Garmin Ltd. — Q1 2011 Form 10-Q
Business context and period: Garmin provides GPS-enabled navigation, communications and information devices. This unaudited report covers the 13 weeks ended March 26, 2011, compared with the 13 weeks ended March 27, 2010. Amounts below are in U.S. dollars; financial statement figures are converted from thousands to millions unless noted.
Financial performance and position
| Metric | Q1 2011 | Q1 2010 / prior year-end |
|---|---|---|
| Net sales | $507.8 million | $431.1 million; up 18% |
| Gross profit / margin | $238.4 million / 47% | $230.9 million / 54% |
| Operating income / margin | $74.8 million / 15% | $83.3 million / 19% |
| Net income | $95.5 million | $37.3 million; up 156% |
| Diluted EPS | $0.49 | $0.19 |
| Operating cash flow | $207.6 million | $200.1 million |
| Cash and cash equivalents | $1,210.6 million | $1,260.9 million at Dec. 25, 2010 |
| Marketable securities | $1,069.1 million | $801.8 million at Dec. 25, 2010 |
| Total assets / equity | $3,937.5 million / $3,193.2 million | $3,988.7 million / $3,049.6 million at Dec. 25, 2010 |
Cash provided by operations was more than offset by $274.6 million used in investing, principally net purchases of fixed-income securities. Cash declined by $50.3 million during the quarter. Current liabilities were $469.9 million versus current assets of $2,192.8 million. The filing reports no outstanding long-term debt and no off-balance-sheet arrangements.
Material changes and operating trends
- Revenue increased in every segment; total unit sales rose 18% to 2.525 million. Fitness grew 30%, marine 24%, automotive/mobile 20%, outdoor 12%, and aviation 5%.
- Automotive/mobile remained the largest segment, contributing 52% of revenue. Its operating income fell to $1.6 million from $17.0 million, reflecting sharply lower segment gross margin and higher per-unit costs.
- Gross margin fell about 660 basis points and operating margin about 460 basis points year over year. Management attributed much of the gross-margin comparison to a $21.8 million warranty-reserve estimate benefit in Q1 2010; excluding that benefit, cost per unit increased 3%.
- Operating expenses rose in dollars, including a 13% increase in R&D, but SG&A and R&D declined as a percentage of revenue. R&D spending supported product development and nearly 250 additional engineering personnel since the prior-year quarter.
- Net income growth also reflected a reversal from a $46.5 million foreign-exchange loss in Q1 2010 to a $12.1 million gain in Q1 2011, and a lower effective tax rate.
Outlook, risks and unusual items
Management believes existing cash and operating cash flow will cover projected capital expenditures, working capital, dividends and other cash needs at least through fiscal 2011. The filing gives no quantified revenue or earnings guidance and cautions that first-quarter results are not necessarily indicative of full-year results.
- The 1.5% effective tax rate, compared with 18.0% a year earlier, reflected releases of reserves after certain statutes expired and lower U.S. reserves following favorable audits. The benefit may not recur at the same level.
- Currency movements are material: Q1 2011’s net foreign-exchange gain was primarily associated with U.S. dollar weakness against the euro and other currencies, partly offset by Taiwan dollar effects. Management identifies future exchange-rate volatility as a risk.
- Marketable securities include $20.6 million of failed auction-rate securities classified as Level 3; these remained in an unrealized loss position for at least 12 months. The company said it intended to hold them until recovery. The portfolio is also exposed to interest-rate-driven fair-value changes.
- Garmin disclosed multiple patent disputes. Notably, a German court found infringement of two Pioneer patents; Garmin appealed. The company contests the claims, but states adverse outcomes could affect results, liquidity or financial position. The filing reports no material changes to the risks in its 2010 Form 10-K.
- After quarter-end, Garmin announced its intent to acquire Garmin Distribution Africa; management did not expect the acquisition to be material.
Important facts for investors to verify
- Whether automotive/mobile profitability and consolidated gross margins recover after the prior-year warranty benefit and Q1 per-unit cost increases.
- How much of the net-income increase is sustainable versus attributable to foreign-exchange gains and the unusually low tax rate.
- Marketability, valuation and recovery prospects of the auction-rate securities, and the broader interest-rate and currency exposures.
- Developments and potential financial exposure from the disclosed patent litigation, particularly the Pioneer proceedings.
- Whether management’s liquidity assessment through fiscal 2011 remains supported by operating cash flow and investment liquidity.