Garmin 2010 Annual Report Download - page 56

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46
assessing the need for the valuation allowance, in the event Garmin 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 is made. Likewise, should Garmin 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 is 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
Garmin awards stock options, stok appeiatio ights SARs, estited stok uits RSUs and/or
performance shares eah ea as pat of Gais opesatio pakage fo eploees. Eploees ith etai
levels of responsibility within Garmin are eligible for stock options, SAR grants, RSU grants and/or performance
shares but the granting of options, SARs, RSUs and/or performance shares is at the discretion of the Compensation
Committee of the Board of Directors and is not a contractual obligation.
Stock-based compensation cost is measured at the grant date based on the fair value of the award and is
recognized as expense over the requisite service period. Determining the fair value of stock-based awards at the
grant date requires judgment, including estimating expected dividends. In addition, judgment is also required in
estimating the amount of stock-based awards that are expected to be forfeited. If actual results differ significantly
from these estimates, stock-based compensation expense could be impacted. Stock compensation plans are
discussed in detail in Note 9 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. Refer to the Revenue Recognition discussion above. 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.
Cost of Sales/Gross Profit
Raw material costs are our most significant component of cost of goods sold. In 2010, gross margin for
our automotive/mobile segment declined 160 basis points as the average selling price declines outpaced raw
material price declines. In addition, the deferral of high margin revenue and the related costs increased
significantly as the product mix shifted toward products bundled with lifetime maps. See Note 2 for further
information. This was partially offset by a positive refinement in the warranty reserve. In 2009, gross margin for
our automotive/mobile segment increased 350 basis points as benefits from raw material price declines and
operating efficiencies exceeded the average selling price decline. 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