filings.toolsItem 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
36K characters. Original on sec.gov ·
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
A number of headwinds including high inflation, rising interest rates, and the strengthening of the U.S. Dollar relative to other major currencies have continued to lead to uncertainty in the economic environment. Additionally, while 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, including Russia’s invasion of Ukraine and the lingering impacts of the COVID-19 pandemic. We expect these economic and supply chain challenges to persist through the end of 2022 and beyond.
While Russia’s invasion of Ukraine has not had a material direct impact on our business, and our related direct exposure is limited, the nature and degree of the effects of that conflict, as well as the effects of the current economic environment over time remain 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 and 39-week periods ended September 25, 2021 have been recast to conform with the current period presentation.
Comparison of 13-Weeks ended September 24, 2022 and September 25, 2021
Net Sales
| Net Sales | 13-Weeks Ended September 24, 2022 | Year-over-Year Change | 13-Weeks Ended September 25, 2021 | |||||||||
| Fitness | $ | 279,875 | (18 | %) | $ | 342,316 | ||||||
| Percentage of Total Net Sales | 25 | % | 29 | % | ||||||||
| Outdoor | 340,388 | 5 | % | 323,856 | ||||||||
| Percentage of Total Net Sales | 30 | % | 27 | % | ||||||||
| Aviation | 188,043 | 4 | % | 180,165 | ||||||||
| Percentage of Total Net Sales | 16 | % | 15 | % | ||||||||
| Marine | 196,506 | (5 | %) | 207,534 | ||||||||
| Percentage of Total Net Sales | 17 | % | 17 | % | ||||||||
| Auto | 135,622 | (2 | %) | 138,102 | ||||||||
| Percentage of Total Net Sales | 12 | % | 12 | % | ||||||||
| Consumer Auto | 66,444 | (20 | %) | 82,914 | ||||||||
| Percentage of Total Net Sales | 6 | % | 7 | % | ||||||||
| Auto OEM | 69,178 | 25 | % | 55,188 | ||||||||
| Percentage of Total Net Sales | 6 | % | 5 | % | ||||||||
| Total | $ | 1,140,434 | (4 | %) | $ | 1,191,973 |
Net sales decreased 4% for the 13-week period ended September 24, 2022 when compared to the year-ago quarter. Total unit sales in the third quarter of 2022 decreased to 3,491 when compared to total unit sales of 3,798 in the third quarter of 2021, which differs from the percent decrease in revenue primarily due to shifts in segment and product mix. Outdoor was the largest portion of our revenue mix at 30% in the third quarter of 2022 compared to fitness at 29% in the third quarter of 2021.
The increase in outdoor revenue was primarily driven by growth in adventure watches and inReach devices and services, partially offset by declines in other product lines. The aviation revenue increase was driven by sales growth in multiple product lines, primarily in aftermarket. Fitness revenue decreased primarily due to declines in our advanced wellness and indoor cycling products. Marine revenue decreased primarily due to the return of typical seasonality trends. Auto revenue decreased as a sales decline in our consumer auto products more than offset the sales growth in auto OEM programs.
Gross Profit
| Gross Profit | 13-Weeks Ended September 24, 2022 | Year-over-Year Change | 13-Weeks Ended September 25, 2021 | |||||||||
| Fitness | $ | 147,716 | (19 | %) | $ | 183,028 | ||||||
| Percentage of Segment Net Sales | 53 | % | 53 | % | ||||||||
| Outdoor | 219,980 | 4 | % | 210,522 | ||||||||
| Percentage of Segment Net Sales | 65 | % | 65 | % | ||||||||
| Aviation | 137,732 | 5 | % | 131,260 | ||||||||
| Percentage of Segment Net Sales | 73 | % | 73 | % | ||||||||
| Marine | 110,747 | (5 | %) | 116,152 | ||||||||
| Percentage of Segment Net Sales | 56 | % | 56 | % | ||||||||
| Auto | 54,324 | (1 | %) | 54,985 | ||||||||
| Percentage of Segment Net Sales | 40 | % | 40 | % | ||||||||
| Consumer Auto | 30,432 | (23 | %) | 39,342 | ||||||||
| Percentage of Segment Net Sales | 46 | % | 47 | % | ||||||||
| Auto OEM | 23,892 | 53 | % | 15,643 | ||||||||
| Percentage of Segment Net Sales | 35 | % | 28 | % | ||||||||
| Total | $ | 670,499 | (4 | %) | $ | 695,947 | ||||||
| Percentage of Total Net Sales | 59 | % | 58 | % |
Gross profit dollars in the third quarter of 2022 decreased 4%, primarily due to the decrease in net sales when compared to the year-ago quarter, as described above. Consolidated gross margin was slightly higher when compared to the year-ago quarter, as a favorable segment mix and lower freight costs offset the net unfavorable impact of the strengthening of the U.S. Dollar relative to other major currencies. The fitness, outdoor, aviation, marine, and auto gross margins were each relatively flat when compared to the year-ago quarter.
