Operator
Hello, everyone. Thank you for joining us and welcome to the Garmin Limited second quarter 2026 earnings call. After today's prepared remarks, we will host a question and answer session. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again. I will now hand the conference over to Terry Sec, Director of Investor Relations. Please go ahead.
Good morning. We would like to welcome you to Garmin Limited's second quarter 2026 earnings call. Please note that the earnings press release and related slides are available at Garmin's Investor Relations site on the internet at www.garmin.com slash investors. An archive of the webcast and related transcript will also be available on our website. This earnings call includes projections and other forward-looking statements regarding Garmin Limited and its business. Any statements regarding our future financial position, revenues, segment growth rates, earnings, gross margins, operating margins, future dividends or share of purchases, market shares, product introductions, foreign currency, tariff impacts, future demand for our products and plans and objectives are forward-looking statements. The forward-looking events and circumstances discussed in this earnings call may not occur and actual results could differ materially as a result of risk factors affecting Garmin. Information concerning these risk factors is contained in our Form 10-K filed with the Securities and Exchange Commission. Presenting on behalf of Garmin Limited this morning are Cliff Pemble, President and Chief Executive Officer, and Doug Bassin, Chief Financial Officer and Treasurer. At this time, I would like to turn the call over to Cliff Pemble.
Thank you, Terry, and good morning, everyone. As announced earlier today, Garmin achieved another quarter of record-breaking financial results in a continuation of the positive trends we've been experiencing over the long term consolidated revenue increased 11 to 2.02 billion dollars we experienced robust expansion in consolidated growth in operating margins the majority of which is attributable to favorable product mix margins also benefited from a 21 million dollar tariff refund recognized in the second quarter. Even when excluding this benefit, our gross margin performance was impressive by any historical comparison, reflecting the strength of our product lines, our vertically integrated business model, and exceptional execution by our global team. Operating income increased 30 percent to $616 million, and Proforma EPS increased 29% to $2.81. Our first half performance exceeded expectations and gives us confidence to raise our full year 2026 guidance. We now expect 2026 revenue of approximately 8.05 billion dollars and pro forma EPS of 10 dollars per share. Services have been an area of strategic focus in recent years with each business segment pursuing unique opportunities to grow service revenue over the long term. We recently announced the strategic acquisition of Training Peaks and Train Heroic, which are leading endurance and strength training platforms connecting coaches to athletes who wish to maximize the impact of their training effort. We are very excited to welcome the training peaks and train heroic teams to our fitness segment and look forward to all that we can accomplish together doug will discuss our financial results in greater detail in a few minutes but first i'll provide a few remarks on the performance of each business segment starting with fitness revenue increased 25 to 757 million dollars a new second quarter record driven by growth across all product categories, led by continued strong demand for advanced wearables. Gross and operating margins expanded to 64% and 37% respectively, resulting in operating income of $277 million. During the quarter, we launched the Forerunner 70, bringing comprehensive running features and a bright AMOLED display to our entry-level running lineup, and the 4Runner 170 with additional running and training features. We also released our annual global running and cycling data report that provides insights into the fitness activities of our customers and their athletic performance. More recently, we announced the Circus SmartBand, a screenless wearable that offers rich wellness and fitness insights without requiring a subscription, which further expands the addressable market for our wellness devices. The fitness segment has achieved outstanding performance over the long term. We are very pleased with these results and continue to expect the fitness segment will be the strongest contributor to 2026 consolidated growth. Moving to outdoor, revenue decreased 2% to $483 million, primarily due to consumer auto and adventure watch product categories. Gross and operating margins expanded to 69% and 34% respectively, resulting in operating income of $164 million. The segment delivered improved profitability and operating income growth through favorable product mix and disciplined execution. We recently expanded our golf lineup with the launch of the Approach Z10, a compact laser rangefinder that sends precise distances to compatible devices, bringing a high-fidelity experience to gain play. We also published our annual Trends in Golf data report. highlighting that participation in the sport is up and players are improving in nearly every shot category. Looking forward, we expect to achieve stronger revenue performance in the back half of 2026 due to the timing