Garmin Ltd. — Q3 2022 Form 10-Q
Business context and reporting period. Garmin designs and sells GPS-enabled devices and applications across fitness, outdoor, aviation, marine, consumer auto and auto OEM markets. This unaudited report covers the 13 weeks and 39 weeks ended September 24, 2022; comparisons are to the corresponding periods ended September 25, 2021. Amounts below are in U.S. dollars.
Financial performance
| Metric | Q3 2022 | Q3 2021 | First 9 months 2022 | First 9 months 2021 |
|---|---|---|---|---|
| Net sales | $1,140.4m | $1,192.0m | $3,553.9m | $3,591.2m |
| Gross profit / margin | $670.5m / 58.8% | $695.9m / 58.4% | $2,061.8m / 58.0% | $2,118.4m / 59.0% |
| Operating income / margin | $239.4m / 21.0% | $282.7m / 23.7% | $760.7m / 21.4% | $903.5m / 25.2% |
| Net income | $210.8m | $259.0m | $680.3m | $796.1m |
| Diluted EPS | $1.09 | $1.34 | $3.52 | $4.13 |
| Cash from operations | Not stated for quarter | Not stated for quarter | $419.6m | $843.5m |
Q3 net sales declined 4%, operating income declined 15% and net income declined $48.2m year over year. For the first nine months, sales declined 1%, operating income declined 16% and net income declined $115.8m. Nine-month diluted EPS was down 15%.
Balance sheet and liquidity: At September 24, 2022, cash and cash equivalents were $1,082.3m and marketable securities totaled $1,615.1m, or approximately $2.7bn combined. Current assets were $3,968.1m and current liabilities $1,442.9m (current ratio approximately 2.75). Total assets were $7,627.6m and stockholders’ equity $5,878.2m. The balance sheet presents no borrowings or debt line item. Cash and cash equivalents fell from $1,498.1m at December 25, 2021.
Cash flow and capital allocation: Nine-month operating cash flow was $419.6m, down from $843.5m, primarily reflecting inventory investment and other operating cash uses. Investing activities used $319.1m; financing activities used $478.0m, including $399.1m of dividends and $105.2m of repurchases. Capital expenditures were $184.9m.
Material changes and business drivers
- Q3 segment sales: fitness fell 18%; outdoor rose 5%; aviation rose 4%; marine fell 5%; auto fell 2%. Outdoor growth reflected adventure watches and inReach; fitness weakness reflected advanced wellness and indoor cycling products.
- For the first nine months, fitness sales fell 27%, while outdoor rose 22%; aviation rose 6%, marine 2%, and auto 1%. Outdoor became the largest sales segment. Fitness operating income fell 75%; outdoor operating income rose 26%.
- Nine-month gross margin contracted about 100 basis points, with higher freight costs and U.S. dollar strength cited as pressures. Operating expenses rose 7%, driven mainly by personnel, IT and engineering costs.
- Foreign currency losses increased to $29.9m in Q3 from $15.0m and to $55.8m for the first nine months from $30.6m, primarily because the U.S. dollar strengthened against several currencies.
- Inventory rose to $1,533.3m from $1,227.6m at fiscal year-end, principally reflecting management’s strategy to increase supply and mitigate longer component lead times.
Outlook, risks and unusual items
- Management expects inflation, rising interest rates, U.S. dollar strength and supply-chain challenges—including component shortages, longer lead times, cost volatility and logistics constraints—to persist through the end of 2022 and beyond. The filing provides no specific earnings or revenue guidance.
- Management said existing cash and operating cash flow should be sufficient for projected working capital, capital expenditures and other requirements.
- Approximately 97% of marketable securities were in an unrealized loss position; gross unrealized losses were $117.4m. Management attributed declines primarily to economic conditions rather than credit deterioration, reported no credit-loss allowance, and said it did not intend, and was not more likely than not required, to sell before recovery.
- Open purchase orders and other commitments potentially representing noncancellable obligations with remaining terms over one year were approximately $363m. Separately, disclosed inventory purchase obligations were $893.8m, other purchase obligations $372.9m and fixed lease payments $139.8m; these amounts have differing scopes and should not be added without reconciliation.
- Management did not consider aggregate loss contingencies reasonably likely to result in a material loss beyond recorded accruals. It cautioned that legal outcomes cannot be predicted with certainty.
- The annual dividend approved was $2.92 per share. The $300m repurchase authorization had approximately $186.3m remaining at quarter-end and expires December 29, 2023.
Most important facts for investors to verify
- Whether inventory build converts to sales and cash, and whether supply constraints or demand changes require further inventory adjustments.
- Whether fitness weakness, freight costs, currency movements and elevated operating expenses continue to pressure margins and earnings.
- The composition, duration and recovery assumptions for unrealized losses in the securities portfolio, particularly if liquidity needs change.
- The reconciliation and payment timing of purchase commitments, lease obligations, dividends and share repurchases against operating cash generation.
- How persistent macroeconomic and geopolitical risks are affecting demand, suppliers, currencies and management’s outlook; the filing gives no quantified forward guidance.