“2017 was our second full year of sales and operating income growth driven by strong sales in our outdoor, aviation and marine segments,” said Cliff Pemble, president and chief executive officer of Garmin Ltd. “Entering 2018, we see additional growth opportunities ahead and we believe that we are well positioned to seize these opportunities with a strong lineup of products.”
Outdoor:
The outdoor segment grew 16% in the quarter with significant contributions from wearable devices combined with growth of inReach® subscription services. Gross and operating margins improved to 63% and 36%, respectively, resulting in 26% operating income growth. We expect outdoor to continue to be a growth segment in 2018 as we leverage opportunities in wearables and other product categories in the segment.
Aviation:
The aviation segment posted solid revenue growth of 11% in the quarter with growth contributions from both aftermarket and OEM. Gross and operating margins remained strong at 75% and 32%, respectively, resulting in 27% operating income growth. During the quarter, we delivered the 500th G1000® integrated flight deck upgrade for King Air aircraft, witnessed continued strength in our ADS-B offerings, and Textron Aviation announced our selection as the avionics provider for the Cessna Sky Courier 408. We continue to invest in upcoming certifications with our numerous OEM partners, as well as ongoing aftermarket opportunities for long-term market share gains.
Marine:
The marine segment posted strong fourth quarter revenue growth of 24% driven by our updated lineup of chartplotters and fishfinders, as well as contributions from our recently acquired Navionics product line. Gross margin improved to 55%. During the fourth quarter, we recorded a one-time accrual for a litigation settlement resulting in an operating loss in the marine segment of 13%. During the fourth quarter, we began shipping our new connected offerings in our popular ECHOMAP and STRIKER product lines enabling connectivity through our new ActiveCaptain™ mobile app. We expect marine to be a growth segment in 2018 as we focus on market share gains and new product innovations.
Fitness:
The fitness segment posted revenue growth of 1% in the quarter driven by our GPS enabled products, partially offset by declines in our basic activity trackers. Gross and operating margins increased to 53% and 21%, resulting in a 24% growth in operating income. Our recently announced Forerunner® 645 Music brings both music and Garmin Pay™ to a wearable with advanced features such as running dynamics and connectivity. We continue to see growth opportunities in our advanced wearables offset by declines in our basic activity trackers.
Auto:
The auto segment recorded revenue decline of 14% in the quarter, primarily due to the ongoing PND market contraction, partially offset by solid growth in OEM and niche categories. Gross margin declined to 41%, and operating margin was flat at 9%. At the recent Consumer Electronics Show, we announced our new OEM scalable infotainment platform with Amazon Alexa digital assistant integration. Looking forward, we are focused on disciplined execution to bring desired innovation to the market and to optimize profitability in this segment.
Additional Financial Information:
Total operating expenses in the quarter were $320 million, a 3% increase from the prior year. Research and development investment increased 3%, due to engineering personnel costs and the Navionics acquisition partially offset by the additional week of expense in 2016. Selling, general and administrative expenses increased 13%, due primarily to litigation related costs and the Navionics acquisition. Advertising decreased 13%, primarily due to lower media spend in the fitness segment.
The effective tax rate in the fourth quarter of 2017 was 23.1%. The pro forma effective tax rate in the fourth quarter of 2017 was 20.9% (see attached table for reconciliation of this non-GAAP measure), compared to an effective tax rate of 19.0% in the prior year quarter. The increase in the pro forma effective tax rate is primarily due to the Company’s election to align certain Switzerland corporate tax positions with evolving international tax initiatives and the impact of the release of reserves partially offset by income mix by tax jurisdiction.
In the fourth quarter of 2017, we generated $144 million of free cash flow (see attached table for reconciliation of this non-GAAP measure) and returned cash to our shareholders with our quarterly dividend of $96 million. We ended the quarter with cash and marketable securities of approximately $2.3 billion.
2018 Guidance:
We currently expect 2018 revenue of approximately $3.2 billion as growth
in marine, outdoor and aviation is partially offset by ongoing declines
in the PND market. We currently expect our full year pro forma EPS will
be approximately $3.05 based upon gross margin of approximately 58.5%,
operating margin of approximately 21% and a full year pro forma
effective tax rate of approximately 19%.