Garmin (NASDAQ:GRMN) shares have performed well recently, rising more than 32% in the last 12 months. Despite facing ever-growing competition in the mobile computing space, the maker of GPS devices has defied its critics and turned in a string of solid earnings reports.
Most recently, the company reported better-than-expected second quarter-earnings and raised its guidance for the full fiscalvyear. During the subsequent earnings call, Garmin's management emphasized a number of key facts about its business. Below are five of the most important quotes from that call.
Garmin is taking steps to return more capital to shareholders
Alongside Garmin's second-quarter earnings report in July, the company announced it would be restructuring its business. During the earnings call, Garmin's CEO, Clifton Pemble, explained the reason for the reorganization:
Our board has approved an inter-company restructuring transaction that will [...] allow us to efficiently repatriate future earnings to fund dividends, share repurchases and acquisitions.
Garmin isn't undergoing any significant changes in terms of its operations, but instead simply moving some subsidiaries out from underneath its Taiwanese business unit. This change will force Garmin to incur a tax penalty of over $300 million in the near term, but it should allow the company to shift future earnings to dividends and buybacks, returning future cash flow to shareholders.
Garmin is generating cash and returning it to shareholders
Garmin already pays a solid dividend -- at current levels, it's yielding around 3.50% -- and management appears committed to capital returns for the foreseeable future. Garmin's CFO, Kevin Rauckman, emphasized the company's cash generation during the earnings call.
[Garmin] continue[s] to generate strong free cash flow across our businesses. Cash from operations was $164 million during [the second quarter] [...] our free cash flow generation was $143 million...we also repurchased $129 million of [stock] during [the second quarter] and still have $79 million authorized to repurchase for the remainder of 2014.
In total, Garmin has $2.8 billion in cash and cash equivalents -- around one quarter of its market cap. That, along with its commitment to capital returns, could keep the stock attractive to value investors.
Garmin's fitness category is growing
But Garmin isn't simply a value play; the company is seeing some growth in its business segments. In particular, its line of Forerunner fitness watches have generated impressive sales in recent months. During the earnings call, Pemble emphasized the growth in Garmin's fitness devices.
[Garmin's fitness revenue] grew 79% on a year-over-year basis with growth driven by new products across multiple fitness categories. We delivered gross and operating margins of 65% and 42% [...] This generated operating income growth of 112% in the quarter.
In total, Garmin's fitness category generated about 19% of its net sales and 29% of its operating income last quarter. With the strong sales growth, those numbers are up meaningfully from the same period last year.
GPS units are declining, but in an orderly fashion
That's great for Garmin's business, as its other segments appear threatened. Its lineup of automotive and personal GPS units, in particular, seems challenged. Pemble is well aware of the trends moving against Garmin's business, but it continues to guide for a gradual decline.
[Garmin expects] the PND market to continue to decline at a rate of approximately 15%-20% on a global basis [...] We will continue to manage the category appropriately to maximize long-term profits.
With the rise and proliferation of GPS-equipped smartphones, the future of Garmin's GPS business looks dire. For the time being, however, Garmin is still selling millions of dollars worth of GPS units, and generating significant cash flow in the process.
Garmin's business is becoming more diversified
At the same time, Garmin's reliance on its GPS units is steadily receding. Although they continue to compose the bulk of its earnings and revenue, management hopes investors will appreciate the company's diversification efforts. During its earnings call, Rauckman drew attention to Garmin's shifting business segments.
I'd like to highlight [...] the auto/mobile segment [represents just] 45% of our total revenues during [the second quarter] [...] down from 50% in [the same period] in the prior year.
There's no way to spin it -- automotive and personal GPS units are still of the utmost importance to Garmin's bottom line. But the company is showing steady progress in moving away from its dependency on the sales of these devices, and investors should be aware that there's more to Garmin than navigation units.
Sam Mattera has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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