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Harman International Industries 10-Q 2008 UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
For
the quarterly period ended September 30, 2008
OR
For
the Transition Period from________to________
Commission
File Number: 1-9764
Harman
International Industries, Incorporated
(Exact name of registrant as
specified in its charter)
Commission
File Number: 1-9764
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. x
Yes o No
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. 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). o
Yes x No
As of October 31, 2008, 58,545,866 shares of common stock, par value
$.01, were outstanding.
FORM
10-Q
Table
of Contents
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-Q refer to Harman International Industries, Incorporated and its subsidiaries
unless the context requires otherwise.
Forward–Looking
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:
Forward–Looking
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, including the
information in Item 1A, “Risk Factors” of Part I to our Annual Report on Form
10-K for the fiscal year ended June 30, 2008 and Item 1A, “Risk Factors” which
is located in Item 1A of Part II of this report.
Harman
International Industries, Incorporated and Subsidiaries
($000s
omitted except share amounts)
See
accompanying notes to condensed consolidated financial
statements. Harman
International Industries, Incorporated and Subsidiaries
(000s
omitted except per share amounts)
(Unaudited)
See
accompanying notes to condensed consolidated financial
statements. Harman
International Industries, Incorporated and Subsidiaries
($000s
omitted)
(Unaudited)
See accompanying notes to condensed
consolidated financial statements.
Notes to
Condensed Consolidated Financial Statements
(Unaudited)
Note
1. Basis
of Presentation
Our
unaudited, condensed consolidated financial statements at September 30, 2008 and
for the three months ended September 30, 2008 and 2007, have been prepared
pursuant to rules and regulations of the Securities and Exchange Commission
(“SEC”). These unaudited condensed consolidated financial statements
do not include all information and footnote disclosures included in our audited
financial statements. In the opinion of management, the accompanying
unaudited, condensed consolidated financial statements include all adjustments,
consisting of normal recurring adjustments and accruals, necessary to present
fairly, in all material respects, the consolidated financial position, results
of operations and cash flows for the periods presented. Operating
results for the three months ended September 30, 2008 are not necessarily
indicative of the results that may be expected for the full fiscal year ending
June 30, 2009 due to seasonal, economic and other factors.
Where
necessary, information for prior periods has been reclassified to conform to the
consolidated financial statement presentation for the corresponding periods in
the current fiscal year. During the first quarter of fiscal 2009, we revised our
business segments to align with our strategic approach to the markets and
customers we serve. We now report the financial information for our
QNX business in our “Other” segment. The QNX business was previously
reported in our Automotive segment. As a result, segment information
for the prior period has been reclassified to reflect the new
presentation. See Note 13, Business Segment Data, for
further discussion.
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.
These
unaudited condensed consolidated financial statements should be read in
conjunction with our audited consolidated financial statements and accompanying
notes included in our Annual Report on Form 10-K for the fiscal year ended June
30, 2008.
Note 2. Inventories
Inventories
consist of the following:
Inventories
are stated at the lower of cost or market. Cost is determined principally by the
first-in, first-out method. The valuation of inventory requires us to make
judgments and estimates regarding obsolete, damaged or excess inventory as well
as current and future demand for our products. The estimates of future demand
and product pricing that we use in the valuation of inventory are the basis for
our inventory reserves and have an effect on our results of operations. We
calculate inventory reserves using a combination of lower of cost or market
analysis, analysis of historical usage data, forecast demand data and historical
disposal rates. Specific product valuation analysis is applied, if practicable,
to those items of inventory representing a higher portion of the value of
inventory on-hand. Note
3. Property,
Plant and Equipment
Property,
plant and equipment are composed of the following:
Note
4. 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.
Details
of the estimated warranty liabilities are as follows:
(1)
Includes amounts representing adjustments to the liability for foreign currency
translation.
Note
5. Revenue
Recognition
Revenue
is generally recognized at the time of product shipment or delivery, depending
on when the passage of title to goods transfers to unaffiliated customers, when
all of the following have occurred: a firm sales agreement is in place, pricing
is fixed or determinable and collection is reasonably assured. We
record estimated reductions to revenue for customer sales programs, returns and
incentive offerings including rebates, price protection, promotions and
volume-based incentives. The reductions to revenue are based on
estimates and judgments using historical experience and expectation of future
conditions. Note
6. Comprehensive
Income
The
components of comprehensive income are as follows:
We have
approximately $21.1 million of investments included in other current assets that
have been classified as available-for-sale securities under the provisions of
Statement of Financial Accounting Standards (“SFAS”) 115, Accounting for Certain Investments
in Debt and Equity Securities. Under the provisions of this
statement, these securities are recorded at fair value with realized gains or
losses recorded in income and unrealized gains and losses recorded in other
comprehensive income, net of taxes.
