form10q.htm
UNITED
STATES
SECURITIES
AND EXCHANGE
COMMISSION
Washington, D.C.
20549
|
x
|
Quarterly
report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
|
|
|
For
the quarterly period ended December 31,
2007
|
Commission
File Number: 1-9764
Harman
International Industries,
Incorporated
(Exact name of registrant as specified
in its charter)
|
Delaware
|
|
11-2534306
|
|
(State
or other jurisdiction of
incorporation
or organization)
|
|
(I.R.S.
Employer
Identification
No.)
|
|
|
|
|
|
1101
Pennsylvania Avenue, NW,
Suite
1010
Washington,
DC
|
|
20004
|
|
(Address
of principal executive offices)
|
|
(Zip
code)
|
(202)
393-1101
(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 o No
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of
“accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange
Act. (Check one):
|
Large
accelerated filer x
|
Accelerated
filer ¨
|
Non-accelerated
filer ¨
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange
Act). o Yes x No
As of
January 31, 2008, 60,536,092 shares of common
stock, par value $.01, were outstanding.
|
Part I
|
|
FINANCIAL
INFORMATION
|
Page
Number
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| |
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Item 1.
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Financial
Statements
|
|
| |
|
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|
| |
|
December 31,
2007 (unaudited)
and June 30,
2007
|
4
|
| |
|
|
|
| |
|
Three and Six
months ended December 31, 2007 and 2006
|
5
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| |
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| |
|
Six months
ended December 31, 2007 and 2006
|
6
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| |
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|
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7
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Item 2.
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24
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Item 3.
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34
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Item 4.
|
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35
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| |
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|
Part
II
|
|
OTHER
INFORMATION
|
|
| |
|
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|
Item 1.
|
|
|
35
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| |
|
|
|
|
Item 1A.
|
|
|
38
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| |
|
|
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|
Item 2.
|
|
|
39
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| |
|
|
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Item 4.
|
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|
40
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| |
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Item
5.
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|
Other
Information |
40
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| |
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Item 6.
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41
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43
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The page numbers in this Table of
Contents reflect actual page numbers, not EDGAR page tag
numbers.
References to “Harman International,”
the “Company,” “we,” “us” and “our” in this Form 10-Q refer
to Harman International Industries, Incorporated and its subsidiaries unless the
context requires otherwise.
Forward–Looking
Statements
This
report contains forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933 and 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange
Act"). You
should not place undue reliance on these statements. Forward-looking
statements include information concerning possible or assumed future results of
operations, capital expenditures, the outcome of pending legal proceedings and
claims, including environmental matters, goals and objectives for future
operations, including descriptions of our business strategies and purchase
commitments from customers. These statements are typically identified
by words such as “believe,” “anticipate,” “expect,” “plan,” “intend,” “estimate” and
similar expressions. We base these statements on particular
assumptions that we have made in light of our industry experience, as well as
our perception of historical trends, current conditions, expected future
developments and other factors that we believe are appropriate under the
circumstances. As you read and consider the information in this
report, you should understand that these statements are not guarantees of
performance or results. They involve risks, uncertainties and
assumptions. In light of these risks and uncertainties, there can be
no assurance that the results and events contemplated by the forward-looking
statements contained in, or incorporated by reference into, this report will in
fact transpire.
You
should carefully consider the risks described below and the other information in
this report. Our operating results may fluctuate significantly and
may not meet our expectations or those of securities analysts or
investors. The price of our stock would likely decline if this
occurs. Factors that may cause fluctuations in our operating results
include, but are not limited to, the following:
|
•
|
automobile
industry sales and production rates and the willingness of automobile
purchasers to pay for the option of a premium audio system and/or a
multi-functional infotainment system;
|
|
•
|
changes
in consumer confidence and spending;
|
|
•
|
fluctuations
in currency exchange rates and other risks inherent in international trade
and business transactions;
|
|
•
|
our
ability to satisfy contract performance criteria, including technical
specifications and due dates;
|
|
•
|
our
ability to design, engineer and manufacture our products profitably under
our long-term contractual commitments;
|
|
•
|
the
loss of one or more significant customers, including our automotive
manufacturer customers;
|
|
•
|
competition
in the automotive, consumer or professional markets in which we operate,
including pricing pressure in the market for personal navigation devices
(“PNDs”);
|
|
•
|
model-year
changeovers in the automotive industry;
|
|
•
|
our
ability to enforce or defend our ownership and use of intellectual
property;
|
|
•
|
our
ability to effectively integrate acquisitions made by our company;
|
|
•
|
strikes,
work stoppages and labor negotiations at our facilities, or at a facility
of one of our significant customers; or work stoppages at a common carrier
or a major shipping location;
|
|
•
|
the
outcome of pending or future litigation and administrative claims,
including but not limited to the outcome of any litigation that has been
or may be instituted against the company and others arising out of or
relating to the abandonment of the proposed acquisition of the company by
the acquiror in September 2007;
|
|
•
|
changes
in general economic conditions and specific market conditions; and
|
|
•
|
world
political stability.
|
Although
we believe that these forward-looking statements are based on reasonable
assumptions, you should be aware that many factors could affect our actual
financial results or results of operations and could cause actual results to
differ materially from those expressed in the forward-looking
statements. As a result, the forgoing factors should not be construed
as exhaustive and should be read together with the other cautionary statements
included in this and other reports we file with the Securities and Exchange
Commission, including the information in Item 1A, “Risk Factors” of Part I to
our Annual Report on Form 10-K for the fiscal year ended June 30, 2007 and Item
1A, “Risk Factors” of the Quarterly Report on Form 10-Q for the quarter ended
September 30, 2007 and this report.
Part
I. FINANCIAL INFORMATION
Item 1. Financial
Statements
Condensed
Consolidated Balance Sheets
Harman
International Industries, Incorporated and Subsidiaries
($000s
omitted except share amounts)
| |
|
December 31,
|
|
|
June 30,
|
|
| |
|
2007
|
|
|
2007
|
|
| |
|
(Unaudited)
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
Current
assets
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
159,275 |
|
|
|
106,141 |
|
|
Receivables
(less allowance for doubtful accounts of $7,545 at December 31, 2007 and
$6,040 at June 30, 2007)
|
|
|
540,641 |
|
|
|
486,557 |
|
|
Inventories
|
|
|
435,324 |
|
|
|
453,156 |
|
|
Other
current assets
|
|
|
191,107 |
|
|
|
187,299 |
|
|
Total
current assets
|
|
|
1,326,347 |
|
|
|
1,233,153 |
|
| |
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
|
611,139 |
|
|
|
591,976 |
|
|
Goodwill
|
|
|
421,898 |
|
|
|
403,749 |
|
|
Other
assets
|
|
|
290,725 |
|
|
|
279,990 |
|
|
Total
assets
|
|
$ |
2,650,109 |
|
|
|
2,508,868 |
|
| |
|
|
|
|
|
|
|
|
|
Liabilities
and Shareholders’ Equity
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
|
|
Short-term
borrowings
|
|
$ |
--- |
|
|
|
1,838 |
|
|
Current
portion of long-term debt
|
|
|
587 |
|
|
|
17,029 |
|
|
Accounts
payable
|
|
|
279,150 |
|
|
|
356,763 |
|
|
Accrued
liabilities
|
|
|
401,543 |
|
|
|
440,351 |
|
|
Total
current liabilities
|
|
|
681,280 |
|
|
|
815,981 |
|
| |
|
|
|
|
|
|
|
|
|
Borrowings
under revolving credit facility
|
|
|
177,950 |
|
|
|
55,000 |
|
|
Convertible
senior notes
|
|
|
400,000 |
|
|
|
--- |
|
|
Other
senior debt
|
|
|
2,504 |
|
|
|
2,661 |
|
|
Minority
interest
|
|
|
(509
|
)
|
|
|
878 |
|
|
Other
non-current liabilities
|
|
|
150,198 |
|
|
|
140,307 |
|
|
Shareholders’
equity
|
|
|
|
|
|
|
|
|
|
Preferred
stock, $.01 par value. Authorized 5,000,000 shares; none issued
and outstanding
|
|
|
--- |
|
|
|
--- |
|
|
Common
stock, $.01 par value. Authorized 200,000,000 shares; issued
and outstanding 83,509,323
at December 31, 2007 and 83,436,983 at June 30,
2007
|
|
|
835 |
|
|
|
834 |
|
|
Additional
paid-in capital
|
|
|
609,131 |
|
|
|
595,853 |
|
|
Accumulated
other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
Unrealized
loss on hedging derivatives
|
|
|
(3,068
|
)
|
|
|
(510
|
)
|
|
Pension
benefits
|
|
|
(15,791
|
)
|
|
|
(15,778
|
)
|
|
Cumulative
foreign currency translation adjustment
|
|
|
147,647 |
|
|
|
98,479 |
|
|
Retained
earnings
|
|
|
1,539,827 |
|
|
|
1,454,771 |
|
|
Less
common stock held in treasury (22,973,631 shares at
December 31, 2007 and 18,198,082 at June 30, 2007)
|
|
|
(1,039,895
|
)
|
|
|
(639,608
|
)
|
|
Total
shareholders’ equity
|
|
|
1,238,686 |
|
|
|
1,494,041 |
|
|
Total
liabilities and shareholders’ equity
|
|
$ |
2,650,109 |
|
|
|
2,508,868 |
|
See accompanying notes to condensed
consolidated financial statements.
Condensed Consolidated Statements of Operations
Harman
International Industries, Incorporated and Subsidiaries
(000s
omitted except per share amounts)
(Unaudited)
| |
|
Three months ended
|
|
Six months ended
|
| |
|
December 31,
|
|
December 31,
|
| |
|
|
2007
|
|
|
2006
|
|
2007
|
|
|
2006
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
1,065,610
|
|
|
931,717
|
|
2,012,572
|
|
|
1,757,260
|
|
Cost
of sales
|
|
|
764,486
|
|
|
612,079
|
|
1,446,873
|
|
|
1,150,333
|
|
Gross
profit
|
|
|
301,124
|
|
|
319,638
|
|
565,699
|
|
|
606,927
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative expenses
|
|
|
240,285
|
|
|
203,918
|
|
463,419
|
|
|
404,289
|
|
Operating
income
|
|
|
60,839
|
|
|
115,720
|
|
102,280
|
|
|
202,638
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
Other
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense, net
|
|
|
2,907
|
|
|
498
|
|
4,317
|
|
|
637
|
|
Miscellaneous,
net
|
|
|
982
|
|
|
484
|
|
1,653
|
|
|
1,345
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes and minority interest
|
|
|
56,950
|
|
|
114,738
|
|
96,310
|
|
|
200,656
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax expense, net
|
|
|
14,596
|
|
|
33,839
|
|
18,253
|
|
|
63,474
|
|
Minority
interest
|
|
|
(526
|
)
|
|
(490
|
)
|
(1,352
|
)
|
|
(815)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
42,880
|
|
|
81,389
|
|
79,409
|
|
|
137,997
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
$
|
0.69
|
|
|
1.25
|
|
1.25
|
|
|
2.11
|
|
Diluted
earnings per share
|
|
$
|
0.68
|
|
|
1.22
|
|
1.23
|
|
|
2.07
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding – basic
|
|
|
62,051
|
|
|
65,285
|
|
63,646
|
|
|
65,401
|
|
Weighted
average shares outstanding – diluted
|
|
|
62,882
|
|
|
66,525
|
|
64,623
|
|
|
66,592
|
See accompanying notes to condensed
consolidated financial statements.
Condensed Consolidated Statements of Cash Flows
Harman
International Industries, Incorporated and Subsidiaries
($000s
omitted)
(Unaudited)
| |
|
Six months ended
|
|
| |
|
December 31,
|
|
| |
|
2007
|
|
|
2006
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
79,409 |
|
|
|
137,997 |
|
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
71,904 |
|
|
|
61,497 |
|
|
Loss
on disposition of assets
|
|
|
393 |
|
|
|
1,607 |
|
|
Stock
option expense
|
|
|
11,604 |
|
|
|
8,276 |
|
|
Excess
tax benefits from share-based payment arrangements
|
|
|
(1,454
|
)
|
|
|
--- |
|
|
Changes
in working capital, net of acquisition/disposition
effects:
|
|
|
|
|
|
|
|
|
|
Decrease
(increase) in:
|
|
|
|
|
|
|
|
|
|
Receivables
|
|
|
(28,554
|
)
|
|
|
(23,003
|
)
|
|
Inventories
|
|
|
38,538 |
|
|
|
(101,579
|
)
|
|
Other
current assets
|
|
|
(961
|
)
|
|
|
(12,025
|
)
|
|
Increase
(decrease) in:
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
|
(90,957
|
)
|
|
|
(32,370
|
)
|
|
Accrued
liabilities
|
|
|
37,627 |
|
|
|
(22,539
|
)
|
|
Income
taxes payable
|
|
|
(90,760
|
)
|
|
|
22,899 |
|
|
Other
operating activities
|
|
|
(769
|
)
|
|
|
7,198 |
|
|
Net
cash provided by operating activities
|
|
$ |
26,020 |
|
|
|
47,958 |
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
Contingent
purchase price consideration
|
|
$ |
(6,475 |
)
|
|
|
(4,525
|
)
|
|
Proceeds
from asset dispositions
|
|
|
334 |
|
|
|
1,027 |
|
|
Capital
expenditures
|
|
|
(62,173
|
)
|
|
|
(39,447
|
)
|
|
Other
items, net
|
|
|
(1,346
|
)
|
|
|
(481
|
)
|
|
Net
cash used in investing activities
|
|
$ |
(69,660 |
)
|
|
|
(43,426
|
)
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
Net
(decrease) increase in short-term borrowings
|
|
$ |
(1,838 |
)
|
|
|
2,266 |
|
|
Net
borrowings (repayments) under revolving credit facility
|
|
|
117,066 |
|
|
|
(44,065
|
)
|
|
Repayment
of long-term debt
|
|
|
(16,486
|
)
|
|
|
(13,168
|
)
|
|
Proceeds
from issuance of convertible debt
|
|
|
400,000 |
|
|
|
--- |
|
|
Other
increase (decrease) in long-term debt
|
|
|
(1,709
|
)
|
|
|
(3,985
|
)
|
|
Repurchase
of common stock
|
|
|
(400,287
|
)
|
|
|
(73,023
|
)
|
|
Dividends
paid to shareholders
|
|
|
(1,572
|
)
|
|
|
(1,635
|
)
|
|
Exercise
of stock options
|
|
|
1,675 |
|
|
|
5,414 |
|
|
Debt
issuance costs
|
|
|
(4,750
|
)
|
|
|
--- |
|
|
Excess
tax benefits from share-based payment arrangements
|
|
|
1,454 |
|
|
|
--- |
|
|
Net
cash provided by (used in) financing activities
|
|
$ |
93,553 |
|
|
|
(128,196
|
)
|
|
Effect
of exchange rate changes on cash
|
|
|
3,221 |
|
|
|
3,014 |
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
$ |
53,134 |
|
|
|
(120,650
|
)
|
|
Cash
and cash equivalents at beginning of period
|
|
|
106,141 |
|
|
|
291,758 |
|
|
Cash
and cash equivalents at end of period
|
|
$ |
159,275 |
|
|
|
171,108 |
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
Interest
paid
|
|
$ |
3,887 |
|
|
|
2,395 |
|
|
Income
taxes paid
|
|
|
90,223 |
|
|
|
40,648 |
|
See accompanying notes to condensed
consolidated financial statements.
