United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 26, 2022
or
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 001-41118
GARMIN LTD.
(Exact name of Company as specified in its charter)
Switzerland
98-0229227
(State or other jurisdiction
(I.R.S. Employer
of incorporation or organization)
identification no.)
Mühlentalstrasse 2
8200 Schaffhausen
N/A
(Address of principal executive offices)
(Zip Code)
Company’s telephone number, including area code: +41 52 630 1600
Securities registered pursuant to Section 12(b) of the Act:
Registered Shares, CHF 0.10 Per Share Par Value
GRMN
New York Stock Exchange
(Title of each class)
(Trading Symbol)
(Name of each exchange on which registered)
Indicate by check mark whether the Company (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Company was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ☑ NO ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer
☑
Accelerated Filer
Non-accelerated Filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. YES ☐ NO ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES ☐ NO ☑
Number of shares outstanding of the registrant’s common shares as of April 22, 2022
Registered Shares, CHF 0.10 par value: 193,125,036 (excluding treasury shares)
Garmin Ltd.
Form 10-Q
Quarter Ended March 26, 2022
Table of Contents
Page
Part I - Financial Information
1
Item 1.
Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets at March 26, 2022 and December 25, 2021 (Unaudited)
Condensed Consolidated Statements of Income for the 13-Weeks ended March 26, 2022 and March 27, 2021 (Unaudited)
2
Condensed Consolidated Statements of Comprehensive Income for the 13-Weeks ended March 26, 2022 and March 27, 2021 (Unaudited)
3
Condensed Consolidated Statements of Stockholders’ Equity for the 13-Weeks ended March 26, 2022 and March 27, 2021 (Unaudited)
4
Condensed Consolidated Statements of Cash Flows for the 13-Weeks ended March 26, 2022 and March 27, 2021 (Unaudited)
5
Notes to Condensed Consolidated Financial Statements (Unaudited)
6
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
13
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
18
Item 4.
Controls and Procedures
Part II - Other Information
19
Legal Proceedings
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Defaults Upon Senior Securities
Mine Safety Disclosures
Item 5.
Other Information
Item 6.
Exhibits
20
Signature Page
21
i
Item I - Condensed Consolidated Financial Statements
Garmin Ltd. and Subsidiaries
Condensed Consolidated Balance Sheets (Unaudited)
(In thousands, except per share information)
March 26,2022
December 25,2021
Assets
Current assets:
Cash and cash equivalents
$
1,417,531
1,498,058
Marketable securities
375,237
347,980
Accounts receivable, net
599,733
843,445
Inventories
1,339,530
1,227,609
Deferred costs
15,003
15,961
Prepaid expenses and other current assets
335,169
328,719
Total current assets
4,082,203
4,261,772
Property and equipment, net
1,092,520
1,067,478
Operating lease right-of-use assets
101,198
89,457
Noncurrent marketable securities
1,238,500
1,268,698
Deferred income tax assets
301,718
260,205
Noncurrent deferred costs
11,396
12,361
Goodwill
572,996
575,080
Other intangible assets, net
209,325
215,993
Other noncurrent assets
93,393
103,383
Total assets
7,703,249
7,854,427
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable
298,992
370,048
Salaries and benefits payable
170,835
211,371
Accrued warranty costs
40,698
45,467
Accrued sales program costs
68,715
121,514
Other accrued expenses
209,155
225,988
Deferred revenue
86,444
87,654
Income taxes payable
148,268
128,083
Dividend payable
129,394
258,023
Total current liabilities
1,152,501
1,448,148
Deferred income tax liabilities
117,649
117,595
Noncurrent income taxes payable
62,732
62,539
Noncurrent deferred revenue
39,061
41,618
Noncurrent operating lease liabilities
82,127
70,044
Other noncurrent liabilities
337
324
Stockholders’ equity:
Shares, CHF 0.10 par value, 198,077 shares authorized and issued; 193,125 shares outstanding at March 26, 2022 and 192,608 shares outstanding at December 25, 2021
17,979
Additional paid-in capital
1,982,561
1,960,722
Treasury stock
(294,711
)
(303,114
Retained earnings
4,532,102
4,320,737
Accumulated other comprehensive income
10,911
117,835
Total stockholders’ equity
6,248,842
6,114,159
Total liabilities and stockholders’ equity
See accompanying notes.
