Garmin Ltd. — Q3 2012 Form 10-Q
Reporting period: Quarter and 39 weeks ended September 29, 2012; comparisons are with periods ended September 24, 2011. Amounts below are in U.S. dollars.
Business context and results
Garmin develops GPS-enabled navigation, communications and information products across Outdoor, Fitness, Marine, Automotive/Mobile and Aviation. Financial statements are unaudited interim statements; management cautions that results are not necessarily indicative of full-year 2012 results.
- Quarter: Revenue was $672.4 million, up 1%; gross profit was $359.1 million and gross margin 53%, versus 52%. Operating income rose 9% to $160.1 million, with a 24% operating margin versus 22%. Net income fell 7% to $140.3 million; diluted EPS was $0.72 versus $0.77.
- First 39 weeks: Revenue was $1.947 billion, up 5%; gross profit increased 18% to $1.065 billion and gross margin rose to 55% from 49%. Operating income rose 28% to $454.4 million, with a 23% operating margin versus 19%. Net income increased 16% to $413.1 million; diluted EPS was $2.11 versus $1.82.
- Quarterly segment revenue: Outdoor $105.6 million (+11%); Fitness $64.8 million (-6%); Marine $44.8 million (-7%); Automotive/Mobile $384.4 million (flat); Aviation $72.9 million (+3%).
- Year-to-date segment revenue: Outdoor $283.2 million (+17%); Fitness $217.8 million (+7%); Marine $168.6 million (-6%); Automotive/Mobile $1.056 billion (+4%); Aviation $221.7 million (+4%).
Cash flow, liquidity and capital
- Operating cash flow for the first 39 weeks was $510.0 million, down from $597.5 million. Management attributed the decline mainly to working-capital movements, partly offset by higher net income.
- Investing activities used $304.6 million, including a net $268.5 million investment in fixed-income securities, $26.9 million of capital expenditures and $4.0 million for acquisitions.
- Financing activities used $247.1 million, primarily from $253.4 million of dividend payments. Cash and cash equivalents were $1.247 billion at September 29; marketable securities totaled $1.472 billion.
- Current assets were $2.473 billion and current liabilities $883.6 million. The company reported no outstanding long-term debt and no off-balance-sheet arrangements.
- Management said existing cash and operating cash flow should cover projected capital expenditures, working capital, dividends and other cash needs at least through fiscal year-end 2012.
Material changes and management commentary
- Quarterly operating improvement reflected higher gross margins and revenue growth, partly offset by increased operating expenses. Outdoor benefited from golf-market share gains and strong dog-tracking products; Marine faced a difficult international market. Fitness compared against strong prior-year promotions.
- Year-to-date gross-margin improvement was especially pronounced in Automotive/Mobile, Fitness and Outdoor. Management cited product mix, newer higher-margin products, less promotional activity and increased amortization of previously deferred revenue.
- Research and development expense increased 13% year over year for both the quarter and 39-week period, reflecting new-product work and more than 275 additional engineering personnel since the year-ago quarter.
- Foreign-currency results were a $6.4 million loss in Q3 2012 versus a $14.9 million gain in Q3 2011; for the first 39 weeks, a $16.1 million loss versus a $12.4 million gain. Management identified the Taiwan dollar, euro and British pound as key exposures.
Outlook, unusual items and risks
- No specific revenue or earnings guidance is provided in the supplied filing text. Management’s cash sufficiency statement extends at least through the end of fiscal 2012.
- A supplier royalty audit identified $20.8 million of prior-period license-fee overpayments; the credit was recorded in cost of goods sold for the 39 weeks and included in accounts receivable. This benefited reported year-to-date margins.
- Net revenue deferrals were $20.0 million in Q3 and $35.3 million for the first 39 weeks, versus $23.8 million and $107.4 million, respectively, a year earlier. The filing attributes the change principally to a 2011 estimate change and increased amortization of prior deferrals.
- Garmin had approximately $175.0 million of contractual purchase commitments over the next five years. It reported numerous intellectual-property and patent matters; management did not expect the proceedings, in aggregate, to materially adversely affect results, financial position or cash flows. In the Ambato case, a jury awarded $500,000 plus $133,950 pre-judgment interest; Garmin’s motion for judgment as a matter of law was pending.
- Key risks discussed include foreign-exchange movements, interest-rate effects on marketable securities, product pricing and raw-material costs. The company reported no material changes to the risk factors in its 2011 Form 10-K.
Important facts for investors to verify
- How much of the year-to-date margin and earnings improvement is repeatable without the $20.8 million royalty credit and changes in revenue deferrals?
- Whether Automotive/Mobile can sustain profitability amid flat quarterly revenue and lower average selling prices, and whether Marine weakness persists.
- Whether operating cash flow recovers after the working-capital decline, inventory build and dividend outflows.
- The sensitivity of earnings and investment values to currency and interest-rate movements, and the composition and maturities of the securities portfolio.
- Developments in the Ambato judgment and other patent litigation, including potential financial exposure not clearly quantified in the filing.