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Harman International Industries 10-K 2008 Documents found in this filing:
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
_____________
FORM
10-K>
_____________
For
the fiscal year ended June 30, 2008
Commission File Number
001-09764
_____________
(Exact
Name of Registrant as Specified in Its Charter)
_____________
Registrants
telephone number, including area code: (202) 393-1101
Securities
registered pursuant to Section 12(b) of the Act:
Securities
registered pursuant to Section 12(g) of the Act: None
_____________
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities
Act. Yes No T
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the
Act. Yes No T
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes T No
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of large accelerated filer, accelerated filer and
smaller reporting company in Rule 12b-2 of the Exchange Act. (Check
one)
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange
Act). Yes No T
The
aggregate market value of the voting common stock held by non-affiliates of the
registrant as of December 31, 2007 (the last business day of the registrants
most recently completed second fiscal quarter)
was $4,086,996,306 based upon the closing price of the shares on the
New York Stock Exchange on that date.
Indicate
the number of shares outstanding of each of the registrants classes of common
stock, as of the latest practicable date: 58,530,066 shares of common stock, par
value $.01 per share, as of August 28, 2008
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the registrants definitive Proxy Statement relating to the 2008 Annual
Meeting of Stockholders are incorporated by reference into Part
III.
The page
numbers in this Table of Contents reflect actual page numbers, not EDGAR page
tag numbers.
References
to Harman International, the Company, we, us and our in this Form 10-K refer to
Harman International Industries, Incorporated and its subsidiaries unless the
context requires otherwise.
ForwardLooking Statements
This
report contains forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933 and 21E of the Securities Exchange Act of 1934, as
amended (the Exchange Act). You should not place undue reliance on these
statements. Forward-looking statements include information concerning possible
or assumed future results of operations, capital expenditures, the outcome of
pending legal proceedings and claims, goals and objectives for future
operations, including descriptions of our business strategies and purchase
commitments from customers. These statements are typically identified by words
such as believe, anticipate, expect, plan, intend, estimate and similar
expressions. We base these statements on particular assumptions that we have
made in light of our industry experience, as well as our perception of
historical trends, current conditions, expected future developments and other
factors that we believe are appropriate under the circumstances. As you read and
consider the information in this report, you should understand that these
statements are not guarantees of performance or results. They involve risks,
uncertainties and assumptions. In light of these risks and uncertainties, we
cannot assure you that the results and events contemplated by the
forward-looking statements contained in, or incorporated by reference into, this
report will in fact transpire.
You
should carefully consider the risks described below and the other information in
this report. Our operating results may fluctuate significantly and
may not meet our expectations or those of securities analysts or
investors. The price of our stock would likely decline if this
occurs. Factors that may cause fluctuations in our operating results
include, but are not limited to, the following:
ForwardLooking
Statements (continued)
Although
we believe that these forward-looking statements are based on reasonable
assumptions, you should be aware that many factors could affect our actual
financial results, results of operations and could cause actual results to
differ materially from those expressed in the forward-looking statements. As a
result, the foregoing factors should not be construed as exhaustive and should
be read together with the other cautionary statements included in this and other
reports we file with the Securities and Exchange Commission. For
additional information regarding certain factors that may cause our actual
results to differ from those expected or anticipated, see the information under
the caption Risk Factors which is located in Item 1A of Part I of this
report.
Part
I
Item 1. Business
We
believe we are a worldwide leader in the development, manufacture and marketing
of high-quality, high fidelity audio products and electronic systems. We have
developed, both internally and through a series of strategic acquisitions, a
broad range of product offerings sold under renowned brand names in our
principal markets. We also believe that we are a leader in digitally integrated
infotainment systems for the automotive industry. Our JBL, Infinity,
Harman/Kardon, Mark Levinson and Becker brand names are well known worldwide for
premium quality and performance. We have built these brands by developing our
engineering, manufacturing and marketing competences and have employed these
resources to establish our Company as a worldwide leader in the markets we
serve.
We report
our business on the basis of three segments: Automotive, Consumer and
Professional. For additional information about these segments, see Managements Discussion and Analysis
of Financial Condition and Results of Operations included in Item 7 of
Part II of this report and Note 17, Business Segment Data, to our
consolidated financial statements located in Item 8 of Part II of this
report.
Our
Automotive segment designs, manufactures and markets audio, electronic and
infotainment systems for vehicle applications primarily to be installed as
original equipment by automotive manufacturers. Our automotive products are
marketed worldwide under brand names including JBL, Infinity, Mark Levinson,
Harman/Kardon, Logic 7, Lexicon and Becker. Through engineering and supply
arrangements, our premium audio systems and infotainment product offerings are
sold to a number of global automotive manufacturers including Daimler, the BMW
Group, Toyota/Lexus, Audi/VW, Chrysler, Porsche, Land Rover, Hyundai, and PSA
Peugeot Citron. We also produce a Harman/Kardon branded infotainment system for
Harley-Davidson touring motorcycles. Our infotainment systems are a combination
of information and entertainment components that may include or control GPS
navigation, traffic information, voice-activated telephone and climate control,
rear seat entertainment, wireless Internet access, hard disk recording, MP3
playback and a high-end branded audio system. Our Automotive segment
also produces personal navigation devices (PNDs) that are primarily sold in
Europe.
Our
Consumer segment designs, manufactures and markets audio and electronic systems
for home, mobile and multimedia applications. Our Consumer home products and
systems are marketed worldwide under brand names including JBL, Infinity,
Harman/Kardon, Lexicon, Mark Levinson, Revel and AKG. Our audio and electronic
systems are recognized throughout the world for superior sound quality and high
performance. Our home product applications include systems to provide
high-quality audio throughout the home and our mobile products include an array
of aftermarket systems to deliver audio entertainment and navigation in the
vehicle. Our home and mobile audio and electronic products are offered primarily
through audio/video specialty stores and retail chain stores such as Best Buy,
MediaMarkt and Fnac. Our branded audio products for multimedia
applications are primarily designed to enhance sound for Apples iPods and
iPhones, computers and other MP3 players and are sold in retail stores such as
the Apple stores, Best Buy, Target and MediaMarkt.
Our
Professional segment designs, manufactures and markets loudspeakers and
electronic systems used by audio professionals in concert halls, stadiums,
airports, houses of worship and other public spaces. We also design products for
recording, broadcast, cinema and music reproduction applications, and we provide
high-quality products to the sound reinforcement, music instrument support and
broadcast and recording segments of the professional audio
market. Our Professional products are marketed worldwide under brand
names including JBL Professional, AKG, Crown, Soundcraft, Lexicon, DigiTech, dbx
and Studer.
We offer
complete systems solutions for professional installations and users around the
world. Our products can be linked by our HiQnetTM network
protocol providing a central digital network for audio professionals to control
different aspects of a complex system. We believe that we are
uniquely equipped to provide turnkey systems solutions for professional audio
applications that offer the customer improved performance, reliability, ease of
installation and reduced cost.
Our
results of operations depend on our sales of audio products and electronic
systems in the automotive, consumer and professional markets. Our products are
sold worldwide, with the largest markets being the United States and Germany. A
significant portion of our net sales are denominated in Euros.
We
believe growth opportunities continue to exist with automotive manufacturers
through an increase in the number of models offering our audio, navigation and
infotainment systems, supply agreements with additional automakers, increases in
per-vehicle content through the provision of integrated infotainment and premium
branded audio systems, higher penetration levels of audio and infotainment
systems within existing models and providing systems that will include
additional functionality such as driver assist safety measures. We believe
growth opportunities exist in the consumer electronics market due to expansion
in emerging markets, such as China, India and Russia, and through opportunities
to leverage brand strength in growing categories in home
installations. We also believe growth opportunities exist in the
professional markets as we expect our HiQnet system protocol to allow us to
capitalize on these opportunities as this technology simplifies the interaction
of our products and provides users with an incentive to purchase complete HiQnet
compatible systems.
Harman
International Industries, Incorporated was incorporated in Delaware in
1980.
Products
Automotive
We
believe that we are a leader in developing and manufacturing high-quality, high
fidelity, digitally-integrated infotainment systems and premium branded audio
systems for automobiles.
The
automotive market is currently experiencing strong demand for information and
entertainment in the car. We have developed leading technical competencies to
address this demand. Our infotainment systems are a combination of information
and entertainment components that may include or control GPS navigation, traffic
information, voice-activated telephone and climate control, rear seat
entertainment, wireless Internet access, hard disk recording, MP3 playback and a
high-end branded audio system. In fiscal 2008, we supplied
infotainment systems for vehicles manufactured by Mercedes-Benz, BMW, Porsche,
Audi, Hyundai, Chrysler and SsangYong Motor. Our business objective
is to maintain our leadership position in the infotainment
business.
We
continue to leverage our expertise in the design and manufacture of premium
branded audio systems, as well as the reputation for quality associated with our
JBL, Infinity, Harman/Kardon, Mark Levinson and Lexicon brand names. As a result
of our well-established relationships with automobile manufacturers, our
engineers are engaged early in the vehicle design process to develop systems
that optimize acoustic performance and minimize weight and space requirements.
Our Infinity branded car audio systems are offered by
Chrysler. Daimlers Mercedes-Benz division, the BMW Group, Land Rover,
Porsche, GM and Saab provide Harman/Kardon branded audio systems in their
vehicles. Our premium Mark Levinson digital audio system is offered by
Lexus. Lexicon branded audio systems are standard on Rolls Royce
vehicles and offered as an option on Hyundais new Genesis
sedan. Toyota and PSA Peugeot Citron offer our JBL branded audio
systems. Hyundai Motor Company and Kia Motor Company also offer our
JBL and Infinity branded audio systems in the Korean and United States markets,
respectively.
In the
future, we expect our infotainment systems will also provide driver assist
capabilities such as pre-crash emergency braking, full speed adaptive cruise
control, sleep guarding, lane departure warnings and night vision.
Consumer
We
manufacture loudspeakers under the JBL, Infinity, Harman/Kardon and Revel brand
names for the consumer home audio market. These loudspeaker lines include models
designed for two-channel stereo and multi-channel surround sound applications
for the home and in a wide range of performance choices, including floor
standing, bookshelf, powered, low frequency, in-wall, wireless and all-weather
as well as in styles and finishes ranging from high gloss lacquers to genuine
wood veneers. The JBL and Infinity product lines also include car loudspeakers,
amplifiers and subwoofers sold in the aftermarket as well as marine speakers
intended for use on boats.
We also
offer a broad range of consumer audio electronics under the Harman/Kardon, Mark
Levinson and Lexicon brand names. Our Harman/Kardon home electronics line
includes audio/video receivers featuring Logic 7, Dolby Digital and DTS surround
sound processing capabilities and multi-channel amplifiers, DVD players and CD
players. We design high-end electronics, including amplifiers, digital signal
processors, compact disc players and transports and surround sound processors
that we market under the renowned Mark Levinson brand. We believe that we are a
leader in the design and manufacture of high-quality home theater surround sound
processors and amplifiers under the Lexicon name. Lexicon was a pioneer in the
development of digital signal processors for the professional audio
market. We have successfully leveraged Lexicons professional audio
expertise to produce premier consumer products.
In the
multimedia market, we offer branded iPod docking devices such as JBL On
Stage TM
, JBL Onstage TM Micro,
JBL Radial
TM, Harman/Kardon Go +Play TM, and
PC related devices such as JBL Creature TM II,
JBL Duet
TM, and Harman/Kardon Soundsticks II. We also offer a variety
of headphone devices. Our products add greater functionality for
computers and the Apple iPod, iPhone and
other MP3 players.
