Garmin Ltd. — Q2 2019 Form 10-Q
Reporting period: 13 weeks ended June 29, 2019; first-half results cover 26 weeks. Comparative periods ended June 30, 2018. Dollar amounts below are in millions unless otherwise noted.
Business context and results
Garmin supplies navigation, communications and information devices across five reportable segments: outdoor, fitness, marine, auto and aviation.
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Net sales | $954.8 | $894.5 | $1,720.9 | $1,605.3 |
| Gross profit / margin | $575.4 / 60% | $523.3 / 59% | $1,027.1 / 60% | $949.8 / 59% |
| Operating income / margin | $256.2 / 27% | $217.5 / 24% | $407.6 / 24% | $359.7 / 22% |
| Net income | $223.7 | $190.3 | $363.8 | $319.7 |
| Diluted EPS | $1.17 | $1.00 | $1.91 | $1.69 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $275.2 | $438.1 |
Changes versus prior period
- Q2 sales rose 7%, operating income 18%, and net income approximately 18%. First-half sales rose 7%, operating income 13%, and net income 14%.
- Q2 revenue growth came from aviation (+20%), marine (+13%), fitness (+12%) and outdoor (+4%). Auto sales fell 13%, primarily due to continued contraction in the portable navigation device (PND) market. The same pattern held in the first half: four segments grew, while auto declined 12%.
- Management attributed improved Q2 gross margin and operating leverage to stronger sales and product mix. Fitness gross margin was pressured by lower average selling prices and mix; auto benefited from lower license expense and mix. Some auto license-expense favorability is expected to continue for the rest of 2019.
- Segment comparisons require care: Garmin refined its allocation of certain selling, general and administrative expenses in 2019 and did not restate prior-year segment results.
Cash, liquidity and capital resources
- At June 29, cash and equivalents were $820.2; marketable securities totaled $1,558.8, for combined cash and securities of approximately $2.38 billion. Working capital was approximately $1.43 billion.
- First-half operating cash flow decreased $162.8 year over year, mainly from working-capital use, including higher inventory, lower net receipts from accounts receivable, payments related to a license-agreement amendment, and lower income taxes payable.
- First-half investing cash use was $346.4, including $276.0 for acquisitions, compared with $185.9 used in the prior-year period. Financing cash use was $308.9, primarily dividends; three dividend payments fell in the first half versus two in 2018. Cash and equivalents declined $381.6 during the half.
- No borrowings are presented in the balance sheet. Operating lease liabilities were $60.7. Management stated existing cash balances and operating cash flow should cover projected capital expenditures, working capital and other cash requirements.
- Inventory rose to $648.1 from $561.8 at year-end. The company declared dividends of $2.28 per share in Q2.
Outlook, risks and unusual items
- Garmin expects a tax benefit from revaluing certain Swiss deferred tax assets following Swiss tax reform, but could not estimate its timing or amount because it depends on future enactment of cantonal tax rates.
- Tacx, acquired during 2019, contributed to fitness revenue and expenses. Acquisition cash outflows were $276.0 in the first half.
- Approximately 55% of the marketable-securities portfolio was in an unrealized-loss position at quarter-end; the fair value of those securities was $846.2. Garmin said it could hold them until maturity or recovery, did not expect to be required to sell, and recorded no material impairment charge.
- Open purchase orders and other commitments were approximately $463.2; the company said it could not determine how much represented binding contractual obligations. Management did not believe aggregate loss contingencies presented a reasonably possible material loss, while noting legal outcomes cannot be predicted with certainty.
- Management reported no material changes in previously disclosed risk factors or market risks. It cautioned that interim results are not necessarily indicative of full-year results and said it would not update forward-looking statements. No off-balance-sheet arrangements were reported.
Key facts for investors to verify
- Whether growth in fitness, marine, outdoor and aviation can offset continued auto/PND decline, and how much of fitness performance reflects Tacx.
- Whether the weaker first-half operating cash flow reflects timing and working-capital investment or persists; monitor inventory and cash conversion.
- The performance and credit quality of the substantial marketable-securities portfolio, including unrealized losses and interest-rate exposure.
- The eventual timing and amount of the Swiss tax-reform benefit and continuation of auto license-expense savings.
- Acquisition integration, related costs, and the nature of the reported commitments and legal contingencies.