HARMAN INTERNATIONAL INDUSTRIES, INCORPORATED AND
SUBSIDIARIES
Notes to
Condensed Consolidated Financial Statements
(Unaudited)
Note
1. Basis of Presentation
Our
unaudited, condensed consolidated financial statements at December 31, 2007 and
for the three and six months ended December 31, 2007 and 2006, have been
prepared pursuant to rules and regulations of the Securities and Exchange
Commission. These unaudited condensed consolidated financial
statements do not include all information and footnote disclosures included in
our audited financial statements. In the opinion of management, the
accompanying unaudited, condensed consolidated financial statements include all
adjustments, consisting of normal recurring adjustments and accruals, necessary
to present fairly, in all material respects, the consolidated financial
position, results of operations and cash flows for the periods
presented. Operating results for the three and six months ended
December 31, 2007 are not necessarily indicative of the results that may be
expected for the full fiscal year ending June 30, 2008 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
(“U.S. GAAP”) have a significant impact on the results we report in our
financial statements. We base our estimates on historical experience
and on various other assumptions that we believe to be reasonable under the
circumstances. The estimates affect the carrying values of assets and
liabilities. Actual results may differ from these estimates under
different assumptions or conditions.
These
unaudited condensed consolidated financial statements should be read in
conjunction with our audited consolidated financial statements and accompanying
notes included in our Annual Report on Form 10-K for the fiscal year ended June
30, 2007.
Note
2. Inventories
Inventories
consist of the following:
| |
|
December
31,
|
|
|
June
30,
|
|
|
($000s omitted)
|
|
2007
|
|
|
2007
|
|
|
Finished
goods
|
|
$ |
213,032 |
|
|
|
235,736 |
|
|
Work
in process
|
|
|
56,590 |
|
|
|
52,682 |
|
|
Raw
materials
|
|
|
165,702 |
|
|
|
164,738 |
|
|
Total
|
|
$ |
435,324 |
|
|
|
453,156 |
|
Inventories
are stated at the lower of cost or market. Cost is determined
principally by the first-in, first-out method. The valuation of
inventory requires us to make judgments and estimates regarding obsolete,
damaged or excess inventory as well as current and future demand for our
products. The estimates of future demand along with analysis of usage
data that we use in the valuation of inventory are the basis for our
inventory
reserves
and have an effect on our results of operations. We calculate
inventory reserves using a combination of specific product valuation analysis,
historical usage data, forecast demand data, estimated future market prices and
historical disposal rates. If market conditions decline in excess of
our estimates, incremental reserves are recorded. Specific product
valuation analysis is typically applied to those items of inventory that
represent a substantial portion of the total value of inventory
on-hand. Valuation reserve requirements are calculated using either
historical or forecast usage to identify slow-moving or obsolete
items.
Note
3. Property, Plant and Equipment
Property,
plant and equipment are composed of the following:
| |
|
December
31,
|
|
|
June
30,
|
|
|
($000s omitted)
|
|
2007
|
|
|
2007
|
|
|
Land
|
|
$ |
13,879 |
|
|
|
14,738 |
|
|
Buildings
and improvements
|
|
|
280,611 |
|
|
|
269,968 |
|
|
Machinery
and equipment
|
|
|
998,514 |
|
|
|
905,293 |
|
|
Furniture
and fixtures
|
|
|
45,153 |
|
|
|
41,386 |
|
| |
|
|
1,338,157 |
|
|
|
1,231,385 |
|
|
Less
accumulated depreciation and amortization
|
|
|
(727,018 |
)
|
|
|
(639,409 |
)
|
|
Property,
plant and equipment, net
|
|
$ |
611,139 |
|
|
|
591,976 |
|
Note
4. Warranty Liabilities
We
warrant our products to be free from defects in materials and workmanship for
periods ranging from six months to six years from the date of purchase,
depending on the business segment and product. The warranty is a
limited warranty, and it may impose certain shipping costs on the customer and
excludes deficiencies in appearance except for those evident when the product is
delivered. Our dealers and warranty service providers normally
perform warranty service for loudspeakers and electronics in the field, using
parts supplied on an exchange basis by our company. Estimated
warranty liabilities are based upon past experience with similar types of
products, the technological complexity of certain products, replacement cost and
other factors. We take these factors into consideration when
assessing the adequacy of our warranty provisions for periods still open to
claim.
Details
of the estimated warranty liabilities are as follows:
| |
|
Six
months ended
|
|
| |
|
December 31,
|
|
|
($000s
omitted)
|
|
2007
|
|
|
2006
|
|
|
Beginning
balance (June 30)
|
|
$ |
48,148 |
|
|
|
60,768 |
|
|
Warranty
provisions
|
|
|
38,330 |
|
|
|
29,506 |
|
|
Warranty
payments (cash or in-kind)
|
|
|
(15,217 |
)
|
|
|
(21,320 |
)
|
|
Ending
balance
|
|
$ |
71,261 |
|
|
|
68,954 |
|
The
warranty liabilities are included in accrued liabilities.
Note 5. Revenue Recognition
We record estimated reductions to
revenue for customer sales programs, returns and incentive offerings including
rebates, price protection, promotions and volume-based
incentives. The reductions to revenue are based on estimates and
judgements using historical experience and expectation of future
conditions. Changes in these estimates could negatively affect our
operating results. These incentives are accrued for in accordance
with U.S. GAAP and reviewed periodically. If market conditions were
to decline, we may take actions to increase customer incentive offerings
possibly resulting in an incremental reduction of revenue at the time the
incentive is offered.
Note
6. Comprehensive Income
The
components of comprehensive income are as follows:
| |
|
Three
months ended
|
|
|
Six
months ended
|
|
| |
|
December 31,
|
|
|
December 31,
|
|
|
($000s omitted)
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
Net
income
|
|
$ |
42,880 |
|
|
|
81,389 |
|
|
|
79,409 |
|
|
|
137,997 |
|
|
Other
comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation
|
|
|
12,521 |
|
|
|
24,527 |
|
|
|
49,168 |
|
|
|
18,615 |
|
|
Unrealized
gains (losses) on hedging
|
|
|
722 |
|
|
|
(82 |
) |
|
|
(2,558 |
) |
|
|
1,356 |
|
|
Change
in pension benefits
|
|
|
(4 |
)
|
|
|
(20 |
)
|
|
|
(13 |
)
|
|
|
(16 |
)
|
|
Total
comprehensive income
|
|
$ |
56,119 |
|
|
|
105,814 |
|
|
|
126,006 |
|
|
|
157,952 |
|
The
components of accumulated other comprehensive income (loss) as of December 31,
2007 and June 30, 2007 and the activity for the six months ended December 31,
2007 are presented below:
| |
|
|
|
|
|
|
|
Cumulative
|
|
|
|
|
| |
|
Unrealized
|
|
|
|
|
|
foreign
|
|
|
Accumulated
|
|
| |
|
loss
|
|
|
|
|
|
currency
|
|
|
other
|
|
| |
|
on
hedging
|
|
|
Pension
|
|
|
translation
|
|
|
comprehensive
|
|
|
($000s omitted)
|
|
derivatives
|
|
|
benefits
|
|
|
adjustment
|
|
|
income (loss)
|
|
|
June
30, 2007
|
|
$ |
(510 |
)
|
|
|
(15,778 |
) |
|
|
98,479 |
|
|
|
82,191 |
|
|
Foreign
currency translation adjustments
|
|
|
--- |
|
|
|
--- |
|
|
|
49,168 |
|
|
|
49,168 |
|
|
Change
in fair value of foreign currency cash
flow hedges
|
|
|
(2,558 |
) |
|
|
--- |
|
|
|
--- |
|
|
|
(2,558 |
) |
|
Change
in pension benefits
|
|
|
--- |
|
|
|
(13 |
)
|
|
|
--- |
|
|
|
(13 |
)
|
|
December
31, 2007
|
|
$ |
(3,068 |
)
|
|
|
(15,791 |
)
|
|
|
147,647 |
|
|
|
128,788 |
|
Note
7. Earnings Per Share
The
following table presents the calculation of basic and diluted earnings per
common share outstanding:
| |
|
Three months ended December
31,
|
|
|
(000s omitted except per share
amounts)
|
|
2007
|
|
|
2006
|
|
| |
|
Basic
|
|
|
Diluted
|
|
|
Basic
|
|
|
Diluted
|
|
|
Net
income
|
|
$ |
42,880 |
|
|
|
42,880 |
|
|
|
81,389 |
|
|
|
81,389 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding
|
|
|
62,051 |
|
|
|
62,051 |
|
|
|
65,285 |
|
|
|
65,285 |
|
|
Employee
stock options
|
|
|
--- |
|
|
|
831 |
|
|
|
--- |
|
|
|
1,240 |
|
|
Total
weighted average shares outstanding
|
|
|
62,051 |
|
|
|
62,882 |
|
|
|
65,285 |
|
|
|
66,525 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share
|
|
$ |
0.69 |
|
|
|
0.68 |
|
|
|
1.25 |
|
|
|
1.22 |
|
| |
|
Six months ended December
31,
|
|
|
(000s omitted except per share
amounts)
|
|
2007
|
|
|
2006
|
|
| |
|
Basic
|
|
|
Diluted
|
|
|
Basic
|
|
|
Diluted
|
|
|
Net
income
|
|
$ |
79,409 |
|
|
|
79,409 |
|
|
|
137,997 |
|
|
|
137,997 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding
|
|
|
63,646 |
|
|
|
63,646 |
|
|
|
65,401 |
|
|
|
65,401 |
|
|
Employee
stock options
|
|
|
--- |
|
|
|
977 |
|
|
|
--- |
|
|
|
1,191 |
|
|
Total
weighted average shares outstanding
|
|
|
63,646 |
|
|
|
64,623 |
|
|
|
65,401 |
|
|
|
66,592 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share
|
|
$ |
1.25 |
|
|
|
1.23 |
|
|
|
2.11 |
|
|
|
2.07 |
|
Certain
options were outstanding and not included in the computation of diluted earnings
per share because the assumed exercise of these options would have been
antidilutive. Options to purchase 1,794,723 shares of our common
stock with exercise prices ranging from $73.53 to $126.94 per share during the
quarter ended December 31, 2007 and options to purchase 557,175 shares of our
common stock at prices ranging from $78.00 to $126.94 per share during the
quarter ended December 31, 2006, were outstanding and not included in the
computation of diluted earnings per share because the exercise of these options
would have been antidilutive.
Options
to purchase 1,091,031 shares of our common stock at prices ranging from $73.53
to $126.94 per share during the six months ended December 31, 2007 and options
to purchase 1,115,802 shares of common stock at prices ranging from $75.22 to
$126.94 per share during the six months ended December 31, 2006, were
outstanding and not included in the computation of diluted earnings per share
because the exercise of these options would have been antidilutive.
The
conversion feature of our 1.25 percent Convertible Senior Notes due 2012 (the
“Notes”) will affect the calculation of diluted earnings per share if the price
of our common stock exceeds the conversion price of the Notes. The
initial conversion price of the Notes was $104 per share and is subject to
adjustment in specified circumstances described in the indenture for the
Notes. Upon conversion, a holder will receive an amount in cash equal
to the lesser of $1,000 or the conversion value of the Notes, determined in the
manner set forth in the indenture for the Notes. If the conversion
value exceeds $1,000, we will deliver, at our option, cash or common stock or a
combination of cash and common stock for the conversion value in excess of
$1,000. The conversion option is indexed to our common stock and
therefore is classified as equity. As a result, the conversion option
will not result in an adjustment to net income in calculating diluted earnings
per share. The dilutive effect of the conversion option will be
calculated using the treasury stock method. Accordingly, conversion
settlement shares will be included in diluted shares outstanding if the price of
our common stock exceeds the conversion price.
Note 8. Convertible Senior
Notes
On
October 23, 2007, we issued $400 million aggregate principal amount of the
Notes. The Notes are convertible into cash, and at our option, if
applicable, shares of our common stock, based on a conversion rate of 9.6154
shares of common stock per $1,000 principal amount of Notes. The
conversion rate is subject to adjustment in specified circumstances described in
the indenture for the Notes. The indenture for the Notes contains a
settlement provision commonly referred to as a “net share
settlement.” Net settlement provisions are currently under review by
the Financial Accounting Standards Board (“FASB”). If the FASB adopts
the proposed new accounting standard, we would incur higher interest expense and
thus lower earnings per share.
The Notes
are convertible:
|
|
·
|
during
any calendar quarter commencing after December 31, 2007, if the closing
price of our common stock exceeds 130% of the conversion price for at
least 20 trading days in the period of 30 consecutive tradings days ending
on the last trading day of the preceding calendar quarter;
|
|
|
·
|
during
the five business day period immediately after any five day trading period
in which the trading price per $1,000 principal amount of the Notes for
each day of the trading period was less than 98% of the product of (1) the
closing price of our common stock on such date and (2) the conversion rate
on such date;
|
|
|
·
|
upon
the occurrence of specified corporate transactions that are described in
the indenture for the Notes; or
|
|
|
·
|
at
any time after June 30, 2012 until the close of business on the business
day immediately prior to October 15, 2012.
|
Upon
conversion, a holder will receive in respect of each $1,000 of principal amount
of Notes to be converted for each conversion day in the 20-day conversion
reference period one twentieth of (A) an amount in cash equal to the lesser of
(1) $1,000 or (2) the conversion value, determined in the manner set forth in
the indenture for the Notes and (B) if the conversion value per Note exceeds
$1,000, the Company will also deliver, at its election, cash or common stock or
a combination of cash and common stock for the conversion value in excess of
$1,000.
Debt
issuance costs of $4.8 million were capitalized and will be amortized over the
term of the Notes.
On
October 23, 2007, we entered into a Registration Rights Agreement requiring us
to register the Notes and the shares contingently issuable upon conversion of
the Notes no later than October 23, 2008. We are required to
keep the registration statement effective until the earlier of (A) such time as
the Notes and the shares contingently issuable under the Notes (1) are sold
under an effective registration statement or Rule 144 of the Securities Act of
1933, (2) are transferable under Rule 144(k) more than two years following
October 23, 2007, (3) cease to be outstanding or (B) five years and three months
following October 23, 2007. In the event of non-compliance with
this agreement, additional interest will accrue on the Notes at the rate per
annum of 0.25%. The maximum exposure to us under this commitment is
therefore four years and three months of interest on $400 million at the rate of
0.25% per annum, or $4.25 million.
The
Company does not believe that it is probable that we will fail to comply with
the Registration Rights Agreement. Therefore, no liability has been
recorded for the additional interest that may be required in the event of
non-compliance.
