Garmin Ltd. — FY2009 Form 10-K Summary
Business context and reporting period
Garmin designs, manufactures and sells GPS-enabled navigation, communications and information products across automotive/mobile, outdoor/fitness, marine and aviation markets. This annual report covers the 52 weeks ended December 26, 2009; it is not a standalone fourth-quarter filing. The unaudited fourth-quarter figures are noted below. Unless indicated otherwise, financial amounts are in U.S. dollars.
Key financial metrics
| Metric | FY2009 | FY2008 | Change |
|---|---|---|---|
| Revenue | $2,946.4 million | $3,494.1 million | -15.7% |
| Gross profit / margin | $1,444.1 million / 49.0% | $1,553.5 million / 44.5% | Profit -7.0%; margin +4.5 percentage points |
| Operating income / margin | $786.0 million / 26.7% | $862.0 million / 24.7% | Income -8.8% |
| Net income / margin | $704.0 million / 23.9% | $732.8 million / 21.0% | -3.9% |
| Diluted EPS | $3.50 | $3.48 | Nearly flat |
| Cash from operations | $1,094.5 million | $862.2 million | +26.9% |
At year-end, cash and cash equivalents were $1,091.6 million and marketable securities totaled $766.0 million. Total debt was zero. Current assets were $2,393.9 million versus current liabilities of $683.7 million (current ratio approximately 3.5). Stockholders’ equity was $2,836.4 million. Capital expenditures were $49.2 million. The company paid $149.8 million in dividends and used $20.3 million to repurchase shares during the year.
Automotive/mobile remained the largest segment at 69.7% of sales. FY2009 revenue and income before taxes by segment were: automotive/mobile $2,054.1 million and $488.6 million; outdoor/fitness $468.9 million and $206.0 million; aviation $245.7 million and $56.6 million; marine $177.6 million and $57.4 million.
Fourth-quarter revenue was $1,059.4 million versus $1,048.2 million in the prior-year quarter; net income was $278.4 million versus $157.7 million. Quarterly figures are unaudited.
Material changes versus prior comparable periods
- Annual sales declined $547.6 million. Automotive/mobile sales fell 19.1%, aviation fell 24.0%, and marine fell 13.1%; outdoor/fitness grew 9.6%.
- Total unit sales decreased 2%, to 16.6 million from 16.9 million. Automotive/mobile average selling price declined 18%; segment volume declined 2%.
- Gross margin improved in every segment, lifting consolidated gross margin to 49.0% from 44.5%. Automotive/mobile margin rose 3.5 percentage points, primarily due to lower material costs and operating efficiencies, but management expected renewed pressure in 2010.
- Operating income fell despite the higher gross margin, as operating expenses were 22.3% of sales versus 19.8%. R&D expense rose 15.7% to $238.4 million, while advertising expense fell 25.3%.
- Operating cash flow increased, supported in part by lower inventory and higher deferred revenue and accrued expenses. Year-end inventory declined to $309.9 million from $425.3 million; receivables rose to $874.1 million from $741.3 million.
- The effective tax rate fell to 12.9% from 19.9%, reflecting a more favorable mix of taxable income and release of reserves after statutes of limitation expired. Other income was lower than in 2008, which included a $50.9 million gain primarily from the sale of Tele Atlas shares.
Outlook, risks, contingencies and unusual items
- Management forecast FY2010 revenue growth of 0–5%, driven by mobile initiatives and growth in outdoor/fitness, aviation and marine. It expected R&D spending to rise approximately 20%, and automotive/mobile gross margins to decline as selling-price reductions outpace cost reductions.
- Management budgeted approximately $50 million of FY2010 capital expenditures, believed available cash and operating cash flow would meet requirements through year-end 2010, and expected to pay a dividend, subject to cash needs and cash generation.
- Key business risks include the concentration in automotive/mobile and potential PND substitution by smartphones and factory-installed navigation; price and margin pressure; economic and seasonal demand swings; Best Buy’s 13.4% share of 2009 sales; reliance on independent distribution; and dependence on certain single- or limited-source components and licensed map data.
- Foreign exchange produced a $6.0 million loss in 2009. The company did not hedge its principal currency exposures. Taiwan tax incentives were expected to continue through 2013, but their future availability was not assured; management expected a slightly higher effective tax rate in 2010.
- Marketable securities included $70.3 million of failed auction-rate securities valued using Level 3 inputs, as well as other unrealized investment losses. The filing reported $21.8 million of cumulative unrealized losses on securities in its market-risk discussion.
- Unrecognized tax benefits were $255.7 million, including accrued interest; the timing of any cash settlement was uncertain. The company said approximately $30 million of reserves could decrease within 12 months due to statute expirations.
- Garmin disclosed multiple patent-related lawsuits, including matters filed in 2009 and early 2010. Management generally considered the claims without merit and did not expect legal proceedings to materially affect results, financial position or cash flows, while acknowledging an unfavorable outcome in certain cases could be material.
- After year-end, the board authorized a new share repurchase program of up to $300 million, expiring December 31, 2010. Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded disclosure controls were effective.
Important facts for investors to verify
- Whether the forecast 0–5% revenue growth and planned mobile-product launches translated into sales, especially given automotive/mobile’s dominant share and expected margin pressure.
- Whether gross-margin improvements were sustainable, and how ongoing price competition, product mix and inventory reserves affected profitability.
- Cash conversion and working-capital trends, including receivables, inventory, deferred revenue and accrued liabilities.
- Liquidity and valuation of the auction-rate securities, and potential cash or earnings effects from the $255.7 million of unrecognized tax benefits.
- Best Buy’s customer concentration, supplier and map-data dependencies, foreign-exchange exposure, and the status and potential exposure of disclosed patent litigation.