Garmin Ltd. — Q1 2010 Form 10-Q
Reporting period: 13 weeks ended March 27, 2010; comparisons are with the 13 weeks ended March 28, 2009. Garmin provides GPS-enabled navigation, communications and information products across outdoor/fitness, marine, automotive/mobile and aviation. Amounts below are in U.S. dollars; financial statement amounts originally reported in thousands are shown in millions unless stated otherwise.
Financial performance
| Metric | Q1 2010 | Q1 2009 | Change |
|---|---|---|---|
| Net sales | $431.1 million | $436.7 million | Down 1.3% |
| Gross profit / margin | $230.9 million / 53.6% | $196.0 million / 44.9% | Margin up 8.7 percentage points |
| Operating income / margin | $83.3 million / 19.3% | $58.0 million / 13.3% | Up 43.8% |
| Income before taxes | $45.5 million | $59.9 million | Down 24% |
| Net income | $37.3 million | $48.5 million | Down 23.1% |
| Diluted earnings per share | $0.19 | $0.24 | Down $0.05 |
| Operating cash flow | $200.1 million | $299.4 million | Down $99.3 million |
The effective tax rate was 18.0%, versus 19.0% a year earlier. A $46.5 million foreign-currency loss drove total other expense of $37.8 million, compared with $2.0 million of other income in Q1 2009. Management attributed most of the currency loss to U.S. dollar movements against the euro, British pound and Taiwan dollar.
Segments
Automotive/mobile remained the largest segment, but sales fell 14.9% to $220.9 million as unit volumes declined and retailer inventory cleared. Total unit sales fell 12% to 2.137 million. Outdoor/fitness sales rose 28.4% to $102.7 million; aviation rose 11.8% to $66.1 million; and marine rose 8.7% to $41.3 million. Segment operating income was $38.6 million for outdoor/fitness, $18.9 million for aviation, $17.0 million for automotive/mobile and $8.9 million for marine. Automotive/mobile recorded a $10.3 million pretax loss, in part reflecting currency effects.
Financial position and liquidity
- Cash and cash equivalents were $1.291 billion at March 27, 2010, up from $1.092 billion at December 26, 2009. Current and noncurrent marketable securities totaled approximately $700.7 million.
- Total assets were $3.552 billion; current liabilities were $679.6 million. The company reported no outstanding long-term debt.
- Operating cash flow of $200.1 million reflected substantial seasonal receivable collections, partly offset by working-capital outflows, including reductions in liabilities and a $50.2 million inventory increase. Investing activities provided $63.9 million, largely from net securities redemptions. Financing activities used $43.1 million, principally for share repurchases.
- Garmin said existing cash and operating cash flow should meet capital, working-capital, repurchase, dividend and other cash requirements through at least fiscal 2010. It reported no off-balance-sheet arrangements.
Changes, outlook and notable items
- Gross margin improvement included a $21.8 million reduction in warranty accrual from a change in estimate, benefiting reported gross margin by approximately 5.1 percentage points. The filing identifies this as an estimate change, not a cash receipt.
- Operating expenses rose: R&D increased 13.5%, reflecting product development and more than 300 additional engineering personnel; SG&A increased 13.2%, including higher IT, administrative, legal and finance costs and expenses related to a proposed redomestication to Switzerland. Advertising expense declined 25.1%.
- Management expected automotive/mobile operating margins to improve sequentially in Q2 2010 as volumes increased. Garmin did not provide full-year earnings or revenue guidance in the supplied filing text.
- The board authorized up to $300 million of share repurchases through December 31, 2010. Garmin repurchased 1.44 million shares for approximately $47.1 million during the quarter, leaving $252.9 million authorized. A dividend of $1.50 per share was declared; the balance sheet included a $300.0 million dividend payable.
- On April 28, 2010, Garmin announced a conditional cash offer for Raymarine plc of 15 pence per share, approximately £12.5 million of equity consideration and an implied enterprise value of approximately £107.4 million. Shareholder acceptance and regulatory approvals remained outstanding.
- Marketable securities included $70.6 million of failed auction-rate securities valued using Level 3 inputs; the filing states these investments had been in a continuous unrealized-loss position for at least 12 months. Supply agreements required approximately $68.4 million of purchases over five years.
- Garmin disclosed multiple pending patent disputes and stated it intended to defend them; it cautioned that adverse outcomes could affect results, liquidity or financial position. It reported no material change to the risk factors in its 2009 Form 10-K.
Investor facts to verify
- How much of the margin expansion is repeatable after excluding the $21.8 million warranty estimate benefit?
- Whether automotive/mobile channel inventory and unit volumes recover as management anticipated, and whether segment margins improve in Q2.
- The drivers and potential volatility of foreign-currency gains and losses, given the quarter’s $46.5 million loss.
- The valuation, liquidity and eventual recovery of the $70.6 million Level 3 auction-rate securities.
- Completion and funding of the declared dividend, remaining repurchase authorization, and status and terms of the Raymarine offer.
- Developments in the disclosed patent litigation and any related financial exposure; the filing text does not provide a clear quantified reserve for these matters.