Note
7. Earnings
Per Share
The
following table presents the calculation of basic and diluted earnings per
common share outstanding:
Options
to purchase 2,232,011 shares of our common stock with exercise prices ranging
from $32.14 to $126.94 per share during the quarter ended September 30, 2008,
were outstanding and not included in the computation of diluted earnings per
share because the exercise of these options would have been
antidilutive. In addition, 28,870 shares of restricted stock were
outstanding and not included in the computation of diluted earnings per share
because they would have had an antidilutive effect.
Options
to purchase 617,796 shares of our common stock with exercise prices ranging from
$85.36 to $126.94 per share during the quarter ended September 30, 2007 were
outstanding and not included in the computation of diluted earnings per share
because the exercise of these options would have been antidilutive.
The
conversion terms of our 1.25 percent Convertible Senior Notes due 2012 (the
“Notes”) will affect the calculation of diluted earnings per share if the price
of our common stock exceeds the conversion price of the Notes. The
initial conversion price of the Notes was $104 per share, subject to adjustment
in specified circumstances as described in the indenture related to the
Notes. Upon conversion, a holder will receive an amount in cash equal
to the lesser of $1,000 or the conversion value of the Notes, determined in the
manner set forth in the indenture. If the conversion value exceeds
$1,000, we will deliver $1,000 in cash and at our option, cash or common stock
or a combination of cash and common stock for the conversion price in excess of
$1,000. The conversion option is indexed to our common stock and
therefore is classified as equity. As a result, the conversion option
will not result in an adjustment to net income in calculating diluted earnings
per share. The dilutive effect of the conversion option will be
calculated using the treasury stock method. Accordingly, conversion
settlement shares will be included in diluted shares outstanding if the price of
our common stock exceeds the conversion price.
Note
8. Convertible
Senior Notes
On
October 23, 2007, we issued $400 million aggregate principal amount of the
Notes. The initial conversion rate is 9.6154 shares of common stock
per $1,000 principal amount of the Notes (which is equal to an initial
conversion price of approximately $104 per share). The conversion
rate is subject to adjustment in specified circumstances described in the
indenture for the Notes.
The Notes
are convertible at the option of the holders:
Upon
conversion, a holder will receive in respect of each $1,000 of principal amount
of Notes to be converted (a) 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 (b) 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.
Debt
issuance costs of $4.8 million associated with this transaction were capitalized
and are being amortized over the term of the Notes. The unamortized
balance at September 30, 2008 was $3.9 million.
On
October 23, 2007, we entered into a Registration Rights Agreement requiring us
to register the Notes and the shares contingently issuable upon conversion of
the Notes. On October 23, 2008, we filed an automatically effective
registration statement with the SEC, thereby registering the Notes and shares
contingently issuable upon conversion of the Notes. We are required
to keep the registration statement effective until the earlier of (a) such time
as the Notes and the shares contingently issuable under the Notes (1) are sold
under an effective registration statement or Rule 144 of the Securities Act of
1933, (2) are freely transferable under Rule 144 more than two years following
October 23, 2007, or (3) cease to be outstanding, or (b) five years and three
months following October 23, 2007. In the event we fail to keep the
registration statement effective as required under the agreement, additional
interest will accrue on the Notes at the rate per annum of 0.25%.
Note
9. Income
Taxes
Our
provision for income taxes is based on an estimated annual tax rate for the year
applied to federal, state and foreign income. Income tax expense for
the quarter ended September 30, 2008 was $8.4 million, compared to $3.7 million
for the same period last year. The effective rate for the quarter
ended September 30, 2008 was 26.5 percent, compared to 9.3 percent in the prior
year period. The rate was higher in the current period due to a favorable
conclusion of a German tax audit recorded in the prior year. As of
September 30, 2008, unrecognized tax benefits and the related interest were $9.0
million and $2.4 million respectively, all of which would affect the tax rate if
recognized. During the three months ended September 30, 2008, the
Company recorded only interest related to uncertain tax positions of $0.3
million.
Note
10. Share-Based
Compensation
On
September 30, 2008, we had one share-based compensation plan with shares
available for future grants, the 2002 Stock Option and Incentive Plan (the “2002
Plan”). The 2002 Plan permits the grant of stock options, stock
appreciation rights, restricted stock and restricted stock units for up to
6,000,000 shares of our common stock. During the quarter ended
September 30, 2008, options to purchase 716,735 shares of our common stock,
5,000 shares of restricted stock and 350,771 restricted stock units were granted
under the 2002 Plan. In addition, 28,344 restricted stock units were
granted outside the 2002 Plan during the same period.
