Garmin Ltd. — Form 10-Q Summary
Reporting period: 13 weeks ended September 30, 2017; year-to-date figures cover 39 weeks. Comparatives are the 13 and 39 weeks ended September 24, 2016. Amounts below are in U.S. dollars unless noted.
Business context and results
Garmin provides GPS-enabled navigation, communications and information devices across outdoor, fitness, marine, auto and aviation markets.
| Metric | Q3 2017 | Q3 2016 | 39 weeks 2017 | 39 weeks 2016 |
|---|---|---|---|---|
| Revenue | $743.1m | $722.3m | $2,198.5m | $2,157.9m |
| Gross profit / margin | $433.7m / 58% | $406.0m / 56% | $1,283.6m / 58% | $1,208.8m / 56% |
| Operating income / margin | $169.8m / 23% | $159.6m / 22% | $489.5m / 22% | $464.1m / 22% |
| Net income | $147.4m | $125.1m | $556.2m | $374.2m |
| Diluted EPS | $0.78 | $0.66 | $2.95 | $1.98 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $462.6m | $492.4m |
Material changes and segment performance
- Q3 revenue increased 3%; year-to-date revenue rose 2%. Gross margin increased 220 basis points in Q3 and 240 basis points year to date, reflecting lower cost of goods sold as a share of revenue and favorable product and segment mix.
- Outdoor revenue rose 31% in Q3 and 34% year to date, driven by wearable products. Aviation grew 16% and 15%, respectively; marine grew 10% in both periods.
- Auto revenue declined 12% in Q3 and 15% year to date amid continued contraction in the personal navigation device market. Fitness declined 12% and 11%, respectively, reflecting weakness in basic activity trackers and product-introduction timing.
- Q3 operating expenses rose 7% to $263.9m, including an 11% increase in R&D. Year-to-date R&D rose 12%, primarily due to engineering personnel supporting wearables and aviation.
Cash, liquidity and capital
- At September 30, 2017, cash and cash equivalents were $891.3m and marketable securities totaled $1,464.0m. Current assets were $2,332.5m and current liabilities $846.0m. The balance sheet lists no borrowings.
- Year-to-date operating cash flow was $462.6m; investing cash outflow was $89.1m and financing cash outflow was $355.1m. Capital expenditures were $85.2m, dividends paid were $287.3m, and share repurchases were $74.5m.
- Management said cash balances and operating cash flow should be sufficient for projected long-term capital expenditures, working capital and other requirements. The company reported no off-balance-sheet arrangements.
- Inventory increased to $575.3m from $484.8m at December 31, 2016; management cited higher materials and work-in-process in anticipation of longer component lead times, new products and strong demand.
Outlook, risks and unusual items
- The filing provides no specific full-year revenue or earnings guidance. Management cautioned that interim results are not necessarily indicative of full-year results.
- Year-to-date net income included a $168.8m income tax benefit from revaluation of deferred tax assets. The effective tax rate was negative 10.8%, versus 18.8% in the prior-year period. Q3 tax expense was $38.6m, with a 20.8% effective rate; changes in Swiss tax positions and income mix contributed to the higher quarterly rate.
- A Texas jury found willful infringement of two Navico patents and awarded $38m. The court could enter damages up to $114m, excluding interest and attorneys’ fees. Garmin disputes the claims and intends to challenge the verdict; it recorded no accrual and assessed a reasonably possible loss range of zero to $114m, excluding those additional amounts.
- In a separate Navico sonar matter, the Federal Circuit reversed the ITC infringement ruling, finding two patents invalid and no infringement of a third. The court issued its mandate on October 31, 2017.
- Garmin acquired Navionics, a marine electronic charts and applications provider, on October 26, 2017; the acquisition was described as not material.
- Garmin plans to adopt the new revenue standard in fiscal 2018 using full retrospective application. For certain auto arrangements, it expects to accelerate recognition of software-license and traffic-service revenue, reducing deferred revenue and deferred costs. The company was finalizing its impact assessment.
- Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.
Investor verification priorities
- Track the Navico Texas case, including post-trial rulings, appeal prospects and possible damages beyond the $38m jury award.
- Assess how much year-to-date earnings growth reflects the one-time deferred-tax-asset revaluation benefit rather than operating performance.
- Monitor continued auto and fitness declines, wearable-led outdoor growth, and the effect of R&D and other operating-cost increases on margins.
- Review cash conversion and inventory growth, including the stated component-lead-time and demand drivers.
- Confirm the eventual financial-statement effects of the new revenue standard, particularly for auto contracts.