Team b “Synergy” (Scott, Irene, April, Simplicious) Garmin Capstone Project Update 10/15

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TECHNOLOGICAL
Sources
Financial Ratio Analysis Garmin Ltd (GRMN)
Critical Success Factors

One popular trend that has emerged is the sport of geocaching. Essentially, this is a high-tech treasure hunt played across 100 countries in the world, including Antarctica. The game works by people identifying hidden containers on a map and then searching to find the container using their GPS-enabled device. Presently, there are over nine hundred thousand geocaches all around the world and the sport is growing rapidly. Geocaching came to be after the United States removed Selective Availability in 2000 and improved accuracy of GPS positioning data. ¹¹

TECHNOLOGICAL:

Although China is a large potential market for GPS manufacturers to sell their devices, there were questions as to the state of their infrastructure back in 2007. In an article found in the EETimes Asia, there was a lack of an industrial standard and supervision for GPS operations in China. The perception was some operators were taking advantage of this situation and cheating their users. The article recommended GPS operators establish contact with the transportation administration department in China to address this concern and the desire for policy support. ¹² Since that time, China has made significant strides to address the infrastructure short-comings. China and the European Union have joined forces to work toward Information and Communications Technologies (ICT) standards.¹³

More recently, there has been a somewhat concerning development brought to light by the US Air Force. They are seeking comments from receiver manufacturers regarding an SVN-49 signal anomaly that is causing signal distortions. This involves the GPS IIR-20(M) spacecraft launched in early 2009, but not yet operational. Due to the number of manufacturers, it is impossible for the Air Force to work through this matter on their own. This brings to light the vulnerability of Garmin’s product, as it is completely dependent upon properly functioning satellites. Should anomalies like this impact its users, in all likelihood confidence in their brand would be significantly affected without the average consumer being aware of the root of the problem. ¹⁴

Sources:

1 http://en.wikipedia.org/wiki/Global_Navigation_Satellite_System

2. http://en.wikipedia.org/wiki/Global_Navigation_Satellite_System

3 http://en.wikipedia.org/wiki/Galileo_positioning_system

4 http://en.wikipedia.org/wiki/Galileo_positioning_system

5http://www.gpsworld.com/consumer-oem/news/gps-enabled-handsets-expected-bypass-economic-downturn-3109

6. US Economy Shrank 0.7%

Published: 9/30/2009 9:46:54 AM By: TradingEconomics.com, Bloomberg

7. European Economy Contracts More Than Estimated

Published: 10/7/2009 9:45:19 AM By: TradingEconomics.com, Bloomberg
8. The Chinese Economy May Be Heading Into an Iceberg
Published: 7/30/2009 6:50:10 PM By: Anna Fedec, contact@tradingeconomics.com

9. http://www.telecomtiger.com/fullstory.aspx?passfrom=vasstory&storyid=7371

10. . http://ezinearticles.com/?The-Present-and-Future-of-GPS-Devices&id=1858530A

11. http://www.geocaching.com/

12. http://www.eetasia.com/ART_8800480860_499488_NT_8bbe4c58.HTM

13. http://www.ed.ac.uk/about/edinburgh-global/research/china-eu

14. http://www.gpsworld.com/gnss-system/receiver-design/news/air-force-polls-receiver-makers-solutions-satellite-problems-8487

Financial Ratio Analysis Garmin Ltd (GRMN)

Garmin had fantastic growth year in FY07 in which it grew revenues 79%. In FY08 however Garmin has grown revenue to $3.5B at a conservative 9% rate. FY08 was a challenging year for Garmin which saw its profits rise slightly by 6% behind the 9% revenue growth but this was misleading because its net income fell significantly as a percentage of revenue by 3% due mainly to an increase in R&D, SG&A and COGS. Net Income fell to $732 million from $855 million in FY07.

