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Garmin Ltd. (NASDAQ:GRMN)
Q4 2017 Earnings Conference Call
Feb. 21, 2018, 10:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the Gamin fourth quarter 2017 earnings call. At this time, all participants are in listen-only mode. Later, we'll conduct a question and answer session, and instructions will be given at that time. If anyone should require assistance during the conference, please press * then 0 to reach an operator. As a reminder, this call is being recorded. I would now like to turn the call over to Teri Seck. You may begin.

Teri Seck -- Director of Investor Relations

Good morning. We would like to welcome you to Garmin Limited's fourth quarter 2017 earnings call. Please note that the earnings press release and related slides are available at Garmin's investor relations site on the internet at www.garmin.com/stock. An archive of the webcast and related transcript will also be available on our website. This earnings call includes projects and other forward-looking statements regarding Garmin Limited and its business. Any statements regarding our future financial position, revenues, earnings, gross and operation margins, and future dividend market shares, product introductions, future demand for our products, and plans and objectives are forward-looking statements. The forward-looking events and circumstances discussed in this earnings call may not occur, and actual results could differ materially as a result of the risk factors affecting Garmin.

Information concerning these risk factors is contained in our Form 10K filed with the Securities and Exchange Commission. Presenting on behalf of Garmin Limited this morning are Cliff Pemble, President and Chief Executive Officer, and Doug Boessen, Chief Financial Officer and Treasurer. At this time, I would like to turn the call over to Cliff Pemble.

Cliff Pemble -- President and Chief Executive Officer

Thanks, Teri, and good morning everyone. As we announced earlier today, we delivered another quarter of revenue and profit growth. Revenue grew 3% on a consolidated basis. Combined revenue from outdoor, aviation, marine, and fitness increased 9% and represented 78% of our revenue in the holiday quarter. Gross margin improved year over year to 56% due to favorable shifts in both segment and product mix. Operating margin improved to 20%, resulting in operating income growth of 12%. These strong results generated GAAP EPS of $0.73 and Pro-Forma EPS of $0.79 in the quarter.

Looking briefly at our full-year performance, 2017 was our second consecutive year of revenue and operating income growth. I believe this is a remarkable achievement considering the challenges that we faced. The P&D market continued its decline as it has done for nearly a decade. In addition, the basic activity tracker market rapidly matured and left additional gaps to fill. We filled these gaps and more because of the strength and diversity of our business. Revenue increased 2% over 2016 to nearly $3.1 billion. Combined revenue from outdoor, aviation, marine, and fitness increased 9% and generated 90% of our operating income. Gross and operating margins improved to 58% percent and 22% respectively while operating income grew 7%. This resulted in GAAP EPS of $3.68 and Pro-Forma EPS of $2.94. Pro-Forma EPS grew 4% over the prior year.

Doug will discuss our financial results in greater detail in a few minutes, but first I want to highlight that Garmin was recently included in the Forbes Global 2000 World's Best Employers List, placing 430th out of more than 300,000 companies that were surveyed. We also were ranked 41st in the Forbes Just 100 America's Best Corporate Citizens List. This ranking considered companies focused on seven metrics, including producing quality goods, treating customers well, minimizing environmental impact, supporting the communities we operate in, commitment to ethical and diverse leadership, and treating our workers well. We are honored by this recognition, and I want to thank all of our employees for your strong commitment to our mission and values which made this recognition possible.

Next I'll highlight 2017 performance and 2018 outlook for each of our five segments. Starting with outdoor, revenue increased 28% on strong demand for outdoor wearables and growth in end-reach subscription services. The segment posted gross and operating margins of 64% and 36% respectively, resulting in operating income growth of 36% over the prior year. Looking back on 2017, our Fenix line of adventure watches continued to show strong momentum driven by the new Fenix 5 series. There are many positive things that we can say about this product line, but one I'd like to highlight is that the variety of sizes and styles offered in the Fenix 5 family has successfully broadened our customer base. In particular, the majority of customers registering Fenix 5S devices are women, which was a previously underrepresented demographic in our Fenix customer base. As we have mentioned in the past, our Connect IQ application platform has become an important differentiator for our smart wearables. Connect IQ now offers more than 3,500 apps, widgets, and watch faces, and has generated over 45 million downloads since inception, approximately half of which occurred in the past year. To further promote the power and utility of Connect IQ, we will host our second annual Developers Conference in mid-April, offering workshops and tools that our developers can use to leverage the Garmin wearable ecosystem. Looking ahead, we anticipate revenue in the outdoor segment will increase approximately 13% in 2018. We anticipate that growth will be driven primarily by the Fenix series and supported by growth in other product categories within the segment.