of product launches, resulting in improved full-year growth when compared to 2025. Looking next at aviation, revenue increased 8% to $269 million, dollars, reflecting growth in both OEM and aftermarket product categories. Gross and operating margins were 75 percent and 27 percent, respectively, resulting in operating income of 72 million dollars. For the 11th consecutive year, we were named Best Supplier of the Year by Embraer, who recognized us for outstanding performance as a supplier of electrical and electronic systems or their Phenom business jets. This recognition validates the long-term investments we have made to create innovative products and build strong relationships with our customers. During the quarter, we launched the D2 Mach2 Pro, our first aviator smartwatch with inReach technology. We recently announced Axis, an all-new family of highly integrated and scalable cockpit display solutions for a broad range of certified and experimental aircraft models. AXIS combines navigation, communication, and audio functions into a single platform, reducing installation time, complexity, and cost, while delivering a modern cockpit experience. AXIS reflects decades of Garmin innovation and sets a new standard for integrated flight displays. We are very pleased with the performance of aviation during the first half of the year and expect to achieve continued growth throughout the remainder of the year. Turning to the marine segment, revenue increased 14% to $341 million, with growth across multiple product categories. Gross and operating margins expanded to 61% and 29% respectively, resulting in operating income of $100 million. The primary driver of margin expansion was the tariff refund recognized during the quarter, although product margins improved, even when excluding this benefit. During the quarter, we launched the Garmin Signal VHF marine radio, which offers a color touch screen and new features to enhance communication on the water. We recently announced the next generation LiveScope 2 sonar system, which offers improved range and clarity over previous LiveScope systems. LiveScope 2 received the Best Electronics Award at the recent ICAST trade show, validating our superior LiveScope technology and further separating us from others in the market. We are pleased with the performance of marine during the first half of the year and believe we are on track to achieve full-year growth that is consistent with that of the prior year. And moving finally to the auto OEM segment, revenue increased 1% to $172 million, with growth primarily driven by domain controllers. Gross and operating margins were 22% and 2% respectively. The gross margin expansion was primarily due to year-to-date cost recoveries that were recognized as revenue during the quarter. Operating income was positive on a GAAP accounting basis at $3 million in the quarter, driven by improved gross profit and lower research and development expenses. While we're excited about the positive quarter, we are expecting revenue to decline and the return to an operating loss in the back half of 2026, leading up to the launch of our next major program with Mercedes-Benz in 2027. Wrapping up, I'm very proud of what our team has accomplished. We delivered strong growth, expanded profitability, invested in innovation, completed a strategic acquisition, and introduced new products across nearly every segment of our business. As we look to the second half of 2026, our product portfolio is strong, and we are confident in the opportunities that lie ahead. We believe our success is driven by our commitment to create products that are essential to our customers and supporting them with industry-leading quality, reliability, and innovation. That concludes my remarks. Next, Doug will walk you through additional details of our financial results.
Thanks, Cliff. Good morning, everyone. I'll begin by reviewing our second quarter financial results, and write comments on the balance sheet, cash flow statement, taxes, and updated guidance. Post a revenue of $2 billion, $22 million for second quarter, representing 11% increase year-over-year. Gross margin was 62.4%, 360 basis point increase from the prior year quarter. Increase was primarily driven by favorable product mix and tariff refunds for approximately $21 million. Operating expense percentage of sales is 32%, 80 basis point decrease. OPERING INCOME INCREASED 30% TO $616 MILLION, OPERING MARGIN EXPANDED TO 30.4%, 440 BASIS POINT INCREASE CREATED PRIOR YEAR QUARTER. OUR GAP EPS WAS $0.080, OUR FORMER EPS $0.081. NEXT, WE LOOK AT OUR SECOND QUARTER REVENUE BY SEGMENT AND GEOGRAPHY. During the second quarter, we achieved consolidated double-digit growth, led by the fitness segment with 25% growth, followed by the marine segment with 14% growth. By geography, we achieved growth in all three regions, led by 13% growth in EMEA, followed by 12% growth in Americas, and 7% growth in APAC. Looking next, and operating expenses, research and development expense increased $27 million. approximately 10 percent, while SG&A expenses increased $25 million, approximately 8 percent. Cures were primarily driven by personnel related expenses. A few highlights on the balance sheet, cash flow statement, and taxes. In the quarter with cash, market securities, approximately $4.4 billion. Account receivable increased both year-over-year and sequentially to approximately $1.2 billion on the seasonally