Garmin Ltd. — Q2 2021 Form 10-Q
Reporting period: 13 weeks ended June 26, 2021; comparisons are with the 13 weeks ended June 27, 2020. The filing also reports first-half results for the 26 weeks ended June 26, 2021. Amounts below are in U.S. dollars; financial figures are rounded to millions unless noted.
Business context
Garmin develops and sells GPS-enabled wireless products across fitness, outdoor, aviation, marine, consumer auto, and auto OEM markets. Management said COVID-19-related demand shifts benefited fitness, outdoor, and marine, while the pandemic’s adverse effects on aviation and auto had lessened in the first half.
Key financial results
| Metric | Q2 2021 | Q2 2020 | First half 2021 | First half 2020 |
|---|---|---|---|---|
| Net sales | $1,326.9 million | $869.9 million | $2,399.2 million | $1,726.0 million |
| Gross profit | $780.9 million | $515.4 million | $1,422.4 million | $1,022.4 million |
| Operating income | $371.2 million | $188.4 million | $620.8 million | $365.9 million |
| Net income | $317.0 million | $184.2 million | $537.0 million | $345.4 million |
| Diluted EPS | $1.64 | $0.96 | $2.78 | $1.80 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $598.0 million | $425.1 million |
- Q2 sales rose 53% year over year; operating income rose 97% and net income rose 72%. First-half sales increased 39%, operating income 70%, and net income approximately 55%.
- Gross margin was approximately 59% in both Q2 periods and in the first-half comparison. Operating margin improved to 28% in Q2 from 22%, and to 26% for the first half from 21%.
- Q2 effective tax rate was 14.8%, versus 6.8%; first-half rate was 13.7%, versus 8.0%. The increase primarily reflected fewer releases of uncertain tax position reserves than in 2020.
- First-half investing cash flow was an outflow of $198.0 million, including $146.5 million of property and equipment purchases. Financing cash flow was an outflow of $215.7 million, including $233.9 million of dividends paid. Cash, cash equivalents, and restricted cash increased by $181.5 million to $1,640.2 million.
- At June 26, cash and cash equivalents were $1,639.4 million and marketable securities totaled $1,534.3 million, or about $3.17 billion combined. Current assets were $3,883.8 million and current liabilities $1,458.8 million. No borrowings are presented in the balance sheet included in the filing text.
Business and segment changes
- Q2 sales increased across all reported segments: fitness +40%, outdoor +57%, aviation +43%, marine +66%, and auto +74%. Marine was 20% of sales; fitness was the largest segment at 31%.
- Growth drivers included cycling and advanced wearables in fitness, adventure watches in outdoor, OEM and aftermarket products in aviation, chartplotters in marine, and new OEM programs in auto. Year-over-year comparisons partly reflect pandemic-related weakness in the prior-year period.
- Consolidated gross margin was broadly stable. Higher freight costs pressured fitness, outdoor, marine, and consumer auto margins; favorable mix partly offset this in fitness and outdoor. Auto OEM mix shifted toward newer, lower-margin programs.
- Auto OEM reported an operating loss of $24.1 million in Q2 and $56.0 million for the first half. Management expected auto OEM operating losses and lower margins to continue through 2021 as program mix and related expenses evolve.
Outlook, risks, and contingencies
- The filing provides no quantified revenue or earnings guidance. Management said global supply-chain challenges, including component shortages, longer lead times, cost fluctuations, and logistics constraints, were expected to continue through at least the end of 2021. No material impact had yet been experienced, but future effects remained uncertain.
- Management stated that existing cash and operating cash flow should be sufficient for projected working capital, capital expenditures, and other cash requirements. The company reported no off-balance-sheet arrangements.
- Open purchase orders and other commitments were approximately $1.298 billion; the company could not determine how much represented binding contractual obligations because orders may be purchase authorizations.
- COVID-19 remains a key risk: demand could weaken as consumer behavior changes, while supply constraints, higher costs, manufacturing disruption, and impacts on customers and suppliers could affect results. The filing also identifies currency and investment-value exposure; management reported no material change in market-risk disclosures.
- Garmin was involved in ordinary-course claims, including patent and other intellectual-property matters. Management did not believe aggregate loss contingencies were reasonably likely to produce a material adverse effect, while noting outcomes cannot be predicted with certainty.
- The board-declared dividend was $2.68 per share for Q2; the balance sheet included a $515.3 million dividend payable. The filing says normal recurring adjustments were included and that interim results are not necessarily indicative of full-year results.
Most important facts to verify
- Whether elevated fitness, outdoor, and marine demand persists beyond the pandemic-related demand shift and the unusually weak 2020 comparison.
- Whether supply-chain constraints, freight costs, and component availability affect shipments, margins, or inventory; inventory rose to $938.6 million from $762.1 million at year-end.
- Whether auto OEM program growth produces the expected returns despite lower gross margins, increased R&D spending, and operating losses.
- How foreign-exchange movements, investment yields, and uncertain tax-position reserve releases affect reported earnings and cash returns.
- The binding portion and timing of the $1.298 billion of commitments, and the cash requirements associated with capital spending and dividends.