Garmin Ltd. — Q2 2015 Form 10-Q
Reporting period: 13 and 26 weeks ended June 27, 2015; comparisons are to the periods ended June 28, 2014. Amounts below are USD unless stated otherwise. Garmin sells navigation, communications and information devices through its Outdoor, Fitness, Marine, Auto and Aviation segments.
Financial performance
| Metric | Q2 2015 | Q2 2014 | First half 2015 | First half 2014 |
|---|---|---|---|---|
| Net sales | $773.8m | $777.8m | $1,359.2m | $1,361.1m |
| Gross profit / margin | $419.3m / 54% | $444.5m / 57% | $763.4m / 56% | $775.3m / 57% |
| Operating income / margin | $166.7m / 22% | $218.8m / 28% | $278.4m / 20% | $339.1m / 25% |
| Net income | $137.8m | $182.0m | $204.5m | $300.8m |
| Diluted EPS | $0.72 | $0.93 | $1.07 | $1.54 |
| Operating cash flow | Not presented separately for quarter | $(15.7)m | $235.4m |
Q2 sales fell 1%, while gross profit fell 6% and operating income and net income each fell 24%. First-half sales were essentially flat; operating income declined 18% and net income 32%. Higher costs and operating expenses compressed margins. First-half foreign-currency losses were $44.8m versus $7.6m a year earlier; the first-half tax rate was 18.1% versus 14.3%.
Segment and operating developments
- Q2 segment sales: Auto $298.9m, down 15%; Fitness $158.6m, up 5%; Outdoor $110.3m, up 4%; Marine $103.7m, up 41%; Aviation $102.3m, up 5%.
- Management estimated the strong U.S. dollar reduced Q2 revenue by about $59m and first-half revenue by about $97m. Total unit sales rose 8% in Q2 and 13% in the first half, led principally by Fitness and Marine.
- Management attributed Marine growth to new products and the Fusion Electronics acquisition. Fitness growth reflected wellness and multisport products. Auto weakness included lower portable navigation device volumes and reduced amortization of previously deferred revenue.
- Q2 advertising rose 31% and R&D rose 11% year over year; R&D spending supported new products, software capabilities and exploration of new categories. More than 100 engineering personnel had been added since the prior-year period.
Cash, liquidity, debt and capital allocation
At June 27, 2015, cash and cash equivalents were $938.2m and marketable securities totaled $1,508.4m, versus $1,196.3m and $1,575.3m at year-end 2014. Current assets were $2,283.3m and current liabilities $961.7m. The balance sheet lists no borrowings or debt; the filing does not identify a debt balance. Management said existing cash and expected operating cash flow should meet long-term capital, working-capital and other cash needs.
First-half operating cash flow was negative $15.7m, primarily reflecting tax-payment timing related to an intercompany restructuring, lower net income and working-capital movements; the filing also identifies unrealized currency losses as a partial offset. Investing cash flow was $7.1m, including $12.6m for acquisitions and $39.7m of property and equipment purchases. Financing cash outflow was $231.7m, including $183.9m in dividends and $57.3m in share repurchases. The company declared dividends of $2.04 per share in the first half. Its $300m repurchase authorization had about $242.7m remaining at quarter-end.
Outlook, risks and unusual items
- The filing gives no specific revenue or earnings guidance. Management’s liquidity statement is its principal forward-looking financial commentary; interim results are not necessarily indicative of full-year results.
- Currency exposure is material: foreign exchange reduced reported revenue and produced substantial first-half losses. Management reported no material change in market-risk disclosures from the 2014 Form 10-K.
- Contractual commitments were approximately $333.3m over five years. After quarter-end, Garmin made a $43m supplier prepayment, to be classified as a noncurrent asset.
- Management did not believe a material loss from legal contingencies was reasonably possible at quarter-end, but cautioned that adverse outcomes could affect results. In the Harbinger/LightSquared litigation, most claims were dismissed with prejudice; remaining negligent-misrepresentation and constructive-fraud claims and related proceedings continued. Harbinger sought at least $1.9bn in damages. Separate marine-sonar patent proceedings included an administrative law judge finding infringement of certain claims of one patent, subject to ITC review; another sonar investigation’s initial determination found no infringement, also subject to review.
- About 56% of the marketable-securities portfolio was in an unrealized-loss position. Garmin said it did not intend, and was not likely required, to sell before recovery; it recorded no material impairment charge during the first half.
- The company was evaluating the impact of the forthcoming revenue-recognition standard. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether currency movements and Auto-segment weakness continue to pressure sales, margins and earnings.
- Whether Fitness and Marine growth can offset higher product, advertising and development costs, including the margin trends in those segments.
- The drivers and persistence of negative first-half operating cash flow, particularly tax-payment timing and working-capital changes.
- Developments in the sonar patent and LightSquared cases, including potential financial or product-market consequences.
- Liquidity and capital allocation after the declared dividend, remaining repurchase authorization, commitments and $43m supplier prepayment.