Harman International Industries 10-Q 12-31-2006
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Form
10-Q
x
|
Quarterly
report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
|
For
the
quarterly period ended December
31, 2006
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.
EmployerIdentification 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. xYes 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, 2007, 65,502,975 shares of common stock, par value $.01, were
outstanding.
Harman
International Industries, Incorporated and Subsidiaries
Form
10-Q
|
|
|
Page
|
Part
I
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|
FINANCIAL
INFORMATION
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Number
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4
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5
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6
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7
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17
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25
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26
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Part
II
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OTHER
INFORMATION
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27
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27
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28
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29
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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.
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
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 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;
|
•
|
model-year
changeovers in the automotive
industry;
|
•
|
changes
in general economic conditions and specific market
conditions;
|
•
|
our
ability to enforce or defend our ownership and use of intellectual
property;
|
•
|
our
ability to effectively integrate
acquisitions;
|
•
|
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 patent and environmental matters;
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, 2006.
Part
I.
|
FINANCIAL
INFORMATION
|
Condensed
Consolidated Balance Sheets
Harman
International Industries, Incorporated
and Subsidiaries
($000s
omitted except share amounts)
|
|
December
31,
|
|
June
30,
|
|
|
|
2006
|
|
2006
|
|
|
|
(Unaudited)
|
|
|
|
Assets
|
|
|
|
|
|
Current
assets
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
171,108
|
|
|
291,758
|
|
Receivables
(less allowance for doubtful accounts of $8,910 at December 31, 2006
and
$8,738 at June 30, 2006)
|
|
|
480,408
|
|
|
444,474
|
|
Inventories
|
|
|
454,682
|
|
|
344,957
|
|
Other
current assets
|
|
|
172,915
|
|
|
168,168
|
|
Total
current assets
|
|
|
1,279,113
|
|
|
1,249,357
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
|
511,618
|
|
|
521,935
|
|
Goodwill
|
|
|
396,219
|
|
|
381,219
|
|
Other
assets
|
|
|
196,063
|
|
|
202,150
|
|
Total
assets
|
|
$
|
2,383,013
|
|
|
2,354,661
|
|
Liabilities
and Shareholders’ Equity
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
Short-term
borrowings
|
|
$
|
3,977
|
|
|
1,751
|
|
Current
portion of long-term debt
|
|
|
17,012
|
|
|
16,337
|
|
Accounts
payable
|
|
|
293,677
|
|
|
320,327
|
|
Accrued
liabilities
|
|
|
396,442
|
|
|
414,093
|
|
Income
taxes payable
|
|
|
144,143
|
|
|
116,493
|
|
Total
current liabilities
|
|
|
855,251
|
|
|
869,001
|
|
|
|
|
|
|
|
|
|
Borrowings
under revolving credit facility
|
|
|
118,495
|
|
|
159,900
|
|
Senior
notes
|
|
|
2,882
|
|
|
19,566
|
|
Minority
interest
|
|
|
2,007
|
|
|
2,716
|
|
Other
non-current liabilities
|
|
|
79,230
|
|
|
75,314
|
|
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 82,972,715 at December 31, 2006 and 82,754,909 at June
30,
2006
|
|
|
829
|
|
|
827
|
|
Additional
paid-in capital
|
|
|
558,560
|
|
|
544,871
|
|
Accumulated
other comprehensive income (loss):
|
|
|
|
|
|
|
|
Unrealized
loss on hedging derivatives
|
|
|
(1,911
|
)
|
|
(3,267
|
)
|
Minimum
pension liability adjustment
|
|
|
(11,805
|
)
|
|
(11,789
|
)
|
Cumulative
foreign currency translation adjustment
|
|
|
82,895
|
|
|
64,280
|
|
Retained
earnings
|
|
|
1,280,432
|
|
|
1,144,070
|
|
Less
common stock held in treasury (17,611,282 shares at December 31,
2006 and
16,690,182 at June 30, 2006)
|
|
|
(583,852
|
)
|
|
(510,828
|
)
|
Total
shareholders’ equity
|
|
|
1,325,148
|
|
|
1,228,164
|
|
Total
liabilities and shareholders’ equity
|
|
$
|
2,383,013
|
|
|
2,354,661
|
|
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,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
931,717
|
|
|
832,645
|
|
|
1,757,260
|
|
|
1,587,293
|
|
Cost
of sales
|
|
|
612,079
|
|
|
526,876
|
|
|
1,150,333
|
|
|
1,015,229
|
|
Gross
profit
|
|
|
319,638
|
|
|
305,769
|
|
|
606,927
|
|
|
572,064
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative expenses
|
|
|
203,918
|
|
|
189,909
|
|
|
404,289
|
|
|
378,011
|
|
Operating
income
|
|
|
115,720
|
|
|
115,860
|
|
|
202,638
|
|
|
194,053
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense, net
|
|
|
498
|
|
|
4,558
|
|
|
637
|
|
|
8,397
|
|
Miscellaneous,
net
|
|
|
484
|
|
|
1,156
|
|
|
1,345
|
|
|
1,770
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes and minority interest
|
|
|
114,738
|
|
|
110,146
|
|
|
200,656
|
|
|
183,886
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax expense, net
|
|
|
33,839
|
|
|
37,968
|
|
|
63,474
|
|
|
57,741
|
|
Minority
interest
|
|
|
(490
|
)
|
|
(357
|
)
|
|
(815
|
)
|
|
(357
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
81,389
|
|
|
72,535
|
|
|
137,997
|
|
|
126,502
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
$
|
1.25
|
|
|
1.10
|
|
|
2.11
|
|
|
1.92
|
|
Diluted
earnings per share
|
|
$
|
1.22
|
|
|
1.07
|
|
|
2.07
|
|
|
1.86
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares - basic
|
|
|
65,285
|
|
|
65,771
|
|
|
65,401
|
|
|
65,944
|
|
Weighted
average shares - diluted
|
|
|
66,525
|
|
|
67,948
|
|
|
66,592
|
|
|
68,185
|
|
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,
|
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
Net
income
|
|
$
|
137,997
|
|
|
126,502
|
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
61,497
|
|
|
64,396
|
|
(Gain)/loss
on disposition of assets
|
|
|
1,607
|
|
|
(55
|
)
|
Stock
option expense
|
|
|
8,276
|
|
|
7,901
|
|
Excess
tax benefits from share-based payment arrangements
|
|
|
---
|
|
|
(6,000
|
)
|
Changes
in working capital, net of acquisition/disposition
effects:
|
|
|
|
|
|
|
|
Decrease
(increase) in:
|
|
|
|
|
|
|
|
Receivables
|
|
|
(23,003
|
)
|
|
9,329
|
|
Inventories
|
|
|
(101,579
|
)
|
|
(13,047
|
)
|
Other
current assets
|
|
|
(10,161
|
)
|
|
(14,218
|
)
|
Increase
(decrease) in:
|
|
|
|
|
|
|
|
Accounts
payable
|
|
|
(32,370
|
)
|
|
(53,392
|
)
|
Accrued
liabilities
|
|
|
(24,347
|
)
|
|
34,056
|
|
Income
taxes payable
|
|
|
22,899
|
|
|
42,599
|
|
Other
operating activities
|
|
|
7,198
|
|
|
5,738
|
|
Net
cash provided by operating activities
|
|
$
|
48,014
|
|
|
203,809
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Payment
for purchase of companies, net of cash acquired
|
|
$
|
(4,525
|
)
|
|
(9,333
|
)
|
Proceeds
from asset dispositions
|
|
|
1,027
|
|
|
793
|
|
Capital
expenditures
|
|
|
(39,447
|
)
|
|
(45,323
|
)
|
Other
items, net
|
|
|
(537
|
)
|
|
(5,134
|
)
|
Net
cash used in investing activities
|
|
$
|
(43,482
|
)
|
|
(58,997
|
)
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Net
increase (decrease) in short-term borrowings
