Garmin 2001 Annual Report Download - page 28

Gross Profit
Gross profit was $183.7 million in fiscal 2000, a 45% increase over gross profit of $126.9 million in fiscal 1999. Gross profit as a percent
of net sales decreased to 53.1% in fiscal 2000 from 54.6% in fiscal 1999 due primarily to inventory charges that were recorded
during 2000 to reserve for excess stocks and technological obsolescence related to the transition to new products expected
during fiscal 2001, offset by the effects of increased efficiencies from higher sales volume across all products and the 6.1 percentage
point shift in the mix to higher margin aviation sales. Gross profit increased $24.5 million, or 27%, in the consumer segment and
$32.3 million, or 90%, in the aviation segment. The percentage increase in gross profits for each segment is generally comparable
to the percentage increase in that segment’s net sales with the consumer segment gross profit affected more by the inventory
charges mentioned above.
Selling, General and Administrative Expenses
Despite a 49% increase in net sales, selling, general and administrative expenses only increased 21%, to $32.7 million (9.4% of
net sales) in fiscal 2000 from $27.1 million (11.6% of net sales) in fiscal 1999. Selling, general and administrative expenses increased
$3.3 million, or 16%, in the consumer segment and $2.3 million, or 36%, in the aviation segment. The increase in expense reflects
increased employment generally across the organization but also specifically in the areas of customer service and marketing, in
support of our increased sales in both segments. The percentage increase was higher in the aviation segment than in the consumer
segment due to the significant increase in aviation net sales as compared to consumer sales growth. We also experienced an increase
in our cooperative advertising costs, which is an ongoing program with our key dealers and distributors in both segments.
Research and Development Expense
Research and development expense increased approximately 26% to $21.8 million (6.3% of net sales) in fiscal 2000 from $17.3
million (7.5% of net sales) in fiscal 1999. Research and development expense increased $2.8 million, or 24%, in the consumer
segment and $1.6 million, or 28%, in the aviation segment. The increase in expense was due primarily to additional product
development costs in both consumer and aviation segments as well as additional software development in the consumer segment.
The percentage increase was slightly higher in the aviation segment due to the development of Garmin’s next generation
aviation products.
Other Income (Expense)
Other income (expense) principally consists of interest income, interest expense and foreign currency exchange gains and losses.
Other income (expense) for fiscal 2000 amounted to $11.6 million compared to $1.6 million in fiscal 1999. Interest income during
fiscal 2000 amounted to $6.9 million compared to $4.3 million in fiscal 1999, the increase being attributable to the growth of Garmin’s
cash and cash equivalents during the year on which interest income is earned. Interest expense increased to $2.3 million in fiscal
2000 from $0.6 million in fiscal 1999, due primarily to the additional long-term debt required to finance the 1999 purchase of
our new Taiwan facility and further expand our Olathe, Kansas facility in 2000. We recognized a foreign currency exchange gain
of $7.0 million during fiscal 2000 compared to a $1.5 million loss in fiscal 1999 due to the significant strengthening of the U.S. Dollar
compared to the Taiwan Dollar during fiscal year 2000, when the exchange rate increased from 31.30 TD/USD at December 25, 1999
to 33.01 TD/USD at December 30, 2000.
Income Tax Provision
Income tax expense increased by $15.3 million, to $35.3 million, in fiscal 2000 from $20.0 million in fiscal 1999, due to our higher
taxable income. The effective tax rate was 25.0% in fiscal 2000 versus 23.7% in fiscal 1999. The increase is partly attributable to a
surtax on undistributed earnings in Taiwan that Garmin will pay in 2001. The tax cost of distributing earnings from Garmin Corporation,
Garmin’s Taiwan subsidiary, to the Company significantly exceeds the amount of the surtax. Prior to Garmin’s reorganization,
completed in September 2000 in contemplation of its IPO, distributions made to Garmin Corporation shareholders resulted in
minimal tax cost to Garmin.
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