Share-based
compensation (benefit) expense was ($3.4 million) and $4.9 million for the three
months ended September 30, 2008 and 2007, respectively. The share-based
compensation benefit recorded for the three months ended September 30, 2008
resulted from significant stock option forfeitures recorded in connection with
the retirement of senior executives. The total income tax
(expense) benefit recognized in the consolidated statements of operations for
share-based compensation arrangements was ($1.7 million) and $1.4 million for
the three months ended September 30, 2008 and 2007, respectively.
Fair
Value Determination
The fair
value of each option award is estimated on the date of grant using the
Black-Scholes option valuation model, which uses the assumptions noted in the
following table.
Groups of
option holders (directors, executives and non-executives) that have similar
historical behavior are considered separately for valuation purposes. Expected
volatilities are based on historical closing prices of our common stock over the
expected option term. We use historical data to estimate option exercises and
employee terminations within the valuation model. The expected term of options
granted is derived using the option valuation model and represents the estimated
period of time from the date of grant that the option is expected to remain
outstanding. The risk-free rate for periods within the contractual life of the
option is based on the U.S. Treasury yield curve in effect at the time of
grant. Stock
Option Activity
A summary
of option activity under our stock option plans as of September 30, 2008 and
changes during the three months ended September 30, 2008 is presented
below:
The
weighted-average grant-date fair value of options granted during the three
months ended September 30, 2008 and 2007 was $11.67 and $45.08, respectively.
The total intrinsic value of options exercised during the quarters ended
September 30, 2008 and 2007 was $0 and $2.2 million, respectively.
A summary
of the status of our nonvested restricted stock as of September 30, 2008 and
changes during the three months ended September 30, 2008, is presented
below:
As of
September 30, 2008, there was $3.6 million of total unrecognized compensation
cost related to nonvested restricted stock-based compensation arrangements. The
weighted average recognition period was 1.91 years.
Grant
of Stock Options with Market Conditions
We
granted 330,470 stock options containing a market condition to employees on
March 21, 2008. The options vest three years from the date of grant
based on a comparison of Harman’s total shareholder return (“TSR”) to the TSR of
a selected peer group of publicly listed multinational companies. TSR
will be measured as the annualized increase in the aggregate value of a
company’s stock price plus the value of dividends, assumed to be reinvested into
shares of the company’s stock at the time of dividend payment. The
base price to be used for the TSR calculation is the 20-day trading average from
February 6, 2008 through March 6, 2008. The ending price to be used
for the TSR calculation will be the 20-day trading average prior to and through
March 6, 2011. The grant date fair value of $4.2 million was
calculated using a combination of Monte Carlo simulation and lattice-based
models. Share-based compensation expense for these awards was $0.4
million for the three months ended September 30, 2008. Restricted
Stock Units
In
January and September 2008, we granted 34,608 and 28,344 cash-settled restricted
stock units, respectively, outside the 2002 Plan. These restricted
stock units are accounted for as liability awards and are recorded at the fair
value at the end of the reporting period in accordance with their vesting
schedules. On July 2, 2008, 1,608 of these restricted stock units
were settled at a cost of approximately $0.1 million.
We
granted 133,507 restricted stock units with performance conditions in the
quarter ended September 30, 2008 under the 2002 Plan. The restricted
stock units vest three years from the date of grant based on attainment of
certain performance targets in fiscal 2011. The targets are
consistent with our current business plans, and therefore it was deemed probable
that 100% vesting would be achieved, requiring ratable accrual of share-based
compensation expense over the three-year vesting period based on grant date fair
value.
In the
quarter ended September 30, 2008, we also granted 217,264 restricted stock units
under the 2002 Plan that vest three years from the date of grant.
A summary
of equity classified restricted stock unit activity as of September 30, 2008 and
changes during the quarter ended September 30, 2008 is presented
below:
At
September 30, 2008, the aggregate intrinsic value of equity classified
restricted stock units was $12.8 million. As of September 30, 2008,
there was $9.7 million of total unrecognized compensation cost related to
restricted stock unit compensation arrangements. The weighted average
recognition period was 2.83 years.
Chief
Executive Officer Special Enterprise Value Bonus
Our Chief
Executive Officer was granted a special bonus award in November
2007. The award will be settled in cash based on a comparison of
Harman’s enterprise value at November 2012 to the enterprise value at the grant
date in November 2007. The award is classified as a liability
award. As a result, the fair value is required to be measured each
quarter. The fair value of this award at September 30, 2008 was $0.8
million, calculated using a Monte Carlo simulation. No compensation
expense was recorded during the quarter ended September 30, 2008 due to the
decrease in the award’s computed fair value.