Condensed Consolidated Statements of Income (Unaudited)
13-Weeks Ended
March 27,2021
Net sales
1,172,662
1,072,327
Cost of goods sold
510,183
430,771
Gross profit
662,479
641,556
Advertising expense
34,133
31,061
Selling, general and administrative expenses
190,784
171,987
Research and development expense
209,006
188,849
Total operating expense
433,923
391,897
Operating income
228,556
249,659
Other income (expense):
Interest income
7,553
7,652
Foreign currency losses
(3,506
(8,281
Other income
3,261
1,484
Total other income (expense)
7,308
855
Income before income taxes
235,864
250,514
Income tax provision
24,272
30,485
Net income
211,592
220,029
Net income per share:
Basic
1.10
1.15
Diluted
1.09
1.14
Weighted average common shares outstanding:
192,887
191,896
193,579
192,810
Condensed Consolidated Statements of Comprehensive Income (Unaudited)
(In thousands)
Foreign currency translation adjustment
(56,912
(35,291
Change in fair value of available-for-sale marketable securities, net of deferred taxes
(50,012
(7,884
Comprehensive income
104,668
176,854
Condensed Consolidated Statements of Stockholders’ Equity (Unaudited)
For the 13-Weeks Ended March 26, 2022 and March 27, 2021
CommonStock
AdditionalPaid-InCapital
TreasuryStock
RetainedEarnings
AccumulatedOtherComprehensiveIncome (Loss)
Total
Balance at December 26, 2020
1,880,354
(320,016
3,754,372
183,427
5,516,116
—
Translation adjustment
Adjustment related to unrealized gains (losses) on available-for-sale securities net of income tax effects of $2,231
Dividends declared
(217
Issuance of treasury stock related to equity awards
(10,118
27,775
17,657
Stock compensation
22,698
Purchase of treasury stock related to equity awards
(17,281
Balance at March 27, 2021
1,892,934
(309,522
3,974,184
140,252
5,715,827
Balance at December 25, 2021
Adjustment related to unrealized gains (losses) on available-for-sale securities net of income tax effects of $14,701
(227
(2,867
23,013
20,146
24,706
(14,610
Balance at March 26, 2022
Condensed Consolidated Statements of Cash Flows (Unaudited)
Operating Activities:
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation
28,984
23,988
Amortization
12,228
12,902
(Gain) loss on sale or disposal of property and equipment
(1,129
133
Unrealized foreign currency (gains) losses
(5,113
7,277
Deferred income taxes
(25,996
497
Stock compensation expense
Realized (gain) loss on marketable securities
(2
22
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable, net of allowance for doubtful accounts
238,134
281,524
(134,807
(87,450
Other current and noncurrent assets
(1,628
(13,710
(61,939
(3,470
Other current and noncurrent liabilities
(119,159
(95,977
(3,704
(7,998
1,904
3,945
Income taxes
21,563
3,952
Net cash provided by operating activities
185,634
368,362
Investing activities:
Purchases of property and equipment
(59,715
(36,894
Proceeds from sale of property and equipment
1,131
Purchase of intangible assets
(547
(760
Purchase of marketable securities
(497,526
(404,599
Redemption of marketable securities
431,604
354,039
Acquisitions, net of cash acquired
(10,828
(15,893
Net cash used in investing activities
(135,881
(104,107
Financing activities:
Dividends
(128,856
(116,655
Proceeds from issuance of treasury stock related to equity awards
Net cash used in financing activities
(123,320
(116,279
Effect of exchange rate changes on cash and cash equivalents
(6,960
(6,488
Net (decrease) increase in cash, cash equivalents, and restricted cash
(80,527
141,488
Cash, cash equivalents, and restricted cash at beginning of period
1,498,843
1,458,748
Cash, cash equivalents, and restricted cash at end of period
1,418,316
1,600,236
March 26, 2022
1.Accounting Policies
Basis of Presentation and Principles of Consolidation
The accompanying unaudited condensed consolidated financial statements include the accounts of Garmin Ltd. and wholly-owned subsidiaries (collectively, the “Company” or “Garmin”). Intercompany balances and transactions have been eliminated.
The condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The condensed consolidated balance sheet at December 25, 2021 has been derived from the audited financial statements at that date, but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. Additionally, the condensed consolidated financial statements should be read in conjunction with Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Form 10-Q, and the Company’s Annual Report on Form 10-K for the year ended December 25, 2021. Operating results for the 13-week period ended March 26, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022.
The Company’s fiscal year is based on a 52- or 53-week period ending on the last Saturday of the calendar year. Therefore, the financial results of certain 53-week fiscal years, and the associated 14-week quarters, will not be exactly comparable to the prior and subsequent 52-week fiscal years and the associated 13-week quarters. The quarters ended March 26, 2022 and March 27, 2021 both contain operating results for 13 weeks.
Changes in Classification and Allocation
Certain prior period amounts have been reclassified or presented to conform to the current period presentation.
In the first quarter of fiscal 2022, the Company refined the methodology used in classifying certain indirect costs in accordance with the way the Company's management is now using the information in decision making, which management believes provides a more meaningful representation of costs incurred to support research and development activities. As a result, the Company’s condensed consolidated statements of income have been recast for the three months ended March 27, 2021 to reflect a reclassification of $14,365 from research and development expense to selling, general, and administrative expense.