Note
9. Share-Based Compensation
On December 31, 2007, we had one share-based compensation
plan with shares available for future grants, the 2002 Stock Option and
Incentive Plan (the “2002 Plan”). The 2002 Plan permits the grant of stock
options, stock appreciation rights, restricted stock and restricted stock units
for up to 6,000,000 shares of our common stock. During the six monthsended December 31, 2007, options to purchase 265,000 shares of our common stock and 15,000 shares of restricted stock were granted
under the 2002 Plan. In addition, during the six months ended December 31,
2007, 49,579 shares of restricted stock and
32,291 restricted stock units were granted
outside of the 2002 Plan. The 32,291 restricted stock units are required to be
settled in cash. As such, the restricted stock units were excluded
from share-based compensation expense,accounted for as bonus
compensationandaccrue ratably over the period of
service.
Share-based compensation expense was
$6.7 million and $4.6 million for the quarters ended December 31, 2007 and 2006,
respectively, and $11.6million and $8.3 million for the six
months ended December 31, 2007 and 2006, respectively. The total income tax
benefit recognized in the income statement for share-based compensation
arrangements was $1.4 million for the quarters ended December 31, 2007 and 2006 and $2.7 million and $2.5
million for the six months ended December 31, 2007 and 2006,
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:
| |
|
Six months ended December
31,
|
|
| |
|
2007
|
|
|
2006
|
|
|
Expected
volatility
|
|
|
35.1%
– 41.0 |
% |
|
|
35.0
– 42.0 |
% |
|
Weighted-average
volatility
|
|
|
37.5 |
% |
|
|
39.2 |
% |
|
Expected
annual dividend
|
|
$ |
0.05 |
|
|
$ |
0.05 |
|
|
Expected
term (in years)
|
|
|
1.69
– 6.71 |
|
|
|
1.55
– 7.69 |
|
|
Risk-free
rate
|
|
|
3.3%
– 5.0 |
% |
|
|
4.4
– 5.0 |
% |
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 December 31, 2007 and
changes during the six months ended December 31, 2007 is presented
below:
| |
|
Shares
|
|
|
Weighted
average
exercise
price
|
|
|
Weighted
average
remaining
contractual
term
(years)
|
|
|
Aggregate
intrinsic
value
($000s)
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at June 30, 2007
|
|
|
3,214,238 |
|
|
$ |
61.11 |
|
|
|
|
|
|
|
|
Granted
|
|
|
265,000 |
|
|
|
95.88 |
|
|
|
|
|
|
|
|
Exercised
|
|
|
(76,550 |
) |
|
|
26.40 |
|
|
|
|
|
|
|
|
Forfeited
or expired
|
|
|
(12,900 |
)
|
|
|
90.85 |
|
|
|
|
|
|
|
|
Outstanding
at December 31, 2007
|
|
|
3,389,788 |
|
|
|
64.50 |
|
|
|
6.24 |
|
|
$ |
72,398 |
|
|
Exercisable
at December 31, 2007
|
|
|
1,835,138 |
|
|
$ |
38.18 |
|
|
|
4.42 |
|
|
$ |
71,297 |
|
The
weighted-average grant-date fair value of options granted during the quarters
ended December 31, 2007 and 2006 was $30.66 and $37.01, respectively. The
weighted-average grant-date fair value of options granted during the six months
ended December 31, 2007 and 2006 was $36.10 and $34.99, respectively. The total
intrinsic value of options exercised during the quarters ended December 31, 2007
and 2006 was $4.0 million and $12.2 million, respectively. The total intrinsic
value of options exercised during the six months ended December 31, 2007 and
2006 was $4.5 million and $15.3 million, respectively.
Restricted
Stock Activity
A summary
of the status of our nonvested shares of restricted stock as of December 31,
2007 and changes during the six months ended December 31, 2007 is presented
below:
| |
|
|
|
Weighted average
|
|
| |
|
|
|
grant-date
|
|
| |
|
Shares
|
|
fair value
|
|
| |
|
|
|
|
|
|
|
|
|
Nonvested
at June 30, 2007
|
|
|
12,000 |
|
|
$ |
82.00 |
|
|
Granted
|
|
|
64,579 |
|
|
|
116.65 |
|
|
Vested
|
|
|
--- |
|
|
|
--- |
|
|
Forfeited
|
|
|
--- |
|
|
|
--- |
|
|
Nonvested
at December 31, 2007
|
|
|
76,579 |
|
|
$ |
111.22 |
|
As of December 31, 2007, there was $1.8
million of total unrecognized compensation cost related to nonvested restricted
stock-based compensation arrangements. The weighted average recognition period
is 1.85 years.
Restricted
Stock Unit Activity
During the six months ended December 31, 2006, 25,000 restricted stock units were granted with
a zero-value exercise price. At December 31, 2007, the aggregate intrinsic value of the
restricted stock unit grant was $1.8 million. As of December 31, 2007, there was $0.3 million of total unrecognized
compensation cost related to restricted stock unit compensation arrangements.
The weighted average recognition period is 1.75 years. Other than 32,291
restricted stock units that are required to be settled in cash, no restricted stock unitswere granted, vested or exercisable in the six
months ended December 31, 2007.
Note
10. Business Segment Data
We
design, manufacture and market high-quality, high fidelity audio products and
electronic systems for the automotive, consumer and professional
markets. We organize our businesses into reporting segments by the
end-user markets served. Our chief operating decision makers evaluate performance and allocate
resources primarily based on net sales, operating income and working capital in
each of the reporting segments. We report on the basis of three
segments: Automotive, Consumer and Professional.
Our Automotive segment designs,
manufactures and markets audio, electronic and infotainment systems for vehicle
applications primarily to be installed as original equipment by automotive
manufacturers. Our automotive products and systems are marketed
worldwide under brand names including JBL, Infinity, Harman/Kardon, Becker,
Logic 7 and Mark Levinson. Our premium branded audio, video,
navigation and infotainment systems are offered to automobile manufacturers
through engineering and supply agreements. Automotive also provides
aftermarket products such as personal navigation devices
(“PNDs”). See Note 15, Significant
Customers.
Our Consumer segment designs,
manufactures and markets audio, loudspeaker and electronic systems for home,
computer and multimedia applications and aftermarket mobile
products. Our Consumer products and systems are marketed worldwide
under brand names including JBL, Infinity, Harman/Kardon, Lexicon, Mark Levinson
and Revel. Our audio and electronic products are offered through
audio/video specialty and retail chain stores. Our branded audio
products for computer and multimedia applications are focused on retail
customers with products designed to enhance sound for computers, Apple’s iPods
and other music control players. Our aftermarket mobile
products, such as iPod adaptors, speakers and amplifiers, deliver audio
entertainment in the vehicle. Additionally, aftermarket mobile
products include PNDs that provide GPS navigation, video and other infotainment
capabilities.
The Professional segment designs,
manufactures and markets loudspeakers and electronic systems used by audio
professionals in concert halls, stadiums, airports and other buildings and for
recording, broadcast, cinema and music reproduction applications. Our
Professional products are marketed worldwide under brand names including JBL
Professional, AKG, Crown, Soundcraft, Lexicon, DigiTech, dbx and
Studer. We provide high-quality products to the sound reinforcement,
music instrument support and broadcast and recording segments of the
professional audio market. We offer complete systems solutions for
professional installations and users around the world.
The
following table reports net sales and operating income (loss) by each reporting
segment:
| |
|
Three
months ended
|
|
|
Six
months ended
|
|
| |
|
December 31,
|
|
|
December 31,
|
|
|
($000s omitted)
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
Net
sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Automotive
|
|
$ |
730,233 |
|
|
|
632,303 |
|
|
|
1,412,536 |
|
|
|
1,233,301 |
|
|
Consumer
|
|
|
183,752 |
|
|
|
163,011 |
|
|
|
303,190 |
|
|
|
256,137 |
|
|
Professional
|
|
|
151,625 |
|
|
|
136,403 |
|
|
|
296,846 |
|
|
|
267,822 |
|
|
Total
|
|
$ |
1,065,610 |
|
|
|
931,717 |
|
|
|
2,012,572 |
|
|
|
1,757,260 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Automotive
|
|
$ |
36,297 |
|
|
|
92,408 |
|
|
|
82,276 |
|
|
|
182,576 |
|
|
Consumer
|
|
|
17,434 |
|
|
|
14,701 |
|
|
|
14,341 |
|
|
|
10,252 |
|
|
Professional
|
|
|
23,044 |
|
|
|
20,098 |
|
|
|
43,432 |
|
|
|
37,173 |
|
|
Other
|
|
|
(15,936
|
)
|
|
|
(11,487
|
)
|
|
|
(37,769 |
)
|
|
|
(27,363
|
)
|
|
Total
|
|
$ |
60,839 |
|
|
|
115,720 |
|
|
|
102,280 |
|
|
|
202,638 |
|
Other
operating loss is comprised of activity related to our corporate operations, net
of reporting segment allocations.
Note
11. Derivatives
We use
foreign currency forward contracts to hedge a portion of our forecasted
transactions. These forward contracts are designated as foreign
currency cash flow hedges and recorded at fair value in the accompanying
consolidated balance sheet with a corresponding entry to accumulated other
comprehensive income (loss) until the underlying forecasted foreign currency
transaction occurs.
When the
transaction occurs, the gain or loss from the derivative designated as a hedge
of the transaction is reclassified from accumulated other comprehensive income
(loss) to the same income statement line item in which the foreign currency gain
or loss on the underlying hedged transaction is recorded. When it
becomes apparent that an underlying forecasted transaction will not occur, the
amount recorded in accumulated other comprehensive income (loss) related to the
hedge is reclassified to the miscellaneous, net line of the income statement in
the then-current period.
Changes
in the fair value of the derivatives are 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 current earnings to the
same income statement line item in which the foreign currency gain or loss on
the underlying hedged transactions is recorded. When it has been
determined that a hedge has become ineffective, the ineffective portion of the
hedge is recorded in current earnings. For the three and six months
ending December 31, 2007 and 2006 we recognized no ineffectiveness.
We
elected to exclude forward points from the effectiveness
assessment. At the end of the period we calculate the fair value
relating to the change in forward points which is recorded to current earnings
as other non-operating income. For the three and six months ended
December 31, 2007, we recognized $0.1 million and $0.6 million, respectively, in
net gains related to the change in forward points.
At
December 31, 2007, we had forward contracts maturing through June 2008 to sell
Euros and buy U.S. Dollars of approximately $32 million, and through June 2008 to
buy Canadian dollars and sell U.S. Dollars of approximately $10.6 million, in
each case to hedge future foreign currency purchases. At December 31, 2007, the amount associated with these
hedges that is expected to be reclassified from accumulated other comprehensive
income (loss) to earnings within the next twelve months is a loss of
approximately $3.0 million. This amount also represents the fair
market value of foreign currency forward contracts at December 31, 2007. In the six months ended
December 31,
2007, we recognized a net
loss of $1.8 million from cash flow hedges of forecasted foreign currency
transactions compared to $1.7 million in net losses in the same period last
year.
As of
December 31, 2007, we had forward contracts maturing through March 2008 to
purchase and sell the equivalent of $76.7 million of various
currencies to hedge foreign currency denominated inter-company loans. At
December 31, 2007, the fair value on these contracts was a net gain of $2.1
million. Adjustments to the carrying value of the foreign currency
forward contracts offset the gains and losses on the underlying loans in other
non-operating income.
In
February 2007 we entered into an interest rate swap contract to 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 is
designated as a cash flow hedge. At the end of each reporting period,
the discounted fair value of the swap is calculated and recorded to other
comprehensive income. The accrued but unpaid net interest on the swap
is recorded in rent expense, which is included in selling, general and
administrative expenses in our consolidated statement of
operations. Changes in the fair value of the interest rate swap are
highly effective in offsetting changes in the hedged
item. Effectiveness is tested using a hypothetical swap that
replicates the actual cash flows of the interest portion of rent expense
regressed against the interest rate swap. If the calculated
correlation factor shows a high degree of correlation, the interest rate swap is
deemed to be highly effective. If the hedge is determined to be
ineffective, the ineffective portion will be reclassified from other
comprehensive income and recorded as rent expense. For the three and
six months ended December 31, 2007, we recognized no
ineffectiveness.
As of
December 31, 2007, the notional amount of the swap contract described above was
$28.9 million and the amount recorded in other comprehensive income was a gain
of $0.4 million. The amount associated with the swap contract that is
expected to be recorded as rent expense over the next twelve months is a gain of
$0.1 million.
Note
12. Commitments and Contingencies
Helen
Rodgers Living Trust v. Harman International Industries, Incorporated, et
al.
On May 8,
2007, Helen Rodgers Living Trust (“Plaintiff”) filed a putative class action
lawsuit against the Company and all of its directors in the Superior Court of
the District of Columbia seeking declaratory and injunctive relief, damages and
costs. The original complaint alleged that the Company’s directors
breached their fiduciary duties to the Company’s stockholders by entering into a
merger agreement with a company (“Parent”) formed by investment funds affiliated
with Kohlberg Kravis Roberts & Co. L.P. (“KKR”) and GS Capital Partners VI
Fund, L.P. and its related funds, which are sponsored by Goldman, Sachs &
Co. (“GSCP”). According to Plaintiff, the consideration to be offered
to the Company’s stockholders under the merger agreement was “inadequate” and
the merger agreement “inequitably favor[ed] . . . insiders” of the
Company. The original complaint also alleged that the termination fee
in the merger agreement was excessive, that the Company’s directors purportedly
would not “fairly and adequately” evaluate any alternative bids, and that the
provision in the merger agreement that allowed the Company to solicit proposals
for alternative bidders during a 50-day period ending in June 2007 was
“illusory.”
On June
29, 2007, Plaintiff filed its first amended complaint. While the
first amended complaint continued to raise the allegations made in the original
complaint, the new focus of Plaintiff’s case was that the merger agreement
“inequitably favor[ed] . . . insiders” of the Company by allowing such insiders
to exchange otherwise worthless “underwater” options for Parent shares on a “one
option for one Parent share basis,” and by allowing them to separately negotiate
with Parent for more favorable treatment of their options. The first
amended complaint also alleged that the disclosures contained in the Company’s
preliminary proxy statement/prospectus were inadequate.
On June
29, 2007, Plaintiff filed a motion for preliminary injunction. The
motion sought to enjoin the conversion of the “underwater” options into Parent
shares, and also sought to “unw[i]nd or otherwise cancel[]” the challenged
options. In the motion, Plaintiff did not seek to enjoin the
shareholder vote or the merger. After Defendants filed their
opposition to the motion for preliminary injunction on July 23, 2007, Plaintiff
agreed to voluntarily withdraw its motion.
Thereafter,
on September 4, 2007, Plaintiff was granted leave to file a second amended
complaint. The second amended complaint narrowed Plaintiff’s claims
by eliminating, among other things, most of its disclosure claims and
allegations relating to “underwater” options. Defendants answered
Plaintiff’s second amended complaint on September 21, 2007, denying Plaintiff’s
claims for breach of fiduciary duty and disclosure deficiencies.
On
January 3, 2008, Plaintiff moved to voluntarily dismiss its
claims. The Court granted the dismissal motion on January 9, 2008 and
dismissed Plaintiff’s claims in their entirety.
