Garmin Ltd. — Q1 2020 Form 10-Q
Reporting period: 13 weeks ended March 28, 2020; comparison is with the 13 weeks ended March 30, 2019. Garmin provides GPS-enabled products across fitness, outdoor, aviation, auto, and marine markets. Amounts below are in U.S. dollars.
Financial performance and position
- Revenue: $856.1 million, up 12% year over year. Fitness, outdoor, aviation, and marine revenue rose 24%, 14%, 10%, and 22%, respectively; auto revenue fell 17%.
- Profit and margins: Gross profit was $506.9 million, up 12%, with gross margin steady at 59%. Operating income increased 17% to $177.5 million; operating margin rose to 21% from 20%. Net income increased 15% to $161.2 million; diluted EPS was $0.84 versus $0.74.
- Cash flow: Operating cash flow was $225.9 million, compared with $164.6 million. Investing activities used $78.9 million and financing activities used $120.2 million. Cash, cash equivalents, and restricted cash increased $21.2 million to $1.049 billion.
- Liquidity and debt: Cash and cash equivalents plus marketable securities totaled approximately $2.64 billion. Current assets were $2.93 billion and current liabilities were $781.9 million. The balance sheet reports no borrowings or debt; the filing text does not provide a separate debt metric.
- Other metrics: Effective tax rate declined to 9.3% from 15.7%, primarily due to a favorable jurisdictional income mix following the start of intellectual property ownership migration from Switzerland to the U.S. Total assets were $6.05 billion and stockholders’ equity was $4.93 billion at quarter-end.
Material changes and segment trends
- Fitness, outdoor, aviation, and marine collectively grew 17% and accounted for 88% of revenue. Fitness benefited from Tacx and advanced wearables; outdoor from adventure watches; aviation mainly from aftermarket sales; and marine from chartplotters and advanced sonars.
- Auto revenue declined amid continued contraction in the personal navigation device market and lower OEM sales. Auto operating income fell from $8.2 million to approximately breakeven, reflecting lower OEM sales and product-development investment.
- Operating expenses increased 10% overall, with R&D up 13%, largely reflecting engineering costs and recent acquisitions. Operating leverage and revenue growth supported the higher consolidated operating margin.
- Foreign currency losses were $15.4 million, versus a $0.3 million gain a year earlier, primarily reflecting U.S. dollar strengthening against the euro, pound, and Australian dollar.
- Unrealized losses on available-for-sale securities contributed to a $24.1 million decline in other comprehensive income. About 49% of the securities portfolio was in an unrealized loss position; management attributed declines primarily to market conditions, reported no credit-loss allowance, and said it did not expect to need to sell the securities before recovery.
Outlook, risks, and contingencies
- COVID-19: Management said first-quarter financial effects were not significant, but sales were adversely affected early in Q2. It expected materially lower demand and adverse profitability effects in Q2 and future periods. The duration and magnitude could not be reasonably estimated; no quantified earnings or revenue guidance was provided.
- Mitigation actions included reducing and prioritizing discretionary operating expenses and capital expenditures, slowing hiring, adding retailer direct-fulfillment arrangements, and addressing supplier concentration. Management cited cash and marketable securities, inventory, and online sales capabilities as mitigating factors.
- Risks identified include weaker demand and distribution disruption, supplier delays or higher costs, manufacturing underutilization or closures, inventory obsolescence, uncollectible receivables, and reduced workforce productivity. COVID-19 could also increase asset impairment or write-down risk.
- Open purchase orders and other commitments were approximately $638.4 million; the company said it could not determine what portion represented binding contractual obligations. Management did not believe aggregate legal loss contingencies were reasonably likely to be material. No off-balance-sheet arrangements were reported.
- Management stated existing cash and operating cash flow should meet projected short- and long-term needs. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting.
Important facts for investors to verify
- How COVID-19 affected actual Q2 and subsequent demand, margins, operations, and cash flow relative to management’s uncertain expectations.
- Whether the growth in fitness, outdoor, aviation, and marine can offset continued weakness in auto.
- The nature and future effects of the intellectual property migration and the resulting tax rate.
- Portfolio exposure and recovery of marketable securities with unrealized losses, alongside the company’s liquidity needs.
- How much of the $638.4 million in commitments is binding, and whether supplier, customer-credit, inventory, or legal exposures change materially.