Additionally, in the first quarter of fiscal 2022, the methodology used to allocate certain selling, general, and administrative expenses to the segments was refined to allocate these expenses in a more direct manner to provide the Company's Chief Operating Decision Maker (CODM) with a more meaningful representation of segment profit or loss. The Company’s composition of operating segments and reportable segments did not change.
These changes in classification and allocation had no effect on the Company’s consolidated operating or net income.
Significant Accounting Policies
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 2, “Summary of Significant Accounting Policies” in the Notes to the Consolidated Financial Statements in Part II, Item 8 of the Company’s Annual Report on Form 10-K for the fiscal year ended December 25, 2021. There were no material changes to the Company’s significant accounting policies during the 13-week period ended March 26, 2022.
Recently Issued Accounting Standards and Pronouncements
Recently adopted accounting standards and recently issued accounting pronouncements not yet adopted are not expected to have a material impact on the Company’s consolidated financial statements, accounting policies, processes, or systems.
2. Inventories
The components of inventories consist of the following:
December 25, 2021
Raw materials
545,668
509,435
Work-in-process
207,340
213,801
Finished goods
586,522
504,373
3. Earnings Per Share
The following table sets forth the computation of basic and diluted net income per share. Stock options, stock appreciation rights, and restricted stock units are collectively referred to as “equity awards”.
March 27, 2021
Numerator:
Numerator for basic and diluted net income per share – net income
Denominator:
Denominator for basic net income per share – weighted-average common shares
Effect of dilutive equity awards
692
914
Denominator for diluted net income per share – adjusted weighted-average common shares
Basic net income per share
Diluted net income per share
Shares excluded from diluted net income per share calculation:
Anti-dilutive equity awards
764
316
4.Segment Information and Geographic Data
Garmin is organized in the six operating segments of fitness, outdoor, aviation, marine, consumer auto, and auto OEM. The fitness, outdoor, aviation, and marine operating segments represent reportable segments. The consumer auto and auto OEM operating segments, which serve the auto market, do not meet the quantitative thresholds to separately qualify as reportable segments, and they are therefore reported together in an “all other” category captioned as auto. Fitness, outdoor, aviation, marine, and auto are collectively referred to as the Company's reported segments.
The Company’s Chief Executive Officer, who has been identified as the CODM, uses operating income as the measure of profit or loss, combined with other measures, to assess segment performance and allocate resources. Operating income represents net sales less costs of goods sold and operating expenses. Net sales are directly attributed to each segment. Most costs of goods sold and the majority of operating expenses are also directly attributed to each segment, while certain other costs of goods sold and operating expenses are allocated to the segments in a manner appropriate to the specific facts and circumstances of the expenses being allocated.
7
As indicated in Note 1 to the condensed consolidated financial statements, in the first quarter of fiscal 2022 the methodology used to allocate certain selling, general, and administrative expenses to the segments was refined to allocate these expenses in a more direct manner to provide the Company’s CODM with a more meaningful representation of segment profit or loss. The Company’s composition of operating segments and reportable segments did not change. Results for the 13-week period ended March 27, 2021 have been recast below to conform with the current period presentation.
Net sales (“revenue”), gross profit, and operating income for each of the Company’s five reported segments are presented below, along with supplemental financial information for the auto OEM and consumer auto operating segments that management believes is useful.
Auto
Fitness
Outdoor
Aviation
Marine
TotalAuto
ConsumerAuto
AutoOEM
13-Weeks Ended March 26, 2022
220,896
384,604
174,766
254,069
138,327
65,130
73,197
106,189
247,495
127,543
128,581
52,671
30,960
21,711
Operating income (loss)
580
148,979
40,127
58,882
(20,012
3,831
(23,843
13-Weeks Ended March 27, 2021
308,125
256,455
173,889
209,372
124,486
62,395
62,091
173,545
171,676
126,182
121,379
48,774
31,964
16,810
70,682
92,011
45,014
62,906
(20,954
9,038
(29,992
Net sales to external customers by geographic region were as follows for the 13-week periods ended March 26, 2022 and March 27, 2021. Note that APAC includes Asia Pacific and Australian Continent and EMEA includes Europe, the Middle East and Africa:
Americas
570,634
503,691
EMEA
397,477
399,508
APAC
204,551
169,128
Net sales to external customers
5. Warranty Reserves
The Company’s standard warranty obligation to its end-users provides for a period of one to two years from the date of shipment, while certain auto, aviation, and marine OEM products have a warranty period of two years or more from the date of installation. The Company’s estimates of costs to service its warranty obligations are based on historical experience and management’s expectations and judgments of future conditions, and are recorded as a liability on the balance sheet. The following reconciliation provides an illustration of changes in the aggregate warranty reserve.