Professional
Our
Professional products include loudspeakers and electronic equipment that are
marketed under what we believe are some of the most respected brand names in the
industry, including JBL Professional, Crown, Soundcraft, Lexicon, DigiTech, AKG,
BSS, dbx and Studer.
The
Professional market is increasingly moving to digital technology. We believe
that we are a leader in this market. Our Professional segment derives value from
our ability to share research and development, engineering talent and other
digital resources among its business units. Soundcraft, Studer, Crown, Lexicon,
DigiTech, dbx and BSS each have substantial digital engineering resources and
work together to achieve common goals by sharing resources and technical
expertise.
Our
Professional loudspeakers are well known for high-quality and superior sound.
JBL Professional branded products include studio monitors, loudspeaker systems,
powered loudspeakers, sound reinforcement systems, cinema systems, surround
sound systems and industrial loudspeakers.
Our
Professional electronic products are recognized for high quality and
reliability. We market these products on a worldwide basis under various trade
names, including Crown, Soundcraft, Lexicon, DigiTech, AKG, BSS, dbx and Studer.
These products are often sold in conjunction with our JBL Professional
loudspeakers and certain products, such as Crown amplifiers, are integrated into
JBL loudspeakers.
We
produce sound mixing consoles ranging from automated multi-track consoles for
professional recording studios to compact professional mixers for personal
recording, home studios and sound reinforcement. Our consoles are sold to four
main market areas: sound reinforcement, recording studios, broadcast studios and
musical instrument dealers. Our mixing consoles are sold primarily under the
Soundcraft and Studer brands. We produce many types of signal processing
products, equalizers, and special effects devices that are used in live sound
applications and in recording studios to produce sound effects and refine final
mixes. These products are sold under the Lexicon, DigiTech, dbx and BSS brand
names.
We
produce microphones, audio headphones, surround-sound headphones and other
professional audio products, which are marketed under the AKG brand
name.
We also
produce professional amplifiers and powered loudspeakers under the Crown and JBL
brand names. We believe the integration of loudspeakers and electronics enhances
our ability to provide complete
systems solutions to the professional audio market. Our other professional
products include switching systems, digital audio workstations and turnkey
broadcasting studio installations marketed primarily under the Studer brand
name.
With our
HiQnet network protocol we can configure, connect and control a complete
professional sound system from microphone to speaker on one unified digital
network. This system provides enhanced productivity and facilitates real-time
problem diagnosis and correction from a central location.
Manufacturing
We
believe that our manufacturing capabilities are essential to maintaining and
improving product quality and performance. Our manufacturing facilities are
located in North America, Europe and Asia.
Our
Automotive manufacturing facilities in Europe are located in Germany, the United
Kingdom, Sweden, France and Hungary. Our European facilities are
primarily used to manufacture infotainment systems and automotive navigation and
audio systems. In North America, we manufacture loudspeakers in Kentucky and
Mexico and manufacture electronics in California, Kentucky and
Missouri. In addition, we are ramping up a new facility in Suzhou,
China where we began production of amplifiers and loudspeakers in June
2008.
Our
Consumer manufacturing facilities are located in California, Mexico and China.
Our loudspeaker manufacturing capabilities include the production of high-gloss
lacquer and wooden veneer loudspeaker enclosures, wire milling, voice coil
winding and the use of computer controlled lathes and other machine tools to
produce precision components.
In North
America, our principal Professional manufacturing facilities for loudspeakers
are located in California and Mexico, and for electronic products, including
amplifiers and effects devices, are located in Utah and Indiana. European
Professional electronics manufacturing includes mixing consoles in the United
Kingdom and Switzerland, and microphones and headphones in Austria.
Our
facilities have been designed to emphasize worker safety and compliance with
environmental and safety regulations.
Suppliers
We use
externally sourced microchips in many of our products. A significant disruption
in our microchip supply chain and an inability to obtain alternative sources
would have a material impact on our consolidated results of
operations.
Several
independent suppliers manufacture Consumer and Professional loudspeakers and
electronic products and personal navigation devices. We do not
believe the loss of any one of these suppliers would have a material impact on
our consolidated results of operations or consolidated financial
position.
Trademarks
and Patents
We market
our products under numerous brand names that are protected by both pending and
registered trademarks around the world. Our brands include JBL, Infinity,
Harman/Kardon, Lexicon, Mark
Levinson, Revel, Crown, Becker, Soundcraft, Spirit, DigiTech,
AKG, Studer, BSS and dbx. Our
trademark registrations cover use of trademark rights in connection with various
products, such as loudspeakers, speaker systems, speaker system components and
other electrical and electronic devices. We have registered or taken other
protective measures for many of these trademarks in substantially all major
industrialized countries.
As of
June 30, 2008 we had 1,868 trademark registrations and 307 pending trademark
applications around the world. On that date, we also had 2,029 United States and
foreign patents and 2,085 pending patent applications covering various audio,
infotainment and software products.
Seasonality
We
experience seasonal fluctuations in sales and earnings. Historically, our first
fiscal quarter ended September 30 is generally the weakest due to automotive
model year changeovers and the summer holidays in Europe. Our sales and earnings
may also vary due to customer acceptance of our products, product offerings by
our competitors and general economic conditions, including fluctuations in
foreign currency exchange rates.
Customers/Industry
Concentration
We are
subject to various risks related to our dependence on key
customers. Sales to Daimler accounted for 18 percent and sales to
Audi/VW accounted for 11 percent of our total consolidated net sales for the
fiscal year ended June 30, 2008. The majority of the Daimler sales
were to the Mercedes-Benz division. Accounts receivable due from
Daimler accounted for 8 percent and accounts receivable due from Audi/VW
accounted for 11 percent of total consolidated accounts receivable at June 30,
2008. We anticipate that Daimler and Audi/VW will continue to account
for a significant portion of our net sales and accounts receivables for the
foreseeable future.
For the
fiscal year ended June 30, 2008, approximately 72 percent of our sales were to
automobile manufacturers. Our automotive customers are not obligated
to any long-term purchase of our products. The loss of Daimler,
Audi/VW or any of our other significant automotive customers would have a
material adverse effect on our total consolidated net sales, earnings and
financial position.
Backlog
Orders
We
manufacture automotive products and systems on a just-in-time basis and maintain
sufficient inventories of finished goods to meet Consumer and Professional
customer orders promptly. As a result, we do not consider the level
of backlog to be an important indication of our future performance. Our backlog
was approximately $69 million at June 30, 2008. We expect to deliver these
products within the next twelve months. Our backlog was approximately $27
million at June 30, 2007.
Warranty
Liabilities
We
warrant our products to be free from defects in materials and workmanship for
periods ranging from six months to six years from the date of purchase,
depending on the business segment and product. The warranty is a limited
warranty, and it may impose certain shipping costs on the customer and exclude
deficiencies in appearance except for those evident when the product is
delivered. Dealers and warranty service providers normally perform warranty
service for loudspeakers and electronics in the field, using parts we supply on
an exchange basis. Estimated warranty liabilities are based upon past experience
with similar types of products, the technological complexity of certain
products, replacement cost and other factors. We take these factors into
consideration when assessing the adequacy of our warranty provisions for periods
still open to claim.
Competition
The audio
industry is fragmented and competitive and includes numerous manufacturers
offering audio products that vary widely in price, quality and distribution
methods. Consumer home, multimedia and mobile aftermarket products are offered
through audio specialty stores, discount stores, department stores, mail order
firms and Internet merchants. Automotive and computer manufacturers also offer
branded audio products as options. Music instrument retailers, national
electronics retailers, audio dealers, contractors and installers offer
professional products and customers can also purchase these products on a
contract bid basis. We concentrate primarily on the higher-quality,
higher-priced segments of the audio market and compete based upon the strength
of our brand names, the quality of our products, our ability to provide
integrated systems and our comprehensive marketing, engineering and
manufacturing resources.
In the
automotive audio market, we compete with Bose, Pioneer ASK, Foster Electric and
Panasonic in the sale of audio systems to automotive manufacturers and Alpine,
Bosch, Panasonic, Continental, Visteon, Mitsubishi Electronics, Aisin Seiki and
Denso in the sale of electronics and infotainment systems to automotive
manufacturers. We compete based upon the strength of our brand names and the
quality of our products.
We
believe our competitive position is enhanced by our technical expertise in
designing and integrating acoustics, navigation, speech recognition and
human-machine interfaces into complete infotainment systems uniquely adapted to
the specific requirements of each automobile model.
We
believe that we currently have a significant share of the consumer market for
loudspeakers, primarily as a result of the strength of our brand names and our
technology. We believe JBL and Infinity are two of the most recognized
loudspeaker brands in the world. Our high-end loudspeaker brand, Revel, extends
our market position. Principal competitors in the consumer loudspeaker market
include Bose, Klipsch, Polk Audio, B&W and Boston Acoustics.
Competition
in the consumer home electronics market remains intense and is dominated by
large Asian manufacturers. This market is characterized by the short life cycle
of products and a need for continuous design and development efforts. Our
competitive strategy is to compete in the higher-quality segments of this market
and to continue to emphasize our ability to provide system solutions to
customers, including a combination of loudspeakers, electronics products,
integrated surround sound and home theater systems. Our principal electronic
competitors include Yamaha, Sony, Denon, Onkyo, Pioneer and
Marantz. We also compete in the luxury consumer electronics market
with our Mark Levinson and Lexicon brands. Our principal competitors in this
high-end market include Krell, McIntosh, Audio Research, Meridian, Linn and
Classe.
In the
multimedia market, we supply Apple stores and other retailers with JBL and
Harman/Kardon speaker systems that serve Apples iPod and iPhone as well as other
MP3 players. Our principal competitors for these products are Bose, Altec
Lansing and Klipsch. We also offer Harman/Kardon and JBL speaker systems to
personal computer retailers. In this market, our principal competitors are
Creative Labs, Altec Lansing, Logitech, Klipsch and Cyber Acoustics.
Additionally, Harman/Kardon audio technology is built into certain Toshiba
laptop computers. The Harman/Kardon Drive + Play 2 mobile product provides full
MP3 control and interface for Apples iPod and iPhone and includes a highly
visible display. Our principal competitor in the MP3 mobile accessory market is
Alpine. Our personal navigation devices range from simple navigation
units to multi-functional units that encompass all-in-one navigation and
entertainment systems for vehicle and personal use. Our principal
competitors for these products are Garmin, TomTom, Magellan and
Pioneer.
The
market for professional sound systems is highly competitive. We believe that we
have historically held a leading market position in the professional loudspeaker
market and have complemented our professional loudspeaker line by adding digital
professional electronic products and broadcast and recording equipment. We
compete by utilizing our ability to provide systems solutions to meet the
complete audio requirements of our professional customers. With our HiQnet
networking protocol software, our professional brand products can communicate
and operate together. We offer products for most professional audio
applications.
We
compete in the sound reinforcement market using many of our brand names,
including JBL Professional, AKG, Crown, Soundcraft, dbx and BSS. Our principal
competitors in the sound reinforcement market include Telex, Electro Voice,
Mackie, QSC, Meyer Sound Laboratories, Sennheiser, Peavey, Shure, Audio
Technica, and Yamaha. Our Studer, AKG, Soundcraft, JBL Professional and Lexicon
branded products compete in the recording and broadcast markets. Principal
competitors in these markets include Yamaha, Sennheiser, Loud Technologies,
Inc., Lawo, Harris Corporation, DigiDesign/M-Audio, Genelec, KRK, TC
Electronics, Stagetec and Sony. In the music instrument market, competitors for
our JBL Professional, DigiTech, dbx, Crown, Soundcraft and AKG products include
Yamaha, Peavey, QSC, Shure, Sennheiser, Line 6, Dunlop, Zoom, Audio Technica and
Roland. We also compete in the industrial and architectural sound market.
Competitors within this market include Siemens, Peavey and Tannoy.
