Garmin 2008 Annual Report Download - page 62

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Accounting Terms and Characteristics
Net Sales
Our net sales are primarily generated through sales to our global dealer and distributor network and to
original equipment manufacturers. The Company recognizes revenue when persuasive evidence of a sales
arrangement exists, delivery has occurred, the sales price is fixed or determinable, and collection is reasonably
assured. Product is considered delivered to the customer once it has been shipped and title and risk of loss have been
transferred. For most of the Company’s product sales, these criteria are met at the time the product is delivered to
the customer’s location. The Company assumes no remaining significant obligations associated with the product sale
other than that related to its warranty programs discussed below. Our sales are largely of a consumer nature;
therefore backlog levels are not necessarily indicative of our future sales results. We aim to achieve a quick
turnaround on orders we receive, and we typically ship most orders within 72 hours.
Net sales are subject to seasonal fluctuation. Typically, sales of our consumer products are highest in the
second quarter, due to increased demand during the spring and summer season, and in the fourth quarter, due to
increased demand during the holiday buying season. Our aviation products do not experience much seasonal
variation, but are more influenced by the timing of the release of new products when the initial demand is typically
the strongest.
Gross Profit
Raw material costs are our most significant component of cost of goods sold. In 2008, gross margin for our
automotive/mobile segment declined 310 basis points as the average selling price continued to decline and we
experienced further shift in product mix to lower-margin product groups. These impacts were somewhat offset by
raw material price declines, most significantly flash memory. 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 that offset a shift in product mix to lower-margin product groups.
Gross margins for the aviation, marine, and outdoor/fitness segments are more stable. Our long-term gross margin
targets are 65%, 55% and 55%, respectively, for these segments.
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, Jhongli, and Lin-Kou manufacturing plants in
Taiwan, our 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
differences inherent within the mix of GPS-enabled products sold could have a significant impact on our gross
profit.