Garmin Ltd. — Q2 2012 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 filing covers the 13 and 26 weeks ended June 30, 2012; comparisons are to the corresponding 2011 periods.
Financial performance
Amounts below are in U.S. dollars; figures are rounded to millions unless stated otherwise.
| Metric | Q2 2012 | Q2 2011 | First half 2012 | First half 2011 |
|---|---|---|---|---|
| Net sales | $718.2m (+7%) | $674.1m | $1,274.8m (+8%) | $1,181.9m |
| Gross profit / margin | $421.8m / 58.7% | $322.1m / 47.8% | $705.6m / 55.4% | $560.5m / 47.4% |
| Operating income / margin | $204.0m / 28.4% | $131.6m / 19.5% | $294.3m / 23.1% | $206.3m / 17.5% |
| Net income | $185.9m (+70%) | $109.5m | $272.8m (+33%) | $205.0m |
| Diluted EPS | $0.95 | $0.56 | $1.39 | $1.05 |
| Operating cash flow | Not separately stated for Q2 | $345.1m | $411.0m |
- Segment sales, Q2 year over year: Outdoor rose 24% to $100.5m; Fitness rose 5% to $81.8m; Marine fell 14% to $67.8m; Automotive/Mobile rose 8% to $392.1m; Aviation rose 4% to $75.9m. Automotive/Mobile remained the largest segment.
- Balance sheet and liquidity: At June 30, cash and cash equivalents were $1,267.7m, marketable securities totaled $1,377.5m, and current assets were $2,381.2m versus current liabilities of $902.0m. Total assets were $4,462.8m. The company reported no outstanding long-term debt.
- Cash flows: First-half investing cash outflow was $200.2m, mainly reflecting net purchases of marketable securities; financing cash outflow was $160.7m, principally the $165.6m dividend payment. Cash and cash equivalents decreased $19.4m from year-end 2011.
- Dividends: $1.80 per share was declared in each reported 2012 period, versus $2.00 per share in 2011.
Material changes and unusual items
- Q2 gross margin expanded about 11 percentage points. Management attributed the improvement principally to Automotive/Mobile, including improved product mix, changes in deferred revenue recognition, and a one-time $20.8m supplier royalty overpayment credit recorded in cost of goods sold. The credit relates to earlier overpayments and should not be assumed recurring.
- Management said reduced revenue deferrals and amortization of previously deferred revenue also supported Automotive/Mobile sales and margins. It cited a 2011 change in the per-unit revenue and cost deferral estimate; net deferred revenue was $15.9m in Q2 2012 versus $61.7m in Q2 2011.
- First-half operating cash flow declined from $411.0m to $345.1m despite higher earnings, reflecting working-capital movements. The filing cites lower cash contribution from receivables versus the prior year and payments of accrued royalties, payroll, advertising and sales-program costs.
- Operating expenses increased: first-half SG&A rose 19% to $189.4m, with acquisitions and higher legal costs among the cited factors; R&D rose 13% to $160.0m, reflecting product development and added engineering personnel.
Outlook, risks and contingencies
- Garmin said existing cash balances and operating cash flow should be sufficient for projected capital expenditures, working capital, dividends and other cash requirements at least through fiscal 2012. The filing does not provide specific earnings or revenue guidance, and cautions that interim results are not necessarily indicative of full-year results.
- Management identified foreign-exchange movements, product pricing and raw-material costs as exposures; Q2 included a $7.8m foreign-currency loss. Interest-rate changes can affect the fair value of marketable securities.
- The company had contractual purchase commitments of approximately $211.6m over the next five years. Management did not expect the pending legal matters to have a material adverse effect, while acknowledging outcomes cannot be predicted with certainty.
- Notable litigation developments included a July 2012 jury verdict finding infringement of a patent and awarding $0.5m in damages, which Garmin said it intended to challenge; an ITC final determination of no violation in the Rambus matter, subject to appeal; and other pending patent-related claims, including new matters filed in July 2012.
- The effective tax rate was 10.4% in Q2 2012 versus 13.8% a year earlier, partly due to the expiration of a Taiwan tax statute of limitations. The first-half rate was 11.2% versus 8.5%; prior-year reserve releases contributed to the lower 2011 rate.
Important facts for investors to verify
- How much of the sharp margin improvement persists after excluding the $20.8m royalty credit and effects of revenue-deferral accounting changes.
- Whether segment trends continue, particularly Marine’s decline and growth in Outdoor, Fitness and Automotive/Mobile.
- Cash conversion and working-capital trends, including the timing of accrued-liability and tax payments.
- Marketable-securities composition, valuation and liquidity, alongside the company’s substantial cash and investment balances.
- Developments in patent litigation and the potential financial or operational implications of adverse outcomes.
- Full-year performance: the filing gives no specific numeric outlook, and management’s liquidity assessment extends only through fiscal 2012.