|
|
$
|
2,266
|
|
|
(844
|
)
|
Net
borrowings (repayments) under revolving credit facility
|
|
|
(44,065
|
)
|
|
75,000
|
|
Repayment
of long-term debt
|
|
|
(13,168
|
)
|
|
---
|
|
Other
increase (decrease) in long-term debt
|
|
|
(3,985
|
)
|
|
866
|
|
Repurchase
of common stock
|
|
|
(73,023
|
)
|
|
(118,972
|
)
|
Dividends
paid to shareholders
|
|
|
(1,635
|
)
|
|
(1,650
|
)
|
Exercise
of stock options
|
|
|
5,414
|
|
|
2,367
|
|
Excess
tax benefits from share-based payment arrangements
|
|
|
---
|
|
|
6,000
|
|
Other
|
|
|
---
|
|
|
109
|
|
Net
cash used in financing activities
|
|
$
|
(128,196
|
)
|
|
(37,124
|
)
|
Effect
of exchange rate changes on cash
|
|
|
3,014
|
|
|
(4,403
|
)
|
Net
increase (decrease) in cash and cash equivalents
|
|
$
|
(120,650
|
)
|
|
103,285
|
|
Cash
and cash equivalents at beginning of period
|
|
|
291,758
|
|
|
291,214
|
|
Cash
and cash equivalents at end of period
|
|
$
|
171,108
|
|
|
394,499
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
Interest
paid
|
|
$
|
2,395
|
|
|
7,643
|
|
Income
taxes paid
|
|
$
|
40,648
|
|
|
23,208
|
|
Supplemental
schedule of non-cash investing activities:
|
|
|
|
|
|
|
|
Fair
value of assets acquired
|
|
$
|
---
|
|
|
9,258
|
|
Cash
paid for the assets
|
|
|
---
|
|
|
6,133
|
|
Liabilities
assumed
|
|
$
|
---
|
|
|
3,125
|
|
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, 2006
and
for the three and six months ended December 31, 2006 and 2005, have been
prepared pursuant to rules and regulations of the Securities and Exchange
Commission (“SEC”). These unaudited condensed consolidated financial statements
do not include all information and footnote disclosures included in our audited
financial statements. In the opinion of management, the accompanying unaudited
condensed consolidated financial statements include all adjustments, consisting
of normal recurring adjustments and accruals, necessary to present fairly,
in
all material respects, the consolidated financial position, results of
operations and cash flows for the periods presented. Operating results for
the
three and six months ended December 31, 2006 are not necessarily indicative
of
the results that may be expected for the full fiscal year ending June 30, 2007
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.
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, 2006.
Note
2. Inventories
Inventories
consist of the following:
|
|
December
31,
|
|
June
30,
|
|
($000s
omitted)
|
|
2006
|
|
2006
|
|
Finished
goods
|
|
$
|
223,068
|
|
|
147,663
|
|
Work
in process
|
|
|
51,797
|
|
|
45,954
|
|
Raw
materials
|
|
|
179,817
|
|
|
151,340
|
|
Total
|
|
$
|
454,682
|
|
|
344,957
|
|
Inventories
are stated at the lower of cost or market value. 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 a
lower of cost or market analysis, an analysis of historical usage data, forecast
demand data and historical disposal rates. Lower of cost or market analysis
is
typically applied to those items of inventory that represent a substantial
portion of the total value of inventory on-hand. The high-value units typically
represent a small percentage of the total inventory items, so identification
of
obsolescence or valuation reserve requirements for the balance of the inventory
on-hand is accomplished using either historical or forecast usage to identify
slow-moving or obsolete items.
Note
3. Warranty Liabilities
We
warrant our products to be free from defects in materials and workmanship for
periods ranging from one to five years from the date of purchase, depending
on
the 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)
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
Beginning
balance (June 30)
|
|
$
|
60,768
|
|
|
48,582
|
|
Warranty
provisions
|
|
|
29,506
|
|
|
22,756
|
|
Warranty
payments (cash or in-kind)
|
|
|
(21,320
|
)
|
|
(17,155
|
)
|
Ending
balance
|
|
$
|
68,954
|
|
|
54,183
|
|
The
warranty liabilities are included in accrued liabilities.
Note
4. Comprehensive Income
The
components of comprehensive income are as follows:
|
|
Three
months ended
|
|
Six
months ended
|
|
|
|
December
31,
|
|
December
31,
|
|
($000s
omitted)
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
81,389
|
|
|
72,535
|
|
|
137,997
|
|
|
126,502
|
|
Other
comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation
|
|
|
24,527
|
|
|
(11,405
|
)
|
|
18,615
|
|
|
(15,039
|
)
|
Unrealized
gains (losses) on hedging
|
|
|
(82
|
)
|
|
(893
|
)
|
|
1,356
|
|
|
(393
|
)
|
Minimum
pension liability adjustment
|
|
|
(20
|
)
|
|
35
|
|
|
(16
|
)
|
|
50
|
|
Total
other comprehensive income
|
|
$
|
105,814
|
|
|
60,272
|
|
|
157,952
|
|
|
111,120
|
|
The
components of accumulated other comprehensive income (loss) as of December
31,
2006 and June 30, 2006 and the activity for the six months ended December 31,
2006 are presented below:
($000s
omitted)
|
|
Unrealized
gain (loss) on hedging derivatives
|
|
Minimum
pension liability adjustment
|
|
Cumulative
foreign currency translation adjustment
|
|
Accumulated
other comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
June
30, 2006
|
|
$
|
(3,267
|
)
|
|
(11,789
|
)
|
|
64,280
|
|
|
49,224
|
|
Foreign
currency translation adjustments
|
|
|
---
|
|
|
---
|
|
|
18,615
|
|
|
18,615
|
|
Change
in fair value of foreign currency cash flow hedges
|
|
|
1,356
|
|
|
---
|
|
|
---
|
|
|
1,356
|
|
Minimum
pension liability adjustment
|
|
|
---
|
|
|
(16
|
)
|
|
---
|
|
|
(16
|
)
|
December
31, 2006
|
|
|
(1,911
|
)
|
|
(11,805
|
)
|
|
82,895
|
|
|
69,179
|
|
Note
5. 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)
|
|
2006
|
|
2005
|
|
|
|
Basic
|
|
Diluted
|
|
Basic
|
|
Diluted
|
|
Net
income
|
|
$
|
81,389
|
|
|
81,389
|
|
|
72,535
|
|
|
72,535
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding
|
|
|
65,285
|
|
|
65,285
|
|
|
65,771
|
|
|
65,771
|
|
Employee
stock options
|
|
|
---
|
|
|
1,240
|
|
|
---
|
|
|
2,177
|
|
Total
weighted average shares outstanding
|
|
|
65,285
|
|
|
66,525
|
|
|
65,771
|
|
|
67,948
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share
|
|
$
|
1.25
|
|
|
1.22
|
|
|
1.10
|
|
|
1.07
|
|
|
|
Six
months ended December 31,
|
|
(000s
omitted except per share amounts)
|
|
2006
|
|
2005
|
|
|
|
Basic
|
|
Diluted
|
|
Basic
|
|
Diluted
|
|
Net
income
|
|
$
|
137,997
|
|
|
137,997
|
|
|
126,502
|
|
|
126,502
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding
|
|
|
65,401
|
|
|
65,401
|
|
|
65,944
|
|
|
65,944
|
|
Employee
stock options
|
|
|
---
|
|
|
1,191
|
|
|
---
|
|
|
2,241
|
|
Total
weighted average shares outstanding
|
|
|
65,401
|
|
|
66,592
|
|
|
65,944
|
|
|
68,185
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share
|
|
$
|
2.11
|
|
|
2.07
|
|
|
1.92
|
|
|
1.86
|
|
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 557,175 shares of our common stock with
exercise prices ranging from $78.00 to $126.94
per
share
during the quarter ended December 31, 2006 and options to purchase 912,664
shares of our common stock at prices ranging from $82.00 to $126.94 per share
during the quarter ended December 31, 2005, 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 1,115,802 shares of our common stock at prices ranging from $75.22
to $126.94 per share during the six months ended December 31, 2006 and options
to purchase 824,468 shares of common stock at prices ranging from $75.22 to
$126.94 per share during the six months ended December 31, 2005, were
outstanding and not included in the computation of diluted earnings per share
because the exercise of these options would have been antidilutive.
