Garmin 2003 Annual Report Download - page 31

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Income Taxes
While no valuation allowance has been recorded, it is the Company’s policy to record a valuation allowance to reduce its
deferred tax assets to an amount that it believes is more likely than not to be realized. While the Company has considered future
taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, in the event
the Company were to determine that it would not be able to realize all or part of its net deferred tax assets in the future, an adjustment
to the deferred tax assets would be charged to income in the period such determination was made. Likewise, should the Company
determine that it would be able to realize its deferred tax assets in the future in excess of its net recorded amount, an adjustment to the
deferred tax assets would increase income in the period such determination was made.
In addition, the calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax
regulations. We recognize liabilities for tax audit issues in the U.S. and other tax jurisdictions based on our estimate of whether, and
the extent to which, additional taxes will be due. If payment of these amounts ultimately proves to be unnecessary, the reversal of the
liabilities would result in tax benefits being recognized in the period when we determine the liabilities are no longer necessary. If our
estimate of tax liabilities proves to be less than the ultimate assessment, a further charge to expense would result.
Stock Based Compensation
The Company distributes a small number of stock options each year as part of the Company’s compensation package for
employees. Employees with certain levels of responsibility within the Company are eligible for stock option grants, but the granting
of options is at the discretion of the Compensation Committee of the Board of Directors and is not a contractual obligation. Stock
compensation plans are discussed in detail in Note 11 of the Notes to Consolidated Financial Statements.
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. We recognize sales when products are shipped. 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 some seasonal fluctuation. Typically, sales of our consumer products are highest in the second
quarter, due to increased demand during the spring and summer marine 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
The most significant components of our cost of goods sold are raw materials, 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 on high technology components in fiscal 2001 and
fiscal 2002. We experienced upward pricing pressures on our high technology components in late 2003, but offset much of those
with efficiencies in our manufacturing processes. 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, 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.