Garmin Ltd. — Q2 2014 Form 10-Q
Business context and reporting period. Garmin is a global provider of GPS-enabled navigation, communications and information products, operating in Outdoor, Fitness, Marine, Automotive/Mobile and Aviation. The quarter ended June 28, 2014 and covered 13 weeks; comparative quarter ended June 29, 2013. First-half figures cover 26 weeks. Dollar amounts below are in millions unless stated otherwise.
Financial performance and position
| Metric | Q2 2014 | Q2 2013 | Change | First half 2014 | First half 2013 |
|---|---|---|---|---|---|
| Net sales | $777.8 | $696.6 | +12% | $1,361.1 | $1,228.5 |
| Gross profit / margin | $444.5 / 57% | $383.6 / 55% | +16%; +2.1 pts | $775.3 / 57% | $659.8 / 54% |
| Operating income / margin | $218.8 / 28% | $169.9 / 24% | +29%; +3.7 pts | $339.1 / 25% | $249.8 / 20% |
| Net income | $182.0 | $172.5 | +6% | $300.8 | $261.2 |
| Diluted EPS | $0.93 | $0.88 | +6% | $1.54 | $1.33 |
| Operating cash flow | Not stated for quarter | $235.4 | $263.7 |
Q2 income before taxes was $208.7 million versus $206.6 million a year earlier. A $20.4 million foreign-currency loss in Q2 2014, compared with a $27.5 million gain in Q2 2013, offset much of the improvement in operating income. The Q2 effective tax rate was 12.8%, versus 16.5%; first-half rates were 14.3% and 9.4%, respectively.
At June 28, cash and cash equivalents were $1.235 billion, and marketable securities totaled $1.617 billion. Current assets were $2.497 billion and current liabilities $969.3 million. The company reported no outstanding long-term debt. First-half capital expenditures were $36.8 million. Cash provided by operations fell $28.3 million year over year, while first-half cash increased $55.7 million to $1.235 billion.
Material changes and drivers
- Fitness was the strongest growth segment: Q2 sales rose 79% to $150.7 million, supported by vívofit and new cycling and running products. First-half sales rose 60% to $251.0 million.
- Q2 Aviation sales increased 11% to $97.3 million, and first-half sales increased 15% to $193.3 million, with OEM share gains and aftermarket products cited as contributors.
- Automotive/Mobile remained the largest segment but Q2 sales grew only 2% to $350.0 million; unit volume declined 8%. First-half sales declined 1% to $593.0 million as volumes fell 10%, partly offset by higher average selling prices, deferred-revenue amortization and OEM growth.
- Q2 Outdoor sales declined 1% to $106.1 million, which management attributed to strong prior-year golf sales not repeated due to product-introduction timing. Marine sales increased 1% to $73.8 million amid a slower industry.
- Gross margin improved in most segments. Management cited deferred high-margin Automotive/Mobile revenue, product mix and selling prices in Marine, and higher-margin software in Aviation. Outdoor was pressured by inventory reserves.
- Operating expenses increased 6% in Q2 to $225.7 million, including higher advertising for new products and higher R&D. First-half R&D rose 6% to $194.6 million, reflecting product development and more than 100 additional engineering personnel.
Outlook, risks and unusual items
- The filing provides no specific full-year revenue, earnings or margin guidance. Management said existing cash and operating cash flow should be sufficient for projected long-term capital expenditures, working capital and other cash requirements; results for the interim period are not necessarily indicative of the full year.
- On July 24, 2014, the board approved a restructuring of certain U.S. subsidiaries. Garmin expects approximately $300 million in one-time cash tax payments over the next year to access historical earnings and facilitate repatriation of future earnings for dividends, repurchases and acquisitions.
- Share repurchases totaled $162.4 million in the first half. At June 28, approximately $79.1 million remained under the $300 million authorization, which expires December 31, 2014. Dividends paid in the first half were $175.6 million.
- Bombardier repaid the remaining loan balance; the $173.7 million loan was fully repaid by April 2014. Garmin completed its acquisition of Fusion Electronics on June 30, 2014; the company said the acquisition was not material.
- Legal matters include Harbinger and LightSquared claims, patent disputes and product-related class actions. The Harbinger complaint seeks at least $1.9 billion; Garmin disputes the claims and intends to defend itself. Management did not expect legal proceedings generally to materially adversely affect results, financial position or cash flows, but individual case outcomes remain uncertain.
- Market risks include foreign-exchange movements, interest-rate effects on securities, semiconductor pricing and raw-material costs. The filing notes no material change in the risk factors described in the 2013 Form 10-K. Approximately 43% of the securities portfolio was in an unrealized loss position; management said it did not intend or expect to be required to sell those securities before recovery.
- Disclosure controls were assessed as effective, with no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether Fitness growth and new product demand persist, and whether Automotive/Mobile’s volume declines continue.
- The sustainability of margin gains, particularly the contribution from amortization of previously deferred Automotive/Mobile revenue and costs.
- The timing and cash impact of the approximately $300 million restructuring-related tax payments, and how the restructuring affects future repatriations.
- Cash conversion and working-capital trends, especially inventory growth, deferred revenue and the decline in first-half operating cash flow.
- Developments in the Harbinger/LightSquared and marine sonar patent litigation, including any potential financial or operational consequences.
- Changes in the market value and credit quality of marketable securities, as well as foreign-exchange exposure.