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Harman International Industries 10-Q 2011

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32.1
  5. Graphic
  6. Graphic
Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2011

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period from              to             

Commission File Number: 1-9764

 

 

Harman International Industries, Incorporated

(Exact name of registrant as specified in its charter)

LOGO

 

 

 

Delaware   11-2534306

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

400 Atlantic Street, Suite 1500

Stamford, CT

  06901
(Address of principal executive offices)   (Zip code)

(203) 328-3500

(Registrant’s telephone number, including area code)

 

 

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    ¨  No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    x  Yes    ¨  No

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):

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ¨  Yes    x  No

As of April 25, 2011, 69,898,232 shares of common stock, par value $.01, were outstanding.

 

 

 


Table of Contents

HARMAN INTERNATIONAL INDUSTRIES, INCORPORATED AND SUBSIDIARIES

Form 10-Q

March 31, 2011

Table of Contents

 

         Page  
 

Forward-Looking Statements

     i   

Part I

 

FINANCIAL INFORMATION

  

Item 1.

 

Financial Statements

     1   
 

Condensed Consolidated Financial Statements

     1   
 

Condensed Consolidated Balance Sheets
March 31, 2011 (unaudited) and June 30, 2010

     1   
 

Condensed Consolidated Statements of Operations (unaudited)
Three and Nine months ended March 31, 2011 and 2010

     2   
 

Condensed Consolidated Statements of Cash Flows (unaudited)
Nine months ended March 31, 2011 and 2010

     3   
 

Notes to the Condensed Consolidated Financial Statements (unaudited)

     4   

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     28   

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

     40   

Item 4.

 

Controls and Procedures

     40   

Part II

 

OTHER INFORMATION

  

Item 1A.

 

Risk Factors

     41   

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

     41   

Item 6.

 

Exhibits

     42   
 

Signatures

     43   

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.

Harman International, the Harman International logo, and the Harman International products and brand names referred to herein are either the trademarks or the registered trademarks of Harman International. All other trademarks are the property of their respective owners.


Table of Contents

Forward-Looking Statements

This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. You should not place undue reliance on these statements. Forward-looking statements include information concerning possible or assumed future results of operations, cash flows, 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,” “should,” “will” 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 because they identify important factors that could cause actual results to differ materially from those predicted in any such forward-looking statements. 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:

 

   

our ability to maintain profitability in our automotive division if there are delays in our product launches which may give rise to significant penalties and increased engineering expense;

 

   

the loss of one or more significant customers, or the loss of a significant platform with an automotive customer;

 

   

warranty obligations for defects in our products;

 

   

fluctuations in currency exchange rates, particularly with respect to the value of the U.S. Dollar and the Euro;

 

   

our ability to successfully implement our global footprint initiative, including achieving cost reductions and other benefits in connection with the restructuring of our manufacturing, engineering, procurement and administrative organizations;

 

   

the inability of our suppliers to deliver products at the scheduled rate and disruptions arising in connection therewith;

 

   

our ability to attract and retain qualified senior management and to prepare and implement an appropriate succession plan for our critical organizational positions;

 

   

our failure to implement and maintain a comprehensive disaster recovery program;

 

   

our failure to comply with governmental rules and regulations, including the Foreign Corrupt Practices Act and U.S. export control laws, and the cost of compliance with such laws;

 

   

our ability to maintain a competitive technological advantage through innovation and leading product designs;

 

   

the outcome of pending or future litigation and other claims, including, but not limited to, the current stockholder and Employee Retirement Income Security Act of 1974 lawsuits; and

 

   

our ability to enforce or defend our ownership and use of intellectual property rights.

Although we believe that these forward-looking statements are based on reasonable assumptions, you should be aware that many factors could affect our actual 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, under the caption “Risk Factors” of Part I to our Annual Report on Form 10-K for the fiscal year ended June 30, 2010 and Item 1A of Part II of this report. We undertake no obligation to publicly update or revise any forward-looking statement (except as required by law).

 

i


Table of Contents

PART I FINANCIAL INFORMATION

 

Item 1. Financial Statements

CONDENSED CONSOLIDATED BALANCE SHEETS

HARMAN INTERNATIONAL INDUSTRIES, INCORPORATED AND SUBSIDIARIES

 

(In thousands)    March 31,
2011
(Unaudited)
    June 30, 2010  

Assets

    

Current assets

    

Cash and cash equivalents

   $ 426,696      $ 645,570   

Short-term investments

     340,777        0   

Receivables, net

     599,969        517,092   

Inventories, net

     455,070        353,123   

Other current assets

     183,539        158,194   
                

Total current assets

     2,006,051        1,673,979   

Property, plant and equipment, net

     446,579        421,949   

Goodwill

     116,366        105,922   

Deferred tax assets, long-term

     242,750        247,602   

Other assets

     129,504        106,763   
                

Total assets

   $ 2,941,250      $ 2,556,215   
                

Liabilities and Equity

    

Current liabilities

    

Current portion of long-term debt

   $ 960      $ 463   

Short-term debt

     2,073        13,472   

Accounts payable

     428,395        382,985   

Accrued liabilities

     425,732        363,261   

Accrued warranties

     110,768        99,329   

Income taxes payable

     14,821        3,941   
                

Total current liabilities

     982,749        863,451   

Convertible senior notes

     374,485        362,693   

Other senior debt

     486        1,209   

Other non-current liabilities

     230,381        193,970   
                

Total liabilities

     1,588,101        1,421,323   
                

Preferred stock

     0        0   

Common stock

     955        952   

Additional paid-in capital

     909,570        892,129   

Accumulated other comprehensive income

     89,186        3,666   

Retained earnings

     1,401,008        1,285,715   

Less: Common stock held in treasury

     (1,047,570     (1,047,570
                

Total equity

     1,353,149        1,134,892   
                

Total liabilities and equity

   $ 2,941,250      $ 2,556,215   
                

See accompanying Notes to the Condensed Consolidated Financial Statements.

 

1


Table of Contents

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

HARMAN INTERNATIONAL INDUSTRIES, INCORPORATED AND SUBSIDIARIES

(Unaudited)

 

(In thousands, except earnings per share data)    Three Months Ended
March 31,
     Nine Months Ended
March 31,
 
     2011     2010      2011     2010  

Net sales

   $ 948,196      $ 837,011       $ 2,741,223      $ 2,513,712   

Cost of sales

     699,371        619,379         1,999,087        1,852,218   
                                 

Gross profit

     248,825        217,632         742,136        661,494   

Selling, general and administrative expenses

     211,362        190,748         594,108        576,055   

Sale of intellectual property

     (16,184     0         (16,184     0   

Loss on deconsolidation of variable interest entity

     0        0         0        13,122   

Goodwill impairment

     0        0         0        12,292   
                                 

Operating income

     53,647        26,884         164,212        60,025   

Other expenses:

         

Interest expense, net

     5,262        5,762         17,172        23,950   

Miscellaneous, net

     1,464        1,572         5,396        3,719   
                                 

Income from continuing operations before income taxes

     46,921        19,550         141,644        32,356   

Income tax expense, net

     10,321        4,629         24,604        10,326   
                                 

Income from continuing operations, net of income taxes

     36,600        14,921         117,040        22,030   

Income from discontinued operations, net of income taxes

     0        3,339         0        8,145   
                                 

Net income

     36,600        18,260         117,040        30,175   

Less: Net income attributable to noncontrolling interest

     0        0         0        5,289   
                                 

Net income attributable to Harman International Industries, Incorporated

   $ 36,600      $ 18,260       $ 117,040      $ 24,886   
                                 

Net income from continuing operations attributable to Harman International Industries, Incorporated

         

Income from continuing operations, net of income taxes

   $ 36,600      $ 14,921       $ 117,040      $ 22,030   

Less: Net income attributable to noncontrolling interest

     0        0         0        5,289   
                                 

Net income from continuing operations attributable to Harman International Industries, Incorporated

   $ 36,600      $ 14,921       $ 117,040      $ 16,741   
                                 

Earnings per share from continuing operations attributable to Harman International Industries, Incorporated:

         

Basic

   $ 0.51      $ 0.21       $ 1.65      $ 0.24   
                                 

Diluted

   $ 0.51      $ 0.21       $ 1.64      $ 0.24   
                                 

Earnings per share from discontinued operations:

         

Basic

   $ 0.00      $ 0.05       $ 0.00      $ 0.12   
                                 

Diluted

   $ 0.00      $ 0.05       $ 0.00      $ 0.12   
                                 

Earnings per share:

         

Basic

   $ 0.51      $ 0.26       $ 1.65      $ 0.35   
                                 

Diluted

   $ 0.51      $ 0.26       $ 1.64      $ 0.35   
                                 

Weighted average shares outstanding:

         

Basic

     71,123        70,531         70,918        70,300   
                                 

Diluted

     71,924        70,905         71,541        70,536   
                                 

See accompanying Notes to the Condensed Consolidated Financial Statements.

 

2


Table of Contents

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

HARMAN INTERNATIONAL INDUSTRIES, INCORPORATED AND SUBSIDIARIES

(Unaudited)

 

(In thousands)    Nine Months Ended
March 31,
 
     2011     2010  

Cash Flows from operating activities:

    

Net income attributable to Harman International Industries, Incorporated

   $ 117,040      $ 24,886   

Adjustments to reconcile net income attributable to Harman International Industries, Incorporated to net cash provided by operating activities:

    

Income from discontinued operations, net of income taxes

     0        (8,145

Depreciation and amortization

     88,931        99,516   

Non-cash interest expense

     14,667        13,097   

Share-based compensation

     13,178        16,466   

Loss on disposition of assets

     1,036        119   

Sale of intellectual property

     (16,184     0   

Deferred income tax (benefit) expense

     (9,195     2,607   

Loss on deconsolidation of variable interest entity

     0        13,122   

Goodwill impairment

     0        12,292   

Noncontrolling interest

     0        5,289   

Changes in operating assets and liabilities:

    

Decrease (increase) in:

    

Receivables

     (18,662     (174,463

Inventories

     (64,198     (38,018

Other current assets

     (13,029     (14,851

Increase (decrease) in:

    

Accounts payable

     11,608        112,897   

Accrued warranties

     11,439        (12,401

Accrued other liabilities

     (25,837     20,920   

Income taxes payable

     7,704        4,166   

Other operating activities

     16,503        18,169   
                

Net cash from continuing operations provided by operating activities

     135,001        95,668   

Net cash from discontinued operations provided by operating activities

     0        9,902   
                

Net cash provided by operating activities

     135,001        105,570   

Cash flows from investing activities:

    

Purchases of short-term investments

     (484,002     (238,090

Maturities of short-term investments

     143,224        114,321   

Acquisitions, net of cash received

     (3,575     0   

Proceeds from asset dispositions

     2,875        1,933   

Capital expenditures

     (64,182     (27,133

Deconsolidation of variable interest entity

     0        (11,347

Other items, net

     577        (1,832
                

Net cash from continuing operations used in investing activities

     (405,083     (162,148

Net cash from discontinued operations used in investing activities

     0        118   
                

Net cash used in investing activities

     (405,083     (162,030

Cash flows from financing activities:

    

Net decrease in short-term borrowings

     (12,088     0   

Net borrowings under revolving credit facility

     0        (228,890

Debt issuance costs for revolving credit facility

     (7,002     0   

Other increase in long-term debt

     4,659        4,007   

Dividends paid to shareholders

     (1,746     0   

Share-based payment arrangements

     8,246        1,519   
                

Net cash used in financing activities

     (7,931     (223,364

Effect of exchange rate changes on cash

     59,139        (5,944
                

Net decrease in cash and cash equivalents

     (218,874     (285,768

Cash and cash equivalents at beginning of period

     645,570        586,359   
                

Cash and cash equivalents at end of period

   $ 426,696      $ 300,591   
                

Supplemental disclosure of cash flow information:

    

Interest paid

   $ 2,759      $ 12,547   

Income taxes paid

   $ 4,108      $ 678   

See accompanying Notes to the Condensed Consolidated Financial Statements

 

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HARMAN INTERNATIONAL INDUSTRIES, INCORPORATED AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements

(In thousands, except per-share data and where otherwise noted)

(Unaudited)

Note 1 – Basis of Presentation

Basis of Presentation

References to “we,” “us,” “our,” the “Company” and “Harman” refer to Harman International Industries, Incorporated and its consolidated subsidiaries unless the context specifically requires otherwise.

Our unaudited, condensed consolidated financial statements at March 31, 2011 and for the three and nine months ended March 31, 2011 and 2010, have been prepared pursuant to rules and regulations of the Securities and Exchange Commission (the “SEC”). These unaudited condensed consolidated financial statements have been prepared in accordance with the accounting policies described in our Annual Report on Form 10-K for the fiscal year ended June 30, 2010 (our “2010 Form 10-K”) and 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 condition, results of operations and cash flows for the periods presented. Operating results for the three and nine months ended March 31, 2011 are not necessarily indicative of the results that may be expected for the full fiscal year ending June 30, 2011 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.

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 2010 Form 10-K.

