Garmin Ltd. — Q1 2018 Form 10-Q Summary
Reporting period: 13 weeks ended March 31, 2018; comparable period ended April 1, 2017. Figures below are in U.S. dollars; financial statement amounts are converted from thousands to millions unless otherwise noted. Garmin provides GPS-enabled navigation, communication and information devices through its outdoor, fitness, marine, auto and aviation segments.
Financial performance and liquidity
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Net sales | $710.9 million | $641.5 million | +11% |
| Gross profit / margin | $426.5 million / 60% | $372.8 million / 58% | +14%; margin +190 bps |
| Operating income / margin | $142.2 million / 20% | $117.0 million / 18% | +22%; margin +180 bps |
| Net income | $129.4 million | $238.4 million | -46% |
| Diluted EPS | $0.68 | $1.26 | Lower, largely reflecting prior-year tax benefit |
| Cash from operations | $214.2 million | $120.4 million | +$93.8 million |
| Capital expenditures | $26.3 million | $25.5 million | +$0.8 million |
Operating cash flow less purchases of property and equipment was approximately $187.9 million, versus $94.9 million in the prior-year quarter. Cash, cash equivalents and marketable securities totaled $2.376 billion at quarter-end. Cash and cash equivalents were $899.0 million; marketable securities were $1.477 billion. Current assets were $2.191 billion and current liabilities $557.8 million. The balance sheet presents no borrowings; liabilities primarily comprise operating, tax and deferred revenue obligations.
Material changes and business drivers
- Outdoor revenue rose 24% to $144.3 million, fitness rose 20% to $166.0 million, aviation rose 19% to $145.7 million, and marine rose 9% to $113.6 million. Auto revenue fell 12% to $141.3 million, primarily due to continued contraction in the personal navigation device market.
- Management attributed growth in outdoor to wearables, fitness to advanced wearables and new products, aviation to broad-based product demand, and marine partly to the acquired Navionics business.
- Total unit sales declined to 2.956 million from 3.099 million, despite higher revenue.
- Gross margin improved, with management citing favorable product mix in outdoor, fitness and marine. Research and development rose 16% to $142.0 million, primarily due to engineering personnel and prior-year acquisitions; SG&A increased 15% to $117.1 million, while advertising fell 20% to $25.3 million.
- Net income was down sharply year over year because Q1 2017 included a $168.8 million benefit from revaluation of Swiss deferred tax assets. Q1 2018 tax expense was $24.6 million, with a 16.0% effective tax rate; the prior-year rate was distorted by that benefit.
Cash, accounting, outlook and risks
- Operating cash flow improved mainly through working-capital movements, including accounts receivable collections. Investing cash outflow increased to $112.6 million, chiefly due to net purchases of marketable securities and $9.4 million of acquisition payments. Financing cash outflow was $100.8 million, including $96.1 million of dividends; no shares were repurchased in the quarter.
- Management said existing cash and operating cash flow should meet long-term capital expenditure, working-capital and other cash needs. The filing provides no quantified earnings or revenue guidance.
- Garmin adopted ASC 606 using full retrospective application. The standard accelerated recognition of certain auto-segment software and traffic-service revenue and associated costs; the 2017 comparison is restated. Management reported no effect on historical cash flows.
- Marketable securities had $42.2 million of gross unrealized losses at quarter-end; approximately 82% of the portfolio was in an unrealized loss position. Garmin said it did not intend, and was not likely required, to sell before recovery, and recorded no material impairment.
- Open purchase orders and other commitments were approximately $325.2 million, although the company could not determine how much represented binding contractual obligations. Management did not believe aggregate legal contingencies presented a material probable loss; a patent-design case was under appeal, and the company intended to defend it.
- Management said there were no material changes to the risk factors or market risks described in its 2017 Form 10-K. It cautioned that estimates, foreign exchange, interest rates, securities values, customer incentives, and litigation outcomes may affect results.
Important facts for investors to verify
- How much of sales growth and margin improvement is sustainable, given lower unit sales and auto-market contraction?
- Whether the Q1 cash-flow increase reflects durable operating performance or mainly timing of working-capital collections.
- The performance and valuation risk of the marketable-securities portfolio, including its unrealized losses and interest-rate sensitivity.
- The continuing effects of ASC 606 on auto-segment revenue, deferred revenue and comparability with previously reported periods.
- Potential costs or outcomes from the PulseOn appeal and other legal matters, and which disclosed commitments are binding.
- Whether management’s liquidity assessment remains appropriate as the company funds dividends, investment, acquisitions and other cash requirements.