Garmin Ltd. — FY2017 Form 10-K
Reporting period: Fiscal year ended December 30, 2017 (52 weeks). The comparable fiscal 2016 had 53 weeks, so reported year-over-year comparisons are not fully like-for-like. Garmin designs and sells GPS-enabled products across auto, aviation, marine, outdoor and fitness markets.
Financial performance
| Metric | FY2017 | FY2016 | Change |
|---|---|---|---|
| Net sales | $3.087 billion | $3.019 billion | +2% |
| Gross profit / margin | $1.783 billion / 57.7% | $1.680 billion / 55.6% | Margin +2.1 percentage points |
| Operating income / margin | $668.9 million / 21.7% | $623.9 million / 20.7% | +7% |
| Net income | $695.0 million | $510.8 million | +36% |
| Diluted EPS | $3.68 | $2.70 | +36% |
| Cash from operations | $660.8 million | $705.7 million | Down $44.8 million |
Net income benefited substantially from a $180.0 million tax benefit associated with Garmin’s election to align certain Swiss corporate tax positions. The effective tax provision was a $12.7 million benefit in 2017 versus $118.9 million of tax expense in 2016. The filing also reports $22.6 million of tax expense related to share-based awards expiring unexercised.
Gross margin improved as sales mix shifted toward higher-margin products, particularly in outdoor, fitness and marine. Research and development expense rose 9% to $511.6 million, or 16.6% of sales. Operating cash flow declined mainly because working capital provided less cash, including higher receivables and inventory spending.
Segments
| Segment | FY2017 sales | Year-over-year change | Reported trend |
|---|---|---|---|
| Outdoor | $698.9 million | +28% | Growth in wearables and subscriptions |
| Fitness | $762.2 million | -7% | Basic activity-tracker market decline |
| Marine | $374.0 million | +13% | Chartplotters, fishfinders, entertainment and Navionics acquisition |
| Auto | $750.6 million | -15% | Ongoing personal navigation device market contraction |
| Aviation | $501.4 million | +14% | Growth in OEM and aftermarket sales |
Total unit sales fell 8% to 15.4 million. Outdoor and aviation operating income increased; auto operating income fell 34% and fitness fell 9%. Marine operating income declined 4% despite higher sales.
Liquidity, capital and shareholder returns
- Cash and cash equivalents were $891.5 million; marketable securities totaled $1.422 billion. Combined cash and securities were $2.313 billion.
- Total debt was zero. Total assets were $5.010 billion and stockholders’ equity was $3.802 billion at year-end.
- Operating, investing and financing cash flows were $660.8 million, negative $194.5 million and negative $448.4 million, respectively. Capital expenditures were $139.7 million.
- Garmin declared dividends of $2.04 per share for 2017. Management expected the scheduled March 2018 installment and indicated it currently expected quarterly cash dividends during the remaining three quarters of 2018; dividends require shareholder approval under Swiss law.
- The share repurchase authorization expired December 31, 2017 with approximately $0.8 million unused. No repurchases were made in the final 13 weeks of 2017.
Outlook, notable items and risks
- Management stated that the auto segment, approximately 24% of 2017 revenue, was expected to continue declining in 2018. The filing does not provide clear company-wide revenue or earnings guidance.
- Fiscal 2018 capital expenditures were budgeted at approximately $140–$150 million, about half for Olathe facility expansion and related work.
- Garmin acquired marine-cartography provider Navionics in 2017. A February 2018 global settlement resolved pending Navico litigation; the company said the settlement was not material, and its terms are confidential. A separate Trigentic AB marine acquisition in February 2018 was also described as not material.
- Garmin said it would adopt the new revenue standard retrospectively in 2018. Its disclosed pro forma restatement increased FY2017 sales by $34.6 million and net income by $10.0 million, primarily reflecting earlier recognition for certain auto software, map-update and traffic-service arrangements. Historical operating, investing and financing cash flows were not affected.
- Key risks include declining PND demand and fitness-tracker weakness; intense competition and product-cycle execution; reliance on some sole-source components and map-data licensors; foreign-exchange volatility (Garmin did not historically hedge); concentration of manufacturing in Taiwan and China and potential trade restrictions; tax-law and tax-audit uncertainty; product certification and liability exposure; cybersecurity and privacy risks; and seasonality.
- Approximately $80 million of auto PND goodwill was identified as potentially at risk of future impairment if performance or market conditions deteriorate beyond management’s forecasts. No impairment was recorded in 2017.
- The company reported $130.8 million of gross unrecognized tax benefits; timing of any cash settlement was uncertain. It also reported $82.2 million of operating lease commitments and approximately $313.4 million of open purchase orders and other commitments, not all of which were necessarily binding.
Most important facts to verify
- How much of the 36% net-income and EPS increase reflects the one-time Swiss tax benefit rather than recurring operations.
- Segment trends and margins, especially continuing auto contraction, fitness weakness and outdoor/aviation growth.
- Revenue and earnings comparisons on a consistent 52-week basis and under the retrospective revenue-standard restatement.
- Whether operating cash generation sustains the dividend, facility investment and other capital needs.
- Exposure to foreign exchange, Taiwan/China supply and geopolitical risks, tax uncertainties, and potential auto PND goodwill impairment.