Garmin 2010 Annual Report Download - page 34

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24
new automobiles through factory-installed systems. Mobile handsets are frequently GPS-enabled and many
companies are now offering navigation software for mobile devices. The acceptance of this technology by
consumers has halted our growth and could further reduce margins. Navigation systems are also becoming more
prevalent as optional equipment on new automobiles. Increased navigation penetration on new automobiles
could cause further declines in sales of our portable navigation devices and further reduce margins.
Our financial results are highly dependent on the automotive/mobile segment, which represents approximately
62% of our revenues and is maturing.
We have historically experienced substantial growth in the automotive/mobile segment of our business as
the products have become mass-market consumer electronics in both Europe and North America. This market has
peaked as penetration rates increase and competing technologies emerge. This has resulted in lower revenues
and lower earnings per share.
Economic conditions and uncertainty could adversely affect our revenue and margins.
Our revenue and margins depend significantly on general economic conditions and the demand for
products in the markets in which we compete. The current economic weakness and constrained consumer and
business spending has resulted in decreased revenue and in the future, could result in decreased revenue and
problems with our ability to manage inventory levels and collect customer receivables. In addition, financial
difficulties experienced by our retailer and OEM customers have resulted, and could result in the future, in
significant bad debt write-offs and additions to reserves in our receivables and could have an adverse affect on our
results of operations.
Gross margins for our products may fluctuate or erode.
Gross margins on our automotive/mobile products have been declining and are expected to decline in
2011 due to price reductions in the increasingly competitive market for personal navigation devices (PNDs) that
are not fully offset by material cost reductions. In addition, our overall gross margin may fluctuate from period to
period due to a number of factors, including product mix, competition and unit volumes. In particular, the average
sellig pies of a speifi podut ted to deease oe that poduts life. To offset suh deeases, e ited to
rely primarily on component cost reduction, obtaining yield improvements and corresponding cost reductions in
the manufacture of existing products and on introducing new products that incorporate advanced features and
therefore can be sold at higher average selling prices. However, there can be no assurance that we will be able to
obtain any such yield improvements or cost reductions or introduce any such new products in the future. To the
extent that such cost reductions and new product introductions do not occur in a timely manner or our products
do not achieve market acceptance, our business, financial condition and results of operations could be materially
adversely affected.
Changes in our United States federal income tax classification or in applicable tax law could result in adverse tax
consequences to our shareholders.
We do not believe that we (or any of our non-Uited States susidiaies ae uetl a passie foeig
iestet opa fo Uited States fedeal ioe ta puposes. We do not expect to become a passive
foreign investment company. However, because the passive foreign investment company determination is made
auall ased o hethe the opas ioe o assets eet etai thesholds as deteied ude Uited
States federal tax principles which are based on facts and circumstances that may be beyond our control, we
cannot assure that we will not become a passive foreign investment company in the future. If we are a passive
foreign investment company in any year, then any of our shareholders that is a United States person could be
liable to pay tax on their pro rata share of our income plus an interest charge upon some distributions by us or
when that shareholder sells our common shares at a gain. Further, if we are classified as a passive foreign
investment company in any year in which a United States person is a shareholder, we generally will continue to be
treated as a passive foreign investment company with respect to such shareholder in all succeeding years,
regardless of whether we continue to satisfy the income or asset tests mentioned above.