Garmin has outperformed the S&P500 on profit margin but is only slightly trailing the industry by 1%. Total Profit margin for FY08 was 22% but decreased 5% from FY07. Return on Assets has declined 1% and Return on Equity also declined 3% to 33% from 36%. Clearly the high expectations and slowing economy have had an impact on Garmin’s capability to maintain this level of performance.
Garmin has apparently not become more efficient as a result of its growth as evident by its declining operating income and a decrease in inventory turnover capability (takes longer). Inventory as a percentage of revenue has grown significantly which may either be a temporary condition due to the slowing economy and missed forecasts or a lesser efficient model. The Quick Ratio or “acid test” of Garmin’s financial health shows that Garmin has 3.8 times assets in short-term investments (cash flow, A/R and short-term investments) versus liability. Cost of Sales rose to 55% as a percentage of revenue which is up 2% from FY07. Likewise R&D rose .9% to 5.9% as a percentage of revenue and SG&A rose 1% to 13% as a percentage of revenue.
If we compare Garmin’s liquidity to Tom-Tom NV a $2.3B competitor, we find that Tom-Tom carries much more debt and risk with a Current Ratio of .35. This means that Tom-Tom carries .35 cents in assets for every $1 in liability compared to Garmin which carries $4 of assets to $1 liability. If Garmin were able to increase its inventory turnover even further and maximize its use of cash store it may be able to put more pressure on a struggling competitor like Tom-Tom with either a leveraged buy-out or increasing pricing pressure.
One area the company has improved upon is in decreasing the average days of A/R by reducing a total of 38 days by moving A/R from 121 days to 83 days. The potential use of this cash was offset by the increase in COGS.
Garmin is a healthy albeit not a fast-moving, aggressive, more efficient company financially over the last 2 years. The current equity return and profit margin is above the S&P 500 average however Garmin has to deal with managing costs as a percentage of revenue. Garmin carries almost no risk to solvency and its ability to cover its liabilities as the Current Ratio shows it has more than 4.5 times assets to liabilities. Garmin carries no debt which can be construed by many investors as a lack of innovation, efficient use of capital, vision and capacity for expansion. Garmin’s growth trend has slowed significantly and it will need to become more efficient and expand its revenue base either through a better use of cash or a reduction of inventory for a better return on capital.

¹Income Statement Garmin Ltd (GRMN) in thousands U.S. Dollars

PERIOD ENDING		27-Dec-08	29-Dec-07	30-Dec-06
Total Revenue		3,494,077	3,180,319	1,774,000
Cost of Revenue		1,940,562	1,717,064	891,614

Gross Profit		1,553,515	1,463,255	882,386

		Operating Expenses
		Research Development	206,109	159,406		113,314
		Selling General and Administrative	485,389	396,498		214,513
		Non Recurring	-	-		-
		Others	-	-		-

	Total Operating Expenses				-		-	-


Operating Income or Loss					862,017		907,351	554,559

	Income from Continuing Operations
	Total Other Income/Expenses Net				52,956		71,129	40,036
	Earnings Before Interest And Taxes				914,973		978,480	594,595
	Interest Expense				607		207	41
	Income Before Tax				914,366		978,273	594,554
	Income Tax Expense				181,518		123,262	80,431
	Minority Interest				-		-	-

	Net Income From Continuing Ops				732,848		855,011	514,123

	Non-recurring Events
	Discontinued Operations				-		-	-
	Extraordinary Items				-		-	-
	Effect Of Accounting Changes				-		-	-
	Other Items				-		-	-


Net Income					732,848		855,011	514,123
Preferred Stock And Other Adjustments					-		-	-

Net Income Applicable To Common Shares					$732,848		$855,011	$514,123

Balance Sheet Garmin Ltd (GRMN)

PERIOD ENDING

27-Dec-08

29-Dec-07

30-Dec-06

Assets

Current Assets

Cash And Cash Equivalents

696,335

707,689

337,321

Short Term Investments

12,886

37,551

73,033

Net Receivables

791,146

1,059,889

459,520

Inventory

425,312

505,467

271,008

Other Current Assets

58,746

22,179

28,202

Total Current Assets

1,984,425

2,332,775

1,169,084

Long Term Investments

262,009

386,954

407,843

Property Plant and Equipment

445,252

374,147

250,988

Goodwill

Intangible Assets

230,954

196,030

67,580

Accumulated Amortization

Other Assets

1,941

1,554

1,525

Deferred Long Term Asset Charges

Total Assets

2,924,581

3,291,460

1,897,020

Liabilities

Current Liabilities

Accounts Payable

479,176

801,883

337,682

Short/Current Long Term Debt

Other Current Liabilities

Total Current Liabilities

479,176

801,883

337,682

Long Term Debt

248

Other Liabilities

215,481

127,028

Deferred Long Term Liability Charges

4,070

11,935

1,191

Minority Interest

Negative Goodwill

Total Liabilities

698,727

940,846

339,121

Stockholders' Equity

Misc Stocks Options Warrants

Redeemable Preferred Stock

Preferred Stock

Common Stock

1,002

1,086

1,082

Retained Earnings

2,262,503

2,171,134

1,478,654

Treasury Stock

Capital Surplus

132,264

83,438

Other Stockholder Equity

(37,651)

46,130

(5,275)

Total Stockholder Equity

2,225,854

2,350,614

1,557,899

Net Tangible Assets

$1,994,900

$2,154,584

$1,490,319

CCash Flow Garmin Ltd (GRMN)

All numbers in thousands

PERIOD ENDING	27-Dec-08	29-Dec-07	30-Dec-06
Net Income	732,848	855,011	514,123

Operating Activities, Cash Flows Provided By or Used In
Depreciation	78,417	64,037	44,475
Adjustments To Net Income	111,702	(2,554)	(3,076)
Changes In Accounts Receivables	206,101	(477,108)	(230,111)
Changes In Liabilities	(330,294)	484,238	136,459
Changes In Inventories	83,035	(224,180)	(95,658)
Changes In Other Operating Activities	(19,645)	(17,356)	(4,357)

