Garmin Ltd. — Q3 2011 Form 10-Q Summary
Business context and reporting period. Garmin provides GPS-enabled navigation, communications and information devices across Automotive/Mobile, Aviation, Marine, Outdoor and Fitness. This unaudited quarterly report covers the 13 and 39 weeks ended September 24, 2011; comparisons are with the corresponding periods ended September 25, 2010. Financial amounts below are in U.S. dollars; income and cash-flow figures are shown in millions unless otherwise noted.
Financial performance
| Metric | Q3 2011 | Q3 2010 | 39 weeks 2011 | 39 weeks 2010 |
|---|---|---|---|---|
| Net sales | $667.0m | $692.4m | $1,848.9m | $1,852.2m |
| Gross profit / margin | $344.3m / 52% | $344.0m / 50% | $904.8m / 49% | $966.6m / 52% |
| Operating income / margin | $147.3m / 22% | $166.6m / 24% | $353.7m / 19% | $452.0m / 24% |
| Net income | $150.4m | $279.6m | $355.3m | $451.7m |
| Diluted EPS | $0.77 | $1.43 | $1.82 | $2.27 |
| Operating cash flow | Not separately reported for the quarter | $597.5m | $586.2m |
- Q3 total unit sales fell 9% to 3.457 million; year-to-date units declined 2% to 9.738 million.
- Q3 revenue fell 4%, led by Automotive/Mobile, down 13%; Fitness grew 29%, Aviation 18%, Outdoor 5% and Marine 4%.
- Year-to-date revenue was essentially flat. Automotive/Mobile declined 9%, while Outdoor, Fitness, Marine and Aviation grew 5%, 28%, 10% and 12%, respectively.
- Q3 gross margin improved 190 basis points, but operating margin fell 200 basis points as higher SG&A more than offset the gross-margin improvement. YTD gross and operating margins declined 320 and 530 basis points, respectively.
- Q3 net income was affected by the prior-year tax benefit: Q3 2010 included a $114.6m net one-time tax benefit. The reported tax rates were 14.1% in Q3 2011 and 11.0% year to date; the filing gives 2010 rates excluding the one-time items of 21.8% and 19.9%.
Financial position, liquidity and capital allocation
- At September 24, 2011, cash and cash equivalents were $1.389bn and marketable securities totaled approximately $1.056bn. Total assets were $4.335bn and stockholders’ equity was $3.068bn.
- Current assets were $2.554bn versus current liabilities of $914.1m. The filing reports no outstanding long-term debt.
- YTD operating cash flow of $597.5m was supported by receivables collections and deferred revenue; investing activities used $324.2m, including net securities purchases, acquisitions and capital expenditures. Financing activities used $148.0m, primarily for dividends.
- The company declared dividends of $2.00 per share for the 39-week period. It paid $154.8m in dividends during the period. No shares were repurchased in Q3; approximately $76.9m remained under the repurchase authorization, which expired December 31, 2011.
- Contractual purchase commitments were approximately $100.5m over five years. Management said cash balances and operating cash flow should cover projected needs at least through fiscal year-end 2011.
Material changes, outlook and risks
- Revenue and cost deferrals: Garmin changed its estimate of per-unit revenue and cost deferrals for products bundled with lifetime map updates and premium traffic services. The Q3 and year-to-date impact was a $17.8m increase in gross profit, $15.3m increase in net income and $0.07 increase in basic and diluted EPS.
- Acquisitions: In Q3, Garmin acquired Navigon, Tri-Tronics, Garmin Distribution Africa and Garmap for $68.0m cash less $15.3m cash acquired. Preliminary purchase-price allocations included $74.0m of goodwill and intangible assets. Navigon-related restructuring costs were $3.9m. Allocations remained subject to adjustment.
- Business pressures: Management cited North American portable navigation device market contraction from market penetration and competing technologies. Product mix, pricing and bundled offerings affected margins and deferrals; year-to-date cost per unit increased 4%.
- Foreign exchange and investments: Foreign-currency gains were $14.9m in Q3 and $12.4m year to date, compared with $35.5m Q3 gains and $54.6m year-to-date losses in 2010. Marketable securities expose Garmin to interest-rate and valuation fluctuations; $7.2m of auction-rate securities remained classified as Level 3, and the company said it intended to hold them until value recovered.
- Legal contingencies: Garmin disclosed multiple patent lawsuits and an ITC proceeding involving semiconductor chips. It stated that it intended to defend the claims; some matters could have a material adverse effect if resolved unfavorably, and the filing does not quantify potential losses.
- No material changes to the risk factors in the 2010 Form 10-K were reported. Management stated that disclosure controls were effective and that there were no off-balance-sheet arrangements.
Important facts for investors to verify
- How sustainable are the Q3 revenue-deferral estimate change and its $17.8m gross-profit benefit?
- Can growth in Fitness, Aviation, Marine and Outdoor offset continuing Automotive/Mobile and portable-navigation weakness?
- What are the final purchase-price allocations and integration outcomes for the Q3 acquisitions?
- How might patent litigation, the ITC matter and other contingencies affect results or cash flows? The filing provides no clear quantified exposure.
- What is the composition, duration and sensitivity of the company’s substantial marketable-securities portfolio, including the remaining auction-rate securities?
- How will margins and earnings trend after the unusually favorable 2010 tax items and warranty-reserve adjustment are considered?