Garmin Ltd. — Q3 2014 Form 10-Q
Business context and reporting period
Garmin designs and sells GPS-enabled navigation, communications and information products across Outdoor, Fitness, Marine, Automotive/Mobile and Aviation. This filing covers the 13 weeks and 39 weeks ended September 27, 2014; comparatives are the corresponding periods of 2013. Financial amounts below are in U.S. dollars, rounded to millions unless stated otherwise.
Financial performance and liquidity
| Metric | Q3 2014 | Q3 2013 | 39 weeks 2014 | 39 weeks 2013 |
|---|---|---|---|---|
| Net sales | $706.3m | $643.6m | $2,067.4m | $1,872.2m |
| Gross margin | 56.4% | 54.8% | 56.8% | 54.1% |
| Operating income | $175.5m | $151.7m | $514.6m | $401.6m |
| Net income (loss) | ($146.8m) | $187.7m | $154.0m | $448.8m |
| Diluted EPS | ($0.76) | $0.96 | $0.79 | $2.29 |
| Operating cash flow | Not separately stated for the quarter | Not separately stated for the quarter | $377.7m | $480.3m |
- Q3 sales rose 10%; operating income rose 16%. For the first 39 weeks, sales rose 10% and operating income rose 28%. YTD operating margin increased to 24.9% from 21.5%.
- The Q3 and YTD net income declines reflect a $307.6m tax charge from an intercompany restructuring, not weaker operating performance alone. The restructuring enabled access to previously permanently reinvested earnings and more efficient future repatriation. Garmin paid $78.1m of related cash taxes in Q3 and anticipated about $185m in Q2 2015, with the remainder due as cash is repatriated.
- YTD investing cash flow was positive $116.4m, including loan repayment and net securities redemptions; financing cash outflow was $503.6m, including $268.0m of dividends and $241.5m of share repurchases. Capital expenditures were $54.8m.
- At September 27, cash and cash equivalents were $1,154.6m and marketable securities totaled $1,604.4m. Current assets were $2,421.5m versus current liabilities of $1,123.5m. Garmin reported no outstanding long-term debt and no off-balance-sheet arrangements.
Material changes and segment trends
- Fitness was the strongest growth segment: Q3 sales increased 43% and YTD sales 54%, driven by vívofit and new biking and running products. Outdoor sales increased 19% in Q3 and 9% YTD; Aviation rose 19% and 16%, respectively.
- Automotive/Mobile remained the largest segment but declined 5% in Q3 and 2% YTD; management cited lower volumes, partly offset by deferred-revenue amortization and, YTD, OEM contribution and ASP improvement. Marine sales rose 12% in Q3 and 10% YTD, including the Fusion Electronics acquisition; management also cited a weak global marine-electronics market.
- YTD gross margin improved 270 basis points. Management attributed improvement principally to product mix, higher-margin software sales in Aviation, and amortization of previously deferred Automotive/Mobile revenue and costs. Outdoor margin weakened due to product mix and inventory reserves.
- Q3 foreign-currency losses were $12.7m; YTD losses were $20.3m, primarily associated with U.S. dollar strength against the euro and pound. Q3 operating expenses included higher advertising and R&D spending to support new products; R&D also reflected more than 100 additional engineering personnel.
Outlook, risks and unusual items
- The filing provides no quantified revenue or earnings guidance. Management said existing cash balances and operating cash flow should be sufficient for projected capital expenditures, working capital and other cash requirements, including dividends, repurchases and strategic acquisitions.
- Garmin completed its $300m share repurchase authorization during Q3, repurchasing 5.746m shares in total under the program. The board authorization was fully used.
- Commitments for raw materials, advertising and other purchases totaled approximately $220.3m over the next five years. Garmin acquired substantially all assets of Fusion Electronics in Q3; the acquisition was described as not material.
- Significant legal matters include Harbinger and LightSquared lawsuits seeking damages (Harbinger alleges at least $1.9bn), and ITC and court proceedings involving marine-sonar patents. Garmin disputes the claims and intends to defend them; the filing cautions that adverse outcomes could affect results, liquidity or financial position. Management does not expect the legal proceedings, considered generally, to have a material adverse effect.
- Other disclosed exposures include foreign-exchange volatility, semiconductor pricing and raw-material costs, and investment-portfolio interest-rate sensitivity. About 52% of marketable securities were in an unrealized-loss position; the company stated it could hold them and recorded no material impairment charge.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. No material changes to the risk factors in the 2013 Form 10-K were reported.
Important facts for investors to verify
- How much of the restructuring-related tax liability remains unpaid, and the timing and amount of future repatriation-related cash taxes.
- Whether Fitness and other growing segments can sustain growth and margins while Automotive/Mobile volumes continue to weaken.
- Inventory growth and reserves: net inventory reached $466.5m from $382.2m at year-end, while inventory-obsolescence provisions increased.
- Developments and potential financial exposure in the Harbinger/LightSquared and marine-sonar patent matters, including whether any material contingency becomes estimable.
- Cash generation after dividends, completed repurchases, capital spending and scheduled tax payments; no formal quantitative earnings outlook was provided.