We are
subject to various Federal, state, local and international environmental laws
and regulations, including those governing the use, discharge and disposal of
hazardous materials. We believe that our facilities are in substantial
compliance with current laws and regulations. The cost of compliance with
current environmental laws and regulations has not been, and is not expected to
be, material.
Research
and Development
Expenditures
for research and development were $395.9 million, $356.7 million and $302.0
million for the fiscal years ended June 30, 2008, 2007 and 2006,
respectively.
Number
of Employees
At June
30, 2008, we had 11,694 full-time employees, including 4,834 employees located
in North America and 6,860 located outside of North America.
Website
Information
Our
corporate website is located at www.harman.com. Through our website we make
available, free of charge, access to our Annual Reports on Form 10-K, Quarterly
Reports on Form 10-Q and Current Reports on Form 8-K that we file or furnish
pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934. Our
website also provides access to reports filed by our directors, executive
officers and certain significant stockholders pursuant to Section 16 of the
Securities Exchange Act of 1934. In addition, our Corporate Governance
Guidelines, Ethics Code and charters for three committees of our Board of
Directors are available on our website. The information on our website is not
incorporated by reference into this report. In addition, the Securities and
Exchange Commission (SEC) maintains a website, www.sec.gov, that contains
reports, proxy and information statements and other information that we file
electronically with the SEC.
Item 1A. Risk Factors
In
addition to the other information included in this report, you should carefully
consider the risk factors described below.
Currency
fluctuations may reduce profits on our foreign sales or increase our costs,
either of which could adversely affect our financial results.
A
significant amount of our assets and operations are located outside the United
States. Consequently, we are subject to fluctuations in foreign currency
exchange rates, especially the Euro. Translation losses resulting from currency
fluctuations may adversely affect the profits from our foreign operations and
have a negative impact on our financial results. In addition, we purchase
certain foreign-made products. Although we hedge a portion of our foreign
currency exposure and, due to the multiple currencies involved in our business,
foreign currency positions partially offset and are netted against one another
to reduce exposure, we cannot assure you that fluctuations in foreign currency
exchange rates will not make these products more expensive to purchase.
Increases in our cost of purchasing these products could negatively impact our
financial results if we are not able to pass those increased costs on to our
customers.
Failure
to maintain relationships with our largest customers and failure by our
customers to continue to purchase expected quantities of our products due to
changes in market conditions would have an adverse effect on our
operations.
We
anticipate that our automotive customers, including Daimler and Audi/VW, will
continue to account for a significant portion of our sales for the foreseeable
future. However, neither Daimler, Audi/VW, nor our other automotive customers
are obligated to any long-term purchases of our products. The loss of sales to
Daimler, Audi/VW, or to any of our other significant automotive customers, would
have a material adverse effect on our consolidated sales, earnings and financial
position. In recent years, we held a majority of Daimlers
infotainment and audio system business. Automakers customarily
maintain dual sourcing arrangements, so our supply relationship with Daimler
exceeded expectations. Daimler made strategic decisions in 2006 and
2007 to move to dual sourcing, and as a result, our share of Mercedes business
has declined in fiscal 2008 and will further decline in fiscal
2009. Thereafter, the production volume reaches a stable level which
is still substantial. However, it is lower than the peak levels of
2006 and 2007. This change in Daimler volume reduces our single customer
dependence. Sales increases with other automotive customers have
offset the reduction in sales at Daimler.
Our
products may not satisfy shifting consumer demand or compete successfully with
competitors products.
Our
business is based on the demand for audio and video products and our ability to
introduce distinctive new products that anticipate changing consumer demands and
capitalize upon emerging technologies. If we fail to introduce new
products, misinterpret consumer preferences or fail to respond to changes in the
marketplace, consumer demand for our products could decrease and our brand image
could suffer. In addition, our competitors may introduce superior
designs or business strategies, impairing our distinctive image and our products
desirability. If any of these events occur, our sales could
decline.
A
decrease in discretionary spending would likely reduce our sales.
Our sales
are dependent on discretionary spending by consumers, which may be adversely
impacted by economic conditions affecting disposable consumer income and retail
sales. In addition, our sales of audio, electronic and infotainment products to
automotive customers are dependent on the overall success of the automobile
industry, as well as the willingness of automobile purchasers to pay for the
option of a premium branded automotive audio system or a multi-function digital
infotainment system.
Our
business could be adversely affected if we are unable to obtain raw materials
and components from our suppliers on favorable terms.
We are
dependent upon third party suppliers, both in the United States and other
countries, for various components, parts, raw materials and finished products.
Some of our suppliers may produce products that compete with our products. We
use externally sourced microchips in many of our products. A significant
disruption in our supply chain and an inability to obtain alternative sources
could have a material impact on our consolidated results of
operations.
Failure
to deliver products on time to our automotive customers could adversely affect
our financial results.
We have
products in various stages of development for our automotive
customers. If we do not complete our development efforts in time to
meet our customers vehicle production requirements, we could be subject to
monetary penalties and damage our customer relationships, which could have a
material adverse effect on our consolidated sales, earnings and financial
condition.
Our
business could be adversely affected by a strike or work stoppage at one of our
manufacturing plants or at a facility of one of our significant customers or at
a common carrier or major shipping location.
Certain
of our automotive customers are unionized and may incur work stoppages or
strikes. A work stoppage at our facilities or those of our automotive customers
could have a material adverse effect on our consolidated sales, earnings and
financial condition. In addition, a work stoppage at a common carrier or a major
shipping location could also have a material adverse effect on our consolidated
sales, earnings and financial condition.
Obligations
to correct product defects covered by our warranties could adversely affect our
financial results.
We
warrant our products to be free from defects in materials and workmanship for
periods ranging from six months to six years. Costs to correct
product defects may exceed our estimates and adversely affect our results of
operations and financial condition.
Bankruptcy
of a significant customer could have a material adverse effect on our liquidity,
financial position and results of operations.
A
significant portion of our revenues are derived from sales to customers in the
automotive industry, where companies have experienced financial
difficulties. As part of the bankruptcy process, our pre-petition
receivables may not be realized, customer manufacturing sites may be closed or
contracts voided. The bankruptcy of a major customer could have a
material adverse effect on the Companys liquidity, financial position, and
results of operations.
We
may lose market share if we are unable to compete successfully against our
current and future competitors.
The audio
and video product markets that we serve are fragmented, highly competitive,
rapidly changing and characterized by intense price competition.
Many
manufacturers, large and small, domestic and foreign, offer audio and video
systems that vary widely in price and quality and are marketed through a variety
of channels, including audio and video specialty stores, discount stores,
department stores, mail order firms, and the Internet. Some of our competitors
have financial and other resources greater than ours. We cannot assure you that
we will continue to compete effectively against existing or new competitors that
may enter our markets. We also compete indirectly with automobile manufacturers
that may improve the quality of original equipment audio and electronic systems,
reducing demand for our aftermarket mobile audio products, or change the designs
of their cars to make installation of our aftermarket products more difficult or
expensive.
If
we do not continue to develop, introduce and achieve market acceptance of new
and enhanced products, our sales may decrease.
In order
to increase sales in current markets and gain entry into new markets, we must
maintain and improve existing products, while successfully developing and
introducing new products. Our new and enhanced products must respond to
technological developments and changing consumer preferences. We may
experience difficulties that delay or prevent the development, introduction or
market acceptance of new or enhanced products. Furthermore, we may be unable to
detect and correct defects in some of our products before we ship them. Delays
or defects in new product introduction may result in loss of sales or delays in
market acceptance. Even after introduction, our new or enhanced products may not
satisfy consumer preferences and product failures may cause consumers to reject
our products. As a result, these products may not achieve market acceptance. In
addition, our competitors new products and product enhancements may cause
consumers to defer or forego purchases of our products.
Our
operations could be harmed by factors including political instability, natural
disasters, fluctuations in currency exchange rates and changes in regulations
that govern international transactions.
The risks
inherent in international trade may reduce our international sales and harm our
business and the businesses of our distributors and suppliers. These risks
include:
These and
other risks may increase the relative price of our products compared to those
manufactured in other countries, reducing the demand for our
products.
If
we are unable to enforce or defend our ownership and use of our intellectual
property, our business may decline.
Our
future success will depend, in substantial part, on our intellectual property.
We seek to protect our intellectual property rights, but our actions may not
adequately protect the rights covered by our patents, patent applications,
trademarks and other proprietary rights and prosecution of our claims could be
time consuming and costly. In addition, the intellectual property laws of some
foreign countries do not protect our proprietary rights, as do the laws of the
United States. Despite our efforts to protect our proprietary information, third
parties may obtain, disclose or use our proprietary information without our
authorization, which could adversely affect our business. From time to time,
third parties have alleged that we infringe their proprietary rights. These
claims or similar future claims could subject us to significant liability for
damages, result in the invalidation of our proprietary rights, limit our ability
to use infringing intellectual property or force us to license third-party
technology rather than dispute the merits of any infringement claim. Even if we
prevail, any associated litigation could be time consuming and expensive and
could result in the diversion of our time and resources.
Covenants
in our existing debt agreements could restrict our operations.
Our
existing revolving credit facility and the indenture for our convertible senior
notes contain provisions that could restrict our operating and financing
activities. Together, they restrict our ability to, among other
things:
Because
of the restrictions on our ability to create or assume liens, we may have
difficulty securing additional financing in the form of additional indebtedness.
In addition, our revolving credit facility contains other and more restrictive
covenants, including financial covenants that will require us to achieve
specified financial and operating results and maintain compliance with specified
financial ratios. We may have to curtail some of our operations to maintain
compliance with these covenants.
If
we fail to comply with the covenants contained in our existing debt agreements,
the related debt incurred under those agreements could be declared immediately
due and payable, which could also trigger a default under other
agreements.
Our
ability to meet the covenants or requirements in our credit facilities and the
indenture for our convertible senior notes may be affected by events beyond our
control, and we cannot assure you that we will satisfy these covenants and
requirements. A breach of these covenants or our inability to comply with the
financial ratios, tests or other restrictions could result in an event of
default under the applicable agreement. Upon the occurrence of an
event of default under the applicable agreement, the lenders could elect to
declare all amounts outstanding under the applicable agreement, together with
accrued interest, to be immediately due and payable. If the payment of our
indebtedness is accelerated, we cannot assure you that we will be able to make
those payments or borrow sufficient funds from alternative sources to make those
payments. Even if we were to obtain additional financing, that financing may be
on unfavorable terms.
We
are engaged in ongoing litigation and may be the subject of additional
litigation that may result in payments to third parties, which could harm our
business and financial results.
As more
fully described in Part II, Item 3 Legal Proceedings, of this report, we are
currently involved in litigation arising out of or relating to the events
leading up to the termination of the proposed acquisition of the Company in
October 2007 or any earnings guidance provided by the Company. In
addition, similar litigation has been and may be initiated against us and others
based on the alleged activities and disclosures at issue in the pending
litigation. We cannot predict the outcome of any such proceeding or
the likelihood that further proceedings will be instituted against
us. In the event that there is an adverse ruling in any legal
proceeding, we may be required to make payments to third parties that could harm
our business or financial results. Furthermore, regardless of the
merits of any claim, the continued maintenance of these legal proceedings may
result in substantial legal expense and could also result in the diversion of
our managements time and attention away from our business.
Harman
International is a holding company with no operations of its own and therefore
our cash flow and ability to service debt is dependent upon distributions from
our subsidiaries.
Our
ability to service our debt and pay dividends is dependent upon the operating
earnings of our subsidiaries. The distribution of those earnings, or advances or
other distributions of funds by those subsidiaries to Harman International, all
of which could be subject to statutory or contractual restrictions, are
contingent upon the subsidiaries earnings and are subject to various business
considerations.