Turning next to aviation, we reported solid revenue growth of 14% with revenues exceeding $500 million for the first time in our history. Growth was broad-based in both aftermarket and OEM product categories. Gross and operating margins were strong at 74% and 31% respectively, resulting in operating income growth of 23% for the year. In recent developments Textron Aviation announced that the new Cessna Sky Courier aircraft will be equipped with the Garmin G1000 NXi system. We are excited to expand our partnership with Textron Aviation and look forward to supporting the certification and delivery of this new aircraft. Last week, we announced that our D2 Charlie aviation watch was selected by the United States Air Force for use by pilots of the Lockheed U2 aircraft. The D2 Charlie will provide unique benefits such as pressure alerts and glanceable navigation information on the wrist. Our aviation team has a strong commitment to delivering quality and service to our customers. As evidence to that commitment, we received two Supplier of the Year awards for technical support to operators and for electric and electronic systems at the recent 2017 Embraer Suppliers Conference. This is a significant accomplishment considering the scope and complexity of Embraer's operation and the high expectations that their suppliers must meet. Also, for the 14th consecutive year, Garmin was ranked number one in avionic support by Professional Pilot magazine and by Aviation International News. I congratulate our team on earning these awards, which is a testament to the quality of Garmin equipment and the amazing way our associates care for our customers. Looking ahead, we anticipate revenue in the aviation segment will increase approximately 13% in 2018. We anticipate broad-based growth across both OEM and aftermarket product categories due to improving market conditions, contributions from new products and platforms, and opportunities related to the ADSB mandate.

Looking next at the marine segment, revenue grew 13% driven by growth in chart plotters, fish finders, and contributions from our recent Navionics acquisition. Gross margin improved to 57% while operating margin declined to 13% due to litigation-related costs. As the Miami Boat Show, we announced that Sea Hunt Boat Company, one of the top-selling saltwater boat brands in the United States, is now offering Garmin electronics in their line of watercraft. We are excited by the opportunity to serve Sea Hunt and their customers. We are entering 2018 with a broad portfolio of strong products and technologies. We anticipate revenue in the marine segment will increase approximately 18%, consisting of both organic growth as well as growth from our recent Navionics acquisition.

Turning next to fitness, revenue declined 7% driven by the rapidly maturing market for basic activity trackers, partially offset by growth in advanced wearables and our children's line of activity trackers. Gross and operating margins were 55% and 19% respectively. Gross margin improved due to product mix while operating margin declined from the prior year. In 2018, we are targeting revenue to be flat in the fitness segment as growth in advanced wearables, cycling, and children's trackers is offset by further declines in basic activity trackers.

Looking finally at the auto segment, revenues were down 15% for the full year as expected due to the ongoing decline of the P&D market. However, our global market share remains very strong. Gross and operating margins were 44% and 9% respectively. While the downward trend of the consumer P&D market is well understood, we see incremental growth opportunities in certain product categories, including trucking, RV, and cameras. We are focused on maximizing profits in the segment while leveraging these opportunities. Looking at 2018, we expect revenue to decline approximately 17% driven by the ongoing decline of the P&D market. We remain focused on disciplined execution to bring pragmatic innovation to the market and to maximize profitability in this segment.

In summary, we are entering 2018 with a strong product lineup, and we see many opportunities ahead. With this in mind, we are projecting revenue of approximately $3.2 billion up 3% year over year as growth in outdoor, aviation, and marine is partially offset by ongoing declines in the auto segment. We are projecting improved gross margin of approximately 58.5%, operating margin of approximately 21%, and a full-year Pro-Forma effective tax rate of approximately 19%, resulting in Pro-Forma earnings-per-share of approximately $3.05. That concludes my remarks. Next, Doug will walk you through additional details on our financial results. Doug?

Doug Boessen -- Chief Financial Officer and Treasurer

Thanks, Cliff. Good morning, everyone. I begin by reviewing our fourth quarter and full-year financial results. To move to comments on the balance sheet, cash flow statement, taxes, impact of new revenue recognition standard. Post a revenue of $880 million for the fourth quarter, representing 3% increase year over year. Gross margin was 56.2%, 150 basis point increase from the prior year, driven by segment and product mix. Operating expense percentage of sales was 36%, consistent with the prior year. Operating income was $179 million, a 12% increase over the prior year. Operating margin was 20.2%, 160 basis point increase from the prior year. Our GAAP EPS was $0.73. Our Pro-Forma EPS was $0.79.

