Garmin Ltd. — Form 10-Q Summary
Reporting period: Quarter and six months ended July 1, 2017; comparative periods ended June 25, 2016. Amounts below are in U.S. dollars. Financial statement amounts originally presented in thousands are converted to millions where shown.
Business context
Garmin develops and sells GPS-enabled navigation, communications and information products across five reportable segments: outdoor, fitness, marine, auto and aviation.
Key financial results
| Metric | Q2 2017 | Q2 2016 | First half 2017 | First half 2016 |
|---|---|---|---|---|
| Net sales | $816.9 million | $811.6 million | $1,455.4 million | $1,435.6 million |
| Gross profit / margin | $477.9 million / 58% | $463.0 million / 57% | $850.0 million / 58% | $802.8 million / 56% |
| Operating income / margin | $203.4 million / 25% | $200.7 million / 25% | $319.7 million / 22% | $304.5 million / 21% |
| Net income | $171.0 million | $161.1 million | $408.8 million | $249.2 million |
| Diluted EPS | $0.91 | $0.85 | $2.17 | $1.31 |
| Operating cash flow | Not separately reported for the quarter | $263.8 million | $279.4 million |
- Q2 sales rose 1%; gross profit increased 3%, while operating income increased 1%. Net income rose about 6%, with higher foreign-currency gains contributing to other income.
- First-half sales increased 1%, operating income rose 5%, and net income increased 64%. The net income increase was principally amplified by a $168.8 million deferred-tax-asset revaluation benefit.
- First-half operating cash flow decreased $15.5 million year over year. Investing activities used $18.7 million and financing activities used $248.9 million, including $191.7 million of dividends paid and $64.0 million of share repurchases.
- At July 1, cash and cash equivalents were $859.6 million and marketable securities totaled $1,449.3 million. Current assets were $2,304.9 million versus current liabilities of $928.5 million. No borrowings or debt are reported on the balance sheet.
- Inventory was $525.2 million, up from $484.8 million at year-end 2016. The company attributed inventory investment partly to longer component lead times, planned second-half product launches and strong demand in some categories.
Segment and year-over-year changes
- Q2 outdoor sales rose 46% to $194.8 million, driven mainly by wearable growth; aviation rose 15% to $124.1 million, primarily on aftermarket sales.
- Q2 fitness sales fell 15% to $181.0 million, reflecting weakness in basic activity trackers and product-introduction timing. Auto fell 15% to $208.5 million amid ongoing personal navigation device market contraction; marine declined 3% to $108.5 million.
- For the first half, outdoor rose 35%, marine 10% and aviation 15%; fitness declined 10% and auto 17%. Total unit sales fell to 7.0 million from 7.5 million.
- Q2 gross margin improved 150 basis points, with outdoor product mix a notable contributor. First-half gross margin improved 250 basis points, helped by higher-margin segment mix and product mix in outdoor and fitness.
- Research and development expense rose 11% in Q2 and 12% in the first half, primarily from engineering personnel costs for wearable products and aviation.
Outlook, risks and unusual items
- The filing provides no specific revenue or earnings guidance. Management said existing cash and operating cash flow should be sufficient for projected long-term capital expenditures, working capital and other cash requirements.
- First-half tax results include a $168.8 million benefit from revaluation of deferred tax assets. Q2 and first-half results also include $7.3 million of tax expense from share-based awards expiring unexercised; management said the new stock-compensation accounting standard could materially affect forthcoming 2017 quarters, but the impact could not be estimated.
- Foreign currency effects were significant: Q2 recorded a $15.1 million gain, while the first half recorded a $22.4 million loss, primarily reflecting movements against the Taiwan dollar.
- Garmin disclosed a recommended $37 million civil penalty in an ITC enforcement proceeding concerning Navico sonar patents. The Federal Circuit had ruled the relevant asserted patents invalid and found no infringement of another patent; the ITC process and related litigation remained ongoing. Management did not expect legal proceedings overall to materially adversely affect results, financial position or cash flows, but outcomes are uncertain.
- Open purchase orders and other commitments were approximately $378 million, although the company could not determine how much represented binding contractual obligations. Management reported no material loss contingency expected from legal matters as of quarter-end.
- The company expects to adopt the new revenue standard in fiscal 2018, likely using full retrospective application. It anticipated changes to timing of revenue recognition for some auto software and traffic-service arrangements; the materiality of the impact was not yet known.
- On July 20, 2017, Garmin acquired Alphamantis Technologies, a cycling aerodynamics technology designer; the acquisition was described as not material.
Important facts for investors to verify
- How much of first-half earnings growth is sustainable excluding the deferred-tax-asset revaluation benefit and other discrete tax items?
- Whether outdoor and aviation growth can offset continued contraction in auto navigation and weakness in basic fitness trackers.
- Future cash conversion, inventory levels and component availability, given lower first-half operating cash flow and higher inventory.
- Developments in the Navico litigation and potential exposure, including the recommended civil penalty and remaining proceedings.
- The eventual effect and retrospective presentation of the new revenue-recognition standard, as well as the status and amount of the declared dividend payable.