Garmin reports strong second quarter 2020 revenue and income during the COVID-19 pandemic

Garmin Ltd. (Nasdaq: GRMN – News) today announced results for the second quarter ended June 27, 2020.

Highlights for second quarter 2020 include:

• Total revenue of $870 million, a 9% year-over-year decrease, as strength in fitness and marine partially offset declines in outdoor, aviation, and automotive
• Gross margin and operating margin were 59.3% and 21.7%, respectively
• GAAP EPS was $0.96 and pro forma EPS⁽¹⁾ was $0.91
• Recently announced the acquisition of Firstbeat Analytics, a leading provider of physiological analytics technology for health, fitness and athletic performance
• Introduced solar charging technology into our Instinct product line dramatically increasing its battery life, and added solar charging technology to additional fēnix 6 models
• Garmin Autoland achieved Federal Aviation Administration (FAA) certification for general aviation aircraft in the Piper M600, marking the beginning of a new era in general aviation safety technology
• Expanded our exclusive relationship with Regulator Marine, adding Fusion Entertainment as standard equipment
• Launched new series of oversized dēzl truck navigators

(in thousands, except per share data)

 

13-Weeks Ended

 

 

26-Weeks Ended

 

 

 

June 27,

 

 

June 29,

 

 

YoY

 

 

June 27,

 

 

June 29,

 

 

YoY

 

 

 

2020

 

 

2019

 

 

Change

 

 

2020

 

 

2019

 

 

Change

 

Net sales

 

$

869,867

 

 

$

954,840

 

 

(9)%

 

 

$

1,725,975

 

 

$

1,720,890

 

 

0%

 

Fitness

 

 

294,642

 

 

 

251,653

 

 

17%

 

 

 

518,242

 

 

 

431,908

 

 

20%

 

Marine

 

 

157,827

 

 

 

151,407

 

 

4%

 

 

 

320,832

 

 

 

285,376

 

 

12%

 

Outdoor

 

 

206,200

 

 

 

210,404

 

 

(2)%

 

 

 

381,302

 

 

 

364,455

 

 

5%

 

Aviation

 

 

126,140

 

 

 

183,965

 

 

(31)%

 

 

 

314,739

 

 

 

354,741

 

 

(11)%

 

Auto

 

 

85,058

 

 

 

157,411

 

 

(46)%

 

 

 

190,860

 

 

 

284,410

 

 

(33)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross margin %

 

59.3%

 

 

60.3%

 

 

 

 

 

 

59.2%

 

 

59.7%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income %

 

21.7%

 

 

26.8%

 

 

 

 

 

 

21.2%

 

 

23.7%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

GAAP diluted EPS

 

$

0.96

 

 

$

1.17

 

 

(18)%

 

 

$

1.80

 

 

$

1.91

 

 

(6)%

 

Pro forma diluted EPS⁽¹⁾

 

$

0.91

 

 

$

1.16

 

 

(22)%

 

 

$

1.82

 

 

$

1.89

 

 

(4)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1) See attached Non-GAAP Financial Information for discussion and reconciliation of non-GAAP financial measures, including pro forma diluted EPS

 

Executive Overview from Cliff Pemble, President and Chief Executive Officer:

“Garmin delivered strong second quarter financial results in a period filled with unprecedented challenges,” said Cliff Pemble, president and chief executive officer of Garmin Ltd. “Business conditions rapidly improved from April lows driven by popular fitness, marine, and outdoor products. We believe these results affirm the resilient nature of our business and the strong utility of our products.”

Fitness:

Revenue from the fitness segment grew 17% in the second quarter driven by strong demand for our advanced wearables and cycling products. Gross margin and operating margin were 53% and 24%, respectively. We launched new Edge cycling products that add performance insights, safety and tracking features to monitor health stats and provide training guidance to our cycling customers. We recently acquired Firstbeat Analytics, establishing Garmin as a global leader in physiological analytics. We continue to see opportunities for innovative and compelling new products within the fitness segment.

Marine:

Revenue from the marine segment grew 4% in the second quarter across multiple categories led by chartplotters and Panoptix sonar technology. Gross margin and operating margin were 59% and 28%, respectively. Regulator Marine expanded its exclusive relationship with Garmin, selecting the Fusion Apollo series stereos as standard equipment on its offshore sportfishing center console boats. Also, we launched quatix solar, our first marine smartwatch featuring solar charging technology. We remain focused on providing leading edge, high quality products and systems with the latest technology that our customers demand.