Looking at full-year results, we post a revenue about $3.1 billion for the year, representing a 2% increase year over year. Gross margin was 57.8%, a 220 basis point increase from the prior year. Operating expense percentage of sales was 36.1%, 110 basis point increase over the prior year. Operating income was $669 million, a 7% increase over the prior year. Our operating margin was 21.7%, increase of 100 basis points from the prior year, driven by the increase in gross margin. Our GAAP EPS was $3.68. Pro-Forma EPS was $2.94.

Next, we'll look at fourth quarter and full-year revenue by segment. During the fourth quarter, we achieved double-digit growth in three of our five segments led by marine segment with 24%. Fitness returned to growth in the fourth quarter. For the full year 2017, we achieved 2% consolidated growth led by robust growth in our outdoor segment and solid double-digit growth in our aviation and marine segments.

Looking next at fourth quarter revenue and operating income, collectively, the outdoor, aviation, marine, and fitness segments contributed 78% total revenue fourth quarter 2017 compared to 74% the prior quarter. Outdoor grew from 20% to 23%. You can from the charts that illustrate our profit mix by segment, outdoor, aviation, marine, and fitness segments collectively delivered 90% of operating income fourth quarter 2017 compared to 88% fourth quarter 2016. Outdoor operating income's percentage of total operating income increased from 36% to 41%.

Looking next to the full-year charts. For the full year, the outdoor, aviation, marine, and fitness segments made up 76% of total revenue compared to 71% in 2016. Similar shift occurred in operating income with 90% for 2017 operating income collectively coming from the outdoor, aviation, marine, and fitness segments compared to 84% 2016.

Looking next at the operating expenses. Fourth quarter operating expenses increased by $9 million for basically flat percent of sales. Research and development increased $4 million year over year due to investment in engineering resources and Navionics acquisition, partially offset by the additional week of expense 2016. Our advertising expense decreased $9 million from the prior quarter, represented 6.6% of sales, a 130 basis point decrease. Decrease was due primarily to lower media spend in the fitness segment. SG&A was up $15 million compared to the prior year quarter, decrease of 120 basis points, percent of sales to 14.5%. This increase was primarily due to litigation-related costs and the Navionics acquisition.

A few highlights from the balance sheet and cash flow statement. We ended the quarter with cash and marketable securities of approximately $2.3 billion. Accounts receivable increased sequentially to $591 million due to the holiday quarter, an increase year over year due to strong sales and the timing of cash received. Inventory balance decreased sequentially to $518 million, so we exited the seasonally strong fourth quarter increase year over year primarily due to raw material requirements. During the fourth quarter 2017, we generated free cash flow of $144 million. Also during the quarter, we paid dividends of approximately $96 million. We announced that we plan to seek shareholder approval for an increased dividend beginning the June 2018 payment. The proposal is a cash dividend of $2.12 per share, $0.53 per share per quarter, 4% increase from our current quarterly divided of $0.51 per share.

For full year 2017, reported an income tax benefit of $13 million which includes $157 million of Pro-Forma net discrete items relating to a $180 million tax benefit related to the change in tax balance sheet accounts as a result of the Switzerland corporate tax election, partially offset by $23 million of tax expense resulting from a new accounting standard related to the expiration of share-based awards. Excluding the Pro-Forma discrete tax items, the full-year 2017 Pro-Forma effective tax rate is 21.2% compared to 18.9% the prior year. The increase in the Pro-Forma effective tax rate primarily due to the company's election to align certain Switzerland tax positions with evolving international tax initiatives. We expect our full-year Pro-Forma effective tax rate 2018 to be approximately 19%. Decrease is primarily due to the U.S. tax reform.

Finally, I'd like to walk you through the impact of the new revenue recognition standard. We adopt a new standard in the first quarter 2018 and restate the prior year financials. The auto segment is the only segment impacted by the new revenue recognition standard. Impact to our 2017 financial statements with an increase in revenue of $35 million, which means we would have deferred less revenue under the new revenue standard. All 2018 guidance is calculated off the restated 2017 amounts which are available in the appendix to earnings release. This concludes our formal remarks.

...

Michelle? Would you please open the line for Q&A.