Any of
the foregoing factors could have a material adverse effect on our business,
results of operations and financial condition. In light of these risks and
uncertainties, there can be no assurance that the results and events
contemplated by the forward-looking statements contained in this report will in
fact transpire.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Our
corporate headquarters are located at 1101 Pennsylvania Avenue, N.W.,
Washington, D.C. 20004. We expect to relocate our corporate
headquarters to Stamford, Connecticut in the second fiscal quarter of fiscal
year 2009. Certain information regarding our principal facilities are
described in the table below.
We also
own or lease other facilities that are not considered principal properties. We
believe that our facilities are suitable and adequate for our present needs and
that suitable additional or substitute facilities will be available, if
required.
Item 3. Legal Proceedings
In
re Harman International Industries, Inc. Securities Litigation
On
October 1, 2007, a purported class action lawsuit was filed by Cheolan Kim (the
Kim Plaintiff) against the Company and certain of its officers in the United
States District Court for the District of Columbia seeking compensatory damages
and costs on behalf of all persons who purchased the Companys common stock
between April 26, 2007 and September 24, 2007 (the Class Period). The
original complaint purported to allege claims for violations of Sections 10(b)
and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated
thereunder.
The
complaint alleged that defendants omitted to disclose material adverse facts
about the Companys financial condition and business prospects. The
complaint contended that had these facts not been concealed at the time the
merger agreement with KKR and GSCP was entered, there would not have been a
merger agreement, or it would have been at a much lower price, and the price of
the Companys common stock therefore would not have been artificially inflated
during the Class Period. The Kim Plaintiff alleged that, following
the reports that the proposed merger was not going to be completed, the price of
the Companys common stock declined causing the plaintiff class significant
losses.
On
November 30, 2007, the Boca Raton General Employees Pension Plan (the Boca Raton
Plaintiff) filed a purported class action lawsuit against the Company and
certain of its officers in the United States District Court for the District of
Columbia seeking compensatory damages and costs on behalf of all persons who
purchased the Companys common stock between April 26, 2007 and September 24,
2007. The allegations in the Boca complaint are essentially identical
to the allegations in the original Kim complaint, and like the original Kim
complaint, the Boca complaint alleges claims for violations of Sections 10(b)
and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated
thereunder.
On
January 16, 2008, the Kim Plaintiff filed an amended complaint. The
amended complaint, which extended the Class Period through January 11, 2008,
contended that, in addition to the violations alleged in the original complaint,
the Company also violated Sections 10(b) and 20(a) and Rule 10b-5 by knowingly
failing to disclose significant problems relating to its personal navigation
device (PND) sales forecasts, production, pricing, and inventory prior to
January 14, 2008. The amended complaint claimed that when Defendants
revealed for the first time on January 14, 2008 that shifts in PND sales would
adversely impact earnings per share by more than $1.00 per share in fiscal 2008,
that led to a further decline in the Companys share value and additional losses
to the plaintiff class.
On
February 15, 2008, the Court ordered the consolidation of the Kim action with
the Boca action, the administrative closing of Boca, and designated the short
caption of the consolidated action as In re Harman International Industries Inc.
Securities Litigation, civil action no. 1:07-cv-01757 (RWR). That
same day, the Court appointed Arkansas Public Retirement System as Lead
Plaintiff and approved the law firm Cohen, Milstein, Hausfeld and Toll, P.L.L.C.
to serve as Lead Counsel.
On March
24, 2008, the Court ordered, for pretrial management purposes only, the
consolidation of Patrick Russell v. Harman International Industries,
Incorporated, et al. with In re Harman International Industries Inc. Securities
Litigation .
On May 2,
2008, Lead Plaintiff filed a Consolidated Class Action Complaint (the
Consolidated Complaint). The Consolidated Complaint, which extends
the Class Period through February 5, 2008, contends that the Company and certain
of its officers and directors violated Sections 10(b) and 20(a) and Rule 10b-5
by issuing false and misleading disclosures regarding the Companys financial
condition in fiscal 2007 and fiscal 2008. In particular, the
Consolidated Complaint alleges that defendants knowingly or recklessly failed to
disclose material adverse facts about MyGIG radios, PNDs and the Companys
capital expenditures. The Consolidated Complaint alleges that when
the Companys true financial condition became known to the market, the price of
the Companys stock declined significantly, causing losses to the plaintiff
class.
On July
3, 2008, defendants moved to dismiss the Consolidated Complaint in its
entirety.
We
believe the lawsuit, which is still in its earliest stages, is without merit and
we intend to vigorously defend against it.
Patrick
Russell v. Harman International Industries, Incorporated, et al.
Patrick
Russell (the Russell Plaintiff) filed a complaint on December 7, 2007 in the
United States District Court for the District of Columbia and an amended
purported putative class action complaint on June 2, 2008 against the Company
and certain of its officers and directors alleging violations of the Employee
Retirement Income Security Act (ERISA) and seeking, on behalf of all
participants in and beneficiaries of the Harman International Industries,
Incorporated Retirement Savings Plan (the Plan), compensatory damages
for losses to the Plan as well as injunctive relief, constructive trust,
restitution, and other monetary relief. The amended complaint alleges
that from April 26, 2007 to the present, defendants failed to prudently and
loyally manage the Plans assets, thereby breaching their fiduciary duties in
violation of ERISA, by causing the Plan to invest in Company stock
notwithstanding that the stock allegedly was no longer a prudent investment for
the Participants retirement savings. The amended complaint further
claims that, during the Class Period, defendants failed to monitor the Plan
fiduciaries, and failed to provide the Plan fiduciaries with, and to disclose to
Plan participants, adverse facts regarding the Company and its businesses and
prospects. The Russell Plaintiff also contends that defendants
breached their duties to avoid conflicts of interest and to serve the interests
of participants in and beneficiaries of the Plan with undivided
loyalty. As a result of these alleged fiduciary breaches, the
complaint asserts that the Plan has suffered substantial losses, resulting in
the depletion of millions of dollars of the retirement savings and anticipated
retirement income of the Plans Participants.
On March
24, 2008, the Court ordered, for pretrial management purposes only, the
consolidation of Patrick Russell v. Harman International Industries,
Incorporated, et al. with In re Harman International Industries Inc. Securities
Litigation.
Defendants
moved to dismiss the complaint in its entirety on August 5, 2008.
We
believe the lawsuit, which is still in its earliest stages, is without merit and
we intend to vigorously defend against it.
Siemens
vs. Harman Becker Automotive Systems GmbH.
In
October 2006 Harman Becker received notice of a complaint filed by Siemens AG
against it with the Regional Court in Dsseldorf in August 2006 alleging that
certain of Harman Beckers infotainment products including both radio receiver
and Bluetooth hands free telephony functionality, infringe upon a patent owned
by Siemens. In November 2006 Harman Becker filed suit with the German
Federal Patent Court in Munich to nullify the claims of this
patent.
On August
14, 2007, the court of first instance in Dsseldorf ruled that the patent in
question had been infringed and ordered Harman Becker to cease selling the
products in question in Germany, and to compile and submit data to Siemens
concerning its prior sales of such products. Harman Becker has
appealed that ruling.
Despite
the pending appeal, Siemens AG provisionally enforced the ruling against Harman
Becker. Accordingly, Harman Becker ceased selling aftermarket
products covered by the patent in Germany, and submitted the required data to
Siemens AG.
On June
4, 2008 the German Federal Patent Court nullified all relevant claims of Siemens
patent. As a result, Harman Becker resumed selling the affected
products, and Siemens suspended further attempts to enforce the
patent. Siemens also requested that Harman Becker suspend its appeal
of the Dsseldorf courts ruling of infringement until the German Federal Patent
Courts nullity ruling has become final. Harman has consented to this
suspension. The written decision of the German Federal Patent Court has not been
issued. Upon receipt of the written decision, Siemens will have one month to
appeal.
We intend
to continue defending this lawsuit.
While the
outcome of any of the legal proceedings described above cannot at this time be
predicted with certainty, we do not expect these matters will materially affect
our financial condition or results of operations.
Other
Legal Actions
At June
30, 2008, we were involved in several other legal actions. The
outcome of these legal actions cannot be predicted with certainty; however,
management, based upon advice from legal counsel, believes such actions are
either without merit or will not have a material adverse effect on our financial
position or results of operations.
Item 4. Submission of Matters to a Vote of Security
Holders and Executive Officers of the Registrant
Submission
of Matters to a Vote of Security Holders
None.
Executive
Officers of the Registrant
Executive
officers are elected annually by our Board of Directors and hold office at the
pleasure of the Board until the next annual election of officers or until their
successors are elected and qualified. Each of our current executive
officers is identified below together with information about each officers age,
position and employment history for the last five years.
Dinesh
Paliwal became Chairman and Chief Executive Officer on July 1,
2008. Mr. Paliwal joined our Company on July 1, 2007 as President,
Chief Executive Officer and Vice Chairman and was elected a director on August
13, 2007. Prior to joining our Company, Mr. Paliwal served as
President of Global Markets and Technology of ABB Ltd from January 2006 until
June 2007 and as President and CEO of ABB North America from January 2004 until
June 2007. He was President and CEO of ABB Automation from October 2002 to
December 2005.
Herbert
Parker joined our Company in June 2008 as Executive Vice President and Chief
Financial Officer. On August 15, 2008, Mr. Parker assumed the
additional position of principal accounting officer. Prior to joining
our Company, he served as Chief Financial Officer of ABB North America, a power
automation company, from 2006 to May 2008. Mr. Parker also served as
CFO, Automation Technologies division of ABB North America, from 2002 through
2005.
Helmut
Schinagel became Chief Technology Officer of our Company in July
2008. Mr. Schinagel previously served as the Chief Executive Officer
of our Automotive division from October 2006 through June 2008. Prior
to joining our Company, Mr. Schinagel served as Senior Vice President of the BMW
Group, an automotive manufacturer, from 1999 to 2006.
Klaus
Blickle joined the Company in July 2008 as President
Automotive. Prior to joining our Company, Mr. Blickle was President
and Chief Executive Officer of EDAG Group from 2005 through 2008. Mr.
Blickle has also served as President of Tesma International Inc. (Magna Group)
from 2004 to 2005 and as President and Chief Technology Office of American
Special Cars, Inc.
Richard
Sorota joined the Company in January 2008 as President Consumer. He
previously served as Senior Vice President at The Scotts Miracle-Gro Company
from 2004 through 2007 and as Senior Vice President at Royal Philips Electronics
from 2000 through 2004.
Blake
Augsburger joined our Company in 2001 as the President of Crown
International. In 2006, Mr. Augsburger was promoted to President of
our Professional division. Mr. Augsburger also serves as Regional
Manager for North America. Prior to joining our Company, he was
Corporate Vice President and General Manager for Hubbell High Voltage Test
Businesses from 1999 to 2001.
John
Stacey joined our Company in February 2008 as Vice President and Chief Human
Resources Officer. Prior to joining our Company, he was Vice
President, People for InBev North America, Inbev Central and Eastern Europe from
2005 through January 2008. He also served as Vice President, Human
Resources for Labatt USA from 2000 to 2005.
David
Karch has served as Vice President, Operational Excellence since May 2008. From
1998 to May 2008, Mr. Karch served in various positions with Harman/Becker
Automotive Systems, most recently as Senior Vice President, Manufacturing and
Quality.
Edwin
Summers has been employed with our Company as Vice President, General Counsel
since July 1998. He became Secretary in November 2005.
Part
II
Item 5. Market for Registrants Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity Securities
Our
common stock is listed on the New York Stock Exchange and is reported on the New
York Stock Exchange Composite Tape under the symbol HAR. As of August 28, 2008,
there were approximately 123
record holders of our common stock.
