Garmin Ltd. — FY 2016 Form 10-K
Business context and reporting period. Garmin designs, manufactures and sells GPS-enabled and related products across auto, aviation, marine, outdoor and fitness. The filing covers the fiscal year ended December 31, 2016. Fiscal 2016 comprised 53 weeks versus 52 weeks in fiscal 2015, so reported year-over-year growth is not fully comparable. Amounts below are U.S. dollars.
Financial performance
| Metric | FY 2016 | FY 2015 |
|---|---|---|
| Net sales | $3.019 billion | $2.820 billion |
| Gross profit / margin | $1.680 billion / 55.6% | $1.539 billion / 54.6% |
| Operating income / margin | $623.9 million / 20.7% | $549.6 million / 19.5% |
| Net income / margin | $510.8 million / 16.9% | $456.2 million / 16.2% |
| Diluted EPS | $2.70 | $2.39 |
| Cash from operating activities | $705.7 million | $280.5 million |
- Sales increased 7%, gross profit 9%, operating income 14%, and net income 12%; unit sales rose 4% to 16.8 million. The extra fiscal week contributed to comparability differences.
- Revenue grew in outdoor (+33%), fitness (+24%), marine (+16%) and aviation (+10%); auto declined 17%. Segment sales were $546 million, $818 million, $332 million, $883 million and $439 million, respectively.
- Operating income by segment: outdoor $184 million; fitness $161 million; marine $52 million; auto $102 million; aviation $125 million. Auto remained the largest sales segment but fell to 29% of revenue from 38%.
- Research and development expense rose 10% to $468 million (15.5% of sales). Consolidated gross margin improved about 100 basis points, partly due to growth in higher-margin businesses; fitness margin declined on product mix.
Liquidity, cash flow and capital
- Year-end cash and cash equivalents were $846.9 million; marketable securities totaled $1.480 billion. Total debt was zero. Current assets were $2.263 billion and current liabilities $782.7 million.
- Operating cash flow increased to $705.7 million, reflecting higher earnings and favorable working-capital timing, including income taxes payable, inventory and prepayments. Investing activities used $121.5 million, including $77.9 million net cash for acquisitions and $91.0 million in property and equipment purchases.
- Financing activities used $561.7 million, including $481.5 million of dividends and $93.2 million of share repurchases. The 2016 dividend was $2.04 per share; management expected the March 2017 installment and indicated it currently expected quarterly dividends for the remaining three quarters of 2017, subject to shareholder approval.
- Management budgeted $130–$140 million of capital expenditures for fiscal 2017, including facility expansion. It stated existing cash and operating cash flow should meet long-term capital, working-capital and other cash requirements.
Outlook, risks and unusual items
- Management expected the auto segment to continue declining in 2017, reflecting the contraction of the personal navigation device market. Wearable-market maturation, competition and rapid product change also pose risks.
- Following Swiss corporate tax reform’s failure to pass, Garmin elected to adjust certain Swiss tax positions. It expected an approximately 300-basis-point increase in the FY 2017 effective tax rate versus FY 2016, while anticipating a roughly $150 million income tax benefit in Q1 2017 from revaluing certain Swiss deferred tax assets.
- Foreign-currency losses were $31.7 million in FY 2016 versus $23.5 million in FY 2015. Garmin said it had not historically hedged currency exposure; a hypothetical 10% adverse currency move could reduce pretax income by about $92 million based on year-end positions.
- Key risks include component supply and pricing, manufacturing and sales exposure to Taiwan and China and potential trade restrictions, foreign exchange, tax audits and legislation, product certification, cybersecurity and privacy, and dependence on GPS and licensed map data.
- Navico marine-sonar patent litigation remained active. An ITC limited exclusion order and cease-and-desist orders were in effect, subject to appeals and enforcement proceedings. Garmin said an adverse result could materially affect operating results, liquidity or financial position, while stating it intended to defend the claims. Other disclosed litigation included patent disputes; management did not expect legal proceedings overall to have a material adverse effect.
- Marketable securities had $30.3 million of gross unrealized losses at year-end; 64.7% of the portfolio was in an unrealized-loss position. Garmin reported no material impairment charges and said it did not expect to need to sell the securities before recovery or maturity.
- Garmin settled a Forerunner watch-band class action for $385,000 in attorneys’ fees plus repair or replacement obligations; final approval was granted in November 2016. The company also acquired DeLorme product lines and Japan distributor Iiyonet during 2016.
- Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective.
Quarterly context
Fiscal Q4 2016 sales were $860.8 million, gross profit $470.8 million, net income $136.6 million and basic EPS $0.73. Versus Q4 2015, sales rose about 10%, gross profit about 14% and net income about 3%; fiscal 2016 Q4 included an extra week, so the comparison is not like-for-like.
Most important facts for investors to verify
- How much of reported FY 2016 growth and margin improvement reflects the extra week versus underlying unit, pricing and mix trends.
- Whether the forecast auto-segment decline is offset by continued growth and profitability in fitness, outdoor, marine and aviation.
- The assumptions and timing behind the expected $150 million Q1 2017 tax benefit and higher FY 2017 effective tax rate.
- Developments and potential commercial or financial effects of the Navico ITC exclusion order, enforcement action and related patent cases.
- Cash-flow sustainability after large dividend payments, planned capital spending and acquisitions, and the composition, duration and credit exposure of the marketable-securities portfolio.