Operating Expense
| Operating Expense | 13-Weeks Ended September 24, 2022 | Year-over-Year Change | 13-Weeks Ended September 25, 2021 | |||||||||
| Advertising expense | $ | 32,888 | (10 | %) | $ | 36,705 | ||||||
| Percentage of Total Net Sales | 3 | % | 3 | % | ||||||||
| Selling, General and administrative expenses | 189,546 | 7 | % | 177,647 | ||||||||
| Percentage of Total Net Sales | 17 | % | 15 | % | ||||||||
| Research and development expense | 208,692 | 5 | % | 198,925 | ||||||||
| Percentage of Total Net Sales | 18 | % | 17 | % | ||||||||
| Total | $ | 431,126 | 4 | % | $ | 413,277 | ||||||
| Percentage of Total Net Sales | 38 | % | 35 | % |
Total operating expense increased 310 basis points and 4% in absolute dollars when compared to the year-ago quarter.
Advertising expense as a percent of revenue was relatively flat and decreased 10% in absolute dollars when compared to the year-ago quarter. The absolute dollar decrease was primarily attributable to decreased cooperative spend.
Selling, general and administrative expense increased 170 basis points as a percent of revenue and 7% in absolute dollars compared to the year-ago quarter. The absolute dollar expense increase in the third quarter of 2022 was primarily attributable to increased personnel related expenses and information technology costs.
Research and development expense increased 160 basis points as a percent of revenue and 5% in absolute dollars when compared to the year-ago quarter. The absolute dollar expense increase was primarily due to higher engineering personnel costs.
Operating Income
| Operating Income (Loss) | 13-Weeks Ended September 24, 2022 | Year-over-Year Change | 13-Weeks Ended September 25, 2021 | |||||||||
| Fitness | $ | 40,850 | (45 | %) | $ | 74,469 | ||||||
| Percentage of Segment Net Sales | 15 | % | 22 | % | ||||||||
| Outdoor | 120,842 | (2 | %) | 122,875 | ||||||||
| Percentage of Segment Net Sales | 36 | % | 38 | % | ||||||||
| Aviation | 48,487 | (6 | %) | 51,747 | ||||||||
| Percentage of Segment Net Sales | 26 | % | 29 | % | ||||||||
| Marine | 44,950 | (18 | %) | 55,142 | ||||||||
| Percentage of Segment Net Sales | 23 | % | 27 | % | ||||||||
| Auto | (15,756 | ) | (27 | %) | (21,563 | ) | ||||||
| Percentage of Segment Net Sales | (12 | %) | (16 | %) | ||||||||
| Consumer Auto | 2,105 | (82 | %) | 11,979 | ||||||||
| Percentage of Segment Net Sales | 3 | % | 14 | % | ||||||||
| Auto OEM | (17,861 | ) | (47 | %) | (33,542 | ) | ||||||
| Percentage of Segment Net Sales | (26 | %) | (61 | %) | ||||||||
| Total | $ | 239,373 | (15 | %) | $ | 282,670 | ||||||
| Percentage of Total Net Sales | 21 | % | 24 | % |
Operating income decreased 15% in absolute dollars and 270 basis points as a percent of revenue when compared to the year-ago quarter. The decrease as a percent of revenue was due to higher operating expenses, while net sales declined, as described above. Decreases in operating income in fitness, outdoor, aviation, marine, and consumer auto were partially offset by improved performance in auto OEM.
Other Income (Expense)
| Other Income (Expense) | 13-Weeks Ended September 24, 2022 | 13-Weeks Ended September 25, 2021 | ||||||
| Interest income | $ | 10,472 | $ | 6,897 | ||||
| Foreign currency losses | (29,863 | ) | (15,014 | ) | ||||
| Other income | 285 | 833 | ||||||
| Total | $ | (19,106 | ) | $ | (7,284 | ) |
The average interest rate returns on cash and investments during the third quarter of 2022 was 1.5%, compared to 0.9% during the same quarter of 2021.