strong sales in the second quarter. Inventory increased year-over-year sequentially to approximately $2 billion. During the second quarter of 2026, we generated free cash flow of $276 million, $148 million increase from prior quarter. Cap expenditures for the second quarter of 2026 were $120 million, approximately $82 million higher in a prior quarter. We expect full year 2026 free cash flow to be approximately 1.4 billion dollars with capital expenditures of approximately 550 million dollars during the second quarter 2026 we paid dividends of approximately 202 million dollars and purchased 43 million dollars of company stock at quarter end we had approximately 448 million dollars remaining a shared purchase program authorized through december 2028 for an effective effective tax rate of 16.8% compared to 16.5% in the prior quarter. Increasing the effective tax rate is primarily due to income mix by jurisdiction. Turning next to our full year guidance. Based on our performance during the first half of 2026, our positive outlook for the remainder of the year, we now estimate revenue of approximately $8.05 billion compared to our previous guidance of $7.9 billion. As a result of year-to-date performance we have increased our gross margin estimate to approximately 59.7 percent to 120 base points higher than our previous guidance and is 100 basis points higher than the full year 2025 gross margin your date results have not been significantly impacted by higher memory costs however we do expect higher memory costs impact a second half which has been factored into our full year gross margin guidance updated gross margin guidance does not include any additional benefit related to tariff refunds besides the benefit already recorded in the second quarter. We expect our operating margin to be approximately 27 percent, 150 basis points higher than our previous guidance. Also, we expect to perform an effective tax rate of 16.5 percent, but our previous guidance is 16 percent, increases due to income mix by jurisdiction. The expected performance earnings per share is approximately $10, but our previous guidance now is $0.35. five cents. This concludes our four remarks. Rebecca, can you please open the line for Q&A?
Operator
We will now begin the question and answer session. Please limit yourself to one question and one follow-up. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again. We ask that you pick up your handset when asking a question to allow for optimum sound quality.
If you are muted locally, please remember to unmute your device please stand by while we compile the q a roster your first question comes from eric woodring with morgan stanley please go ahead great good morning guys thank you uh very thank you very much for taking my questions and a really nice performance and guide um cliff you know congrats on the circuit launch last week um clearly you're taking kind of the expertise you have broad-based and risk-based wearables and expanding it to new uh to new kind of form factors or adjacencies um just maybe two two questions one a clarification just i want to make sure to get the kind of most advanced features excuse me ai software features on the circa the user still needs a subscription to connect plus i just want to make sure that's correct and then second you know how far are you willing to go when we think about adjacent form factors just as i think about the broad wearables market there are other other wearable form factors having success is it your intention to to expand to other form factors and just kind of your thoughts on why you would or what would would or would not go that direction thanks so much yeah thank you eric and good morning um in terms of circa and and the features what we're trying to communicate there is that Circa comes with all of the features that people have expected and get in any Garmin
wearable on Garmin Connect. They can certainly add the additional features of Connect+, including the AI and the nutrition tracking and other features that we'll add in the future. I think our main point and one of the things that we felt was a unique differentiator for us is the fact that our product is so richly featured right out of the box compared to competitors. In terms of other form factors, you know, I won't comment specifically on our product roadmap, but as we've demonstrated over time, we tend to move into categories and explore new things. And so our product roadmap is very rich, and I would expect that we'll see additional new product in the future, just like you've always seen from us. Okay.
That's helpful. And then maybe just as my follow-up, I guess maybe the broad question is just how sustainable is kind of this broad-based margin expansion that we're seeing? It's incredibly impressive, obviously, even when you exclude the tariff refund. And what I'm really trying to understand is you talk a lot about mix as a tailwind. Can you just be a little bit more specific? When you say mix, is this kind of lower-cost products mixing in? Is this higher price products mixing in? Is there anything within mix that is kind of notable that you would call out that is more of a sustainable tailwind? I just want to make sure I understand when we're talking about mix. I understand just how sustainable that trend could be as we think, you know, not a quarter beyond, but like one, two, three years beyond where we are from now. Thanks so much.