Cheolan
Kim v. Harman International Industries, Incorporated, et al.
On
October 1, 2007, a purported class action lawsuit was filed by Cheolan Kim (the
“Kim Plaintiff”) against the Company and certain of its officers in the United
States District Court for the District of Columbia seeking compensatory damages
and costs on behalf of all persons who purchased the Company’s common stock
between April 26, 2007 and September 24, 2007 (the “Class
Period”). The original complaint purported to allege claims for
violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934
and Rule 10b-5 promulgated thereunder.
The
complaint alleged that defendants omitted to disclose material adverse facts
about the Company’s financial condition and business prospects. The
complaint contended that had these facts not been concealed at the time the
merger agreement with KKR and GSCP was entered, there would not have been a
merger agreement, or it would have been at a much lower price, and the price of
the Company’s common stock therefore would not have been artificially inflated
during the Class Period. The Kim Plaintiff alleged that, following
the reports that the proposed merger was not going to be completed, the price of
the Company’s common stock declined causing the plaintiff class significant
losses.
On
January 16, 2008, the Kim Plaintiff filed an amended complaint. The
amended complaint, which extends the Class Period through January 11, 2008
contends that, in addition to the violations alleged in the original complaint,
the Company also violated Sections 10(b) and 20(a) and Rule 10b-5 by purportedly
knowingly failing to disclose “significant problems” relating to its personal
navigation device (“PND”) “sales forecasts, production, pricing, and inventory”
prior to January 14, 2008. The amended complaint claims that when
“Defendants revealed for the first time on January 14, 2008 that shifts in PND
sales would adversely impact earnings per share by more than $1.00 per share in
fiscal 2008,” that led to a further decline in the Company’s share value and
additional losses to the plaintiff class.
We
believe the lawsuit, which is still in its earliest stages, is without merit and
we intend to vigorously defend against it.
Boca
Raton General Employees’ Pension Plan v. Harman International Industries,
Incorporated, et al.
On
November 30, 2007, the Boca Raton General Employees’ Pension
Plan (the “Boca Raton Plaintiff”) filed a purported class action
lawsuit against the Company and certain of its officers in the United States
District Court for the District of Columbia seeking compensatory damages and
costs on behalf of all persons who purchased the Company’s 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 Securities Exchange Act
of 1934 and Rule 10b-5 promulgated thereunder.
We
believe the lawsuit, which is still in its earliest stages, is without merit and
we intend to vigorously defend against it.
Patrick
Russell v. Harman International Industries, Incorporated, et al.
Patrick
Russell (the “Russell Plaintiff”) filed a purported class action lawsuit in the
United States District Court for the District of Columbia against the Company
and certain of its officers and directors on December 7, 2007, alleging
violations of the Employee Retirement Income Security Act (“ERISA”) and seeking,
on behalf of all participants in and beneficiaries of the Harman International
Industries, Incorporated Retirement Savings Plan (“the Plan”), compensatory
damages for losses to the Plan as well as injunctive relief, constructive trust,
restitution, and other monetary relief. The 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 Company stock notwithstanding that
the stock allegedly was “no longer a prudent investment for the Participants’
retirement savings.” The complaint further claims that, during the
Class Period, defendants failed to monitor the Plan fiduciaries, and failed to
provide the Plan fiduciaries with, and to disclose to Plan participants, adverse
facts regarding the Company and its businesses and prospects. The
Russell Plaintiff also contends that defendants breached their duties to avoid
conflicts of interest and to serve the interests of participants in and
beneficiaries of the Plan with undivided loyalty. As a result of
these alleged fiduciary breaches, the complaint asserts that the Plan has
“suffered substantial losses, resulting in the depletion of millions of dollars
of the retirement savings and anticipated retirement income of the Plan’s
Participants.”
We
believe the lawsuit, which is still in its earliest stages, is without merit and
we intend to vigorously defend against it.
Siemens
vs. Harman Becker Automotive Systems GmbH.
In
October 2006 Harman Becker received notice of a complaint filed by Siemens AG
against it with the Regional Court in Düsseldorf in August 2006 alleging that
certain of Harman
Becker infotainment products including both radio receiver and
Bluetooth hands free telephony functionality, infringe upon a patent owned by
Siemens. In November 2006 Harman Becker filed suit with the German patent
office in Munich to nullify the claims of this patent.
On
September 18, 2007 the court of first instance in Düsseldorf ruled that the
patent in question had been infringed and ordered Harman Becker to cease selling
the products in question in Germany, and to compile and submit data to Siemens
concerning its prior sales of such products. Harman Becker has appealed
that ruling.
Despite
the pending nullity proceedings, Siemens AG provisionally enforced the ruling
against Harman Becker. Accordingly, Harman Becker ceased selling aftermarket
products covered by the patent in Germany, and has submitted the required data
to Siemens AG.
In June
2008 a hearing is scheduled in the German Federal Patent Court with respect to
Harman Becker’s lawsuit seeking to nullify the claims of the patent in question.
The Company believes Siemens’ patent is invalid on several grounds, and
anticipates that the German Patent Court should nullify its claims totally or in
part. In either instance the ruling of the court of first instance as to
Harman Becker’s infringement would become void, and Siemens may in addition be
required to compensate Harman Becker for damages suffered as a result of it
ceasing to sell the products enjoined by the Düsseldorf court’s
order.
We intend
vigorously to defend the infringement lawsuit which we believe is without merit,
and to prosecute the nullity action.
While the
outcome of any of the legal proceedings described above cannot at this time be
predicted with certainty, we do not expect these matters will materially affect
our financial condition or results of operations.
Other
Legal Actions
At
December 31, 2007, we were involved in several other legal
actions. The outcome of these legal actions cannot be predicted with
certainty; however, management, based upon advice from legal counsel, believes
such actions are either without merit or will not have a material adverse effect
on our financial position or results of operations. In fiscal 2005,
we recorded a $6 million liability for probable unasserted claims. We
believe the relevant statutes of limitation have expired, and the
probability of the claim is now remote. Therefore, the reserve for
this claim was released during the second quarter ended December 31,
2007.
Accelerated
Share Repurchase
At
December 31, 2007, our Board of Directors had authorized the repurchase of an
initial amount of 4,775,549 shares of common stock, under separate accelerated
share repurchase (“ASR”) agreements with two financial institutions, having a
market value of approximately $400 million at the time of entry into the ASRs
and up to an additional 20 million shares of common stock under our share
repurchase program. The purchase price of the shares under the ASR
agreements is subject to adjustment scheduled for late February
2008. As a result of the settlements, we may receive or be required
to remit a price adjustment, payable at our option, in cash or
stock. Any price adjustment will be based on the volume weighted
average price of our common stock during the respective terms of the ASR
agreements. Through December 31, 2007, we had acquired and placed in
treasury a total of 22,973,631 shares of our common stock at a total cost of
$1.040 billion. See
Note 17, Accelerated Share
Repurchase.
Note
13. Recent Accounting Pronouncements
In June
2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes (“FIN 48”). FIN 48 clarifies the accounting for
uncertainty in income taxes recognized in accordance with Statement of Financial
Accounting Standards (“SFAS”) No. 109, Accounting for Income
Taxes. It also prescribes a recognition threshold and
measurement attribute for financial statement recognition and measurement for a
tax position taken or expected to be taken in a tax return. FIN 48 is
effective for fiscal years beginning after December 15, 2006. We
adopted the provisions of FIN 48 on July 1, 2007. See Note 16, Income Taxes to review the
effect of adoption on our consolidated financial statements.
In May 2007, the FASB issued FASB Staff
Position (“FSP”) No. FIN 48-1, Definition of
Settlement in FASB Interpretation No. 48 (“FSP FIN 48-1”) which amends FIN 48, to
provide guidance about how an enterprise should determine whether a tax position
is effectively settled for the purpose of recognizing previously unrecognized
tax benefits. Under FSP FIN 48-1, a tax position is considered to be
effectively settled if the taxing authority completed its examination, the
enterprise does not plan to appeal, and it is remote that the taxing authority
would reexamine the tax position in the future. We adopted the
provisions of FSP FIN 48-1 on July 1, 2007. See Note 16, Income Taxes
to review the effect of
adoption on our consolidated financial statements.
The FASB recently issued proposed FSP
APB 14-a, Accounting for
Convertible Debt Instruments That May Be Settled in Cash upon Conversion
(Including Partial Cash Settlement)which would require issuers of
convertible debt that may be settled wholly or partly in cash to account for the
debt and equity components separately. The proposed FSP would require
separate accounting to be applied retrospectively to both new and existing
convertible instruments within the proposal’s scope and would thereby affect our
net income and earnings per share. See Note 8, Convertible
Debtfor additional
information regarding our recently issued convertible notes.
In
December 2007, FASB issued Statement No. 141R, Business Combinations (“SFAS
141R”) which requires most identifiable assets, liabilities, noncontrolling
interests, and goodwill acquired in a business combination to be recorded at
"full fair value." The Statement applies to all business
combinations, including combinations among mutual entities and combinations by
contract alone. Under SFAS 141R, all business combinations will be
accounted for by applying the acquisition method. SFAS 141R is
prospectively effective for business combinations for which the acquisition date
is on or after the beginning of the first annual reporting period beginning on
or after December 15, 2008. SFAS 141R will be adopted on July 1, 2009
at the beginning of the 2010 fiscal year.
In
December 2007, FASB issued Statement No. 160, Noncontrolling Interests in
Consolidated Financial Statements (“SFAS 160”) which will require
noncontrolling interests (previously referred to as minority interests) to be
treated as a separate component of equity, not as a liability or other item
outside of permanent equity. SFAS 160 applies to the accounting for
noncontrolling interests and transactions with noncontrolling interest holders
in consolidated financial statements. SFAS 160 is effective for
annual periods beginning on or after December 15, 2008. SFAS 160 will
be applied prospectively to all noncontrolling interests, including any that
arose before the effective date except that comparative period information must
be recast to classify noncontrolling interests in equity, attribute net income
and other comprehensive income to noncontrolling interests, and provide other
disclosures required by SFAS 160. We are currently evaluating the
reporting impact of our adoption of SFAS 160 on July 1, 2009 at the beginning of
the 2010 fiscal year.
Note
14. Retirement Benefits
We have certain business units in
Europe that maintain defined benefit pension
plans for many of our current and former European 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. The measurement date used for determining pension
benefits is the last day of our fiscal year-end, June 30. In the United States, we have a Supplemental Executive
Retirement Plan that provides retirement, death and termination benefits, as
defined, to certain key executives designated by the Board of
Directors.
Our
retirement benefits are more fully disclosed in Notes 1 and 12 of our
Consolidated Financial Statements included in Item 8 of our Annual Report on
Form 10-K for the fiscal year ended June 30, 2007.
The
following table presents the components of net periodic benefit
costs:
| |
|
Three
months ended
|
|
|
($000s omitted)
|
|
December 31,
|
|
| |
|
2007
|
|
|
2006
|
|
|
Service
cost
|
|
$ |
876 |
|
|
|
923 |
|
|
Interest
cost
|
|
|
1,649 |
|
|
|
1,274 |
|
|
Amortization
of prior service cost
|
|
|
215 |
|
|
|
182 |
|
|
Amortization
of net loss
|
|
|
303 |
|
|
|
409 |
|
|
Net
periodic benefit cost
|
|
$ |
3,043 |
|
|
|
2,788 |
|
| |
|
Six
months ended
|
|
|
($000s omitted)
|
|
December 31,
|
|
| |
|
2007
|
|
|
2006
|
|
|
Service
cost
|
|
$ |
1,793 |
|
|
|
1,732 |
|
|
Interest
cost
|
|
|
3,237 |
|
|
|
2,541 |
|
|
Amortization
of prior service cost
|
|
|
430 |
|
|
|
364 |
|
|
Amortization
of net loss
|
|
|
606 |
|
|
|
876 |
|
|
Net
periodic benefit cost
|
|
$ |
6,066 |
|
|
|
5,513 |
|
During the three and six months ended December 31, 2007, we made
an insignificant contribution to the defined benefit pension plans and expect
full year contributions to be immaterial.
Note
15. Significant Customers
Presented below are the percentages of
net sales to and receivables due from customers who represent 10 percent or more
of our net sales or accounts receivable for the periods
presented:
| |
|
Net Sales
|
|
|
Accounts
Receivable
|
|
| |
|
Six months
ended December
31,
|
|
|
December
31,
|
|
| |
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
Daimler AG
|
|
|
20 |
%
|
|
|
24 |
% |
|
|
10 |
%
|
|
|
13 |
%
|
|
Other
Customers
|
|
|
80 |
|
|
|
76 |
|
|
|
90 |
|
|
|
87 |
|
|
Total
|
|
|
100 |
%
|
|
|
100 |
%
|
|
|
100 |
%
|
|
|
100 |
%
|
We
anticipate that Daimler AG will continue to account for a significant portion of
our net sales and accounts receivable for the foreseeable future. Our
automotive customers are not obligated to any long-term purchase of our
products. The loss of Daimler AG as a customer would have a material
adverse effect on our total consolidated net sales, earnings and financial
position.
Note
16. 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. The projected effective
tax rate of 24 percent for 2008 differs from the U.S. statutory rate primarily
due to foreign rates, which differ from those in the U.S., the realization of
certain business tax credits including R&D, favorable permanent differences
between book and tax treatment for items, and the benefit from the conclusion of
a tax audit. This rate is expected to be greater than the full year
2007 effective tax rate of 18.36 percent because the 2007 rate included the
recognition of certain federal tax credits.
We
adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes (“FIN 48”), on July 1, 2007. FIN 48 clarifies the
accounting for income tax uncertainties. The company has developed and
implemented a process based on the guidelines of FIN 48 to ensure that uncertain
tax positions are identified, analyzed and properly reported in the company’s
financial statements in accordance with SFAS 109.
Based on
all known facts and circumstances and current tax law, the company believes that
the total amount of unrecognized tax benefits as of June 30, 2007 was $31.2
million. As a result of the implementation of FIN 48, we recognized a
$6.9 million reduction to the $31.2 million unrecognized tax benefit due to the
fact that certain tax positions were at a more likely than not threshold at July
1, 2007. This reduction was included as an increase to the July 1, 2007
balance of retained earnings. Additionally, we effectively settled a
German tax audit for fiscal tax years through June 30, 2004. During
the three months ended September 30, 2007, we recognized $5.7 million in
previously unrecognized tax benefits due to the effective settlement criteria of
FSP FIN 48-1. For the three months ended December 31, 2007, we did
not recognize any unrecorded tax benefits.
The
unrecognized tax benefits at July 1, 2007 are tax positions that are permanent
in nature and, if recognized, would reduce the effective tax
rate. However, the Company's federal, certain state and certain
non-U.S. income tax returns are currently under various stages of audit or
potential audit by applicable tax authorities and the amounts ultimately paid,
if any, upon resolution of the issues raised by the taxing authorities may
differ materially from the amounts accrued for each year. The
material tax jurisdictions for the Company are Germany and the United
States. The tax years subject to examination in Germany are fiscal years
2005 through the current year. The tax years subject to examination in the
United States are fiscal years 2004 through the current year. Due to
provisions allowed in the tax law, we may recognize $3.4 million in unrecognized
tax benefits within the next 12 months.
