“We delivered another quarter of revenue and earnings growth led by strong double-digit growth in our outdoor and aviation segments,” said Cliff Pemble, president and chief executive officer of Garmin Ltd. “The demand for advanced wearables was particularly strong, but was partially offset by negative trends in the activity tracker market. Our results thus far give us confidence in raising our outlook for the remainder of the year.”
Outdoor:
During the second quarter of 2017, the outdoor segment grew 46% driven by strong demand for our fēnix® 5 watch series. Gross margin improved to 66% while operating margin improved to 38%, resulting in operating income growth of 53%. We launched the Approach® S60, our newest GPS golf watch with a sunlight-readable color touchscreen display, and recently announced new offerings in our Foretrex® and Rino® lineup. Looking forward, we are focused on growth opportunities in wearables and inReach product lines.
Aviation:
The aviation segment posted revenue growth of 15%, driven primarily by strong aftermarket sales and positive contributions from OEM product categories. Gross and operating margins were strong at 75% and 32%, respectively, resulting in 28% operating income growth. During the quarter, we announced our first Head-up Display (GHD) system for integrated flight decks and are pleased that it will be incorporated on the Cessna Citation Longitude coupled with the G5000® integrated flight deck. We also received approval from the European Aviation Safety Agency for our previously announced G1000® NXi system. Looking forward, we are focused on maximizing ADS-B mandate opportunities and gaining share in the OEM market.
Marine:
Revenue in the marine segment declined 3% during the quarter, with gross and operating margins of 57% and 22%, respectively. For the first half of the year we delivered 10% revenue growth and 9% operating income growth and remain confident in our outlook for the year. During the second quarter of 2017, we announced the acquisition of Active Corporation, a developer of crowd sourced content for boaters and launched our latest marine wearable, the quatix® 5, adding autopilot control and the ability to mark remote multifunction display waypoints. Looking forward, we are focused on product innovations and gaining share in the inland fishing category.
Fitness:
Revenue in the fitness segment declined 15% during the quarter, with gross and operating margins of 56% and 21%, respectively. The drop in revenue was primarily driven by a decline in the activity tracker category due to the general decline of the basic activity tracker market and the timing of product introductions. Looking forward, we are focused on growth opportunities in advanced wearables devices.
Auto:
The auto segment recorded revenue decline of 15% in the second quarter of 2017, primarily due to the ongoing PND market contraction partially offset by growth in niche categories such as fleet, camera and RV. Gross and operating margin declined year-over-year to 45% and 13%, respectively but increased sequentially. During the second quarter of 2017, we launched the VIRB® 360, a compact, multi-lens, full spherical 360-degree camera. The VIRB 360 offers an easy-to-use camera that captures video up to 5K/30fps with four built in microphones and easy upload. Looking forward, we are focused on disciplined execution to bring desired innovation to the market and to optimize profitability in the segment.
Additional Financial Information:
Total operating expenses in the quarter were $275 million, an increase of 5% over the prior year. Research and development increased 11% primarily due to engineering personnel costs related to our wearable product offerings and aviation. Selling, general and administrative expenses increased 2%, and were relatively flat as a percent of sales. Advertising decreased 5% primarily due to reduced media spending and lower cooperative advertising.
The effective tax rate in the second quarter of 2017 was 25.0%. The pro forma effective tax rate in the second quarter of 2017 was 21.9% (see attached table for reconciliation of this non-GAAP measure) compared to an effective tax rate of 21.0% in the prior year quarter. The year-over-year 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 partially offset by income mix by tax jurisdiction.
In the second quarter of 2017, we generated $129 million of free cash flow (see attached table for reconciliation of this non-GAAP measure). We continued to return cash to shareholders with our quarterly dividend of approximately $96 million and our share repurchases activity, which totaled approximately $36 million in the second quarter of 2017. We have approximately $11 million remaining in the share repurchase program authorized through December 31, 2017. We ended the quarter with cash and marketable securities of approximately $2.3 billion.
2017 Guidance:
Based on our performance in the first half of 2017, we are updating our
full year guidance. We now anticipate revenue of approximately $3.04
billion driven primarily by higher expectations for our outdoor and
aviation segments partially offset by lower expectations for the fitness
segment. Our outlook for marine and auto is unchanged. We anticipate our
full year pro forma EPS will be approximately $2.80 based on an improved
gross margin of about 57.5%, operating margin of about 21% and a full
year pro forma effective tax rate of about 22%.