Garmin Ltd. — Q3 2016 Form 10-Q
Reporting period: 13 and 39 weeks ended September 24, 2016; comparisons are to the corresponding periods ended September 26, 2015. Garmin supplies navigation, communications and information devices across Outdoor, Fitness, Marine, Auto and Aviation. Financial figures below are in U.S. dollars; statements report dollars in thousands unless stated otherwise.
Financial performance and liquidity
| Metric | Q3 2016 | Q3 2015 | First 39 weeks 2016 | First 39 weeks 2015 |
|---|---|---|---|---|
| Net sales | $722.3m | $679.7m | $2,157.9m | $2,038.9m |
| Gross profit / margin | $406.0m / 56% | $362.2m / 53% | $1,208.8m / 56% | $1,125.6m / 55% |
| Operating income / margin | $159.6m / 22% | $125.5m / 18% | $464.1m / 22% | $403.8m / 20% |
| Net income | $125.1m | $119.3m | $374.2m | $323.8m |
| Diluted EPS | $0.66 | $0.63 | $1.98 | $1.69 |
| Operating cash flow | Not separately provided | Not separately provided | $492.4m | $122.1m |
- At September 24, 2016, cash and cash equivalents were $912.6m and marketable securities totaled $1,528.9m, including $201.6m classified as current. Current assets were $2,247.5m versus current liabilities of $920.0m.
- Total assets were $4,591.9m and stockholders’ equity was $3,362.2m. The balance sheet presents no borrowings or other debt; the filing does not show a debt balance.
- Cash and equivalents increased $79.5m from December 26, 2015. The company paid $289.3m in dividends and used $65.2m to repurchase shares during the 39-week period.
Material changes and operating drivers
- Q3 sales rose 6%; unit sales were slightly lower at 3.848m versus 3.861m. Fitness (+32%), Outdoor (+28%), Aviation (+14%) and Marine (+12%) grew, while Auto declined 21%.
- For the first 39 weeks, sales increased 6% and unit sales increased 3% to 11.374m. Outdoor (+27%), Fitness (+26%), Marine (+15%) and Aviation (+9%) grew; Auto fell 17%.
- Management attributed Auto declines primarily to continued contraction in the personal navigation device market and additional revenue deferrals on certain OEM products. Wearables and acquired DeLorme product lines supported Outdoor growth; activity trackers, running and cycling supported Fitness.
- Q3 gross margin increased 290 basis points, with increases across all segments. YTD gross margin rose 80 basis points; Fitness margin declined on product mix.
- Operating income grew faster than sales, aided by improved Q3 gross margin and revenue growth. Research and development expense rose 10% in Q3 and 6% YTD, primarily for new product development.
- Foreign currency results were a significant year-over-year swing: Q3 recorded a $19.4m loss versus a $30.6m gain in Q3 2015; YTD loss was $30.0m versus $14.2m. Management primarily attributed 2016 losses to the U.S. dollar weakening against the Taiwan dollar.
- The effective tax rate fell to 16.5% in Q3 from 27.6%, and to 18.8% YTD from 21.9%, mainly due to projected income mix by jurisdiction and the extended U.S. R&D tax credit.
Outlook, risks and notable items
- The filing provides no quantified earnings or revenue guidance. Management said existing cash balances and operating cash flow should be sufficient for projected long-term capital expenditures, working capital and other cash requirements. Fiscal 2016 is a 53-week year, with a 14-week final quarter; management cautioned interim results are not necessarily indicative of full-year results.
- Operating cash flow rose substantially year over year, driven largely by timing of income-tax payments, royalties, inventory purchases and other working-capital items, as well as higher net income. These timing effects make the comparison less indicative of recurring cash generation.
- Marketable securities had $8.9m of gross unrealized losses at quarter-end, including $2.4m on holdings in a loss position for at least 12 months. Garmin said it did not intend or expect to need to sell these securities before recovery and recorded no material impairment charge.
- Open purchase orders and other commitments totaled approximately $277.0m, though the company said it could not determine how much represented binding contractual obligations. Management did not expect existing legal matters, individually or collectively, to materially affect results, financial position or cash flows, but outcomes remain uncertain.
- Marine sonar litigation with Navico remained active. The ITC had modified a limited exclusion order; Garmin’s requests to stay it pending appeal were denied on October 20 and 21, 2016, respectively. The ITC also initiated an enforcement proceeding. Garmin disclosed additional patent and trademark litigation against Navico and C-MAP filed October 17.
- Garmin identified economic and political uncertainty, including the UK’s proposed exit from the EU, as a risk to revenue and margins. It also highlighted potential retailer/OEM financial distress, bad debt, inventory, foreign-exchange and market risks.
- On September 30, 2016, Garmin acquired Japanese distributor Iiyonet, Inc.; the acquisition was described as not material. During the quarter, Garmin also completed a share par-value reduction and cancellation of 10,000 formation shares, reclassifying share capital to additional paid-in capital.
Key facts for investors to verify
- Whether growth in Fitness and Outdoor can offset continued Auto declines and PND-market contraction.
- How much of the large year-over-year operating-cash-flow improvement reflects recurring performance versus timing of working-capital and tax payments.
- The effect of OEM revenue deferrals and the 14-week fourth quarter on reported revenue and comparability.
- Developments and any commercial impact from the Navico/ITC sonar exclusion order, enforcement proceeding and related litigation.
- Future foreign-exchange exposure, tax-rate variability, and investment portfolio valuation and credit risks.