With regards to margin, I would say that it's never our strategy to go backwards. But that said, you know, everyone is facing higher costs, especially in the area of memory. And so we recognize that's a headwind. We're going to use the same playbook with memory as we did with tariffs and managing the business and trying to provide outstanding performance. So we don't rule anything out and we'll continue to leverage everything we have in our toolbox to be able to mitigate the cost of memory. In terms of mix, I think it is somewhat of a generic term. You know, on the obvious side of that, it's when we reduce or release new products in our families that come out at higher margins. And so when those new products start to become a greater part of the overall sales mix, we see higher margins in the segments because of that. And then there's also some improvements in the basic product cost side of things as well. we've been able to achieve through our vertical integration and leveraging our scale.
Okay, incredibly helpful. Thank you guys and best of luck to you guys. Thank you.
Operator
Your next question comes from David McGregor with Longbow Research. Please go ahead.
Hi, good morning. This is Joe Nolan. I'm for David. I just wanted to ask, follow up on the cost there. You talked about memory chips briefly. You guys obviously put up a strong margin performance in 2Q, but can you just talk about how to think about price cost as we move into the second half? And you have higher memory chip costs, but if there's any other raw materials or other buckets to keep in mind.
I think we've benefited from having a strategic inventory of memory that we've been using throughout the year. So the higher costs that are in the market today have not yet impacted our financials. We do expect that to start to impact this in the back half, and we've included that in our guidance. But in terms of other components, you know, I think everything's under pressure right now. We're seeing far less attention in some of those other component categories, far less movement. But I think everything is certainly under pressure because of the AI demand. But, again, we're managing that the same way we manage any other ripple in the dynamics. Again, I would call people's attention to our response around the tariffs and how we've been able to manage the business to be able to provide outstanding performance.
Got it. And then on the auto OEM business, you have the current air pocket between contracts. Just wondering if you could talk about how to think about second half quarterly cadence on revenues and just remind us on the timing of the upcoming contract, if anything's changed there.
Yeah, so we do expect back half revenue to decline versus 2025 as we've reached the peak of our BMW volumes. and we are on track and preparing for the launch of the next program, a major program with Mercedes-Benz in early 2027 as those products start to come off of our production line. So we expect 2027 would be a year that auto OEM would again return to growth. Got it. Thanks.
Operator
Your next question comes from Akonksh Shohan with J.P. Morgan. Please go ahead.
Yes, this is actually Joe Cardoso from JP Morgan. Yeah, sure. Maybe for my first question, you know, I was just curious, I think late last year you announced a partnership around health savings accounts. And, you know, I'm just curious if you're actually starting to see any tangible traction in terms of that driving any demand across your product portfolio, and how you guys are thinking about that opportunity unfolding, and whether we can start to see any near-term benefits from that. And then I do have a follow-up.
Okay, good morning. I'm sorry, I think the line was a little garbled when you mentioned the partnership. Could you clarify again?
Yes. the HSA reimbursement partnership. I believe October of last year, maybe you announced some partnerships on that front.
Yeah, the TruMet partnership. And that has been a great new distribution channel for our products.
And we don't quantify results by customer, but it was a great way to expand our reach, especially for people that want to purchase a high quality wearable using hsa funds got it and then maybe cliff just wanted to get you to talk about the acquisitions you mentioned in your prepared remarks training peaks and train heroics you know how should we think about these two in terms of your long-term strategy for the company like how are you thinking about the synergies across these platforms playing out in the context of both your product portfolio as well as potentially connect plus and and how you're thinking about that
unfolding for the company well it's it's early days and in terms of of traditional synergies you know we're really not thinking about any of those the synergies we're thinking about in training peaks and train heroic really has to do with our product line and the ability to offer what i would call a 360 degree experience for our customers where using our devices they record information that is then loaded into the training platform, and coaches are able to review that and provide recommendations, which then modifies the behaviors of the user. So we feel like that's a fantastic thing to achieve, to be able to give a full experience to our customers of training and improvement. Got it. Thank you. Thank you.
