Garmin Ltd. 2020 Form 10-K Summary
Business context and reporting period
Garmin designs, manufactures and sells GPS-enabled and other navigation, communications, and sensor-based products across fitness, outdoor, marine, aviation and automotive markets. This annual report covers the 52-week fiscal year ended December 26, 2020; comparisons are primarily with the 52-week year ended December 28, 2019. The filing is not a standalone fourth-quarter report.
Financial results and liquidity
| Metric | FY 2020 | FY 2019 | Change |
|---|---|---|---|
| Net sales | $4.187 billion | $3.758 billion | +11% |
| Gross profit / gross margin | $2.481 billion / 59% | $2.234 billion / 59% | Profit +11%; margin broadly flat |
| Operating income / margin | $1.054 billion / 25% | $945.6 million / 25% | +11%; margin broadly flat |
| Net income | $992.3 million | $952.5 million | +4% |
| Diluted EPS | $5.17 | $4.99 | +4% |
| Cash from operating activities | $1.135 billion | $698.5 million | +$436.7 million |
| Cash, cash equivalents and marketable securities at year-end | $2.977 billion | $2.610 billion | +$367.8 million |
Net cash used in investing was $260.5 million, including $185.4 million of property and equipment purchases and $148.6 million of acquisition payments. Net cash used in financing was $461.8 million, primarily dividends. Garmin reported no outstanding debt. Year-end total assets were $7.031 billion and stockholders’ equity was $5.516 billion. The company declared dividends of $2.44 per share for 2020.
Performance varied substantially by segment: fitness revenue rose 26% to $1.317 billion, outdoor rose 23% to $1.128 billion, and marine rose 29% to $657.8 million. Aviation revenue fell 15% to $622.8 million. Auto revenue fell 16% to $460.3 million; consumer auto declined 25%, while auto OEM sales increased 1%. Auto OEM recorded an operating loss of $60.1 million; total auto reported an operating loss of $18.7 million.
Fourth-quarter net sales were $1.351 billion, compared with $1.102 billion a year earlier; net income was $333.5 million versus $360.8 million. The fourth quarter remains seasonally important for consumer products.
Material changes and unusual items
- COVID-19 adversely affected auto and aviation sales and profitability, while demand across fitness, outdoor and marine helped offset the impact. Total unit sales decreased 1.3% to 15.4 million despite 11% revenue growth.
- Operating cash flow increased significantly, helped by working-capital movements, including lower cash use for inventory, and by noncash adjustments. It should not be viewed as solely earnings-driven.
- Reported 2020 income tax expense was $111.1 million, versus $34.7 million in 2019. The 2019 result included a $118.0 million Swiss tax-reform benefit. In 2020, Garmin recorded a $14.3 million tax benefit from releasing uncertain tax reserves and an $11.0 million tax expense from revaluing Swiss tax assets. Excluding these identified items and the 2019 benefit, management reported tax expense of $114.4 million for 2020 and $152.7 million for 2019.
- A July 2020 cyberattack encrypted some systems and interrupted online services, customer support and company communications. Garmin reported no indication customer data was accessed, lost or stolen, and said the operational and financial impact was not material.
- Consumer auto goodwill was approximately $80 million. The 2020 impairment test found fair value substantially above carrying value, but management said some or all of this goodwill remains at risk if market conditions or operating results deteriorate beyond forecasts.
Outlook, risks and contingencies
The filing does not provide consolidated revenue or earnings guidance. Management expects auto OEM operating losses and higher auto OEM research and development costs to continue in 2021; it also expects the lower gross-margin mix associated with new auto OEM programs to persist. The company says its cash balances and operating cash flow should be sufficient for projected working capital, capital expenditures and other cash needs.
Key risks include continued COVID-19 effects, intense competition and product obsolescence, component shortages and sole-source suppliers, foreign-exchange movements, and the ongoing contraction in consumer navigation devices. Other material exposures include auto OEM investment execution, tax and transfer-pricing uncertainty, data security and privacy, regulatory and aviation certification delays, and geopolitical or natural-disaster disruption affecting Taiwan-based manufacturing. Garmin disclosed $85.0 million of gross unrecognized tax benefits and is pursuing an advance pricing agreement concerning an intellectual-property migration from Switzerland to the United States. Management did not expect pending legal matters to have a material adverse effect; no specific material loss estimate was provided. Operating lease commitments totaled $107.9 million, and open purchase orders and other commitments totaled approximately $880 million, although Garmin could not determine how much represented binding obligations.
Ernst & Young issued an unqualified opinion on the financial statements and internal control over financial reporting. The auditor identified goodwill valuation and measurement of unrecognized tax benefits as critical audit matters.
Important facts for investors to verify
- Whether strong fitness, outdoor and marine demand continues and offsets weakness in aviation and consumer auto.
- Auto OEM program economics: contract wins, reimbursable development costs, gross margins and the expected duration of operating losses.
- Whether consumer auto forecasts support the carrying value of its approximately $80 million of goodwill.
- Cash-flow sustainability after considering working-capital timing, capital spending, acquisitions and dividends.
- Resolution and potential financial effects of the advance pricing agreement, other transfer-pricing matters and the $85.0 million of gross unrecognized tax benefits.
- Whether COVID-19, component availability, foreign exchange or cyber and privacy risks cause impacts beyond those described as nonmaterial or manageable.