Total Cash Flow From Operating Activities	862,164	682,088	361,855

Investing Activities, Cash Flows Provided By or Used In
Capital Expenditures	(119,623)	(156,777)	(92,906)
Investments	130,744	112,775	(93,772)
Other Cashflows from Investing Activities	(67,470)	(131,693)	(39,707)

Total Cash Flows From Investing Activities	(56,349)	(175,695)	(226,385)

Financing Activities, Cash Flows Provided By or Used In
Dividends Paid	(150,251)	(162,531)	(107,923)
Sale Purchase of Stock	(659,943)	9,228	(34,376)
Net Borrowings	-	(248)	(11)
Other Cash Flows from Financing Activities	2,143	17,434	9,660

Total Cash Flows From Financing Activities	(808,051)	(136,117)	(132,650)
Effect Of Exchange Rate Changes	(9,118)	92	149

Change In Cash and Cash Equivalents	($11,354)	$370,368	$2,969

Growth Rates %	Company	Industry	S&P 500
Sales (Qtr vs year ago qtr)	-26.60	-12.60	-9.10
Net Income (YTD vs YTD)	-47.90	-10.50	-5.00
Net Income (Qtr vs year ago qtr)	-36.80	-38.60	-11.30
Sales (5-Year Annual Avg.)	43.56	23.69	13.14
Net Income (5-Year Annual Avg.)	32.62	18.72	12.74
Dividends (5-Year Annual Avg.)	24.57	3.18	11.70

Profit Margins %	Company	Industry	S&P 500
Gross Margin	45.1	46.8	38.1
Pre-Tax Margin	22.3	0.9	10.4
Net Profit Margin	17.8	5.1	7.1
5Yr Gross Margin (5-Year Avg.)	47.3	46.6	37.8
5Yr PreTax Margin (5-Year Avg.)	30.4	11.2	16.5
5Yr Net Profit Margin (5-Year Avg.)	25.6	8.5	11.5

Financial Condition	Company	Industry	S&P 500
Debt/Equity Ratio	0.00	0.40	1.39
Current Ratio	4.5	3.3	1.5
Quick Ratio	3.8	2.5	1.2
Interest Coverage	21.4	61.6	23.4
Leverage Ratio	1.3	1.9	5.2
Book Value/Share	12.28	20.33	21.10

Investment Returns %	Company	Industry	S&P 500
Return On Equity	22.6	9.7	15.7
Return On Assets	17.2	5.1	5.9
Return On Capital	20.9	6.4	8.2
Return On Equity (5-Year Avg.)	35.0	14.8	19.1
Return On Assets (5-Year Avg.)	27.4	7.8	7.9
Return On Capital (5-Year Avg.)	33.8	10.0	10.6
Management Efficiency	Company	Industry	S&P 500
Income/Employee	60,469	19,667	56,806
Revenue/Employee	339,059	280,441	846,884
Receivable Turnover	5.0	5.7	13.1
Inventory Turnover	3.4	4.1	9.4
Asset Turnover	1.0	0.7	0.8

Critical Success Factors

1. Leverage use of cash and control expenses

Garmin has the strength afforded a company with significant assets and no long-term debt. Garmin could put price pressure on smaller competitors by becoming even more efficient with its own expenses and use of inventory and build up a stronger cash position in order to reduce prices or use the cash for purchase into a marketplace through its competitors or incentives to partners.

2. Diversify Product Line

The popularity of Smart phones and online mapping software is a risk to Garmin’s business model as there will be less desire to purchase stand-alone navigation devices. Garmin must either diversify its product line by selling IP or find a new way to partner with auto and boat manufacturers. Of course Garmin could compete in the phone space as well either through partnership, purchase or innovation. The risk is the margins of these businesses are typically much less and have greater competition.

Garmin has sufficient cash to purchase its way into IP or the phone market either through partnership with a phone manufacturer or buyout of smaller competitors that have valuable IP such as TOM-TOM.

On Sep 9th, Garmin launched its Nuvifone with direct distribution with AT&T Inc according to the Wall Street Journal. According to the Wall Street Journal, “the Nuviphone is Garmin’s entry into the cellular phone market and is considered key to the company’s future. Cell phone carriers have increasingly been chipping away at Garmin’s market, adding navigational features to the phones.” “In February, Garmin said it was teaming up with Taiwan-based Asustek Computer Inc. to develop and produce a cobranded line of feature-rich mobile phones.”

Sources
MSN Money. (2009, 10 6). Retrieved from http://www.msn.com: http://moneycentral.msn.com/detail/stock_quote?Symbol=GRMN%2C
Press, A. (2009, September 9). http://online.wsj.com/article/SB12542356078994945. Retrieved from The Wall Street Journal Online.

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