Garmin Ltd. — Q1 2019 Form 10-Q
Business context and reporting period
Garmin designs and sells navigation, communications, and information devices across five reportable segments: outdoor, fitness, marine, auto, and aviation. This unaudited report covers the 13 weeks ended March 30, 2019; comparable figures are for the 13 weeks ended March 31, 2018. Financial figures below are in U.S. dollars; unless stated otherwise, amounts are converted from thousands to millions.
Financial performance and liquidity
- Revenue: $766.1 million, up 8% year over year. Gross profit was $451.7 million, up 6%; gross margin declined to 59% from 60%.
- Operating results: Operating income rose 6% to $151.4 million; operating margin was approximately 20%, unchanged. Net income increased 8% to $140.2 million. Diluted EPS was $0.74 versus $0.68.
- Costs and taxes: Operating expenses totaled $300.3 million, up 6%; SG&A increased 8%, R&D 3%, and advertising 9%. The effective tax rate was 15.7%, versus 16.0%.
- Segment revenue: Outdoor $154.1 million (+7%); fitness $180.3 million (+9%); marine $134.0 million (+18%); auto $127.0 million (-10%); aviation $170.8 million (+17%).
- Cash flow: Operating cash flow was $164.6 million, down from $214.2 million. Investing used $32.6 million, compared with $112.6 million; financing used $213.4 million, compared with $100.8 million. Cash and cash equivalents declined to $1.116 billion from $1.202 billion during the quarter.
- Liquidity and debt: Cash and marketable securities totaled approximately $2.65 billion at quarter-end. Current assets were $2.51 billion and current liabilities $622.5 million. The balance sheet reports no borrowings; operating lease liabilities totaled $56.4 million. Management said existing cash and operating cash flow should meet projected long-term needs.
- Other balance-sheet items: Total assets were $5.28 billion and stockholders’ equity $4.32 billion. Inventory rose to $598.4 million from $561.8 million. Marketable securities were $1.535 billion in fair value.
Material changes and management commentary
- Growth in outdoor and fitness was attributed mainly to wearables; marine growth to chartplotters and sonar; and aviation growth to OEM and aftermarket product lines. Auto revenue declined amid ongoing contraction in the PND market.
- Fitness gross margin fell to 50% from 58%, primarily due to lower average selling prices and product mix. Outdoor margin also declined; marine and aviation margins were relatively flat. Segment operating income fell sharply in fitness and modestly in outdoor, while marine, auto, and aviation increased.
- Operating cash flow decreased mainly because of lower working-capital cash contribution, including lower net receipts from accounts receivable and higher inventory cash outflows. Financing outflow rose principally because two dividend payments occurred in Q1 2019 versus one in Q1 2018.
- Management refined its allocation method for certain SG&A expenses among segments in Q1 2019. Prior-year segment figures were not restated; management estimated the change would shift about $4 million of prior-year operating income from aviation to marine for comparison.
Outlook, risks, contingencies, and unusual items
- The filing provides no specific quarterly or annual revenue or earnings guidance. Management stated that available cash and operating cash flow are expected to be sufficient for long-term capital expenditure, working-capital, and other requirements.
- Management reported no material change in previously disclosed business or market risks. It cited foreign-exchange, interest-rate, and investment-value sensitivities; no material market-risk changes were reported for the quarter.
- The company had approximately $435.1 million of open purchase orders and other commitments, though it could not determine how much represented binding contractual obligations. Management did not believe a material loss from legal contingencies was reasonably possible in aggregate; outcomes remain uncertain.
- About 73% of the securities portfolio was in an unrealized loss position at quarter-end. The company said it did not intend, and was not likely to be required, to sell those securities before recovery; it recorded no material impairment charge.
- Garmin adopted the new lease standard at the start of fiscal 2019, recording $55.0 million of right-of-use assets and $56.4 million of lease liabilities at quarter-end; management did not expect a material effect on income or cash flows. On April 1, 2019, it acquired Dutch indoor-cycling company Tacx; the acquisition was described as not material.
Important facts for investors to verify
- Whether wearables-led growth in outdoor and fitness can offset continued contraction in auto, and whether fitness gross-margin pressure persists.
- Drivers of the $49.6 million year-over-year decline in operating cash flow, particularly working capital and inventory.
- Effects of the revised segment expense-allocation methodology when comparing segment profitability with prior periods.
- Exposure of the marketable-securities portfolio to interest rates, issuer credit, and unrealized losses, as well as the company’s ability to hold securities to recovery.
- Future cash demands from dividends, capital investment, lease obligations, and the Tacx acquisition; the filing gives no specific forward earnings guidance.