Questions and Answers:

Operator

Ladies and gentlemen, if you'd like to ask a question, please press * then 1. If at any you're your question has been answered and you would like to remove yourself from the queue, you may press #. Once again, to ask a question, please press * then 1.

Our first question comes from Charlie Anderson of Dougherty Markets. Your line is open.

Charlie Anderson -- Dougherty Markets -- Analyst

Yeah, thanks for taking my questions, and you wrapped on a strong year. So I want to start with aviation, kind of a two-part question. Cliff, you mentioned the environment getting a little bit better. I think some of your peers have expressed a similar sentiment, so I just wondering what you're seeing. Does it feel sustainable in terms of you know, the outlook for that market? And then as it relates to ADSB upgrades, I wonder if you view 2018 or 2019 as the peak year for you guys in terms of that contribution from those upgrades, then I'm going to follow up on Marine.

Cliff Pemble -- President and Chief Executive Officer

Yeah, so good morning, Charlie. In terms of the aviation environment, I think we're all seeing that it's incrementally better. Of course, we're coming off a very low bottom, and the numbers are somewhat small in terms of the overall growth. But I think most in the industry are very encouraged by that. In terms of its sustainability, I think things look good for the foreseeable future. Somebody recently commented to me though that some of these markets, like aviation and marine, are one economic bump away from downturn. So we have to recognize that they are somewhat fragile due to their nature. But in general we feel good about that. In terms of ADSB and which year would be the peak year, we would certainly see acceleration in unit deliveries going forward. I think I would anticipate that 2019 would probably be even bigger than 2018 as people get serious about retrofitting their aircraft. But it's still somewhat early days, and the number of aircraft that have been equipped so far is still on the low side, less than half. So we're waiting to see more people step forward.

Charlie Anderson -- Dougherty Markets -- Analyst

Great. And then as it relates to marine, I wonder how much benefit you guys got from acquisition in Q4, and then how much of the 18% growth anticipates the inorganic portion?

Doug Boessen -- Chief Financial Officer and Treasurer

Yeah, so Charlie, related to the 2018 guidance we gave, we are basically expecting about half of that to come from Navionics.

Charlie Anderson -- Dougherty Markets -- Analyst

Okay, great. Thank you.

Operator

Our next question comes from Doug Clark of Goldman Sachs. Your line is open.

Doug Clark -- Goldman Sachs -- Analyst

Hi, thanks. First one, on the auto segment, the 2018 guide implies kind of an acceleration in decline, so I'm wondering if you can talk about what's driving that acceleration after a few years of what seemed like moderation?

Cliff Pemble -- President and Chief Executive Officer

Yeah, so in terms of our overall outlook in the auto segment, I think P&D is pretty much on the same trajectory that we've been on before. We did see some improvement in 2017 due to mandate categories, such as ELD which drove some of our fleet products as well as new ELD categories. In 2018, the OEM part of our business is not expected to grow as fast as what it has been because we're seeing year over year comps in some of our major customers that have come on board, like Honda.

Doug Clark -- Goldman Sachs -- Analyst

Okay, got it. That's helpful. And then my other two questions. First, on OpEx, using your guidance, it looks like kind of implied OpEx is expected to be about $1.2 billion, or up 8% year on year. So can you talk about the acceleration in OpEx spend, and then kind of a financial question. I'm curious what the FX impact to fourth quarter '17 revenues was and what the expectation for FX benefit in 2018 is.

Doug Boessen -- Chief Financial Officer and Treasurer

Yeah. As it relates to OpEx for 2018, yeah, we're expecting, you know, about an 8% type of increase. About a third of that really is relating to Navionics. So we have that acquisition that will be hitting in 2018. Also looking at some of the different OpEx lines for '18 as it relates to advertising, percent of sales, we would expect to keep that relatively flat. Then in R&D, obviously we're adding some additional headcount there, investments in our business, and then also have some additional costs relating to the new aviation manufacturing and consumer distribution facility, some additional cost relating to that. Then as it relates to FX, the FX impact on revenue for Q4 was about a tailwind of $28 million, and then for the full year, it was about $25 million of tailwind, primarily driven by the strength of the Euro.

Doug Clark -- Goldman Sachs -- Analyst

Thanks. And then are you assuming any, within your guidance for 2018, any FX impact?

Doug Boessen -- Chief Financial Officer and Treasurer

Sure. There's impact to that in the guidance because, you know, for the average for the year, I think the Euro was probably at 1.13. You know, it's probably higher than that now. It's probably about $75 million of FX tailwind that's in the guidance. Assuming the current type of Euro rate.

