“Through an intense focus on innovation and execution, we posted four consecutive quarters of revenue and pro forma EPS growth in 2014. We have redefined our earnings power as a company and further diversified our operating profit base,” said Cliff Pemble, president and chief executive officer (CEO) of Garmin Ltd. “I am pleased with everything that we have accomplished in 2014. Yet, we recognize that significant opportunities and challenges lie ahead of us. We will not be complacent. We believe that we are well positioned to gain share in categories that we are currently serving, while also launching products into new categories in the future. 2014 serves as a solid foundation from which to build and we plan to do just that.”
The fitness segment posted revenue growth of 70% in the quarter, confirming the strength of our product portfolio across a broad spectrum of price points and categories. Gross margin in the quarter remained strong at 61% while operating margin declined to 29% due to our aggressive spending for advertising and point of sale displays. This investment allowed us to establish a solid market share position and retail presence in the growing activity tracker market in just our first year serving the category. We will further leverage these investments to drive growth in 2015. We believe that fitness will again be the largest contributor of growth in 2015, and we have launched important new products at CES to strengthen our position in the segment. New products include the vívoactive™ and vívofit® 2. The vívoactive is a GPS-enabled smartwatch that delivers unparalleled capabilities for those with an active lifestyle, while vivofit 2 adds a backlight and vibration alert to the already popular vívofit. With these exciting products and new things yet to come in cycling and running, we enter 2015 with high expectations for continued success.
The outdoor segment posted a revenue decline of 8% in the quarter, while gross and operating margins remained strong at 62% and 35%, respectively. For the full year, we were able to deliver revenue growth of 4%, even though we have faced a number of headwinds in the outdoor segment including maturity of our traditional handheld business and a slowdown in the golf industry. We have overcome these challenges with strong offerings in wearables and dog tracking and training, which continue to be growth categories. As we enter 2015, we are dedicated to delivering compelling, feature-rich products, that will capture new and repeat customers. Fēnix® 3 and epix™, both of which launched at CES (Consumer Electronics Show), are those types of products and we expect to deliver products in other outdoor categories as the year progresses.
The aviation segment posted revenue growth of 7% in the quarter with contributions from both OEM and aftermarket. While this represents a slowdown from prior quarters, it follows a very strong fourth quarter 2013 when revenues grew 25%. Gross and operating margins softened slightly in the quarter due to product mix, but for the full year improved to 73% and 28%, respectively. This strong full year margin performance allowed the aviation segment to deliver 22% operating income growth in 2014. We recently announced a new relationship with Gulfstream, which has selected Garmin to provide an all-inclusive ADS-B solution for the G150 business jet. This type of win confirms our strategy of continued research and development investment in aviation to support upcoming certifications with OEM partners in 2015 and beyond, as well as ongoing opportunities for long-term market share gains across numerous aviation categories.
The marine segment posted revenue growth of 18% in the quarter with strong demand for chartplotters, and contribution from our July acquisition of Fusion® Electronics. Gross margins declined year-over-year to 47% in the quarter due to the lower margin profile of the entertainment products and highly competitive pricing dynamics in aftermarket marine electronics. This led to a slight operating loss in the seasonally weak fourth quarter. We continue to forge ahead with innovative products that we believe will improve our profitability and competitive position going forward. As such, we announced the 2015 availability of numerous products incorporating our industry-leading scanning sonar technology, along with new radar and autopilot offerings. We are planning for revenue and operating profit improvement in 2015 as we continue to focus on innovation and market share gains, while managing costs and driving efficiencies at Fusion.
The automotive/mobile segment posted a revenue decline of 11% as PND sales continued to decline. Gross and operating margins in the quarter were 43% and 17%, respectively, representing an improvement over the prior year. While the PND industry does continue to slow, we have noted global improvement in the trajectory throughout 2014 and are anticipating PND industry unit declines of 10-15% with stable pricing in 2015. The segment delivers solid profits; thus, we will continue to innovate with disciplined investment levels to grow market share and maintain profitability in the segment. On the OEM side, we have started delivering content to Mercedes and Honda. We remain excited about the expanded partnerships that we have secured in 2014, and we will build on this success in 2015.
Additional Financial Information:
Total operating expenses in the quarter were $255 million, a 15% increase from the prior year. We invested heavily in advertising during the quarter to build improved point of sale presence and brand awareness. The strategy yielded market share gains for our family of activity trackers and now provides a strong position from which to grow in 2015. We also grew research and development investment in each of our segments excluding automotive/mobile, which declined slightly. We continue to invest in research and development to stimulate both near-term and long-term revenue growth opportunities.
Our fourth quarter income tax benefit was $10 million, including the impact of a $49 million income tax benefit associated with net releases of reserves primarily associated with completion of audits. Adjusting for this item, our pro forma effective tax rate in fourth quarter 2014 was 19.1% compared to 20.0% in the prior year quarter. The decreased rate resulted from the approval of the 2014 U.S. research and development credit offset by unfavorable income mix by tax jurisdiction caused by foreign currency fluctuations, as well as reduced tax incentives in Taiwan.
In 2014, we generated $528 million of free cash flow and returned over 100% of it to shareholders via the dividend and share repurchase. We ended the quarter with cash and marketable securities of almost $2.8 billion.
|Operating Income||$675 M|
|EPS (Pro Forma)||~$3.10|