We
recognize interest and penalties related to unrecognized tax benefits in income
tax expense. We had $2.5 million accrued at July 1, 2007 for the
payment of any such interest and penalties.
Income
tax expense for the quarter ended December 31, 2007 was $14.6 million, compared
to $33.8 million for the same period last year. The effective tax
rate for the three months ended December 31, 2007 was 25.6 percent, compared to
29.5 percent in the prior year period. The effective tax rate for the
quarter ended December 31, 2007 includes a $1.2 million benefit related to a
change in German tax law which lowered the German effective tax rate and a $2.6
million benefit from the previously non-deductible merger cost. The
termination of the merger agreement allowed merger cost to be tax deductible in
the second quarter. For the six months ended December 31, 2007,
income tax expense was $18.3 million, compared to $63.5 million for the same
period last year. The effective tax rate for the six months ended
December 31, 2007 of 19.0 percent, was lower than the comparable prior period
rate of 31.6 percent due to the realization of $5.7 million of previously
unrecognized tax benefits resulting from the effective settlement of a German
tax audit. The effective tax rate for the six months ended December
31, 2006 was lower due to a $5.6 million benefit related to a change in German
tax law which lowered the German effective tax rate and a $1.1 million benefit
from the previously non-deductible merger cost. The termination of
the merger agreement allowed merger cost to be deductible in the second
quarter.
Note 17. Accelerated Share Repurchase
On
October 30, 2007, we used the proceeds from the issuance and sale of the
Notes to repurchase and retire approximately 4.8 million shares of our common
stock for a total purchase price of approximately $400 million from two
financial institutions, under two separate accelerated share repurchase (“ASR”)
agreements. The 4.8 million shares represented approximately 7
percent of the then-outstanding shares of our common stock.
Each ASR
was accounted for as a purchase of shares and a separate net-settled forward
contract indexed to our stock. The forward contract will be settled
during the quarter ended March 31, 2008 based on the difference between the
volume weighted average price of our common stock over the financial
institutions’ open market purchase period and the valuation at the time of
the shares purchase. The open market purchase period represents
the period of time over which the financial institutions may purchase
shares in the open market to satisfy the borrowings of our common stock they
made to execute the share purchase transactions. Settlement of the
forward contract may be in shares or in cash at our option, and we may
receive or be required to remit a price adjustment at settlement.
Note 18. Subsequent Events
In the fiscal third quarter, we
accelerated the restructuring of our automotive footprint with the decision to
close plants in Northridge, California and Martinsville, Indiana. We also decided to shut
down two smaller facilities in Massachusetts serving the Consumer
division. These operations will be integrated with other Harman
facilities in California
and New York. Consolidations of
additional manufacturing and engineering facilities in Europe and Africa are under review.
These actions are expected to result in
restructuring charges of $25 to $30 million in the third quarter and $5 to $10
million in the fourth quarter of fiscal 2008. About 1,400 jobs will
be affected, of which 500 jobs will be eliminated and the balance transferred to
other Harman facilities in the United States, Germany, China and Mexico.
We have added several hundred new jobs
at our plants in Mexico
and China and extensive job training is now being
completed. We have decided to add capacity to our plant in
Hungary in order to expand production of audio
electronics and speakers.
We are in the final stage of completing
our plan to outsource our information technology infrastructure. This
step will blend an outside service provider’s solutions expertise with
emerging-country resources to bring us significant gains in both agility and
cost. This initiative will also help us take a close look at
alternative resources for project-related software, systems and
costs.
Also during the quarter, we decided to
consolidate resources from Washington, DC and Northridge, California to our new corporate headquarters in
Stamford, Connecticut. This will accelerate the
speed of decision making and improve coordination across key company
functions.
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, together with Management's Discussion and Analysis of Financial Condition
and Results of Operations included in our Annual Report on Form 10-K for the
year ended June 30, 2007 (“2007 Form10-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, including foreign currency exchange
rates, and other factors that we believe are appropriate under the
circumstances. These statements involve risks and uncertainties that
could cause actual results to differ materially from those suggested in the
forward-looking statements.
We begin
our discussion with an overview of our company to give you an understanding of
our business and the markets we serve. We then discuss our critical
accounting policies. This is followed by a discussion of our results
of operations for the three and six months ended December 31, 2007 and
2006. We include in this discussion an analysis of certain
significant period-to-period variances in our consolidated statements of
operations. We also provide specific information regarding our three
reportable business segments: Automotive, Consumer and
Professional. Our liquidity, capital resources and cash flows are
discussed under the caption Financial Condition. We complete our
discussion with a business outlook for future periods.
Overview
We
design, manufacture and market high-quality, high fidelity audio products and
electronic systems for the automotive, consumer and professional
markets. We have developed, both internally and through a series of
strategic acquisitions, a broad range of product offerings sold under renowned
brand names in our principal markets. These brand names have a
heritage of technological leadership and product innovation. Our
three reportable business segments, Automotive, Consumer and Professional, are
based on the end-user markets we serve.
Automotive
designs, manufactures and markets audio, electronic and infotainment systems for
vehicle applications. Our systems are generally shipped directly to
our automotive customers for factory installation. Infotainment
systems are a combination of information and entertainment components that may
include or control GPS navigation, traffic information, voice-activated
telephone and climate control, rear seat entertainment, wireless Internet
access, hard disk recording, MP3 playback and a high-end branded audio
system. These systems include scaleable software to allow us to
better serve a full range of vehicles from luxury through the entry-level
vehicles. Future
infotainment systems may also provide driver safety capabilities such as lane
guidance, pre-crash emergency braking, adaptive cruise control and night
vision. Automotive also provides aftermarket products such as
personal navigation devices (“PNDs”) to customers primarily in
Europe. Our PNDs leverage many of the successful
technologies developed by our Automotive segment.
Consumer
designs, manufactures and markets audio, loudspeaker and electronic systems for
home, computer and multimedia applications and aftermarket mobile
products. Home product applications include systems to provide
high-quality audio throughout the home and to enhance in-home video systems such
as home theatres. Our aftermarket mobile products, such as iPod
adaptors, speakers and amplifiers, deliver audio entertainment in the
vehicle. Additionally, aftermarket mobile products include PNDs that
provide GPS navigation, video and other infotainment
capabilities. Our multimedia applications include loudspeaker
accessories for personal computers, music phones, and portable electronic
devices such as the iPod and other MP3 players. Our consumer products
are primarily distributed through retail outlets.
Professional
designs, manufactures and markets loudspeakers and electronic systems used by
audio professionals in concert halls, stadiums, airports, houses of worship and
other public spaces. We also develop products for recording,
broadcast, cinema, touring and music reproduction applications. In
addition, we have leading shares of both the portable PA market and musician
vertical markets serving small bands, DJ’s and other
performers. These products are increasingly linked by our proprietary
HiQnet network protocol which provides centralized monitoring and control of
both complex and simple professional audio systems.
Our
products are sold worldwide, with the largest markets being the United States
and Germany. In the United States, our primary manufacturing
facilities are located in California, Indiana, Kentucky, Missouri and
Utah. Outside of the United States, we have significant manufacturing
facilities in Germany, Austria, the United Kingdom, Mexico, Hungary, France and
China. Our businesses operate using local
currencies. Therefore, we are subject to currency fluctuations that
are partially mitigated by the fact that we purchase raw materials and supplies
locally when possible. We are especially affected by Euro exchange
rates since a significant percentage of our sales are made in
Euros.
We
experience seasonal fluctuations in sales and earnings. Historically,
our first quarter ending September 30 is generally the weakest due to the
production schedules of our automotive customers and summer holidays in
Europe. Our sales and earnings may also vary due to customer
acceptance of our products, the timing of new product introductions, product
offerings by our competitors and general economic conditions. Our
reported sales and earnings may also fluctuate due to foreign currency exchange
rates, especially for the Euro.
Each of our three business segments
reported sales growth for the second quarter. Although we continue to increase net
sales across all divisions, our PNDs continue to experience aggressive pricing
pressure. We are accelerating a number of strategic actions to
improve our cost structure and global footprint.
Critical
Accounting Policies
Our critical accounting policies are
described under the caption "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in our 2007 Form 10-K. These
policies include allowance for doubtful accounts, inventory valuation, goodwill,
pre-production and development costs, warranty liabilities, income taxes, and
stock-based compensation. Also see Note 1, Summary of
Significant
Accounting Policies to our
Consolidated Financial Statements included in our 2007 Form
10-K.
Summary
of Operations
Sales
Our net sales for the quarter ended
December 31, 2007
were $1.066 billion compared to $931.7
million in the same period last year, an increase of 14 percent. For the six months ended December 31, 2007, net sales were $2.013 billion compared
to net sales of $1.757 billion in the same period last year, an increase of 15
percent. Foreign currency translation contributed approximately $75
million and $117 million,
respectively, to the sales increase for the three and six months ended
December 31, 2007. For the three and six months ended December 31, 2007, each of
our three business segments
reported higher sales when
compared to the prior year period. For the three and six
months ended December 31, 2007, the increase in net sales was primarily due to
increased shipments of infotainment systems to automotive customers and higher
sales of consumer and professional products to major distributors.
Presented
below is a summary of our net sales by reporting segment:
|
($000s omitted)
|
|
Three months ended
December 31,
|
|
|
Six months ended
December 31,
|
|
| |
|
2007
|
|
|
%
|
|
|
2006
|
|
|
%
|
|
|
2007
|
|
|
%
|
|
|
2006
|
|
|
%
|
|
|
Net
sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Automotive
|
|
$ |
730,233 |
|
|
|
69 |
% |
|
|
632,303 |
|
|
|
68 |
% |
|
$ |
1,412,536 |
|
|
|
70 |
% |
|
|
1,233,301 |
|
|
|
70 |
% |
|
Consumer
|
|
|
183,752 |
|
|
|
17 |
% |
|
|
163,011 |
|
|
|
17 |
% |
|
|
303,190 |
|
|
|
15 |
% |
|
|
256,137 |
|
|
|
15 |
% |
|
Professional
|
|
|
151,625 |
|
|
|
14 |
%
|
|
|
136,403 |
|
|
|
15 |
%
|
|
|
296,846 |
|
|
|
15 |
%
|
|
|
267,822 |
|
|
|
15 |
%
|
|
Total
|
|
$ |
1,065,610 |
|
|
|
100 |
%
|
|
|
931,717 |
|
|
|
100 |
%
|
|
$ |
2,012,572 |
|
|
|
100 |
%
|
|
|
1,757,260 |
|
|
|
100 |
%
|
Automotive - Net sales for
the quarter ended December 31, 2007 increased $97.9 million, or 15 percent
compared to the same period last
year. Foreign currency translation contributed approximately $61
million to the increase in sales. Because a significant percentage of
our automotive sales are to customers in Europe, our automotive segment incurs most of
our foreign currency translation exposure. Higher sales to Chrysler
to support the MyGig ramp up, the roll-out of next generation mid-level
infotainment systems to BMW and the extension of our MultiMedia Interface
infotainment system for the Audi A4 and A5 were primary factors contributing to
automotive increased sales. Sales were higher to Porsche due to
higher vehicle production for the Cayenne. Higher sales of audio systems to
Toyota/Lexus were due to increased production to support launches of the new
Tundra, Highlander and Sequoia. For the quarter ended December 31,
2007, the increase in automotive sales was partially offset by lower aftermarket
sales of PNDs due to aggressive price reductions, the delay of new products and
the sale of older products at substantial discounts. Sales to Daimler
were also lower due to reduced vehicle production for the E-Class, M-Class and
R-Class vehicles.
Net sales for the six months ended
December 31, 2007
increased $179.2 million,
or 15 percent compared to the same period last year. Foreign currency
translation contributed approximately $97 million to the increase in
sales. The primary contributors were strong sales of our MyGig
infotainment systems to Chrysler and higher sales of infotainment systems to
Audi for the ramp-up of the Audi A4 and A5. Sales to BMW also
contributed to the increase in sales due to higher production for the
3-Series. Sales of audio systems to Toyota/Lexus were also higher due
to the launch of the new Toyota Camry. Sales to Porsche and Hyundai
were also higher than the prior year period. These sales increases were
partially offset by lower infotainment system sales to Daimler due to lower
vehicle production for the E-Class and C-Class vehicles and lower aftermarket
sales of PNDs due to aggressive price reductions in the
market.
Consumer - Net sales for the
quarter ended December 31, 2007 increased $20.7 million, or 13 percent, compared
to the same period last
year. Foreign currency translation contributed approximately $11
million to the increase in sales compared to the prior year
period. The increase in net sales was primarily due to higher
international multimedia sales of iPod docking products and higher sales of
Harman/Kardon home electronic products. These sales increases were partially
offset by lower sales of Infinity loudspeakers in North America.
Net sales for the six months ended
December 31, 2007 increased $47.1 million, or 18 percent, compared to the same
period last year. Foreign currency translation contributed
approximately $15 million to sales compared to the prior year
period. The sales increase was primarily due to higher sales in North
America and Europe. Sales were higher in
Europe due to multimedia sales of the JBL
OnStage and OnTime products and higher sales of Harman Kardon
electronics. North American sales were higher due to increased sales
of Harman/Kardon electronics to a major retailer and higher mobile
sales.
Professional - Net sales for
the quarter ended December 31, 2007 increased $15.2 million, or 11 percent,
compared to the same period last year. Foreign currency translation
contributed approximately $3 million to the increase in sales compared to the
prior year. The increase in sales compared to the same period
last year was primarily due to strong sales at JBL Professional and Harman Music
Group in North America. Soundcraft/Studer also contributed to
the increase in sales with higher sales of touring and installed sound and AKG contributed to
the increase with higher sales of headphones.
Net sales for the six months ended
December 31, 2007 increased $29.0 million, or 11 percent, compared to the same
period last year. Foreign currency translation contributed
approximately $5 million to the increase in sales compared to the prior
year. Professional sales increased due to higher sales of JBL
Professional products including PRX, VRX and Control Contractor
series. Sales at AKG were higher due to strong sales of headphones
and studio products. In addition, sales of our Soundcraft/Studer
products increased due to higher sales to China associated with the upcoming
Olympics.
Gross Profit
Gross profit as a percentage of net
sales decreased 6.0 percentage points to 28.3 percent for the quarter ended
December 31, 2007
compared to 34.3 percent of
sales in the same period last quarter. Gross profit as a percentage
of net sales decreased 6.4 percentage points to 28.1 percent for the six months
ended December 31, 2007
compared to 34.5 percent of
sales in the same period in the prior year period. The decrease in gross
profit margin is primarily due to substantially reduced margins on PNDs, product
mix change, including higher sales of lower margin infotainment systems for
mid-level vehicles and higher than expected material
costs. The reduction of the PND margin is the result of three
primary factors: a significant decline in average market prices, delayed
introductions and lower volumes of new generation products and the inventory
clearance of prior generation models at a loss. Higher sales of lower
margin infotainment systems and higher than expected material costs are both
exemplified in our infotainment program with Chrysler. This infotainment
program award included the supply of both a high- and a mid-level system.