Balance - beginning of period
42,643
Accrual for products sold (1)
10,871
11,456
Expenditures
(15,640
(14,811
Balance - end of period
39,288
(1)Changes in cost estimates related to pre-existing warranties were not material and aggregated with accruals for new warranty contracts in the ‘accrual for products sold’ line.
8
6.Commitments and Contingencies
Commitments
The Company is party to certain commitments that require the future purchase of goods or services (“unconditional purchase obligations”). The Company’s unconditional purchase obligations primarily consist of payments for inventory, capital expenditures, and other indirect purchases in connection with conducting the business. The aggregate amount of purchase orders and other commitments open as of March 26, 2022 that may represent noncancellable unconditional purchase obligations having a remaining term in excess of one year was approximately $357,000.
Certain cash balances are held as collateral in relation to bank guarantees. This restricted cash is reported within other assets on the condensed consolidated balance sheets and totaled $785 and $785 on March 26, 2022 and December 25, 2021, respectively. The total of the cash and cash equivalents balance and the restricted cash reported within other assets in the condensed consolidated balance sheets equals the total cash, cash equivalents, and restricted cash shown in the condensed consolidated statements of cash flows.
Contingencies
Management of the Company currently does not believe it is reasonably possible that the Company may have incurred a material loss, or a material loss in excess of recorded accruals, with respect to loss contingencies in the aggregate, for the fiscal quarter ended March 26, 2022. The results of legal proceedings, investigations and claims, however, cannot be predicted with certainty. An adverse resolution of one or more of such matters in excess of management’s expectations could have a material adverse effect in the particular quarter or fiscal year in which a loss is recorded, but based on information currently known, the Company does not believe it is likely that losses from such matters would have a material adverse effect on the Company’s business or its consolidated financial position, results of operations or cash flows.
The Company settled or resolved certain matters during the 13-week period ended March 26, 2022 that did not individually or in the aggregate have a material impact on the Company’s business or its consolidated financial position, results of operations or cash flows.
7.Income Taxes
The Company recorded income tax expense of $24,272 in the 13-week period ended March 26, 2022, compared to income tax expense of $30,485 in the 13-week period ended March 27, 2021. The effective tax rate was 10.3% in the first quarter of 2022, compared to 12.2% in the first quarter of 2021. The decrease was primarily due to an increase in U.S. tax deductions and credits in the first quarter of 2022 compared to the first quarter of 2021.
8.Marketable Securities
The FASB ASC topic entitled Fair Value Measurements and Disclosures defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The accounting guidance classifies the inputs used to measure fair value into the following hierarchy:
Level 1
Unadjusted quoted prices in active markets for the identical asset or liability
Level 2
Observable inputs for the asset or liability, either directly or indirectly, such as quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are observable for the asset or liability
Level 3
Unobservable inputs for the asset or liability
The Company endeavors to utilize the best available information in measuring fair value. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. Valuation is based on prices obtained from an independent pricing vendor using both market and income approaches. The primary inputs to the valuation include quoted prices for similar assets in active markets, quoted prices for identical or similar assets in markets that are not active, contractual cash flows, benchmark yields, and credit spreads.
9
The method described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while the Company believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.
Marketable securities classified as available-for-sale securities are summarized below:
Available-For-Sale Securitiesas of March 26, 2022
Fair Value Level
Amortized Cost
Gross Unrealized Gains
Gross Unrealized Losses
Fair Value
Agency securities
7,000
(487
6,513
Mortgage-backed securities
170,419
(2,264
168,155
Corporate securities
1,124,686
947
(47,717
1,077,916
Municipal securities
352,245
199
(19,731
332,713
Other
30,675
(2,235
28,440
1,685,025
1,146
(72,434
1,613,737
Available-For-Sale Securitiesas of December 25, 2021
(110
6,890
149,692
257
(880
149,069
1,079,390
9,830
(11,827
1,077,393
356,037
1,870
(4,864
353,043
31,134
(873
30,283
1,623,253
11,979
(18,554
1,616,678
The Company’s investment policy targets low risk investments with the objective of minimizing the potential risk of principal loss. The fair value of 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.
Accrued interest receivable, which totaled $10,510 as of March 26, 2022, is excluded from both the fair value and amortized cost basis of available-for-sale securities and is included within prepaid expenses and other current assets on the Company’s condensed consolidated balance sheets. The Company writes off impaired accrued interest on a timely basis, generally within 30 days of the due date, by reversing interest income. No accrued interest was written off during the 13-week period ended March 26, 2022.
The Company recognizes impairments relating to credit losses of available-for-sale securities through an allowance for credit losses and other income on the Company’s condensed consolidated statements of income. Impairment not relating to credit losses is recorded in other comprehensive income on the Company’s condensed consolidated balance sheets. The cost of securities sold is based on the specific identification method. Approximately 80% of securities in the Company’s portfolio were at an unrealized loss position as of March 26, 2022.