Outdoor:

Revenue from the outdoor segment decreased 2% in the second quarter as declines in handhelds were mostly offset by strong demand of adventure watches. Gross margin and operating margin were 65% and 33%, respectively. We recently expanded our solar charging technology to the Instinct, fēnix 6 and 6S and tactix Delta adventure watches allowing customers to “Do What They Love Longer” through significantly increased battery life and new purpose-built functionality. Looking forward, our outdoor segment remains focused on providing compelling new products and new categories that enable and enrich the outdoor experiences of our customers.

Aviation:

Revenue from the aviation segment declined 31% in the second quarter, as the pandemic negatively impacted OEM and aftermarket product categories, and the ADS-B market rapidly matured. Gross margin and operating margin were 73% and 12%, respectively. During the quarter, we received FAA certification for the Garmin Autoland system in the Piper M600, marking the beginning of a new era for general aviation safety technology. We continue to invest in additional certifications and new products that will make general aviation safer and more accessible.

Auto:

Revenue from the auto segment declined 46% during the second quarter, as the pandemic significantly impacted driving activity and production of new vehicles. Gross margin was 47%, and we experienced an operating loss of $10 million in the quarter. During the quarter, we launched the oversized dēzl GPS truck navigators featuring large, easy-to-read HD touchscreens, industry-best load-to-dock guidance and popular truck routing for professional truck drivers. We also launched the RV 890 navigator specifically geared for the RV and camping lifestyle, with a large high-resolution touchscreen display and revamped voice assistant which simplifies overall interaction with the navigator. Looking forward, our auto segment is committed to enhancing the automotive experience through compelling aftermarket products for adventure, professional and daily drivers, and becoming a respected tier 1 supplier of innovative electronic solutions for a broad range of vehicles.

Additional Financial Information:

Total operating expenses in the second quarter were $327 million, a 2% increase over the prior year. Research and development increased 11%, primarily due to engineering personnel costs. Selling, general and administrative expenses increased 3%, driven primarily by personnel related expenses. Advertising decreased 29%, driven by lower media spend in the quarter.

The effective tax rate in the second quarter of 2020 was 6.8%. Excluding the impact of a $14 million income tax benefit due to the release of uncertain tax position reserves associated with the 2014 intercompany restructuring, our pro forma effective tax rate in the second quarter 2020 was 14.0% compared to 18.9% in the prior year quarter. The decrease in the pro forma effective tax rate is primarily due to the intellectual property migration transaction.

In the second quarter of 2020, we generated approximately $142 million of free cash flow⁽¹⁾, and paid a quarterly dividend of approximately $109 million. We ended the quarter with cash and marketable securities of approximately $2.7 billion.

(1) See attached Non-GAAP Financial Information for discussion and reconciliation of non-GAAP financial measures, including free cash flow.

Webcast Information/Forward-Looking Statements:
The information for Garmin Ltd.’s earnings call is as follows:
			When:		Wednesday, July 29, 2020 at 10:30 a.m. Eastern
			Where:		https://www.garmin.com/en-US/investors/events/
			How:		Simply log on to the web at the address above or call to listen in at 855-757-3897

An archive of the live webcast will be available until July 29, 2021 on the Garmin website at www.garmin.com. To access the replay, click on the Investor Relations link and click over to the Events Calendar page.

This release includes projections and other forward-looking statements regarding Garmin Ltd. and its business that are commonly identified by words such as “anticipates”, “would,” “may,” “expects,” “estimates,” “plans,” “intends,” “projects,” and other words or phrases with similar meanings. Any statements regarding the Company’s GAAP and pro forma estimated earnings, EPS, and effective tax rate, and the Company’s expected segment revenue growth rates, consolidated revenue, gross margins, operating margins, potential future acquisitions, currency movements, expenses, pricing, new products to be introduced in 2020, statements relating to possible future dividends, statements related to the ongoing impact of the COVID-19 pandemic, and the Company’s plans and objectives are forward-looking statements. The forward-looking events and circumstances discussed in this release may not occur and actual results could differ materially as a result of risk factors and uncertainties affecting Garmin, including, but not limited to, the risk factors that are described in both the Annual Report on Form 10-K for the year ended December 28, 2019 and the Quarterly Report on Form 10-Q for the quarter ended June 27, 2020 filed by Garmin with the Securities and Exchange Commission (Commission file number 0-31983). A copy of Garmin’s 2019 Form 10-K and the Q2 2020 Form 10-Q can be downloaded from https://www.garmin.com/en-US/investors/sec/

This release and the attachments contain non-GAAP financial measures. A reconciliation to the nearest GAAP measure and a discussion of the Company's use of these measures are included in the attachments.