Allowance for Doubtful Accounts: We reserve an estimated amount for accounts receivable that may not be collected. Methodologies for estimating the allowance for doubtful accounts are primarily based on specific identification of uncollectible accounts. Historical collection rates and customer credit worthiness are considered in determining specific reserves. At March 31, 2011 and June 30, 2010, we had $7.4 million and $8.1 million, respectively, reserved for possible uncollectible accounts receivable.

Discontinued Operations: The results of operations of businesses that have been sold are presented separately as Income from discontinued operations, net of income taxes, in our Condensed Consolidated Statement of Operations, in the current and prior periods, where applicable. Amounts in prior periods have been restated in the Notes to the Condensed Consolidated Financial Statements to reflect continuing operations. Refer to Note 19—Discontinued Operations for further information.

Note 2 – New Accounting Standards

Recently Adopted Accounting Standards

Variable Interest Entities: On July 1, 2010, we adopted the new accounting guidance issued by the Financial Accounting Standards Board (“FASB”) within Accounting Standards Codification (“ASC”) 810 “Consolidation” regarding certain amended provisions relating to the consolidation of variable interest entities (“VIE”). The amended provisions primarily include (i) amending the guidance for determining whether an entity is a VIE and (ii) amending the criteria for identification of the primary beneficiary of a VIE. The new provisions also require us to continually reassess whether we are the primary beneficiary of a VIE and require that we enhance our disclosures in the financial statements about our VIE relationships. The adoption of the new guidance did not have any impact on our financial condition or results of operations.

Transfers of Financial Assets: On July 1, 2010, we adopted the new accounting guidance issued by the FASB within Accounting Standards Update (“ASU”) 2009-16 “Transfers and Servicing (Topic 860): Accounting for the Transfers of Financial Assets” relating to the accounting for transfers of financial assets. The new guidance requires additional disclosures relating to the transparency of transfers of financial assets. The adoption of the new guidance did not have any impact on our financial condition or results of operations.

 

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Multiple Element Revenue Arrangements: On July 1, 2010, we adopted the new accounting guidance issued by the FASB relating to the accounting for multiple element revenue arrangements issued in ASC 605-25 and ASC 985-707. The new guidance requires a vendor to allocate revenue to each standalone deliverable in arrangements involving multiple deliverables based on the relative selling price of each deliverable. It also changes the level of evidence of the standalone selling price required to separate deliverables by allowing a vendor to make its best estimate of the standalone selling price of deliverables when more objective evidence of selling price is not available. The new guidance also excludes sales of tangible products that contain essential software elements from the scope of revenue recognition for software arrangements. Because of these changes, revenue is recognized earlier for many revenue transactions involving multiple deliverables and sales of software enabled devices. The new guidance also requires additional disclosures relating to qualitative and quantitative information about a vendor’s revenue arrangements and about the significant judgments made about the application of the new guidance and any changes in those judgments or the application that may significantly affect the timing or amount of revenue recognition. The new guidance can be adopted on a prospective basis or in certain circumstances on a retrospective basis. We adopted the new guidance on a prospective basis and applied the new guidance to all arrangements entered into or materially modified in fiscal years beginning after June 15, 2010. The adoption of the new guidance did not have any impact on our financial condition or results of operations.

Recently Issued Accounting Standards

Intangibles, Goodwill and Other: In December 2010, the FASB issued ASU 2010-28, “Intangibles - Goodwill and Other (Topic 350): When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts.” The new guidance requires that reporting units with zero or negative carrying amounts perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. The new guidance is effective for us for fiscal years beginning after December 15, 2010. We will adopt the provisions of this new guidance on July 1, 2011. We do not expect the adoption of the new provisions to have any impact on our financial condition or results of operations.

Business Combinations: In December 2010, the FASB issued ASU 2010-29, “Business Combinations (Topic 805): “Disclosure of Supplementary Pro Forma Information for Business Combinations.” The new guidance specifies that when comparative financial statements are presented, the revenue and earnings of the combined entity should be disclosed as though the business combination that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The new guidance applies prospectively to us for business combinations which occur on or after July 1, 2011. Early adoption is permitted. The impact of these new provisions on our consolidated financial statements will depend upon the nature, terms and size of the acquisitions we consummate in the future.

Note 3 – Inventories, net

Inventories, net consist of the following:

 

     March 31,
2011
     June 30,
2010
 

Finished goods

   $ 167,455       $ 130,827   

Work in process

     67,630         59,196   

Raw materials

     219,985         163,100   
                 

Inventories, net

   $ 455,070       $ 353,123   
                 

At March 31, 2011 and June 30, 2010, our inventory reserves were $77.1 million and $75.1 million, respectively.

 

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Note 4 – Property, Plant and Equipment, net

Property, plant and equipment consist of the following:

 

     Estimated
Useful Lives
(in Years)
     March 31,
2011
    June 30,
2010
 

Land

      $ 11,715      $ 10,370   

Buildings and improvements

     1-50         277,055        255,440   

Machinery and equipment

     3-20         1,010,426        880,364   

Furniture and fixtures

     3-10         31,977        28,137   
                   

Property, plant and equipment, gross

        1,331,173        1,174,311   

Less accumulated depreciation and amortization

        (884,594     (752,362
                   

Property, plant and equipment, net

      $ 446,579      $ 421,949   
                   

Depreciation expense for the three months ended March 31, 2011 and 2010 was $28.4 million and $31.5 million, respectively, and was $83.4 million and $97.7 million for the nine months ended March 31, 2011 and 2010, respectively.

Note 5 – Accrued Warranties

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 as warranty expense in our Condensed Consolidated Statement of Operations. We take these factors into consideration when assessing the adequacy of our warranty provision for periods still open to claim.

Details of our accrued warranties are as follows:

 

     Nine Months Ended
March 31,
 
     2011     2010  

Accrued warranties, June 30

   $ 99,329      $ 116,673   

Warranty expense

     36,443        39,168   

Warranty payments (cash or in-kind)

     (38,670     (50,545

Other(1)

     13,666        (1,024
                

Accrued warranties, March 31

   $ 110,768      $ 104,272   
                

 

(1) 

Other primarily represents foreign currency translation.

 

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Note 6 – Earnings Per Share

The following table presents the calculation of basic and diluted earnings per share of common stock outstanding:

 

     Three Months Ended March 31,  
     2011      2010  
     Basic      Diluted      Basic      Diluted  

Numerator for Basic and Diluted Earnings per Share:

           

Income from continuing operations, net of income taxes

   $ 36,600       $ 36,600       $ 14,921       $ 14,921   

Less: Net income attributable to noncontrolling interest

     0         0         0         0   
                                   

Net income from continuing operations attributable to Harman International Industries, Incorporated

     36,600         36,600         14,921         14,921   

Income from discontinued operations, net of income taxes

     0         0         3,339         3,339   
                                   

Net income attributable to Harman International Industries, Incorporated

   $ 36,600       $ 36,600       $ 18,260       $ 18,260   
                                   

Denominator for Basic and Diluted Earnings per Share:

           

Weighted average shares outstanding

     71,123         71,123         70,531         70,531   

Employee stock options

     0         801         0         374   
                                   

Total weighted average shares outstanding

     71,123         71,924         70,531         70,905   
                                   

Earnings per Share:

           

Net income from continuing operations attributable to Harman International Industries, Incorporated

   $ 0.51       $ 0.51       $ 0.21       $ 0.21   
                                   

Income from discontinued operations, net of income taxes

   $ 0.00       $ 0.00       $ 0.05       $ 0.05   
                                   

Net income attributable to Harman International Industries, Incorporated

   $ 0.51       $ 0.51       $ 0.26       $ 0.26   
                                   
     Nine Months Ended March 31,  
     2011      2010  
     Basic      Diluted      Basic      Diluted  

Numerator for Basic and Diluted Earnings per Share:

           

Income from continuing operations, net of income taxes

   $ 117,040       $ 117,040       $ 22,030       $ 22,030   

Less: Net income attributable to noncontrolling interest

     0         0         5,289         5,289   
                                   

Net income from continuing operations attributable to Harman International Industries, Incorporated

     117,040         117,040         16,741         16,741   

Income from discontinued operations, net of income taxes

     0         0         8,145         8,145   
                                   

Net income attributable to Harman International Industries, Incorporated

   $ 117,040       $ 117,040       $ 24,886       $ 24,886   
                                   

Denominator for Basic and Diluted Earnings per Share:

           

Weighted average shares outstanding

     70,918         70,918         70,300         70,300   

Employee stock options

     0         623         0         236   
                                   

Total weighted average shares outstanding

     70,918         71,541         70,300         70,536   
                                   

Earnings per Share:

           

Net income from continuing operations attributable to Harman International Industries, Incorporated

   $ 1.65       $ 1.64       $ 0.24       $ 0.24   
                                   

Income from discontinued operations, net of income taxes

   $ 0.00       $ 0.00       $ 0.12       $ 0.12   
                                   

Net income attributable to Harman International Industries, Incorporated

   $ 1.65       $ 1.64       $ 0.35       $ 0.35   
                                   

Options to purchase 995,599 and 1,572,904 shares of our common stock with exercise prices ranging from $43.65 to $126.94 and $32.83 to $126.94 per share were outstanding during the three months ended March 31, 2011 and 2010, respectively, and were excluded from the computation of diluted earnings per share because they would have been antidilutive. In addition, restricted shares

 

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and restricted stock units of 7,530 and zero were outstanding during the three months ended March 31, 2011 and 2010, respectively, and were excluded from the computation of diluted earnings per share as they also would have been antidilutive.

Options to purchase 1,703,014 and 2,390,501 shares of our common stock with exercise prices ranging from $29.82 to $126.94 and $26.64 to $126.94 per share were outstanding during the nine months ended March 31, 2011 and 2010, respectively, and were excluded from the computation of diluted earnings per share because they would have been antidilutive. In addition, restricted shares and restricted stock units of 15,829 and 777 were outstanding during the nine months ended March 31, 2011 and 2010, respectively, and were excluded from the computation of diluted earnings per share as they also would have been antidilutive.

We had $400 million of 1.25 percent convertible senior notes (the “Convertible Senior Notes”) outstanding at March 31, 2011 and June 30, 2010. The conversion terms of the Convertible Senior Notes will affect the calculation of diluted earnings per share if the price of our common stock exceeds the conversion price of the Convertible Senior Notes. The initial conversion price of the Convertible Senior Notes is approximately $104 per share, subject to adjustment in specified circumstances as described in the indenture governing the Convertible Senior Notes (the “Indenture”). Upon conversion, a holder of Convertible Senior Notes will receive an amount per Convertible Senior Note in cash equal to the lesser of $1,000 or the conversion value of the Convertible Senior 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. 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. Therefore, conversion settlement shares will be included in diluted shares outstanding if the price of our common stock exceeds the conversion price of the Convertible Senior Notes. Refer to Note 8 – Debt for further information.

Note 7 – Goodwill

We test for impairment at the reporting unit level on an annual basis as of April 30th of every year and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying value. The impairment test for goodwill is a two-step process. The first step compares the fair value of each reporting unit to its carrying value, with the fair value of each reporting unit determined using established valuation techniques, specifically the market and income approaches. Should the results of the first step indicate that the fair value of a reporting unit is less than its carrying value, the second step of this test is conducted wherein the amount of any impairment is determined by comparing the implied fair value of goodwill in a reporting unit to the recorded amount of goodwill for that reporting unit. The implied fair value of goodwill is calculated as the excess of the fair value of the reporting unit over the amounts assigned to its assets and liabilities. Should the fair value of the goodwill so calculated be less than the carrying value, an impairment charge is recognized. The annual goodwill impairment test conducted as of April 30, 2010 indicated that the fair value of each reporting unit was substantially in excess of its carrying value and, as such, no impairment was deemed to exist and therefore we did not recognize any goodwill impairment charges in the three and nine months ended March 31, 2011.

Our annual goodwill impairment test conducted in April 2009 indicated that no goodwill was supportable in our Automotive segment. In the first half of fiscal year 2010, we recorded additional goodwill of $12.3 million associated with contingent purchase price arrangements from acquisitions in prior years and subsequently impaired $12.3 million of goodwill in the same reporting period. As a result, during the three and nine months ended March 31, 2010 we recognized zero and $12.3 million, respectively, of goodwill impairment in our Condensed Consolidated Statements of Operations.

We performed a preliminary goodwill impairment test as of March 31, 2010, as a result of sustained improvements in the operating results of our Automotive business due to improvements in economic conditions and realized savings resulting from our cost cutting initiatives. This goodwill impairment test demonstrated that the calculated fair value of our reporting units exceeded their respective carrying values and therefore no impairment existed in Automotive and our other reporting units. As a result, no further goodwill impairment charges associated with the incremental goodwill were recorded that were related to the contingent purchase price arrangements. During the three months ended March 31, 2010, we recorded $3.1 million of goodwill associated with a contingent purchase price arrangement in our Automotive segment.

Note 8 – Debt

Short Term Borrowings

At March 31, 2011 and June 30, 2010, we had $2.1 million and $13.5 million of short-term borrowings outstanding, respectively, and we maintained lines of credit of $18.6 million, in the aggregate, in Hungary, the U.S., Austria and Brazil and $13.6 million, in the aggregate, in Germany, Austria, and Hungary, respectively.

