Garmin Ltd. — 2018 Form 10-K Summary
Business context and reporting period
Garmin designs, manufactures and sells GPS-enabled and related products across five segments: outdoor, fitness, marine, auto and aviation. This 10-K covers the 52-week fiscal year ended December 29, 2018; it is an annual filing, not a standalone quarterly report. The filing also presents unaudited fourth-quarter results. Comparative 2017 figures were restated for adoption of the new revenue-recognition standard.
Financial performance and position
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Net sales | $3,347.4 million | $3,121.6 million |
| Gross profit / margin | $1,979.7 million / 59% | $1,797.9 million / 58% |
| Operating income / margin | $778.3 million / 23% | $683.6 million / 22% |
| Net income | $694.1 million | $709.0 million |
| Diluted EPS | $3.66 | $3.76 |
| Operating cash flow | $919.5 million | $660.8 million |
| Cash and cash equivalents | $1,201.7 million | $891.5 million |
| Marketable securities | $1,513.1 million | $1,421.7 million |
| Total debt | None | None |
Cash, cash equivalents and marketable securities totaled $2,714.8 million at year-end. Total assets were $5,382.9 million and shareholders’ equity was $4,163.0 million. Management said existing cash and operating cash flow should cover projected capital expenditures, working capital and other cash needs.
FY 2018 sales rose 7%, while unit sales fell 3% to 14.9 million. Outdoor revenue increased 16% to $809.9 million, fitness 13% to $858.3 million, marine 18% to $441.6 million and aviation 20% to $603.5 million. Auto revenue declined 19% to $634.2 million. Operating income increased 14%; net income fell 2%, principally reflecting the absence of a large 2017 tax benefit.
For the fourth quarter, sales were $932.1 million versus $897.3 million a year earlier; net income was $190.2 million versus $142.6 million. Quarterly figures are unaudited.
Material changes and notable items
- Outdoor and fitness growth was primarily driven by wearables; marine growth reflected broad product-line growth and acquisitions; aviation growth came from OEM and aftermarket sales.
- Auto weakness reflected the ongoing personal navigation device (PND) market contraction and lower OEM sales due to program timing. Auto operating income fell 54% to $38.0 million.
- Gross margin improved 150 basis points, supported by product mix, including higher-margin marine cartography. Research and development expense rose 11% to $567.8 million, reflecting engineering costs and marine acquisitions.
- 2018 income tax expense was $129.2 million, compared with a $11.9 million benefit in 2017. The 2017 result included a $180.0 million benefit related primarily to revaluation of Swiss deferred tax assets.
- Garmin adopted ASC 606 retrospectively. The standard accelerated recognition of certain auto software and traffic-service revenue; restated 2017 sales increased $34.6 million and net income increased $14.1 million versus previously reported amounts. The adoption did not affect historical cash flows.
- Garmin acquired marine digital-switching company Trigentic in 2018. In February 2019 it signed an agreement to acquire Tacx, an indoor-cycling products and software company; completion was subject to customary conditions and was not expected to be material.
- The company declared a 2018 dividend of $2.12 per share; $1.06 per share was paid during the fiscal year. No shares were repurchased in 2018; the prior authorization expired in 2017.
Outlook, risks and contingencies
The filing provides no quantified 2019 revenue or earnings guidance. Management expected the auto segment, approximately 19% of 2018 revenue, to continue declining in 2019. Consumer sales are seasonal, generally strongest in the second and fourth quarters. The company highlighted product innovation and continued research and development as important to replacing sales in declining categories.
- Key risks include competition and product obsolescence, wearable-market contraction, component shortages and single-source suppliers, inventory forecasting, foreign-exchange volatility, and reliance on GPS/GNSS systems.
- Garmin cited exposure to tariffs and trade restrictions involving Taiwan and China, Taiwan geopolitical risks, Brexit uncertainty, changing tax rules and data-protection requirements, cybersecurity and privacy risks, and regulatory certification delays—particularly for aviation products.
- Management said it did not believe aggregate loss contingencies presented a material loss exposure at year-end. The PulseOn design-rights appeal was dismissed in February 2019; other claims and proceedings remain subject to uncertainty.
- Approximately $80 million of goodwill associated with auto PND was identified as potentially at risk of future impairment if operating results or market conditions deteriorate; no impairment was recorded in 2018.
- At year-end, available-for-sale securities had $42.6 million of gross unrealized losses, but the company reported no material impairment and said it did not expect to need to sell the securities before recovery. A hypothetical 100-basis-point rate increase would reduce portfolio fair value by about $38 million.
- Unrecognized tax benefits totaled $118.3 million. Garmin said $20–25 million of reserves could decrease within 12 months as statutes of limitation expire; timing and cash settlement of other amounts were uncertain.
Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting. Management also concluded disclosure controls and internal controls were effective at December 29, 2018.
Important facts for investors to verify
- Whether growth in wearables, marine and aviation can offset continuing auto/PND declines, and whether the forecast auto contraction materializes.
- Whether operating cash flow remains strong after working-capital movements and the effects of taxes and acquisitions.
- How the $129.2 million 2018 tax expense compares with future tax rates, given the unusual 2017 Swiss deferred-tax benefit and pending tax matters.
- Whether the auto PND goodwill exposure, currency risk and unrealized securities losses change materially.
- Whether acquisitions, the new lease-standard balance-sheet recognition and ongoing investment spending affect liquidity, margins or returns.