The table
below sets forth the reported high and low sales prices for our common stock, as
reported on the New York Stock Exchange, for each quarterly period for fiscal
years ended June 30, 2008 and 2007.
We paid
cash dividends during fiscal 2008 and 2007 of $.05 per share, with a dividend of
$.0125 per share paid in each quarter.
The
following table provides information about shares acquired from employees during
the fourth quarter in connection with the surrender of shares to pay option
exercise prices.
Since
inception of our share repurchase program in June 1998 and through September 30,
2007, we had acquired and placed in treasury a total of 18,198,082 shares of our
common stock at a cost of $639.6 million. Our program was suspended
upon the announcement in April 2007 of our proposed merger with a company formed
by investment funds affiliated with Kohlberg Kravis Roberts & Co. L.P.
(KKR), GS Capital Partners VI Fund, L.P. and its related funds, which are
sponsored by Goldman, Sachs & Co. (GSCP). On October 22, 2007, we
announced the termination of our agreement with KKR and GSCP and companies
formed by investment funds affiliated with KKR and GSCP. In
connection with the termination agreement, the Company entered into a
note purchase agreement under which it sold $400 million aggregate principal
amount of its 1.25 percent Convertible Notes due 2012 (the Notes) to affiliates
of KKR, GSCP, Citibank, N.A. and HSBC USA, Inc. On October 30, 2007,
the Company used the proceeds from the issuance and sale of the Notes to
repurchase 4,775,549 shares of the Companys common stock at a cost of $400.3
million. We received an additional 2,449,230 shares upon settlement
of the October 2007 repurchase. The total number of shares purchased
and retired as a result of the October 2007 repurchase was
7,224,779. The total number of shares repurchased through June 30,
2008 was 25,422,861.
For a
description of limitations on repurchases of shares and on the payment of
dividends, see Managements Discussion and Analysis of Financial Condition and
Results of Operations Financial Condition located in Item 7 of Part II of this
report.
Item 6. Selected Financial Data
The
following table presents selected historical financial data derived from the
audited Consolidated Financial Statements for each of the five years
presented. The information should be read in conjunction with
Managements Discussion and Analysis of Financial Condition and Results of
Operations and the audited Consolidated Financial Statements and the Notes
thereto.
Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations
The
following discussion should be read in conjunction with the information
presented in other sections of this Annual Report on Form 10-K, including Item
1. Business, Item 6. Selected Financial Data, and Item 8. Financial Statements
and Supplementary Data. This discussion contains forward-looking statements
which are based on our current expectations and experience and our perception of
historical trends, current market conditions, including customer acceptance of
our new products, current economic data, expected future developments, including
foreign currency exchange rates, and other factors that we believe are
appropriate under the circumstances. These statements involve risks and
uncertainties that could cause actual results to differ materially from those
suggested in the forward-looking statements. See Risk Factors included in Item
1A of Part I of this report.
We begin
this discussion with an overview of our company to give you an understanding of
our business and the markets we serve. We then discuss our critical accounting
policies. This is followed by a discussion of our results of operations for the
fiscal years ended June 30, 2008, 2007 and 2006. We include in this discussion
an analysis of certain significant year-to-year variances included in our
results of operations and an analysis of our restructuring
program. We also provide specific information regarding our three
reportable business segments: Automotive, Consumer and Professional. We then
discuss our financial condition at June 30, 2008 with a comparison to June 30,
2007. This section contains information regarding our liquidity, capital
resources and cash flows from operating, investing and financing
activities. We complete our discussion with an update on recent
developments and a business outlook for future periods.
Overview
We
design, manufacture and market high-quality, high-fidelity audio products and
electronic systems for the automotive, consumer and professional markets. We
have developed, both internally and through a series of strategic acquisitions,
a broad range of product offerings sold under renowned brand names in our
principal markets. These brand names have a heritage of technological leadership
and product innovation. Our three reportable business segments,
Automotive, Consumer and Professional, are based on the end-user markets we
serve.
Automotive
designs, manufactures and markets audio, electronic and infotainment systems for
vehicle applications. Our systems are generally shipped directly to our
automotive customers for factory installation. Infotainment systems are a
combination of information and entertainment components that may include or
control GPS navigation, traffic information, voice-activated telephone and
climate control, rear seat entertainment, wireless Internet access, hard disk
recording, MP3 playback and a premium branded audio system. We expect
future infotainment systems to also provide driver safety capabilities such as
lane guidance, pre-crash emergency braking, adaptive cruise control, and night
vision. Automotive also provides aftermarket products such as personal
navigation devices (PNDs) to customers primarily in Europe.
Consumer
designs, manufactures and markets audio, video and electronic systems for
multimedia, home and mobile applications. Multimedia applications include
innovative accessories for portable electronic devices including music-enabled
cell phones such as the iPhone, and MP3 players including the
iPod. Our multimedia applications also include audio systems for
personal computers. Home applications include systems to provide
high-quality audio throughout the home and to enhance video systems such as home
theatres. Aftermarket mobile products include speakers and amplifiers
that deliver audio entertainment in the vehicle. Consumer products
are primarily distributed through retail outlets.
Professional
designs, manufactures and markets loudspeakers and electronic systems used by
audio professionals in concert halls, stadiums, airports, houses of worship and
other public spaces. We also develop products for recording,
broadcast, cinema, touring and music reproduction applications. In
addition, we have leading products in both the portable PA market and musician
vertical markets serving small bands, DJs and other performers. A
growing number of our products are enabled by our proprietary HiQnet protocol
which provides centralized monitoring and control of both complex and simple
professional audio systems.
Our
products are sold worldwide, with the largest markets being the United States
and Germany. In the United States, our primary manufacturing facilities are
located in California, Kentucky, Missouri, Indiana and Utah. Outside of the
United States, we have significant manufacturing facilities in Germany, Austria,
the United Kingdom, Mexico, Hungary, France and China. During fiscal
2008, we announced a restructuring program that will reduce our manufacturing
footprint and result in the closure of our Automotive manufacturing facilities
in California and Indiana. We include further information regarding
our restructuring program later in this discussion.
Our sales
and earnings may vary due to the production schedules of our automotive
customers, customer acceptance of our products, the timing of new product
introductions, product offerings by our competitors and general economic
conditions. Since our businesses operate using local currencies, our
reported sales and earnings may also fluctuate due to foreign currency exchange
rates, especially for the Euro.
On
October 22, 2007, we announced that we had entered into an agreement with KKR
and GSCP and companies formed by investment funds affiliated with KKR and GSCP,
to terminate the merger agreement we had entered into with these parties in
April 2007, without litigation or payment of a termination fee. In
connection with the settlement, we sold $400 million of our 1.25 percent
Convertible Senior Notes due 2012 (Notes).
The Board
determined that this settlement would permit us to better focus our time and
attention on operations and ongoing restructuring efforts by avoiding the cost
and distraction involved in potentially protracted litigation with KKR and GSSP
regarding the termination of the merger agreement. The proceeds from
the sale of the Notes were used to repurchase an aggregate of 7,224,779 shares
of our common stock through an accelerated share repurchase
program.
In
addition to terminating the merger agreement, we appointed new members to the
executive management team and Board of Directors during fiscal year
2008. One of our primary focal points during the year was to develop
a strategic plan that would optimize our manufacturing, engineering and
administrative organizations. This plan also includes more aggressive
penetration of emerging markets and matching our technology efforts with
evolving market trends.
Our
profitability was down in fiscal year 2008 due to lower gross profit margin,
restructuring charges, higher warranty costs, continued high R&D to support
the record number of launches in our Automotive division, and expenses related
to the merger termination. The decrease in gross profit margin was primarily
related to several new Automotive platform launches, called Start of Production
(SOPs), which typically start their life cycle at their lowest margins, higher
Automotive warranty costs and lower Consumer margins. We were also
adversely affected by weakening economies in the U.S. and Europe. We
believe fiscal 2009 will be a challenging year as we execute our strategic
plan. However, we feel these initiatives are necessary to return our
company to long-term profitable growth.
Critical
Accounting Policies
The
methods, estimates and judgments we use in applying our accounting policies, in
conformity with generally accepted accounting principles in the United States
(GAAP), have a significant impact on the results we report in our financial
statements. We base our estimates on historical experience and on various other
assumptions that we believe to be reasonable under the circumstances. The
estimates affect the carrying values of assets and liabilities. Actual results
may differ from these estimates under different assumptions or conditions. Our
accounting policies are more fully described in Note 1, Summary of Significant Accounting
Policies, of our consolidated financial statements located in Item 8 of
Part II. However, we believe the following policies merit discussion due to
their higher degree of judgment, estimation, or complexity.
Allowance
for Doubtful Accounts
Our
products are sold to customers in many different markets and geographic
locations. Methodologies for estimating bad debt reserves include specific
reserves for known collectibility issues and percentages applied to aged
receivables based on historical experience. We must make judgments and estimates
regarding account receivables that may become uncollectible. These estimates
affect our bad debt reserve and results of operations. We base these estimates
on many factors including historical collection rates, the financial stability
and size of our customers as well as the markets they serve and our analysis of
aged accounts receivable. Our judgments and estimates regarding collectibility
of accounts receivable have an impact on our financial statements.
Inventory
Valuation
The
valuation of inventory requires us to make judgments and estimates regarding
excess, obsolete or damaged inventories including raw materials, finished goods
and spare parts. Our determination of adequate reserves requires us to analyze
the aging of inventories and the demand for parts and to work closely with our
sales and marketing staff to determine future demand and pricing for our
products. We make these evaluations on a regular basis and adjustments are made
to the reserves as needed. These estimates and the methodologies that we use
have an impact on our financial statements.
Goodwill
We
perform a goodwill impairment test on an annual basis. At June 30, 2008, our
goodwill balance of $436.4 million was not impaired. We made this determination
based upon a valuation of our reporting units, as defined by Statement of
Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible
Assets. The valuation took into consideration various factors such as our
historical performance, future discounted cash flows, performance of our
competitors, market conditions and current market valuations of Harman and peer
companies. We cannot predict the occurrence of events that might adversely
affect the reported value of goodwill. These events may include, but are not
limited to, strategic decisions made in response to economic and competitive
conditions, the impact of the economic environment on our customer base, or a
material negative change in our relationships with significant customers. Please
refer to Note 4, Goodwill, of our consolidated
financial statements for additional information regarding our goodwill balance
and annual impairment test.
Pre-Production
and Development Costs
We incur
pre-production and development costs related to infotainment systems that we
develop for automobile manufacturers pursuant to long-term supply
arrangements. Portions of these costs are reimbursable under separate
agreements and are recorded as unbilled costs on our balance sheet in other
current assets and other assets. We believe that the terms of our supply
contracts and established relationship with these automobile manufacturers
reasonably assure that we will collect the reimbursable portions of these
contracts. Accounting for development costs under the percentage of completion
method requires us to make estimates of costs to complete projects. We review
these estimates on a quarterly basis. Unforeseen cost overruns or difficulties
experienced during development could cause losses on these contracts. Such
losses are recorded once a determination is made that a loss will
occur.
Warranty
Liabilities
We
warrant our products to be free from defects in materials and workmanship for
periods ranging from six months to six years from the date of purchase,
depending on the business segment and product. Our dealers and
warranty service providers normally perform warranty service in field locations
and regional service centers, using parts and replacement finished goods we
supply on an exchange basis. Our dealers and warranty service
providers also install updates we provide to correct defects covered by our
warranties. Estimated warranty liabilities are based upon past
experience with similar types of products, the technological complexity of
certain products, replacement cost and other factors. If estimates of warranty
provisions are no longer adequate based on our analysis of current activity,
incremental provisions are recorded. We take these factors into
consideration when assessing the adequacy of our warranty provision for periods
still open to claim.
