Garmin Ltd. — 2013 Form 10-K Summary
Business context and reporting period
Garmin designs, manufactures and sells GPS-enabled products across automotive/mobile, aviation, marine, outdoor and fitness markets. This annual report covers the 52 weeks ended December 28, 2013; fiscal 2012 also had 52 weeks. The requested “2013 Q4” is not a standalone filing period, but unaudited quarterly figures are provided.
Key financial metrics
| Metric | FY 2013 | FY 2012 |
|---|---|---|
| Net sales | $2.632 billion | $2.716 billion |
| Gross profit / margin | $1.407 billion / 53.5% | $1.438 billion / 53.0% |
| Operating income / margin | $574.0 million / 21.8% | $604.2 million / 22.2% |
| Net income / diluted EPS | $612.4 million / $3.12 | $542.4 million / $2.76 |
| Cash from operations | $630.1 million | $684.7 million |
| Cash and cash equivalents | $1.179 billion | $1.231 billion |
| Marketable securities | $1.652 billion | $1.641 billion |
| Total debt | None | None |
At year-end, current assets were $2.596 billion and current liabilities were $905.3 million (approximately 2.9 times current-asset coverage). Total assets were $4.880 billion and stockholders’ equity was $3.660 billion. Cash from operations exceeded net income; the company reported no off-balance-sheet arrangements.
Fourth-quarter sales were $759.7 million versus $768.5 million in Q4 2012. Q4 net income was $163.6 million versus $129.3 million; gross profit was $394.6 million versus $373.9 million.
Material changes versus prior comparable period
- Revenue declined 3%; total unit sales fell 10% to 13.9 million. Automotive/mobile sales dropped 13% to $1.302 billion and represented 49% of revenue, versus 55% in 2012.
- Growth in aviation (+16%), fitness (+11%), marine (+7%) and outdoor (+2%) partially offset automotive/mobile weakness. Aviation revenue reached $339.3 million; fitness, $356.3 million; marine, $222.9 million; and outdoor, $411.0 million.
- Operating income fell 5%, partly due to a 12% increase in R&D spending to $364.9 million, or 13.9% of sales. Marine gross margin contracted about 8.5 percentage points, pressured by legacy-inventory discounts, competition and product mix.
- Net income rose 13%, despite lower operating income, helped by $79.5 million of other income, including a $35.5 million foreign-exchange gain, and a lower reported tax provision.
- Operating cash flow declined $54.7 million, or 8%, year over year. Investing cash use fell to $274.4 million, while financing cash use increased to $406.8 million, including $351.7 million of dividends and $58.4 million of repurchases.
Outlook, commentary, risks and unusual items
- For 2014, management forecast revenue of $2.6–$2.7 billion, with growth in outdoor, fitness, aviation and marine offset by continued automotive/mobile declines. It expected operating cash flow of $550–$600 million and approximately $50 million of capital expenditures.
- Management expected R&D expense to rise in 2014, gross margins to remain relatively stable, and SG&A to be relatively stable as a percentage of sales. It emphasized innovation and new product launches as key to future growth.
- The reported 2013 effective tax rate was approximately 6.3%, including a $68.7 million benefit associated with releases of uncertain tax reserves and related Taiwan surtax. Excluding special items, the company reported a 16.8% effective rate and expected a similar adjusted rate in 2014.
- Garmin made an interest-free loan to Bombardier to support the Lear 70/75 avionics program; $137.4 million remained receivable at year-end, with repayment scheduled through April 2014.
- Investment securities had substantial unrealized valuation declines: approximately 50% of the portfolio was in an unrealized-loss position. Management attributed the declines mainly to higher Treasury yields, said it did not intend or expect to be required to sell, and reported no material impairment charge on outstanding securities.
- Key risks include structural decline in portable navigation devices as smartphone and factory-installed navigation alternatives spread; competitive pricing and margin pressure; reliance on new-product execution; single- or limited-source components; foreign-exchange volatility (the company did not hedge); and Taiwan manufacturing, tax and geopolitical exposure.
- Litigation includes Furuno patent claims and disputes connected to LightSquared’s proposed terrestrial wireless network. A related Harbinger complaint sought at least $1.9 billion in damages; Garmin described the claims as without merit and intended to defend them. Management did not expect legal proceedings, in aggregate, to materially affect results, financial position or cash flows.
- Shareholders approved a $1.80-per-share dividend for 2013, payable in four installments; the final $0.45 installment was scheduled for March 2014. The board’s $300 million repurchase authorization ran through December 31, 2014.
Important facts for investors to verify
- Whether automotive/mobile revenue and unit declines continue, and how effectively growth in other segments offsets them.
- Whether 2014 revenue, operating cash flow, R&D and capital-spending expectations are achieved.
- The sustainability of earnings after removing the tax-reserve benefit and foreign-exchange gains.
- Bombardier’s repayment progress and the outcome or financial exposure of pending litigation, especially the LightSquared-related claims and Furuno proceedings.
- Investment portfolio credit quality and valuation recovery, alongside the company’s substantial dividends and repurchases.
Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting as of December 28, 2013.