Garmin Was Considered to Be a Company

Garmin was considered to be a company that was "well-run and positioned to grow" (Peters, 2006). The company's stock was trading around $93 per share at the time. The optimism surrounding Garmin was based on a strong balance sheet, technological innovation, double digit growth and the ability for the company to change direction. The company's core products, GPS systems for automobile consumers, were becoming viewed as valuable, if not essential, items, something that would have implied to an outside observer a strong long-run upside in demand (Pittsley, 2007).

Somewhere between its great starting position and this promised land, Garmin lost its way. The company, once lauded for its ability to "change direction," found itself unable to adapt to a major technological shift. In 2006, the smartphone market was relatively small, a niche business within the corporate telecommunications business. Palm and Blackberry were the dominant products. With the iPhone, and later Android phones, two things happened. The first is that tens of millions of consumers purchased smartphones and the second is that these phones were able to deliver to consumers GPS functions at a fraction of the cost of a Garmin GPS system, and sometimes at no cost at all. The minute smartphones hit the market, some analysts began to realize that they posed an existential threat to Garmin (no author, 2009).

By autumn of 2009, Google announced that it would include turn-by-turn direction functionality on the Google Maps (Hesseldahl, 2009). That Android has since gone on to become the most popular smartphone operating system means that tens of millions of consumers are receiving what is basically a free GPS, dramatically undercutting Garmin. The company began seeing reduced income almost immediately, with revenue from the automotive/mobile segment declining 15% in Q1 2010 (Tilak, 2010).

Garmin's response was relatively rapid, moving to introduce a smartphone in 2010 (Bylund, 2010) in order to compete against Android phones. The company eventually shifted its focus on other uses for GPS technology, and in selling directly to automakers for use in their in-dash navigation systems (Weise, 2012).

The company's financial performance has mirrored these changes in its business. In FY2007, the company was still on an upward trajectory. Revenues increases in FY2008 but already at this point the company's profits were starting to decline. The company's cost of goods sold as a percentage of revenues increased, and so did its selling, general and administration expense. These trends had already cut the company's net margin when its revenues began to decline. Part of the problem was the recession, which challenged the necessity of having a GPS device for many consumers. Dramatically increased competition from smartphones at the end of 2009 exacerbated Garmin's problems. Predictably, revenues declined, falling 15.6% in FY2009 and a further 8.7% in FY2010. The company was forced to cut back on its general expenses in order to attempt to retain profitability. The strategy was ultimately unable to contain the decline in net income, but Garmin was able to remain profitable during this time, which was probably essential to its long-term survival. The company's recent moves have resulted in a slight improvement in the revenue, reversing the trend. Revenue increased 2.5% in FY2011.

Net income, however, has continued to fall. The challenges of making money in Garmin's number one revenue segment have forced the company to pursue other means of attracting revenue, and there are costs associated with developing new business lines. Research & development expense increased 7.5% in FY2011, faster than the growth in revenue. Selling, general and administrative expense increased 12.5%, hinting that Garmin has been forced to spend more on promoting its products. Thus, the slight improvement in revenues has not resulted in an improvement in profits.

The balance sheet was touted as one of the company's main strengths in 2006, and it remains fairly strong today. The current ratio is 2.97, compared with 2.91 in FY2007. The company still does not have any long-term debt, and its total capital structure is 27% debt and 73% equity, compared with 28.5% debt and 71.5% equity five years ago. That Garmin has remained profitable in the past five years has allowed to it continue to be highly liquid and to avoid taking on debt, thus the lack of change in its capital structure.

The company has not grown much, either. Plant, property and equipment on the balance sheet amounts to $417 million as of FY2011, compared with $374 million in FY2007. The company grew slightly in FY2008 but scaled back after that to reflect the declining revenues. The company also has long-term investments on the books, and these have increased from $386 million in FY2007 to $1.097 billion in FY2011, much faster than the growth in the company's asset base.

Garmin has not changed its working capital much in the past five years. The company's cash holdings have grown steadily and its inventories have closely tracked sales, declining from 2009-2010 before a slight increase in 2011. Garmin has tightened its receivables, however, and brought these down from 28.9% of total assets in FY2007 to 13.5% in FY2011. Arguably, this move was not simply about addressing the reduced revenues but simply about bringing the level of receivables down to a reasonable level. The company has also reduced its accounts payable over the past five years, indicating that Garmin has adopted a policy of being more conservative, and disciplined with its working capital as a response to the challenges that it has faced.

The financial press has effectively buried the corpse of Garmin, and while there are concerns about the competition in the automotive sector, Garmin could be described today in roughly the same terms as when the company's stock was double the price in 2006. Garmin still has no debt, it has tightened its working capital management, it has proven at least somewhat adaptable by bringing out new products in order to diversify away from a declining business, and the company still has a very healthy balance sheet. What Garmin lacks from those days is the double-digit growth. While Garmin has stabilized its business in the face of significant threat from new technology, it has also taken advantage of new opportunities in the market place to develop new revenue streams. This response has generally been positive, and if the company can find more new revenue streams and new applications for its technology, Garmin may yet see a resurgence. In the meantime, the company's demise has perhaps been overstated, simply because many in the press are only familiar with the consumer automotive product, and are unaware of other products that the company has. Garmin remains in good financial health despite its challenges.