Doug Clark -- Goldman Sachs -- Analyst

Got it. Thanks very much for that detail, I appreciate it.

Operator

Our next question comes from Joe Wittine of Longbow Research. Your line is open.  

Joe Wittine -- Longbow Research -- Analyst

Hey, guys. Nice quarter. I guess I'll ask on wearables here. So first off, in the wearables portion of outdoor, do you expect you can maintain your average selling prices in 2018 based on your product roadmap?

Cliff Pemble -- President and Chief Executive Officer

Yeah. So we believe so. That's in our plan. We believe that the Fenix line is generally very strong and we have product roadmaps that allow us to be able to bring in our newer products, such as the Fenix 5, and to be able to offering some discounting on the older products, which helps promote them and sell more volume. So in general, we feel like the ASP situation is fairly stable.

Joe Wittine -- Longbow Research -- Analyst

Thanks, Cliff. And then I wanted to ask on availability for two new products, Forerunner 645 still isn't available, and then vivomove HR seems to be pretty limited, so I'm just wondering if there's anything to note on production just given the fact that both have somewhat new-to-Garmin technology and when we can expect those to be in consumer's hands.

Cliff Pemble -- President and Chief Executive Officer

So the 645 is imminent. We're making our final adjustments on some features and performance. So that should be coming very soon. The vivomove HR we took a very conservative view about as we launched the product based on our experience from the original vivomove, which was more of a niche product. But we've been pleasantly surprised by the reception to the vivomove HR, so we've been chasing supply chain and trying to increase our volumes on that product as well. So we feel pretty good about that as a contributor, but we've not been able to supply all the demand.

Joe Wittine -- Longbow Research -- Analyst

Okay, great. Then finally, just on the same topic here, you've got a very active six months of new product introductions in fitness, especially when you also include cycling on top of wearables. But looking forward on wearables, I know you won't tip individual products, but is it reasonable to expect perhaps a lighter number of new announcements ahead in the spring given, you know, that momentum of announcements exiting 2017?

Cliff Pemble -- President and Chief Executive Officer

Yeah, I can't really comment on the timing of introductions, but we do have a very active roadmap of new wearables that are coming in 2018 and beyond. So we're still very, very much developing the product line and introducing new products and features.

Joe Wittine -- Longbow Research -- Analyst

Great. Thank you, Cliff.

Operator

Our next question comes from Eugene Anderson of Morgan Stanley. Your line is open.

Eugene Anderson -- Morgan Stanley -- Analyst

Great. Thanks so much for taking my question. If we could unpack the outdoor outlook there, how much of that, you know, can you give us a better sense of how much that would be attributable to products that have yet to be launched versus products that obviously you already have?

Cliff Pemble -- President and Chief Executive Officer

Well, I think we said in our comments that the primary driver of the growth is certainly Fenix as it's grown in the overall contribution to the segment. It's the single largest product category within the segment. But in terms of details around new product contributions and such, we won't comment on that.

Eugene Anderson -- Morgan Stanley -- Analyst

Okay, got it. And then on fitness, with the flat revenue guidance and, you know, just with the recent product launches, is it assumed that fitness would decline toward the end of the year, just given, you know, the timing of the products launches there, or is it going to be more even keel throughout the year?

Cliff Pemble -- President and Chief Executive Officer

Well, certainly we will be comping against tougher numbers in the fourth quarter of 2018 as we anniversary the launch of quite a few new products in the advanced wearable wellness category as well as vivomove HR and others, but in general, we anticipate that the advanced wearables will do well throughout the year, and then our big headwind will be the basic trackers.

Eugene Anderson -- Morgan Stanley -- Analyst

Great. Thanks so much.

Operator

Our next question comes from Rob Spingarn of Credit Suisse. Your line is open.

Robert Spingarn -- Credit Suisse-Analyst

Good morning. So, Cliff, when we look at outdoor from a high level, is there any risk that Fenix or the other components within outdoor start to hit that maturation level that we saw in fitness, or is it just a different type of market with less competition?

Cliff Pemble -- President and Chief Executive Officer

Well, I think there's always risk in any of these consumer markets, so for sure, that's something that we're aware of. We believe the market though is still doing well, and we believe there's opportunity for additional innovation and new products that can come to the market.

