Garmin Ltd. — Q3 2015 Form 10-Q
Business context and period: Garmin designs and sells GPS-enabled navigation, communications and information products across Outdoor, Fitness, Marine, Auto and Aviation. This unaudited quarterly report covers the 13 weeks ended September 26, 2015; year-to-date figures cover 39 weeks. Comparisons are with the periods ended September 27, 2014.
Key financial metrics
| Metric | Q3 2015 | Q3 2014 | 39 weeks 2015 | 39 weeks 2014 |
|---|---|---|---|---|
| Net sales | $679.7m | $706.3m | $2,038.9m | $2,067.4m |
| Gross profit / margin | $362.2m / 53% | $398.2m / 56% | $1,125.6m / 55% | $1,173.6m / 57% |
| Operating income / margin | $125.5m / 18% | $175.5m / 25% | $403.8m / 20% | $514.6m / 25% |
| Net income (loss) | $119.3m | ($146.8m) | $323.8m | $154.0m |
| Diluted earnings per share | $0.63 | ($0.76) | $1.69 | $0.79 |
- Cash flow: For the 39 weeks, operating cash flow was $122.1m, versus $377.7m; investing activities provided $2.8m, versus $116.4m; financing used $379.7m, versus $503.6m. Cash declined $281.4m to $914.9m.
- Liquidity and debt: At September 26, cash and cash equivalents were $914.9m and marketable securities totaled $1,502.0m. Current assets were $2,232.0m and current liabilities $894.7m. The balance sheet presents no borrowings line item.
- Capital returns: The company paid $281.2m in dividends and repurchased $108.1m of shares during the first 39 weeks. It declared dividends of $2.04 per share for the 39-week period, compared with $1.92 a year earlier.
Material changes versus prior periods
- Q3 sales fell 4%; year-to-date sales fell 1%. Management estimated that U.S. dollar strength reduced sales by about $52m in Q3 and $148m year to date, each approximately 7% of revenue.
- Q3 operating income declined 29%, and year-to-date operating income declined 22%, as gross margins contracted and operating expenses increased. Year-to-date research and development expense rose 9%, while advertising increased 19%.
- Fitness revenue grew 23% in Q3 and 18% year to date; Marine grew 18% year to date. Auto revenue fell 14% in Q3 and 13% year to date. Management cited lower auto PND volumes and lower amortization of previously deferred revenue. Aviation sales were down 5% in Q3 but up 1% year to date.
- Q3 net income turned positive from a prior-year loss largely because the 2014 quarter included a $307.6m tax expense from an intercompany restructuring. Q3 2015 effective tax rate was 28%; year-to-date rate was 22%.
- Q3 included a $30.6m foreign-currency gain, compared with a $12.7m loss a year earlier. Year-to-date foreign-currency results remained a $14.2m loss.
Outlook, risks and unusual items
- The filing provides no specific revenue or earnings guidance. Management said existing cash balances and operating cash flow should be sufficient for projected long-term capital expenditures, working capital and other cash needs.
- Management cited product development, software improvements and new categories as R&D priorities; more than 100 engineering personnel had been added since the prior-year comparable period.
- Foreign exchange remains a material exposure. Management reported no material change in market-risk exposures from its 2014 Form 10-K. The company’s investment portfolio was $1.502bn; about 49% of securities were in an unrealized loss position, which management attributed to market factors and did not consider a temporary credit impairment. It stated it did not intend, and was not more likely than not required, to sell those securities before recovery.
- Contractual commitments were approximately $312.3m over the next five years. Garmin reported various patent, product and other legal matters, including LightSquared-related litigation and marine sonar patent disputes. Management did not expect material losses overall, while acknowledging adverse outcomes could affect results or liquidity; it considered the claims without merit and intended to defend them.
- The board authorized up to $300m in share repurchases through December 31, 2016; $108.1m had been used by quarter-end, leaving approximately $191.9m available. The company reported no off-balance-sheet arrangements.
Important facts for investors to verify
- Whether subsequent results confirm stabilization in Auto and continued Fitness and Marine growth, given the reported year-over-year declines in operating income and margins.
- The persistence and financial impact of currency movements, including the difference between Q3’s currency gain and the year-to-date currency loss.
- Cash conversion and working-capital trends: year-to-date operating cash flow fell materially, with management citing tax-payment timing and movements in other assets and liabilities.
- Developments in the LightSquared and marine sonar litigation, including potential financial exposure and any changes to management’s assessment.
- Future capital allocation, including dividend sustainability, remaining repurchase authorization and the liquidity and valuation of the marketable-securities portfolio.