 

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New Revolving Credit Facility

On December 1, 2010, we and one of our wholly-owned subsidiaries, Harman Holding GmbH & Co. KG (“Harman KG”), entered into a Multi-Currency Credit Agreement (the “Credit Agreement”) with a group of banks. The Credit Agreement provides for a five-year secured revolving credit facility which expires on December 1, 2015 (the “Revolving Credit Facility”) in the amount of $550 million (the “Aggregate Commitment”), of which up to $60 million will be available for letters of credit. Subject to certain conditions set forth in the Credit Agreement, the Aggregate Commitment may be increased up to a maximum aggregate amount of $700 million.

The Credit Agreement effectively replaced our previous revolving credit facility, the second amended and restated multi-currency, multi-option credit agreement dated March 31, 2009, as amended (the “2009 Credit Agreement”), which had a maximum borrowing capacity of $231.6 million (the “2009 Maximum Borrowing Capacity”), including outstanding letters of credit, which is more fully described in our 2010 Form 10-K. As a result of such replacement, we voluntarily terminated the 2009 Credit Agreement. There were no outstanding borrowings under the 2009 Credit Agreement as of December 1, 2010, and we incurred no early termination penalties due to the termination of the 2009 Credit Agreement.

Interest rates for borrowings under the Revolving Credit Facility range from 0.875 percent to 1.375 percent above the applicable base rate for base rate loans and range from 1.875 percent to 2.375 percent above London Interbank Offered Rate (“LIBOR”) for Eurocurrency loans based on our Total Leverage Ratio (as defined below). In addition, we are obligated to pay an annual facility fee on the Aggregate Commitment, whether drawn or undrawn, ranging from 0.375 percent to 0.625 percent based on our Total Leverage Ratio. Any proceeds from borrowings under the Revolving Credit Facility may be used for general corporate purposes.

Interest rates for borrowings under the 2009 Credit Agreement were 3.0 percent above the applicable base rate for base rate loans and 4.0 percent above LIBOR for Eurocurrency loans. In addition, the annual facility fee rate payable under the 2009 Credit Agreement was one percent based on the 2009 Maximum Borrowing Capacity, whether drawn or undrawn.

The Credit Agreement contains financial condition covenants that require us to maintain the following ratios, each calculated as of the end of the applicable fiscal quarter on a rolling four-quarter basis:

 

   

The ratio of consolidated earnings before interest, taxes, depreciation and amortization (“EBITDA”) less capital expenditures, to consolidated cash interest expense, must be more than 3.25 to 1.00 (the “Interest Coverage Ratio”);

 

   

The ratio of consolidated total debt to consolidated EBITDA must be less than 4.00 to 1.00 (the “Total Leverage Ratio”); and

 

   

The ratio of consolidated senior debt to consolidated EBITDA must be less than 3.00 to 1.00 (the “Senior Leverage Ratio”).

The Credit Agreement also contains covenants that require us to maintain minimum levels of liquidity in certain specified circumstances, imposes limitations on our ability to incur debt, place liens on our assets, make fundamental changes, sell assets, make investments, undertake transactions with affiliates, undertake sale and leaseback transactions, incur guarantee obligations, modify or prepay certain material debt (including the Convertible Senior Notes), enter into hedging agreements, pay dividends, make capital expenditures and acquire certain types of collateral.

The Revolving Credit Facility is subject to acceleration upon certain specified events of default, including failure to make timely payments, breaches of representations or covenants, or a change in control of our company, as defined in the Credit Agreement.

At March 31, 2011, we had no borrowings under the Credit Agreement and had outstanding letters of credit of $6.8 million. Unused available credit under the Credit Agreement was $543.2 million at March 31, 2011. In connection with the Credit Agreement, we incurred $7.0 million in fees and other expenses which have been capitalized within Other assets in our Condensed Consolidated Balance Sheet. These costs will be amortized over the term of the Credit Agreement on a straight-line basis. In addition, we wrote off $0.7 million of debt issuance costs associated with the 2009 Credit Agreement, which represented the portion of these costs that were attributed to the 2009 Credit Agreement.

If we do not meet the forecast in our budgets, we could violate our debt covenants and, absent a waiver from our lenders or an amendment to our Credit Agreement, we could be in default under the Credit Agreement. As a result, our debt under the Credit Agreement could become due, which would have a material adverse effect on our financial condition and results of operations. A default under the Credit Agreement could also lead to an event of default under the Indenture, as amended, and the acceleration of the Convertible Senior Notes. As of March 31, 2011, we were in compliance with all the financial covenants of the Credit Agreement.

Guarantee and Collateral Agreement

In connection with the Credit Agreement, we and Harman KG entered into a guarantee and collateral agreement (the “Guarantee and Collateral Agreement”) which provides, among other things, that the obligations under the Credit Agreement are guaranteed by us and

 

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each of the subsidiary guarantors party thereto, and that the obligations generally are secured by liens on substantially all of our assets and certain of our subsidiary guarantors’ assets.

The term of the Guarantee and Collateral Agreement corresponds with the term of the Credit Agreement, which matures on December 1, 2015. Under the terms of this Guarantee and Collateral Agreement, we have effectively guaranteed the payment of the full amount of borrowings under the Credit Agreement, including outstanding letters of credit, upon maturity. The potential amount of future payments that we would be required to pay under the Guarantee and Collateral Agreement is the amount that we have borrowed under the Credit Agreement, including outstanding letters of credit. At March 31, 2011, we had no borrowings under the Credit Agreement and had outstanding letters of credit of $6.8 million.

Convertible Senior Notes

We had $400 million of Convertible Senior Notes outstanding at March 31, 2011 and June 30, 2010 which were issued on October 23, 2007 (the “Issuance Date”) and are due on October 15, 2012. The Convertible Senior Notes were issued at par and we pay interest at a rate of 1.25 percent per annum on a semiannual basis. The initial conversion rate on the Convertible Senior Notes is 9.6154 shares of our common stock per $1,000 principal amount of the Convertible Senior 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.

Accounting guidance issued by the FASB requires the issuer of convertible debt instruments with cash settlement features to account separately for the liability and equity components of the instrument. Under this guidance, the debt is recognized at the present value of its cash flows discounted using the issuer’s nonconvertible debt borrowing rate at the time of issuance and the equity component is recognized as the difference between the proceeds from the issuance of the note and the fair value of the liability, net of taxes. The reduced carrying value on the convertible debt results in a debt discount that is accreted back to the convertible debt’s principal amount through the recognition of noncash interest expense over the expected life of the debt, which results in recognizing interest expense on these borrowings at effective rates approximating what we would have incurred had nonconvertible debt with otherwise similar terms been issued.

In accordance with this guidance, we measured the fair value of the debt components of the Convertible Senior Notes at the Issuance Date using an effective interest rate of 5.6 percent. As a result, we attributed $75.7 million of the proceeds received to the conversion feature of the Convertible Senior Notes at the Issuance Date, which is netted against the face value of the Convertible Senior Notes as a debt discount. This amount represents the excess proceeds received over the fair value of the Convertible Senior Notes at the Issuance Date and is being accreted back to the principal amount of the Convertible Senior Notes through the recognition of noncash interest expense over the expected life of the Convertible Senior Notes. In addition, we recorded $48.3 million within additional paid-in capital in our Condensed Consolidated Balance Sheets representing the equity component of the Convertible Senior Notes, which is net of deferred taxes. The effect of this guidance has resulted in a decrease to net income and earnings per share for all periods presented; however, there is no effect on our cash interest payments.

The principal amounts, unamortized discount and net carrying amounts of the liability components and the equity components for the Convertible Senior Notes as of March 31, 2011 and June 30, 2010 are as follows:

 

     Principal
Balance
     Unamortized
Discount
    Net
Carrying
Amount
     Equity
Component
 

March 31, 2011

   $ 400,000       $ (25,515   $ 374,485       $ 48,323   

June 30, 2010

   $ 400,000       $ (37,307   $ 362,693       $ 48,323   

At March 31, 2011, the unamortized discount is recognized as a reduction in the carrying value of the Convertible Senior Notes in the Condensed Consolidated Balance Sheets and is being amortized to Interest expense, net in our Condensed Consolidated Statement of Operations over the expected remaining term of the Convertible Senior Notes of 19 months.

Debt issuance costs of $4.8 million were recorded in connection with this transaction and are included in Other assets in our Condensed Consolidated Balance Sheets and are also being amortized to Interest expense, net in our Condensed Consolidated Statements of Operations over the expected remaining term of the Convertible Senior Notes. The unamortized balance of debt issuance costs at March 31, 2011 and June 30, 2010 was $1.2 million and $1.8 million, respectively.

Total interest expense related to the Convertible Senior Notes for the three months ended March 31, 2011 and 2010 includes $1.3 million for both periods of contractual cash interest expense, $3.9 million and $3.7 million of noncash interest expense, respectively, related to the amortization of the discount and $0.2 million in both periods related to the amortization of debt issuance costs. Total interest expense related to the Convertible Senior Notes for the nine months ended March 31. 2011 and 2010 includes $3.8 million for both periods of contractual cash interest expense, $11.8 million and $11.1 million of noncash interest expense, respectively, related to the amortization of the discount and $0.6 million in both periods related to the amortization of debt issuance costs.

The Indenture contains covenants, one of which requires us to calculate the ratio of Consolidated Total Debt to Consolidated EBITDA, as defined in the Indenture, each time we incur additional indebtedness, for the most recently ended four quarter period (the

 

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“Incurrence of Debt Covenant”). On January 12, 2010, we entered into a supplemental indenture to the Indenture (the “Supplemental Indenture”) which amended the Incurrence of Debt Covenant. Under the Supplemental Indenture, we were permitted to, without complying with the ratio of Consolidated Total Debt to Consolidated EBITDA of 3.25 to 1.00: (a) incur revolving extensions of credit under the 2009 Credit Agreement, up to a maximum amount of $231.6 million, and (b) incur additional indebtedness, subject to a requirement to make a pro rata offer to purchase a principal face amount of the Convertible Senior Notes equal to 50 percent of the aggregate amount of such indebtedness so incurred, plus accrued and unpaid interest thereon. The Incurrence of Debt Covenant lapsed on October 23, 2010, and was no longer applicable to us after this date. At March 31, 2011, we were in compliance with all covenants under the Indenture, as amended.

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 three months ended March 31, 2011 was $10.3 million, compared to $4.6 million in the same period in the prior year. The effective tax rate for the three months ended March 31, 2011 was 22.0 percent, compared to 23.7 percent for the same period in the prior year. The change in the effective tax rate for the three months ended March 31, 2011 compared to the same period in the prior year was primarily due to the retroactive reinstatement of the U.S. research and experimental tax credit, the U.S. domestic manufacturer’s deduction that was not available in the three months ended March 31, 2010, higher income in foreign jurisdictions that is subject to tax below the statutory rate and U.S. foreign tax credits.

Income tax expense for the nine months ended March 31, 2011 was $24.6 million, compared to $10.3 million in the same period in the prior year. The effective tax rate for the nine months ended March 31, 2011 was 17.4 percent, compared to 31.9 percent in the same period in the prior year. The change in the effective tax rate for the nine months ended March 31, 2011 compared to the same period in the prior year was primarily due to the retroactive reinstatement of the U.S. research and experimental tax credit, the U.S. domestic manufacturer’s deduction that was not available in the nine months ended March 31, 2010, higher income in foreign jurisdictions that is subject to tax below the statutory rate and U.S. foreign tax credits.

As of March 31, 2011, unrecognized tax benefits and the related interest were $29.9 million and $0.9 million, respectively, of which $28.9 million would affect the tax rate if recognized. During the three and nine months ended March 31, 2011, we recorded tax reserves on uncertain tax positions in the amount of $3.3 million and $8.8 million, respectively. During the three and nine months ended March 31, 2011, we recorded a benefit related to the reduction of interest expense on uncertain tax positions of $1.3 million and $1.1 million, respectively.

Note 10 – Shareholders’ Equity

Preferred Stock

As of March 31, 2011 and June 30, 2010, we had no shares of preferred stock outstanding. We are authorized to issue 5 million shares of preferred stock, $0.01 par value.

Common Stock

We have 200 million authorized shares of common stock, $0.01 par value. At March 31, 2011 and June 30, 2010, we had 95,486,844 and 95,129,836 shares issued, respectively; 25,599,817 shares in treasury stock in both periods and 69,887,027 and 69,530,019 shares outstanding (net of treasury stock), respectively.