The following tables display additional information regarding gross unrealized losses and fair value by major security type for available-for-sale securities in an unrealized loss position as of March 26, 2022 and December 25, 2021.
As of March 26, 2022
Less than 12 Consecutive Months
12 Consecutive Months or Longer
(1,757
52,201
(507
7,476
59,677
(32,386
669,654
(15,331
192,402
862,056
(13,953
231,353
(5,778
68,672
300,025
(1,293
20,230
(942
6,480
26,710
(49,876
979,951
(22,558
275,030
1,254,981
10
As of December 25, 2021
(148
18,909
(732
7,598
26,507
(9,466
499,084
(2,361
85,033
584,117
(4,247
226,009
(617
29,405
255,414
(467
17,845
(406
7,205
25,050
(14,438
768,737
(4,116
129,241
897,978
As of March 26, 2022 and December 25, 2021, the Company had not recognized an allowance for credit losses on any securities in an unrealized loss position.
The Company has not recorded an allowance for credit losses and charge to other income for the unrealized losses on agency, mortgage-backed, corporate, municipal, and other securities presented above because the Company's management does not consider the declines in fair value to have resulted from credit losses. Management has not observed a significant deterioration in credit quality of these securities, which are highly rated with moderate to low credit risk. Declines in value are largely attributable to current global economic conditions. The securities continue to make timely principal and interest payments, and the fair values are expected to recover as they approach maturity. Management does not intend to sell the securities, and it is not more likely than not that the Company will be required to sell the securities, before the respective recoveries of their amortized cost bases, which may be maturity.
The amortized cost and fair value of marketable securities at March 26, 2022, by maturity, are shown below.
Due in one year or less
375,211
Due after one year through five years
1,275,626
1,206,941
Due after five years through ten years
31,106
29,025
Due after ten years
3,082
2,534
9. Accumulated Other Comprehensive Income
The following provides required disclosure of changes in accumulated other comprehensive income (AOCI) balances by component for the 13-week period ended March 26, 2022:
Foreign currencytranslation adjustment
Net gains (losses) on available-for-sale securities
123,415
(5,580
Other comprehensive income before reclassification, net of income tax benefit of $14,700
(50,010
(106,922
Amounts reclassified from Accumulated other comprehensive income to Other income, net of income tax expense of $1 included in Income tax provision
Net current-period other comprehensive income
(106,924
66,503
(55,592
10. Revenue
In order to further depict how the nature, amount, timing and uncertainty of the Company's revenue and cash flows are affected by economic factors, revenue (or “net sales”) is disaggregated by geographic region, major product category, and pattern of recognition.
Disaggregated revenue by geographic region (Americas, APAC, and EMEA) is presented in Note 4 – Segment Information and Geographic Data. Note 4 also contains disaggregated revenue information of the six major product categories identified by the Company – fitness, outdoor, aviation, marine, consumer auto, and auto OEM.
11
A large majority of the Company’s sales are recognized on a point in time basis, usually once the product is shipped and title and risk of loss have transferred to the customer. Sales recognized over a period of time are primarily within the auto and outdoor segments and relate to performance obligations that are satisfied over the life of the product or contractual service period. Revenue disaggregated by the timing of transfer of the goods or services is presented in the table below:
Point in time
1,114,200
1,022,777
Over time
58,462
49,550
Transaction price and costs associated with the Company’s unsatisfied performance obligations are reflected as deferred revenue and deferred costs, respectively, on the Company’s condensed consolidated balance sheets. Such amounts are recognized ratably over the applicable service period or estimated useful life. Changes in deferred revenue and costs during the 13-week period ended March 26, 2022 are presented below:
13-Weeks EndedMarch 26, 2022
Deferred Revenue (1)
Deferred Costs (2)
Balance, beginning of period
129,272
28,322
Deferrals in period
54,695
3,527
Recognition of deferrals in period
(58,462
(5,450
Balance, end of period
125,505
26,399
(1)Deferred revenue is comprised of both deferred revenue and noncurrent deferred revenue per the condensed consolidated balance sheets
(2)Deferred costs are comprised of both deferred costs and noncurrent deferred costs per the condensed consolidated balance sheets
Of the $58,462 of deferred revenue recognized in the 13-week period ended March 26, 2022, $28,412 was deferred as of the beginning of the period. Approximately seventy-five percent of the $125,505 of deferred revenue at the end of the period, March 26, 2022, is recognized ratably over a period of three years or less.
