Garmin 2002 Annual Report Download - page 28

Gross Profit
The most significant components of our cost of goods sold are raw material, labor and depreciation. Raw material costs, which
are our most significant cost item, have come down slightly as a percentage of sales in recent years, as we have negotiated lower
raw material costs with our key suppliers. As a result, gross profit has improved somewhat as a percentage of sales when
compared with prior years.
In 2000, we experienced upward pricing pressures on our high technology components, but had offset those with efficiencies in
our manufacturing processes. We did not experience significant pricing pressure in fiscal 2001 and fiscal 2002. Our existing
practice of performing the design and manufacture of our products in-house has enabled us to utilize alternative lower cost
components from different suppliers and, where necessary, to redesign our products to permit us to use these lower cost
components. We believe that because of our practice of performing the design, manufacture and marketing of our products in-
house, both our Shijr, Taiwan and Olathe, Kansas manufacturing plants have experienced relatively low costs of manufacturing,
compared to our competition. In general, products manufactured in Taiwan have been our highest volume products. Our
manufacturing labor costs historically have been lower in Taiwan than in Olathe.
Sales price variability has had and can be expected to have an effect on our gross profit. In the past, prices of some of our
handheld devices sold into the consumer market have declined due to market pressures and introduction of new products sold at
lower price points. The average selling prices of our aviation products have decreased due to product mix and market pressures
partially offset by the introduction of more advanced products sold at higher prices. In conjunction with the effects of lower
labor costs experienced on Taiwan production, the effect of the sales price variability inherent within the mix of GPS-enabled
products sold could have a significant impact on our gross profit.
Selling, General and Administrative Expenses
Our selling, general and administrative expenses consist primarily of:
•salaries for sales and marketing personnel;
• salaries and related costs for executives and administrative personnel;
•advertising, marketing, and other brand building costs;
• accounting and legal costs;
• information systems and infrastructure costs;
•travel and related costs; and
• occupancy and other overhead costs.
Since we plan to increase market penetration in the future, we expect selling, general and administrative expenses to continue
to increase for the foreseeable future. We intend to increase advertising and marketing expenses in order to build increased
brand awareness in the consumer marketplace, especially as we enter into new markets, such as wireless and personal digital
assistants (PDA). We also intend to increase our customer call center support as our consumer segment continues to grow. We do
not anticipate that these increased expenses will significantly impact our financial results in 2003 and subsequent periods.
Research and Development
The majority of our research and development costs represent salaries for our engineers, costs for high technology components
used in product and prototype development, and costs of test equipment needed during product development.
We have continued to grow our research and development capabilities since our inception. Substantially all of the research and
development of our products is performed in the United States.
We are committed to increasing the level of innovative design and development of new products as we strive for expanded
ability to serve our existing consumer and aviation markets as well as new markets for GPS-enabled devices. We continue to
grow our research and development budget on absolute terms. Research and development expenses may also grow at a faster
rate when compared to our projected revenue growth for fiscal year 2003.
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