Note
11. Restructuring
Program
We
announced a restructuring program in June 2006 designed to increase efficiency
in our manufacturing, engineering and administrative
organizations. During the third quarter of fiscal 2008, we expanded
our restructuring actions to improve our global footprint, cost structure,
technology portfolio, human resources and internal processes. These
actions will reduce the number of our manufacturing, engineering and operating
locations.
We have
announced plant closings in Northridge, California and Martinsville, Indiana and
closed a plant in South Africa and a small facility in
Massachusetts. We have also completed the transition of our corporate
headquarters from Washington D.C. to Stamford, Connecticut.
For the
quarter ended September 30, 2008, selling, general and administrative
(“SG&A”) expenses included $4.9 million for our restructuring program, of
which $2.2 million was recorded for employee termination
benefits. Cash paid for restructuring actions during the quarter
totaled $7.0 million. We also recorded $5.6 million in cost of sales
relating to accelerated depreciation and the classification of the Martinsville
property from held and used to held for sale, both of which were recorded in
accordance with SFAS 144, Accounting for the Impairment or
Disposal of Long-Lived Assets.
Below is
a rollforward of our restructuring accrual, accounted for in accordance with
SFAS 88, SFAS 112 and SFAS 146:
(1)
Includes amounts representing adjustments to the liability for changes in
foreign currency exchange rates.
Restructuring
expenses by reporting segment are as follows:
Note
12. Retirement
Benefits
We
provide defined pension benefits to certain eligible employees. The
measurement date used for determining pension benefits is the last day of our
fiscal year, June 30. We have certain business units in Europe that maintain
defined benefit pension plans for many of our current and former employees. The
coverage provided and the extent to which the retirees’ share in the cost of the
program vary by business unit. Generally, plan benefits are based on age, years
of service and average compensation during the final years of
service. In the United States, we have a Supplemental Executive
Retirement Plan (“SERP”) that provides retirement, death and termination
benefits, as defined, to certain key executives designated by the Board of
Directors.
Our
retirement benefits are more fully disclosed in Note 16, Retirement Benefits, to our
consolidated financial statements included in Item 8 of our Annual Report on
Form 10-K for the fiscal year ended June 30, 2008. The
following table presents the components of net periodic benefit
costs:
During
the three months ended September 30, 2008, we made an insignificant contribution
to the defined benefit pension plans. We expect to contribute
approximately $9 million in fiscal 2009.
Note
13. Business
Segment Data
We
design, manufacture and market high-quality, high fidelity audio products and
electronic systems for the automotive, consumer and professional
markets. We organize our businesses into reporting segments by the
end-user markets we serve. Our chief operating decision makers
evaluate performance and allocate resources primarily based on net sales,
operating income and working capital in each of the reporting
segments. We report on the basis of three
segments: Automotive, Consumer and Professional.
During
the first quarter of fiscal 2009, we revised our business segments to align with
our strategic approach to the markets and customers we serve. We now
report financial information for the QNX business in our “Other”
segment. The QNX business was previously reported in our Automotive
segment. Segment information for the prior period has been
reclassified to reflect the new presentation.
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 and systems are marketed worldwide under brand names including JBL,
Infinity, Harman/Kardon, Becker, Logic 7 and Mark Levinson. Our
premium branded audio, video, navigation and infotainment systems are offered to
automobile manufacturers through engineering and supply
agreements. See Note 14, Significant
Customers.
Our
Consumer segment designs, manufactures and markets audio and electronic
systems for home, computer and multimedia applications and mobile
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 products are
offered through audio specialty and retail chain stores. Our
branded audio products for computer and multimedia applications are focused on
retail customers with products designed to enhance sound for computers, Apple’s
iPod and other music control players.
Our
Professional segment designs, manufactures and markets loudspeakers and
electronic systems used by audio professionals in concert halls, stadiums,
airports and other buildings and for recording, broadcast, cinema and music
reproduction applications. Our Professional products are marketed
worldwide under brand names including JBL Professional, AKG, Crown, Soundcraft,
Lexicon, DigiTech, dbx and Studer. We provide high-quality products
to the sound reinforcement, music instrument support and broadcast and recording
segments of the professional audio market. We offer complete systems
solutions for professional installations and users around the
world.
Our Other
segment includes the operations of the QNX business, which offers embedded
operating system software and related development tools and consulting services
used in a variety of products and industries. Our Other segment also
includes compensation, benefit and occupancy costs for corporate
employees.
The
following table reports net sales and operating income (loss) by each reporting
segment:
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