Garmin Ltd. — Form 10-Q Summary
Reporting period: 13 weeks and 39 weeks ended September 29, 2018; comparable periods ended September 30, 2017. Dollar amounts below are in U.S. dollars and generally converted from thousands to millions. Garmin provides GPS-enabled navigation, communications, and information products across outdoor, fitness, marine, auto, and aviation segments.
Financial performance
| Metric | Q3 2018 | Q3 2017 | 39 weeks 2018 | 39 weeks 2017 |
|---|---|---|---|---|
| Net sales | $810.0M | $751.2M | $2,415.3M | $2,224.2M |
| Gross profit / margin | $480.7M / 59% | $437.5M / 58% | $1,430.6M / 59% | $1,294.5M / 58% |
| Operating income / margin | $196.0M / 24% | $173.6M / 23% | $555.7M / 23% | $500.3M / 22% |
| Net income | $184.2M | $151.1M | $503.9M | $566.5M |
| Diluted EPS | $0.97 | $0.80 | $2.66 | $3.00 |
- Q3 sales rose 8%, gross profit 10%, operating income 13%, and net income 22% year over year. Gross margin expanded about 110 basis points.
- For the first 39 weeks, sales increased 9%, gross profit 11%, and operating income 11%, while net income declined 11%. The comparison is affected by a $168.8M tax benefit recorded in 2017, primarily from revaluation of Swiss deferred tax assets; 2018 recorded tax expense instead.
- Q3 effective tax rate was 8.5% versus 20.5%; the filing attributes the decrease primarily to the lower U.S. corporate tax rate and increased U.S. R&D tax credits. The 39-week rate was 14.8% versus a benefit rate of 10.5% in 2017.
- Revenue growth was broad outside auto. Q3 growth: outdoor 13%, fitness 14%, marine 28%, aviation 17%; auto fell 16%, mainly due to ongoing personal navigation device market contraction. For 39 weeks, these segments grew 12%, 20%, 19%, and 20%, respectively, while auto fell 16%.
Cash flow, liquidity, and balance sheet
- Operating cash flow for the first 39 weeks was $701.8M, up from $462.6M. Investing cash outflow was $238.8M; financing cash outflow was $288.5M. Capital expenditures were $122.8M.
- Cash and cash equivalents were $1,056.4M and marketable securities totaled $1,474.8M at September 29, 2018; together, approximately $2.5B. Current assets were $2,400.6M and current liabilities $854.0M.
- The balance sheet presents no borrowings or debt line item. Total liabilities were approximately $1.14B and stockholders’ equity $3.95B.
- Cash, cash equivalents, and restricted cash increased $164.8M from the start of the period. Dividends paid were $296.1M; no shares were repurchased under the expired repurchase authorization during the period.
Changes, outlook, and risks
- Management said it expects existing cash balances and operating cash flow to cover long-term projected capital expenditures, working capital, and other cash needs. The filing provides no specific earnings or revenue guidance.
- Garmin adopted ASC 606 revenue recognition retrospectively in 2018. The change accelerated recognition for certain auto software-license and traffic-service arrangements; 2017 comparative results were restated. The company says adoption did not affect historical cash flows.
- Marketable securities had $48.8M of gross unrealized losses at quarter end, and approximately 85% of the portfolio was in an unrealized-loss position. Management said it did not intend, and did not expect to be required, to sell these securities before recovery; no material impairment was recorded.
- Open purchase orders and other commitments were approximately $346M, although the company could not determine how much constituted binding contractual obligations. Management did not believe aggregate legal contingencies were reasonably likely to result in a material loss; a PulseOn design-patent case was on appeal, with a hearing scheduled for January 30, 2019.
- The filing highlights potential harm from new trade restrictions or tariffs, particularly given manufacturing and sourcing exposure to Taiwan and China. Other exposures include foreign-exchange and interest-rate movements and the ongoing contraction of the auto PND market. Management reported no material change in market-risk disclosures from its 2017 Form 10-K.
- Garmin planned to adopt the new lease standard in fiscal 2019; it expected increases in reported assets and liabilities because most leases are operating leases, but was still evaluating the full quantitative effect.
Important facts for investors to verify
- Assess the durability and profitability of growth in outdoor, fitness, marine, and aviation against continuing auto-segment contraction.
- Separate underlying 2018 earnings performance from the unusually large 2017 Swiss deferred-tax benefit when comparing year-to-date net income.
- Review the composition, maturity, and interest-rate sensitivity of the $1.47B securities portfolio and its unrealized losses.
- Check future filings for the quantified balance-sheet effect of lease-standard adoption and for developments in the PulseOn appeal and trade-policy risks.