Note
6. Stock Options
On
December 31, 2006, 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 and restricted stock. In 2006, the Company’s Board of Directors approved
amendments to the 2002 Plan. The amendments provide for the issuance of
restricted share units under the 2002 Plan, to reduce the number of options
granted annually to non-management directors from a maximum of 9,000 to a fixed
number of 5,000 and increase the initial one-time grant of options to new
non-management directors from 6,000 to 8,000.
Share-based
compensation expense was $4.6 million and $4.0 million for the quarters ended
December 31, 2006 and 2005, respectively, and $8.3 million and $7.9 million
for
the six months ended December 31, 2006 and December 31, 2005, respectively.
Share-based compensation expense has been recorded in selling, general and
administrative expense for the quarter and six months ended December 31, 2006
and 2005. The total income tax benefit recognized in the income statement for
share-based compensation arrangements was $1.4
million
and $1.1 million for the quarters ended December 31, 2006 and 2005,
respectively, and $2.5 million and $2.2 million for the six months ended
December 31, 2006 and 2005, 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,
|
|
2006
|
|
2005
|
|
|
|
|
Expected
volatility
|
35.0%
- 42.0%
|
|
38.0
- 42.0%
|
Weighted-average
volatility
|
39.2%
|
|
38.5%
|
Expected
annual dividend
|
$0.05
|
|
$0.05
|
Expected
term (in years)
|
1.55
- 7.69
|
|
4.24
- 6.33
|
Risk-free
rate
|
4.4%
- 5.0%
|
|
3.9
- 4.3%
|
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, 2006 and
changes during the six months ended December 31, 2006 is presented below:
|
|
Shares
|
|
Weighted
average exercise price
|
|
Weighted
average remaining contractual term (years)
|
|
Aggregate
intrinsic value ($000s omitted)
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at June 30, 2006
|
|
|
3,299,720
|
|
$
|
47.04
|
|
|
|
|
|
|
|
Granted
|
|
|
325,000
|
|
|
80.50
|
|
|
|
|
|
|
|
Exercised
|
|
|
(213,474
|
)
|
|
27.01
|
|
|
|
|
|
|
|
Forfeited
or expired
|
|
|
(100,640
|
)
|
|
81.31
|
|
|
|
|
|
|
|
Outstanding
at December 31, 2006
|
|
|
3,310,606
|
|
|
50.58
|
|
|
6.29
|
|
$
|
164,349
|
|
Exercisable
at December 31, 2006
|
|
|
1,938,876
|
|
$
|
33.49
|
|
|
4.97
|
|
$
|
129,176
|
|
The
weighted-average grant-date fair value of options granted during the quarters
ended December 31, 2006 and 2005 was $37.01 and $47.54, respectively. The
weighted-average grant-date fair value of options granted during the six months
ended December 31, 2006 and 2005 was $34.99 and $30.24, respectively. The total
intrinsic value of options exercised during the quarters ended December 31,
2006
and 2005 was $12.2 million and $7.8 million, respectively. The total intrinsic
value of options exercised during the six months ended December 31, 2006 and
2005 was $15.3 million and $24.7 million, respectively.
A
summary
of the status of our nonvested shares of restricted stock as of December 31,
2006 and changes during the six months ended December 31, 2006 is presented
as
follows:
|
|
Shares
|
|
Weighted
average
grant-date
fair
value
|
|
|
|
|
|
|
|
Nonvested
at June 30, 2006
|
|
|
37,000
|
|
$
|
85.36
|
|
Granted
|
|
|
---
|
|
|
---
|
|
Vested
|
|
|
---
|
|
|
---
|
|
Forfeited
|
|
|
(25,000
|
)
|
|
86.98
|
|
Nonvested
at December 31, 2006
|
|
|
12,000
|
|
|
82.00
|
|
As
of
December 31, 2006, there was $0.4 million of total unrecognized compensation
cost related to nonvested restricted share-based compensation arrangements
granted under the 2002 Plan. The weighted average recognition period is 1.62
years. No shares of restricted stock vested in the six months ended December
31,
2006.
During
the quarter ended December 31, 2006, 25,000 restricted share units were granted
with a zero-value exercise price and an aggregate intrinsic value of $2.5
million. As of December 31, 2006, there was $1.5 million of total unrecognized
compensation cost related to restricted share unit compensation arrangements
granted under the 2002 Plan. The weighted average recognition period is 2.75
years. No restricted share units vested or were exercisable in the six months
ended December 31, 2006.
Note
7. 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 based upon 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. See Note 12
“Significant Customers.”
Our
Consumer segment designs, manufactures and markets audio, video and electronic
systems for home, mobile and multimedia applications. Our Consumer home products
and systems are marketed worldwide under brand names including JBL, Infinity,
Harman/Kardon, Lexicon, Mark Levinson and Revel. Our audio and electronic
products are offered through audio/video specialty and retail chain stores.
Our
branded audio products for multimedia applications are focused on retail
customers that sell products designed to enhance sound for computers, Apple’s
iPods and other music control players.
The
Professional segment designs, manufactures and markets loudspeakers and
electronic systems used by audio professionals in concert halls, stadiums,
houses of worship, airports and other public spaces. We also create products
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)
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Net
sales:
|
|
|
|
|
|
|
|
|
|
Automotive
|
|
$
|
632,303
|
|
|
547,584
|
|
|
1,233,301
|
|
|
1,067,880
|
|
Consumer
|
|
|
163,011
|
|
|
155,008
|
|
|
256,137
|
|
|
266,376
|
|
Professional
|
|
|
136,403
|
|
|
130,053
|
|
|
267,822
|
|
|
253,037
|
|
Total
|
|
$
|
931,717
|
|
|
832,645
|
|
|
1,757,260
|
|
|
1,587,293
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Automotive
|
|
$
|
92,408
|
|
|
88,021
|
|
|
182,576
|
|
|
161,958
|
|
Consumer
|
|
|
14,701
|
|
|
21,993
|
|
|
10,252
|
|
|
32,571
|
|
Professional
|
|
|
20,098
|
|
|
14,984
|
|
|
37,173
|
|
|
27,851
|
|
Other
|
|
|
(11,487
|
)
|
|
(9,138
|
)
|
|
(27,363
|
)
|
|
(28,327
|
)
|
Total
|
|
$
|
115,720
|
|
|
115,860
|
|
|
202,638
|
|
|
194,053
|
|
Other
operating loss is comprised of activity related to our corporate operations,
net
of reporting segment allocations.
