Earnings

Garmin's Inventory Hits About $2.3 Billion As Memory Prepayments Cut Cash Flow $132 Million

Garmin's CFO lowered full-year free cash flow guidance to about $1.1 billion while the company stocks up on components and prepays suppliers.

Matteo Parrino Jonathan Ponciano

Matteo Parrino, Jonathan Ponciano

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Garmin's Inventory Hits About $2.3 Billion As Memory Prepayments Cut Cash Flow $132 Million

Garmin's third-quarter free cash flow fell to $293 million, $132 million lower than a year earlier, as the company stockpiled components and prepaid suppliers to lock in memory supply, CFO Doug Boessen said on Wednesday's earnings call. The company also lowered its full-year free cash flow estimate to approximately $1.1 billion.

Inventory and prepayments eat cash

Boessen, Garmin's chief financial officer and treasurer, said inventory rose both from a year earlier and from the prior quarter to approximately $2.3 billion. Garmin is building stocks of certain components to reduce the risk of supply constraints, he said, and the cost of some components has climbed significantly from a year ago.

The cash-flow decline came mainly from that inventory build and from prepayments to secure future deliveries of strategic components, partly offset by better operating results. Capital spending in the quarter was $101 million, about $40 million above the prior-year quarter. For the full year, Boessen now expects capital spending of about $500 million and attributed the lower free cash flow estimate to inventory and prepayments.

Asked by an analyst how locked in the prepayment agreements are, Boessen said they relate to the memory shortage and are negotiated "on a one-by-one basis." CEO Clif Pemble said the inventory strategy is "focused on product availability" and that Garmin makes prepayments "from time to time" to secure additional supplies.

Strong quarter, costlier memory ahead

Garmin, which makes GPS-enabled fitness, outdoor, aviation, marine and automotive devices, reported third-quarter revenue of $1.986 billion, up 12%, with operating income up 34% to $612 million and adjusted earnings of $2.76 a share. It raised its full-year revenue outlook to about $8.15 billion from $8.05 billion and adjusted earnings to about $10.80 from $10.

Pemble said results have benefited from safety stock of memory bought at lower prices, while new supplies are purchased at current market prices that are significantly higher than last year. Full-year gross margin is expected near 61%, and Pemble said he expects gross margin to return to a historical range in 2027 mainly because of higher memory costs. Garmin ended the quarter with about $4.1 billion in cash and marketable securities and had a market value of $55.8 billion in Wednesday morning trading.

Thailand plant and capacity limits

Pemble said volumes have basically reached Garmin's capacity, and that a new Thailand facility is on track to begin producing new products in the first quarter of 2027. Boessen said costs there will flow through the income statement once the plant is in production.

Garmin expects the Thailand facility to start producing in the first quarter of 2027, the next test of the capacity limits Pemble described.

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