Garmin Ltd. — 2011 Form 10-K Summary
Business context and reporting period. Garmin designs, manufactures and sells GPS-enabled navigation, communication and information products across automotive/mobile, aviation, marine, outdoor and fitness markets. This annual filing covers the fiscal year ended December 31, 2011. Fiscal 2011 had 53 weeks, versus 52 weeks in 2010, so comparisons are not fully like-for-like. Figures below are in U.S. dollars unless stated otherwise.
Key financial metrics
| Metric | FY 2011 | FY 2010 |
|---|---|---|
| Net sales | $2.759 billion | $2.690 billion |
| Gross profit; gross margin | $1.339 billion; 48.5% | $1.346 billion; 50.1% |
| Operating income; operating margin | $553.8 million; 20.1% | $636.7 million; 23.7% |
| Net income; diluted EPS | $520.9 million; $2.67 | $584.6 million; $2.95 |
| Cash from operations | $822.3 million | $770.6 million |
| Cash and cash equivalents | $1.287 billion | $1.261 billion |
| Marketable securities | $1.208 billion | $801.8 million |
| Total debt | None | None |
At year-end, current assets were $2.556 billion and current liabilities were $858.3 million. Cash plus marketable securities totaled approximately $2.495 billion. Operating cash flow less $38.4 million of capital expenditures was approximately $784.0 million. Investing activities used $488.2 million, including $54.2 million net cash for acquisitions and substantial net purchases of securities. Financing activities used $307.4 million, primarily for dividends.
Material changes and segment performance
- Reported sales rose 3% (2.6% based on the stated amounts), but total units sold fell 1% to 15.8 million. The extra fiscal week contributed to the reported-year comparison.
- Automotive/mobile sales fell 5% to $1.591 billion and accounted for 58% of sales, down from 62%. North American portable-navigation demand weakened amid market saturation and competition from smartphones and factory-installed systems.
- Fitness sales increased 24% to $298.2 million; outdoor rose 14% to $363.2 million; marine rose 12% to $221.7 million; and aviation rose 9% to $284.9 million.
- Operating income declined 13% and net income declined 11%, despite higher sales. Gross margin fell about 150 basis points, while operating expenses increased 11%, including higher R&D and SG&A.
- Segment operating income was $160.8 million in automotive/mobile, $161.5 million outdoor, $102.1 million fitness, $57.6 million marine and $71.7 million aviation. Automotive/mobile operating income declined 35% year over year.
- Garmin acquired NAVIGON, Tri-Tronics and distribution/mapping businesses in South Africa and Chile. Net cash paid was $54.2 million; Garmin also recorded $3.9 million of restructuring costs related to NAVIGON.
Outlook, commentary and unusual items
- Management forecast 2012 revenue of $2.7–$2.8 billion, with growth in outdoor, fitness, aviation and marine expected to be offset by continued automotive/mobile declines. It expected overall gross margins to be stable, operating cash generation to continue, and approximately $50 million of capital expenditures.
- Management expected 2012 R&D to increase, SG&A to rise slightly due to 2011 acquisitions, and advertising to remain broadly stable as a percentage of sales. It anticipated a higher effective tax rate than 2011.
- A third-quarter 2011 change in the estimated selling price allocated to bundled lifetime map updates and premium traffic services increased FY 2011 revenue by $77.8 million, gross profit by $66.5 million, net income by $59.3 million and diluted EPS by $0.30. The filing’s quarterly data attributes $21.4 million of sales and $17.8 million of gross profit impact to Q3, and $56.4 million of sales and $48.7 million of gross profit impact to Q4.
- The 2010 comparison included a $42.8 million favorable warranty-reserve adjustment and a $98.7 million one-time income-tax benefit. These items affect year-over-year comparisons.
- Foreign-currency losses were $12.1 million in 2011, versus $88.4 million in 2010. Garmin said it did not hedge currency exposure and identified the Taiwan dollar, euro and British pound as major exposures.
- Year-end unrecognized tax benefits were $161.9 million; management could not reliably estimate the timing of any related cash settlement. The company reported no off-balance-sheet arrangements. Management did not expect disclosed legal proceedings to have a material adverse effect, while noting outcomes were uncertain.
- Principal risks include smartphone and in-car navigation competition, automotive/mobile concentration, price and margin pressure, reliance on independent distribution, single- or limited-source components, map-data licensing, foreign exchange, Taiwan operational and geopolitical exposure, GPS availability or interference, product liability, regulatory certification and intellectual-property litigation.
- Ernst & Young issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. Management also concluded disclosure controls and internal controls were effective.
Fourth-quarter context
Fiscal Q4 2011 sales were $909.6 million, gross profit $433.8 million and net income $165.6 million, compared with $837.7 million, $379.8 million and $132.9 million, respectively, in Q4 2010. Q4 2011 results included the revenue-estimate change described above; Q4 2010 net income included the one-time tax benefit. Quarterly results are therefore affected by significant accounting items and are not directly comparable without adjustment.
Most important facts for investors to verify
- Assess the sustainability and future-period consequences of the $77.8 million revenue and $66.5 million gross-profit benefit from the 2011 change in estimate, including the related deferred revenue and costs.
- Reconcile the 53-week FY 2011 comparison with 52-week FY 2010, and distinguish recurring performance from the prior-year warranty and tax benefits.
- Track automotive/mobile sales, unit volumes, pricing and margins against the growth and margin assumptions underlying 2012 guidance.
- Review liquidity and investment portfolio composition and credit quality; marketable securities were $1.208 billion, and unrecognized tax benefits were $161.9 million.
- Monitor segment growth and profitability, acquisition integration and restructuring, and whether planned product launches support management’s forecast.
- Follow unresolved litigation, component and map-supplier concentration, currency exposure, and risks to GPS availability or reception.