Garmin Ltd. — Q3 2009 Form 10-Q
Business context and reporting period. Garmin supplies GPS-enabled navigation, communications and information products across outdoor/fitness, marine, automotive/mobile and aviation markets. This unaudited quarterly report covers the 13 weeks and 39 weeks ended September 26, 2009, compared with the periods ended September 27, 2008. Amounts below are in U.S. dollars; financial statement amounts are converted from thousands to millions where shown.
Key financial results
| Metric | Q3 2009 | Q3 2008 | 39 weeks 2009 | 39 weeks 2008 |
|---|---|---|---|---|
| Net sales | $781.3M | $870.4M | $1,887.1M | $2,445.8M |
| Gross profit / margin | $409.7M / 52.4% | $385.6M / 44.3% | $957.4M / 50.7% | $1,122.9M / 45.9% |
| Operating income / margin | $236.9M / 30.3% | $214.4M / 24.6% | $494.0M / 26.2% | $625.6M / 25.6% |
| Net income | $215.1M | $171.2M | $425.5M | $575.1M |
| Diluted EPS | $1.07 | $0.82 | $2.12 | $2.68 |
| Operating cash flow | Not separately reported by quarter | $848.6M | $512.7M |
Cash and cash equivalents were $1,011.8M at September 26, 2009, versus $696.3M at December 27, 2008. Marketable securities totaled $788.1M, including $66.6M of Level 3 auction-rate securities. Current assets were $2,078.9M and current liabilities $712.0M. The company reported no outstanding long-term debt and said it had no meaningful debt-related interest-rate risk.
Material changes versus prior comparable periods
- Q3 sales declined 10.2%, while net income rose 25.6%; gross margin expanded 8.1 percentage points. Management attributed the margin improvement principally to lower unit costs, favorable currency effects, product mix and cost reductions.
- For the first 39 weeks, sales declined 22.8%, operating income fell 21.0%, and net income fell 26.0%. Gross margin nevertheless rose 4.8 percentage points.
- Automotive/mobile remained the largest segment, but revenue fell 12.9% in Q3 and 27.4% year to date. Year-to-date aviation and marine sales fell 29.2% and 16.1%, respectively; outdoor/fitness sales increased 3.9% year to date.
- Q3 total unit sales were approximately flat at 3.866M versus 3.855M a year earlier. Year-to-date unit sales fell 5% to 9.997M.
- Year-to-date operating cash flow increased by $335.9M. Lower receivables and inventories contributed to cash generation; investing activities used $558.4M, mainly reflecting net purchases of fixed-income securities.
Management commentary, outlook and risks
- Management said existing cash and operating cash flow should cover projected capital expenditures, working capital, share repurchases and other needs at least through fiscal 2010. The filing does not provide specific revenue or earnings guidance.
- Management cited global macroeconomic weakness and market penetration as pressures on automotive/mobile sales, and a significant industry slowdown in aviation. R&D spending rose 7.0% year to date, including the addition of more than 230 engineering personnel.
- Q3 SG&A included a bad-debt accrual tied to collection risks at several customers. The filing does not specify the amount of this accrual.
- Q3 foreign-currency gains were $11.8M, compared with a $12.7M loss in Q3 2008. Lower interest rates reduced investment income. For the first 39 weeks of 2008, other income included a $50.9M gain on sale of equity securities, making year-over-year comparisons less comparable.
- The effective tax rate was 16.2% for Q3 and 17.6% year to date, versus 19.0% in the respective 2008 periods. The company attributed the lower 2009 rate partly to release of 2005 tax reserves after the statute of limitations expired.
- Risks include foreign-exchange movements, product pricing and semiconductor/raw-material costs, and litigation. Several patent cases remained pending; Garmin stated it believed the claims lacked merit and intended to defend them. The filing reported no material changes to the risk factors in its 2008 Form 10-K.
- Contractual purchase commitments were approximately $72.8M over the next five years. The company reported no off-balance-sheet arrangements. A $0.75-per-share dividend was declared; $150.4M was shown as payable at quarter-end.
Important facts for investors to verify
- Whether automotive/mobile and aviation demand stabilized after the substantial year-to-date sales declines, and whether newer products can sustain outdoor/fitness growth.
- Whether Q3 gross-margin gains from costs, mix and currency are repeatable, particularly as pricing and unit volumes remain under pressure.
- The extent of customer collection risk and any further bad-debt provisioning.
- The valuation, liquidity and recovery prospects of the $66.6M Level 3 auction-rate securities and the broader investment portfolio.
- Potential cash-flow and financial exposure from pending patent litigation, together with the status of the declared dividend and share-repurchase authorization.