While the Chrysler infotainment program as a whole is slightly profitable, the
mid-level system is not. Design engineering capacity was not available to
work on cost reduction initiatives for the mid-level system as we had expected
due to our unprecedented number of new platform launches scheduled during
2008 and 2009.
Presented
below is a summary of our gross profit by reporting segment:
|
($000s omitted)
|
|
Three months ended
December 31,
|
|
|
Six months ended
December 31,
|
|
| |
|
2007
|
|
|
Percent
of
net sales
|
|
|
2006
|
|
|
Percent
of
net sales
|
|
|
2007
|
|
|
Percent
of
net sales
|
|
|
2006
|
|
|
Percent
of
net sales
|
|
|
Gross
Profit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Automotive
|
|
$ |
193,700 |
|
|
|
26.5 |
% |
|
|
225,420 |
|
|
|
35.7 |
% |
|
$ |
375,536 |
|
|
|
26.6 |
% |
|
|
440,160 |
|
|
|
35.7 |
% |
|
Consumer
|
|
|
48,534 |
|
|
|
26.4 |
% |
|
|
43,036 |
|
|
|
26.4 |
% |
|
|
76,641 |
|
|
|
25.3 |
% |
|
|
66,543 |
|
|
|
26.0 |
% |
|
Professional
|
|
|
60,140 |
|
|
|
39.7 |
% |
|
|
52,432 |
|
|
|
38.4 |
% |
|
|
116,022 |
|
|
|
39.1 |
% |
|
|
102,724 |
|
|
|
38.4 |
% |
|
Other
|
|
|
(1,250 |
)
|
|
|
--- |
|
|
|
(1,250 |
)
|
|
|
--- |
|
|
|
(2,500 |
)
|
|
|
--- |
|
|
|
(2,500 |
)
|
|
|
--- |
|
|
Total
|
|
$ |
301,124 |
|
|
|
28.3 |
% |
|
|
319,638 |
|
|
|
34.3 |
% |
|
$ |
565,699 |
|
|
|
28.1 |
% |
|
|
606,927 |
|
|
|
34.5 |
% |
Automotive–
Gross profit as a percentage of
net sales decreased 9.2 percentage points for the quarter ended December 31,
2007 compared to the same period in the prior year. Gross profit as a
percentage of net sales decreased 9.1 percentage points for the six months ended
December 31,
2007 compared to the same
period in the prior year. For the three and six month periods the
gross margin decline was the result of lower margins on PND products, product
mix change, including higher sales of lower margin infotainment systems for
mid-level vehicles and higher than expected material
costs. The reduction of the PND margin is the result of three
primary factors: a significant decline in average market prices,
delayed introductions and lower volumes of new generation products and the
inventory clearance of prior generation models at a loss. Higher sales of
lower margin infotainment systems and higher than expected material costs are
both exemplified in our infotainment program with Chrysler. This
infotainment program award included the supply of both a high- and a mid-level
system. While the Chrysler infotainment program as a whole is slightly
profitable, the mid-level system is not. Design engineering capacity was
not available to work on cost reduction initiatives for the mid-level system as
we had expected due to our unprecedented number of new platform launches
scheduled during 2008 and 2009.
Consumer–
Gross profit as a percentage of
net sales of 26.4 percent for the quarter ended December 31, 2007 was
consistent with the same period last year. Gross profit as a
percentage of net sales decreased 0.7 percentage points for the six months ended
December 31,
2007 compared to the same
period in the prior year. For the six months, gross margins were
lower due to increased competition in the multimedia market and new product
introductions with lower margins to respond to the competitive pricing
environment.
Professional–
Gross profit as a percentage of
net sales increased 1.3 percentage points for the three months ended
December 31,
2007 compared to the same
period in the prior year. Gross profit as a percentage of net sales
increased 0.7 percentage points for the six months ended December 31, 2007 compared to the same period in the
prior year. For the three and six months, gross margins improved as a
percentage of sales primarily due to favorable product mix and lower variable
expenses.
Selling, General and Administrative
Expenses
Selling, general and administrative
expenses (“SG&A”) were $240.3 million for the quarter ended December 31,
2007 compared to $203.9 million in the same period last year. As a
percentage of sales, SG&A increased 0.6 percentage points for the quarter
ended December 31, 2007
compared to the same period
in the prior year. Foreign currency translation contributed
approximately $13 million to the increase in SG&A expenses for the quarter
compared to the same period last year. For the quarter, SG&A expenses were
$9.1 million higher due to merger-related costs associated with the
termination of the proposed merger announced in April 2007. Higher
research and development costs also contributed to the increase in SG&A
expenses. Including foreign currency effect, research and development
costs were $100.4 million compared to $90.0 million in the same period last
year. Research and development costs primarily increased due to
increased spending associated with the launch of new automotive infotainment
products.
For the six-month period ended December
31, 2007, SG&A expenses were $463.4 million compared to $404.3 million in
the same period last year. Foreign currency translation contributed
approximately $21 million to the increase in SG&A expenses for the six
months compared to the same period last year. For the six months ended December 31,
2007, SG&A expenses were higher $13.8 million due to merger-related costs
associated with the termination of the proposed merger announced in April
2007. Research and development expenses were higher when compared to
the prior year period. Including foreign currency effect, research
and development costs were $188.2 million compared to $172.8 million in the same
period last year. Research and development costs primarily increased due to
increased spending associated with the launch of new automotive infotainment
systems.
Presented
below is a summary of SG&A expenses by reporting segment:
|
($000s omitted)
|
|
Three months ended December
31,
|
|
|
Six months ended December
31,
|
|
| |
|
2007
|
|
|
Percent
of
net sales
|
|
|
2006
|
|
|
Percent
of
net sales
|
|
|
2007
|
|
|
Percent
of
net sales
|
|
|
2006
|
|
|
Percent
of
net sales
|
|
|
SG&A
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Automotive
|
|
$ |
157,403 |
|
|
|
21.6 |
% |
|
|
133,012 |
|
|
|
21.0 |
% |
|
$ |
293,260 |
|
|
|
20.8 |
% |
|
|
257,584 |
|
|
|
20.9 |
% |
|
Consumer
|
|
|
31,100 |
|
|
|
16.9 |
% |
|
|
28,335 |
|
|
|
17.4 |
% |
|
|
62,300 |
|
|
|
20.5 |
% |
|
|
56,291 |
|
|
|
22.0 |
% |
|
Professional
|
|
|
37,096 |
|
|
|
24.5 |
% |
|
|
32,334 |
|
|
|
23.7 |
% |
|
|
72,590 |
|
|
|
24.5 |
% |
|
|
65,551 |
|
|
|
24.5 |
% |
|
Other
|
|
|
14,686 |
|
|
|
--- |
|
|
|
10,237 |
|
|
|
--- |
|
|
|
35,269 |
|
|
|
--- |
|
|
|
24,863 |
|
|
|
--- |
|
|
Total
|
|
$ |
240,285 |
|
|
|
22.5 |
% |
|
|
203,918 |
|
|
|
21.9 |
% |
|
$ |
463,419 |
|
|
|
23.0 |
% |
|
|
404,289 |
|
|
|
23.0 |
% |
Automotive– SG&A expenses were $ 157.4 million
for the quarter ended December 31, 2007 compared to $133.0 million in the same
period last year. Foreign currency translation contributed
approximately $11 million to the increase in SG&A expenses compared to the
same prior year period. SG&A expenses also increased due to
higher research and development costs, advertising and general and
administrative expenses. Including foreign currency effect, research
and development expenses for the quarter increased approximately $10 million to
$82.8 million or 11.3 percent of sales compared to $73.1 million or 11.6 percent
of sales, in the same prior year period. Research and development
costs were higher primarily to support the BMW L6 and Audi 3G
launch. Advertising costs increased due to a new PND advertising
campaign and general and administrative expenses increased due to increased
information technology requirements.
SG&A expenses were $293.3 million
for the six months ended December 31, 2007 compared to $257.6 million in the same
period last year. Foreign currency translation contributed
approximately $17 million to the increase in SG&A expenses for the six
months compared to the same prior year period. SG&A expenses also
increased due to higher advertising, general and administrative and research and
development expenses. Advertising expenses were higher due to new PND
advertising programs and general and administrative expenses were higher
primarily to support increased information technology
requirements. Including foreign currency effect, research and development expenses for
the six months were $152.4 million or 10.8 percent of sales, compared to $138.5
or 11.2 percent of sales, for the same period in the prior
year. Research and development expenses increased primarily due to
higher spending to support new automotive infotainment systems for a significant
number of programs launching in fiscal 2008.
Consumer–
SG&A expenses were $31.1
million for the quarter ended December 31, 2007 compared to $28.3 million in the
same period last year. Foreign currency translation contributed
approximately $1 million to the increase in SG&A expenses compared to the
same prior year period.
SG&A expenses were $62.3 million for
the six months ended December 31, 2007 compared to $56.3 million in the same
period last year. Foreign currency translation contributed
approximately $2 million to the increase in SG&A expenses compared to the
same prior year period. For the three and six months, SG&A
expenses increased primarily due to higher advertising expenses related to trade
shows and marketing costs. Including foreign currency effect, for the
three and six month periods ended December 31, 2007, research and development
expenses were $8.7 million and $17.5 million, respectively. In the
same periods last year research and development expenses were $8.3 million and
$17.2 million, respectively.
Professional– SG&A
expenses were $37.1 million for the quarter ended December 31, 2007 compared to
$32.3 million in the same period last year. Foreign currency
translation contributed approximately $1 million to the increase in SG&A
expenses compared to the same prior year period. SG&A expenses
were $72.6 million for the six months ended December 31, 2007 compared to $65.6
million in the same period last year. Foreign currency translation
contributed approximately $2 million to the increase in SG&A expenses
compared to the same prior year period.
For the three and six months, SG&A
expenses increased primarily in the area of selling expenses to support higher
sales volume and increased variable selling expenses at
Soundcraft/Studer. Research and development expenses were $8.9
million compared to $8.5 million in the same period last
year. Including foreign currency effect, for the six month period,
research and development expenses were $18.1 million compared to $17.0 million
in the same period last year.
Other– Corporate SG&A
expenses for the three and six months ended December 31, 2007 increased $4.4
million and $10.4 million, respectively, compared to the same periods last
year. For the three and six months ended December 31, 2007, corporate
SG&A expenses increased $9.1 million and $13.8 million, respectively,
primarily due to merger-related costs associated with the termination of the
proposed merger announced in April 2007. Also, higher compensation
and stock option expenses contributed to the increase in SG&A
expenses. These higher expenses were partially offset by the reversal
of an accrual for an unasserted claim that is no longer probable.
Operating Income
Operating income for the quarter ended
December 31, 2007
was $60.8 million or 5.7
percent of sales compared to $115.7 million or 12.4 percent of sales in the same
period last year. Operating income for the six months ended
December 31,
2007 was $102.3 million or
5.1 percent of sales compared to $202.6 million or 11.5 percent of sales in the
same prior year period. The decrease in operating income for the
three and six months was driven by PND, product mix, and higher research and
development, material and merger-related costs.
Interest Expense,
Net
Interest expense, net, for the three and
six months ended December
31, 2007 was $2.9 million
and $4.3 million, respectively. In the same periods last year, net
interest expense was $0.5 million and $0.6 million, respectively. For
the quarter, interest expense, net, included $5.3 million of gross interest
expense and $2.4 million of interest income. For the same period in
the prior year, interest expense, net, included $2.4 million of gross
interest
expense and interest income was $1.9
million. For the six months ended December 31, 2007, interest expense, net, included $8.3
million of gross interest expense and $4.0 million of interest
income. For the same period last year, interest expense, net,
included $4.7 million of gross interest expense and interest income was $4.1
million.
Interest expense was higher primarily
due to increased borrowings. Weighted average borrowings outstanding were $510.7
million for the quarter ended December 31, 2007 compared to $176.7 million for the same
period in the prior year. Weighted average borrowings outstanding
were $336.7 million for the six months ended December 31, 2007 compared to $175.0 million for the same
period in the prior year.
The weighted average interest rate on
borrowings was 3.4 percent for the quarter ended December 31, 2007 and 4.4
percent for the six months ended December 31, 2007. The weighted
average interest rates for the comparable periods in the prior year were 5.5
percent and 5.4 percent, respectively. The weighted average interest
rate decreased due to the issuance of the Notes in October
2007.
Miscellaneous
Expenses
Miscellaneous, net expenses were $1.0
million for the quarter ended December 31, 2007 and $1.7 million for the six months
ended December 31, 2007
compared to $0.5 million
and $1.3 million, respectively, in the same periods last
year. Miscellaneous net, primarily consists of bank charges
for the three and six months ended December 31, 2007.
Income Taxes
Income tax expense for the quarter ended
December 31, 2007
was $14.6 million, compared
to $33.8 million for the same period last year. The effective tax
rate for the three months ended December 31, 2007 was 25.6 percent, compared to 29.5
percent in the prior year period. The effective tax rate for the
quarter ended December 31,
2007 includes a $1.2
million benefit related to a change in German tax law which lowered the German
effective tax rate. Income tax expense for the six months ended
December 31, 2007 was $18.3 million, compared to $63.5 million for the same
period last year. The effective tax rate for the six months ended
December 31, 2007 of 19.0 percent, was lower than the comparable prior period
rate of 31.6 percent due to the realization of $5.7 million of previously
unrecognized tax benefits resulting from the effective settlement of a German
tax audit. The effective tax rate for the six months ended December
31, 2007, was also lower due to a $5.6 million benefit related to a change in
German tax law which lowered the German effective tax rate and a $1.1 million
benefit from the previously non-deductible merger cost. The
termination of the merger agreement allowed merger cost to be deductible in the
second quarter.
Financial Condition
Liquidity and Capital
Resources
We
primarily finance our working capital requirements through cash generated by
operations, trade credit, and borrowings under our revolving credit
facility. Cash and cash equivalents were $159.3 million at December
31, 2007 compared to $106.1 million at June 30, 2007. During the
six-month period ended December 31, 2007, cash was primarily used to make tax
payments (primarily in Germany), invest in our manufacturing facilities, retire
senior debt and repurchase shares of our common stock. The proceeds received
from the $400 million convertible debt issued in October 2007 were used to
repurchase shares of our common stock.
We will continue to have cash
requirements to support seasonal working capital needs, capital expenditures,
interest, principal and dividend payments and stock and debt
repurchases. We intend to use cash on hand, cash generated by
operations and borrowings under our revolving credit facility to meet these
requirements. We believe that cash from operations and our borrowing
capacity will be adequate to meet our cash requirements over the next twelve
months. Following is a more detailed discussion of our cash flow
activities during the six months ended December 31, 2007.
Operating Activities
For the six months ended December 31, 2007, our cash flows from operations were
$27.5 million compared to $48.0 million during the same period last
year. The decrease in operating cash flows was primarily due to a
decrease in net income and increased tax payments in the
period.
At December 31, 2007, net working capital, excluding cash
and short term debt, was $486.4 million compared to $329.9 million at
June 30, 2007. The $156.5 million increase
was primarily due to higher accounts receivable due to higher sales, a decrease
in taxes payable due to tax payments, primarily in Germany, and a decrease in accounts payable due
to the timing of vendor payments.