Garmin, the Garmin logo and the Garmin delta, Edge, fēnix, Fusion, Instinct, quatix and tactix are trademarks of Garmin Ltd. or its subsidiaries and are registered in one or more countries, including the U.S. dezl, and Panoptix, are trademarks of Garmin Ltd. or its subsidiaries. All other brands, product names, company names, trademarks and service marks are the properties of their respective owners. All rights reserved

Garmin Ltd. And Subsidiaries
Condensed Consolidated Statements of Income (Unaudited)
(In thousands, except per share information)
		13-Weeks Ended								26-Weeks Ended
		June 27,				June 29,				June 27,				June 29,
		2020				2019				2020				2019
Net sales		$	869,867			$	954,840			$	1,725,975			$	1,720,890
Cost of goods sold			354,437				379,475				703,605				693,827
Gross profit			515,430				575,365				1,022,370				1,027,063
Advertising expense			29,285				41,523				56,165				69,139
Selling, general and administrative expense			132,016				128,738				269,202				255,519
Research and development expense			165,740				148,883				331,131				294,801
Total operating expense			327,041				319,144				656,498				619,459
Operating income			188,389				256,221				365,872				407,604
Other income (expense):
Interest income			10,455				13,735				22,481				27,439
Foreign currency (losses) gains			(4,493	)			3,413				(19,916	)			3,727
Other income			3,241				2,409				6,789				3,273
Total other income (expense)			9,203				19,557				9,354				34,439
Income before income taxes			197,592				275,778				375,226				442,043
Income tax provision			13,412				52,122				29,866				78,214
Net income		$	184,180			$	223,656			$	345,360			$	363,829
Net income per share:
Basic		$	0.96			$	1.18			$	1.81			$	1.92
Diluted		$	0.96			$	1.17			$	1.80			$	1.91
Weighted average common shares outstanding:
Basic			191,024				189,855				190,914				189,728
Diluted			191,597				190,714				191,640				190,657

Garmin Ltd. And Subsidiaries
Condensed Consolidated Balance Sheets (Unaudited)
(In thousands, except per share information)
		June 27, 2020				December 28, 2019
Assets
Current assets:
Cash and cash equivalents		$	1,354,924			$	1,027,567
Marketable securities			380,880				376,463
Accounts receivable, net			523,901				706,763
Inventories			813,243				752,908
Deferred costs			22,033				25,105
Prepaid expenses and other current assets			163,458				169,044
Total current assets			3,258,439				3,057,850
Property and equipment, net			791,175				728,921
Operating lease right-of-use assets			76,214				63,589
Restricted cash			283				71
Marketable securities			993,021				1,205,475
Deferred income taxes			254,202				268,518
Noncurrent deferred costs			18,748				23,493
Intangible assets, net			656,898				659,629
Other assets			171,062				159,253
Total assets		$	6,220,042			$	6,166,799
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable		$	193,216			$	240,831
Salaries and benefits payable			123,404				128,426
Accrued warranty costs			39,293				39,758
Accrued sales program costs			66,696				112,578
Deferred revenue			87,727				94,562
Accrued royalty costs			10,833				15,401
Accrued advertising expense			23,302				35,142
Other accrued expenses			98,097				95,060
Income taxes payable			54,894				56,913
Dividend payable			466,465				217,262
Total current liabilities			1,163,927				1,035,933
Deferred income taxes			103,583				114,754
Noncurrent income taxes			92,120				105,771
Noncurrent deferred revenue			54,860				67,329
Noncurrent operating lease liabilities			60,000				49,238
Other liabilities			4,691				278
Stockholders’ equity:
Shares, CHF 0.10 par value, 198,077 shares authorized and issued; 191,223 shares outstanding at June 27, 2020 and 190,686 shares outstanding at December 28, 2019			17,979				17,979
Additional paid-in capital			1,851,695				1,835,622
Treasury stock			(326,310	)			(345,040	)
Retained earnings			3,107,768				3,229,061
Accumulated other comprehensive income			89,729				55,874
Total stockholders’ equity			4,740,861				4,793,496
Total liabilities and stockholders’ equity		$	6,220,042			$	6,166,799