Robert Spingarn -- Credit Suisse-Analyst

Okay. Because when I think about the change in the growth rates, you know, as we go forward, I'm just wondering if this is a similar dynamic, just lagging by a couple of years?

Cliff Pemble -- President and Chief Executive Officer

Well, I think, you know, we're lapping against a very strong launch of the Fenix 5, which drove significant growth during 2017. So we're looking at 2018 and trying to be realistic about the overall growth prospects there and trying to make sure that we can deliver on what we say.

Robert Spingarn -- Credit Suisse-Analyst

Okay. And then just on the margin guides, maybe this is for Doug. You know, the gross margin ticks up a little bit. Is that simply just because of the smaller contribution from automotive, or is there -- and I think Cliff said a little bit earlier, that ASPs are holding steady. But is that true from segment to segment? How do we think about that 58.5%?

Doug Boessen -- Chief Financial Officer and Treasurer

Yeah, the 58.5% is primarily a segment mix, as you mentioned, just because, you know, we're having a situation where our growth is going into some higher-margin areas and then some of our decline, some of our lower-margin areas such as the activity trackers and P&D is big. There may be some puts and takes by each of the segments, but they will be relatively comparable to what we anticipate for the full year. But the big driver of that is the segment mix.

Robert Spingarn -- Credit Suisse-Analyst

Okay. And then just you spoke to the higher operating expenses a little while ago. You did mention a facility. I was going to ask you if CapEx has been a little elevated and if that continues?

Doug Boessen -- Chief Financial Officer and Treasurer

Yeah. So CapEx will go up a little bit we anticipate, 2018, probably to about $145 million compared to the $140 that we had in 2017.

Robert Spingarn -- Credit Suisse-Analyst

Okay. All right. Well, thank you both very much.

Operator

Our next question comes from Ben Bollin of Cleveland Research. Your line is open.  

Ben Bollin -- Cleveland Research -- Analyst

Good morning. Thanks for taking my question. I wanted to start, we look at the fitness business and the guidance there. Do you have any incremental share gain assumption built into your guidance following TomTom's exit of the category, and then I have a followup.

Cliff Pemble -- President and Chief Executive Officer

Yeah, I think TomTom's contribution was fairly low on an overall market basis, and the prime area impact of that would be Europe. So I think, you know, certainly that's in our overall view of the market, but it's not necessarily moving the needle in terms of the overall guidance.

Ben Bollin -- Cleveland Research -- Analyst

Okay. And then a couple other items. How has tax reform in the U.S. influenced any thoughts you have on the domicile and the potential to adjust that, and working capital levels, a little elevated relative to the last couple of years. How do you think about where working capital should be or could be, you know, over the course of the next 12 months? Thank you.

Doug Boessen -- Chief Financial Officer and Treasurer

Yeah, regarding U.S. tax reform, yeah, there's about, as we talked about, you know, the big driver that we have in the tax rate year over year is the U.S. tax reform, and as it relates to our domicile, you know, currently in Switzerland, if you compare Switzerland to U.S. even after the current changes in those corporate rates, Switzerland still is at a lower statutory and our effective rates from that standpoint. And then the followup, question, Ben, was regarding?

Ben Bollin -- Cleveland Research -- Analyst

Working capital. A little elevated relative to the last few years. Just where that goes from here?

Doug Boessen -- Chief Financial Officer and Treasurer

Yeah, working capital. So working capital in 2017 primarily looked in that inventory and receivables. For '18, we would expect to see probably inventory and receivables end of year similar to what our growth in sales is. If you looked at 2017, receivables did increase a little bit more than that, primarily due to some receipts there. So we looked at, you know, January receipts came back in line with some of our DSO comparisons that we had. But we would expect, you know, kind of looking at our free cash flow for 2018, we probably would expect somewhere to be around $560 million of free cash flow. A piece of that would be some favorability due to less cash taxes due to tax reform we talked about. Also, we should see some favorability relating to working capital that you mentioned there. We shouldn't expect to see the type of increases, you know, in AR that we saw in '17 continue into '18. We're in line probably with our revenue increases.

Ben Bollin -- Cleveland Research -- Analyst

Thank you.

Operator

Our next question comes from Brad Erickson of KeyBanc Capital. Your line is open.  

Brad Erickson -- KeyBanc Capital -- Analyst

Hi, thanks. Just two quick housekeeping questions to start for Doug. One, just what was the litigation expense exactly in marine in Q4, and then you mentioned the revenue impacts from FX. Just curious if you can give the EBIT tailwinds to Q4 in the 2018 guide from FX?

