Garmin Ltd. — Q1 2013 Form 10-Q
Business context and period: Garmin designs and sells GPS-enabled navigation, communications and information products across Outdoor, Fitness, Marine, Automotive/Mobile and Aviation. This unaudited report covers the 13 weeks ended March 30, 2013, compared with the 13 weeks ended March 31, 2012. Amounts below are in U.S. dollars; financial statement amounts have been converted from thousands to millions where shown.
Financial performance
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Net sales | $532.0 million | $556.6 million | Down 4% |
| Gross profit / margin | $276.1 million / 51.9% | $283.8 million / 51.0% | Profit down 3%; margin up about 0.9 percentage points |
| Operating income / margin | $79.9 million / 15.0% | $90.3 million / 16.2% | Down 12% |
| Income before taxes | $81.6 million | $99.6 million | Down 18% |
| Net income | $88.7 million | $86.9 million | Up 2% |
| Diluted earnings per share | $0.45 | $0.44 | Up $0.01 |
| Cash provided by operating activities | $59.4 million | $122.2 million | Down $62.9 million |
Revenue fell primarily because Automotive/Mobile and Marine declined. Total unit sales decreased 8% to 2.491 million. Operating margin contracted as lower sales and higher research and development costs outweighed the improvement in gross margin. Research and development expense rose 10% to $87.7 million, reflecting product development and nearly 400 additional engineering personnel since the prior-year quarter.
Segments and material changes
| Segment | Sales | Year-over-year change | Operating income |
|---|---|---|---|
| Outdoor | $76.2 million | Down 1% | $21.6 million |
| Fitness | $72.4 million | Up 2% | $19.9 million |
| Marine | $50.3 million | Down 10% | Loss of $2.4 million |
| Automotive/Mobile | $252.6 million | Down 10% | $20.0 million |
| Aviation | $80.5 million | Up 10% | $20.9 million |
Marine results were pressured by discounting older products ahead of planned second-quarter releases and a weak global marine electronics market. Aviation benefited from improvement in some OEM aircraft categories and recent share gains. Automotive/Mobile revenue declined on lower volumes, partly offset by higher average selling prices and amortization of previously deferred revenue. Marine and Outdoor gross margins also weakened, while Automotive/Mobile margin benefited from deferred revenue and costs recognized in the quarter.
Cash, liquidity and capital resources
- Cash and cash equivalents were $1.093 billion at March 30, 2013, down from $1.231 billion at year-end 2012. Marketable securities totaled $1.625 billion, including $145.5 million classified as current.
- Current assets were $2.314 billion and current liabilities $605.1 million. Garmin reported no outstanding long-term debt.
- Operating cash flow was $59.4 million. Investing activities used $18.0 million, including an $18.3 million advance to Bombardier; financing activities used $174.3 million, principally reflecting $176.0 million of dividends paid. Cash decreased by $137.7 million during the quarter.
- Management said existing cash balances and operating cash flow should be sufficient for projected capital expenditures, working capital and other cash requirements at least through fiscal 2013. The company expects cash needs to include capital expenditures, working capital, declared dividends, share repurchases and strategic acquisitions.
Outlook, unusual items and risks
- The filing provides no specific full-year revenue or earnings guidance and cautions that first-quarter results are not necessarily indicative of full-year results.
- Net income benefited from an income tax benefit of $7.0 million, compared with tax expense of $12.7 million a year earlier. The negative 8.6% effective tax rate primarily reflected a $16.5 million release of uncertain-tax-position reserves and $6.3 million of prior-year R&D tax credits recognized after legislation was enacted.
- Foreign-exchange losses were $8.3 million, compared with $2.0 million a year earlier; management attributed most of the 2013 loss to the U.S. dollar strengthening against the euro and British pound.
- Under a March 2013 agreement, Garmin committed to provide Bombardier an interest-free loan of up to $173.7 million in seven installments through September 20, 2013, to support delayed program cash flows. $18.3 million had been advanced by quarter-end. Repayment in five installments from November 2013 through March 2014 is conditional on specified delivery milestones.
- Garmin authorized up to $300 million of share repurchases through December 31, 2014; no shares had been repurchased under the program by quarter-end.
- The company disclosed multiple patent and other legal matters. Management did not expect the proceedings to have a material adverse effect on results, financial position or cash flows, though individual cases include statements that an unfavorable outcome could be material. No material changes to the risks in the 2012 Form 10-K were reported.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether Marine and Automotive/Mobile trends, including unit volumes and segment margins, improved following planned product releases.
- Whether higher R&D spending translates into product growth and whether operating margins recover.
- Bombardier loan milestones, total advances, and timely repayment; the filing makes repayment conditional on specified deliveries.
- The repeatability of net income given the one-time tax reserve release and tax-credit benefit, as well as the sensitivity of earnings to currency movements.
- Cash generation and liquidity after dividends, planned repurchases and other commitments, including approximately $204.7 million of contractual purchases over five years.
- Developments in the disclosed patent litigation and any material change in exposure or management’s assessment.