Garmin Ltd. — 2015 Form 10-K
Business and period: Garmin designs, manufactures and sells GPS-enabled navigation, communications and information products across five segments: Auto, Aviation, Marine, Outdoor and Fitness. This filing covers the 52-week fiscal year ended December 26, 2015; comparisons are with the 52 weeks ended December 27, 2014. Figures below are in U.S. dollars unless stated otherwise.
Financial performance and liquidity
| Metric | FY 2015 | FY 2014 | Change / context |
|---|---|---|---|
| Net sales | $2,820.3 million | $2,870.7 million | Down 2%; management estimated the stronger U.S. dollar reduced revenue by about $189 million, or 6%. |
| Gross profit / margin | $1,538.7 million / 54.6% | $1,604.4 million / 55.9% | Profit down 4%; margin declined about 130 basis points. |
| Operating income / margin | $549.6 million / 19.5% | $690.6 million / 24.1% | Down 20%; operating expenses rose while revenue and gross margin weakened. |
| Net income / diluted EPS | $456.2 million / $2.39 | $364.2 million / $1.88 | Net income rose 25%, principally reflecting the absence of the $307.6 million restructuring-related tax expense recorded in 2014. |
| Operating cash flow | $280.5 million | $522.7 million | Down $242.2 million, largely due to timing of tax payments and working-capital movements. |
| Capital expenditures | $80.6 million | $73.3 million | Operating cash flow less capital expenditures was approximately $199.9 million. |
| Cash and marketable securities | $2,391.6 million | $2,771.6 million | Cash was $833.1 million; marketable securities were $1,558.5 million. |
| Total debt | None | None | No long-term debt outstanding. |
| Total assets / equity | $4,499.4 million / $3,345.1 million | $4,693.3 million / $3,403.4 million | Current assets were $2,211.1 million and current liabilities $866.0 million. |
Segment results
| Segment | FY 2015 sales | Year-over-year change | Reported drivers |
|---|---|---|---|
| Auto | $1,048.1 million | Down 15% | Lower volume and reduced amortization of previously deferred revenue; segment remained the largest at 37% of sales. |
| Fitness | $661.6 million | Up 16% | Growth from wearables, with weaker segment operating income amid product mix, pricing and higher operating costs. |
| Aviation | $398.6 million | Up 3% | Market-share gains partly offset industry weakness. |
| Outdoor | $425.2 million | Down 1% | Currency and maturing product categories largely offset by outdoor wearables. |
| Marine | $286.8 million | Up 15% | New product introductions supported growth. |
Fourth-quarter indicators
Unaudited fourth-quarter 2015 sales were $781.4 million, gross profit $413.1 million and net income $132.4 million, compared with $803.3 million, $430.8 million and $210.2 million, respectively, in fourth-quarter 2014. The 2014 comparison includes the year’s unusual tax and restructuring effects.
Outlook, commentary and material risks
- 2016 outlook: Management expected revenue of approximately $2.82 billion, with growth in Outdoor, Fitness, Aviation and Marine offset by continued Auto declines. It expected Auto to decline, cost of goods sold as a percentage of sales and total-company gross margin to be relatively consistent, and R&D and SG&A expenses to increase. Advertising was expected to be relatively flat.
- Management forecast approximately $475 million of operating cash flow and $75 million of capital expenditures in 2016. The expected 2016 effective tax rate was approximately 20.5%. These are forward-looking estimates, not guarantees.
- Shareholders approved a $2.04-per-share 2015 dividend, payable in four $0.51 installments; the March 2016 installment was expected, and the company then anticipated quarterly dividends for the remaining 2016 quarters, subject to shareholder approval under Swiss law. A share-repurchase authorization allowed up to $300 million through December 31, 2016; $131.4 million was repurchased in FY 2015.
- Tax and currency: The 2014 intercompany restructuring generated a $307.6 million tax expense; related cash tax payments continued into 2015. FY 2015 included a $23.5 million foreign-currency loss. The company did not historically hedge its currency exposure and estimated that a hypothetical adverse 10% move in specified currencies could affect pretax income by about $95 million at year-end 2015.
- Litigation: Marine-sonar patent cases led to ITC findings of infringement on certain claims and limited exclusion and cease-and-desist orders affecting certain U.S. products or activities. Appeals were pending after year-end. Garmin said it believed the claims were without merit; outcomes could nevertheless affect operations or liquidity.
- Other risks: Garmin cited continuing structural decline in portable auto navigation from smartphones, factory-installed systems and market saturation; intense competition and margin pressure; reliance on some sole- or limited-source components; product-development and certification risk; Taiwan manufacturing and geopolitical exposure; tax-law uncertainty; and cybersecurity, privacy, product-liability and intellectual-property risks.
- FY 2015 included $11.4 million of other income, primarily from a legal settlement and property disposal gain. Management reported no material expected loss from legal contingencies at year-end, while noting outcomes remain uncertain. The company reported no off-balance-sheet arrangements.
Key facts for investors to verify
- Whether 2016 revenue growth in Fitness, Outdoor, Aviation and Marine offset the forecast Auto decline, and whether reported sales are materially affected by currency movements.
- Whether operating margins recover after the 2015 decline, particularly in Fitness and Auto, as R&D and SG&A spending rise.
- Whether operating cash flow approaches management’s $475 million forecast, given FY 2015’s lower cash generation and inventory increase.
- The status and business impact of the marine-sonar ITC orders and appeals, including any product restrictions, redesign costs or related litigation exposure.
- Tax cash payments and exposure: the remaining restructuring-related payments, approximately $97.9 million of gross unrecognized tax benefits, and the expected 20.5% 2016 effective tax rate.
- Dividend and repurchase execution, including shareholder approvals and the effect of Swiss-law distribution and share-repurchase constraints.
- The filing reports unqualified audit opinions on the financial statements and internal control over financial reporting; investors may verify these alongside the stated estimates and litigation disclosures.