Doug Boessen -- Chief Financial Officer and Treasurer

Yeah, so as it relates to the litigation, we have a settlement agreement there that we will not be able to disclose that number as it relates to that settlement agreement. Then you know, as it relates to the EBIT impact, what you have in this situation here is in Q4, you have some things going against you with the strengthening of the Taiwan dollar. That's partially to offset that and then for the full year in that period also.

Brad Erickson -- KeyBanc Capital -- Analyst

Got it. On that marine litigation expense question, maybe another way to ask it. Would the margins have been sort of historically normal for marine had the expense been removed?

Doug Boessen -- Chief Financial Officer and Treasurer

Yeah, you know, if you put it in there, I think we would have comparable types of margins, yes.

Brad Erickson -- KeyBanc Capital -- Analyst

Got it. Helpful. Thanks. And then just a high-level question on the auto OEM business. I guess for years you've had a pretty solid portfolio for that info team and opportunity obviously with the shifts that are occurring in automotive toward ADAS and autonomy, etcetera. How should we think about kind of the investments you're thinking about or making in your auto OEM portfolio as you look to get centered over the target of I guess what we'd call OEM's highest priority content objectives in the coming years? Thanks.

Cliff Pemble -- President and Chief Executive Officer

Yeah, I think certainly, you know, the content view is changing in terms of what goes into the automobile. We're still seeing lots of interest though in infotainment systems. People still want those kinds of systems in the car. And we've seen a higher mix of software-related business with what we've talked about with Honda and Daimler as well. But looking forward, you know, we've announced and talked about our relationship with BMW where we will be supplying more of what's called a silver box, which is a generic computing platform in the vehicle which can run all kinds of software stacks associated with infotainment and clusters and other things in the vehicle. So there is some evolution like that, but there's still opportunity for computing in the vehicle and software.

Brad Erickson -- KeyBanc Capital -- Analyst

Got it. Thanks.

Operator

Our next question comes from Will Power of Baird. Your line is open.  

Will Power -- Baird -- Analyst

Great, thanks. Yeah, actually just a couple quick, you know, follow-ups. So I know you talked about higher gross margins and some higher OpEx. Are there any particular segments where you're seeing the higher OpEx and perhaps lower operating margins? I guess that's question number one. And then I guess number two, you know, within the fitness category, you know, we've got this ongoing basic activity tracker weakness. Is that just a continuation of, you know, kind of the market trends? Is there any chance in share there? And I guess I'd just be curious within the advanced section of that, you know, what the Forerunner outlook looks like, if you continue to see growth there. Thanks.

Doug Boessen -- Chief Financial Officer and Treasurer

Yeah, I'll talk about the gross margins first of all. You know, as I mentioned, you know, the gross margin consolidate is really from a segment mix standpoint. So we're anticipating relatively comparable, you know, maybe a few puts and takes for each one of the segments that are out there. As it relates to OpEx, what we'll see there is, you know, obviously investment in where we have our advanced wearables, primarily in the outdoor area. Also you've got the aviation will make R&D investments in there, too. So given the decline that we're seeing in the auto areas, hopefully we're looking at, you know, tightening up those expenses in those areas. And then as it relates to advertising, you know, as we looked at 2017, you know, we actually cut back on our advertising in the fitness area related to activity trackers, so we'll continue to look at that, you know, where we really have, you know, some of the more advanced wearable products like the Fenix.

Will Power -- Baird -- Analyst

Okay. And then any color on the kind of basis activity tracker market? How much of that is just ongoing market trends versus any, you know, share loss and color on Forerunner sales?

Cliff Pemble -- President and Chief Executive Officer

Yeah, our idea is that most of that is really associated with the market trends. Customers are moving toward more advanced wearables, and so consequently, the basic market has matured and is declining rapidly. So our share assumptions are pretty equal to what they've been in the past in the basic side. We've typically said that on a global basis, roughly 10% market share as we look across the universe of what's going on around the world. In terms of impact on Forerunner, that falls into our advanced category, so that's the area where we still see opportunity, and we still see people moving toward the more advanced products. In the case of Forerunner, it's more technical runners, but in the case of our vivoactive line, which is GPS-enabled smartwatches, those are the folks that are coming off the basic trackers into a more advanced product.

Will Power -- Baird -- Analyst

Okay, thank you.