Note
8. Derivatives
We
use
foreign currency forward contracts to hedge a portion of our forecasted foreign
currency denominated purchase 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 other
accumulated 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.
Because
the amounts and the maturities of the derivatives approximate those of
forecasted exposures, changes in the fair value of the derivatives are highly
effective in offsetting changes in the cash flows of the hedged items. When
we
determine that a hedge has become ineffective, the ineffective portion of the
hedge is recorded in current earnings.
At
December 31, 2006, we had contracts maturing through June 2008 to sell Euros
and
buy U.S. Dollars of approximately $65.9
million, and through June 2007 to buy Canadian dollars and sell US dollars
of
approximately $3.9 million, to hedge future foreign currency purchases. At
December 31, 2006, 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 $2.0 million and
thereafter a gain of $0.1 million. These amounts represent the fair market
value
of these foreign currency forward contracts at December 31, 2006. In the six
months ended December 31, 2006 we recognized approximately $1.7 million in
net
losses from cash flow hedges of forecasted foreign currency transactions
compared to $3.6 million in net gains in the same period last year.
As
of
December 31, 2006, we also had contracts maturing through January 2007 to
purchase and sell the equivalent of $60.8
million
of various currencies to hedge foreign currency denominated loans to foreign
subsidiaries. These loans are of a long-term investment nature. Adjustments
to
the carrying value of the foreign currency forward contracts offset the gains
and losses on the underlying loans in the same statement of operations line
item. At December 31, 2006, the market value of these contracts was a net loss
of $1.2
million.
Note
9. Commitments and Contingencies
At
December 31, 2006, we were involved in several 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 $6.0 million liability
for
probable unasserted claims. There was no change in the status of these claims
at
December 31, 2006.
At
December 31, 2006, our Board of Directors has authorized the repurchase of
a
total of up to 20 million shares of common stock. During the quarter ended
December 31, 2006, no shares of common stock were repurchased. Through December
31, 2006, we had acquired and placed in treasury 17,611,282 shares of our common
stock at a total cost of $583.9 million. We expect future share repurchases
to
be funded primarily with cash generated by operations and borrowings under
our
revolving credit facility.
Note
10. Recent Accounting Pronouncements
In
September 2006, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards (“SFAS”) No. 157, Fair
Value Measurements.
The
statement defines fair value, establishes a framework for measuring fair value
in generally accepted accounting principles in the United States of America
(“GAAP”), and enhances disclosures about fair value measurements. This statement
applies when other accounting pronouncements require fair value measurements;
it
does not require new fair value measurements. This statement is effective for
financial statements issued for fiscal years beginning after November 15, 2007
and interim periods within those fiscal years. We do not expect SFAS No. 157
to
have a material impact on our consolidated financial statements upon adoption
during fiscal 2009.
In
September 2006, FASB issued SFAS No. 158, Employers’
Accounting for Defined Benefit Pension and Other Postretirement
Plans.
This
statement requires an employer to recognize on its balance sheet the overfunded
or underfunded status of a defined benefit postretirement plan measured as
the
difference between the fair value of plan assets and the benefit obligation.
Employers must also recognize as a component of accumulated other comprehensive
income, net of tax, the actuarial gains and losses and the prior service costs
and credits that arise during the period. SFAS No. 158 requires companies to
apply the requirement to recognize the funded status of a benefit plan and
the
disclosure requirements as of the end of the fiscal years ending after December
15, 2006. We are currently assessing the impact of adoption of SFAS No. 158
for
the 2007 fiscal year end.
In
September 2006, the SEC released SEC Staff Accounting Bulletin (“SAB”) No. 108,
Considering
the Effects of Prior Year Misstatements when Quantifying Misstatements in
Current Year Financial Statements,
which
addresses how uncorrected errors in previous years should be considered when
quantifying errors in current-year financial statements. SAB No. 108 requires
registrants to consider the effect of all carry over and reversing effects
of
prior-year misstatements when quantifying errors in current-year financial
statements. SAB No. 108 allows registrants to record the effects of adopting
the
guidance as a cumulative-effect adjustment to retained earnings. This adjustment
must be reported as of the beginning of the first fiscal year ending after
November 15, 2006. We do not expect SAB No. 108 to have a material impact on
our
consolidated financial statements.
Note
11. Pensions and Other Postretirement Benefits
We
provide defined benefit pension and other postretirement benefits to certain
eligible employees. In Europe, we have business units that maintain defined
benefit pension plans for certain current and former employees. Generally,
plan
benefits are based on age, years of service and average compensation during
the
final years of service. In the United States, other postretirement benefits
are
comprised of an unfunded Supplemental Executive Retirement Plan (SERP) that
provides retirement, pre-retirement and termination benefits, as defined, to
certain key executives designated by our Board of Directors.
Our
pension and other postretirement benefit plans are more fully disclosed in
Notes
1 and 12 to our Consolidated Financial Statements included in Item 8 of our
Annual Report on Form 10-K for the year ended June 30, 2006. The following
table
presents the components of net periodic benefit costs for the three months
ended
December 31, 2006 and 2005:
|
|
Pension
benefits
|
|
Other
postretirement benefits
|
|
($000s
omitted)
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Components
of net periodic benefit cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$
|
382
|
|
|
300
|
|
|
388
|
|
|
400
|
|
Interest
cost
|
|
|
590
|
|
|
466
|
|
|
616
|
|
|
587
|
|
Expected
return on plan assets
|
|
|
(29
|
)
|
|
(24
|
)
|
|
---
|
|
|
---
|
|
Amortization
of prior service cost
|
|
|
---
|
|
|
---
|
|
|
182
|
|
|
182
|
|
Amortization
of net loss
|
|
|
(29
|
)
|
|
14
|
|
|
438
|
|
|
368
|
|
Net
periodic benefit cost
|
|
$
|
914
|
|
|
756
|
|
|
1,624
|
|
|
1,537
|
|
The
following table presents the components of net periodic benefit costs for the
six months ended December 31, 2006 and 2005.
|
|
Pension
benefits
|
|
Other
postretirement benefits
|
|
($000s
omitted)
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Components
of net periodic benefit cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$
|
756
|
|
|
607
|
|
|
776
|
|
|
800
|
|
Interest
cost
|
|
|
1,173
|
|
|
946
|
|
|
1,232
|
|
|
1,174
|
|
Expected
return on plan assets
|
|
|
(60
|
)
|
|
(48
|
)
|
|
---
|
|
|
---
|
|
Amortization
of prior service cost
|
|
|
---
|
|
|
---
|
|
|
364
|
|
|
364
|
|
Amortization
of net loss
|
|
|
---
|
|
|
27
|
|
|
876
|
|
|
736
|
|
Net
periodic benefit cost
|
|
$
|
1,869
|
|
|
1,532
|
|
|
3,248
|
|
|
3,074
|
|
During
the three and six months ended December 31, 2006, we made an insignificant
contribution to the defined benefit pension plans and expect full year
contributions to be immaterial.
