Garmin 2005 Annual Report Download - page 67

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Raw material costs are our most significant cost item. In 2005 we experienced a shift in product mix to
lower-margin product groups and price declines related to increased competition, both in relation to the rapidly
growing automotive navigation product line. We experienced shortages in certain high technology components in
early 2004 as well as upward pricing pressure on components in the first half of 2004, much of which was alleviated
by the end of the fiscal year. 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, our Shijr, Taiwan, Olathe, Kansas, and Salem, Oregon
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 and Salem.
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 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 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 the
portable automobile navigation, which is becoming a mass market. We also intend to increase our customer call
center support as our consumer segment continues to grow. We also anticipate increased selling, general, and
administrative costs associated with information technology staffing and support activities.
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. Approximately 87% of the research and development of our products is performed in the
United States. The remainder of our research and development activities are performed by our Taiwan engineering
group, which has increased in size in recent years.