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 $29.9 million currency loss recognized in the third quarter of 2022 was primarily due to the U.S. Dollar strengthening against the Polish Zloty, Euro, Australian Dollar, British Pound Sterling, Chinese Yuan, and Japanese Yen, partially offset by the U.S. Dollar strengthening against the Taiwan Dollar, within the 13-week period ended September 24, 2022. During this period, the U.S. Dollar strengthened 8.8% against the Polish Zloty, 8.2% against the Euro, 5.3% against the Australian Dollar, 11.5% against the British Pound Sterling, 5.4% against the Chinese Yuan, and 5.7% against the Japanese Yen resulting in losses of $15.4 million, $12.2 million, $5.0 million, $4.3 million, $3.3 million, and $1.9 million, respectively, partially offset by the U.S. Dollar strengthening 6.6% against the Taiwan Dollar, resulting in a gain of $17.1 million. The remaining net currency loss of $4.9 million was related to the impacts of other currencies, each of which was individually immaterial.
The $15.0 million currency loss recognized in the third quarter of 2021 was primarily due to the U.S. Dollar strengthening against the Euro, Polish Zloty, Australian Dollar, and British Pound Sterling and weakening against the Taiwan Dollar within the 13-week period ended September 25, 2021. During this period, the U.S. Dollar strengthened 1.8% against the Euro, 3.6% against the Polish Zloty, 3.8% against the Australian Dollar, and 1.4% against the British Pound Sterling, resulting in losses of $4.1 million, $3.0 million, $1.4 million, and $0.9 million, respectively, while the U.S. Dollar weakened 0.6% against the Taiwan Dollar, resulting in a loss of $2.7 million. The remaining net currency loss of $2.9 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 $9.4 million in the 13-week period ended September 24, 2022, compared to income tax expense of $16.3 million in the 13-week period ended September 25, 2021. The effective tax rate was 4.3% in the third quarter of 2022, compared to 5.9% in the third quarter of 2021. The decrease was primarily due to income mix by jurisdiction and an increase in U.S. tax deductions and credits in the 13-week period ended September 24, 2022 compared to the year-ago quarter.
Net Income
As a result of the above, net income for the 13-week period ended September 24, 2022 was $210.8 million compared to $259.0 million for the 13-week period ended September 25, 2021, a decrease of $48.2 million.
Comparison of 39-Weeks ended September 24, 2022 and September 25, 2021
Net Sales
| Net Sales | 39-Weeks Ended September 24, 2022 | Year-over-Year Change | 39-Weeks Ended September 25, 2021 | |||||||||
| Fitness | $ | 772,867 | (27 | %) | $ | 1,063,642 | ||||||
| Percentage of Total Net Sales | 22 | % | 30 | % | ||||||||
| Outdoor | 1,106,908 | 22 | % | 903,715 | ||||||||
| Percentage of Total Net Sales | 31 | % | 25 | % | ||||||||
| Aviation | 567,548 | 6 | % | 534,886 | ||||||||
| Percentage of Total Net Sales | 16 | % | 15 | % | ||||||||
| Marine | 693,369 | 2 | % | 678,698 | ||||||||
| Percentage of Total Net Sales | 19 | % | 19 | % | ||||||||
| Auto | 413,239 | 1 | % | 410,265 | ||||||||
| Percentage of Total Net Sales | 12 | % | 11 | % | ||||||||
| Consumer Auto | 211,902 | (9 | %) | 231,587 | ||||||||
| Percentage of Total Net Sales | 6 | % | 6 | % | ||||||||
| Auto OEM | 201,337 | 13 | % | 178,678 | ||||||||
| Percentage of Total Net Sales | 6 | % | 5 | % | ||||||||
| Total | $ | 3,553,931 | (1 | %) | $ | 3,591,206 |
Net sales decreased 1% for the 39-week period ended September 24, 2022 when compared to the year-ago period. Total unit sales in the first three quarters of 2022 decreased to 10,672 when compared to total unit sales of 11,564 in the first three quarters of 2021, which differs from the percent decrease in revenue primarily due to shifts in segment and product mix. Outdoor was the largest portion of our revenue mix at 31% in the first three quarters of 2022 compared to fitness at 30% in the first three quarters of 2021.
The increase in outdoor revenue was primarily driven by strong demand for our adventure watches. Aviation revenue increased due to growth in both OEM and aftermarket product categories. Marine revenue increased due to growth across multiple product categories, led by strong demand for our sonar products. The increase in auto revenue was due to sales growth in auto OEM programs, partially offset by sales declines in our consumer auto products. Fitness revenue decreased due to declines across all product categories, driven primarily by our advanced wearables and cycling products.