Investing Activities
Net cash used in investing activities
was $69.7 million for the six months ended December 31, 2007 compared to $43.4 million in the same
period last year. We had capital expenditures of $62.2 million during
the six months ended December 31, 2007 compared to $39.4 million for the same
period last year. The increase in capital spending is primarily due
to a new manufacturing facility in China and the launch of new automotive
programs. We anticipate the need to continue to make
significant investments in manufacturing equipment, facilities and tooling in
fiscal 2008, primarily in support of new infotainment system awards and to
support our efforts to reduce costs by moving production to lower cost
countries.
Financing Activities
In the six months ended December 31,
2007, we used $400 million to repurchase 4,775,549 shares of our common stock
under two separate accelerated share repurchase agreements. We
estimate that we will receive an additional two million shares in settlement of
the agreements. Since the inception of our share repurchase program
in June 1998 and through the accelerated share repurchase agreements, we have
acquired and placed into treasury 22,973,631 shares.
Our total debt at December 31, 2007 was $581.0 million, primarily comprised
of $178.0 million of borrowings under our revolving credit facility and $400.0
million of 1.25 percent Convertible Senior Notes due in 2012. Also
included in total debt are capital leases and other short-term borrowings of
$3.0 million.
We are party to a $300 million committed
multi-currency revolving credit facility with a group of
banks. This facility expires in June 2010. At
December 31, 2007, we had borrowings of $178.0 million and outstanding letters
of credit of $5.5 million under this facility. Unused availability
under the revolving credit facility was $116.5 million at December 31,
2007.
On
October 23, 2007, we issued $400 million of 1.25 percent Convertible Senior
Notes due 2012. The Notes are convertible into cash and, at the
Company’s option, if applicable, shares of the Company’s common stock, based on
a conversion rate of 9.6154 shares of common stock per $1,000 principal amount
of Notes (which is equal to an initial conversion price of approximately $104
per share) only in certain circumstances as set forth in the indenture for the
Notes. The conversion rate is subject to adjustment in certain
circumstances as described in the indenture.
Upon
conversion, a holder will receive in respect of each $1,000 of principal amount
of Notes to be converted for each conversion day in the 20-day conversion
reference period one twentieth of (A) an amount in cash equal to the lesser
of (1) $1,000 or (2) the conversion value, determined in the manner
set forth in the indenture for the Notes and (B) if the conversion value
per Note exceeds $1,000, the Company will also deliver, at its election, cash or
common stock or a combination of cash and common stock for the conversion value
in excess of $1,000.
The notes
include a settlement provision commonly referred to as a “net share
settlement.” Net share settlements are currently under review by the
FASB. If FASB adopts the proposed new accounting standard, we would
incur higher interest expense and lower earnings per share.
Our
long-term debt agreements contain financial and other covenants that, among
other things, limit our ability to incur additional indebtedness, restrict
subsidiary dividends and distributions, limit our ability to encumber certain
assets and restrict our ability to issue capital stock of our
subsidiaries. Our long-term debt agreements permit us to pay
dividends or repurchase our capital stock without any dollar limitation provided
that we would be in compliance with the financial covenants in our revolving
credit facility after giving effect to such dividend or
repurchase. At December 31, 2007, we were in compliance with the
terms of our long-term debt agreements.
Equity
Total shareholders’ equity at
December 31, 2007
was $1.239 billion compared
with $1.494 billion at June
30, 2007. The
decrease is primarily due to the repurchase of 4,775,549 shares partially offset
by net income of $76.4 million and favorable foreign currency translation
increase of $49.2 million. As a result of the implementation of FIN 48, we
recognized a $6.9 million reduction to our unrecognized tax
benefit. The $6.9 million reduction was included in our balance sheet
as an adjustment to the July 1, 2007 retained earnings.
Business Outlook
We expect
continued growth in sales across our three divisions, although the economic
slowdown may offset some of this growth. Our current expectations for
fiscal 2008 could be affected by the potential impact of changes in currency
exchange rates (primarily the Euro compared to the U.S. dollar).
In
January, we announced updated earnings guidance for the fiscal year, which
included a decrease in our expected operating profit of more than $100
million. The primary driver of this deterioration is
the PND market, with higher-than-expected engineering and material
costs also contributing.
The PND
margin outlook for the 2008 fiscal year has declined by about $60
million. This is divided almost equally across three
factors: a significant decline in average market prices; delayed
introductions and lower volumes of new generation products; and the inventory
clearance of prior generation models at a loss.
Engineering
costs will continue to run higher-than-expected into the 2009 fiscal
year to support the 13 new product launches this fiscal year and next --
for which we underestimated the magnitude and complexity. We
originally planned for a decline in engineering costs in the second half of
the 2008 fiscal year. However, our efforts to ensure the timely
launch of customer programs will cause us to incur about $30 million of
additional engineering this fiscal year.
Material
costs will be about $20 million higher than we expected in the 2008 fiscal
year due to delayed implementation of planned material cost
improvements. We are unwilling to risk these changes in
light of our significant number of new program launches.
These
experiences also reinforce the need for timely action in raising productivity
and optimizing the cost base for our automotive operations
globally. We took additional steps in this process within the past
weeks, announcing the closure of our automotive manufacturing facilities in
Northridge, California and Martinsville, Indiana. These are the first
of multiple actions that will improve our cost structure while shifting some
resources to other sites in both mature and emerging markets.
Item 3. Quantitative and Qualitative Disclosures
About Market Risk
We are
required to include information about potential effects of changes in interest
rates and currency exchange rates in our periodic reports filed with the
Securities and Exchange Commission. Since June 30, 2007, there have
been no material changes in the quantitative or qualitative aspects of our
market risk profile. See Item 7A, Quantitative and Qualitative
Disclosure About Market Risk included in our 2007 Form 10-K.
Interest
Rate Sensitivity/Risk
At December 31, 2007, interest on
approximately 70 percent of our borrowings was determined on a fixed rate
basis. The interest rates on the balance of our debt are subject to
changes in U.S.
and European short-term
interest rates. To assess exposure to interest rate changes, we have
performed a sensitivity analysis assuming a hypothetical 100 basis point
increase or decrease in interest rates across all outstanding debt and
investments. Our analysis indicates that the effect on net income at
December 31, 2007 of such an increase or decrease in interest rates would be
approximately $0.04 million.
Foreign
Currency Risk
We
maintain significant operations in Germany, the United Kingdom, France, Austria,
Hungary, Mexico, Switzerland and Sweden. As a result, we are subject
to market risks arising from changes in foreign currency exchange rates,
principally the change in the value of the Euro compared to the U.S.
dollar. Our subsidiaries purchase products and raw materials in
various currencies. As a result, we may be exposed to the cost
changes relative to local currencies in the markets to which we sell our
products. To mitigate these risks, we enter into forward foreign
exchange contracts. Also, foreign currency positions are partially
offsetting and are netted against one another to reduce exposure.
We presently estimate the effect of
changes in currency exchange rates, principally the change in the value of the
Euro compared to the U.S. dollar, has an impact on our reported results when the
financial statements of foreign subsidiaries are translated into U.S.
dollars. Over half of our sales are currently denominated in
Euros. Currency translation for the Euro versus the U.S. dollar had a
significant impact on earnings for the first half of fiscal 2008 compared to the
prior year first half due to the strengthening of the Euro relative to the U.S.
dollar. The average exchange rate for the Euro versus the U.S. dollar
for the six months ended December 31, 2007 increased 12.3 percent from the same
period in the prior year.
To assess exposure to changes in
currency exchange rates, we prepared an analysis assuming a hypothetical 10
percent change in currency exchange rates across all currencies used by our
subsidiaries. This analysis indicated that a 10 percent increase or
decrease in exchange rates would have increased or decreased income before
income taxes by approximately $10 million for the six months ended
December 31,
2007.
Competitive
conditions in the markets in which we operate may limit our ability to increase
prices in the event of adverse changes in currency exchange
rates. For example, certain products made in the U.S. are sold
outside of the U.S. Sales of these products are affected by the value
of the U.S. dollar relative to other currencies. Any long-term
strengthening of the U.S. dollar could depress the demand for these U.S.
manufactured products and reduce sales. However, due to the multiple
currencies involved in our business and the netting effect of various
simultaneous transactions, our foreign currency positions are partially
offsetting.
Actual
gains and losses in the future may differ materially from the hypothetical gains
and losses discussed above based on changes in the timing and amount of interest
rate foreign currency exchange rate movements and our actual exposure and
hedging transactions.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls
and Procedures - Under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief Financial Officer,
we have evaluated the effectiveness of our disclosure controls and procedures
(as defined in Rules 13a-15(e) and 15d-15(e) promulgated by the Securities and
Exchange Commission under the Securities Exchange Act of 1934) as of the end of
the period covered by this Quarterly Report on Form 10-Q. Based
on that evaluation, our Chief Executive Officer and Chief Financial Officer
concluded that our disclosure controls and procedures are effective to provide reasonable
assurance that information required to be disclosed in the reports that we file
or submit under the Securities Exchange Act of 1934 is recorded, processed,
summarized, and reported within the time periods specified in Securities and
Exchange Commission rules and forms. We note that the design of any
system of controls is based in part upon certain assumptions about the
likelihood of future events, and there can be no assurance that any design will
succeed in achieving our stated goals under all potential future
conditions.
Change in Internal Control Over
Financial Reporting - There has not been any change in our internal
control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) as
promulgated by the Securities and Exchange Commission under the Securities Act
of 1934) during our most recently completed fiscal quarter that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
Part
II. OTHER INFORMATION
Item 1. Legal Proceedings
Helen
Rodgers Living Trust v. Harman International Industries, Incorporated, et
al.
On May 8,
2007, Helen Rodgers Living Trust (“Plaintiff”) filed a putative class action
lawsuit against the Company and all of its directors in the Superior Court of
the District of Columbia seeking declaratory and injunctive relief, damages and
costs. The original complaint alleged that the Company’s directors
breached their fiduciary duties to the Company’s stockholders by entering into a
merger agreement with a company (“Parent”) formed by investment funds affiliated
with Kohlberg Kravis Roberts & Co. L.P. (“KKR”) and GS Capital Partners VI
Fund, L.P. and its related funds, which are sponsored by Goldman, Sachs &
Co. (“GSCP”). According to Plaintiff, the consideration to be offered
to the Company’s stockholders under the merger agreement was “inadequate” and
the merger agreement “inequitably favor[ed] . . . insiders” of the
Company. The original complaint also alleged that the termination fee
in the merger agreement was excessive, that the Company’s directors purportedly
would not “fairly and adequately” evaluate any alternative bids, and that the
provision in the merger agreement that allowed the Company to solicit proposals
for alternative bidders during a 50-day period ending in June 2007 was
“illusory.”
On June
29, 2007, Plaintiff filed its first amended complaint. While the
first amended complaint continued to raise the allegations made in the original
complaint, the new focus of Plaintiff’s case was that the merger agreement
“inequitably favor[ed] . . . insiders” of the Company by allowing such insiders
to exchange otherwise worthless “underwater” options for Parent shares on a “one
option for one Parent share basis,” and by allowing them to separately negotiate
with Parent for more favorable treatment of their options. The first
amended complaint also alleged that the disclosures contained in the Company’s
preliminary proxy statement/prospectus were inadequate.
On June
29, 2007, Plaintiff filed a motion for preliminary injunction. The
motion sought to enjoin the conversion of the “underwater” options into Parent
shares, and also sought to “unw[i]nd or otherwise cancel[]” the challenged
options. In the motion, Plaintiff did not seek to enjoin the
shareholder vote or the merger. After Defendants filed their
opposition to the motion for preliminary injunction on July 23, 2007, Plaintiff
agreed to voluntarily withdraw its motion.
Thereafter,
on September 4, 2007, Plaintiff was granted leave to file a second amended
complaint. The second amended complaint narrowed Plaintiff’s claims
by eliminating, among other things, most of its disclosure claims and
allegations relating to “underwater” options. Defendants answered
Plaintiff’s second amended complaint on September 21, 2007, denying Plaintiff’s
claims for breach of fiduciary duty and disclosure deficiencies.
On
January 3, 2008, Plaintiff moved to voluntarily dismiss its
claims. The Court granted the dismissal motion on January 9, 2008 and
dismissed Plaintiff’s claims in their entirety.
Cheolan
Kim v. Harman International Industries, Incorporated, et al.
On
October 1, 2007, a purported class action lawsuit was filed by Cheolan Kim (the
“Kim Plaintiff”) against the Company and certain of its officers in the United
States District Court for the District of Columbia seeking compensatory damages
and costs on behalf of all persons who purchased the Company’s common stock
between April 26, 2007 and September 24, 2007 (the “Class
Period”). The original complaint purported to allege claims for
violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934
and Rule 10b-5 promulgated thereunder.
The
complaint alleged that defendants omitted to disclose material adverse facts
about the Company’s financial condition and business prospects. The
complaint contended that had these facts not been concealed at the time the
merger agreement with KKR and GSCP was entered, there would not have been a
merger agreement, or it would have been at a much lower price, and the price of
the Company’s common stock therefore would not have been artificially inflated
during the Class Period. The Kim Plaintiff alleged that, following
the reports that the proposed merger was not going to be completed, the price of
the Company’s common stock declined causing the plaintiff class significant
losses.
On
January 16, 2008, the Kim Plaintiff filed an amended complaint. The
amended complaint, which extends the Class Period through January 11, 2008,
contends that, in addition to the violations alleged in the original complaint,
the Company also violated Sections 10(b) and 20(a) and Rule 10b-5 by purportedly
knowingly failing to disclose “significant problems” relating to its personal
navigation device (“PND”) “sales forecasts, production, pricing, and inventory”
prior to January 14, 2008. The amended complaint claims that when
“Defendants revealed for the first time on January 14, 2008 that shifts in PND
sales would adversely impact earnings per share by more than $1.00 per share in
fiscal 2008,” that led to a further decline in the Company’s share value and
additional losses to the plaintiff class.
We
believe the lawsuit, which is still in its earliest stages, is without merit and
we intend to vigorously defend against it.
Boca
Raton General Employees’ Pension Plan v. Harman International Industries,
Incorporated, et al.
On
November 30, 2007, the Boca Raton General Employees’ Pension
Plan (the “Boca Raton Plaintiff”) filed a purported class action
lawsuit against the Company and certain of its officers in the United States
District Court for the District of Columbia seeking compensatory damages and
costs on behalf of all persons who purchased the Company’s 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 Section 10(b) and 20(a) of the Securities Exchange Act
of 1934 and Rule 10b-5 promulgated thereunder.
We
believe the lawsuit, which is still in its earliest stages, is without merit and
we intend to vigorously defend against it.
Patrick
Russell v. Harman International Industries, Incorporated, et al.
