“Our strong year continued with a third consecutive quarter of revenue, operating income and pro forma EPS growth. Our non-automotive/mobile segments delivered 24% revenue growth and 70% of our operating profits. We believe we are well positioned with our current product portfolio while also investing for long-term sustained growth through further innovation and diversification,” said Cliff Pemble, president and chief executive officer (CEO) of Garmin Ltd. “Given the strong revenue and margin performance in the third quarter, we are revising our guidance as we now expect our revenue and pro forma EPS for the full year to be approximately $2.85 billion and $3.10, respectively.”
Outdoor:
The outdoor segment posted revenue growth of 19% in the quarter due to the strong performance of recently introduced products including the fēnix™ 2, the Approach® S6 and the Alpha® series. Gross and operating margins remain strong at 65% and 42%, respectively. The significant revenue growth in the quarter confirms the strength of our product portfolio and will allow us to generate mid-single digit full year growth in the segment. We will continue to expand our offerings in our existing categories and explore additional adjacencies to drive future growth.
Fitness:
The fitness segment posted revenue growth of 43% in the quarter as the strong performance of numerous products and categories continued. Gross margins increased to 64% year-over-year while operating margins were relatively consistent with the prior year due to significant investments in advertising, sponsorships and point of sale displays to drive long-term market share gains. We believe these initiatives are already producing positive results and anticipate strong sales in the holiday quarter and beyond as we build market share in the growing global wearables category. We have recently announced two additional products in the fitness segment that highlight our commitment to innovation – the vívosmart™, our latest activity tracker which delivers smart notifications, and the Forerunner® 920XT, our next generation multisport product with advanced running dynamics and connected features. In the quarter, we also launched Connect IQ™, an open platform for developers to create applications for Garmin wearables like the 920XT. Connect IQ opens the door to a world of possibilities for our active lifestyle customers looking to expand the utility of their Garmin device.
Aviation:
The aviation segment posted revenue growth of 19% in the quarter driven by increased demand across all product categories. The gross and operating margins in aviation were strong at 73% and 29%, respectively. We continue to see projects reach final certification including the Cessna CJ3+ and the Enstrom 480B-G, both now offering Garmin avionics. We also are pursuing additional aftermarket opportunities with the recently introduced stand-alone ADS-B solution for mid-sized business jets and enhanced capabilities for King Air customers considering a Garmin retrofit solution. We believe that these investments, along with new aircraft certifications yet to come, will be key drivers of future growth.
Marine:
The marine segment posted revenue growth of 12% aided by our third quarter acquisition of Fusion® Electronics. Gross margin improved to 51% driving 32% growth in operating income. We expect to build upon the improved performance that we have achieved in 2014 with the launch of our 2015 marine product line-up. At the Fort Lauderdale boat show this week, we are showcasing a comprehensive range of all new products including multi-function displays, chartplotters, radars and autopilots. We believe these products position us well against the competition and should provide the foundation for growth in 2015.
Auto/Mobile:
The automotive/mobile segment posted a revenue decline of 5% due to ongoing PND volume declines. Gross and operating margins in the quarter were 46% and 17%, respectively, consistent with the prior year. In the quarter, we announced an OEM partnership with Honda to provide navigation software for the Civic and CR-V models in Europe, Russia and South America. We are excited to deliver our high-quality, feature-packed navigation solution to Honda’s 2015 line-up while also continuing to pursue additional opportunities to deliver our innovative OEM solutions to the auto industry.
Additional Financial Information:
Total operating expenses in the quarter were $223 million, an 11% increase from the prior year. Research and development investment increased 12%, while remaining consistent as a percentage of sales, driven primarily by fitness and aviation investments to support new product initiatives. Advertising increased 26% as we launched television advertising campaigns and improved point of sale displays with many retailers to support new products in outdoor and fitness. Selling, general and administrative expense increased by 5% while remaining consistent as a percentage of sales in the quarter.
Our third quarter income tax expense was $319 million, including the
impact of the $308 million income tax expense associated with our
inter-company restructuring, announced in July 2014, and a $24 million
income tax benefit associated with net releases of reserves primarily
associated with specific uncertain tax positions. Adjusting for these
items, our pro forma effective tax rate for the quarter was 21.0%. This
compares to a pro forma rate of 15.7% in the prior year when we had
reserve releases of $52 million. The pro forma effective tax rate
increase is primarily due to income mix across tax jurisdictions, the
expiration of certain Taiwan tax holidays and the expiration of the U.S.
research and development tax credit. We now anticipate a full year pro
forma rate of 17% due primarily to the anticipated delay in approval of
the U.S. research and development tax credit.
