Garmin Ltd. — Q1 2023 Form 10-Q
Reporting period: 13 weeks ended April 1, 2023; comparative period was the 13 weeks ended March 26, 2022. Garmin provides GPS-enabled devices and related services across fitness, outdoor, aviation, marine, and auto OEM. Unless indicated otherwise, amounts below are in U.S. dollars.
Financial performance and position
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Net sales | $1,147.4 million | $1,172.7 million | Down 2% |
| Gross profit / margin | $652.8 million / 56.9% | $662.5 million / 56.5% | Profit down 1%; margin up about 0.4 percentage points |
| Operating income / margin | $197.0 million / 17.2% | $228.6 million / 19.5% | Down 14%; margin down about 2.3 points |
| Net income | $202.3 million | $211.6 million | Down 4% |
| Diluted earnings per share | $1.05 | $1.09 | Down 4% |
| Operating cash flow | $279.2 million | $185.6 million | Up $93.6 million |
Operating expenses rose 5% to $455.8 million, or 40% of sales versus 37% a year earlier, reflecting higher selling, general and administrative costs and research and development spending. Interest income and foreign-exchange gains contributed to higher other income, partly offsetting lower operating income. The effective tax rate fell to 8.8% from 10.3%, primarily due to income mix by jurisdiction.
At April 1, cash and cash equivalents were $1.362 billion and marketable securities were $1.353 billion, totaling approximately $2.714 billion. Current assets were $3.964 billion and current liabilities $1.008 billion. The balance sheet reports no borrowings or other conventional debt balance; lease liabilities are reported separately. Total assets were $7.726 billion and stockholders’ equity was $6.405 billion.
Investing activities used $7.9 million, while financing activities used $192.3 million, including $139.8 million of dividends and $43.3 million of share repurchases. Cash, cash equivalents, and restricted cash increased by $82.4 million during the quarter.
Material changes and segment performance
- Fitness sales rose 11% to $244.7 million, supported by demand for advanced wearables. Operating income was $10.6 million, compared with $0.6 million.
- Outdoor sales fell 27% to $328.7 million, primarily due to declines in adventure watches. Operating income fell 50% to $76.7 million.
- Aviation sales increased 22% to $213.6 million, with growth in OEM and aftermarket products; operating income rose 44% to $57.7 million.
- Marine sales increased 10% to $279.0 million, primarily due to promotion timing; operating income rose 22% to $71.9 million.
- Auto OEM sales rose 11% to $81.5 million, primarily on higher domain-controller shipments. The segment recorded a $19.9 million operating loss, improved from a $23.8 million loss.
Garmin reorganized its reporting segments in January 2023, combining consumer auto with outdoor; prior-period segment figures were recast, with no effect on consolidated results. Total unit sales declined to 3.210 million from 3.438 million. Americas sales increased, while EMEA and APAC sales declined.
Outlook, risks, and unusual items
- The filing gives no consolidated revenue or earnings guidance. Management expects auto OEM to continue operating at a loss through 2023.
- Management cited high inflation, rising interest rates, a stronger U.S. dollar, and supply-chain component shortages, longer lead times, cost fluctuations, and logistics constraints. Certain challenges were expected to persist through 2023; their effects remain uncertain.
- Management said existing cash and operating cash flow should be sufficient for projected working capital, capital expenditures, and other cash requirements. It also cautioned that quarterly results are subject to seasonality, product-launch timing, and OEM production schedules.
- Available-for-sale securities had $100.5 million of gross unrealized losses at quarter-end, and approximately 98% of the portfolio was in an unrealized-loss position. Garmin recorded no credit-loss allowance, citing that declines were not considered credit-related; management said it did not intend, and was not more likely than not to be required, to sell before recovery.
- Open purchase orders and other commitments that may be noncancellable and extend beyond one year totaled approximately $396 million. Separately, the MD&A reports $714.7 million of inventory purchase obligations and $415.4 million of other purchase obligations, with $494.5 million and $188.2 million, respectively, payable within 12 months. Fixed lease payments totaled $158.8 million, including $31.3 million due within 12 months.
- Management did not consider material losses from legal or other contingencies reasonably possible in aggregate based on information then available, while noting outcomes cannot be predicted with certainty. No material changes to the previously disclosed risk factors or market-risk exposures were reported.
Investor verification priorities
- Track whether outdoor demand, particularly adventure watches, stabilizes and whether segment mix affects margins.
- Monitor operating expenses and operating margin, including the expected duration and scale of auto OEM losses.
- Assess whether supply-chain and macroeconomic headwinds persist and how foreign-exchange movements affect results.
- Review the composition, maturity, and fair-value recovery of marketable securities, including the unrealized-loss position.
- Reconcile the differing commitment disclosures and assess cash needs alongside dividends, repurchases, and purchase obligations.
- Confirm that future cash generation remains consistent with management’s liquidity assessment; quarterly results may not indicate full-year performance.