Garmin 2001 Annual Report Download - page 32

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Quantitative and Qualitative Disclosures About Market Risk
Market Sensitivity
We have market risk primarily in connection with the pricing of our products and services and the purchase of raw materials.
Product pricing and raw materials costs are both significantly influenced by semiconductor market conditions. Historically, during
cyclical industry downturns, we have been able to offset pricing declines for our products through a combination of improved
product mix and success in obtaining price reductions in raw material costs.
Inflation
We do not believe that inflation has had a material effect on our business, financial condition or results of operations. If our costs
were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs through price
increases. Our inability or failure to do so could adversely affect our business, financial condition and results of operations.
Foreign Currency Exchange Rate Risk
The operation of the Company’s subsidiaries in international markets results in exposure to movements in currency exchange rates.
We generally have not been significantly affected by foreign exchange fluctuations because, until recently, the Taiwan Dollar has
proven to be relatively stable. However, within the last two years we have experienced significant foreign currency gains due to
the strengthening of the U.S. dollar. The potential of volatile foreign exchange rate fluctuations in the future could have a significant
effect on our results of operations.
The principal currency involved is the Taiwan Dollar. Garmin Corporation, located in Shijr, Taiwan uses the local currency as the
functional currency. The Company translates all assets and liabilities at year-end exchange rates and income and expense accounts
at average rates during the year. In order to minimize the effect of the currency exchange fluctuations on our operations, we
have elected to retain most of our cash at our Taiwan subsidiary in U.S. dollars. As discussed above, the exchange rate increased
6.5% during 2001 and resulted in a foreign currency gain of $11.6 million. If the exchange rate decreased by a similar percentage,
a comparable foreign currency loss would be recognized.
Interest Rate Risk
As of December 29, 2001, we have interest rate risk in connection with our industrial revenue bonds that bear interest at a floating
rate. Garmin International, Inc. entered into two interest rate swap agreements, one on July 1, 2000 ($10.0 million) and another
on February 6, 2001 ($5.0 million), totaling $15.0 million to modify the characteristics of its outstanding long-term debt from a
floating rate to a fixed rate basis. These agreements involve the receipt of floating rate amounts in exchange for fixed rate interest
payments over the life of the agreements without an exchange of the underlying principal amount. The estimated fair value of
the interest swap agreements of $1.5 million is the amount we would be required to pay to terminate the swap agreements at
December 29, 2001. A 10% positive or negative change in the floating counterparty interest rates associated with the swaps would
change the estimated fair value of the interest rate swap agreements to $1.4 million (positive 10% change) or $1.6 million
(negative 10% change), respectively.
The Company’s average outstanding debt during fiscal year 2001 was approximately $39.3 million. The average interest rate on
debt during fiscal 2001 was 5.5%. A 10% positive or negative change in the average interest rate during fiscal 2001 would have
resulted in interest expense of $2.4 million (positive 10% change) or $1.9 million (negative 10% change), respectively. This compares
to the actual interest expense of $2.2 million during fiscal 2001.