11.Subsequent Events
On April 22, 2022, the Board of Directors authorized the Company to repurchase up to $300 million of the Company’s shares through December 29, 2023. The timing and volume of any share repurchases under this authorization will be determined by management at its discretion. Share repurchases, which are subject to market conditions, other business conditions and applicable legal requirements, may be made from time to time in the open market or in privately negotiated transactions, including under plans complying with the provisions of Rule 10b5-1 and Rule 10b-18 of the Securities Exchange Act of 1934, as amended.
12
Item 2. Management’s Discussion and Analysis of 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 verbs as expects, anticipates, believes or similar verbs or conjugations of such verbs. 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 25, 2021. This report has been filed with the Securities and Exchange Commission (the “SEC” or the “Commission”) in Washington, D.C. and can be obtained by contacting the SEC’s public reference operations or obtaining it through the SEC’s website at http://www.sec.gov. Readers are strongly encouraged to consider those factors when evaluating any forward-looking statement concerning the Company. The Company will not update any forward-looking statements in this Quarterly Report to reflect future events or developments.
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 25, 2021. Unless the context otherwise requires, references in this document to "we", "us", "our" 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 six operating segments of fitness, outdoor, aviation, marine, consumer auto, and auto OEM. The operating segments offer products through our network of subsidiary distributors and independent dealers and distributors, our own webshop, as well as through various auto, aviation, and marine original equipment manufacturers (OEMs). Each of the operating segments is managed separately.
Business Environment Update
Persisting headwinds related to the COVID-19 pandemic, along with Russia’s invasion of Ukraine, have created disruption, uncertainty, and inflationary pressure in the global economy that have affected our business, suppliers, and customers. Our global supply chain is routinely subject to component shortages, increased lead times, cost fluctuations, and logistics constraints. These factors have been further amplified by the current environment, and we expect these supply chain challenges to continue through at least the end of calendar year 2022.
The current business environment may evolve in ways that could impact our operations and financial results. Further, the nature and degree of the effects of the pandemic, Russia’s invasion of Ukraine, supply chain challenges, and inflationary pressure over time remains uncertain. Refer to Part II, Item 1A, “Risk Factors” of this Quarterly Report for further discussion of the risks and uncertainties facing our Company.
Results of Operations
As indicated in Note 1 to the condensed consolidated financial statements, in the first quarter of fiscal 2022 the Company refined the methodology used in classifying certain indirect costs as research and development expense, which we believe provides a more meaningful representation of costs incurred to support research and development activities.
Additionally, as indicated in Note 1 and Note 4 to the condensed consolidated financial statements, in the first quarter of fiscal 2022 the methodology used to allocate certain selling, general, and administrative expenses to the segments was refined to allocate these expenses in a more direct manner to provide the Company’s CODM with a more meaningful representation of segment profit or loss. The Company’s composition of operating segments and reportable segments did not change.
These changes in classification and allocation had no effect on the Company’s consolidated operating or net income. The amounts presented below for selling, general, and administrative expense, research and development expense, segment operating expense, and segment operating income for the 13-week period ended March 27, 2021 have been recast to conform with the current period presentation.
Comparison of 13-Weeks ended March 26, 2022 and March 27, 2021
Net Sales
Year-over-Year Change
(28
%)
Percentage of Total Net Sales
%
29
50
33
24
15
16
Consumer Auto
Auto OEM
Net sales increased 9% for the 13-week period ended March 26, 2022 when compared to the year-ago quarter. Total unit sales in the first quarter of 2022 decreased to 3,438 when compared to total unit sales of 3,463 in the first quarter of 2021, which differs from the increase in revenue primarily due to shifts in segment and product mix. Outdoor was the largest portion of our revenue mix at 33% in the first quarter of 2022 compared to fitness at 29% in the first quarter of 2021.
The increase in outdoor revenue was primarily driven by strong demand for our adventure watches. Aviation revenue increased primarily due to growth in the OEM product category. Marine revenue increased due to growth across multiple product categories, led by strong demand for our chartplotters. The increase in auto revenue was due to sales growth in both consumer auto and auto OEM products. Fitness revenue decreased due to declines across all product categories, driven primarily by the normalization of demand for cycling products compared to the year-ago quarter, which had benefited from a pandemic-driven shift in consumer behavior.
Gross Profit
(39
Percentage of Segment Net Sales
48
56
44
64
67
73
51
58
38
39
(3
30
27
60
Gross profit dollars in the first quarter of 2022 increased 3%, primarily due to the increase in net sales compared to the year-ago quarter, as described above. Consolidated gross margin decreased 330 basis points when compared to the year-ago quarter, primarily due to higher freight costs and a stronger U.S. Dollar that created downward pressure on revenues denominated in currencies that were weaker against the U.S. Dollar.
The fitness, outdoor, marine, and consumer auto gross margins were adversely impacted by higher freight costs and a stronger U.S. Dollar. In the outdoor segment, these impacts were partially offset by a favorable product mix. The auto OEM gross margin increase was primarily attributable to a more favorable product mix.
