Garmin Ltd. — Q1 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 unaudited report covers the 13 weeks ended March 29, 2014; comparison is with the 13 weeks ended March 30, 2013. Financial amounts below are in U.S. dollars unless stated otherwise.
Financial performance and liquidity
| Metric | Q1 2014 | Q1 2013 / comparison |
|---|---|---|
| Net sales | $583.2 million | $532.0 million; up 10% |
| Gross profit / margin | $330.8 million / 56.7% | $276.1 million / 51.9%; margin up about 4.8 percentage points |
| Operating income / margin | $120.4 million / 20.6% | $79.9 million / 15.0%; operating income up 51% |
| Net income | $118.8 million | $88.7 million; up 34% |
| Diluted earnings per share | $0.61 | $0.45 |
| Operating cash flow | $71.2 million | $59.4 million |
| Cash and cash equivalents | $1,136.7 million at March 29 | $1,179.1 million at December 28, 2013 |
| Marketable securities | $1,734.8 million total | $1,652.0 million at December 28, 2013 |
- Cash plus marketable securities totaled approximately $2.87 billion at quarter-end. Garmin reported no outstanding long-term debt.
- Current assets were $2.39 billion and current liabilities $697.1 million. Inventory increased to $442.0 million from $382.2 million at year-end.
- Cash declined by $42.5 million during the quarter. Investing activities provided $3.6 million, including $94.5 million of repayments on the Bombardier loan, partly offset by net purchases of marketable securities. Financing activities used $117.6 million, including $87.9 million of dividends and $33.0 million of share repurchases.
Material changes and management commentary
- Sales grew in Fitness (38%), Marine (19%), Aviation (19%), and Outdoor (10%); Automotive/Mobile sales declined 4%. Fitness growth reflected new running products and the vívofit band. Marine growth benefited from new products and market-share gains; Aviation from OEM gains and aftermarket products.
- Automotive/Mobile remained the largest segment at 42% of revenue, but volume fell 12%. The segment’s reported revenue and margin benefited from amortization of previously deferred revenue and costs exceeding current-period deferrals.
- Total unit sales were essentially flat at 2.492 million versus 2.491 million. Gross-margin improvement was reported across all segments, attributed to product mix, selling prices, software sales, and the Automotive/Mobile deferred-revenue effect.
- Operating expenses rose 7% to $210.5 million; R&D increased 10% to $96.2 million, reflecting product development and more than 100 additional engineering personnel since the year-ago quarter. SG&A rose 4%, primarily due to legal and occupancy costs.
- Other income was $22.1 million versus $1.7 million, mainly because foreign-currency results swung to a $12.8 million gain from an $8.3 million loss. Management attributed most of the 2014 gain to U.S. dollar strength against the Taiwan dollar.
- The effective tax rate was 16.6%, compared with negative 8.6% a year earlier. The filing cites expired Taiwan tax holidays and the federal R&D tax credit, as well as lower releases of uncertain-tax-position reserves; the prior-year rate also benefited from recognized R&D credits.
Outlook, risks, and contingencies
- No specific revenue, earnings, or margin guidance is provided. Management says existing cash balances and operating cash flow should be sufficient for projected capital expenditures, working capital, and other cash needs. Expected cash uses include dividends, repurchases, and strategic acquisitions.
- Management identifies foreign-exchange volatility, product pricing and semiconductor/raw-material costs, and possible inflationary pressures as risks. The investment portfolio is exposed to interest-rate and valuation changes; about 46% of securities were in an unrealized-loss position at quarter-end. Garmin stated it did not intend, and was not likely required, to sell those securities before recovery.
- Garmin had approximately $212.7 million of contractual purchase commitments over the next five years. It said ordinary-course legal matters were not expected to have a material adverse effect overall, but noted individual cases could have material consequences.
- Harbinger plaintiffs sought at least $1.9 billion in damages in litigation related to LightSquared and alleged GPS interference. LightSquared also sought damages, with no clear amount specified in the filing. Garmin disputed the claims and planned to defend them.
- Other pending matters included patent litigation and product-related class actions. Garmin disclosed that the Forerunner-watch class action remained pending and that the battery-related class action could proceed on certain claims; no class had been certified in that battery case. The filing also reported settlements of the ICON and Innovative Display Technologies matters after quarter-end, and an ITC determination of no violation in one patent matter, subject to appeal.
- The $42.9 million Bombardier loan receivable outstanding at quarter-end was collected in full in April 2014. The filing reported no other subsequent event with a material financial-statement impact through April 30, 2014.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether operating growth and improved gross margins persist, particularly given the benefit from amortization of deferred Automotive/Mobile revenue and costs.
- Fitness and other growing segments’ ability to sustain demand, and whether Automotive/Mobile volume declines continue.
- Cash conversion and working-capital trends, especially rising inventory and the timing of deferred revenue and customer collections.
- Investment portfolio valuation and interest-rate exposure, alongside the company’s stated ability to hold securities with unrealized losses.
- Developments in the Harbinger/LightSquared claims, the product-related class actions, and other patent litigation; the filing does not quantify a probable loss for these matters.
- Changes in tax rates and tax benefits, foreign-exchange gains or losses, and the pace of dividends and share repurchases.