Garmin Ltd. — Form 10-Q Summary
Reporting period: Fiscal third quarter ended September 26, 2020 (13 weeks), with year-to-date results for the 39 weeks ended September 26, 2020. Comparisons are to the corresponding 2019 periods. Financial amounts below are in U.S. dollars; millions are rounded.
Financial performance
| Metric | Q3 2020 | Q3 2019 | 39 weeks 2020 | 39 weeks 2019 |
|---|---|---|---|---|
| Net sales | $1,109.2m | $934.4m | $2,835.2m | $2,655.3m |
| Gross profit / margin | $668.0m / 60% | $567.5m / 61% | $1,690.4m / 60% | $1,594.5m / 60% |
| Operating income / margin | $317.1m / 29% | $261.5m / 28% | $683.0m / 24% | $669.1m / 25% |
| Net income | $313.4m | $227.9m | $658.8m | $591.7m |
| Diluted EPS | $1.63 | $1.19 | $3.44 | $3.10 |
| Operating cash flow | Not separately reported for quarter | Not separately reported for quarter | $699.4m | $464.2m |
For the 39-week period, investing activities used $179.3m and financing activities used $331.8m, including $334.0m of dividends paid. Capital expenditures were $137.1m. Cash, cash equivalents and restricted cash totaled $1,223.8m at period end.
At September 26, 2020, cash and current and noncurrent marketable securities totaled approximately $2.712bn. Total current assets were $3.342bn versus current liabilities of $1.123bn. The balance sheet presents no borrowings or debt line item. Total assets were $6.551bn and stockholders’ equity was $5.104bn.
Changes and business drivers
- Q3 sales rose 19% year over year; net income increased about 38%. Operating income rose 21%, while gross margin was approximately one percentage point lower.
- Q3 segment sales: fitness +35%, outdoor +30%, marine +54%; aviation −19% and auto −6%. Growth in fitness, outdoor and marine reflected demand for wearables, adventure watches, cycling products, chartplotters and other products. Aviation weakness reflected fewer OEM shipments and lower ADS-B contributions; auto PND declines were partly offset by niche categories and new OEM programs.
- Year-to-date sales increased 7%, but operating income rose only 2% and operating margin declined from 25% to 24%. Fitness (+25%), outdoor (+15%) and marine (+24%) grew; aviation (−14%) and auto (−24%) declined. Auto recorded a $6.8m operating loss for the 39-week period, compared with $54.0m operating income in 2019.
- Year-to-date operating cash flow increased $235.3m, primarily from improved working-capital cash use and higher net income. Inventory increased to $821.4m from $752.9m at fiscal year-end.
Outlook, risks and unusual items
- Management expected COVID-19 to continue to adversely affect aviation sales and profitability for the remainder of fiscal 2020. It reported improving demand trends through Q3 for most products and all segments, but warned that pandemic duration, restrictions, consumer behavior and supply-chain effects remained uncertain. No numerical company-wide guidance is provided in the supplied filing text.
- Management said the auto OEM product mix and related lower gross-margin trend was generally expected to continue into Q4 and beyond. It also expected elevated auto OEM development costs, including R&D costs, to continue in Q4 and beyond.
- A July 23, 2020 cyberattack encrypted some company systems and interrupted online services, customer support, applications and communications. Garmin reported that product functionality was otherwise unaffected, found no indication customer data was accessed, lost or stolen, restored affected systems, and said the incident had no material Q3 financial impact and was not expected to materially affect future periods.
- COVID-19 could create further demand, supplier, operating-cost, receivables, inventory-obsolescence and asset-impairment risks. The filing also identifies cybersecurity risks and currency, interest-rate and securities-valuation exposures.
- The effective tax rate was 6.9% in Q3 2020 versus 11.6% in Q3 2019. For the first 39 weeks it was 7.5% versus 15.4%, including a $14.3m Q2 tax benefit from releasing uncertain-tax-position reserves related to a 2014 intercompany restructuring. The lower rate also reflected a favorable income mix associated with moving intellectual-property ownership from Switzerland to the U.S.
- Open purchase orders and other commitments were approximately $646m; the company noted these may be purchase authorizations rather than binding contractual obligations. Management did not believe aggregate legal contingencies presented a material probable loss, while cautioning that outcomes cannot be predicted with certainty.
Important facts for investors to verify
- Whether strong Q3 demand in fitness, outdoor and marine persisted, and how aviation and auto trends developed after the quarter.
- Whether COVID-19, supply constraints or changes in consumer and retailer behavior affected sales, margins, inventory or collections.
- Whether the cyberattack led to later costs, service disruption, data exposure or other consequences beyond management’s Q3 assessment.
- The durability and tax implications of the intellectual-property migration, and the effects of the one-time $14.3m tax benefit on comparable earnings.
- The terms, timing and binding nature of the $646m commitments, as well as cash needs for dividends, capital spending and acquisitions.