Garmin Ltd . ( GRMN ) reported strong fourth-quarter 2013 earnings of 83 cents per share, comfortably beating the Zacks Consensus Estimate by 22 cents, on the back of strong growth in new products that are increasingly diversifying its business.
Revenues
Garmin's fourth-quarter revenues of $759.7 million were up 18.0% sequentially but down 1.2% year over year and above the Zacks Consensus Estimate of $709.0 million. Volumes were up 36.4% sequentially but down 11.0% from the year-ago quarter.
However, the blended average selling price (ASP) grew 2.6% sequentially and 11.2% year over year to $169 per unit. The increase was driven by mix changes and amortization of previously deferred revenues.
Revenues by Segment
Garmin's Auto/Mobile, Outdoor, Aviation, Fitness and Marine segments generated 50%, 17%, 12%, 16% and 5% of the quarterly revenues, respectively.
Seasonality typically makes for significant variations in quarterly revenues, with the most significant increase in the December quarter, followed by the most significant decline in the March quarter.
The Auto/Mobile segment was up 18.6% sequentially but down 12.4% from the year-ago quarter. The personal navigation device (PND) market weakness continued in the last quarter, which was partially offset by growth in original equipment manufacturers (OEM) and mobile product categories. Garmin expects PND volumes to decline in 2014, in line with the 2013 rates.
Garmin remains the number one supplier in the U.S. (with a market share of more than 70%) and one of the major suppliers in Europe (around 30% market share). The primary focus areas are currently automotive OEMs for in-dash applications and emerging markets.
The Aviation segment revenues were up 4.7% sequentially and 25.0% year over year. The year-over-year increase was due to notable strength in the OEM segment. The aviation market recovery appears to be gathering momentum with three straight quarters of double-digit year-over-year growth.
New products, opportunities in the retrofit segment, opportunities in the military and government markets, and share gains in the helicopter market remain the positives for 2014.
The Outdoor segment revenues were up 24.9% sequentially and 6.8% year over year due to several product introductions. Garmin expects to see success in this segment because of the new products that are gradually expanding its markets and enabling it to enter new categories.
The introduction of VIRB and VIRB Elite products in the camera market aided strong growth in the last quarter. Management believes further expansion into new categories and new products will likely remain an important driver of segmental growth.
The Fitness segment increased 46.4% sequentially and 14.1% year over year.
Management believes that the continued move toward higher-margin products, especially in the running category, will help segment margins in the near term. GPS-enabled running and cycling products are gaining worldwide popularity, which is good news for Garmin, the market leader. Management also has several new products in the pipeline that are expected to drive growth in 2014.
The Marine segment decreased 19.4% sequentially but grew 12.8% from the year-ago quarter. The year-over-year growth was driven by new products, some pent-up demand and positive seasonality. Management expects new products to drive sales in 2014.
Garmin is trying to build a solid product portfolio (including acquisitions) and the strengthening of strategic relationships with marine OEMs.
Operating Results
The gross margin for the quarter was 51.9%, down 290 basis points (bps) sequentially but up 330 bps year over year. The year-over-year increase was due to a favourable segment mix. Also, the amortization of previously deferred revenues was a positive for margins.
The operating expenses of $222.2 million were down 0.8% from $224.1 million in the year-ago quarter. The operating margin shrank 90 bps sequentially but was up 320 bps year over year to 22.7% in the last quarter. All, except advertising expenses, increased year over year as a percentage of sales.
On a pro-forma basis, Garmin reported a net income of $149.8 million compared to $132.5 million in the fourth quarter of last year. Pro-forma earnings per share were 83 cents compared to 66 cents in the comparable prior-year quarter.
One-time adjustments in the quarter included currency-related gains.
Balance Sheet
Inventories were down 8.3% sequentially to $382.2 million, with inventory days decreasing from 124 days to 114 days. Days sales outstanding (DSOs) went up from 66 days to around 79 days. The cash and short-term investments balance was approximately $1.33 billion versus $1.20 billion in the prior quarter, with the company generating around $149.8 million from operations.
Garmin spent around $14.8 million on capex, yielding a free cash flow of around $135.0 million. Garmin has no long-term debt.
In the last quarter, the company spent approximately $88 million on dividends and $31 million on share repurchases. The company has $241 million remaining in the share repurchase program authorized through Dec 31, 2014.
2014 Guidance
Garmin expects 2014 revenues of $2.6-$2.7 billion, gross margin of 54-55%, operating income of $530-$565 million, operating margin of approximately 21%, a tax rate of 17% and pro-forma earnings per share of $2.50 to $2.60. The Zacks Consensus Estimate for the year is pegged at $2.53, which is at the lower end of the guidance range.
Conclusion
Garmin's results indicate that the company is successfully diversifying its business away from the shrinking PND market. This has been possible because of focused research and development efforts that have resulted in a steady flow of innovative higher-margin products. The company is also increasingly collaborating with OEMs for product designing, which is leading to greater volume, predictability and more stable pricing.
In the last quarter, the traditional PND business shrank to less than 50% of its total business, although Garmin remains the market leader in the category. On the other hand, Garmin is seeing good growth in its target markets, all of which carry higher margins.
Though management expects the PND market to continue to impact top- and bottom-line results, the forward guidance provided was encouraging, indicating strong growth to continue in the upcoming quarter.
Garmin's shares carry a Zacks Rank #2 (Buy). Other stocks that have been performing well and are worth a look include Mistras Group Inc. ( MG ), Cubic Corp. ( CUB ) and Gigoptix Inc. ( GIG ). While Mistras Group sports a Zacks Rank #1 (Strong Buy) Cubic and Fiserv carry the same Zacks Rank as Garmin.
CUBIC CORP (CUB): Free Stock Analysis Report
GIGOPTIX INC (GIG): Free Stock Analysis Report
GARMIN LTD (GRMN): Free Stock Analysis Report
MISTRAS GROUP (MG): Free Stock Analysis Report
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