 

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Changes in Equity:

The following is a summary of the changes in Accumulated Other Comprehensive Income (“AOCI”) and changes in equity for the nine months ended March 31, 2011:

 

    Preferred
Stock
    Common
Stock
    Additional
Paid-in
Capital
    AOCI     Retained
Earnings
    Treasury Stock     Harman
Shareholders’
Equity
    Non-
controlling
Interest
    Total Equity  

Balance at June 30, 2010

  $ 0      $ 952      $ 892,129      $ 3,666      $ 1,285,715      $ (1,047,570   $ 1,134,892      $ 0      $ 1,134,892   
                                                                       

Net income attributable to Harman International Industries, Incorporated

    0        0        0        0        117,040        0        117,040        0        117,040   

Foreign currency translation

    0        0        0        131,571        0        0        131,571        0        131,571   

Unrealized loss on hedging

    0        0        0        (47,058     0        0        (47,058     0        (47,058

Changes in pension benefits

    0        0        0        (715     0        0        (715     0        (715

Unrealized loss on available-for-sale securities

    0        0        0        1,722        0        0        1,722        0        1,722   
                                                                       

Comprehensive income

    0        0        0        85,520        117,040        0        202,560        0        202,560   

Dividends ($0.10 per share

    0        0        0        0        (1,747     0        (1,747     0        (1,747

Exercise of stock options, net of shares received

    0        3        8,750        0        0        0        8,753        0        8,753   

Share-based compensation

    0        0        12,608        0        0        0        12,608        0        12,608   

Deferred taxes on share-based compensation

    0        0        (3,917     0        0        0        (3,917     0        (3,917
                                                                       

Balance at March 31, 2011

  $ 0      $ 955      $ 909,570      $ 89,186      $ 1,401,008      $ (1,047,570   $ 1,353,149        0      $ 1,353,149   
                                                                       

 

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The following is a summary of the changes in AOCI and changes in equity for the nine months ended March 31, 2010:

 

    Preferred
Stock
    Common
Stock
    Additional
Paid-in
Capital
    AOCI     Retained
Earnings
    Treasury Stock     Harman
Shareholders’
Equity
    Non-
controlling
Interest
    Total Equity  

Balance at June 30, 2009

  $ 0      $ 949      $ 869,609      $ 57,198      $ 1,126,946      $ (1,047,570   $ 1,007,132      $ 786      $ 1,007,918   
                                                                       

Net income

    0        0        0        0        24,886        0        24,886        0        24,886   

Foreign currency translation

    0        0        0        (17,064     0        0        (17,064     0        (17,064

Unrealized gain on hedging

    0        0        0        16,706        0        0        16,706        0        16,706   

Changes in pension benefits

    0        0        0        (230     0        0        (230     0        (230

Unrealized gain on available-for-sale securities

    0        0        0        239        0        0        239        0        239   
                                                                       

Comprehensive (loss) income

    0        0        0        (349     24,886        0        24,537        0        24,537   

Exercise of stock options, net of shares received

    0        2        2,545        0        0        0        2,547        0        2,547   

Share based compensation

    0        0        14,936        0        0        0        14,936        0        14,936   

Noncontrolling interest

    0        0        0        0        0        0        0        (786     (786
                                                                       

Balance at March 31, 2010

  $ 0      $ 951      $ 887,090      $ 56,849      $ 1,151,832      $ (1,047,570   $ 1,049,152      $ 0      $ 1,049,152   
                                                                       

At March 31, 2011 and June 30, 2010, AOCI consisted of the following:

 

     March 31,
2011
    June 30,
2010
 

AOCI:

    

Foreign currency translation

   $ 149,626      $ 18,055   

Unrealized (loss) gain on hedging

     (28,350     18,708   

Change in pension benefits

     (28,135     (27,420

Unrealized loss on available-for-sale securities

     (3,955     (5,677
                

Total AOCI

   $ 89,186      $ 3,666   
                

We have approximately $1.8 million and $1.6 million of investments at March 31, 2011 and June 30, 2010, respectively, included in Other current assets in our Condensed Consolidated Balance Sheets that have been classified as available-for-sale securities. These securities are recorded at fair value with realized gains and losses recorded in income and unrealized gains and losses recorded in AOCI, net of taxes.

Note 11 – Share-Based Compensation

On March 31, 2011, we had one share-based compensation plan with shares available for future grants, the Amended and Restated 2002 Stock Option and Incentive Plan (the “2002 Plan”). On December 8, 2010, we amended the 2002 Plan to increase the number of shares available under the 2002 Plan for the grant of stock options, stock appreciation rights, restricted stock and restricted stock units by 1,100,000 to an aggregate amount not to exceed 7,860,000 shares of our common stock. During the nine months ended March 31, 2011, options to purchase 347,401 shares of our common stock and 712,548 restricted stock units were granted under the 2002 Plan. No shares of restricted stock or restricted stock units were granted outside the 2002 Plan during the same period.

 

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Share-based compensation expense was $3.8 million and $6.0 million for the three months ended March 31, 2011 and 2010, respectively, and was $13.2 million and $16.5 million for the nine months ended March 31, 2011 and 2010, respectively. The total income tax benefit recognized in the Condensed Consolidated Statements of Operations for share-based compensation arrangements was $1.2 million and $1.3 million for the three months ended March 31, 2011 and 2010, respectively, and was $3.8 million and $3.7 million for the nine months ended March 31, 2011 and 2010, 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.

 

     Nine Months Ended March 31,  
     2011     2010  

Expected volatility

     60.4% - 73.2     59.9% - 79.0

Weighted-average volatility

     68.8     68.6

Expected annual dividend

   $ 0.10      $ —     

Expected term (in years)

     1.71 -3.80        1.88 -3.98   

Risk-free rate

     0.5 % - 1.7     0.9% -2.2

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 March 31, 2011 and changes during the nine months ended March 31, 2011 is presented below:

 

     Shares     Weighted
Average
Exercise
Price
     Weighted
Average
Remaining
Contractual
Term (Years)
     Aggregate
Intrinsic
Value
 

Outstanding at June 30, 2010

     2,894,405      $ 55.67         6.83       $ 2,760   

Granted

     347,401        34.17         

Exercised

     (304,696     28.74         

Forfeited or expired

     (311,419     56.79         
                

Outstanding at March 31, 2011

     2,625,691      $ 55.82         6.83       $ 22,820   
                                  

Exercisable at March 31, 2011

     1,439,556      $ 64.05         5.85       $ 8.274   
                                  

The weighted-average grant-date fair value of options granted for the three months ended March 31, 2011 and 2010 was $19.07 and $16.14, respectively, and for the nine months ended March 31, 2011 and 2010 was $14.76 and $12.84, respectively. The total intrinsic value of options exercised for the three months ended March 31, 2011 and 2010 was $4.5 million and $1.4 million, respectively, and for the nine months ended March 31, 2011 and 2010 was $5.4 million and $2.4 million, respectively.

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 vested on March 21, 2011, which was 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 was 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 used for the TSR calculation of $42.19 is the 20-day trading average from February 6, 2008 through March 6, 2008. The ending price used for the TSR calculation of $49.81 was 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 for these awards was income of $1.5 million and expense of $0.3 million for the three months ended March 31, 2011 and 2010, respectively, and was income of $0.8 million and expense of $1.0 million for the nine months ended

 

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March 31, 2011 and 2010, respectively. A net benefit was recognized during the three months ended March 31, 2011 related to forfeitures for employees with awards which did not meet the service requirements.

Restricted Stock Awards

A summary of the status of our nonvested restricted stock as of March 31, 2011 and changes during the nine months ended March 31, 2011, is presented below:

 

     Shares     Weighted Average
Grant-Date
Fair Value
 

Nonvested at June 30, 2010

     60,000      $ 65.13   

Granted

     —          —     

Vested

     (23,500     99.53   

Forfeited

     —          —     
          

Nonvested at March 31, 2011

     36,500      $ 42.98   
                

As of March 31, 2011, there was $0.2 million of total unrecognized compensation cost related to nonvested restricted stock-based compensation arrangements, granted under the 2002 Plan. The weighted average recognition period was 0.58 years. At March 31, 2011, a total of 36,500 shares of restricted stock were outstanding of which 30,500 were granted under the 2002 Plan and 6,000 were granted outside of the 2002 Plan.

Restricted Stock Units

We granted 191,721 restricted stock units with performance conditions and 191,715 restricted stock units with market conditions, in the nine months ended March 31, 2011, under the 2002 Plan. The restricted stock units with performance conditions cliff vest three years from the date of grant based on the attainment of certain performance conditions in fiscal year 2013. The restricted stock units with market conditions cliff vest three years from the date of grant based on a comparison of our total TSR to the TSR of a selected peer group of publicly listed multinational companies. The grant date fair value of $5.2 million was calculated using a Monte Carlo simulation model. Compensation expense, for both the restricted stock units with performance conditions and the restricted stock units with market conditions, is recognized ratably over the three-year vesting period based on the grant date fair value and our assessment of the probability that the applicable targets will be met. The probability is reassessed each reporting period for the restricted stock units with performance conditions.

We granted 380,400 and 133,507 restricted stock units with performance conditions in the nine months ended March 31, 2010 and 2009, respectively, under the 2002 Plan. The restricted stock units cliff vest three years from the date of grant based on the attainment of certain performance targets in fiscal years 2012 and 2011, respectively. Compensation expense is recognized ratably over the three-year vesting period, on a straight-line basis, based on the grant date fair value and our assessment of the probability that the performance targets will be met. We have recognized compensation expense based on our estimate of the probability of achieving the targets.

In the nine months ended March 31, 2011 and 2010, we also granted 329,112 and 386,356 restricted stock units, respectively, under the 2002 Plan that vest three years from the date of grant.

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. During the three months ended March 31, 2011 and 2010, zero and 12,856 of these restricted stock units were settled, respectively, at a cost of zero and $0.6 million, respectively, and during the nine months ended March 31, 2011 and 2010, 9,647 and 14,464 of these restricted stock units were settled, respectively, at a cost of approximately $0.3 million and $0.6 million, respectively. At March 31, 2011, 3,216 cash-settled restricted stock units were outstanding.

 

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A summary of equity classified restricted stock unit activity as of March 31, 2011 and changes during the nine months ended March 31, 2011 is presented below:

 

     Shares  

Nonvested at June 30, 2010

     1,130,223   

Granted

     712,548   

Vested

     (58,268

Forfeited

     (65,500
        

Nonvested at March 31, 2011

     1,719,003   
        

At March 31, 2011, the aggregate intrinsic value of equity classified restricted stock units was $80.5 million. As of March 31, 2011, there was $25.7 million of total unrecognized compensation cost related to restricted stock unit compensation arrangements. The weighted average recognition period was 1.69 years.

Chief Executive Officer Special Enterprise Value Bonus

Our Chief Executive Officer (“CEO”) was granted a special bonus award in November 2007 (the “Special Bonus Award”). The award was to 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. This award was classified as a liability in our Condensed Consolidated Balance Sheet at June 30, 2009. The fair value of the Special Bonus Award was measured each quarter using a Monte Carlo simulation.

On September 1, 2009, pursuant to the terms of an amendment to the CEO’s employment letter agreement, the Special Bonus Award was cancelled and replaced with the right to an annual equity award for fiscal years 2011 through 2013 (the “Annual Equity Grant”). On September 1, 2009, both time-based and performance based restricted stock units were granted to the CEO pursuant to the terms of the Annual Equity Grant. The replacement of the Special Bonus Award with the awards granted pursuant to the Annual Equity Grant was accounted for as a modification of an existing award. As a result of this modification, in the first quarter of fiscal year 2010, approximately $0.5 million was reclassified from a liability to additional paid-in capital and $0.5 million was recognized as compensation expense within selling, general and administrative expense (“SG&A”) in our Condensed Consolidated Statement of Operations in the first quarter of fiscal year 2010 and therefore is included in our Condensed Consolidated Statement of Operations for the nine months ended March 31, 2010.

Note 12 – Derivatives

We are exposed to market risk from changes in foreign currency exchange rates and interest rates, which could affect our operating results, financial condition and cash flows. We manage our exposure to these risks through our regular operating and financial activities and, when appropriate, through the use of derivative financial instruments. These derivative instruments are utilized to hedge economic exposures, as well as to reduce earnings and cash flow volatility resulting from shifts in market rates. We enter into limited types of derivative contracts, including foreign currency spot, forward and option contracts and an interest rate swap, to manage foreign currency and interest rate exposures. Our primary foreign currency exposure is the Euro. The fair market values of all our derivative contracts change with fluctuations in interest rates and currency rates and are designed so that any changes in their values are offset by changes in the values of the underlying exposures. Derivative financial instruments are held solely as risk management tools and not for trading or speculative purposes.

We record all derivative instruments as either assets or liabilities at fair value in our Condensed Consolidated Balance Sheets. Certain of these derivative contracts have been designated as cash flow hedges, whereby gains and losses are reported within AOCI in our Condensed Consolidated Balance Sheets, until the underlying transaction occurs, at which point they are reported in earnings as gains and losses in our Condensed Consolidated Statements of Operations. Certain of our derivatives, for which hedge accounting is not applied, are effective as economic hedges. These derivative contracts are required to be recognized each period at fair value, with gains and losses reported in earnings in our Condensed Consolidated Statements of Operations and therefore do result in some level of earnings volatility. The level of volatility will vary with the type and amount of derivative hedges outstanding, as well as fluctuations in the currency and interest rate markets during the period. The related cash flow impacts of all our derivative activities are reflected as cash flows from operating activities.

Derivatives, by their nature, involve varying degrees of market and credit risk. The market risk associated with these instruments resulting from currency exchange and interest rate movements is expected to offset the market risk of the underlying transactions, assets and liabilities being hedged. We do not believe there is significant risk of loss in the event of non-performance by the counterparties associated with these instruments, because these transactions are executed with a diversified group of major financial institutions. Furthermore, our policy is to contract only with counterparties having a minimum investment grade or better credit rating. Credit risk is managed through the continuous monitoring of exposure to such counterparties.

