Garmin Ltd. — Q1 2017 Form 10-Q
Business context and period: Garmin provides navigation, communications and information devices across outdoor, fitness, marine, auto and aviation markets. This unaudited filing covers the 13 weeks ended April 1, 2017, compared with the 13 weeks ended March 26, 2016. Amounts below are in U.S. dollars.
Financial performance and position
- Revenue: $638.5 million, up 2% year over year. Total unit sales declined to 3.099 million from 3.316 million.
- Profit and margins: Gross profit was $372.1 million, up 9%; gross margin was 58%, versus 54%. Operating income rose 12% to $116.3 million, with an 18% operating margin versus 17%. Net income was $237.8 million ($1.26 per diluted share), versus $88.1 million ($0.46).
- Cash flow: Operating cash flow was $120.4 million, down from $129.4 million. Investing activities used $13.3 million; financing activities used $127.4 million. Cash declined $13.3 million during the quarter to $833.6 million.
- Liquidity: At April 1, cash and cash equivalents were $833.6 million and marketable securities totaled $1.470 billion. Current assets were $2.157 billion versus current liabilities of $571.5 million. Total equity was $3.702 billion. The balance sheet presents no debt balance.
- Capital returns and investment: Garmin paid $96.0 million in dividends and spent $27.9 million on repurchases under its authorization. Approximately $47.5 million remained available under the $300 million repurchase program, extended through December 31, 2017. Capital expenditures were $25.5 million.
Segment results
| Segment | Revenue | Year-over-year change | Operating income |
|---|---|---|---|
| Outdoor | $115.9 million | +20% | $34.5 million |
| Fitness | $137.8 million | -3% | $18.5 million |
| Marine | $104.4 million | +26% | $18.1 million |
| Auto | $157.5 million | -19% | $6.7 million |
| Aviation | $122.9 million | +16% | $38.6 million |
Material changes and management commentary
- Outdoor growth was primarily driven by wearables; marine growth was broad across product categories; aviation growth was primarily aftermarket-related.
- Fitness revenue declined as lower basic activity-tracker volume more than offset strong growth in advanced GPS wearables. Auto continued to face contraction in the personal navigation device market.
- Improved product mix supported gross-margin expansion, particularly in outdoor, marine and fitness. Research and development expense increased 13% to $122.2 million, reflecting new-product development and additional engineering staff. Selling, general and administrative expense rose 7%, primarily due to legal and IT costs.
- Foreign-currency losses were $37.5 million, compared with $4.8 million a year earlier, principally reflecting U.S. dollar weakness against the Taiwan dollar.
Outlook, unusual items and risks
- Net income includes a $168.8 million income-tax benefit from revaluing certain Swiss deferred tax assets, following Garmin’s election to align certain Swiss corporate tax positions with evolving international tax initiatives. The reported effective tax rate was negative 171.2%; excluding the revaluation, the effective tax rate was 320 basis points above the prior-year rate. The tax benefit materially lifts reported year-over-year net income.
- The filing provides no specific revenue or earnings guidance. Management said existing cash balances and operating cash flow should be sufficient for projected long-term capital, working-capital and other cash requirements. It expects cash needs to include capital expenditures, working capital, dividends, repurchases and strategic acquisitions.
- Open purchase orders and other commitments were approximately $364.3 million; the filing says it cannot determine how much represents binding contractual obligations. Management did not expect legal matters to have a material adverse effect, but outcomes cannot be predicted with certainty. A marine sonar enforcement proceeding involving Navico was pending an administrative law judge’s initial determination.
- Garmin reported no material changes to the risks described in its 2016 Form 10-K and no off-balance-sheet arrangements. It noted that unrealized losses affected 58.7% of its marketable-securities portfolio, but said it intended and expected to be able to hold the securities until recovery or maturity and recorded no material impairment.
- Garmin adopted ASU 2016-09 for share-based compensation; management said the quarter’s impact was not material but could be material in later 2017 quarters. Adoption of the new revenue standard was planned for fiscal 2018, with full retrospective application anticipated, subject to completing its analysis; the financial impact was not yet known.
Important facts for investors to verify
- How much of the net-income increase reflects the $168.8 million deferred-tax-asset revaluation rather than operating performance.
- Whether the improved gross margin and growth in outdoor, marine and aviation can offset continued auto-market contraction and softer basic fitness trackers.
- How foreign-exchange movements, especially the Taiwan dollar, affect future earnings and cash flows.
- The eventual effect of revenue-standard adoption and share-based-compensation accounting changes.
- Developments in the Navico marine sonar proceeding and any resulting financial or business impact.