Note
12. 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:
|
|
Net
sales
|
|
Receivables
|
|
|
|
Six
months ended December 31,
|
|
December
31,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
DaimlerChrysler
|
|
|
26
|
%
|
|
25
|
%
|
|
15
|
%
|
|
17
|
%
|
BMW
|
|
|
8
|
|
|
10
|
|
|
5
|
|
|
6
|
|
Other
Customers
|
|
|
66
|
|
|
65
|
|
|
80
|
|
|
77
|
|
Total
|
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
We
anticipate that DaimlerChrysler and BMW will continue to account for a
significant portion of our net sales and accounts receivable for the foreseeable
future. These automotive customers are not obligated to any long-term purchase
of our products. The loss of sales to DaimlerChrysler or BMW would have a
material adverse effect on our total consolidated net sales, earnings and
financial position.
Note
13. Income Taxes
Income
tax expense for the quarter ended December 31, 2006 was $33.8 million, compared
to $38.0 million for the same period last year. The effective tax rate for
the
three months ended December 31, 2006 was 29.5 percent, compared to 34.5 percent
in the prior year period. Income tax expense for the six months ended December
31, 2006 was $63.5 million, compared to $57.7 million for the same period last
year. The effective tax rate for the six months ended December 31, 2006 was
31.6
percent, compared to 31.4 percent in the prior year period. During the quarter
ended December 31, 2006, Congress reinstated the R&D tax credit resulting in
a $4.0 million tax benefit. The tax rate for the prior year quarter included
a
$1.1 million charge for the repatriation of cash from our non-U.S. subsidiaries
under the American Jobs Creation Act of 2004. We currently expect the tax rate
for the full fiscal year 2007 to range between 32 and 33 percent.
|
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, 2006 (“2006 Form 10-K”).
This discussion contains forward-looking statements. See the information under
the caption “Forward-Looking Statements” on page 3 of this
report.
We
begin
our discussion with an overview of our company to give you an understanding
of
our business and the markets we serve. This is followed with a discussion of
our
results of operations for the three and six months ended December 31, 2006
and
2005. This discussion includes 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.
Our liquidity, capital resources and cash flows are discussed under the caption
Financial Condition. We then provide a Business Outlook at the end of this
discussion.
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. 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 infotainment and entertainment components with features including
or controlling GPS navigation, traffic information, cellular phone service,
wireless Internet access, security, climate control, backup camera, digital
audio playback and rear seat entertainment. These systems are increasingly
developed using scaleable software allowing us to better serve a full range
of
vehicles from luxury through entry-level. Automotive also produces aftermarket
personal navigation devices (“PNDs”) that are currently sold in Europe. Our PNDs
leverage
many of the successful applications developed by our Automotive
segment.
Consumer
designs, manufactures and markets audio, video and electronic systems for home,
mobile and multimedia applications. Home product applications include systems
to
provide high-quality audio throughout the home and to enhance home theatre
performance. Our aftermarket mobile products, including in-vehicle iPod
adaptors, deliver audio entertainment in the vehicle. Our multimedia products
include accessories for computers and portable electronic devices, such as
the
iPod and other MP3 players. Our consumer systems are primarily distributed
through retail outlets.
Professional
designs, manufactures and markets loudspeakers and electronic systems used
by
audio professionals in concert halls, stadiums, airports and other public
spaces. We also create products for recording, broadcast, cinema and music
reproduction applications. These products are increasingly linked by our HiQnet
network protocol that provides a central digital network giving audio
professionals control of a complex system from a central location.
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 Switzerland. 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. Our operating results are
especially affected by changes in the exchange rates of the Euro compared to
the
U.S. dollar since a significant percentage of our sales are in countries where
the local currency is the Euro.
We
experience seasonal fluctuations in sales and earnings. Historically, our first
quarter ending September 30 is generally the weakest due to automotive model
changeovers and the summer holidays in Europe. Our sales and earnings may also
vary due to customer acceptance of our products, product offerings by our
competitors and general economic conditions, including fluctuations in currency
exchange rates.
We
achieved record sales and earnings for the second quarter and six months ended
December 31, 2006. Our Automotive and Professional business segments reported
solid results when compared to the prior year periods, while our Consumer
segment experienced lower operating income due primarily to increased
competition in the North America multimedia market.
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
2006 Form 10-K. These policies include inventory valuation, allowance for
doubtful accounts, warranty liabilities, income taxes, pre-production and
development costs, goodwill and stock-based compensation. Also see Note 1
“Summary of Significant Accounting Policies” to our Consolidated Financial
Statements included in our 2006 Form 10-K.
Results
of Operations
Sales
Our
net
sales for the quarter ended December 31, 2006 were $931.7 million compared
to
$832.6 million in the same period last year, an increase of 12 percent. For
the
six months ended December 31, 2006, net sales were $1.757 billion compared
to
net sales of $1.587 billion in the same period last year, an increase of 11
percent. Foreign currency translation contributed approximately $43 million
and
$62 million respectively, for the three and six months ended December 31, 2006.
For the three months ended December 31, 2006, each of our three operating groups
reported higher sales when compared to the prior year period. For the six months
ended December 31, 2006, the increase in net sales was primarily due to higher
sales of our automotive audio and infotainment systems to automotive customers
and higher automotive aftermarket sales of our personal navigation devices.
For
the six months ended December 31, 2006, Professional sales were up 6 percent
and
Consumer sales were down 4 percent when compared to the prior
year.
Presented
below is a summary of our net sales by reporting segment:
($000s
omitted)
|
|
Three
months ended December 31,
|
|
Six
months ended December 31,
|
|
|
|
2006
|
|
%
|
|
2005
|
|
%
|
|
2006
|
|
%
|
|
2005
|
|
%
|
|
Net
sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Automotive
|
|
$
|
632,303
|
|
|
68
|
%
|
|
547,584
|
|
|
66
|
%
|
$
|
1,233,301
|
|
|
70
|
%
|
|
1,067,880
|
|
|
67
|
%
|
Consumer
|
|
|
163,011
|
|
|
17
|
%
|
|
155,008
|
|
|
19
|
%
|
|
256,137
|
|
|
15
|
%
|
|
266,376
|
|
|
17
|
%
|
Professional
|
|
|
136,403
|
|
|
15
|
%
|
|
130,053
|
|
|
15
|
%
|
|
267,822
|
|
|
15
|
%
|
|
253,037
|
|
|
16
|
%
|
Total
|
|
$
|
931,717
|
|
|
100
|
%
|
|
832,645
|
|
|
100
|
%
|
$
|
1,757,260
|
|
|
100
|
%
|
|
1,587,293
|
|
|
100
|
%
|
Automotive
- Net
sales for the quarter ended December 31, 2006 increased $84.7 million, or 15
percent compared to the same period
last
year. Foreign currency translation contributed approximately $35 million to
the
increase in sales. Because a significant percentage of our automotive sales
are
to customers in Europe, Automotive is responsible for most of our foreign
currency exposure. Increased sales of our infotainment systems to European
automakers and strong sales of our aftermarket navigation products contributed
significantly to the increase in sales over the prior period quarter. The
primary contributors were higher sales of our infotainment systems to
Mercedes-Benz to support higher production of the S-Class and higher sales
of
infotainment systems to Audi for its new Q7 platform. Sales of audio systems
to
Toyota/Lexus also increased due to the ramp up of the new Lexus LS460 and Toyota
Camry. Aftermarket sales increased due to higher PDN sales in Europe. These
increases in net sales were offset by lower sales to Porsche due to lower car
production for the Cayenne.