14
Operating Expense
105,609
102,863
98,516
79,665
26
31
87,416
81,168
47
69,699
58,473
28
72,683
69,728
53
27,129
22,926
42
37
45,554
46,802
62
75
Total operating expense was relatively flat as a percent of revenue and increased 11% in absolute dollars compared to the year-ago quarter.
Advertising expense as a percent of revenue was relatively flat when compared to the year-ago quarter and increased 10% in absolute dollars. The absolute dollar increase was primarily attributable to increased spend on tradeshows.
Selling, general and administrative expense was relatively flat as a percent of revenue and increased 11% in absolute dollars compared to the year-ago quarter. The absolute dollar increase in the first quarter of 2022 was primarily attributable to increased personnel related expenses and information technology costs. Absolute dollar increases in outdoor and auto OEM were more than offset by the corresponding increases in sales, resulting in decreases as percent of revenue of 280 and 180 basis points, respectively. Absolute dollar increases in aviation and consumer auto were greater than the corresponding increases in sales, resulting in increases as a percent of revenue of 160 and 100 basis points, respectively. An absolute dollar decrease in fitness was less than the corresponding decrease in sales, resulting in an increase of 670 basis points as a percent of revenue. Marine expense generally increased in line with the increase in sales.
Research and development expense was relatively flat as a percent of revenue when compared to the year-ago quarter and increased 11% in absolute dollars. The absolute dollar increase was primarily due to higher engineering personnel costs. An absolute dollar increase in outdoor was more than offset by the increase in outdoor sales, resulting in a decrease as percent of revenue of 220 basis points. Absolute dollar increases in fitness, aviation, and consumer auto were greater than the corresponding increases in sales, resulting in increases as a percent of revenue of 680, 170, and 280 basis points, respectively. Auto OEM expense was relatively flat in absolute dollars and decreased 1,150 basis points as a percent of revenue as revenue grew over the year-ago quarter. Marine expense generally increased in line with the increase in sales.
Operating Income
Operating Income (Loss)
(99
0
23
36
(11
(6
(4
(14
(17
(58
(21
(33
(48
(8
Operating income decreased 8% in absolute dollars and decreased 380 basis points as a percent of revenue when compared to the year-ago quarter. This decrease was due to lower gross margin and relatively flat expenses as a percent of revenue, as described above. Auto OEM experienced an operating loss in the current quarter, and we expect this trend to continue through 2022 as we continue to invest in certain auto OEM programs.
Other Income (Expense)
The average interest rate returns on cash and investments during the first quarter of 2022 was 1.0%, consistent with 1.0% during the same quarter of 2021.
Foreign currency gains and losses for the Company are typically 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, Japanese Yen, Polish Zloty, and Swiss Franc. 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 $3.5 million currency loss recognized in the first quarter of 2022 was primarily due to the U.S. Dollar strengthening against the Polish Zloty, Euro, and Japanese Yen, partially offset by the U.S. Dollar strengthening against the Taiwan Dollar, within the 13-week period ended March 26, 2022. During this period, the U.S. Dollar strengthened 5.7% against the Polish Zloty, 3.0% against the Euro, and 6.2% against the Japanese Yen, resulting in losses of $6.0 million, $5.1 million, and $1.6 million, respectively, while the U.S. Dollar strengthened 3.5% against the Taiwan Dollar, resulting in a gain of $8.2 million. The remaining net currency gain of $1.0 million was related to the impacts of other currencies, each of which was individually immaterial.
The $8.3 million currency loss recognized in the first quarter of 2021 was primarily due to the U.S. Dollar strengthening against the Euro and Japanese Yen, partially offset by the U.S. Dollar strengthening against the Taiwan Dollar and weakening against the British Pound, within the 13-week period ended March 27, 2021. During this period, the U.S. Dollar strengthened 3.3% against the Euro and 5.6% against the Japanese Yen, resulting in losses of $11.0 million and $1.4 million, respectively, while the U.S. Dollar strengthened 1.7% against the Taiwan Dollar and weakened 1.8% against the British Pound, resulting in gains of $4.7 million and $1.3 million, respectively. The remaining net currency loss of $1.9 million was related to the impacts of other currencies, each of which was individually immaterial.
Income Tax Provision
The Company recorded income tax expense of $24.3 million in the 13-week period ended March 26, 2022, compared to income tax expense of $30.5 million in the 13-week period ended March 27, 2021. The effective tax rate was 10.3% in the first quarter of 2022, compared to 12.2% in the first quarter of 2021. The decrease was primarily due to an increase in U.S. tax deductions and credits in the 13-week period ended March 26, 2022 compared to the year-ago quarter.
Net Income
As a result of the above, net income for the 13-week period ended March 26, 2022 was $211.6 million compared to $220.0 million for the 13-week period ended March 27, 2021, a decrease of $8.4 million.
