Garmin Ltd. — Q1 2015 Form 10-Q
Business and period: Garmin provides GPS-enabled navigation, communications and information products across Outdoor, Fitness, Marine, Auto and Aviation. This unaudited report covers the 13 weeks ended March 28, 2015; the comparison is the 13 weeks ended March 29, 2014. Dollar amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Net sales | $585.4 | $583.2 | Up $2.2, approximately flat |
| Gross profit / margin | $344.1 / 58.8% | $330.8 / 56.7% | Profit up 4%; margin up about 210 bps |
| Operating income / margin | $111.7 / 19.1% | $120.4 / 20.6% | Down 7%; margin down about 160 bps |
| Net income / diluted EPS | $66.8 / $0.35 | $118.8 / $0.61 | Net income down 44% |
| Operating cash flow | $81.7 | $71.2 | Up $10.5 |
Gross margin improvement reflected lower cost of goods sold as a share of sales, particularly in Outdoor, Marine and Auto. Higher advertising, selling and administrative, and research and development expenses more than offset the gross-profit improvement at the operating-income level. The effective tax rate was 12.3%, versus 16.6%; the filing attributes the decrease primarily to the projected full-year income mix by taxing jurisdiction. The quarter also included a $44.3 million foreign-currency loss, compared with a $12.8 million gain in Q1 2014, principally from U.S. dollar movements against the euro and Taiwan dollar.
Segments
- Fitness: sales of $131.0 million, up 31%, supported by wellness and multisport products introduced in late 2014.
- Auto: sales of $216.1 million, down 11%; the company cited lower PND volumes and lower amortization of previously deferred revenue.
- Outdoor: sales of $75.9 million, down 10%; wearable growth was more than offset by handheld weakness.
- Marine: sales of $64.3 million, up 7%, partly reflecting the Fusion Electronics acquisition.
- Aviation: sales of $98.1 million, up 2%; OEM share gains were partly offset by aftermarket weakness and weakness in Europe.
Liquidity, capital and balance sheet
At March 28, 2015, cash and cash equivalents were $1.171 billion, and marketable securities totaled $1.529 billion ($270.2 million current and $1.259 billion noncurrent). Total current assets were $2.500 billion and current liabilities $824.3 million. Total assets were $4.543 billion; stockholders’ equity was $3.478 billion. The presented balance sheet lists no borrowings or debt. Cash and cash equivalents declined $24.9 million during the quarter, including a $22.0 million adverse effect from exchange rates.
Operating activities provided $81.7 million; investing activities provided $23.2 million, including net redemptions of marketable securities, while acquisition payments were $12.6 million. Financing activities used $107.7 million, including $92.0 million of dividends and $16.3 million of share repurchases. The board authorized up to $300 million of repurchases through December 31, 2016; $16.3 million had been used by quarter-end, leaving approximately $283.7 million available. Management said existing cash and operating cash flow should meet projected long-term capital expenditure, working-capital and other requirements.
Changes, outlook and risks
- Revenue was essentially flat, but the mix shifted: Fitness grew strongly while Auto and Outdoor declined. Management reported unit sales of 3,044 versus 2,492, without a clear unit scale in the filing text.
- Operating expenses increased as Garmin supported new products, added nearly 300 engineering personnel since the year-earlier quarter, increased Fitness advertising and incurred product-support and legal costs. Management cited legal fees associated with defending multiple matters.
- The filing provides no specific revenue or earnings guidance. Management cautioned that quarterly results are not necessarily indicative of the full fiscal year and said it would not update forward-looking statements.
- Contractual commitments were approximately $372.9 million over the next five years. After quarter-end, Garmin made a $43 million supplier prepayment, the majority expected to be classified as a noncurrent asset.
- Garmin said it did not expect legal proceedings to have a material adverse effect overall and did not believe a material loss was reasonably possible at quarter-end. However, litigation outcomes are uncertain. In the Harbinger/LightSquared matters, most claims were dismissed with prejudice in February 2015; negligent-misrepresentation and constructive-fraud claims remained, and Harbinger appealed.
- Approximately 43% of the marketable-securities portfolio was in an unrealized loss position. Garmin said it could hold the securities to maturity or recovery, did not intend to sell them and recorded no material impairment charge in the quarter.
- Management reported no material changes to the market, currency, inflation or interest-rate risks previously disclosed, and concluded disclosure controls were effective. It also reported no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether Fitness momentum and product introductions can offset continued Auto and Outdoor weakness.
- How foreign-exchange movements affect reported earnings and cash flow, given the quarter’s $44.3 million currency loss.
- Whether rising operating expenses, including R&D, advertising and legal costs, stabilize relative to revenue.
- Developments in the remaining patent, product and class-action matters, particularly the Marine sonar disputes and Harbinger/LightSquared claims.
- The composition, unrealized losses and liquidity of the marketable-securities portfolio, alongside the $372.9 million commitment schedule and capital returns.