Net
sales
for the six months ended December 31, 2006 increased $165.4 million, or 15
percent compared to the same period last year. Foreign currency translation
contributed approximately $51 million to the increase in sales. The primary
contributors to the higher sales were strong sales of our infotainment systems
to Mercedes-Benz for the S-Class, E-Class, and B-Class platforms and higher
sales of infotainment systems to Audi for its new Q7 platform. Sales of audio
systems to Toyota/Lexus were also up due to the launch of the new Lexus LS460
and Toyota Camry. Strong sales of our new aftermarket PND, Traffic Assist,
also
contributed to the sales growth. These sales increases were partially offset
by
lower sales to BMW due to lower production for the 1 and 7-series and the
phase-out of the current X5 and the postponed ramp up of the new X5 series.
Sales to Porsche and Landrover were also lower than the prior year
period.
Consumer
- Net
sales for the quarter ended December 31, 2006 increased $8.0 million, or 5
percent, compared to the same period
last
year. Foreign currency translation contributed approximately $6 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 the OnStage and
OnTime products, which are accessories for the Apple iPod, and higher sales
of
Harman/Kardon home electronic products. These sales increases were partially
offset by lower North America sales of Infinity loudspeakers and Harman/Kardon
electronics due to the decision to exit distribution through a major North
American retailer.
Net
sales
for the six months ended December 31, 2006 decreased $10.2 million, or 4 percent
compared to the same period last year. Foreign currency translation contributed
approximately $7 million to sales compared to the prior year period. The sales
decrease was primarily due to lower North America multimedia sales due to
increased competition within the multimedia market and lower Infinity
loudspeaker and Harman/Kardon electronics sales due to the decision to exit
distribution through a major retailer in North America.
Professional
- Net
sales for the quarter ended December 31, 2006 increased $6.4 million, or 5
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
higher sales of JBL Professional and Crown products to major
retailers. Soundcraft/Studer and AKG also contributed to the increase in
sales
due
to higher sales of installed
sound and mixing consoles.
Net
sales
for the six months ended December 31, 2006 increased $14.8 million, or 6 percent
compared to the same period last year. Foreign currency translation contributed
approximately $4 million to the increase in sales compared to the prior year.
Professional sales were higher due to an increase in sales of JBL Professional
and Crown products to our major US retailers. These increases were partially
offset by lower Harman Music Group sales to retailers.
Gross
Profit
Gross
profit as a percentage of net sales decreased 2.4 percentage points to 34.3
percent for the quarter ended December 31, 2006 compared to 36.7 percent of
sales in the same period last quarter. Gross profit as a percentage of net
sales
decreased 1.5 percentage points to 34.5 percent for the six months ended
December 31, 2006 compared to 36.0 percent of sales in the same period in the
prior year period.
Presented
below is a summary of our gross profit by reporting segment:
($000s
omitted)
|
|
Three
months ended December 31,
|
|
Six
months ended December 31,
|
|
|
|
2006
|
|
Percent
of net sales
|
|
2005
|
|
Percent
of net sales
|
|
2006
|
|
Percent
of net sales
|
|
2005
|
|
Percent
of net sales
|
|
Gross
Profit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Automotive
|
|
$
|
225,420
|
|
|
35.7
|
%
|
|
206,903
|
|
|
37.8
|
%
|
$
|
440,160
|
|
|
35.7
|
%
|
|
391,182
|
|
|
36.6
|
%
|
Consumer
|
|
|
43,036
|
|
|
26.4
|
%
|
|
52,259
|
|
|
33.7
|
%
|
|
66,543
|
|
|
26.0
|
%
|
|
91,066
|
|
|
34.2
|
%
|
Professional
|
|
|
52,432
|
|
|
38.4
|
%
|
|
47,857
|
|
|
36.8
|
%
|
|
102,724
|
|
|
38.4
|
%
|
|
93,239
|
|
|
36.8
|
%
|
Other
|
|
|
(1,250
|
)
|
|
---
|
|
|
(1,250
|
)
|
|
---
|
|
|
(2,500
|
)
|
|
---
|
|
|
(3,423
|
)
|
|
---
|
|
Total
|
|
$
|
319,638
|
|
|
34.3
|
%
|
|
305,769
|
|
|
36.7
|
%
|
$
|
606,927
|
|
|
34.5
|
%
|
|
572,064
|
|
|
36.0
|
%
|
Automotive
-
Gross
profit as a percentage of net sales decreased 2.1 percentage points for the
quarter ended December 31, 2006 compared to the same period in the prior year.
Gross profit as a percentage of net sales decreased 0.9 percentage points for
the six months ended December 31, 2006 compared to the same period in the prior
year. The gross margin percentage decrease for the three and six month periods
is primarily related to unfavorable changes in product mix compared to the
prior
year period.
Consumer
-
Gross
profit as a percentage of net sales decreased 7.3 percentage points for the
quarter ended December 31, 2006 compared to the same period in the prior year.
Gross profit as a percentage of net sales decreased 8.2 percentage points for
the six months ended December 31, 2006 compared to the same period in the prior
year. For the three and six months, gross margins were lower due to increased
competition in the multimedia market, new product introductions with lower
margins to respond to the competitive environment and the discontinuance of
sales of higher margin products to a major North American
retailer.
Professional
-
Gross
profit as a percentage of net sales increased 1.6 percentage points for the
three and six months ended December 31, 2006 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 improvements in net variable costs at JBL and
AKG.
Selling,
General and Administrative Expenses
Selling,
general and administrative expenses (“SG&A”), as a percentage of sales,
decreased 0.9 percentage points for the quarter ended December 31, 2006 compared
to the same period in the prior year. For the six-month period ended December
31, 2006, SG&A expenses decreased 0.8 percentage points compared to the same
period last year. The percent of sales decrease primarily relates to the impact
of higher sales offset by higher research and development costs associated
with
new infotainment system programs. For the three and six months ended December
31, 2006, research and development costs were $90.0 million or 9.7 percent
of
sales, and $172.8 million or 9.8 percent of sales, respectively. For the same
periods in the prior year, research and development costs were $75.2 million
or
9.0 percent of sales, and $143.6 million or 9.0 percent of sales, respectively.
Research and development costs continue to increase to support new automotive
awards to be supplied in future years.
During
the fourth quarter of fiscal 2006, we initiated a restructuring program designed
to increase efficiencies in our manufacturing facilities and to realign our
engineering organization. SG&A expenses associated with this program were
$1.3 million for the three months ended December 31, 2006. We also made cash
payments of $0.9 million during the second quarter ended December 31, 2006,
primarily for severance. Since the inception of the restructuring program,
we have incurred costs of $11.5 million. We presently expect to record an
additional $4.5 million, for total restructuring costs of $16.0 million, in
future periods in connection with this program.