Garmin Ltd. And Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
		26-Weeks Ended
		June 27, 2020				June 29, 2019
Operating Activities:
Net income		$	345,360			$	363,829
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation			37,030				34,526
Amortization			20,502				16,208
(Gain) loss on sale of property and equipment			(1,807	)			94
Unrealized foreign currency losses			16,678				(6,811	)
Deferred income taxes			272				7,077
Stock compensation expense			31,484				30,961
Realized gain on marketable securities			(331	)			(60	)
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable, net of allowance for doubtful accounts			178,120				6,189
Inventories			(57,126	)			(68,217	)
Other current and non-current assets			(10,427	)			(68,370	)
Accounts payable			(51,463	)			5,960
Other current and non-current liabilities			(58,662	)			(33,001	)
Deferred revenue			(19,301	)			(6,252	)
Deferred costs			7,817				3,876
Income taxes payable			(13,035	)			(10,791	)
Net cash provided by operating activities			425,111				275,218
Investing activities:
Purchases of property and equipment			(98,270	)			(60,495	)
Proceeds from sale of property and equipment			1,916				271
Purchase of intangible assets			(1,374	)			(853	)
Purchase of marketable securities			(346,129	)			(192,168	)
Redemption of marketable securities			566,688				182,860
Acquisitions, net of cash acquired			(7,893	)			(276,014	)
Net cash provided by (used in) investing activities			114,938				(346,399	)
Financing activities:
Dividends			(217,450	)			(308,905	)
Proceeds from issuance of treasury stock related to equity awards			15,202				12,982
Purchase of treasury stock related to equity awards			(11,883	)			(12,954	)
Net cash used in financing activities			(214,131	)			(308,877	)
Effect of exchange rate changes on cash and cash equivalents			1,651				(1,493	)
Net increase (decrease) in cash, cash equivalents, and restricted cash			327,569				(381,551	)
Cash, cash equivalents, and restricted cash at beginning of period			1,027,638				1,201,805
Cash, cash equivalents, and restricted cash at end of period		$	1,355,207			$	820,254

Garmin Ltd. And Subsidiaries
Net Sales, Gross Profit and Operating Income by Segment (Unaudited)
(In thousands)
		Reportable Segments
		Fitness				Marine				Outdoor				Aviation				Auto				Total
13-Weeks Ended June 27, 2020
Net sales		$	294,642			$	157,827			$	206,200			$	126,140			$	85,058			$	869,867
Gross profit			156,817				93,470				133,189				92,036				39,918				515,430
Operating income			71,981				43,553				67,414				15,566				(10,125	)			188,389
13-Weeks Ended June 29, 2019
Net sales		$	251,653			$	151,407			$	210,404			$	183,965			$	157,411			$	954,840
Gross profit			135,136				91,683				135,508				138,177				74,861				575,365
Operating income			50,413				42,730				71,336				66,834				24,908				256,221
26-Weeks Ended June 27, 2020
Net sales		$	518,242			$	320,832			$	381,302			$	314,739			$	190,860			$	1,725,975
Gross profit			269,142				187,680				245,447				230,844				89,257				1,022,370
Operating income			102,992				83,712				114,581				74,887				(10,300	)			365,872
26-Weeks Ended June 29, 2019
Net sales		$	431,908			$	285,376			$	364,455			$	354,741			$	284,410			$	1,720,890
Gross profit			225,970				169,739				232,996				266,160				132,198				1,027,063
Operating income			68,537				68,205				113,290				124,451				33,121				407,604

Garmin Ltd. And Subsidiaries
Net Sales by Geography (Unaudited)
(In thousands)
		13-Weeks Ended												26-Weeks Ended
		June 27,				June 29,				YoY				June 27,				June 29,				YoY
		2020				2019				Change				2020				2019				Change
Net sales		$	869,867			$	954,840			(9)%				$	1,725,975			$	1,720,890			0%
Americas			423,091				470,840			(10)%					850,491				850,296			0%
EMEA			335,201				338,595			(1)%					635,069				598,615			6%
APAC			111,575				145,405			(23)%					240,415				271,979			(12)%
EMEA - Europe, Middle East and Africa; APAC - Asia Pacific and Australian Continent

Non-GAAP Financial Information

To supplement our financial results presented in accordance with GAAP, this release includes the following measures defined by the Securities and Exchange Commission as non-GAAP financial measures: pro forma net income (earnings) per share, pro forma effective tax rate and free cash flow. These non-GAAP measures are not based on any comprehensive set of accounting rules or principles and should not be considered a substitute for, or superior to, financial measures calculated in accordance with GAAP, and may be different from non-GAAP measures used by other companies, limiting the usefulness of the measures for comparison with other companies. Management believes providing investors with an operating view consistent with how it manages the Company provides enhanced transparency into the operating results of the Company, as described in more detail by category below.

The tables below provide reconciliations between the GAAP and non-GAAP measures.

Pro forma effective tax rate

The Company’s income tax expense is periodically impacted by discrete tax items that are not reflective of income tax expense incurred as a result of current period earnings. Therefore, management believes disclosure of the effective tax rate and income tax provision before the effect of certain discrete tax items are important measures to permit investors' consistent comparison between periods. In the first quarter 2020 and the first half of 2019, there were no such discrete tax items identified.

