Garmin Ltd. — FY2010 Form 10-K
Business context and reporting period. Garmin designs, manufactures and sells GPS-enabled products across automotive/mobile, outdoor/fitness, marine and aviation markets. This is the annual report for the 52 weeks ended December 25, 2010; fiscal 2009 also comprised 52 weeks. Automotive/mobile remained the largest segment. Garmin completed its redomestication from the Cayman Islands to Switzerland on June 27, 2010.
Financial performance
Amounts are in U.S. dollars; millions except per-share data and percentages.
| Metric | FY2010 | FY2009 | Change |
|---|---|---|---|
| Net sales | $2,689.9 | $2,946.4 | -9% |
| Gross profit / margin | $1,346.4 / 50% | $1,444.1 / 49% | Profit -7%; margin +110 bps |
| Operating income / margin | $636.7 / 24% | $786.0 / 27% | -19%; margin -300 bps |
| Net income | $584.6 | $704.0 | -17% |
| Diluted EPS | $2.95 | $3.50 | -16% |
| Cash from operations | $770.6 | $1,094.5 | -30% |
- Segment sales: Automotive/mobile $1,668.9 million (-19%; 62% of sales); outdoor/fitness $559.6 million (+19%); aviation $262.5 million (+7%); marine $198.9 million (+12%). Total unit sales fell 4% to 16.0 million.
- Q4 2010, unaudited: Sales were $837.7 million versus $1,059.4 million in Q4 2009; net income was $132.9 million versus $278.4 million.
- Liquidity and debt: Cash and cash equivalents were $1,260.9 million and marketable securities $801.8 million at year-end. Total current assets were $2,498.8 million and current liabilities $669.0 million. The company reported no outstanding long-term debt.
- Capital and cash uses: Capital expenditures were $32.2 million. Dividends paid totaled $298.9 million; share repurchases used $225.9 million. Management said cash balances and operating cash flow should cover projected requirements through at least FY2011.
Material changes versus the prior comparable period
- Sales weakness was concentrated in automotive/mobile, where revenue fell 19% as average selling prices declined 11% and volume declined 9%. Management cited market saturation and competing navigation technologies.
- Growth in the other three segments partly offset the automotive/mobile decline. Outdoor/fitness delivered the strongest increase, supported by new products and broader market penetration.
- Gross margin improved to 50% from 49%, but operating margin contracted as revenue fell and research and development and selling, general and administrative expenses increased. R&D rose 16% to $277.3 million, or 10.3% of sales.
- Other expense shifted to $59.4 million from $22.6 million of income, largely because foreign-currency losses increased to $88.4 million from $6.0 million.
- Operating cash flow declined from FY2009, reflecting lower earnings and working-capital movements, including increased inventory and reduced payables. Year-end cash nevertheless increased by $169.4 million.
Outlook, commentary, risks and unusual items
- FY2011 outlook: Management anticipated overall revenue declines, primarily from automotive/mobile, partly offset by growth in outdoor/fitness, aviation and marine. It expected total gross margin to be stable, R&D spending stable in dollars, and cash flow from operations to remain positive. No quantified revenue or EPS guidance is provided in the filing.
- Management expected automotive/mobile margin pressure to continue as selling-price declines outpace cost reductions. It expected SG&A to fall in dollars but rise as a percentage of sales; it also forecast a higher effective tax rate than FY2010.
- Tax item: FY2010 included a reported $98.7 million one-time tax benefit associated with releases of uncertain-tax-position reserves and related settlement and surtax items. The reported effective tax rate was approximately -1.3%; management stated it would have been 15.8% excluding the one-time items. The benefit was recorded in Q3.
- Warranty item: A $42.8 million favorable warranty-reserve adjustment reduced cost of goods sold and improved reported gross margin by about 160 basis points.
- Business risks: Personal navigation devices face substitution from smartphones and factory-installed auto systems; automotive/mobile products represented 62% of sales. Other material risks include pricing and margin pressure, dependence on key or single-source components and map-data licensors, currency volatility, seasonal demand, customer/channel and inventory risks, product certification, product liability, and reliance on GPS infrastructure. Principal manufacturing facilities are in Taiwan.
- Contingencies: Garmin disclosed multiple patent disputes. In January 2011, a German court found infringement of two Pioneer patents; Garmin said it intended to appeal. In a separate U.S. International Trade Commission matter, an administrative law judge found no violation and no infringement, with final Commission confirmation pending at the report date. Management did not expect legal proceedings overall to have a material adverse effect, but noted unfavorable outcomes could affect results or liquidity.
- The filing reports no off-balance-sheet arrangements. The financial statement audit and the audit of internal control over financial reporting received unqualified opinions.
Important facts for investors to verify
- Whether automotive/mobile sales and margins stabilize, and whether growth in other segments can offset further PND declines.
- The recurring earnings and cash-flow effect of the $98.7 million tax benefit and $42.8 million warranty adjustment; review tax reserves, including $153.6 million of unrecognized tax benefits at year-end.
- Whether FY2011 revenue, gross-margin, expense and tax-rate expectations were achieved; the filing provides directional rather than quantified guidance.
- Exposure to foreign exchange: FY2010 included an $88.4 million loss, and Garmin said it did not hedge currencies.
- Developments in the Pioneer litigation and other patent claims, as well as component supply, mapping-data licensing and Taiwan-related operational risks.