Presented
below is a summary of SG&A expenses by reporting segment:
($000s
omitted)
|
|
Three
months ended December 31,
|
|
Six
months ended December 31,
|
|
|
|
2006
|
|
Percent
of net sales
|
|
2005
|
|
Percent
of net sales
|
|
2006
|
|
Percent
of net sales
|
|
2005
|
|
Percent
of net sales
|
|
SG&A
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Automotive
|
|
$
|
133,012
|
|
|
21.0
|
%
|
|
118,882
|
|
|
21.7
|
%
|
$
|
257,584
|
|
|
20.9
|
%
|
|
229,224
|
|
|
21.5
|
%
|
Consumer
|
|
|
28,335
|
|
|
17.4
|
%
|
|
30,266
|
|
|
19.5
|
%
|
|
56,291
|
|
|
22.0
|
%
|
|
58,495
|
|
|
22.0
|
%
|
Professional
|
|
|
32,334
|
|
|
23.7
|
%
|
|
32,873
|
|
|
25.3
|
%
|
|
65,551
|
|
|
24.5
|
%
|
|
65,388
|
|
|
25.8
|
%
|
Other
|
|
|
10,237
|
|
|
---
|
|
|
7,888
|
|
|
---
|
|
|
24,863
|
|
|
---
|
|
|
24,904
|
|
|
---
|
|
Total
|
|
$
|
203,918
|
|
|
21.9
|
%
|
|
189,909
|
|
|
22.8
|
%
|
$
|
404,289
|
|
|
23.0
|
%
|
|
378,011
|
|
|
23.8
|
%
|
Automotive
-
SG&A expenses as a percentage of sales decreased 0.7 percentage points for
the quarter ended December 31, 2006 compared to the same period last year.
SG&A expenses as a percentage of sales decreased 0.6 percentage points for
the six months ended December 31, 2006 compared to the same period last year.
For the three and six months ended December 31, 2006, the decrease as a
percentage of sales is primarily due to the impact of higher sales offset by
higher research and development costs associated with new infotainment system
programs. SG&A expenses primarily increased due to higher research and
development costs. Research and development expenses were $73.1 million or
11.6
percent of sales, for the quarter ended December 31, 2006 compared to $58.6
million or 10.7 percent of sales, in the prior year. Research and development
expenses were $138.5 million or 11.2 percent of sales, for the six months ended
December 31, 2006 compared to $110.2 or 10.3 percent of sales, for the same
period in the prior year. For the three and six-month periods, research and
development expenses increased primarily due to higher spending to support
new
automotive infotainment systems for programs launching in fiscal 2008 and 2009,
in Europe and North America.
Consumer
-
SG&A
expenses as a percentage of sales decreased 2.1 percentage points for the three
months ended December 31, 2006 compared to the same period last year. SG&A
expenses as a percentage of sales for the six months ended December 31, 2006
were approximately the same as the six months ended December 31, 2005. In the
quarter, the decrease is primarily due to lower general and administrative
expenses resulting from cost control measures and slightly lower research and
development costs. For the three and six months ended December 31, 2006,
research and development expenses were $8.3 million or 5.1 percent of sales,
and
$17.2 million or 6.7 percent of sales, respectively. In the same periods last
year research and development expenses were $9.1 million, or 5.9 percent of
sales, and $17.6 million or 6.6 percent of sales, respectively.
Professional
-
SG&A
expenses as a percentage of sales decreased 1.6 percentage points for the
quarter ended December 31, 2006 compared to the same period last year. SG&A
expenses as a percentage of sales decreased 1.3 percentage points for the six
months ended December 31, 2006 compared to the same period last year. For the
three and six month periods, the SG&A decrease as a percentage of sales is
primarily due to cost controls across the organization, partially offset by
higher research and development expenses. Research and development expenses
were
$8.5 million or 6.2 percent of sales, for the quarter ended December 31, 2006
compared to $7.6 million or 5.8 percent of sales in the same period last year.
Research and development expenses were $17.0 million or 6.3 percent of sales
for
the six months ended December 31, 2006 compared to $15.8 million or 6.2 percent
in the same period last year.
Other
-
Corporate SG&A expenses for the three months ended December 31, 2006
increased $2.3 million compared to the same period last year. SG&A expenses
increased primarily due to increased salary, stock option and pension expenses.
Corporate SG&A expenses for the six months ended December 31, 2006 were
approximately the same as the six month period in the prior year.
Operating
Income
Operating
income for the quarter ended December 31, 2006 was $115.7 million or 12.4
percent of sales compared to
$115.9
million
or 13.9
percent of sales in the same period last year. Operating income for the six
months ended December 31, 2006 was $202.6 million or 11.5 percent of sales
compared to $194.1 million or 12.2 percent of sales in the same prior year
period. The decrease in operating margins for the three and six months was
primarily the result of lower gross margins and higher research and development
costs in our Automotive reporting segment and lower Consumer operating
margins.
Interest
Expense, Net
Interest
expense is reported net of interest income in our consolidated statements of
operations. Net interest expense for the three and six months ended December
31,
2006 was $0.5 million and $0.6 million, respectively. In the same periods last
year, net interest expense was $4.6 million and $8.4 million, respectively.
For
the quarter, interest expense, net, included $2.4 million of gross interest
expense and $1.9 million of interest income. For the same period in the prior
year, interest expense, net, included $6.6 million of gross interest expense
and
interest income was $2.0 million. For the six months ended December 31, 2006,
interest expense, net, included $4.7 million of gross interest expense and
$4.1
million of interest income. For the same period last year, interest expense
net,
included $12.1 million of gross interest expense and interest income was $3.7
million.
Interest
expense, net has decreased primarily due to the repayment of debt. Weighted
average borrowings outstanding were $176.7 million for the quarter ended
December 31, 2006 compared to $399.7 million for the same period in the prior
year. Weighted average borrowings outstanding were $175.0 million for the six
months ended December 31, 2006 compared to $376.1 million for the same period
in
the prior year. For the three and six months ended December 31, 2005, the
weighted average borrowings excluded the average fair value of the interest
rate
swaps of $2.7 million, and $4.2 million, respectively. There were no interest
rate swaps at December 31, 2006.
The
weighted average interest rate on borrowings was 5.5 percent for the quarter
ended December 31, 2006 and 5.4 percent for the six months ended December 31,
2006. The weighted average interest rates for the comparable periods in the
prior year were 6.7 percent and 6.4 percent, respectively. The weighted average
interest rate decreased due to lower rates on current outstanding debt and
the
repayment of fixed rate debt at higher interest rates.
Miscellaneous
Expenses
Miscellaneous,
net expenses were $0.5 million for the quarter ended December 31, 2006 and
$1.3
million for the six months ended December 31, 2006 compared to $1.2 million
and
$1.8 million, respectively, in the same periods last year. Miscellaneous net,
primarily consists of bank charges for the three and six months ended December
31, 2006.
Income
Taxes
Income
tax expense for the quarter ended December 31, 2006 was $33.8 million, compared
to $38.0 million for the same period last year. The effective tax rate for
the
three months ended December 31, 2006 was 29.5 percent, compared to 34.5 percent
in the prior year period. Income tax expense for the six months ended December
31, 2006 was $63.5 million, compared to $57.7 million for the same period last
year. The effective tax rate for the six months ended December 31, 2006 was
31.6
percent, compared to 31.4 percent in the prior year period. During the quarter
ended December 31, 2006, Congress reinstated the research and development tax
credit resulting in a $4.0 million tax benefit. The tax rate for the prior
year
quarter included a $1.1 million charge for the repatriation of cash from our
non-U.S. subsidiaries under the American Jobs Creation Act of 2004. We currently
expect the tax rate for the full fiscal year 2007 to range between 32 and 33
percent.