Operator

Our next question comes from Ivan Feinseth of Tigress Financial. Your line is open.  

Ivan Feinseth -- Tigress Financial -- Analyst

Thank you for taking my call, and congratulations on another great quarter and a great year.

Cliff Pemble -- President and Chief Executive Officer

Thanks, Ivan.

Ivan Feinseth -- Tigress Financial -- Analyst

My question is, on the new scalable infotainment platform, what kind of feedback are you getting from automakers, and can we expect any kind of partnership announcement soon?

Cliff Pemble -- President and Chief Executive Officer

Well, we're getting good feedback, and much of the work of selling into these automakers is to demonstrate capability, so I think the news that you've been seeing from us is surrounding more of that prototyping and predevelopment work. We're getting good feedback from them, but in terms of specific announcements, we can't comment on that right now.

Ivan Feinseth -- Tigress Financial -- Analyst

Okay. But the -- you seem to be getting some good feedback and interest in it?

Cliff Pemble -- President and Chief Executive Officer

Yes.

Ivan Feinseth -- Tigress Financial -- Analyst

Okay. That's pretty much my question. Thanks.

Operator

Once again, if you'd like to ask a question, please press * then 1. Our next question comes from Ronald Epstein at Bank of America Merrill Lynch. Your line is open.  

Kristine Liwag -- Bank of America/Merrill Lynch

Good morning, guys. It's Kristine Liwag calling in for Ron. There's discussion that Boeing may launch a new clean sheet middle-of-the-market aircraft this year or next, and considering your avionics are certified now for part 25 aircraft, does Boeing shifting strategy and managing its avionics supply chain provide an opportunity for you to provide content on the new middle-of-the-market aircraft, and if so, what would you need to do and how much would you need to spend in R&D in order to be competitive?

Cliff Pemble -- President and Chief Executive Officer

Well, certainly I think any opportunity around Boeing would certainly be hypothetical. I would say that our G5000 system is, as you have said, Part 25 certified, and we feel like it's the major building block that we need in order to be able to serve more advanced applications such as regional and commercial aviation. But in terms of investing in a specific opportunity like that, it would require a significant investment in order to be able to build up the other infrastructure we would need in the company to be able to serve a player like that. We're certainly prepared and have been taking steps to do that, but again, it would be driven by specific opportunities.

Kristine Liwag -- Bank of America/Merrill Lynch

And a followup to that, I mean, it seems like also Boeing and Embraer are considering a partnership, and since you have a -- and should they consider that partnership to create a new middle-of-the-market aircraft, you've got content in Embraer aircraft already today. So does that mean that if their partnership goes ahead, does that give you a higher likelihood of getting content on that plane, and then another followup would be, how much would that investment be? Could you quantify the timing and possibly the size if you pursue that opportunity?

Cliff Pemble -- President and Chief Executive Officer

Yeah, so in terms of, you know, any hypothetical partnerships between Embraer and Boeing, I would say certainly we feel like we're well-positioned because of our experience with Embraer and as I mentioned, we've been winning consistently supplier awards with Embraer, so they seem to be happy with what we're doing. But again, it's all hypothetical, because I think any particular partnership on their part would consider all the factors they have in hand at that time. In terms of timing and size of investment, really not prepared to be able to comment on that, but as I said, I think there would be work to do, and certainly able to and willing to make those investments.

Kristine Liwag -- Bank of America/Merrill Lynch

Thank you very much.

Operator

There are no further questions. I'd like to turn the call back over to Teri Seck for any closing remarks.

Teri Seck -- Director of Investor Relations

Thanks, everyone. Doug and I are available for callbacks today. Have a great day. Bye.

...

Operator

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a great day.

Duration: 45 minutes

Call participants:

Teri Seck -- Director of Investor Relations

Cliff Pemble -- President and Chief Executive Officer

Doug Boessen -- Chief Financial Officer and Treasurer

Charlie Anderson -- Dougherty Markets -- Analyst

Doug Clark -- Goldman Sachs -- Analyst

Joe Wittine -- Longbow Research -- Analyst

Eugene Anderson -- Morgan Stanley -- Analyst

Robert Spingarn -- Credit Suisse-Analyst

Ben Bollin -- Cleveland Research -- Analyst

Brad Erickson -- KeyBanc Capital -- Analyst

Will Power -- Baird -- Analyst

Ivan Feinseth -- Tigress Financial -- Analyst

Kristine Liwag -- Bank of America/Merrill Lynch

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