Garmin Ltd. Form 10-Q Summary
Business context and reporting period
Garmin designs and sells wireless and GPS-enabled products across fitness, outdoor, aviation, auto, and marine markets. This unaudited filing covers the 13 weeks and 26 weeks ended June 27, 2020, compared with the periods ended June 29, 2019. Unless stated otherwise, financial amounts below are in U.S. dollars.
Financial performance and liquidity
| Metric | Q2 2020 | Q2 2019 | First half 2020 | First half 2019 |
|---|---|---|---|---|
| Net sales | $869.9 million | $954.8 million | $1,726.0 million | $1,720.9 million |
| Gross profit | $515.4 million | $575.4 million | $1,022.4 million | $1,027.1 million |
| Operating income | $188.4 million | $256.2 million | $365.9 million | $407.6 million |
| Net income | $184.2 million | $223.7 million | $345.4 million | $363.8 million |
| Diluted EPS | $0.96 | $1.17 | $1.80 | $1.91 |
| Gross margin | 59% | 60% | 59% | 60% |
| Operating margin | 22% | 27% | 21% | 24% |
- Q2 sales fell 9% year over year; operating income declined 26% and net income declined 18%. First-half sales were essentially flat, while operating income fell 10% and net income fell 5%.
- First-half cash provided by operating activities was $425.1 million, up from $275.2 million. Investing activities provided $114.9 million, compared with $346.4 million used in the prior-year period; financing activities used $214.1 million, mainly for dividends.
- At June 27, cash and cash equivalents were $1.355 billion and marketable securities totaled $1.374 billion, or approximately $2.7 billion combined. Current assets were $3.258 billion and current liabilities $1.164 billion. Management said available cash and operating cash flow should meet projected needs.
- Capital expenditures were $98.3 million in the first half, versus $60.5 million a year earlier. The company declared dividends of $2.44 per share in Q2; first-half cash dividends paid were $217.5 million.
- No borrowing balance is separately presented in the supplied balance sheet. Noncurrent operating lease liabilities were $60.0 million; the filing text does not provide a clear separate current lease-liability value.
Material changes and segment results
- COVID-19 reduced Q2 demand across the business, though Garmin reported that sales in all segments improved compared with the start of the quarter. Segment Q2 sales changes were fitness +17%, marine +4%, outdoor -2%, aviation -31%, and auto -46%.
- Fitness growth was led by advanced wearables and cycling products; marine growth by chartplotters and advanced sonars. Aviation was affected by weaker OEM and aftermarket demand and a maturing ADS-B market. Auto faced lower driving activity, vehicle production disruptions, and ongoing personal-navigation-device market contraction.
- Auto recorded a Q2 operating loss of $10.1 million, compared with $24.9 million operating income a year earlier. Aviation operating income fell 77% to $15.6 million. Fitness operating income increased 43% to $72.0 million.
- Consolidated gross margin edged down to 59%, with management citing higher freight costs and segment mix. Operating expenses rose 2% in Q2 as research and development increased 11% and selling, general and administrative costs rose 3%; advertising expense fell 29%.
- Q2 unit sales fell to 3.093 million from 3.838 million; first-half unit sales were 6.024 million versus 7.019 million.
Outlook, commentary, risks, and unusual items
- Management expected COVID-19 to continue adversely affecting aviation and auto sales and profitability for the remainder of fiscal 2020. The filing does not provide numerical full-year guidance.
- The Q2 effective tax rate was 6.8%, including a $14.3 million benefit from releasing uncertain-tax-position reserves related to a 2014 intercompany restructuring. Excluding that benefit, the rate was still lower year over year, primarily due to a favorable jurisdictional income mix associated with moving intellectual-property ownership from Switzerland to the United States.
- On July 23, 2020, after the reporting period, a cyberattack encrypted some systems and interrupted online services, customer support, customer-facing applications, and company communications. Garmin reported no indication that customer data was accessed, lost, or stolen; product functionality was not affected apart from access to online services. Critical systems had been restored, and management did not expect a material financial or operational impact, while noting further consequences remained possible.
- Purchase orders and other open commitments were approximately $598 million, but the company could not determine how much represented binding contractual obligations. Management did not believe aggregate legal contingencies were reasonably likely to result in a material loss; outcomes remain uncertain.
- Firstbeat Analytics Oy was acquired on June 30, 2020. The company described the acquisition as not material.
- COVID-19 risks include prolonged demand and distribution disruption, supply constraints and higher component costs, manufacturing inefficiencies, inventory obsolescence, customer credit losses, and additional operating costs. The filing also highlights cybersecurity, foreign exchange, product development, and supplier-dependence risks.
Important facts for investors to verify
- Whether fitness and marine demand can offset continued weakness in aviation and auto, and how segment margins evolve.
- Whether the expected continuing COVID-19 impact on aviation and auto persists through the rest of fiscal 2020.
- The sustainability of reported earnings and tax rates, given the $14.3 million tax benefit and favorable jurisdictional income mix.
- The full operational, financial, and data-security consequences of the July cyberattack, including any effects beyond management’s initial expectations.
- Cash conversion and working-capital trends, inventory growth, capital spending, and the company’s dividend capacity.