 

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Foreign Exchange Risk Management

We use foreign exchange contracts to hedge the price risk associated with foreign denominated forecasted purchases of materials used in our manufacturing process and to manage currency risk associated with operating costs in certain operating units, including foreign currency denominated intercompany loans and other foreign currency denominated assets. These contracts generally mature in one year or less. The majority of these contracts are designated as cash flow hedges.

At March 31, 2011 and June 30, 2010, we had outstanding foreign currency forward exchange and option contracts which are summarized below:

 

     March 31, 2011     June 30, 2010  
     Gross Notional
Value
     Fair  Value
Asset/
(Liability) (1)
    Gross Notional
Value
     Fair  Value
Asset/
(Liability) (1)
 

Currency Hedged (Buy/Sell):

          

U.S. Dollar/Euro

   $ 784,600       $ (36,873   $ 511,600       $ 25,852   

Swiss Franc/U.S. Dollar

     22,975         2,209        13,922         922   

U.S. Dollar/British Pound

     19,500         (199     0         0   

U.S. Dollar/Chinese Yuan

     9,926         95        0         0   

Euro/British Pound

     11,326         261        7,343         (32

U.S. Dollar/Brazilian Real

     10,412         (509     0         0   

Japanese Yen/Euro

     0         0        6,786         137   

Swedish Krona/Euro

     0         0        5,389         7   

U.S. Dollar/Japanese Yen

     2,100         (24     0         0   

Danish Krone/Euro

     0         0        1,150         (1

Swiss Franc/Euro

     0         0        9,282         772   

Other

     7,693         46        4,528         (230
                                  

Total

   $ 868,532       $ (34,993   $ 560,000       $ 27,427   
                                  

 

(1) 

Represents the net (payable)/receivable included in our Condensed Consolidated Balance Sheets.

Cash Flow Hedges

We designate a portion of our foreign currency derivative contracts as cash flow hedges of foreign currency denominated purchases. As of March 31, 2011 and June 30, 2010, we had $749.3 million and $511.6 million of forward and option contracts maturing through June 2012 and June 2011, respectively. These contracts are recorded at fair value in the accompanying Condensed Consolidated Balance Sheets. The changes in fair value for these contracts on a spot to spot basis are reported in AOCI, and are reclassified to either Cost of sales or SG&A, depending on the nature of the underlying asset or liability that is being hedged, in our Condensed Consolidated Statements of Operations, in the period or periods during which the underlying transaction occurs. If it becomes apparent that an underlying forecasted transaction will not occur, the amount recorded in AOCI related to the hedge is reclassified to Miscellaneous, net in our Condensed Consolidated Statements of Operations in the then-current period. Amounts relating to such reclassifications were immaterial for the three and nine months ended March 31, 2011 and 2010.

Changes in the fair value of the derivatives are highly effective in offsetting changes in the cash flows of the hedged items because the amounts and the maturities of the derivatives approximate those of the forecasted exposures. Any ineffective portion of the derivative is recognized in the current period in our Condensed Consolidated Statements of Operations, in the same line item in which the foreign currency gain or loss on the underlying hedged transaction was recorded. No amount of ineffectiveness was recognized in the Condensed Consolidated Statements of Operations for the three and nine months ended March 31, 2011 and 2010. All components of each derivative’s gain or loss, with the exception of forward points (see below), were included in the assessment of hedge ineffectiveness. At March 31, 2011 and June 30, 2010, the fair value of these contracts was a net liability of $30.6 million and a net asset of $21.5 million, respectively. The amount associated with these hedges that is expected to be reclassified from AOCI to earnings within the next 12 months is a loss of $36.4 million.

We elected to exclude forward points from the effectiveness assessment. At the end of the reporting period, we calculate the excluded amount, which is the fair value relating to the change in forward points that is recorded in current earnings as Miscellaneous, net in our Condensed Consolidated Statements of Operations. For the three months ended March 31, 2011 and 2010, we recognized $0.8 million of net losses and $0.3 million of net gains, respectively, related to the change in forward points. For the nine months ended March 31, 2011 and 2010, we recognized $1.6 million of losses and $1.1 million of gains, respectively, related to the change in forward points.

 

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Economic Hedges

When hedge accounting is not applied to derivative contracts, or after former cash flow hedges have been de-designated as balance sheet hedges, we recognize the gain or loss on the associated contracts directly in current period earnings in either Miscellaneous, net or Cost of sales according to the underlying exposure, in our Condensed Consolidated Statements of Operations, as unrealized exchange gains/(losses). As of March 31, 2011 and June 30, 2010, we had $119.3 million and $47.5 million, respectively, of forward contracts maturing through March 2012 and November 2010, respectively, in various currencies to hedge foreign currency denominated intercompany loans and other foreign currency denominated assets. At March 31, 2011 and June 30, 2010, the fair value of these contracts was a liability of $4.4 million and an asset of $5.9 million, respectively. Adjustments to the carrying value of the foreign currency forward contracts offset the gains and losses on the underlying loans and other foreign denominated assets in other non-operating income.

Interest Rate Risk Management

We have one interest rate swap contract with a notional amount of $24.2 million and $21.7 million at March 31, 2011 and June 30, 2010, respectively, in order to manage our interest rate exposure and effectively convert interest on an operating lease from a variable rate to a fixed rate. The objective of the swap is to offset changes in rent expenses caused by interest rate fluctuations. The interest rate swap contract is designated as a cash flow hedge. At the end of each reporting period, the discounted fair value of the swap contract is calculated and recorded in AOCI and reclassified as rent expense, within SG&A in our Condensed Consolidated Statements of Operations, in the then-current period. If the hedge is determined to be ineffective, the ineffective portion will be reclassified from AOCI and recorded as rent expense, within SG&A. We recognized less than $0.1 million in each of the three month periods ended March 31, 2011 and 2010, and less than $0.1 million in each of the nine month periods ended March 31, 2011 and 2010, in our Condensed Consolidated Statement of Operations. All components of the derivative loss were included in the assessment of the hedged effectiveness. The amount associated with the swap contract that is expected to be recorded as rent expense in the next 12 months is a loss of $0.8 million.

Fair Value of Derivatives

The following tables provide a summary of the fair value amounts of our derivative instruments at March 31, 2011 and June 30, 2010:

 

            Fair Value  
     Balance Sheet Location      March 31,
2011
    June 30,
2010
 

Derivatives Designated as Cash Flow Hedges, Gross:

       

Other assets:

       

Foreign exchange contracts

     Other current assets       $ 285      $ 24,969   

Other liabilities:

       

Foreign exchange contracts

     Accrued liabilities         30,905        3,429   

Interest rate swap

     Accrued liabilities         654        709   

Interest rate swap

     Other non-current liabilities         485        1,129   
                   

Total liabilities

        32,044        5,267   
                   

Net (liability)/asset for derivatives designated as hedging instruments

        (31,759     19,702   
                   

Derivatives Designated as Economic Hedges, Gross:

       

Other assets:

       

Foreign exchange contracts

     Other current assets         2,471        6,223   

Other liabilities:

       

Foreign exchange contracts

     Accrued liabilities         6,844        325   
                   

Net (liability)/asset for economic hedges

        (4,373     5,898   
                   

Total net derivative (liability)/asset

      $ (36,132   $ 25,600   
                   

 

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Derivative Activity

The following table shows derivative activity for derivatives designated as cash flow hedges for the three months ended March 31, 2011 and 2010:

 

Derivative

   Location  of
Derivative
Gain/(Loss)
Recognized in
Income
     Gain/(Loss)
Recognized
in OCI
(Effective
Portion)
    Gain/(Loss)
Reclassified
from AOCI
into Income
(Effective
Portion)
    Gain/(Loss)
Recognized
in Income  on
Derivatives
(Ineffective
Portion)
     Gain/(Loss)
from Amounts
Excluded from
Effectiveness
Testing
 
            Three Months Ended March 31,  
            2011     2010     2011     2010     2011     2010      2011      2010  

Foreign exchange contracts

     Cost of sales       $ (29,635   $ 8,384      $ (8,100   $ (2,381   $ 0      $ 0       $ 3       $ 171   

Foreign exchange contracts

     SG&A         0        0        0        156        (4     0         805         (108

Foreign exchange contracts

     Other expense         0        0        0        0        0        0         0         (164

Interest rate swap

     Rent expense         232        (312     (186     7        (2     22         0         0   
                                                                     

Total cash flow hedges

      $ (29,403   $ 8,072      $ (8,285   $ (2,218   $ (6   $ 22       $ 808       $ (101
                                                                     

The following table shows derivative activity for derivatives designated as cash flow hedges for the nine months ended March 31, 2011 and 2010:

 

Derivative

   Location  of
Derivative
Gain/(Loss)
Recognized in
Income
     Gain/(Loss)
Recognized
in OCI
(Effective
Portion)
    Gain/(Loss)
Reclassified
from AOCI
into Income
(Effective
Portion)
    Gain/(Loss)
Recognized
in Income  on
Derivatives
(Ineffective
Portion)
     Gain/(Loss)
from Amounts
Excluded from
Effectiveness
Testing
 
            Nine Months Ended March 31,  
            2011     2010     2011     2010     2011     2010      2011      2010  

Foreign exchange contracts

     Cost of sales       $ (65,423   $ 8,505      $ (10,106   $ (10,340   $ 0      $ 0       $ 13       $ 0   

Foreign exchange contracts

     SG&A         0        0        0        2,016        (22     0         765         (244

Foreign exchange contracts

     Other expense         0        0        0        0        0        0         0         (164

Interest rate swap

     Rent expense         123        (403     (575     (214     (6     17         0         0   
                                                                     

Total cash flow hedges

      $ (65,292   $ 8,102      $ (10,681   $ (8,538   $ (28   $ 17       $ 779       $ (408
                                                                     

The following table summarizes gains and losses from our derivative instruments that are not designated as hedging instruments for the three and nine months ended March 31, 2011 and 2010:

 

          Three Months Ended
March 31,
     Nine Months Ended
March 31,
 

Derivative

   Location of Derivative Gain/(Loss)    2011     2010      2011      2010  

Foreign exchange contracts—forwards

   Cost of sales    $ 588      $ 1,100       $ (91    $ 1,461   

Foreign exchange contracts—forwards

   Miscellaneous, net      (1,796     0         (2,112      0   

Note 13 – Fair Value Measurements

Pursuant to the accounting guidance for fair value instruments, fair value is defined as the price we would receive to sell an asset or pay to transfer a liability in an orderly transaction with a market participant at the measurement date. When determining the fair value measurements for assets and liabilities required to be recorded at fair value, we consider the principal or most advantageous market in which it would transact and we consider assumptions that market participants would use when pricing the asset or liability.

Fair Value Hierarchy

Under fair value accounting guidance, there is a three-tier fair value hierarchy to prioritize the inputs used in measuring fair value. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our market assumptions.

 

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The hierarchy gives the highest priority to quoted prices in active markets (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels are defined as follows:

 

Level 1:

   Observable inputs, such as unadjusted quoted market prices in active markets for the identical asset or liability.

Level 2:

   Inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument.

Level 3:

   Unobservable inputs that reflect the entity’s own assumptions in measuring the asset or liability at fair value.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

For assets and liabilities measured at fair value on a recurring basis, fair value is the price we would receive to sell an asset or pay to transfer a liability in an orderly transaction with a market participant at the measurement date. In the absence of active markets for the identical assets and liabilities, such measurements involve developing assumptions based on market observable data, and in the absence of such data, internal information that is consistent with what market participants would use in a hypothetical transaction that occurs at the measurement date.

The following table provides the fair value hierarchy for assets and liabilities measured on a recurring basis:

 

     Fair Value at March 31, 2011      Fair Value at June 30, 2010  

Description

   Level 1      Level 2     Level 3      Level 1      Level 2     Level 3  

Assets

               

Short-term investments

   $ 340,777       $ 0      $ 0       $ 0       $ 0      $ 0   

Money market funds

     17,500         0        0         17,340         0        0   

Available-for-sale securities

     1,831         0        0         1,555         0        0   

Foreign exchange contracts

     0         (34,993     0         0         27,438        0   

Interest rate swap

     0         (1,139     0         0         (1,838     0   
                                                   

Total

   $ 360,108       $ (36,132   $ 0       $ 18,895       $ 25,600      $ 0   
                                                   

The following describes the valuation methodologies we use to measure assets and liabilities accounted for at fair value on a recurring basis:

Short-term Investments, Money Market Funds and Available-for-Sale Securities: Short-term investments, money market funds and available-for-sale securities are classified as Level 1 as the fair value was determined from market quotes obtained from financial institutions in active markets.

Foreign Exchange Contracts: We use foreign exchange contracts to hedge market risks relating to possible adverse changes in foreign currency exchange rates. Our foreign exchange contracts were measured at fair value using Level 2 inputs. Such inputs include foreign currency exchange spot and forward rates for similar transactions in actively quoted markets.

