Garmin 2003 Annual Report Download - page 32

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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 continue to develop new markets, such as automotive and personal digital
assistants (PDA). We also intend to increase our customer call center support as our consumer segment continues to grow. Another
cause of increased selling, general, and administrative costs is the continued implementation of an ORACLE Enterprise Resource
Planning (ERP) system during fiscal 2004 and associated information system staffing needed to support ORACLE. We anticipate that
these increased expenses could impact our financial results in fiscal 2004 and subsequent periods, although it is unclear at this point
what the extent of this impact may be.
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.
Customers
No customer accounted for greater than 10% of our sales in the year ended December 27, 2003. Our top ten customers
accounted for approximately 25% of net sales. We have experienced average sales days in our customer accounts receivable between
35 and 51 days since 1999. The average sales days in our customer accounts receivable was 51 days as of December 27, 2004.
Income Taxes
We have experienced a relatively low effective tax rate in Taiwan due to lower marginal tax rates and substantial tax
incentives offered by the Taiwanese government on certain high-technology capital investments. Therefore, profits earned in Taiwan
have been taxed at a lower rate than those in the United States and Europe. As a result, our consolidated effective tax rate was
approximately 21% during 2003. We have taken advantage of this tax benefit in Taiwan since our inception and we expect to
continue to benefit from lower effective tax rates at least through 2008. The current Taiwan tax incentives for which Garmin has