Operator
Your next question comes from Noah Zatzkin with KeyBank Capital Markets. Please go ahead.
Hi. Thanks for taking my questions. I guess just to follow up on Circa, any early feedback? I know it's super early from retail partners or consumers you'd like to share. And I noticed on the website, on your website, it seems that the product sold out and now the ship wait time is five to eight weeks. So just wondering if that's kind of demand or supply driven or how we should think about Well, I think it is demand and supply driven, but definitely ahead of anything that we had imagined.
We had expected that we would receive a good reception to that product when we introduced we had discussions with retailers and things in advance and they all were very excited about it but the the actual result once we announced the product was very strong ahead of our expectations so we will be chasing back orders for a while but um it is early days but um you know in the first few days of registration tracking it was very very strong so the product is already getting out to customers um and and maybe just uh one on the thailand facility um any updates there and then maybe just how we should think about the opportunity from a cost perspective and a capacity perspective thanks yeah so um thailand is on track and we're in probably the most intense part of our capital expenditures expenditures to be able to build and equip that facility We expect it to be finished towards the end of the year, and we'll start utilizing it in early 2027. Initially, we're building the site out in phases, and so our first phase is about 400,000 square feet, but it can, in total, has the potential of doubling our capacity across all of Garmin, so we have a lot of room to grow there. The cost structure is probably the same or even slightly less than what we have globally right now. But in general, you know, we're doing this out of the ability to differentiate and kind of give us additional manufacturing options as we diversify our business. Thank you.
Operator
Your next question comes from Ivan Feinseth with Tigris Financial Partners. Please go ahead.
Hi, thanks for taking my question and congratulations on the huge results and the increase in guidance.
I have two questions. My first is on the JL Audio Primacy. What kind of uptake or reception are you seeing on that?
And since this is not like a direct to consumer product but it looks like you need professional install what what kind of uh inquiry are you getting from the professional install community about becoming a dealer for this and you know getting training and stuff by you to sell it and install it yeah we had a good reception to primacy we hosted um large groups of um home audio installers and and custom audio outfitters in our facility down in Miramar, Florida, and we had a very good reception to that and very good reviews from them coming out of that. It is a specialty product, highly specialty product, and so it's going to take some time to really see the pull through of that, but the initial reactions and the feedback we got from people was strong.
And my second question on the new AXIS displays, how does that compare to some of the competing products as far as cost and integration, and what kind of reception are you getting to that?
The reception to AXIS is very strong. There's really nothing else like it out on the market, and it has basically been designed to address the ability to lower installation costs to simplify for both OEMs and home builders and to provide a level of integration that they just didn't have access to before. So we're very excited about that and we think it really resets the bar in terms of integrated flight displays.
Thank you. Congratulations again.
Operator
Your next question comes from Ronald Epstein with Bank of America. Please go ahead.
Hey, this is Alex Preston on for Ron this morning. Thank you for taking the question.
I just wanted to turn to aviation real quick.
And I was wondering if you could talk a little about the demand that you're seeing across end markets, right? So it seems that business aviation has been strong, maybe despite some macro concern. Defense and government platforms have support. I'm just curious if there's any sort of more detail you could give there.
Yeah, I think business aviation continues to be strong. As you know, OEMs are sitting on pretty much record backlogs as they work through those. So there doesn't appear to be an excess capacity issue. Customers still want these vehicles and appreciate them for what they do. And so the OEM side of things has been going very well. The aftermarket side has been resilient and strong, even despite some of the bumps that we've seen in the near term with fuel prices and things like that. But good used airplanes are things that people invest in and they add equipment to. And so that market has been resilient.
And sort of, I guess, to follow up, any changes to what you're thinking going forward into the second half, maybe into 27 on those demand drivers?
No, really no changes at all. We see things kind of moving as they have been.
Okay. Thank you very much. Appreciate the color.
Operator
We have reached the end of the Q&A session. I will now turn the call back to Terri Seck for closing remarks.
Thanks to all of you for joining us today. Doug and I are available for callbacks, and we hope you have a great rest of your day. Bye.
Operator
This concludes today's call. Thank you for attending. You may now disconnect.