Interest Rate Swap: We use an interest rate swap to hedge market risk relating to possible adverse changes in interest rates. We have elected to use the income approach to value our interest rate swap contract, which uses observable Level 2 inputs at the measurement date and standard valuation techniques to convert future amounts to a single present amount (discounted). Level 2 inputs for the swap contract valuation are limited to quoted prices for similar assets or liabilities in active markets (specifically futures contracts on LIBOR, for the first two years) and inputs other than quoted prices that are observable for the asset or liability (specifically LIBOR cash and swap rates) at commonly quoted intervals, and credit risk. These key inputs, including the LIBOR cash rates for very short-term, futures rates for up to two years, and LIBOR swap rates beyond the derivative maturity are used to construct the swap yield curve and discount the future cash flows to present value at the measurement date. As the interest rate swap contract is a derivative asset, a credit default swap basis available at commonly quoted intervals has been collected from Bloomberg and applied to all cash flows. If the interest rate swap contract was determined to be a derivative liability, we would be required to reflect potential credit risk to lenders using a borrowing rate specific to our Company. See Note 12 – Derivatives, for further discussion regarding our derivative financial instruments.

 

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Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis

Certain assets are measured at fair value on a non-recurring basis. These assets are not measured at fair value on an ongoing basis but are subject to fair value adjustments only in certain circumstances. These assets can include loans and long-lived assets that have been reduced to fair value when they are held for sale, impaired loans that have been reduced based on the fair value of the underlying collateral, cost and equity method investments and long-lived assets that are written down to fair value when they are impaired and the remeasurement of retained investments in formerly consolidated subsidiaries upon a change in control that results in deconsolidation of a subsidiary if we sell a controlling interest and retain a noncontrolling stake in the entity. Assets that are written down to fair value when impaired and retained investments are not subsequently adjusted to fair value unless further impairment occurs.

The following table provides the fair value hierarchy for assets and liabilities measured on a non-recurring basis and the losses recorded during the periods presented:

 

     Fair Value at March 31, 2011      Fair Value at June 30, 2010      Total Losses for the
Three Months Ended
March 31,
     Total Losses for the
Nine Months Ended
March 31,
 

Description of Assets

   Level 1      Level 2      Level 3      Level 1      Level 2      Level 3      2011     2010      2011     2010  

Equity method investments

   $ 0       $ 0       $ 290       $ 0       $ 0       $ 2,108       $ 16      $ 0       $ (1,818   $ (13,122

Goodwill

     0         0         116,366         0         0         105,922         0        0         0        (12,292

Long-lived assets

     0         0         0         0         0         2,706         0        0         0        (995
                                                                                       

Total

   $ 0       $ 0       $ 116,656       $ 0       $ 0       $ 110,736       $ (0   $ 0       $ (0   $ (26,409
                                                                                       

The following describes the valuation methodologies we use to measure financial and non-financial instruments accounted for at fair value on a non-recurring basis.

Equity Method Investments: Equity method investments are generally valued using a discounted cash flow model, comparative market multiples or a combination of both approaches as appropriate. These investments are generally included in Level 3.

Investments in Subsidiaries and Formerly Consolidated Subsidiaries: Upon a change in control that results in either consolidation or deconsolidation of a subsidiary, the fair value measurement of our previous equity investment or retained noncontrolling stake in the former subsidiary, respectively, are valued using an income approach, a market approach, or a combination of both approaches as appropriate. In applying these methodologies we rely on a number of factors, including actual operating results, future business plans, economic projections, market observable pricing multiples of similar businesses and comparable transactions, and possible control premium. These investments are included in Level 3.

Goodwill: Goodwill is tested for impairment annually or more frequently if an event or circumstance indicates that an impairment loss may have been incurred. Application of the goodwill impairment test requires judgment, including the identification of reporting units, assignment of assets and liabilities to reporting units, assignment of goodwill to reporting units, and determination of the fair value of each reporting unit. We estimate the fair value of each reporting unit using a discounted cash flow methodology. This requires us to use significant judgment including estimation of future cash flows, which is dependent on internal forecasts, estimation of the long-term rate of growth for our business, the useful life over which cash flows will occur, determination of our weighted average cost of capital, and relevant market data. This asset is included in Level 3. Refer to Note 7 – Goodwill for more information.

Long-lived Assets: Long-lived assets, including aircraft and real estate, are valued using the best information available, including quoted market prices or market prices for similar assets when available or internal cash flow estimates discounted at an appropriate interest rate or independent appraisals, as appropriate. For real estate, cash flow estimates are based on current market estimates that reflect current and projected lease profiles and available industry information about expected trends in rental, occupancy and capitalization rates. These assets are generally included in Level 3.

Note 14 – Restructuring Program

We announced a restructuring program in June 2006 designed to increase efficiency in our manufacturing, engineering and administrative organizations and expanded these activities from that time through the current period to improve our global footprint, cost structure, technology portfolio, human resources, and internal processes.

In fiscal year 2010, we announced the relocation of certain manufacturing activities from the United Kingdom to Hungary, a consolidation and optimization of our manufacturing capabilities in China and a reorganization of our portable navigation device (“PND”) business in Germany, which resulted in our exit of the PND distribution channel. During the nine months ended March 31, 2011, we announced the relocation of certain manufacturing activities from Washington, Missouri to Mexico, the outsourcing of certain manufacturing activities to third party suppliers and continued to refine and expand on activities launched in prior years.

 

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For the three months ended March 31, 2011, we recorded $7.8 million for our restructuring programs, primarily within SG&A, of which $5.7 million was related to employee termination benefits. Cash paid for these and prior initiatives was $5.9 million. In addition, we have recorded $1.7 million of accelerated depreciation primarily within Cost of sales. For the three months ended March 31, 2010, we recorded $4.4 million for our restructuring program, primarily within SG&A, of which $4.0 million was related to employee termination benefits. Cash paid for these and prior initiatives was $8.8 million. In addition, we recorded $1.5 million of accelerated depreciation and inventory provisions primarily in Cost of sales in our Condensed Consolidated Statement of Operations.

For the nine months ended March 31, 2011, we recorded $9.7 million for our restructuring program, primarily within SG&A, of which $6.5 million was related to employee termination benefits. Cash paid for these and prior initiatives was $16.5 million. In addition, we have recorded $2.0 million of accelerated depreciation primarily within Cost of sales in our Condensed Consolidated Statement of Operations. For the nine months ended March 31, 2010, we recorded $9.0 million for our restructuring program, primarily within SG&A, of which $8.0 million was related to employee termination benefits. Cash paid for these and prior initiatives for the nine months ended March 31, 2010 was $38.0 million. In addition, we have recorded $4.7 million of accelerated depreciation and inventory provisions primarily in Cost of Sales in our Condensed Consolidated Statement of Operations. During the second quarter of fiscal 2010, our Automotive and Professional segments updated their severance accruals based on new estimates which took into account higher than originally anticipated natural attrition rates. As a result, these restructuring accruals were reduced by approximately $12.0 million to reflect these updated estimates which are included within expense in the tables below.

Below is a rollforward of our restructuring accrual for the nine months ended March 31, 2011 and 2010:

 

     Nine Months Ended
March 31,
 
     2011     2010  

Beginning accrued liability

   $ 40,598      $ 76,871   

Expense

     9,666        8,993   

Utilization(1)

     (13,426     (39,055
                

Ending accrued liability

   $ 36,838      $ 46,809   
                

 

(1) 

Includes cash payments and the effects of foreign currency translation.

Restructuring expenses by reporting segment are as follows and include accruals for new programs as noted above plus revisions to estimates, both increases and decreases, to programs accrued in prior periods:

 

     Three Months Ended
March 31,
     Nine Months Ended
March 31,
 
     2011      2010      2011     2010  

Automotive

   $ 4,054       $ 1,434       $ 7,687      $ 3,588   

Consumer

     2,036         372         1,899        3,719   

Professional

     1,713         2,456         (206     1,467   

Other

     20         113         286        219   
                                  

Total

     7,823         4,375         9,666        8,993   
                                  

Accelerated depreciation and inventory provisions

     1,716         1,541         2,049        4,693   
                                  

Total

   $ 9,539       $ 5,916       $ 11,715      $ 13,686   
                                  

Note 15 – Retirement Benefits

Plan Descriptions

Retirement savings plan

We provide a Retirement Savings Plan for certain employees in the United States. Under the plan, employees may contribute up to 50 percent of their pretax compensation subject to certain limitations. Each business unit will make a safe harbor non-elective contribution in an amount equal to three percent of a participant’s eligible contribution. Each business unit may make a matching contribution of up to three percent (50 percent on the first six percent of an employee’s tax-deferred contribution) and, upon approval of our Board of Directors, a profit sharing contribution. Matching and profit sharing contributions vest at a rate of 25 percent for each year of service with the employer, beginning with the second year of service. Effective January 1, 2009, we suspended the matching and safe harbor non-elective contributions for these plans. Effective January 1, 2010, the employer matching contribution and the safe

 

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harbor non-elective contribution were reinstated. Approval for the profit sharing contribution is requested from our Board of Directors at the end of each fiscal year. Management has eliminated the profit sharing contribution as of December 28, 2010. No amount has been accrued for the profit sharing contribution for the three and nine months ended March 31, 2011.

Pension 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 30th. 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 in the SERP, to certain key executives designated by our Board of Directors. The majority of our defined benefit plans do not have contractual or legal statutes which specify minimum funding requirements. We are in compliance with all existing contractual obligations and legal statutes.

The following table presents the components of net periodic benefit cost for the three and nine months ended March 31, 2011 and 2010:

 

     Three Months Ended
March 31,
     Nine Months Ended
March 31,
 
     2011     2010      2011     2010  

Service cost

   $ 635      $ 565       $ 1,876      $ 1,735   

Interest cost

     2,051        1,921         6,089        5,852   

Expected return on plan assets

     (54     0         (163     0   

Amortization of prior service cost

     352        352         1,055        1,055   

Amortization of net loss

     555        177         1,663        530   
                                 

Net periodic benefit cost

   $ 3,539      $ 3,015       $ 10,520      $ 9,172   
                                 

During the three months ended March 31, 2011 and 2010, we made contributions of $2.0 million and $2.3 million, respectively, to the defined benefit pension plans which were paid to participants. During the nine months ended March 31, 2011 and 2010, we made contributions of $5.8 million and $6.2 million, respectively, to the defined benefit pension plans which were paid to participants. We expect to make approximately $2.0 million in contributions for the remainder of the fiscal year ending June 30, 2011.

Note 16 – Business Segment Data

We design, manufacture and market high-quality, high fidelity audio products and electronic systems for the automotive, consumer and professional markets. Our chief operating decision maker evaluates performance and allocates resources based on net sales, operating income and working capital in each of the reporting segments.

We report our business on the basis of four segments. Our Automotive, Consumer and Professional segments are based on the end-user markets we serve. Our fourth segment, Other, includes compensation, benefit and occupancy costs for corporate employees.

Automotive

Our Automotive segment designs, manufactures and markets audio, electronic and infotainment systems for vehicle applications to be installed primarily as original equipment by automotive manufacturers. Our Automotive products are marketed worldwide under brand names including JBL®, Infinity®, Mark Levinson®, Harman/Kardon®, Logic 7® and Lexicon®. Our premium branded audio, video, navigation and infotainment systems are offered to automobile manufacturers through engineering and supply agreements.

Consumer

Our Consumer segment designs, manufactures and markets a wide-range of mid- to high-end audio, video and digital storage systems for home, multimedia and mobile applications. Our Consumer products feature some of the world’s most recognized audio brands, including AKG®, Harman/Kardon, Infinity, JBL, Selenium® and Mark Levinson. Our loudspeaker and electronic products are offered through audio specialty and retail chain stores. Our branded products for computer and multimedia applications are focused on retail customers with products designed to enhance sound for computers, Apple’s iPod® and similar devices.

Professional

Our Professional segment designs, manufactures and markets an extensive range of loudspeakers, power amplifiers, digital signal processors, microphones, headphones and mixing consoles used by audio professionals in concert halls, stadiums, airports, houses of

 

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worship and other public spaces. We also 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 Professional products are marketed globally under brand names including JBL Professional®, AKG, Crown®, Soundcraft®, Lexicon, Revel®, Mark Levinson, DigiTech®, dbx®, BSS®, Selenium and Studer®. On February 10, 2011, we acquired 3dB Research Limited (“3dB”), developer of music and signal processing technology. The results of 3dB are now included in our Professional segment. Refer to Note 21 – Acquisitions for further information.

Other

Our Other segment includes compensation, benefits and occupancy costs for corporate employees, net of reporting segment allocations, expenses associated with new technology innovation and our corporate brand identity campaign, as well as the results of operations of Aha Mobile (“Aha”) a provider of on-demand and location-based internet content services, which we acquired in September 2010. Refer to Note 21 – Acquisitions for further information.

