Garmin Ltd. — Q2 2013 Form 10-Q
Reporting period: 13 and 26 weeks ended June 29, 2013, compared with the periods ended June 30, 2012. Interim financial statements are unaudited; amounts below are U.S. dollars, generally in millions unless stated otherwise.
Business context and financial performance
Garmin develops and sells navigation, communications and information products across Outdoor, Fitness, Marine, Automotive/Mobile and Aviation. Automotive/Mobile remained the largest segment, contributing 50% of Q2 sales and 48% in the first half.
- Q2 revenue: $696.6 million, down 3% year over year. Net income was $172.5 million, down 7%; diluted EPS was $0.88 versus $0.95.
- First-half revenue: $1,228.5 million, down 4%. Net income was $261.2 million, down 4%; diluted EPS was $1.33 versus $1.39.
- Margins and operating results: Q2 gross margin was 55% versus 59%; operating income was $169.9 million, down 17%, with a 24% operating margin versus 28%. First-half gross margin was 54% versus 55%; operating income was $249.8 million, down 15%, with a 20% operating margin versus 23%.
- Cash flow: First-half operating cash flow was $263.7 million versus $345.1 million. Capital expenditures were $29.7 million; operating cash flow less those purchases was approximately $233.9 million. Cash and cash equivalents declined by $147.7 million to $1,083.5 million.
- Liquidity and debt: Current assets were $2,346.3 million and current liabilities $889.7 million (about 2.6 times current coverage). Cash plus marketable securities totaled approximately $2,701.8 million. Garmin reported no outstanding long-term debt.
- Capital returns: First-half dividends paid were $263.9 million. A $300 million repurchase authorization began in February; Garmin had repurchased 383,790 shares for $13.4 million by June 29, with approximately $286.6 million remaining. The income statement reports dividends declared of $1.80 per share for both comparative periods.
Material changes and segment trends
- Automotive/Mobile sales fell 12% in Q2 and 11% in the first half, principally reflecting lower personal navigation device (PND) volumes. Total unit sales decreased 7% in Q2 and 8% in the first half.
- Q2 sales grew in Aviation (+16%), Marine (+7%), Outdoor (+6%) and Fitness (+3%). First-half Aviation grew 13%, Outdoor 3% and Fitness 2%; Marine declined 1%.
- First-half segment operating income fell most sharply in Marine (down 56%) and Automotive/Mobile (down 23%). Aviation operating income rose 10%.
- Research and development expense increased 20% in Q2 and 15% in the first half, reflecting product development and nearly 300 additional engineering personnel. Lower advertising and SG&A partly offset the increase.
- Comparisons are affected by a $20.8 million supplier license-fee overpayment credit recorded in Q2 2012 cost of goods sold. Its absence in 2013 weighed on reported year-over-year gross margin, particularly in Automotive/Mobile.
Outlook, risks and unusual items
- The filing provides no specific full-year revenue or earnings guidance. Management cited planned Outdoor and Fitness product launches in the second half of 2013, continued investment in Aviation OEM opportunities, marine product enhancements and automotive OEM opportunities. Management stated existing cash and operating cash flow should cover projected long-term capital, working-capital and other cash needs.
- Foreign-currency movements produced a $27.5 million Q2 gain and a $19.1 million first-half gain, versus losses in the 2012 comparisons; this materially supported other income. Results remain exposed to currency volatility.
- Income tax expense was $34.1 million in Q2, with a 16.5% effective rate versus 10.4%. The first-half effective rate was 9.4% versus 11.2%, aided by $26.5 million of reserve releases and $6.3 million of R&D tax credits; these items may not recur.
- Marketable securities had $41.0 million of gross unrealized losses at quarter-end, associated mainly with higher Treasury yields and lower valuations of mortgage-backed and municipal securities. Approximately half the portfolio was in an unrealized loss position; Garmin stated it could hold the securities and recorded no impairment.
- Garmin agreed to provide Bombardier a short-term, interest-free loan of up to $173.7 million in installments through September 2013, with repayment scheduled from November 2013 through March 2014. $82.0 million had been advanced by June 29.
- Commitments for purchases of raw materials, advertising and other items totaled approximately $210.3 million over five years. The company disclosed multiple patent and other legal matters; management did not expect the proceedings collectively to materially adversely affect results, financial position or cash flows, while acknowledging outcomes are uncertain.
- Other stated risks include weaker PND demand, macroeconomic weakness in marine markets, product pricing and semiconductor/raw-material costs, investment-portfolio interest-rate sensitivity, and foreign exchange exposure. Management reported no material change to the prior annual report’s risk factors.
Key facts for investors to verify
- Whether Automotive/Mobile demand and PND unit declines persist, and whether growth in Aviation and other segments can offset them.
- How much margin pressure reflects the nonrecurrence of the 2012 license-fee credit versus current pricing, product mix and operating costs.
- Whether the Bombardier loan is repaid on schedule and whether related aircraft-program certification delays affect future sales or cash flows.
- Changes in marketable-security valuations, unrealized losses and the company’s ability and intention to hold securities through recovery or maturity.
- The sustainability of reported earnings given currency gains, tax-reserve releases and tax credits, as well as the scale of ongoing R&D investment and planned shareholder returns.
- Developments in the disclosed litigation and any resulting financial exposure; the filing does not quantify a probable loss.