GARMIN LTD 10-Q

Item 2. Management’s Discussion and Analysis o f Financial Condition and Results of Operations The discussion set forth below, as well as other portions of this Quarterly Report, contain statements concerning potential future events. Such forward-looking statements are based upon assumptions by management, as of the date of this Quarterly Report, including assumptions about risks and uncertainties faced by the Company. Readers can identify these forward-looking statements by their use of such words as "future", "expects", "anticipates", "believes", “estimates”, “would”, “could”, “can”, “may,” or other similar words or other comparable terms. If any of the Company’s assumptions prove incorrect or should unanticipated circumstances arise, actual results could materially differ from those anticipated by such forward-looking statements. The differences could be caused by a number of factors or combination of factors including, but not limited to, those factors identified in Part II, Item 1A of this Quarterly Report on Form 10-Q and in the Company’s Annual Report on Form 10-K for the year ended December 30, 2023. Readers are strongly encouraged to consider those factors when evaluating any forward-looking statement concerning the Company. These forward-looking statements are made as of the date hereof, and the Company disclaims any obligation to update any forward-looking statements in this Quarterly Report to reflect future events or developments, except as required by law. The information contained in this Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Condensed Consolidated Financial Statements and Notes thereto included in this Form 10-Q and the audited financial statements and notes thereto in the Company’s Annual Report on Form 10-K for the year ended December 30, 2023. Unless the context otherwise requires, references in this document to "we", "us", "our", the "Company" and similar terms refer to Garmin Ltd. and its subsidiaries. Unless otherwise indicated, amounts set forth in the discussion below are in thousands. Company Overview The Company is a leading worldwide provider of wireless devices, many of which feature Global Positioning System (GPS) navigation, and applications that are designed for people who live an active lifestyle. We are organized in the five operating segments of fitness, outdoor, aviation, marine, and auto OEM. Our products are sold through a variety of indirect distribution channels, including a large worldwide network of independent retailers, dealers, distributors, installation and repair shops, and original equipment manufacturers (OEMs). We also sell our products and services directly through our online webshop (garmin.com), subscriptions for connected services, and our own retail stores. Results of Operations As indicated in Note 1 to the Condensed Consolidated Financial Statements, in the first quarter of fiscal 2024, the Company changed the presentation of operating expense to include advertising expense within selling, general and administrative expenses on the Company's condensed consolidated statements of income, which management believes to be a more meaningful presentation. This change in presentation had no effect on the Company's consolidated operating or net income. The amounts presented below for selling, general and administrative expenses for the 13-week period ended April 1, 2023 have been recast to conform with the current period presentation. Comparison of 13-Weeks Ended March 30, 2024 and April 1, 2023 Net Sales Net Sales 13-Weeks Ended March 30, 2024 Year-over-Year Change 13-Weeks Ended April 1, 2023 Fitness $ 342,892 40 % $ 244,721 Percentage of Total Net Sales 25 % 21 % Outdoor 366,193 11 % 328,662 Percentage of Total Net Sales 26 % 29 % Aviation 216,855 2 % 213,582 Percentage of Total Net Sales 16 % 19 % Marine 326,736 17 % 278,975 Percentage of Total Net Sales 24 % 24 % Auto OEM 128,973 58 % 81,484 Percentage of Total Net Sales 9 % 7 % Total $ 1,381,649 20 % $ 1,147,424 14 Net sales increased 20% for the 13-week period ended March 30, 2024 when compared to the year-ago quarter. Total unit sales in the first quarter of 2024 increased to 3,890 when compared to total unit sales of 3,210 in the first quarter of 2023, which differs from the percent increase in revenue primarily due to shifts in segment and product mix. Outdoor was the largest portion of our revenue mix at 26% in the first quarter of 2024 compared to 29% in the first quarter of 2023. The increase in fitness revenue was driven by sales growth across all categories, led by strong demand for advanced wearables. Outdoor revenue increased primarily due to growth in wearable products. Aviation revenue increased due to growth in OEM product categories. The increase in marine revenue was primarily driven by contributions from the Company's acquisition of JL Audio. Auto OEM revenue increased primarily due to increased shipments of domain controllers. Gross Profit Gross Profit 13-Weeks Ended March 30, 2024 Year-over-Year Change 13-Weeks Ended April 1, 2023 Fitness $ 194,802 61 % $ 120,910 Percentage of Segment Net Sales 57 % 49 % Outdoor 242,739 18 % 204,948 Percentage of Segment Net Sales 66 % 62 % Aviation 162,626 5 % 154,454 Percentage of Segment Net Sales 75 % 72 % Marine 179,252 20 % 149,631 Percentage of Segment Net Sales 55 % 54 % Auto OEM 22,720 (1 %) 22,851 Percentage of Segment Net Sales 18 % 28 % Total $ 802,139 23 % $ 652,794 Percentage of Total Net Sales 58 % 57 % Gross profit dollars in the first quarter of 2024 increased 23%, primarily due to the increase in net sales when compared to the year-ago quarter, as described above. Consolidated gross margin increased 120 basis points when compared to the year-ago quarter primarily due to favorable product mix within certain