Garmin Ltd. (NASDAQ: GRMN) — Q3 2023 Form 10-Q
Business context and reporting period. Garmin designs and sells GPS-enabled devices, applications and related services through fitness, outdoor, aviation, marine and auto OEM segments. This unaudited filing covers the 13 weeks ended September 30, 2023, compared with the 13 weeks ended September 24, 2022, and the first 39 weeks of each year. Amounts below are in U.S. dollars.
Financial performance and liquidity
| Metric | Q3 2023 | Q3 2022 | First 39 weeks 2023 | First 39 weeks 2022 |
|---|---|---|---|---|
| Net sales | $1,277.5 million | $1,140.4 million | $3,745.8 million | $3,553.9 million |
| Gross profit / margin | $728.6 million / 57% | $670.5 million / 59% | $2,140.8 million / 57% | $2,061.8 million / 58% |
| Operating income / margin | $270.4 million / 21% | $239.4 million / 21% | $751.7 million / 20% | $760.7 million / 21% |
| Net income | $257.2 million | $210.8 million | $747.5 million | $680.3 million |
| Diluted EPS | $1.34 | $1.09 | $3.90 | $3.52 |
| Cash provided by operating activities | Not separately stated for quarter | Not separately stated for quarter | $910.3 million | $419.6 million |
At September 30, 2023, cash and cash equivalents were $1.423 billion and marketable securities were $1.355 billion, or approximately $2.8 billion combined. Current assets totaled $4.157 billion and current liabilities $1.328 billion. No financial borrowings are presented in the supplied balance sheet; noncurrent operating lease liabilities were $111.0 million. Equity totaled $6.349 billion.
For the first 39 weeks, investing activities used $267.7 million and financing activities used $486.2 million, including $419.2 million of dividends and $79.5 million of share repurchases. Cash, cash equivalents and restricted cash increased by $143.6 million to $1.424 billion. Capital expenditures were $144.9 million. The company declared a fiscal 2023 dividend of $2.92 per share, payable in installments.
Material changes versus comparable periods
- Q3 sales increased 12%, gross profit rose 9%, operating income rose 13%, and net income increased $46.4 million, or about 22%, year over year. Higher sales drove profit growth, while consolidated gross margin fell 180 basis points, mainly due to segment and product mix.
- Q3 segment sales increased in fitness (26%), outdoor (7%), aviation (5%) and auto OEM (59%); marine sales declined 7%. Fitness growth was led by wearables, outdoor by adventure watches, aviation by OEM products, and auto OEM by domain-controller shipments. Marine weakness across categories was partly offset by JL Audio.
- For the first 39 weeks, sales rose 5%, but operating income declined 1%. Fitness, aviation and auto OEM sales grew; outdoor sales fell 8% and marine fell 2%. Operating income declined in outdoor and marine, partly offset by improved fitness, aviation and auto OEM results.
- Operating cash flow more than doubled year over year, primarily because inventory consumed less cash; lower accounts-receivable collections partially offset the improvement. Inventory declined to $1.440 billion from $1.515 billion at year-end 2022.
- Other income improved year over year: first-39-week foreign currency results were a $6.9 million gain versus a $55.8 million loss in 2022, while Q3 still recorded an $11.5 million currency loss. Interest income increased with higher average returns on cash and investments.
Outlook, risks and unusual items
- The filing provides no quantified full-year revenue or earnings guidance. Management says existing cash and operating cash flow should be sufficient for projected working capital, capital expenditures and other cash requirements. Results are subject to seasonality, product launch timing and OEM production schedules.
- Management identifies inflation, rising interest rates, component availability and lead times, cost changes and logistics constraints as business-environment uncertainties. It says market-risk exposures have not materially changed from the 2022 Form 10-K.
- Tax uncertainty is notable. The company is seeking an advanced pricing agreement related to an intercompany transfer of certain intellectual property from Switzerland to the U.S. Potential OECD Pillar Two and Swiss minimum-tax legislation may affect the tax rate; management cannot reasonably estimate the timing or impact and warns the outcome could materially affect tax expense and financial statements.
- Available-for-sale securities had $101.3 million of gross unrealized losses at quarter-end; about 99% of the portfolio was in an unrealized loss position. The company attributed declines mainly to economic conditions and interest rates, reported no credit-loss allowance, and said it neither intends nor expects to be required to sell before recovery.
- JL Audio was acquired during Q3; the company said the acquisition was not material. Noncancelable purchase obligations included approximately $644.6 million for inventory and $299.8 million for other purchases. Management does not currently expect legal matters to result in a material adverse effect, while noting outcomes cannot be predicted with certainty.
- Management reported effective disclosure controls as of September 30, 2023, and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the Q3 sales and earnings momentum continues, particularly in fitness and auto OEM, and whether outdoor and marine recover.
- How segment and product mix affect gross margins, including the lower Q3 marine and auto OEM margins.
- Future operating cash conversion, inventory levels and accounts-receivable collections.
- The advanced pricing agreement, Swiss tax changes and global minimum-tax implementation, and their potential effects on Garmin’s effective tax rate.
- Marketable-securities valuation and liquidity, given the unrealized losses and exposure to interest-rate movements.
- JL Audio’s contribution after acquisition and the company’s capital allocation, including dividends and repurchases; the existing $300 million repurchase authorization was scheduled to expire December 29, 2023.