Gross Profit
| Gross Profit | 39-Weeks Ended September 24, 2022 | Year-over-Year Change | 39-Weeks Ended September 25, 2021 | |||||||||
| Fitness | $ | 387,921 | (33 | %) | $ | 581,765 | ||||||
| Percentage of Segment Net Sales | 50 | % | 55 | % | ||||||||
| Outdoor | 720,731 | 22 | % | 590,355 | ||||||||
| Percentage of Segment Net Sales | 65 | % | 65 | % | ||||||||
| Aviation | 413,206 | 6 | % | 389,376 | ||||||||
| Percentage of Segment Net Sales | 73 | % | 73 | % | ||||||||
| Marine | 376,734 | (3 | %) | 390,141 | ||||||||
| Percentage of Segment Net Sales | 54 | % | 57 | % | ||||||||
| Auto | 163,213 | (2 | %) | 166,717 | ||||||||
| Percentage of Segment Net Sales | 39 | % | 41 | % | ||||||||
| Consumer Auto | 98,645 | (13 | %) | 113,567 | ||||||||
| Percentage of Segment Net Sales | 47 | % | 49 | % | ||||||||
| Auto OEM | 64,568 | 21 | % | 53,150 | ||||||||
| Percentage of Segment Net Sales | 32 | % | 30 | % | ||||||||
| Total | $ | 2,061,805 | (3 | %) | $ | 2,118,354 | ||||||
| Percentage of Total Net Sales | 58 | % | 59 | % |
Gross profit dollars in the first three quarters of 2022 decreased 3% and consolidated gross margin decreased 100 basis points when compared to the year-ago period, primarily due to higher freight costs and the strengthening of the U.S. Dollar relative to other major currencies, which created downward pressure on revenues.
The fitness, outdoor, marine, and 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.
Operating Expense
| Operating Expense | 39-Weeks Ended September 24, 2022 | Year-over-Year Change | 39-Weeks Ended September 25, 2021 | |||||||||
| Advertising expense | $ | 110,378 | — | % | $ | 110,705 | ||||||
| Percentage of Total Net Sales | 3 | % | 3 | % | ||||||||
| Selling, General and administrative expenses | 571,541 | 8 | % | 530,351 | ||||||||
| Percentage of Total Net Sales | 16 | % | 15 | % | ||||||||
| Research and development expense | 619,215 | 8 | % | 573,798 | ||||||||
| Percentage of Total Net Sales | 17 | % | 16 | % | ||||||||
| Total | $ | 1,301,134 | 7 | % | $ | 1,214,854 | ||||||
| Percentage of Total Net Sales | 37 | % | 34 | % |
Total operating expense increased 280 basis points as a percent of revenue and 7% in absolute dollars when compared to the year-ago period.
Advertising expense as a percent of revenue and in absolute dollars was relatively flat when compared to the year-ago period.
Selling, general and administrative expense increased 130 basis points as a percent of revenue and 8% in absolute dollars when compared to the year-ago period. The absolute dollar increase in the first three quarters of 2022 was primarily attributable to increased personnel related expenses and information technology costs.
Research and development expense increased 150 basis points as a percent of revenue and 8% in absolute dollars when compared to the year-ago period. The absolute dollar increase was primarily due to higher engineering personnel costs.
Operating Income
| Operating Income (Loss) | 39-Weeks Ended September 24, 2022 | Year-over-Year Change | 39-Weeks Ended September 25, 2021 | |||||||||
| Fitness | $ | 64,894 | (75 | %) | $ | 258,884 | ||||||
| Percentage of Segment Net Sales | 8 | % | 24 | % | ||||||||
| Outdoor | 424,071 | 26 | % | 335,728 | ||||||||
| Percentage of Segment Net Sales | 38 | % | 37 | % | ||||||||
| Aviation | 150,359 | 2 | % | 147,888 | ||||||||
| Percentage of Segment Net Sales | 26 | % | 28 | % | ||||||||
| Marine | 172,451 | (18 | %) | 209,140 | ||||||||
| Percentage of Segment Net Sales | 25 | % | 31 | % | ||||||||
| Auto | (51,104 | ) | 6 | % | (48,140 | ) | ||||||
| Percentage of Segment Net Sales | (12 | %) | (12 | %) | ||||||||
| Consumer Auto | 15,058 | (60 | %) | 37,371 | ||||||||
| Percentage of Segment Net Sales | 7 | % | 16 | % | ||||||||
| Auto OEM | (66,162 | ) | (23 | %) | (85,511 | ) | ||||||
| Percentage of Segment Net Sales | (33 | %) | (48 | %) | ||||||||
| Total | $ | 760,671 | (16 | %) | $ | 903,500 | ||||||
| Percentage of Total Net Sales | 21 | % | 25 | % |
Operating income decreased 16% in absolute dollars and 380 basis points as a percent of revenue when compared to the year-ago period. The decrease as a percent of revenue was due to lower gross margin and higher operating expenses, while net sales declined, as described above. Decreases in operating income in fitness, marine, and consumer auto were partially offset by improved performance in outdoor, aviation and auto OEM.