segments, partially offset by unfavorable segment mix. The fitness, outdoor, and marine gross margin increases of 740 basis points, 390 basis points, and 120 basis points respectively, were primarily attributable to favorable product mix within those segments. The aviation gross margin increase of 270 basis points was primarily attributable to lower warranty costs. The auto OEM gross margin decrease of 1,040 basis points was primarily attributable to unfavorable product mix. Operating Expense Operating Expense 13-Weeks Ended March 30, 2024 Year-over-Year Change 13-Weeks Ended April 1, 2023 Research and development expense 242,535 10 % 221,485 Percentage of Total Net Sales 18 % 19 % Selling, general and administrative expenses 261,194 11 % 234,327 Percentage of Total Net Sales 19 % 20 % Total $ 503,729 11 % $ 455,812 Percentage of Total Net Sales 36 % 40 % Total operating expense in the first quarter of 2024 increased 11% in absolute dollars and decreased 330 basis points as a percent of revenue when compared to the year-ago quarter. Research and development expense increased 10% in absolute dollars and decreased 180 basis points as a percent of revenue when compared to the year-ago quarter. The absolute dollar expense increase was primarily due to higher engineering personnel costs. Selling, general and administrative expenses increased 11% in absolute dollars and decreased 150 basis points as a percent of revenue when compared to the year-ago quarter. The absolute dollar expense increase was primarily attributable to increased personnel-related expenses, including the impact of the Company's acquisition of JL Audio. 15 Operating Income Operating Income (Loss) 13-Weeks Ended March 30, 2024 Year-over-Year Change 13-Weeks Ended April 1, 2023 Fitness $ 68,133 544 % $ 10,578 Percentage of Segment Net Sales 20 % 4 % Outdoor 106,950 39 % 76,743 Percentage of Segment Net Sales 29 % 23 % Aviation 52,134 (10 %) 57,695 Percentage of Segment Net Sales 24 % 27 % Marine 87,692 22 % 71,908 Percentage of Segment Net Sales 27 % 26 % Auto OEM (16,499 ) (17 %) (19,942 ) Percentage of Segment Net Sales (13 %) (24 %) Total $ 298,410 51 % $ 196,982 Percentage of Total Net Sales 22 % 17 % Total operating income in the first quarter of 2024 increased 51% in absolute dollars and increased 440 basis points as a percent of revenue when compared to the year-ago quarter. The increase in operating income was driven by the increase in sales, increase in gross margin, and lower operating expenses as a percent of revenue, as described above. The improved performance in fitness, outdoor, marine, and auto OEM was partially offset by a decrease in aviation. Other Income (Expense) Other Income (Expense) 13-Weeks Ended March 30, 2024 13-Weeks Ended April 1, 2023 Interest income $ 25,027 $ 15,899 Foreign currency gains 2,282 7,688 Other income 1,321 1,203 Total $ 28,630 $ 24,790 The average interest rate return on cash and investments during the first quarter of 2024 was 3.1%, compared to 2.4% during the same quarter of 2023. Foreign currency gains and losses for the Company are driven by movements of a number of currencies in relation to the U.S. Dollar. The Taiwan Dollar is the functional currency of Garmin Corporation, the Euro is the functional currency of several subsidiaries, and the U.S. Dollar is the functional currency of Garmin (Europe) Ltd., although some transactions and balances are denominated in British Pounds. Other notable currency exposures include the Australian Dollar, Chinese Yuan, Japanese Yen, and Polish Zloty. The majority of the Company’s consolidated foreign currency gain or loss is typically driven by the significant cash and marketable securities, receivables and payables held in a currency other than the functional currency at a given legal entity. The $2.3 million currency gain recognized in the first quarter of 2024 was primarily due to the U.S. Dollar strengthening against the Taiwan Dollar, partially offset by the U.S. Dollar strengthening against the Polish Zloty, Australian Dollar, and Euro within the 13-week period ended March 30, 2024. During this period, the U.S. Dollar strengthened 3.9% against the Taiwan Dollar, resulting in a gain of $21.6 million, while the U.S. Dollar strengthened 1.8% against the Polish Zloty, 4.6% against the Australian Dollar, and 2.2% against the Euro, resulting in losses of $6.8 million, $3.3 million, and $3.0 million, respectively. The remaining net currency loss of $6.2 million was related to the impacts of other currencies, each of which was individually immaterial. The $7.7 million currency gain recognized in the first quarter of 2023 was primarily due to the U.S. Dollar weakening against the Polish Zloty, British Pound Sterling, Chinese Yuan, and Euro, partially offset by the U.S. Dollar weakening against the Taiwan Dollar, within the 13-week period ended April 1, 2023. During this period, the U.S. Dollar weakened 2.7% against the Polish Zloty, 2.0% against the British Pound Sterling, 1.3% against the Chinese Yuan, and 1.3% against the Euro, resulting in gains of $4.5 million, $1.3 million, $0.7 million, and $0.5 million respectively, while the U.S. Dollar weakened 0.4% against the Taiwan Dollar, resulting in a loss of $1.1 million. The remaining net currency gain of $1.8 million was related to the impacts of other currencies, each of which was individually immaterial. 