Patrick
Russell (the “Russell Plaintiff”) filed a purported class action lawsuit in the
United States District Court for the District of Columbia against the Company
and certain of its officers and directors on December 7, 2007, alleging
violations of the Employee Retirement Income Security Act (“ERISA”) and seeking,
on behalf of all participants in and beneficiaries of the Harman International
Industries, Incorporated Retirement Savings Plan (“the Plan”), compensatory
damages for losses to the Plan as well as injunctive relief, constructive trust,
restitution, and other monetary relief. The 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 Company stock notwithstanding that
the stock allegedly was “no longer a prudent investment for the Participants’
retirement savings.” The complaint further claims that, during the
Class Period, defendants failed to monitor the Plan fiduciaries, and failed to
provide the Plan fiduciaries with, and to disclose to Plan participants, adverse
facts regarding the Company and its businesses and prospects. The
Russell Plaintiff also contends that defendants breached their duties to avoid
conflicts of interest and to serve the interests of participants in and
beneficiaries of the Plan with undivided loyalty. As a result of
these alleged fiduciary breaches, the complaint asserts that the Plan has
“suffered substantial losses, resulting in the depletion of millions of dollars
of the retirement savings and anticipated retirement income of the Plan’s
Participants.”
We
believe the lawsuit, which is still in its earliest stages, is without merit and
we intend to vigorously defend against it.
Siemens
vs. Harman Becker Automotive Systems GmbH.
In
October 2006 Harman Becker received notice of a complaint filed by Siemens AG
against it with the Regional Court in Düsseldorf in August 2006 alleging that
certain Harman Becker infotainment products including both radio receiver and
Bluetooth hands free telephony functionality, infringe upon a patent owned by
Siemens. In November 2006 Harman Becker filed suit with the German patent
office in Munich to nullify the claims of this patent.
On
September 18, 2007 the court of first instance in Düsseldorf ruled that the
patent in question had been infringed and ordered Harman Becker to cease selling
the products in question in Germany, and to compile and submit data to Siemens
concerning its prior sales of such products. Harman Becker has appealed
that ruling. Despite the pending nullity proceedings, Siemens AG
provisionally enforced the ruling against Harman Becker. Accordingly,
Harman Becker ceased selling aftermarket products covered by the patent in
Germany, and has submitted the required data to Siemens AG.
In June
2008 a hearing is scheduled in the German Federal Patent Court with respect to
Harman Becker’s lawsuit seeking to nullify the claims of the patent in question.
The Company believes Siemens’ patent is invalid on several grounds, and
anticipates that the German Patent Court should nullify its claims totally or in
part. In either instance the ruling of the court of first instance as to
Harman Becker’s infringement would become void, and Siemens may in addition be
required to compensate Harman Becker for damages suffered as a result of it
ceasing to sell the products enjoined by the Düsseldorf court’s
order.
We intend
vigorously to defend the infringement lawsuit which we believe is without merit,
and to prosecute the nullity action.
While the
outcome of any of the legal proceedings described above cannot at this time be
predicted with certainty, we do not expect these matters will materially affect
our financial condition or results of operations.
Other
Legal Actions
At
December 31, 2007, we were involved in several other legal
actions. The outcome of these legal actions cannot be predicted with
certainty; however, management, based upon advice from legal counsel, believes
such actions are either without merit or will not have a material adverse effect
on our financial position or results of operations. In fiscal 2005,
we recorded a $6 million liability for probable unasserted claims. We
believe the relevant statutes of limitation have expired, and the
probability of the claim is now remote. Therefore, the reserve for this claim
was released during the second quarter ended December 31, 2007.
On
October 22, 2007, the Company entered into a Termination and Settlement
Agreement with KKR, KHI Parent Inc., KHI Merger Sub Inc. and
GSCP. Under the agreement, effective on October 23, 2007, each of (a)
the Agreement and Plan of Merger, dated April 26, 2007, among the Company, KHI
Parent Inc. and KHI Merger Sub Inc., (b) the related guarantees and (c) the
Election Agreement, dated April 26, 2007, between KHI Parent Inc. and Dr. Sidney
Harman, was terminated in its entirety. As a result, the risk factors
included in Item 1A “Risk Factors – Risks Related to the Merger with Parent” of
our Annual Report on Form 10-K for the fiscal year ended June 30, 2007 are no
longer applicable.
The risk
factors applicable to Harman as a stand alone company included in Item 1A “Risk
Factors – Risks Related to Harman” of our Annual Report on Form 10-K for the
fiscal year ended June 30, 2007 are updated to include the
following:
We
are engaged in ongoing litigation and may be the subject of additional
litigation that may result in payments to third parties, which could harm our
business and financial results.
As more
fully described in Part II, Item 1 “Legal Proceedings,” of this report, we are
currently involved in litigation arising from the abandonment of the proposed
merger by the acquirer in September 2007. In addition,
additional
similar litigation has been and may be initiated against us and others based on
the alleged activities and disclosures at issue in the pending
litigation. We cannot predict the outcome of any such proceeding or
the likelihood that further proceedings will be instituted against
us. In the event that there is an adverse ruling in any legal
proceeding, we may be required to make payments to third parties that could harm
our business or financial results. Furthermore, regardless of the merits of any
claim, the continued maintenance of these legal proceedings may result in
substantial legal expense and could also result in the diversion of our
management's time and attention away from our business.
Item 2. Unregistered Sales of Equity Securities and Use of
Proceeds
The
following table sets forth our repurchases of common stock for each month in the
second quarter of fiscal 2008:
Issuer
Purchases of Equity Securities
| |
|
Total
number
of Shares
purchased
|
|
|
Average
price
paid per
share
|
|
|
Total number
of shares
purchased as
part of
publicly
announced
plans or
programs
|
|
|
Maximum
number of
shares that
may yet be
purchased
under the
plans or
programs
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
October
1, 2007 through October
31, 2007
|
|
|
4,775,549
|
(1)
|
|
$ |
83.76 |
(1) |
|
|
4,775,549 |
|
|
|
1,801,918 |
|
|
November
1, 2007 through
November 30, 2007
|
|
|
--- |
|
|
|
--- |
|
|
|
--- |
|
|
|
1,801,918 |
|
|
December
1, 2007 through December
31, 2007
|
|
|
--- |
|
|
|
--- |
|
|
|
--- |
|
|
|
1,801,918 |
|
| |
|
|
4,775,549 |
|
|
$ |
83.76
|
(1)
|
|
|
4,775,549 |
|
|
|
1,801,918 |
(2) |
(1) These
shares were acquired under separate accelerated share repurchase (“ASR”)
agreements entered into on October 30, 2007 with two financial
institutions. Our intention to enter into the ASR agreements was
first announced on October 22, 2007. The purchase price of the
shares is subject to adjustment scheduled for late February 2008. As
a result of the settlements, the Company may receive or be required to remit a
price adjustment, payable at the Company’s option, in cash or stock, based on
the volume weighted average price of the Company’s common stock during the
respective terms of the ASR agreements. For additional information,
see the Current Report on Form 8-K filed by the Company on October 31,
2007.
(2) Our
share repurchase program was first publicly announced on June 16,
1998. In August 2005, the Board authorized the purchase of up to an
additional four million shares, bringing the total authorized to 20 million
shares. In October 2007, we entered into accelerated share repurchase
agreements and repurchased 4,775,549 million shares of our common
stock. The total number of shares repurchased through December 31,
2007 was 22,973,631.
For a
description of limitations on repurchases of shares and on the payment of
dividends, see Management’s
Discussion and Analysis of Financial Condition and Results of Operations –
Financial Condition.
Item 4. Submission of Matters to a Vote of Security
Holders
The
Company held its 2007 Annual Meeting of Stockholders on December 17, 2007.
Stockholders were asked to vote on the election of two directors to serve a
three-year term expiring at the 2010 Annual Meeting of Stockholders and to
approve the 2007 Key Executive Officers Bonus Plan. The results with respect to
the election of directors were as follows:
|
Name
|
|
Total
vote for
each
Director
|
|
Total vote
withheld
from each
Director
|
|
Ann
McLaughlin Korologos
|
|
54,129,605
|
|
4,439,884
|
|
Dr.
Harald Einsmann
|
|
57,100,137
|
|
1,469,352
|
Sidney
Harman, Dinesh Paliwal, Brian F. Carroll, Edward H. Meyer and Shirley Mount
Hufstedler will continue to serve as directors of the Company. On December 17,
2007, Gary G. Steel was appointed to the Board of Directors to fill a new
vacancy created when the Board was increased from seven to eight members. Mr.
Steel’s term as a director will expire at the Company’s 2009 Annual Meeting of
Stockholders. On February 6, 2008, Kenneth Reiss was appointed to the Board of
Directors to fill a new vacancy created when the Board was increased from eight
to nine members. Mr. Reiss' term as a director will expire at the
Company's 2010 Annual Meeting of Stockholders.
The
results with respect to the approval of the 2007 Key Executive Officers Bonus
Plan were as follows:
|
|
|
|
|
|
|
55,080,137
|
|
3,007,014
|
|
482,338
|
Item 5. Other Information
On February 6, 2008, Dr. Sidney Harman notified the
Board that he intends to retire as an employee of the Company, effective
February 22, 2008. Dr. Harman will continue to serve as Non-Executive
Chairman of the Board and a director of the Company.
Upon the recommendation of the Nominating and
Governance Committee, on February 6, 2008, the Board appointed Kenneth
Reiss as a director of the Company. Mr. Reiss was appointed to fill a
vacancy created when the Board was increased from eight to nine members.
Mr. Reiss was also appointed a member of the Audit Committee. Mr. Reese's
compensation as a director will be consistent with that of the other
non-management directors.
On February 6, 2008, the Board also approved an
amendment to the Company's By-Laws. Prior to this amendment, Section 1 of
Article V of the By-Laws provided that the Chairman of the Board was an
officer of the Company. Under the amended By-Laws, the Chairman of the
Board is no longer an officer of the Company and the responsibilities and
authority of the Chairman of the Board have been updated to reflect this
change. This summary of the By-Law amendment is qualified in its entirety
by reference to the text of the Amended and Restated By-Laws, a copy of which is
attached as Exhibit 3.1 to this Quarterly Report on Form 10-Q and is
incorporated herein by reference.
Exhibits
required by Item 601 of Regulation S-K
| |
|
|
| 3.1 |
|
Amended
and Restated By-Laws as of February 6, 2008. |
| |
|
|
|
4.1
|
|
Indenture,
related to the 1.25% Convertible Senior Notes due 2012, dated as of
October 23, 2007, between Harman International Industries,
Incorporated and Wells Fargo Bank, National Association, as trustee
(including the form of 1.25% Convertible Senior Note due 2012) (filed as
Exhibit 4.1 to the Current Report on Form 8-K filed with the Securities
and Exchange Commission on October 25, 2007, Commission File No.
001-09764, and hereby incorporated by reference).
|
| |
|
|
|
4.2
|
|
Registration
Rights Agreement, dated as of October 23, 2007, between Harman
International Industries, Incorporated, KKR I-H Limited, GS Capital
Partners VI Fund L.P., GS Capital Partners VI Parallel, L.P., GS Capital
Partners VI Offshore Fund, L.P., GS Capital Partners VI GmbH &
Co. KG, Citibank, N.A. and HSBC USA Inc. (filed as Exhibit 4.2 to the
Current Report on Form 8-K filed with the Securities and Exchange
Commission on October 25, 2007, Commission File No. 001-09764, and hereby
incorporated by reference).
|
| |
|
|
|
10.1
|
|
Note
Purchase Agreement, dated October 22, 2007, by and among Harman
International Industries, Incorporated, KKR I-H Limited, GS Capital
Partners VI Fund L.P., GS Capital Partners VI Parallel, L.P., GS Capital
Partners VI Offshore Fund, L.P., GS Capital Partners VI GmbH &
Co. KG, Citibank, N.A. and HSBC USA Inc. and, for limited purposes,
Kohlberg Kravis Roberts & Co. L.P. (filed as Exhibit 10.1 to the
Current Report on Form 8-K filed with the Securities and Exchange
Commission on October 25, 2007, Commission File No. 001-09764, and hereby
incorporated by reference).
|
| |
|
|
|
10.2
|
|
Termination
and Settlement Agreement, dated October 22, 2007, by and among Harman
International Industries, Incorporated, KHI Parent Inc., KHI Merger Sub
Inc., KKR 2006 Fund L.P., Kohlberg Kravis Roberts & Co. L.P., GS
Capital Partners VI Fund L.P., GS Capital Partners VI Parallel, L.P., GS
Capital Partners VI Offshore Fund, L.P. and GS Capital Partners VI
GmbH & Co. KG (filed as Exhibit 10.2 to the Current Report on Form 8-K
filed with the Securities and Exchange Commission on October 25, 2007,
Commission File No. 001-09764, and hereby incorporated by
reference).
|
| |
|
|
|
10.3
|
|
Confirmation
between Harman International Industries, Incorporated and Bear, Stearns
International Limited, dated October 30, 2007 (filed as Exhibit 10.1
to the Current Report on Form 8-K filed with the Securities and Exchange
Commission on October 31, 2007, Commission File No. 001-09764, and hereby
incorporated by reference).
|
| |
|
|
|
10.4
|
|
Confirmation
between Harman International Industries, Incorporated and J.P. Morgan
Securities Inc., as agent for JPMorgan Chase Bank, National Association,
London Branch, dated October 30, 2007 (filed as Exhibit 10.2 to the
Current Report on Form 8-K filed with the Securities and Exchange
Commission on October 31, 2007, Commission File No. 001-09764, and hereby
incorporated by reference).
|
| |
|
|
|
10.5
|
|
Harman
International Industries, Incorporated 2007 Key Executive Officers Bonus
Plan (filed as Exhibit 10.1 to the Current Report on Form 8-K filed with
the Securities and Exchange Commission on December 21, 2007, Commission
File No. 001-09764, and hereby incorporated by reference).
|
| |
|
|
|
10.6
|
|
Harman
International Industries, Incorporated Management Incentive Compensation
Plan (filed as Exhibit 10.2 to the Current Report on Form 8-K filed with
the Securities and Exchange Commission on December 21, 2007, Commission
File No. 001-09764, and hereby incorporated by reference).
|
| |
|
|
|
10.7
|
|
Amendment
to Letter Agreement, dated November 29, 2007, between Harman
International Industries, Incorporated and Dinesh Paliwal (filed as
Exhibit 10.2 to the Current Report on Form 8-K filed with the Securities
and Exchange Commission on December 4, 2007, Commission File No.
001-09764, and hereby incorporated by reference).
|
| |
|
|
| 10.8 |
|
Agreement
between Harman International Industries, Incorporated and Sandra B.
Robinson |
| |
|
|
|
31.1
|
|
Certification
of Dinesh C. Paliwal pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
| |
|
|
|
31.2
|
|
Certification
of Kevin L. Brown pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
| |
|
|
|
32.1
|
|
Certification
of Dinesh C. Paliwal and Kevin L. Brown, pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, Harman International
Industries, Incorporated has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
| |
Harman
International Industries, Incorporated
|
| |
|
| |
(Registrant)
|
|
|
|
|
Date: February
11, 2008
|
By: /s/ Kevin L.
Brown
|
| |
Kevin
L. Brown
Executive
Vice President and Chief Financial Officer
|
| |
(Principal
Financial and Accounting Officer)
|
43