Garmin 2007 Annual Report Download - page 66

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Gross Profit
Raw material costs are our most significant component of cost of goods sold. In the first half of 2007, we
experienced favorable product mix and product pricing, which allowed us to hold margins in our automotive/mobile
segment steady; margin declines in the second half of 2007 were primarily a result of average selling price declines,
coupled with raw materials price increases, most notably the costs for flash memory, in late second quarter and
through the third quarter of 2007 when we were purchasing these components for our holiday production runs,
resulting in margin declines as these components were sold, primarily in the fourth quarter of 2007. In the first half
of 2006, we experienced meaningful price declines on flash memory and color screens, which allowed us to hold
margins in our automotive/mobile segment steady in the face of price declines, and allowed us to improve margins
in other business segments as well. While these price declines did not continue throughout all of 2006, we did have
additional component cost reductions as we neared year end. In 2005 we experienced a shift in product mix to
lower-margin product groups, which continued in 2006, and price declines related to increased competition, both in
relation to the rapidly growing automotive navigation product line.
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 possible, 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, our Shijr, Taiwan, Jhongli, Taiwan, Lin-Kou, Taiwan, Olathe,
Kansas, and Salem, Oregon manufacturing plants have experienced relatively low costs of manufacturing. 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 and Salem.
Sales price variability has had and can be expected to have an effect on our gross profit. In the past, prices
of our devices sold into the automotive/mobile 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 increased due to
product mix and the introduction of more advanced products sold at higher prices. 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.
With the expected increase of total revenues 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 focus on individual markets and build increased brand awareness in the consumer marketplace,
especially as we continue to develop new markets and expand opportunities in rapidly growing markets like portable
automobile navigation, which is becoming a mass market. We also intend to increase our customer call center
support as our business continues to grow. We also anticipate increased selling, general, and administrative costs
associated with information technology staffing and support activities.