Garmin Ltd. — Q2 2010 Form 10-Q
Reporting period: 13 and 26 weeks ended June 26, 2010; comparative periods ended June 27, 2009. Unaudited interim results. Garmin designs and sells GPS-enabled navigation, communications, and information devices across outdoor/fitness, marine, automotive/mobile, and aviation segments.
Financial performance
| Metric | Q2 2010 | Q2 2009 | First half 2010 | First half 2009 |
|---|---|---|---|---|
| Net sales | $728.8m | $669.1m | $1,159.8m | $1,105.8m |
| Gross profit / margin | $391.7m / 53.7% | $351.6m / 52.6% | $622.6m / 53.7% | $547.6m / 49.5% |
| Operating income / margin | $202.0m / 27.7% | $199.2m / 29.8% | $285.4m / 24.6% | $257.1m / 23.3% |
| Net income | $134.8m | $161.9m | $172.1m | $210.4m |
| Diluted EPS | $0.67 | $0.81 | $0.86 | $1.05 |
Q2 revenue rose 8.9%, while net income declined about 17%. For the first half, revenue rose 4.9%, but net income fell 18.2%. The substantial foreign-exchange expense was the principal drag: $43.6m in Q2 and $90.1m year to date, mostly from the U.S. dollar strengthening against the euro. Operating expenses also increased, including research and development and selling, general and administrative costs.
- Segments: Q2 outdoor/fitness sales increased 31.8%, marine 23.4%, automotive/mobile 2.4%, and aviation 1.1%. First-half automotive/mobile sales declined 4.0%; the other three segments grew. Automotive/mobile remained the largest segment, but fell to 57.6% of first-half sales from 63.0% a year earlier.
- Cash flow: First-half operating cash flow was $381.9m, down from $555.7m. Investing activities provided $104.9m, including net redemptions of securities; financing activities used $376.1m, including $299.1m of dividends and $84.3m of share repurchases. Cash increased $81.6m to $1,173.2m.
- Liquidity and debt: Current assets were $2,159.5m and current liabilities $436.4m at June 26. Marketable securities totaled $654.8m in the fair-value disclosure. The company reported no outstanding long-term debt and said existing cash and operating cash flow should cover projected requirements at least through fiscal 2010.
- Other balance-sheet items: Total assets were $3,431.4m and stockholders’ equity $2,651.6m. The balance sheet reports inventory of $358.6m, while the inventory note reports $373.3m; the filing text does not provide a clear reconciliation.
Changes, outlook, and notable items
- Q2 gross margin improved by 110 basis points, but included a $21.0m reduction in estimated warranty accruals (about 290 basis points of margin benefit). The first-half margin benefit was $42.8m (about 370 basis points). Management described this as a refinement of its warranty estimate.
- Operating margin declined in Q2 as higher advertising, SG&A, and R&D offset revenue and gross-margin gains. First-half operating margin improved year over year. R&D spending rose 22% in the first half, including costs associated with more than 500 additional engineering personnel and product development, including the mobile handset initiative.
- Management cited product introductions and market penetration for outdoor/fitness growth, industry recovery and market-share gains in marine, and recovery in aviation. First-half automotive/mobile unit volumes were affected by a first-quarter decline as excess retail inventory cleared; Q2 volumes improved.
- No specific full-year revenue or earnings guidance is stated. Management cautioned interim results are not necessarily indicative of full-year results and expects cash to fund capital expenditures, working capital, repurchases, and declared dividends through at least year-end 2010.
- The board authorized up to $300m of share repurchases through December 31, 2010. By June 26, the company had repurchased 3.1m shares for approximately $99.6m, including unsettled trades. After quarter-end it repurchased a further 3.0m shares; the filing reports approximately $111.6m remaining under the authorization after those purchases.
- Garmin completed its redomestication from the Cayman Islands to Switzerland after quarter-end. Management did not expect a significant financial-statement impact, but the filing discusses potential consequences of Swiss corporate, tax, dividend, and share-repurchase rules.
- Risks include foreign-exchange volatility, competition from mobile handsets and factory-installed navigation, automotive/mobile market maturity and margin pressure, economic and customer-credit conditions, seasonal and demand/inventory fluctuations, reliance on dealers and suppliers, Taiwan manufacturing and geopolitical exposure, GPS availability, and product liability and certification risks. Best Buy was identified as a customer representing more than 10% of sales (13.4% in 2009).
- The company disclosed multiple ongoing patent infringement matters and stated it intends to defend them; adverse outcomes could affect results or liquidity. It also held $64.5m of Level 3 auction-rate securities, in continuous unrealized loss positions for at least 12 months, and said it intended to hold them until recovery. Contractual purchase commitments were approximately $70.1m over five years; no off-balance-sheet arrangements were reported.
Important facts for investors to verify
- Reconcile the $358.6m balance-sheet inventory figure with the $373.3m amount in the inventory note.
- Assess how much reported gross-margin improvement depended on the warranty-reserve adjustment and whether future warranty experience supports the estimate.
- Monitor foreign-exchange effects, especially euro and Taiwan-dollar movements, and their impact on earnings versus cash flow.
- Review the valuation, liquidity, and recovery assumptions for Level 3 auction-rate securities and the outcomes of disclosed patent litigation.
- Track automotive/mobile segment trends, customer concentration, inventory levels, and the sustainability of spending and returns from the mobile handset initiative.
- Evaluate the financial and shareholder implications of Swiss redomestication, including dividend and repurchase taxation, and confirm remaining repurchase authorization after subsequent purchases.