Garmin Ltd. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2018. Comparatives are the 13 and 26 weeks ended July 1, 2017. Financial statement amounts below are in U.S. dollars; reported figures were generally in thousands. Prior periods were retrospectively restated for adoption of the new revenue standard.
Business context and results
Garmin provides navigation, communications and information devices across outdoor, fitness, marine, auto and aviation segments. Second-quarter net sales rose 8% to $894.5 million; first-half sales rose 9% to $1.605 billion. Growth in fitness, marine, aviation and outdoor more than offset declines in auto, where the ongoing personal navigation device market contraction continued.
Key financial metrics
| Metric | Q2 2018 | Q2 2017 | First half 2018 | First half 2017 |
|---|---|---|---|---|
| Net sales | $894.5m | $831.5m | $1,605.3m | $1,473.0m |
| Gross profit / margin | $523.3m / 58.5% | $484.1m / 58.2% | $949.8m / 59.2% | $856.9m / 58.2% |
| Operating income / margin | $217.5m / 24.3% | $209.6m / 25.2% | $359.7m / 22.4% | $326.7m / 22.2% |
| Net income | $190.3m | $177.0m | $319.7m | $415.4m |
| Diluted EPS | $1.00 | $0.94 | $1.69 | $2.20 |
| Operating cash flow | Not separately stated | Not separately stated | $438.1m | $263.8m |
Q2 net income increased about 8%; first-half net income fell about 23%, principally because the prior-year period included a $168.8 million tax benefit related primarily to revaluation of Swiss deferred tax assets. First-half 2018 effective tax rate was 18.0%, compared with a reported benefit rate of 28.7% in first-half 2017; excluding specified unusual tax items, management said the 2018 rate was lower year over year, primarily due to the U.S. corporate tax rate reduction.
At June 30, cash and cash equivalents were $946.7 million and marketable securities totaled $1.476 billion, or approximately $2.422 billion combined. Current assets were $2.324 billion and current liabilities $929.1 million. No borrowings are presented in the balance sheet. First-half capital expenditures were $93.1 million; dividends paid were $196.1 million. Cash increased $55.1 million during the half.
Material changes and segment trends
- Q2 fitness sales increased 24%, marine 24%, aviation 23% and outdoor 4%; auto sales fell 19%. First-half trends were similar: fitness +23%, marine +17%, aviation +21%, outdoor +11% and auto −16%.
- Fitness growth reflected advanced wearables and cycling products; marine growth benefited from the acquired Navionics business and product mix; aviation and outdoor gains reflected broad product-line strength. Total unit sales declined to 3.783 million in Q2 from 3.904 million and to 6.739 million in the first half from 7.003 million.
- Gross margin improved year over year, helped by higher-margin Navionics sales and fitness product mix. Auto margin weakened, including inventory write-downs. Q2 operating margin declined about 90 basis points as expenses grew; first-half operating margin was broadly stable.
- First-half SG&A rose 15% and R&D rose 14%, primarily reflecting personnel, product development and recent marine acquisitions. First-half operating cash flow increased by $174.2 million, supported by working capital and tax-payment timing.
Outlook, risks and unusual items
- The filing provides no quantified full-year guidance. Management stated that existing cash and operating cash flow should be sufficient for projected capital expenditures, working capital and other cash needs.
- Garmin adopted ASC 606 retrospectively. The change accelerated recognition of certain auto-segment software-license and traffic-service revenue and related costs; it changed reported results and deferred balances but not historical cash flows.
- Marketable securities had $47.6 million of gross unrealized losses at quarter-end, and about 83% of the portfolio was in an unrealized-loss position. The company said it did not intend, and was not likely required, to sell before recovery and recorded no material impairment.
- Open purchase orders and other commitments were approximately $343 million, though the company could not determine how much represented binding obligations. Management did not believe material loss from contingencies was reasonably possible in aggregate; it noted an appeal in the PulseOn design-patent case, with a hearing scheduled for January 2019.
- The filing highlights possible adverse effects from new trade restrictions or tariffs, particularly on goods made in Taiwan and China or components sourced from China. Management reported no material change in the disclosed market risks, including foreign-exchange and interest-rate risks.
- The company plans to adopt the lease standard in fiscal 2019; it expects increases in balance-sheet assets and liabilities, but was still evaluating the full impact.
Important facts for investors to verify
- Whether growth in fitness, marine, aviation and outdoor can continue to offset the ongoing contraction in auto PND sales.
- How much of first-half operating cash flow reflects sustainable operations versus working-capital and tax timing.
- The impact of acquisition-related costs and elevated R&D and SG&A on future margins, particularly in marine.
- Any changes to trade tariffs, currency movements, or the valuation and credit profile of the marketable-securities portfolio.
- Developments in the PulseOn appeal and any other legal or purchase commitments that could affect results or liquidity.
- The eventual balance-sheet impact of lease-standard adoption and any future tax adjustments under the measurement period.