Garmin Ltd. — Q1 2012 Form 10-Q
Business and period: Garmin provides GPS-enabled navigation, communications and information products across outdoor, fitness, marine, automotive/mobile and aviation markets. This unaudited filing covers the 13 weeks ended March 31, 2012, compared with the 13 weeks ended March 26, 2011. Amounts below are in U.S. dollars.
Financial performance
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Net sales | $556.6 million | $507.8 million | +10% |
| Gross profit / margin | $283.8 million / 51% | $238.4 million / 47% | +19%; margin +4 percentage points |
| Operating income / margin | $90.3 million / 16% | $74.8 million / 15% | +21%; margin +1.5 percentage points |
| Income before taxes | $99.6 million | $96.9 million | +3% |
| Net income | $86.9 million | $95.5 million | -9% |
| Diluted EPS | $0.44 | $0.49 | Down $0.05 |
| Operating cash flow | $122.2 million | $207.6 million | Down $85.4 million |
Gross margin improvement was driven principally by automotive/mobile, including amortization of previously deferred high-margin revenue and a lower per-unit deferral rate. This was partly offset by marine product mix shifting toward lower-margin products. Operating expenses rose 18% overall, led by higher SG&A (+23%) and R&D (+13%).
Net income declined despite higher operating income, primarily reflecting income tax expense of $12.7 million versus $1.4 million a year earlier and lower other income. The effective tax rate was 12.8%, compared with 1.5%; the prior-year rate benefited from reserve releases and favorable audit-related effects. Foreign-currency results swung from a $12.1 million gain to a $2.0 million loss.
Segments and material changes
- Automotive/mobile remained the largest segment, with sales of $279.3 million, up 6%; operating income rose to $17.9 million from $1.6 million. The filing cites Navigon acquisition-related volume, market-share gains, product mix and deferred-revenue effects.
- Fitness sales increased 26% to $71.2 million, attributed to recent product introductions and global market penetration. Outdoor sales rose 16% to $77.2 million, supported by golf-category share gains and an acquisition.
- Marine sales grew 9% to $56.1 million, but operating income fell 42% to $8.8 million; management cited lower-margin product mix. Aviation sales increased 5% to $72.9 million, while operating income declined 4% to $17.1 million.
- Total unit sales rose 7% to 2.712 million. Management attributed the largest percentage volume increase to marine, where mix shifted toward higher-volume, lower-priced products.
Cash, liquidity and debt
- At March 31, 2012, cash and equivalents were $1.286 billion and marketable securities totaled $1.250 billion. Total assets were $4.325 billion; stockholders’ equity was $3.379 billion.
- Current liabilities were $594.5 million, down from $858.3 million at year-end, including payment of the $77.9 million declared dividend. The company reported no outstanding long-term debt.
- Operating cash flow was $122.2 million. The year-over-year decline primarily reflected working-capital movements, including lower collections benefit from receivables, payments of liabilities and reduced accounts payable. Investing used $54.8 million, including net marketable-security purchases, capital expenditures, intangible assets and acquisitions. Financing used $74.5 million, mainly for the dividend.
- Cash and equivalents decreased $1.4 million during the quarter. Management said existing cash and operating cash flow should meet projected capital expenditures, working capital, dividends and other requirements through at least fiscal 2012. No off-balance-sheet arrangements were reported.
Outlook, risks and unusual items
The filing provides no numerical revenue or earnings guidance. Management cautions that the quarter’s results are not necessarily indicative of full-year performance. The company identifies exposure to foreign-exchange movements, semiconductor pricing and raw-material costs; it notes that inflationary cost increases might not be fully offset by price increases. Interest-rate exposure relates to marketable securities, not debt.
Revenue and cost deferrals for bundled automotive/mobile products reflect a 2011 change in accounting estimates amid shifts in product bundling, selling prices and margins. In Q1 2012, amortization of previously deferred revenue exceeded new deferrals, producing net deferred-revenue amortization of approximately $0.7 million; the comparable prior-year figure was $21.8 million of net deferrals. Garmin also recorded a $1.3 million other-than-temporary impairment on U.S. corporate bonds in the marketable-securities disclosure.
Garmin disclosed numerous patent and other legal matters. Management did not expect the proceedings, considered collectively, to materially adversely affect results, financial position or cash flows, while acknowledging outcomes cannot be predicted with certainty. Notable matters included the Ambato case scheduled for trial in July 2012, the ITC proceeding in which an administrative law judge found no violation but the ITC announced review, and several other pending or refiled claims. The company had approximately $149.6 million of contractual purchase commitments over the next five years.
Investor verification points
- Assess whether automotive/mobile margin gains from deferred-revenue amortization and the revised deferral estimate are sustainable.
- Track segment trends, particularly marine profitability and the performance of fitness and outdoor products and acquired businesses.
- Review the causes and persistence of lower operating cash flow and working-capital movements.
- Monitor tax-rate normalization and foreign-exchange exposure, especially currency effects involving the Taiwan dollar, euro and pound.
- Follow developments and potential exposure in the disclosed litigation, and compare management’s stated liquidity outlook with subsequent cash needs and dividend payments.