Liquidity and Capital Resources
As of March 26, 2022, we had approximately $3.0 billion of cash, cash equivalents and marketable securities. 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.
It is management’s goal to invest the on-hand cash in accordance with the investment policy, which has been approved by the Company’s Board of Directors. The investment policy’s primary purpose is 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 quarters of 2022 and 2021 were approximately 1.0% and 1.0%, respectively. The fair value of our securities varies from period to period due to changes in interest rates, in the performance of the underlying collateral, and in the credit performance of the underlying issuer, among other factors. See Note 8 for additional information regarding marketable securities.
Cash Flows
Cash provided by operating activities totaled $185.6 million for the first quarter of 2022, compared to $368.4 million for the first quarter of 2021. The decrease was primarily due to higher purchases of inventory associated with the Company's strategy to increase days of supply to support our increasingly diversified product lines, and a decrease in collections of accounts receivable when compared to the year-ago quarter.
Cash used in investing activities totaled $135.9 million in the first quarter of 2022, compared to $104.1 million for the first quarter of 2021. The increase was primarily due to higher capital expenditures as the Company invested more heavily in platforms for growth.
Cash used in financing activities totaled $123.3 million for the first quarter of 2022, compared to $116.3 million for the first quarter of 2021. This increase was primarily due to higher cash dividend payments in the first quarter of 2022, as our declared dividend increased from $0.61 per share for the four calendar quarters beginning in June 2020 to $0.67 per share for the four calendar quarters beginning in June 2021.
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 26, 2022, the Company had fixed lease payment obligations of $116.0 million, with $24.8 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 26, 2022, the Company had inventory purchase obligations of $1,212.8 million, with $941.7 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 26, 2022, the Company had other purchase obligations of $549.4 million, with $348.8 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.
17
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 2, “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 25, 2021. There were no significant changes to the Company’s critical accounting policies and estimates in the 13-week period ended March 26, 2022.
Item 3. Quantitative and Qualitative 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 25, 2021. There have been no material changes during the 13-week period ended March 26, 2022 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.
Item 4. Controls and Procedures
(a) Evaluation of disclosure controls and procedures. The Company maintains a system of disclosure controls and procedures that are designed to provide reasonable assurance that information, which is required to be timely disclosed, is accumulated and communicated to management in a timely fashion. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. As of March 26, 2022, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded as of March 26, 2022 that our disclosure controls and procedures were effective such that the information relating to the Company, required to be disclosed in our Securities and Exchange Commission (“SEC”) reports (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) is accumulated and communicated to the Company’s management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
(b) Changes in internal control over financial reporting. There has been no change in the Company’s internal controls over financial reporting that occurred during the Company’s fiscal quarter ended March 26, 2022 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
Item 1. Legal Proceedings
In the normal course of business, the Company and its subsidiaries are parties to various legal claims, actions, and complaints, including matters involving patent infringement, other intellectual property, product liability, customer claims and various other risks. It is not possible to predict with certainty whether or not the Company and its subsidiaries will ultimately be successful in any of these legal matters, or if not, what the impact might be. However, the Company’s management does not expect that the results in any of these legal proceedings will have a material adverse effect on the Company’s results of operations, financial position or cash flows. For additional information, see Note 6 – Commitments and Contingencies in the above Condensed Consolidated Financial Statements and Part I, Item 3, “Legal Proceedings” in the Company’s Annual Report on Form 10-K for the fiscal year ended December 25, 2021.
Item 1A. Risk Factors
There are many risks and uncertainties that can affect our future business, financial performance or share price. In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 25, 2021. There have been no material changes during the 13-week period ended March 26, 2022 in the risks described in our Annual Report on Form 10-K. These risks, however, are not the only risks facing our Company. Additional risks and uncertainties, including those not currently known to us or that we currently deem to be immaterial, also may materially adversely affect our business, financial condition and/or operating results.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Not applicable.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
Exhibit 10.1
Garmin Ltd. 2005 Equity Incentive Plan, as amended and restated on April 22, 2022.
Exhibit 31.1
Certification of Chief Executive Officer pursuant to Exchange Act Rule 13a-14(a) or 15d-14(a).
Exhibit 31.2
Certification of Chief Financial Officer pursuant to Exchange Act Rule 13a-14(a) or 15d-14(a).
Exhibit 32.1
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Exhibit 32.2
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Exhibit 101.INS
XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
Exhibit 101.SCH
Inline XBRL Taxonomy Extension Schema
Exhibit 101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase
Exhibit 101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase
Exhibit 101.LAB
Inline XBRL Taxonomy Extension Label Linkbase
Exhibit 101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase
Exhibit 104
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
By
/s/ Douglas G. Boessen
Douglas G. Boessen
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
Dated: April 27, 2022