Garmin Ltd. — Q3 2013 Form 10-Q
Business context and reporting period
Garmin designs and sells GPS-enabled navigation, communications and information devices across Outdoor, Fitness, Marine, Automotive/Mobile and Aviation. This unaudited report covers the 13 weeks and 39 weeks ended September 28, 2013; comparable periods ended September 29, 2012. Dollar amounts below are in millions unless noted.
Financial performance and liquidity
| Metric | Q3 2013 | Q3 2012 | 39 weeks 2013 | 39 weeks 2012 |
|---|---|---|---|---|
| Net sales | $643.6 | $672.4 | $1,872.2 | $1,947.1 |
| Gross profit / margin | $352.9 / 54.8% | $359.1 / 53.4% | $1,012.7 / 54.1% | $1,064.6 / 54.7% |
| Operating income / margin | $151.7 / 23.6% | $160.1 / 23.8% | $401.6 / 21.4% | $454.4 / 23.3% |
| Net income | $187.7 | $140.3 | $448.8 | $413.1 |
| Diluted EPS | $0.96 | $0.72 | $2.29 | $2.11 |
At September 28, cash and cash equivalents were $1,068.7 and marketable securities totaled $1,728.4. Current assets of $2,444.6 less current liabilities of $974.0 imply working capital of $1,470.6 and a current ratio of approximately 2.5. Total assets were $4,823.2; stockholders’ equity was $3,557.5. Garmin reported no outstanding long-term debt.
For the first 39 weeks, operating cash flow was $480.3 (versus $510.0 in 2012); investing cash outflow was $359.4 and financing cash outflow was $284.2. Cash declined $162.5 from year-end 2012. Financing included $263.9 of dividends and $26.9 of share repurchases. Management said cash balances and operating cash flow should meet projected long-term requirements.
Changes versus comparable periods
- Q3 sales fell 4%; year-to-date sales also fell 4%. Automotive/Mobile was the principal drag: Q3 revenue declined 16% and YTD declined 13%, with lower unit volumes. Total unit sales fell 12% in Q3 and 9% YTD.
- Fitness, Marine and Aviation grew in Q3 (25%, 24% and 15%, respectively). YTD they grew 9%, 6% and 14%. Outdoor was down 4% in Q3 and approximately flat YTD.
- Q3 gross margin improved 140 basis points, but YTD gross margin declined 60 basis points. Marine margin pressure was notable: YTD cost of goods sold rose to 49% of Marine revenue from 38%, reflecting legacy-product discounting, competitive pricing and higher component costs.
- YTD operating income declined 12%, with operating margin down 190 basis points, as lower sales, weaker gross margin and higher R&D offset lower advertising and SG&A. R&D increased 12% YTD, partly reflecting nearly 300 additional engineering personnel.
- Q3 net income rose 34% and YTD net income rose 9%, substantially affected by tax benefits from releases of uncertain tax-position reserves. Excluding specified discrete tax items, Garmin reported estimated effective tax rates of 15.7% for Q3 and 15.3% YTD 2013, versus 13.7% and 12.0% in 2012.
Outlook, risks, contingencies and unusual items
- The filing provides no specific revenue or earnings guidance. Management described planned product launches in 2013–2014 and continued investment in Aviation OEM opportunities, Marine enhancements, Automotive OEM opportunities, and Outdoor/Fitness product categories.
- Q3 income tax included a $52.2 benefit tied primarily to release of 2009 uncertain tax-position reserves, partly offset by Taiwan surtax expense. A further $16.5 tax benefit from reserve releases was recorded in Q1. These discrete items materially lifted reported net income.
- In 2012, a $20.8 supplier license-fee overpayment credit reduced cost of goods sold; this creates a comparison item for YTD 2013.
- Garmin advanced $173.7 to Bombardier under an interest-free short-term loan related to delayed cash flows on the Lear 70/75 avionics program. Repayment was scheduled in five installments from November 2013 through March 2014; the advance was included in prepaid and other current assets.
- Marketable securities had $48.2 of gross unrealized losses at quarter-end, primarily reflecting higher Treasury yields and lower valuations for mortgage-backed and municipal securities. About 47% of the portfolio was in an unrealized-loss position; management considered the losses temporary and recorded no impairment.
- Garmin disclosed multiple patent, product and other legal matters, including newly filed Furuno patent litigation and an ITC complaint, a GPS-related Harbinger lawsuit seeking at least $1.9 billion from multiple defendants, and a putative battery-defect class action. Management said it did not expect legal proceedings to have a material adverse effect, while acknowledging outcomes are uncertain.
- Contractual purchase commitments were approximately $213.2 over five years. The filing identified currency and investment interest-rate exposure; it stated there were no material changes to the annual-report risk factors.
Most important facts for investors to verify
- Whether Automotive/Mobile sales and unit volumes continue to weaken, and whether growth in Fitness, Marine and Aviation can offset that decline.
- Marine and Fitness segment margins, including the effect of pricing, product mix and component costs.
- Underlying earnings excluding the discrete tax benefits, and the sustainability of the reported effective tax rate.
- Collection and timing of Bombardier’s $173.7 loan repayment, and the impact of the investment portfolio’s unrealized losses.
- Developments and potential exposure in the disclosed litigation, especially Furuno, Harbinger and the battery class action.
- Cash generation after dividends, repurchases and investment needs; the filing cautions that interim results are not necessarily indicative of full-year 2013 results.