Garmin Ltd. — FY2019 Form 10-K
Reporting period: Fiscal year ended December 28, 2019 (52 weeks). The filing also reports unaudited fourth-quarter results. Unless stated otherwise, financial amounts below are in U.S. dollars.
Business context
Garmin designs, manufactures and sells GPS-enabled and related products across five reportable segments: fitness, outdoor, aviation, auto and marine. Consumer-product sales are typically strongest in the second and fourth quarters. Garmin operates globally, with substantial manufacturing in Taiwan and other facilities in the United States, China and the Netherlands.
Financial performance and liquidity
| Metric | FY2019 | FY2018 | Change |
|---|---|---|---|
| Net sales | $3,757.5 million | $3,347.4 million | +12% |
| Gross profit / margin | $2,234.0 million / 59% | $1,979.7 million / 59% | Profit +13% |
| Operating income / margin | $945.6 million / 25% | $778.3 million / 23% | Income +21% |
| Net income | $952.5 million | $694.1 million | +37% |
| Diluted EPS | $4.99 | $3.66 | +36% |
| Operating cash flow | $698.5 million | $919.5 million | −$221.0 million |
| Cash, cash equivalents and marketable securities | $2,609.5 million | $2,714.8 million | −$105.3 million |
| Total debt | None | None | — |
At year-end, current assets were $3,057.9 million and current liabilities were $1,035.9 million. Total assets were $6,166.8 million and shareholders’ equity was $4,793.5 million. The board-approved dividend was $2.28 per share. FY2019 cash used in investing was $450.7 million, including $300.3 million paid for acquisitions; cash used in financing was $416.0 million, primarily reflecting dividends.
Fourth-quarter net sales were $1,102.2 million versus $932.1 million a year earlier; net income was $360.8 million versus $190.2 million. The filing presents these quarterly figures as unaudited.
Material changes versus FY2018
- Fitness revenue rose 22% to $1,047.5 million, led by wearables and including Tacx, acquired in April 2019. Outdoor rose 13% to $917.6 million; aviation rose 22% to $735.5 million; and marine rose 15% to $508.9 million.
- Auto revenue fell 14% to $548.1 million, attributed to continued contraction in personal navigation devices (PNDs) and lower auto OEM program sales.
- Operating income improved across all segments. Total operating margin rose about 190 basis points, reflecting sales growth, slightly higher gross margin and operating-expense leverage. Fitness margin declined, primarily due to lower average selling prices and product mix.
- Net income growth was amplified by a $118.0 million tax benefit from the revaluation and step-up of certain Swiss tax assets. Excluding this benefit, reported net income growth would have been materially lower.
- Operating cash flow declined as working capital used more cash, including higher inventory and lower net receivable collections. Inventory increased to $752.9 million from $561.8 million.
- Comparisons of segment operating expenses and income are affected by a revised allocation methodology for certain SG&A costs beginning in 2019; prior-year segment figures were not restated.
Outlook, risks and unusual items
- The filing provides no numerical FY2020 revenue or earnings guidance. Management says existing cash and operating cash flow are expected to fund projected working capital, capital expenditures and other requirements.
- In February 2020, Garmin initiated a transaction to migrate ownership of certain consumer-product intellectual property from Switzerland to the United States, with a multi-year intercompany license. Management expects a favorable shift in income mix and lower expense related to uncertain tax positions, but outcomes depend partly on an advance pricing agreement with tax authorities.
- Gross unrecognized tax benefits were $101.3 million, primarily related to transfer pricing. The filing says $25–$40 million may decrease within 12 months as statutes of limitations expire; tax audits and transfer-pricing resolution could affect earnings or cash flows.
- Garmin recorded an approximately $3 million goodwill impairment for auto OEM. The approximately $80 million of auto PND goodwill was not impaired, but management disclosed it could be at risk if future results or market conditions deteriorate.
- Key risks include continued PND decline and lower-margin auto OEM investment, competition and product-transition execution, component availability and pricing, foreign-exchange volatility, trade restrictions and Taiwan geopolitical exposure, cybersecurity and privacy, and required product certifications. COVID-19 was identified as a potential disruption risk; the filing does not quantify an impact on FY2019 results.
- Management did not expect pending legal matters to have a material adverse effect. Garmin reported no off-balance-sheet arrangements. Ernst & Young issued unqualified opinions on the financial statements and internal control; Tacx was excluded from the internal-control assessment.
Important facts for investors to verify
- How much of the 2019 earnings increase is sustainable after separating the $118 million Swiss tax benefit from recurring operating performance.
- Whether fitness, outdoor, aviation and marine growth can continue, and whether auto PND declines or auto OEM investment pressure segment profitability.
- Cash conversion and working-capital trends, particularly inventory levels and receivable collections after the year-end increase in inventory.
- Resolution and cash-tax implications of transfer-pricing positions, the Swiss-to-U.S. IP transaction, and the related advance pricing agreement.
- Potential impairment sensitivity of auto PND goodwill and any business or supply-chain effects from the risks identified in the filing.