Garmin Ltd. — Q3 2019 Form 10-Q
Business context and reporting period. Garmin provides navigation, communications and information devices across outdoor, fitness, marine, auto and aviation markets. This unaudited report covers the 13 weeks ended September 28, 2019, and year-to-date results for the 39 weeks ended that date; comparisons are to the corresponding 2018 periods.
Financial performance
Amounts below are in millions of U.S. dollars, except per-share data and percentages.
| Metric | Q3 2019 | Q3 2018 | 39 weeks 2019 | 39 weeks 2018 |
|---|---|---|---|---|
| Net sales | $934.4 | $810.0 | $2,655.3 | $2,415.3 |
| Gross profit / margin | $567.5 / 60.7% | $480.7 / 59.3% | $1,594.5 / 60.1% | $1,430.6 / 59.2% |
| Operating income / margin | $261.5 / 28.0% | $196.0 / 24.2% | $669.1 / 25.2% | $555.7 / 23.0% |
| Net income / margin | $227.9 / 24.4% | $184.2 / 22.7% | $591.7 / 22.3% | $503.9 / 20.9% |
| Diluted EPS | $1.19 | $0.97 | $3.10 | $2.66 |
| Operating cash flow | Not separately reported | Not separately reported | $464.2 | $701.8 |
- Q3 sales rose 15%, operating income 33%, and net income 24% year over year. For the first 39 weeks, sales rose 10%, operating income 20%, and net income 17%.
- Q3 operating margin improved about 3.8 percentage points and gross margin about 1.4 points. YTD operating margin improved about 2.2 points.
- Q3 revenue growth was led by outdoor (+23%), fitness (+28%), and aviation (+28%); marine grew 9%. Auto fell 17%. YTD, aviation grew 22%, fitness 16%, marine 13%, outdoor 12%, while auto declined 13%.
- At September 28, cash and cash equivalents were $976.4 million and marketable securities totaled $1,552.8 million, for approximately $2.53 billion combined. Current assets were $2.76 billion and current liabilities $1.04 billion. No borrowings are listed in the supplied balance sheet.
- Total assets were $5.76 billion, stockholders’ equity $4.38 billion, and inventories $749.8 million, up from $561.8 million at December 29, 2018. The balance sheet also reports $56.3 million of operating lease liabilities.
- YTD cash from operations was $464.2 million, investing cash outflow $367.8 million, and financing cash outflow $308.9 million. Cash, cash equivalents and restricted cash declined $224.4 million to $977.4 million.
Material changes and management commentary
- Management attributed growth to product demand, including adventure watches and inReach products in outdoor; wearables and acquired Tacx products in fitness; chartplotters and sonar in marine; and OEM and aftermarket sales in aviation. Auto weakness reflected lower OEM sales and continued contraction in the portable navigation device market.
- Q3 gross-margin improvement reflected sales growth and product mix, including lower auto license expense. Management said some auto license-cost benefit was expected to continue for the remainder of 2019. YTD fitness gross margin declined, primarily due to lower average selling prices and product mix.
- Operating expenses increased in dollars, largely due to personnel, engineering, and recent-acquisition costs; operating expenses declined as a share of sales. Management cited operating leverage as a contributor to higher operating income.
- Operating cash flow fell $237.6 million year over year. Management attributed the decrease primarily to working-capital use, including higher inventory to support a broader product range, lower net receipts from accounts receivable, and payments related to a license-agreement amendment.
- YTD acquisition spending was $275.3 million, compared with $29.2 million in the prior-year period; the filing discusses the acquired Tacx business. YTD dividends declared were $433.5 million; cash dividends paid were $308.9 million.
- The company refined its allocation of certain selling, general and administrative expenses among segments in 2019. Prior-year segment figures were not restated, limiting direct segment comparisons.
Outlook, risks and unusual items
- The filing provides no specific sales, earnings, or margin guidance. Garmin said existing cash balances and operating cash flow were expected to be sufficient for projected capital expenditures, working capital and other cash needs.
- Following enactment of Swiss federal and Schaffhausen cantonal tax reform in October 2019, the company expected a Q4 2019 tax benefit of approximately $20 million to $220 million from increased deferred tax assets. The range and effect on the ongoing tax rate remained under evaluation.
- Q3 foreign-currency losses were $16.3 million, versus $6.9 million a year earlier, primarily reflecting U.S. dollar strength against the euro and British pound. YTD currency losses were $12.6 million, compared with $3.4 million.
- Inventory obsolescence provisions were $32.5 million YTD, up from $17.7 million. Approximately 44% of the marketable-securities portfolio was in an unrealized-loss position; management said it did not intend, and was not likely to be required, to sell those securities before recovery and recorded no material impairment.
- Open purchase orders and other commitments totaled approximately $467.3 million, although Garmin noted these may include authorizations that are not binding contracts. Management did not consider a material loss from legal contingencies reasonably possible in the aggregate; claims include patent and other intellectual-property matters.
- Garmin identified no material change in its previously disclosed risk factors or market-risk exposures, and reported no off-balance-sheet arrangements. It stated that disclosure controls were effective and that no material change in internal control over financial reporting occurred during the quarter.
Important facts for investors to verify
- Whether the expected Swiss tax benefit ultimately falls within the stated $20 million–$220 million range and how tax reform affects the ongoing effective tax rate.
- Whether elevated inventory converts to sales as intended, and whether inventory growth or obsolescence provisions pressure future cash flow and margins.
- Whether operating cash flow recovers after the reported working-capital outflows and acquisition spending.
- Whether continued growth in outdoor, fitness, marine and aviation offsets ongoing auto-market weakness; review the segment-allocation change when comparing historical segment profitability.
- Exposure to foreign-currency movements, marketable-securities valuation changes, legal claims, and the nature of the reported license-agreement amendment payments.