Garmin Ltd. And Subsidiaries
Pro Forma Effective Tax Rate
(In thousands, except effective tax rate (ETR) information)
		13-Weeks Ended								26-Weeks Ended
		June 27,								June 27,
		2020								2020
		$				ETR(1)				$				ETR(1)
U.S GAAP income tax provision		$	13,412				6.8	%		$	29,866				8.0	%
Pro forma discrete tax item:
Uncertain Tax Reserve Release(2)			14,308								14,308
Pro forma income tax provision		$	27,720				14.0	%		$	44,174				11.8	%
(1) Effective tax rate is calculated by taking the income tax provision divided by income before taxes, as presented on the face of the Condensed Consolidated Statements of Income.
(2) In second quarter 2020, the Company recognized a $14 million income tax benefit due to the release of uncertain tax position reserves associated with the 2014 intercompany restructuring, which was a pro forma adjustment in 2014. The second quarter 2020 impact of the reserve release is not reflective of income tax expense incurred as a result of current period earnings and therefore affects period-to-period comparability.

The net release of other uncertain tax position reserves, amounting to approximately $4.1 million and $6.7 million in the 26 weeks ended June 27, 2020 and June 29, 2019, respectively, have not been identified as pro forma adjustments as such items tend to be more recurring in nature.

Pro forma net income (earnings) per share

Management believes that net income (earnings) per share before the impact of foreign currency gains or losses and certain discrete income tax items, as discussed above, is an important measure in order to permit a consistent comparison of the Company’s performance between periods.

Garmin Ltd. And Subsidiaries
Pro Forma Net Income (Earnings) Per Share
(In thousands, except per share information)
		13-Weeks Ended								26-Weeks Ended
		June 27,				June 29,				June 27,				June 29,
		2020				2019				2020				2019
GAAP net income		$	184,180			$	223,656			$	345,360			$	363,829
Foreign currency gains / losses(1)			4,493				(3,413	)			19,916				(3,727	)
Tax effect of foreign currency gains / losses(2)			(630	)			645				(2,345	)			660
Uncertain Tax Reserve Release(3)			(14,308	)			—				(14,308	)			—
Pro forma net income		$	173,735			$	220,888			$	348,623			$	360,762
GAAP net income per share:
Basic		$	0.96			$	1.18			$	1.81			$	1.92
Diluted		$	0.96			$	1.17			$	1.80			$	1.91
Pro forma net income per share:
Basic		$	0.91			$	1.16			$	1.83			$	1.90
Diluted		$	0.91			$	1.16			$	1.82			$	1.89
Weighted average common shares outstanding:
Basic			191,024				189,855				190,914				189,728
Diluted			191,597				190,714				191,640				190,657
(1) Foreign currency gains and losses for the Company are driven by movements of a number of currencies in relation to the U.S. Dollar and the related exchange rate impact on the significant cash, receivables, and payables held in a currency other than the functional currency at a given legal entity. However, there is minimal cash impact from such foreign currency gains and losses.
(2) The tax effect of foreign currency gains and losses was calculated using the pro forma effective tax rate of 14.0% and 11.8% for the 13-weeks and 26-weeks ended June 27, 2020, respectively, and an effective tax rate of 18.9% and 17.7% for the 13-weeks and 26-weeks ended June 29, 2019, respectively.
(3) The discrete tax item is discussed in the pro forma effective tax rate section above.

Free cash flow

Management believes that free cash flow is an important financial measure because it represents the amount of cash provided by operations that is available for investing and defines it as operating cash flows less capital expenditures for property and equipment. Management believes that excluding purchases of property and equipment provides a better understanding of the underlying trends in the Company’s operating performance and allows more accurate comparisons of the Company’s operating results to historical performance. This metric may also be useful to investors, but should not be considered in isolation as it is not a measure of cash flow available for discretionary expenditures. The most comparable GAAP measure is net cash provided by operating activities.

Garmin Ltd. And Subsidiaries
Free Cash Flow
(In thousands)
		13-Weeks Ended								26-Weeks Ended
		June 27,				June 29,				June 27,				June 29,
		2020				2019				2020				2019
Net cash provided by operating activities		$	199,237			$	110,636			$	425,111			$	275,218
Less: purchases of property and equipment			(56,909	)			(30,401	)			(98,270	)			(60,495	)
Free Cash Flow		$	142,328			$	80,235			$	326,841			$	214,723

Category: Earnings

Category: Corporate

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