The following table reports net sales and operating income/(loss) by each reporting segment for the three and nine months ended March 31, 2011 and 2010:

 

     Three Months Ended
March 31,
    Nine Months Ended
March 31,
 
     2011     2010     2011     2010  

Net sales:

        

Automotive

   $ 707,162      $ 629,676      $ 1,978,141      $ 1,840,668   

Consumer

     94,750        81,192        320,493        292,284   

Professional

     146,099        125,994        441,996        380,294   

Other

     185        149        593        466   
                                

Total

   $ 948,196      $ 837,011      $ 2,741,223      $ 2,513,712   
                                

Operating income (loss):

        

Automotive

   $ 55,801      $ 29,140      $ 148,221      $ 53,945   

Consumer

     (1,407     (742     9,952        5,710   

Professional

     19,259        14,912        67,528        52,319   

Other

     (20,006     (16,426     (61,489     (51,949
                                

Total

   $ 53,647      $ 26,884      $ 164,212      $ 60,025   
                                

Note 17 – Significant Customers

Presented below are the percentages of net sales to and net accounts receivables due from customers who represent ten percent or more of our net sales or net accounts receivable, as follows:

 

     Net Sales     Accounts
Receivable, net
 
     Nine Months Ended
March 31,
    March 31,  
     2011     2010     2011     2010  

BMW

     20     18     15     13

Audi/Volkswagen

     15     14     13     14

Daimler AG

     9     9     6     10

Other customers

     56     59     66     63
                                

Total

     100     100     100     100
                                

We anticipate that BMW, Audi/Volkswagen and Daimler AG will continue to account for a significant portion of our net sales and net accounts receivable for the foreseeable future. Our automotive customers are not obligated to any long-term purchase of our products.

Note 18 – Commitments and Contingencies

At March 31, 2011, we were subject to legal claims and litigation arising in the ordinary course of business, including the matters described below. The outcome of these legal actions cannot be predicted with certainty; however, management, based upon advice

 

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from legal counsel, believes such actions are either without merit or will not have a material adverse effect on our financial condition or results of operations.

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 Harman and certain of our officers in the United States District Court for the District of Columbia (the “Court”) seeking compensatory damages and costs on behalf of all persons who purchased our common stock between April 26, 2007 and September 24, 2007 (the “Class Period”). The original complaint alleged claims for violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, (the “1934 Act”) and Rule 10b-5 promulgated thereunder.

The complaint alleged that the defendants omitted to disclose material adverse facts about Harman’s financial condition and business prospects. The complaint contended that had these facts not been concealed at the time the merger agreement with Kohlberg Kravis Roberts & Co. and Goldman Sachs Capital Partners was entered into, there would not have been a merger agreement, or it would have been at a much lower price, and the price of our 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 our 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 Harman and certain of our officers in the Court seeking compensatory damages and costs on behalf of all persons who purchased our common stock between April 26, 2007 and September 24, 2007. The allegations in the Boca Raton complaint are essentially identical to the allegations in the original Kim complaint, and like the original Kim complaint, the Boca Raton complaint alleges claims for violations of Sections 10(b) and 20(a) of the 1934 Act 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, Harman also violated Sections 10(b) and 20(a) of the 1934 Act and Rule 10b-5 promulgated thereunder by “knowingly failing to disclose “significant problems” relating to its 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 our 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 Raton action, the administrative closing of the Boca Raton action, 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 (“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 Harman and certain of our officers and directors violated Sections 10(b) and 20(a) of the 1934 Act and Rule 10b-5 promulgated thereunder, by issuing false and misleading disclosures regarding our financial condition in fiscal year 2007 and fiscal year 2008. In particular, the Consolidated Complaint alleges that defendants knowingly or recklessly failed to disclose material adverse facts about MyGIG radios, PNDs and our capital expenditures. The Consolidated Complaint alleges that when Harman’s true financial condition became known to the market, the price of our common stock declined significantly, causing losses to the plaintiff class.

On July 3, 2008, defendants moved to dismiss the Consolidated Complaint in its entirety. Lead Plaintiff opposed the defendants’ motion to dismiss on September 2, 2008, and defendants filed a reply in further support of their motion to dismiss on October 2, 2008. The motion is now fully briefed.

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 Harman and certain of our officers and directors alleging violations of the Employee Retirement Income Security Act of 1974 (“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, imposition of a 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 Plan’s assets, thereby breaching their fiduciary duties in violation of ERISA by causing the Plan to invest in our common stock notwithstanding that the stock allegedly was “no longer a prudent investment for the Participants’ retirement savings.” The

 

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amended complaint further claims that, during the Class Period, defendants failed to monitor the Plan fiduciaries, failed to provide the Plan fiduciaries with, and to disclose to Plan participants, adverse facts regarding Harman and our 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 amended 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 Plan’s 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. The Russell Plaintiff opposed the defendants’ motion to dismiss on September 19, 2008, and defendants filed a reply in further support of their motion to dismiss on October 20, 2008. The motion is now fully briefed.

Automotive Supply Arrangements

We have arrangements with our automotive customers to provide products that meet predetermined technical specifications and delivery dates. In the event that we do not satisfy the performance obligations under these arrangements, we may be required to indemnify the customer. We accrue for any loss that we expect to incur under these arrangements when that loss is probable and can be reasonably estimated. During the three months ended March 31, 2011 and 2010, we did not incur any costs relating to settlement of a claim associated with automotive supply arrangements. During the nine months ended March 31, 2011 and 2010, we incurred $4.7 million and $11.7 million, respectively, of costs relating to settlement of a claim associated with automotive supply arrangements. An inability to meet performance obligations on automotive platforms to be delivered in future periods could adversely affect our results of operations and financial condition in future periods.

Note 19 – Discontinued Operations

On April 9, 2010, we and Harman KG, entered into a share purchase agreement to sell all of the issued and outstanding shares of QNX Software Systems Co., QNX Software Systems (Wavemakers), Inc. and QNX Software Systems, Inc. (collectively, the “QNX Entities”) for $200 million. The sale closed on June 1, 2010. Refer to Note 3 – Discontinued Operations in Item 8 of our 2010 Form 10-K for further information.

The operations of the QNX Entities have been segregated from continuing operations and are reflected as discontinued operations in the three and nine months ended March 31, 2010 in our Condensed Consolidated Statement of Operations as follows:

 

     Three Months
Ended
March 31,
     Nine Months
Ended
March 31,
 
     2010      2010  

Net sales

   $ 11,221       $ 29,376   

Income from discontinued operations, net of income taxes

     3,339         8,145   

Diluted earnings per share from discontinued operations

     0.05         0.12   

Note 20 – Related Party Transactions

From time to time we enter into transactions with related parties. In December 2009, we entered into a three-year agreement for engineering and software development services with Neusoft Corporation (“Neusoft”), a Shanghai exchange listed technology solutions provider. A member of our Board of Directors is the Chairman and Chief Executive Officer of Neusoft.

On April 20, 2010, our subsidiary, innovative systems GmbH (“innovative”) entered into an asset purchase and business transfer agreement (the “Asset Purchase Agreement”) with Neusoft Technology Solutions GmbH (“Neusoft Technology”), which is a subsidiary of Neusoft for the sale of certain tangible assets located at innovative’s facility in Hamburg, Germany. This transaction closed on June 1, 2010. As part of the Asset Purchase Agreement, innovative and Neusoft Technology entered into a five-year agreement for engineering and software development services related to innovative’s vehicle navigation business (the “Services Agreement”). Under the terms of the Asset Purchase Agreement, innovative transferred at closing certain tangible assets and employment relationships to Neusoft Technology and received consideration of €6 million. Our subsidiary, Harman Becker Automotive Systems GmbH and Neusoft Europe AG, a subsidiary of Neusoft, are guarantors under the terms of the Asset Purchase Agreement and the Services Agreement. During the three months ended March 31, 2011 and 2010, we incurred total expenses of $8.3 and zero, respectively and during the nine months ended March 31, 2011 and 2010 we incurred $19.8 million and zero, respectively, for engineering and software development services with Neusoft Technology and Neusoft.

Note 21 – Acquisitions

 

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On February 10, 2011 (the “3dB Acquisition Date”), we acquired all of the issued and outstanding shares of 3dB, a leading developer of music and signal processing technology, for a total purchase price of $3.0 million, which was subject to a working capital adjustment as of the 3dB Acquisition Date of $0.5 million. On the 3dB Acquisition Date, we paid $2.3 million in cash to the sellers, which consisted of 60 percent of the purchase price of $1.8 million plus a working capital adjustment of $0.5 million. The remainder of the purchase price of $1.2 million will be paid in three equal installments on the first, second and third anniversary dates of the 3dB Acquisition Date. The total cost of the acquisition was allocated to the assets acquired and the liabilities assumed, based on their estimated fair values. The excess of the purchase price over the net assets acquired was allocated to intangible assets. We incurred less than $0.1 million of transaction costs in connection with this acquisition, which are included in SG&A in our Condensed Consolidated Statement of Operations. The operating results of 3dB are not material to our financial statements.

On September 13, 2010 (the “Aha Acquisition Date”), we acquired Aha, a provider of on-demand mobile and location-based internet content services, for $1.8 million, which we paid in cash on the Aha Acquisition Date. The total cost of the acquisition was allocated to intangible assets, based on their estimated fair values. We incurred less than $0.1 million of transaction costs in connection with this acquisition, which are included in SG&A in our Condensed Consolidated Statement of Operations. The operating results of Aha are not material to our financial statements.

Note 22 – Sale of Intellectual Property

Effective February 15, 2011, we entered into an agreement with a third party pursuant to which we monetized certain intellectual property rights. Income of $16.2 million was recognized in connection with this transaction, which is included in the Condensed Consolidated Statement of Operations for the three and nine months ended March 31, 2011 under the caption Sale of intellectual property.

Note 23 – Investment in Joint Venture

In October 2005, we formed Harman Navis Inc., (“Harman Navis”), a joint venture located in Korea, to engage in the design and development of navigation systems for Asian markets. We evaluated the joint venture agreement and determined that the newly formed joint venture was a VIE requiring consolidation under the appropriate accounting guidance. We owned a 50 percent equity interest in the joint venture through December 2009. We are not obligated to fund any joint venture losses beyond our investment.

In fiscal year 2009, we entered into a restructuring agreement which amends the Harman Navis joint venture agreement and other related agreements which resulted in the sale of the Harman Navis joint venture to our 50 percent equity partner (“Navis”) over a period of 26 months. As a result of the restructuring agreement, we and Navis agreed to have Navis purchase our interest in the joint venture for an aggregate price of $20 million, payable in three installments through June 2011. The first of these amounts was due on December 15, 2009 and, on such date, Navis agreed to make a payment in the amount of $10 million in exchange for 50 percent of our equity interest. However, we agreed to pay a guaranteed royalty of $29 million over a three year period in lieu of future royalty payments, of which $10 million was payable by us on December 15, 2009, and as a result no cash was exchanged in this transaction since both the amount payable from us and receivable from Navis were equal and offsetting.

As a result of this transaction, we determined that we were no longer the primary beneficiary of the joint venture and therefore deconsolidated the joint venture in December 2009 and recorded an investment of $2.8 million in our Consolidated Balance Sheets at that time which is being accounted for under the equity method. Our remaining 25 percent equity interest was measured at fair value using a weighted application of the cost, market and income valuation techniques. The deconsolidation of Harman Navis resulted in an overall loss of $13.1 million which is included in our Consolidated Statement of Operations as loss on deconsolidation of variable interest entity for the nine months ended March 31, 2010. The loss resulted primarily from the difference between the fair value of the consideration received for the disposal of our equity interest and the net asset value of the joint venture that was deconsolidated.

In February 2011, Navis redeemed 15 percent of our equity interest in consideration for a payment of $6.0 million. The second installment of the guaranteed royalty of $6.0 million was also payable by us. Both the amount receivable from Navis and payable from us were equal and offsetting. This reduced our ownership interest to 10 percent, and we are now accounting for Navis under the cost method.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

General

The following discussion should be read in conjunction with the accompanying unaudited Condensed Consolidated Financial Statements and the related notes included in Item 1 of this Quarterly Report on Form 10-Q, and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2010 (our “2010 Form 10-K”). 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, 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. Unless otherwise indicated, “Harman,” “our company,” “we,” “our,” and “us” are used interchangeably to refer to Harman International Industries, Incorporated and its consolidated subsidiaries.

We begin our discussion with an executive overview of our company to give you an understanding of our business and the markets we serve. This is followed by a discussion of our critical accounting policies, and then by a discussion of our results of operations for the three and nine months ended March 31, 2011 and 2010. We include in this discussion an analysis of certain significant period-to-period variances in our Condensed Consolidated Statements of Operations and an analysis of our restructuring program. We also provide specific information regarding our four business segments: Automotive, Consumer, Professional and Other. We then discuss our financial condition at March 31, 2011 with a comparison to June 30, 2010. 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 our outlook.

Executive Overview

We believe we are a worldwide leader in the development, manufacturing and marketing of high quality, high fidelity audio products and electronic systems, as well as digitally integrated infotainment systems for the automotive industry. We have developed a broad range of product offerings which we sell in our principal markets under renowned brand names, including AKG®, Crown®, JBL®, Infinity®, Harman/Kardon®, Lexicon®, Mark Levinson® and Selenium®. We have built these brands by developing our engineering, manufacturing and marketing competencies, and have employed these resources to establish our company as a leader in the markets we serve. We report our business on the basis of four segments. Our Automotive, Consumer and Professional segments are based on the end-user markets we serve. Our fourth segment, Other, includes compensation, benefits and occupancy costs for corporate employees, new technology innovation and expenses associated with our corporate brand identity campaign.