Income
Taxes
Deferred
income tax assets or liabilities are computed based on the temporary differences
between the financial statement and income tax basis of assets and liabilities
using the statutory marginal income tax rate in effect for the years in which
the differences are expected to reverse. Deferred income tax expenses or credits
are based on the changes in the deferred income tax assets or liabilities from
period to period. We record a valuation allowance to reduce our deferred tax
assets to the amount that we believe is more likely than not to be realized. In
determining the need for, and amount of, a valuation allowance, we consider our
ability to forecast earnings, future taxable income, carryback losses, if any,
and tax planning strategies. We believe the estimate of our income tax assets,
liabilities and expense are critical accounting estimates because if the actual
income tax assets, liabilities and expenses differ from our estimates the
outcome could have a material impact on our results of operations.
Effective
July 1, 2007, we adopted FIN 48, Accounting for Uncertainty in Income Taxes an
interpretation of FASB Statement No. 109 (FIN 48). FIN 48 clarifies
the accounting for uncertainty in income taxes by prescribing rules for
recognition, measurement and classification in our consolidated financial
statements of tax positions taken or expected to be taken in a tax
return. For tax benefits to be recognized under FIN 48, a tax
position must be more-likely-than-not to be sustained upon examination by taxing
authorities. The amount recognized is measured as the largest amount
of benefit that is greater than 50% likely of being realized upon
settlement. The cumulative effect of applying the recognition and
measurement provisions upon adoption of FIN 48 resulted in a decrease of $7.2
million of unrealized tax benefits to our balance of $31.2
million. This reduction was included as an increase to the July 1,
2007 balance of retained earnings.
Severance
and Exit Costs
We
recognize liabilities for severance and exit costs based upon the nature of the
liability incurred. For involuntary separation programs that are
conducted according to the guidelines of our written involuntary separation
plan, we record the liability when it is probable and reasonably estimable in
accordance with SFAS No. 112, Employers Accounting for
Postemployment Benefits. For involuntary separation programs
that are conducted according to the provisions of collective bargaining
agreements or statutes, we record the liability when it is probable and
reasonably estimable in accordance with SFAS No. 88, Employers Accounting for Settlements
and Curtailments of Defined Benefit Pension Plans and for Termination
Benefits. For one-time termination benefits, such as
additional severance pay, and other exit costs, such as lease and other contract
termination costs, the liability is measured and originally recognized at fair
value in the period in which the liability is incurred, with subsequent changes
recognized in the period of change, in accordance with SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities.
Stock-Based
Compensation
On July
1, 2005, we adopted SFAS No. 123R, Share-Based Payment, using
the modified prospective method. Prior to fiscal 2006, we used a fair value
based method of accounting for share-based compensation provided to our
employees in accordance with SFAS No. 123. The adoption of this revised standard
did not have a material impact on our results of operations as we have recorded
share-based compensation expense on a fair value basis for all awards granted on
or after July 1, 2002. See Note 12, Stock Option and Incentive
Plan, to our consolidated financial statements included in this report
for additional information regarding our share-based compensation.
Results
of Operations
Net
Sales
Fiscal
2008 net sales were $4.113 billion, an increase of 16 percent compared to the
prior year. The effects of foreign currency translation contributed
approximately $275 million to the increase in net sales. Each of our
three reportable business segments had higher net sales in fiscal 2008 compared
to the prior year. The strong growth in net sales was primarily due
to full production of an infotainment system for Chrysler, higher infotainment
systems sales to European automakers, and higher sales of professional audio
products.
In fiscal
2007, net sales increased 9 percent to $3.551 billion when compared to the prior
year. The effects of foreign currency translation contributed
approximately $144 million during the year. The growth in net sales
was primarily due to higher sales of infotainment systems to automotive
customers, strong sales of multimedia products, and increased sales in the
professional market.
We
present below a summary of our net sales by reportable business
segment:
Automotive Automotive net
sales increased 19 percent in fiscal 2008 compared to the prior
year. Foreign currency translation contributed approximately $229
million to the net sales increase compared to the prior year. Since a
significant percentage of our sales are to customers in Europe, the majority of
our foreign currency exposure is in the automotive segment. Net sales
were higher in North America due to a full year of producing the MyGig
infotainment system for Chrysler, our first infotainment system launch in North
America. We also had higher infotainment system sales to Hyundai/Kia
in support of their Genesis launch and we began producing infotainment systems
for SsangYong during the year. Audio system sales to Toyota were
higher than last year and we had increased shipments of Mark Levinson premium
audio systems to Lexus. Additionally, we began a new relationship
with Subaru late in fiscal 2008 providing the automaker with acoustic systems.
Excluding foreign currency translation, sales in Europe were higher due to
increased shipments of infotainment systems to Audi for the new A4 and A5
models. We also had higher sales to BMW supporting several mid-level
platforms. These sales increases were partially offset by lower sales
to Mercedes due to reduced E-Class production and price
reductions. Aftermarket sales of PNDs in fiscal 2008 were also lower
than the prior year and may continue to decline as a result of our decision to
focus exclusively on the automotive aftermarket premium sector.
In fiscal
2007, Automotive net sales increased 11 percent compared to fiscal
2006. Foreign currency translation contributed approximately $122
million to the net sales increase compared to the prior year. The
growth in net sales was primarily due to higher shipments of audio systems to
Lexus for the LS460 and to Toyota for the Camry. We also had higher
sales of infotainment system to Audi due to a full year of production of the Q7
platform. Infotainment system sales to Daimler were higher than the
prior year due primarily to supplying the Mercedes-Benz GL
Class. Automotive reported lower sales to BMW, Landrover, Renault,
Porsche and PSA Peugeot Citron compared to the prior year. Sales of
aftermarket products, particularly PNDs, were very strong during fiscal
2007.
Consumer Consumer net sales
increased 7 percent in fiscal 2008 compared to last year. Foreign
currency translation contributed approximately $33 million to the net sales
increase compared to the prior year. Sales were adversely affected by
general economic weakness in North America and Europe. We also
experienced significant competition in North America across multiple product
categories including multimedia, which contributed to lower sales of iPod
docking stations. In Europe, sales excluding foreign currency
translation were higher than last year due to the popularity of certain
Harman/Kardon electronic systems and increased sales of multimedia
products.
Consumer
net sales were 1 percent higher in fiscal 2007 compared to the prior
year. Consumer reported higher multimedia sales in Europe, partially
offset by lower multimedia sales in the United States. Multimedia
products include popular accessories for the iPod such as the JBL OnStage and
OnTime. Sales in the United States were adversely affected by
substantial competition in this market. Sales of Harman/Kardon home
electronic products were also higher in Europe but lower in the United
States. Sales of traditional home loudspeakers were lower in both
Europe and the United States. The decrease in U.S. sales was
primarily due to our decision to exit distribution through a major North
American retailer.
Professional Professional net
sales were 9 percent higher than fiscal 2007. Foreign currency
translation contributed approximately $13 million to the net sales increase
compared to the prior year. Sales growth was supported by an
increasing number of HiQnet enabled products that provide audio professionals
with a centralized point to monitor and control complex audio
systems. JBL Pro had strong sales of products supporting the install,
portable and tour sound markets. Harman Music Group had higher sales
due to new product introductions. AKG sales of headphones and
microphones were higher than year. Additionally, sales of Soundcraft
and Studer mixing consoles were above last year, reflecting successful new
product introductions.
In fiscal
2007, Professional net sales were 8 percent higher than fiscal
2006. Foreign currency translation contributed approximately $8
million to the net sales increase compared to the prior
year. Professional sales growth was driven by new JBL Pro and Crown
products as well as the introduction of new digital audio mixing
consoles.
Gross
Profit
Gross
profit margin in fiscal 2008 was 27.0 percent, a decrease of 7.1 percentage
points compared to the prior year. The decrease in gross profit
margin was primarily related to several automotive platform launches, increased
shipments of lower margin mid-level infotainment systems to automotive
customers, higher Automotive warranty costs, and lower Consumer margins in
multiple product categories. Accelerated depreciation of $3.8 million related to
restructuring programs contributed to the decrease in gross profit
margin.
Fiscal
2007 gross profit margin decreased 1.4 percentage points from the prior year to
34.1 percent. The decline was primarily due to competition in the
Consumer multimedia market. Automotive product mix and higher
manufacturing costs also contributed to the decrease in gross profit
margin. These lower margins were partially offset by increased
margins in our Professional business.
A summary
of our gross profit by reportable business segment is presented
below:
Automotive Automotive gross
profit margin declined 9.9 percentage points in fiscal 2008. The
decrease is primarily related to several platform launches, a higher portion of
our sales for lower margin mid-level infotainment systems, higher warranty
costs, and lower margins on PND sales. Automotive platform launches
begin their life cycles at their lowest gross margins. As previously
stated, sales growth was driven by infotainment system sales to Chrysler and BMW
primarily for their mid-level vehicles. We also had lower sales to
Mercedes due to a decrease in production for the E-Class and price
reductions. Historically, sales of these high-level infotainment
systems generated higher margins for our Automotive division. In
fiscal 2008, our warranty liabilities increased $77.5 million partially due to
an engineering change made on a product that has been in production for a number
of years. Due to a supplier discontinuation, we implemented a new
memory chip with existing software during the products life
cycle. The software and memory chip combination developed an
incompatibility over time.
In fiscal
2007, automotive gross profit margin decreased 1.0 percentage points compared to
fiscal 2006. The decrease primarily resulted from higher
manufacturing costs and product mix.
Consumer In fiscal 2008,
Consumer gross profit margin decreased 2.0 percentage points compared to the
prior year. The gross profit margin was adversely affected by
competitive pricing pressure, particularly in the multimedia market, and general
economic weakness in North America and Europe. The mobile market has
also become increasingly competitive and gross margins on PNDs and in-vehicle
iPod adapters were pressured downward during the fiscal year.
Consumer
gross profit margin declined 7.1 percentage points in fiscal 2007 compared to
the prior year. Gross profit margins in fiscal 2006 were particularly
high due to the success of high-margin multimedia products, including the JBL
OnStage and OnTour. In fiscal 2007, increased competition in the
multimedia market resulted in lower prices and margins compared to the prior
year.
Professional Professional
gross profit margin improved 1.1 percentage points in fiscal
2008. The improvement was primarily due to higher sales of products
enabled with the HiQnet protocol and manufacturing efficiency
improvements. We have been able to lower certain costs on HiQnet
products as we achieve economies of scale with additional product
generations. Further initiatives to reduce manufacturing costs
include the migration of some production from our Northridge, California
facility to our expanded facility in Tijuana, Mexico.
Gross
profit margin in fiscal 2007 was 1.4 percentage points higher than fiscal
2006. The improvement was due primarily to leveraging fixed costs
against an increase in net sales. The introduction of high-margin
products enabled with the HiQnet protocol in fiscal 2007 also contributed to the
improvement in gross profit margin. In particular, Soundcraft/Studer
introduced new digital mixing consoles that are produced in more efficient
factories after significant investments in new technologies over the past few
years. Professionals overall gross profit margin improvement was
partially offset by higher than expected material costs at Crown.
Selling,
General and Administrative Expenses
Selling,
general and administrative (SG&A) expenses, as a percent of net sales, were
23.6 percent in fiscal 2008 compared to 23.2 percent in the prior
year. Research and Development (R&D) costs are the largest
component of our SG&A expenses. In fiscal 2008, R&D costs
were $395.9 million or 9.6 percent of net sales. These costs were
$356.7 million or 10.0 percent of net sales in fiscal 2007. R&D
costs were higher in fiscal 2008 to support infotainment system programs for
automotive customers. We expect R&D costs as a percent of net
sales to be approximately the same in fiscal 2009 as we continue to develop a
record number of infotainment system programs in our Automotive
division. Employee compensation and benefit costs are also included
in SG&A expenses. We have recorded stock-based compensation
expense under the fair value based method since fiscal 2003, including $23.7
million, $15.4 million and $16.6 million in fiscal years 2008, 2007 and 2006,
respectively.