Other Income (Expense)
| Other Income (Expense) | 39-Weeks Ended September 24, 2022 | 39-Weeks Ended September 25, 2021 | ||||||
| Interest income | $ | 26,520 | $ | 21,568 | ||||
| Foreign currency losses | (55,809 | ) | (30,621 | ) | ||||
| Other Income | 3,716 | 3,511 | ||||||
| Total | $ | (25,573 | ) | $ | (5,542 | ) |
The average interest rate returns on cash and investments during the 39-week periods ended September 24, 2022 and September 25, 2021 were 1.2% and 0.9%, respectively.
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 $55.8 million currency loss recognized in the 39-week period ended September 24, 2022 was primarily due to the U.S. Dollar strengthening against the Polish Zloty, Euro, Australian Dollar, British Pound Sterling, Chinese Yuan, and Japanese Yen, partially offset by the U.S. Dollar strengthening against the Taiwan Dollar, within the 39-week period ended September 24, 2022. During this period, the U.S. Dollar strengthened 16.7% against the Polish Zloty, 14.4% against the Euro, 9.9% against the Australian Dollar, 18.9% against the British Pound Sterling, 10.0% against the Chinese Yuan, and 20.2% against the Japanese Yen resulting in losses of $26.7 million, $21.1 million, $11.7 million, $6.8 million, $6.2 million, and $5.7 million, respectively, partially offset by the U.S. Dollar strengthening 12.9% against the Taiwan Dollar, resulting in a gain of $34.2 million. The remaining net currency loss of $11.8 million was related to the impacts of other currencies, each of which was individually immaterial.
The $30.6 million currency loss recognized in the 39-week period ended September 25, 2021 was primarily due to the U.S. Dollar strengthening against the Euro and Polish Zloty and weakening against the Taiwan Dollar within the 39-week period ended September 25, 2021. During this period, the U.S. Dollar strengthened 4.0% against the Euro and 5.9% against the Polish Zloty, resulting in losses of $13.9 million and $3.8 million, respectively, while the U.S. Dollar weakened 1.4% against the Taiwan Dollar, resulting in a loss of $7.4 million. The remaining net currency loss of $5.5 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 $54.8 million in the first three quarters of 2022, compared to income tax expense of $101.9 million in the first three quarters of 2021. The effective tax rate was 7.5% in the first three quarters of 2022, compared to 11.3% in the first three quarters of 2021. The decrease was primarily due to income mix by jurisdiction and an increase in U.S. tax deductions and credits in the first three quarters of 2022 compared to the first three quarters of 2021.
Net Income
As a result of the above, net income for the 39-week period ended September 24, 2022 was $680.3 million compared to $796.1 million for the 39-week period ended September 25, 2021, a decrease of $115.8 million.
Liquidity and Capital Resources
As of September 24, 2022, we had approximately $2.7 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.
Management invests idle or surplus cash in accordance with the 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 three quarters of 2022 and 2021 were approximately 1.2% and 0.9%, 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 $419.6 million for the first three quarters of 2022, compared to $843.5 million for the first three quarters of 2021. The decrease was primarily due to a higher use of cash on purchases of inventory, principally associated with the Company's strategy to increase days of supply to support our increasingly diversified product lines, optimize shipping methods, and mitigate increased lead times for raw materials. Additionally, the Company used more cash for income taxes and operating expenses, while sales and the associated collections of receivables were down in the first three quarters of 2022 compared to the first three quarters of 2021.
Cash used in investing activities totaled $319.1 million in the first three quarters of 2022, compared to $311.7 million for the first three quarters of 2021. The increase was primarily due to higher net purchases of marketable securities, as more desirable investment opportunities were available compared to the first three quarters of 2021.
Cash used in financing activities totaled $478.0 million for the first three quarters of 2022, compared to $344.5 million for the first three quarters of 2021. This increase was primarily due to the purchase of treasury stock under the share repurchase plan, and higher cash dividend payments in the first three quarters 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, and to $0.73 per share for the four calendar quarters beginning in June 2022.
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 September 24, 2022, the Company had fixed lease payment obligations of $139.8 million, with $27.0 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 September 24, 2022, the Company had inventory purchase obligations of $893.8 million, with $633.1 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 September 24, 2022, the Company had other purchase obligations of $372.9 million, with $176.5 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 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 and 39-week periods ended September 24, 2022.
Previous: Cover and table of contents · Next: Item 3. Quantitative and Qualitative Disclosures About Market Risk