Our products are sold worldwide, with the largest markets located in the United States and Germany. In the United States, our primary manufacturing facilities are located in Kentucky, Missouri, Indiana and Utah. Outside of the United States, we have manufacturing facilities in Austria, Brazil, China, Hungary, France, Germany, Mexico and the United Kingdom.

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.

Critical Accounting Policies

For the three and nine months ended March 31, 2011, there were no significant changes to our critical accounting policies and estimates from those disclosed in the consolidated financial statements and the related notes included in our 2010 Form 10-K, except as described below.

 

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Recently Adopted Accounting Standards

Variable Interest Entities: On July 1, 2010, we adopted the new accounting guidance issued by the Financial Accounting Standards Board (“FASB”) within Accounting Standards Codification (“ASC”) 810 “Consolidation” regarding certain amended provisions relating to the consolidation of variable interest entities (“VIE”). The amended provisions primarily include (i) amending the guidance for determining whether an entity is a VIE and (ii) amending the criteria for identification of the primary beneficiary of a VIE. The new provisions also require us to continually reassess whether we are the primary beneficiary of a VIE and require that we enhance our disclosures in the financial statements about our VIE relationships. The adoption of the new guidance did not have any impact on our financial condition or results of operations.

Transfers of Financial Assets: On July 1, 2010, we adopted the new accounting guidance issued by the FASB within Accounting Standards Update (“ASU”) 2009-16 “Transfers and Servicing (Topic 860): Accounting for the Transfers of Financial Assets” relating to the accounting for transfers of financial assets. The new guidance requires additional disclosures relating to the transparency of transfers of financial assets. The adoption of the new guidance did not have any impact on our financial condition or results of operations.

Multiple Element Revenue Arrangements: On July 1, 2010, we adopted the new accounting guidance issued by the FASB relating to the accounting for multiple element revenue arrangements issued in ASC 605-25 and ASC 985-707. The new guidance requires a vendor to allocate revenue to each standalone deliverable in arrangements involving multiple deliverables based on the relative selling price of each deliverable. It also changes the level of evidence of the standalone selling price required to separate deliverables by allowing a vendor to make its best estimate of the standalone selling price of deliverables when more objective evidence of selling price is not available. The new guidance also excludes sales of tangible products that contain essential software elements from the scope of revenue recognition for software arrangements. Because of these changes, revenue is recognized earlier for many revenue transactions involving multiple deliverables and sales of software enabled devices. The new guidance also requires additional disclosures relating to qualitative and quantitative information about a vendor’s revenue arrangements and about the significant judgments made about the application of the new guidance and any changes in those judgments or the application that may significantly affect the timing or amount of revenue recognition. The new guidance can be adopted on a prospective basis or in certain circumstances on a retrospective basis. We adopted the new guidance on a prospective basis and applied the new guidance to all arrangements entered into or materially modified in fiscal years beginning after June 15, 2010. The adoption of the new guidance did not have any impact on our financial condition or results of operations.

Recently Issued Accounting Standards

Intangibles, Goodwill and Other: In December 2010, the FASB issued ASU 2010-28, “Intangibles – Goodwill and Other (Topic 350): When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts.” The new guidance requires that reporting units with zero or negative carrying amounts perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. The new guidance is effective for us for fiscal years beginning after December 15, 2010. We will adopt the provisions of this new guidance on July 1, 2011. We do not expect the adoption of the new provisions to have any impact on our financial condition or results of operations.

Business Combinations: In December 2010, the FASB issued ASU 2010-29, “Business Combinations (Topic 805): “Disclosure of Supplementary Pro Forma Information for Business Combinations.” The new guidance specifies that when comparative financial statements are presented, the revenue and earnings of the combined entity should be disclosed as though the business combination that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The new guidance applies prospectively to us for business combinations which occur on or after July 1, 2011. Early adoption is permitted. The impact of these new provisions on our consolidated financial statements will depend upon the nature, terms and size of the acquisitions we consummate in the future.

Discontinued Operations

The results of operations of businesses that have been sold are presented separately as Income from discontinued operations, net of income taxes, in our Condensed Consolidated Statements of Operations, in the current and prior periods, where applicable. Refer to Note 19 – Discontinued Operations in the Notes to the Condensed Consolidated Financial Statements for further information.

Results of Operations

Net Sales

Net sales for the three months ended March 31, 2011 were $948.2 million compared to $837.0 million in the same period in the prior year, an increase of 13.3 percent, or 13.4 percent excluding foreign currency translation. Net sales increased in all of our segments

 

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compared to the same period in the prior year. The increase in overall net sales was primarily in our Automotive segment due to new infotainment business awards with European automobile manufacturers resulting from the launch of new platforms and overall production recovery. The increases in net sales in our Professional and Consumer segments were primarily due to increased market share in Latin America, aided by Selenium, a company we acquired in June 2010 and whose results were not included in the same period in the prior year, as well as improvements in overall market conditions, specifically within our loudspeaker, digital signal processing, mixing and microphone/headphone business units. These increases were partially offset by unfavorable foreign currency translation of $0.8 million.

Net sales for the nine months ended March 31, 2011 were $2.741 billion, compared to net sales of $2.514 billion in the same period in the prior year, an increase of 9.1 percent, or 13.1 percent excluding foreign currency translation. Net sales increased in all of our segments compared to the same period in the prior year. The increase in overall net sales was primarily in our Automotive segment due to new infotainment business awards with European automobile manufacturers, resulting from the launch of new platforms and overall production recovery, as well as the ramp-up of new infotainment business, partially offset by the exit of the personal navigation device business (“PND”) in January 2010, which contributed approximately $61.0 million of net sales in the same period in the prior year. The increases in net sales in our Professional and Consumer segments were primarily due to increased market share in Latin America, aided by Selenium, as well as improvements in overall market conditions, specifically within our loudspeaker, digital signal processing, mixing and microphone/headphone business units. These increases were partially offset by unfavorable foreign currency translation of $89.1 million.

In January 2010, we reorganized our PND business and entered into a trademark license agreement under which we exited the PND distribution channel. Under the terms of the agreement, a third party was permitted to sell our PND inventory over a period of six months ending in June 2010. Thereafter, we are entitled to receive 50 percent of the profits from the sale of PNDs by the third party for the first five years. Subsequent to this, we will receive a royalty based on sales of PNDs for the remainder of the term of the agreement which can be extended for up to 20 years.

A summary of our net sales by business segment is presented below:

 

     Three Months Ended March 31,     Nine Months Ended March 31,  
     2011      %     2010      %     2011      %     2010      %  

Net sales:

                    

Automotive

   $ 707,162         75   $ 629,676         75   $ 1,978,141         72   $ 1,840,668         73

Consumer

     94,750         10     81,192         10     320,493         12     292,284         12

Professional

     146,099         15     125,994         15     441,996         16     380,294         15

Other

     185         —          149         —          593         0     466         —     
                                                                    

Total

   $ 948,196         100   $ 837,011         100   $ 2,741,223         100   $ 2,513,712         100
                                                                    

Automotive – Net sales for the three months ended March 31, 2011 increased $77.5 million or 12.3 percent compared to the same period in the prior year, and increased 12.6 percent excluding foreign currency translation. The increase in net sales was due to new infotainment business awards with European automobile manufacturers resulting from the launch of new platforms and overall production recovery, partially offset by the exit of the PND business, which contributed approximately $5.0 million of net sales in the same period in the prior year and unfavorable foreign currency translation of $1.7 million.

Net sales for the nine months ended March 31, 2011 increased $137.5 million or 7.5 percent compared to the same period in the prior year, and increased 12.1 percent excluding foreign currency translation. The increase in net sales was primarily due to new infotainment business awards with European automobile manufacturers and overall production recovery, partially offset by unfavorable foreign currency translation of $76.6 million and the exit of the PND business which contributed approximately $61.0 million of net sales in the same period in the prior year.

Consumer – Net sales for the three months ended March 31, 2011 increased $13.6 million, or 16.7 percent, compared to the same period in the prior year, and increased 17.0 percent excluding foreign currency translation. The increase in net sales was primarily due to increased market share in Latin America, aided by $11.0 million of Selenium net sales, and improvements in overall market conditions, partially offset by unfavorable foreign currency translation of $0.2 million.

Net sales for the nine months ended March 31, 2011 increased $28.2 million, or 9.7 percent, compared to the same period in the prior year, and increased 14.1 percent excluding foreign currency translation. The increase in net sales was primarily due to increased market share in Latin America, aided by $31.9 million of Selenium net sales, and improvements in overall market conditions, partially offset by unfavorable foreign currency translation of $11.5 million.

 

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Professional – Net sales for the three months ended March 31, 2011 increased $20.1 million or 16.0 percent compared to the same period in the prior year, and increased 14.9 percent excluding foreign currency translation. The increase in net sales was primarily due to increased market share in Latin America, aided by $10.2 million of Selenium net sales, improvements in overall market conditions, specifically within our loudspeaker, digital signal processing, mixing and microphone/headphone business units and favorable foreign currency translation of $1.1 million.

Net sales for the nine months ended March 31, 2011 increased by $61.7 million, or 16.2 percent compared to the same period in the prior year, and increased 16.5 percent excluding foreign currency translation. The increase in net sales was primarily due to increased market share in Latin America, aided by $30.5 million of Selenium net sales and improvements in overall market conditions, specifically within our loudspeaker, digital signal processing, mixing and microphone/headphone business units, partially offset by unfavorable foreign currency translation of $1.0 million.

Gross Profit

Gross profit as a percentage of net sales increased 0.2 percentage point to 26.2 percent for the three months ended March 31, 2011 compared to 26.0 percent of net sales in the same period in the prior year. The slight increase in gross profit as a percentage of net sales was in all of our segments due to higher sales volumes, the inclusion of Selenium and savings achieved from our STEP Change cost reduction program (“STEP Change”), partially offset by slightly higher restructuring charges.

Gross profit as a percentage of net sales increased 0.8 percentage point to 27.1 percent for the nine months ended March 31, 2011 compared to 26.3 percent of net sales in the same period in the prior year. The increase in gross profit as a percentage of net sales was in all of our segments and was primarily due to improved leverage of fixed overhead costs due to higher sales volumes, Selenium, savings achieved resulting from our STEP Change program and lower restructuring charges.

A summary of our gross profit by business segment is presented below:

 

     Three Months Ended March 31,     Nine Months Ended March 31,  
     2011      Percentage
of Net Sales
    2010     Percentage
of Net Sales
    2011      Percentage
of Net Sales
    2010     Percentage
of Net Sales
 

Gross profit:

                  

Automotive

   $ 163,854         23.2   $ 145,085        23.0   $ 470,449         23.8   $ 438,506        23.8

Consumer

     26,207         27.7     22,386        27.6     92,791         29.0     79,651        27.3

Professional

     58,574         40.1     50,226        39.9     178,287         40.3     147,480        38.8

Other

     190         —          (65     —          609         —          (4,143     —     
                                          

Total

   $ 248,825         26.2   $ 217,632        26.0   $ 742,136         27.1   $ 661,494        26.3
                                          

Automotive – Gross profit as a percentage of net sales increased 0.1 percentage points to 23.2 percent for the three months ended March 31, 2011 compared to the same period in the prior year. The slight increase in gross profit as a percentage of net sales was primarily due to improved leverage of fixed costs and savings achieved through our STEP Change program initiatives, partially offset by slightly higher restructuring charges.

Gross profit as a percentage of net sales was flat at 23.8 percent for the nine months ended March 31, 2011 compared to the same period in the prior year, due to improved leverage of fixed costs and savings achieved through our STEP Change program initiatives.

Consumer – Gross profit as a percentage of net sales increased 0.1 percentage points to 27.7 percent for the three months ended March 31, 2011 compared to the same period in the prior year. The slight increase in gross profit as a percentage of net sales was aided by Selenium and savings achieved through our STEP Change program initiatives.

Gross profit as a percentage of net sales increased 1.7 percentage points to 29.0 percent for the nine months ended March 31, 2011 compared to the same period in the prior year. The increase in gross profit as a percentage of net sales was aided by Selenium, improved leverage of fixed costs and savings achieved through our STEP Change program initiatives.

Professional – Gross profit as a percentage of net sales increased 0.2 percentage points to 40.1 percent for the three months ended March 31, 2011 compared to the same period in the prior year. The slight increase in gross profit as a percentage of net sales was primarily due to lower restructuring charges and savings achieved through our STEP Change program initiatives.

Gross profit as a percentage of net sales increased 1.5 percentage points to 40.3 percent for the nine months ended March 31, 2011 compared to the same period in the prior year. The increase in gross profit as a percentage of net sales was primarily due to favorable product mix shift, lower restructuring charges, savings achieved through our STEP Change program initiatives and new product introductions.

 

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Other – Other gross profit improved by $0.3 million in the three months ended March 31, 2011 compared to the same period in the prior year. Other gross profit improved by $4.8 million in the nine months ended March 31, 2011 compared to the same period in the prior year. The improvement in both periods was primarily due to vacant facility costs retained at corporate in the prior year.

Selling, General and Administrative Expenses

Selling, general and administrative expenses (“SG&A”) were $211.4