Our
fiscal 2007 SG&A expenses were 23.2 percent of net sales, essentially flat
to fiscal 2006. R&D costs were higher due to new infotainment
systems development for automotive customers. However, SG&A as a
percentage of sales was lower due to sales growth.
We
incurred costs associated with restructuring programs in each of the past three
fiscal years. These programs are designed to address our global
footprint, cost structure, technology portfolio, human resources and internal
processes. These costs are described under the caption Restructuring Programs later
in this discussion.
Below is a
summary of our SG&A expenses by reportable business segment:
Automotive Automotive
SG&A expenses were 21.1 percent of sales in fiscal 2008, a decrease of 0.3
percentage points compared to the prior year. R&D costs are the
largest component of SG&A expenses. In fiscal 2008, Automotive
R&D costs were $322.5 million or 10.9 percent of sales. During
the prior year, R&D costs were $286.5 million or 11.5 percent of
sales. Higher costs were incurred to develop and support 13
infotainment system launches occurring in fiscal years 2008 and 2009, a record
number for the division. Automotive SG&A expenses also include
restructuring charges of $24.7 million, $5.7 million and $7.3 million in fiscal
years 2008, 2007 and 2006, respectively.
Consumer SG&A expenses
were 24.8 percent of Consumer sales in fiscal 2008, an increase of 2.1
percentage points compared to the prior year. Selling expenses and
R&D costs are the most significant components of SG&A
expenses. Selling expenses were 0.7 percentage points higher in
fiscal 2008 primarily due to increased marketing efforts for multimedia products
in response to general economic weakness and a competitive
market. R&D costs were $36.1 million, $34.2 million and $36.3
million during fiscal years 2008, 2007 and 2006,
respectively. Consumer SG&A expenses also include restructuring
charges of $8.7 million, $1.0 million and $0.4 million in fiscal years 2008,
2007 and 2006, respectively.
Professional Professional
SG&A expenses as a percentage of sales were 24.9 percent in fiscal 2008, an
increase of 0.6 percentage points compared to the prior year. Selling
expenses and R&D costs are the most significant components of SG&A
expenses. Selling expenses are incurred to support a broad range of
branded audio products. These products are marketed to audio
professionals for use in public places such as concert halls, stadiums and
houses of worship. Selling expenses were $54.4 million, $49.6 million
and $49.3 million in fiscal 2008, 2007 and 2006, respectively. A
significant amount of R&D costs have been incurred to develop our HiQnet
networking protocol and include it on new products. This protocol
simplifies and centralizes the monitoring and control of complex professional
audio systems. R&D costs in fiscal 2008, 2007 and 2006 were $36.9
million, $35.7 million and $33.2 million, respectively. Professional
SG&A expenses include restructuring charges of $6.0 million, $0.4 million
and $1.7 million in fiscal years 2008, 2007 and 2006, respectively.
Other Other SG&A expenses
primarily include compensation, benefit and occupancy costs for corporate
employees. In fiscal 2008, we also had $13.8 million of legal and
advisory expenses associated with the termination of our proposed merger with a
company formed by investment funds affiliated with KKR and
GSCP. Additionally, we had $2.8 million of restructuring expenses
related to the consolidation of our corporate headquarters in Stamford,
Connecticut.
Restructuring
Program
We
announced a restructuring program in June 2006 designed to increase efficiency
in our manufacturing, engineering and administrative
organizations. The implementation of this program continued through
fiscal years 2007 and 2008.
During
the third quarter of fiscal 2008, we expanded our restructuring actions to
improve global footprint, cost structure, technology portfolio, human resources,
and internal processes. These programs will reduce the number of our
manufacturing, engineering and operating locations. We also expect
significant cost reductions through moves to low cost countries and optimization
of various processes including quality and risk management.
We have
announced plant closings in Northridge, California and Martinsville,
Indiana. We have also closed a plant in South Africa and a small
facility in Massachusetts. Our corporate headquarters is currently
transitioning to Stamford, Connecticut.
In fiscal
2008, SG&A expenses included $42.2 million for our restructuring
program. Cash paid for these initiatives was $14.1
million. In addition, we have recorded $3.8 million of accelerated
depreciation in cost of sales.
Below is
a rollforward of our restructuring accrual for fiscal years 2008, 2007 and
2006:
Please
also see Note 14, Restructuring Program for additional information.
Operating
Income
Fiscal
2008 operating income was $138.5 million or 3.4 percent of net
sales. This represents a decrease of 7.5 percentage points compared
to the prior year. The decrease in operating income was primarily due
to lower gross profit margin, restructuring costs, and expenses related to the
merger termination.
Our
fiscal 2007 operating income was $386.4 million or 10.9 percent of net sales.
This represented a decrease of 1.3 percentage points below fiscal
2006. The decrease in operating income was primarily driven by
lower gross profit margin partially offset by lower SG&A, as a percentage of
sales.
We
present below a summary of our operating income by reportable business
segment:
Interest
Expense
Interest
expense, net, was $8.6 million in fiscal 2008 compared to $1.5 million in the
prior year. Our net interest expense increased compared to the prior
year due to the issuance of the $400 million senior convertible notes in October
2007. Our fiscal 2008 interest expense, net, included $9.2 million of
interest income primarily related to interest on our cash and cash equivalents
and short-term investment balances. In fiscal 2007 and 2006, interest income was
$8.1 million and $12.2 million, respectively.
We had
average borrowings outstanding of $401.0 million in fiscal 2008 compared to
$170.2 million in fiscal 2007 and $342.0 million in 2006. Our
weighted average interest rate in fiscal 2008 was 3.5 percent. In
fiscal 2007 and 2006, the weighted average interest rates were 5.6 percent and
7.4 percent, respectively. Our fiscal 2008 weighted average interest
rates have decreased compared to the prior year due to the coupon rate of 1.25%
on our senior convertible notes.
Miscellaneous
Expenses
We
recorded miscellaneous expenses, net, of $5.4 million in fiscal 2008, compared
to $2.7 million and $8.0 million in fiscal 2007 and 2006,
respectively. The fiscal 2008 expense was comprised primarily of bank
charges. Bank charges were $3.3 million, $2.6 million and $2.5
million in fiscal 2008, 2007 and 2006, respectively. In fiscal 2006,
we incurred a $4.9 million expense for repurchase premiums associated with the
buyback of over 90 percent of our then-outstanding senior
notes. These premiums also include a charge on the termination of
interest rate swap contracts.
Income
Taxes
Our
fiscal 2008 effective tax rate was 13.8 percent. The effective tax
rate was lower than the prior year due to a significant reduction in German
statutory tax rates and the effect of permanent deductions on lower pre-tax
income. Also, in fiscal 2008 we settled a German tax audit on terms
favorable to our previous estimates. Exclusive of restructuring and
merger costs recorded during fiscal 2008, the tax rate was 20.9
percent.
The
effective tax rates in fiscal 2007 and 2006, were 18.4 percent and 32.4 percent,
respectively. In fiscal 2007, the tax rate was impacted by a $51
million net gain resulting from a court decision that allowed certain taxpayers
to recognize additional foreign tax credits. The effective tax rate
was also impacted by a $4 million tax charge resulting from a dividend from
South Africa. In fiscal 2006, we repatriated $500 million from our
foreign subsidiaries under the American Jobs Creation Act of
2004. This decision resulted in a $3.4 million tax
charge.
Financial
Condition
Liquidity
and Capital Resources
We
primarily finance our working capital requirements through cash generated by
operations, borrowings under revolving credit facilities and trade credit, if
needed. During fiscal 2008, cash was primarily used to make
investments in our manufacturing facilities, make tax payments, primarily in
Germany, and meet our working capital needs. Cash and cash
equivalents were $223.1 million at June 30, 2008 compared to $106.1 million at
June 30, 2007.
We will
continue to have cash requirements to support seasonal working capital needs,
investments in our manufacturing facilities, interest and principal payments,
and dividend payments. We intend to use cash on hand, cash generated
by operations and borrowings under our revolving credit facility to meet these
requirements. We believe that cash from operations and our borrowing
capacity, if needed, will be adequate to meet our normal cash requirements over
the next twelve months.
Below is
a more detailed discussion of our cash flow activities during fiscal
2008.
Operating
Activities
Net cash
provided by operating activities in fiscal 2008 was $316.8 million compared to
$215.3 million in fiscal 2007. The increase in operating cash flows
was primarily due to improved working capital management. Inventories
were reduced significantly in fiscal 2008 despite higher sales
volume.
Investing
Activities
Net cash
used in investing activities was $142.5 million in fiscal 2008, compared to
$180.0 million in fiscal 2007. The fiscal 2008 activity primarily
reflects investments in our manufacturing facilities and contingent purchase
price consideration related to an acquisition made several years
ago. Capital expenditures were $138.9 million in fiscal 2008 and
$174.8 million in fiscal 2007. During fiscal 2008, we invested in
customer tooling and other manufacturing equipment to support infotainment
system programs for automotive customers. In addition, we made
machinery and equipment investments in our new manufacturing facility in
China. Capital expenditures were also used for new product tooling
for consumer and professional products.
In fiscal
2007, we invested in the necessary equipment and tooling to begin production of
infotainment systems in our Washington, Missouri facility. This
facility was substantially complete at the end of fiscal 2006 but required
additional investments in customer tooling equipment in fiscal 2007 to ramp-up
production for Chrysler.
We expect
capital expenditures in fiscal 2009 to approximate fiscal 2008
levels.
Financing
Activities
Net cash
flows used in financing activities were $64.8 million in fiscal 2008 compared to
$222.7 million used in fiscal 2007. During fiscal 2008, we used $400
million to repurchase 7,224,779 shares of our common stock under two separate
accelerated share repurchase agreements. Since the inception of our
share repurchase program in June 1998 and including the shares acquired under
the accelerated share repurchase agreements, we have acquired and placed into
treasury 25,422,861 shares.
Our total
debt was $428.0 million at June 30, 2008 primarily comprised of $400 million of
1.25 percent Convertible Senior Notes due in 2012 and $25.0 million under our
revolving credit facility. We also had capital leases and other
long-term borrowings of $3.0 million at June 30, 2008.
At June
30, 2007, our total debt was $76.5 million primarily comprised of borrowings of
$55 million under our revolving credit facility and $16.5 million in outstanding
principal amount of senior notes. The senior notes had a stated
interest rate of 7.32 percent and were due on July 1, 2007. These
notes were paid upon maturity. We also had capital leases and other
long-term borrowings of $3.2 million at June 30, 2007. Short-term
borrowings included in debt were $1.8 million at June 30, 2007.
We are
party to a $300 million multi-currency revolving credit facility with a group of
banks, which under certain circumstances could have been increased to $350
million. This facility expires in June 2010 and replaces the $150 million
revolving credit facility that expired on August 14, 2005. On June 22, 2006, we
amended and restated our multi-currency revolving credit facility. The Restated
Credit Agreement, among other things, added Harman Holding GmbH & Co. KG
(Harman Holding), a limited partnership organized under the laws of Germany and
wholly-owned subsidiary of the Company, as an additional
borrower. The maximum principal amount of borrowings permitted under
the Restated Agreement remains at $300 million. The Restated Agreement also
amends our conditional option to increase the maximum aggregate revolving
commitment amount from $350 million to $550 million. At June 30, 2008, we had
$25.0 million of borrowings under this credit facility and outstanding letters
of credit of $6.0 million. Unused availability under the revolving
credit facility was $269 million at June 30, 2008.