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 $171.1 million at December 31, 2006 compared
to
$291.8 million at June 30, 2006. During the six-month period, cash was primarily
used to repurchase shares of our common stock, meet our working capital needs,
and make investments in property, plant and equipment.
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, 2006.
Operating
Activities
For
the
six months ended December 31, 2006, our cash flows from operations were $48.0
million compared to $203.8 million during the same period last year. The
decrease in operating cash flows was primarily due to higher working capital
requirements.
At
December 31, 2006, net working capital, excluding cash and short term debt,
was
$273.7 million compared to $106.7 million at June 30, 2006. The $167.0 million
increase was primarily due to higher inventory levels to support increased
sales
to our automotive customers and demand for our PND products. Accounts receivable
also increased due to record sales during the three months ended December 31,
2006.
Investing
Activities
We
had
capital expenditures of $39.4 million during the six months ended December
31,
2006 compared to $45.3 million for the same period last year. The decrease
is
primarily due to capital expenditures in the prior year to complete a new
manufacturing facility in Missouri and substantial investments in Europe for
customer tooling and other manufacturing equipment to support infotainment
system programs for automotive customers.
We
anticipate total capital expenditures for fiscal 2007 to be
approximately $150
million.
Financing
Activities
In
the
six months ended December 31, 2006, we paid $73.0 million to repurchase 921,100
shares of our common stock. Since the inception of our share repurchase program
in June 1998, we have acquired and placed into treasury 17,611,282 shares.
At
December 31, 2006, we had the authority to purchase up to 2.4 million additional
shares of our common stock under our current share repurchase program. We
presently intend to continue our share repurchase program for the remainder
of
the fiscal year, evaluating the buy levels on a quarter-to-quarter
basis.
Our
total
debt at December 31, 2006 was $142.4 million, primarily comprised of $118.5
million of borrowings under our revolving credit facility. Also included in
total debt is $16.5 million principal amount of 7.32 percent senior notes due
July 1, 2007 and capital leases and other short-term borrowings of $7.4
million.
We
have a
$300 million committed multi-currency revolving credit facility that expires
in
June 2010. The interest rate on the revolving credit facility at December 31,
2006 is LIBOR plus 40 basis points. At
June
30, 2006, we had outstanding borrowings of $159.9 million under our revolving
credit facility. At December 31, 2006, we had reduced the balance by $41.4
million to $118.5 million. At
December 31, 2006 we had borrowings of $118.5 million and outstanding letters
of
credit of $5.6 million under this facility. Unused
availability under the revolving credit facility was $175.9 million at December
31, 2006.
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, 2006, we were in compliance with
the terms of our long-term debt agreements.
Equity
Total
shareholders’ equity at December 31, 2006 was $1.325 billion compared with
$1.228 billion at June 30, 2006. The increase is primarily due to net income
of
$138.0 million and favorable foreign currency translation increase of $18.6
million offset by share repurchases of $73 million.
Business
Outlook
We
had a
strong second quarter and six-month period ended December 31, 2006. Our
Automotive and Professional business segments reported solid results when
compared to the prior year periods, while our Consumer segment experienced
lower
operating income due primarily to increased competition in the North America
multimedia market. We continue to believe we will see growth in all three of
our
core business segments in fiscal 2007. For the full fiscal year ending June
30,
2007, we currently believe our net sales will be approximately $3.5 billion
and
earnings per share will be approximately $4.35 per share. Our current
expectation for fiscal 2007 could be affected by the potential impact of changes
in currency exchange rates, softness in automobile sales or increases in
research and development costs to support new infotainment business. We are
contemplating changes in the second half of fiscal 2007 to our engineering
and
manufacturing operations that would result in a restructuring charge. We
estimate the charge would be in the range of $0.10 to $0.15 cents per share.
Our
earnings guidance for fiscal 2007 does not include the effect of this
contemplated charge.
|
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, 2006, there have been no
material changes in the quantitative or qualitative aspects of our market risk
profile.
Interest
Rate Sensitivity/Risk
At
December 31, 2006, interest on approximately 12 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, based on our December 31, 2006 positions, the impact
of
such changes in interest rates would increase or decrease net income by
approximately $0.3 million for the six months ended December 31,
2006.
Foreign
Currency Risk
We
maintain significant operations in Germany, the United Kingdom, France, Austria,
Hungary, Mexico and Switzerland. 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 transactional risks, we enter into forward
foreign exchange contracts. Also, foreign currency positions are partially
offsetting and are netted against one another to reduce exposure.
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 non-U.S. subsidiaries are translated
into U.S. dollars. Over
half
of our sales are now 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 2007 compared to the prior year first half due to the strengthening
of
the Euro relative to the U.S. dollar. The first half average exchange rate
for
the Euro versus the U.S. dollar increased 6.46 percent from the prior year’s
first half average exchange rate.
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 $20
million
for the six months ended December 31, 2006.
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.
Evaluation
of Disclosure Controls and Procedures - Under
the
supervision and with the participation of our management, including our
Executive Chairman and Chief Executive Officer and our 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 Executive Chairman and Chief Executive Officer and our 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
|
|
Unregistered
Sales of Equity
Securities and Use of
Proceeds
|
We
did
not repurchase any shares of our common stock in the quarter ended December
31,
2006. 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. The
total number of shares repurchased through December 31, 2006 was 17,611,282.
A
maximum of 2,388,718 shares may yet be purchased under our share repurchase
program. 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.”
|
Submission
of Matters to a Vote of Security
Holders
|
Our
2006
Annual Meeting of Stockholders was held on November 2, 2006. The following
item
of business was presented to the stockholders at the annual
meeting:
Election
of Directors
At
our
Annual Meeting of Stockholders, two directors were elected to serve a three-year
term expiring at the 2009 Annual Meeting of Stockholders. The vote with respect
to the election of these directors was as follows:
Name
|
|
Total
vote for each Director
|
|
Total
vote withheld from each Director
|
|
Edward
H. Meyer
|
|
|
57,204,564
|
|
|
4,636,933
|
|
Gina
Harman
|
|
|
156,325,593
|
|
|
5,515,904
|
|
Sidney
Harman, Ann McLaughlin Korologos and Shirley Hufstedler will continue to serve
as directors of the Company.
Exhibits
required by Item 601 of Regulation S-K
|
|
|
|
Consulting
Agreement dated January 15, 2007 between the Company and Dr. A. Erich
Geiger.
|
|
|
|
|
|
Consulting
Agreement dated December 8, 2006 between the Company and Dr. Floyd
Toole.
|
|
|
|
|
|
Certification
of Sidney Harman pursuant to Section 302 of the Sarbanes-Oxley Act
of
2002.
|
|
|
|
|
|
Certification
of Kevin L. Brown pursuant to Section 302 of the Sarbanes-Oxley Act
of
2002.
|
|
|
|
|
|
Certification
of Sidney Harman 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
9, 2007
|
|
By: /s/ Kevin
L. Brown
|
|
|
Kevin
L. Brown
|
|
|
Executive
Vice President and Chief Financial Officer
|
|
|
(Principal
Financial Officer)
|
|
|
|
|
|
|
Date: February
9, 2007
|
|
By: /s/ Sandra
B. Robinson
|
|
|
Sandra
B. Robinson
|
|
|
Vice
President - Financial Operations and Chief Accounting
Officer
|
|
|
(Principal
Accounting Officer)
|
29