16 Income Tax Provision The Company recorded income tax expense of $51.1 million in the 13-week period ended March 30, 2024, compared to income tax expense of $19.4 million in the 13-week period ended April 1, 2023. The effective tax rate was 15.6% in the first quarter of 2024, compared to 8.8% in the first quarter of 2023. The increase in effective tax rate between comparative periods was primarily due to the increase in the combined federal and cantonal Switzerland statutory tax rate in response to the implementation of global minimum tax requirements. Net Income As a result of the above, net income for the 13-week period ended March 30, 2024 was $276.0 million compared to $202.3 million for the 13-week period ended April 1, 2023, an increase of $73.7 million. Liquidity and Capital Resources We primarily use cash flow from operations, and expect that future cash requirements may be used, to fund our capital expenditures, support our working capital requirements, pay dividends, fund share repurchases, and fund strategic acquisitions. We believe that our existing cash balances and cash flow from operations will be sufficient to meet our short- and long-term projected working capital needs, capital expenditures, and other cash requirements. Cash, Cash Equivalents, and Marketable Securities As of March 30, 2024, we had approximately $3.3 billion of cash, cash equivalents and marketable securities. Management invests idle or surplus cash in accordance with the Company's investment policy, which has been approved by the Company’s Board of Directors. The investment policy’s primary objectives are to preserve capital, maintain an acceptable degree of liquidity, and maximize yield within the constraint of low credit risk. Garmin’s average interest rate returns on cash and investments during the first quarter of 2024 and 2023 were 3.1% and 2.4%, respectively. The fair value of our securities varies from period to period due to changes in interest rates, the performance of the underlying collateral, and the credit performance of the underlying issuer, among other factors. See Note 4 for additional information regarding marketable securities. Cash Flows Cash provided by operating activities totaled $435.3 million for the first quarter of 2024, compared to $279.2 million for the first quarter of 2023. The increase was primarily due to an increase in cash received from customers primarily driven by higher net sales, partially offset by increases in cash paid for cost of goods sold and operating expenses in the first quarter of 2024 compared to the first quarter of 2023. Cash used in investing activities totaled $36.9 million for the first quarter of 2024, compared to $7.9 million for the first quarter of 2023. The increase was primarily due to net purchases of marketable securities in the first quarter of 2024, compared to the net redemptions of marketable securities in the first quarter of 2023, partially offset by a decrease in purchases of property and equipment. Cash used in financing activities totaled $156.2 million for the first quarter of 2024, compared to $192.3 million for the first quarter of 2023. This decrease was primarily due to lower purchases of treasury shares under the share repurchase plan and partially offset by an increase in the purchase of treasury shares related to equity awards in the first quarter of 2024 compared to the first quarter of 2023. 17 Use of Cash Operating Leases The Company has lease arrangements for certain real estate properties, vehicles, and equipment. Leased properties are typically used for office space, distribution, and retail. As of March 30, 2024, the Company had fixed lease payment obligations of $155.7 million, with $34.5 million payable within 12 months. Inventory Purchase Obligations The Company obtains various raw materials and components for its products from a variety of third party suppliers. The Company’s inventory purchase obligations are primarily noncancelable. As of March 30, 2024, the Company had inventory purchase obligations of $773.5 million, with $623.1 million payable within 12 months. Other Purchase Obligations The Company’s other purchase obligations primarily consist of noncancelable commitments for capital expenditures and other indirect purchases in connection with conducting our business. As of March 30, 2024, the Company had other purchase obligations of $396.8 million, with $210.2 million payable within 12 months. Critical Accounting Policies and Estimates General Our discussion and analysis of financial condition and results of operations are based upon the Company’s condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The presentation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to customer sales programs and incentives, product returns, bad debts, inventories, investments, intangible assets, income taxes, warranty obligations, and contingencies and litigation. We base our estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. For a description of the significant accounting policies and methods used in the preparation of the Company’s condensed consolidated financial statements, refer to Note 1, “Summary of Significant Accounting Policies” in the Notes to the Consolidated Financial Statements in Part II, Item 8 and “Critical Accounting Policies and Estimates” in Part II, Item 7 of the Company’s Annual Report on Form 10-K for the fiscal year ended December 30, 2023. There were no significant changes to the Company’s critical accounting policies and estimates in the 13-week period ended March 30, 2024. 18 Item 3. Quantitative and Qualitat ive Disclosures About Market Risk There are numerous market risks that can affect our future business, financial condition and results of operations. In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part II, Item 7A, "Quantitative and Qualitative Disclosures About Market Risk” in our Annual Report on Form 10-K for the fiscal year ended December 30, 2023. There have been no material changes during the 13-week period ended March 30, 2024 in the risks described in our Annual Report on Form 10-K related to market sensitivity, inflation, foreign currency exchange rate risk and interest rate risk.