On
October 23, 2007, we issued $400 million of 1.25 percent Convertible Senior
Notes due 2012. The initial conversion rate is 9.6154 shares of
common stock per $1,000 principal amount of Notes (which is equal to an initial
conversion price of approximately $104 per share). The conversion rate is
subject to adjustment in specified circumstances as described in the indenture
for the Notes. The Notes are convertible under the specified
circumstances set forth in the indenture for the Notes.
Upon
conversion, a holder will receive in respect of each $1,000 of principal amount
of Notes to be converted an amount in cash equal to the lesser of (1) $1,000 or
(2) the conversion value, determined in the manner set forth in the indenture
for the Notes and if the conversion value per Note exceeds $1,000, the Company
will also deliver, at its election, cash or common stock or a combination of
cash and common stock for the conversion value in excess of $1,000.
In May
2008, the Financial Accounting Standards Board (FASB) issued FSP APB 14-1, Accounting for Convertible Debt
Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash
Settlement) (FSP APB 14-1). FSP APB 14-1 requires the issuer
of convertible debt instruments with cash settlement features to account
separately for the liability and equity components of the
instrument. The proposed transition guidance requires retrospective
application to all periods presented, and does not grandfather existing
instruments. FSP APB 14-1 is effective for us on July 1,
2009. We expect the effect of adoption of FSP APB 14-1 to be dilutive
to earnings per share.
Our
long-term debt agreements contain financial and other covenants that, among
other things, limit our ability to incur additional indebtedness, restrict
subsidiary dividends and distributions, limit our ability to encumber certain
assets and restrict our ability to issue capital stock of our subsidiaries. Our
long-term debt agreements permit us to pay dividends or repurchase our capital
stock without any dollar limitation provided that we would be in compliance with
the financial covenants in our revolving credit facility after giving effect to
such dividend or repurchase. We were in compliance with the terms of our
long-term debt agreements at June 30, 2008, 2007 and 2006.
Contractual
Obligations
We have
obligations and commitments to make future payments under debt agreements and
operating leases. The following table details our financing obligations by due
date:
Recent
Developments
As
previously announced, on June 30, 2008, Dr. Sidney Harman resigned as
non-executive Chairman of the Board. Dr. Harman continues to be a
member of our Board of Directors. However, he does not intend to
stand for re-election to the Board at our next annual meeting. Dinesh
Paliwal succeeded Dr. Harman as Chairman of the Board effective July 1,
2008.
As
previously announced, restructuring of the Companys Automotive division
footprint was accelerated with the announcement of plant closings in Northridge,
California and Martinsville, Indiana. The Company also closed its Consumer
manufacturing facility in Bedford, Massachusetts. The Company has started the
transfer of JBL production from Northridge, California to our plant in Tijuana,
Mexico. We have also down-sized our factory in Motala, Sweden and closed our
operations in South Africa. As previously mentioned, our PND business has been
re-positioned and is exclusively focused on the Automotive aftermarket premium
sector.
We also
took several actions to outsource non-core activities. Highlights included
outsourcing global IT infrastructure to Wipro Technologies and
warehousing/distribution operations for Consumer and Professional Divisions to
Ryder System.
We
expanded our manufacturing capacity in Tijuana, Mexico and Szekesfehervar,
Hungary, and have started production at a new factory in Suzhou,
China.
Complementing
these initiatives, we launched a detailed market opportunity assessment and
channel strategy for China to accelerate the penetration of our premium brands
and products in this large, fast-growing region.
Business
Outlook
The
Company has initiated a detailed five-year strategic planning process to address
cost base and global competitiveness, including manufacturing footprint,
procurement, technology portfolio, emerging market growth, and talent
management. Plan highlights include defined reductions in the number of
manufacturing, engineering and operating locations, global footprint
optimization, and improved processes for forecasting, quality and risk
management. As part of our implementation, the Company launched on July 1, 2008
a sweeping cost and productivity improvement program called STEP Change. This
24-month program, which is inclusive of previously announced initiatives, is
expected to yield $400 million in sustainable annual savings beyond fiscal year
2010. We also plan to aggressively pursue emerging market
opportunities and better match our technology efforts with evolving market
trends. We
believe fiscal 2009 will be a challenging year as we execute our strategic plan.
However, we feel these initiatives are necessary to return our company to
long-term profitable growth.
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk
We are
required to include information about potential effects of changes in interest
rates and currency exchange rates in our periodic reports filed with the
Securities and Exchange Commission.
Interest
Rate Sensitivity/Risk
At June
30, 2008, interest on approximately 94 percent of our borrowings was determined
on a fixed rate basis. The interest rates on the balance of our debt are subject
to changes in U.S. and European short-term interest rates. To assess exposure to
interest rate changes, we have performed a sensitivity analysis assuming a
hypothetical 100 basis point increase or decrease in interest rates across all
outstanding debt and investments. Our analysis indicates that the effect on
fiscal 2008 net income of such an increase and decrease in interest rates
would be approximately $1.7 million. Based on June 30, 2007 positions, the
impact of such changes in interest rates were approximately $0.4 million to
fiscal 2007 net income.
The
following table provides information as of June 30, 2008 about our financial
instruments that are sensitive to changes in interest rates. The
table presents principal cash flows and related average interest rates by
contractual maturity dates. Weighted average variable rates are generally based
on LIBOR as of the reset dates. The information is presented in U.S. dollar
equivalents as of June 30, 2008.
Principal
Payments and Interest Rates by Contractual Maturity Dates
Foreign
Currency Risk
We
maintain significant operations in Germany, the United Kingdom, France, Austria,
Hungary, Mexico, China and Sweden. As a result, we are subject to market
risks arising from changes in foreign currency exchange rates, principally the
change in the value of the Euro versus the U.S. Dollar. Our subsidiaries
purchase products and raw materials in various currencies. As a result, we
may be exposed to cost changes relative to local currencies in the markets
to which we sell our products. To mitigate these transactional risks, we enter
into foreign exchange contracts. Also, foreign currency positions are partially
offsetting and are netted against one another to reduce exposure.
We
presently estimate the effect on projected 2009 income before income taxes,
based upon a recent estimate of foreign exchange transactional exposure, of a
uniform strengthening or uniform weakening of the transaction currency rates of
10 percent would be to increase or decrease income before income taxes by
approximately $50 million. As of June 30, 2008, we had hedged a portion of our
estimated foreign currency transactions using forward exchange
contracts.
We
presently estimate the effect on projected 2009 income before income taxes,
based upon a recent estimate of foreign exchange translation exposure
(translating the operating performance of our foreign subsidiaries into U.S.
Dollars), of a uniform strengthening or weakening of the U.S. Dollar by 10
percent would be to increase or decrease income before income taxes by
approximately $16 million.
Competitive
conditions in the markets in which we operate may limit our ability to increase
prices in the event of adverse changes in currency exchange rates. For example,
certain products made in the U.S. are sold outside of the U.S. Sales of
these products are affected by the value of the U.S. Dollar relative to other
currencies. Any long-term strengthening of the U.S. dollar could depress the
demand for these U.S. manufactured products and reduce sales. However, due to
the multiple currencies involved in our business and the netting effect of
various simultaneous transactions, our foreign currency positions are partially
offsetting.
Actual
gains and losses in the future may differ materially from the hypothetical gains
and losses discussed above based on changes in the timing and amount of interest
rate and foreign currency exchange rate movements and our actual exposure and
hedging transactions.
Item 8. Consolidated Financial Statements and
Supplementary Data
Managements Report on
Internal Control over Financial Reporting
The
management of Harman International Industries, Incorporated is responsible for
establishing and maintaining adequate internal control over financial reporting.
Our internal control system was designed to provide reasonable assurance to our
management and Board of Directors regarding the preparation and the fair
presentation of published financial statements. All internal control systems, no
matter how well designed, have inherent limitations. Therefore, even those
systems determined to be effective can provide only reasonable assurance with
respect to financial statement preparation and presentation.
We
assessed the effectiveness of our internal control over financial reporting as
of June 30, 2008. In making
this assessment, we used the framework set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in Internal Control-Integrated
Framework. Our
assessment included an evaluation of such elements as the design and operating
effectiveness of key financial reporting controls, process documentation,
accounting policies, overall control environment and
information systems control environment. Based on our assessment, we have
concluded that, as of June 30, 2008, our internal control over financial
reporting was effective.
The
effectiveness of our internal control over financial reporting, as of June 30,
2008, has been audited by KPMG LLP, an independent registered public accounting
firm. KPMGs report on our internal controls over financial reporting is included
herein.
/s/ Herbert
Parker
Herbert
Parker
Executive
Vice President and Chief Financial Officer
Report
of Independent Registered Public Accounting Firm
The Board
of Directors and Stockholders
Harman
International Industries, Incorporated:
We have
audited Harman International Industries, Incorporated and subsidiaries (the
Company) internal control over financial reporting as of June 30, 2008, based on
criteria established in
Internal Control Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). Harman International
Industries, Incorporateds management is responsible for maintaining effective
internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting, included in the
accompanying Managements Report on Internal Control over Financial Reporting.
Our responsibility is to express an opinion on the Companys internal control
over financial reporting based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audit also included performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A
companys internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A companys internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the companys
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our
opinion, Harman International Industries, Incorporated maintained, in all
material respects, effective internal control over financial reporting as of
June 30, 2008, based on criteria established in Internal Control Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of Harman
International Industries, Incorporated and subsidiaries as of June 30, 2008 and
2007, and the related consolidated statements of operations, shareholders equity
and comprehensive income, and cash flows for each of the years in the three-year
period ended June 30, 2008, and our report dated August 29, 2008 expressed an
unqualified opinion on those consolidated financial statements.
(signed)
KPMG LLP
McLean,
Virginia
August
29, 2008
Report
of Independent Registered Public Accounting Firm
The Board
of Directors and Stockholders
Harman
International Industries, Incorporated:
We have
audited the accompanying consolidated balance sheets of Harman International
Industries, Incorporated and subsidiaries (the Company) as of June 30, 2008 and
2007, and the related consolidated statements of operations, shareholders equity
and comprehensive income, and cash flows for each of the years in the three-year
period ended June 30, 2008. In connection with our audits of the consolidated
financial statements, we also have audited the related financial statement
schedule for each of the years in the three-year period ended June 30,
2008. These consolidated financial statements and financial statement
schedule are the responsibility of the Companys management. Our responsibility
is to express an opinion on these consolidated financial statements and
financial statement schedule based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Harman International
Industries, Incorporated and subsidiaries as of June 30, 2008 and 2007, and the
results of their operations and their cash flows for each of the years in the
three-year period ended June 30, 2008, in conformity with U.S. generally
accepted accounting principles. Also in our opinion, the related
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
As
discussed in Note 11 to the consolidated financial statements, the Company
adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes an interpretation of FASB Statement No. 109, effective July 1,
2007.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Harman International Industries, Incorporateds
internal control over financial reporting as of June 30, 2008, based on criteria
established in Internal
Control Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO), and our report dated August 29,
2008 expressed an unqualified opinion on the effectiveness of the Companys
internal control over financial reporting.
(signed)
KPMG LLP
McLean,
Virginia
August
29, 2008
Consolidated
Balance Sheets
Harman
International Industries, Incorporated and Subsidiaries
See
accompanying notes to consolidated financial statements.
Consolidated
Statements of Operations
Harman
International Industries, Incorporated and Subsidiaries
($000s
omitted except per share amounts)
See
accompanying notes to consolidated financial statements.
Consolidated
Statements of Cash Flows
Harman
International Industries, Incorporated and Subsidiaries
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