10-K 1 d375884d10k.htm FORM 10-K Form 10-K
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-K

 

 

(Mark One)

 

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

For the fiscal year ended June 30, 2012

or

 

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

For the transition period from              to             

Commission File Number 001-09764

 

 

Harman International Industries, Incorporated

(Exact Name of Registrant as Specified in Its Charter)

LOGO

 

 

 

Delaware   11-2534306

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

400 Atlantic Street, Suite 1500

Stamford, CT

  06901
(Address of Principal Executive Offices)   (Zip Code)

Registrant’s telephone number, including area code (203) 328-3500

Securities registered pursuant to Section 12(b) of the Act:

 

Title of Each Class

 

Name of Each Exchange on Which Registered

Common Stock, par value $.01 per share   New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  x    No  ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one)

 

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

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

The aggregate market value of the voting common stock held by non-affiliates of the registrant as of December 31, 2011 (the last business day of the registrant’s most recently completed second fiscal quarter) was $2,662,339,944 based upon the closing price of the shares on the New York Stock Exchange on that date.

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date: 67,164,240 shares of common stock, par value $.01 per share, as of July 31, 2012.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive Proxy Statement to be delivered to shareholders in connection with the 2012 Annual Meeting of Stockholders are incorporated by reference into Part III.

 

 

 


Table of Contents

INDEX

 

     Page  

Forward–Looking Statements

     1   

Part I

  

Item

  1.   

Business

     3   

Item

  1A.   

Risk Factors

     14   

Item

  1B.   

Unresolved Staff Comments

     20   

Item

  2.   

Properties

     21   

Item

  3.   

Legal Proceedings

     21   
    

Executive Officers of the Registrant

     23   

Item

  4.   

Mine Safety Disclosures

     25   

Part II

  

Item

  5.   

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

     26   

Item

  6.   

Selected Financial Data

     27   

Item

  7.   

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

     28   

Item

  7A.   

Quantitative and Qualitative Disclosures About Market Risk

     47   

Item

  8.   

Financial Statements and Supplementary Data

     49   

Item

  9.   

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

     106   

Item

  9A.   

Controls and Procedures

     106   

Item

  9B.   

Other Information

     106   

Part III

  

Item

  10.   

Directors, Executive Officers and Corporate Governance

     107   

Item

  11.   

Executive Compensation

     107   

Item

  12.   

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

     107   

Item

  13.   

Certain Relationships and Related Transactions, and Director Independence

     107   

Item

  14.   

Principal Accounting Fees and Services

     107   

Part IV

  

Item

  15.   

Exhibits, Financial Statement Schedules

     108   

Signatures

     115   

The page numbers in this Table of Contents reflect actual page numbers, not EDGAR page tag numbers.

References to “Harman,” the “Company,” “we,” “us” and “our” in this Form 10-K refer to Harman International Industries, Incorporated and its subsidiaries unless the context requires otherwise.

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

 

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Forward-Looking Statements

This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. You should not place undue reliance on these statements. Forward-looking statements include information concerning possible or assumed future results of operations, cash flows, capital expenditures, the outcome of pending legal proceedings and claims, goals and objectives for future operations, including descriptions of our business strategies and purchase commitments from customers. These statements are typically identified by words such as “believe,” “anticipate,” “expect,” “plan,” “intend,” “estimate,” “should,” “will” and similar expressions. We base these statements on particular assumptions that we have made in light of our industry experience, as well as our perception of historical trends, current conditions, expected future developments and other factors that we believe are appropriate under the circumstances. As you read and consider the information in this report, you should understand that these statements are not guarantees of performance or results. They involve risks, uncertainties and assumptions. In light of these risks and uncertainties, we cannot assure you that the results and events contemplated by the forward-looking statements contained in, or incorporated by reference into, this report will in fact transpire.

You should carefully consider the risks described below and the other information in this report because they identify important factors that could cause actual results to differ materially from those predicted in any such forward-looking statements. Our operating results may fluctuate significantly and may not meet our expectations or those of securities analysts or investors. The price of our stock would likely decline if this occurs. Factors that may cause fluctuations in our operating results include, but are not limited to, the following:

 

   

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

 

   

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

 

   

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

 

   

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

 

   

fluctuations in the price and supply of raw materials including, without limitation, petroleum, copper, steel, aluminum, synthetic resins, rare metals and rare-earth minerals, or shortages of materials, parts and components;

 

   

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

 

   

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

 

   

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

 

   

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

 

   

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

 

   

our failure to maintain the value of our brands and implementing a sufficient brand protection program.

Although we believe that these forward-looking statements are based on reasonable assumptions, you should be aware that many factors could affect our actual results of operations and could cause actual results to

 

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differ materially from those expressed in the forward-looking statements. As a result, the foregoing factors should not be construed as exhaustive and should be read together with the other cautionary statements included in this and other reports we file with the Securities and Exchange Commission. For additional information regarding certain factors that may cause our actual results to differ from those expected or anticipated, see the information under the caption “Risk Factors” which is located in Item 1A of Part I of this report. We undertake no obligation to publicly update or revise any forward-looking statement (except as required by law).

Market, ranking and other data

In this report, we refer to information regarding market data obtained from internal sources, market research, publicly available information and industry publications. Estimates are inherently uncertain, involve risks and uncertainties and are subject to change based on various factors, including those discussed under the caption “Risk Factors” which is located in Item 1A of Part I of this report.

 

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Part I

 

Item 1. Business

Our Company

We believe we are a worldwide leader in the development, manufacture and marketing of high quality, high-fidelity audio products and electronic systems. We have developed, both internally and through a series of strategic acquisitions, a broad range of product offerings sold under renowned brand names in our principal markets. We also believe that we are a leader in digitally integrated infotainment and audio systems for the automotive industry. Our AKG®, Crown®, JBL®, Infinity®, Harman/Kardon®, Lexicon®, dbx®, Digitech®, BSS®, Studer®, Soundcraft®, Mark Levinson®, Becker®, Revel®, Logic 7®, and Selenium® brand names are well known worldwide for premium quality and performance.

Segments

Effective July 1, 2011, we revised our business segments in order to better align them with our strategic approach to the markets and customers we serve. While our Professional segment was largely unaffected, we reorganized our Automotive and Consumer segments and created two new segments, Infotainment and Lifestyle. The Infotainment segment includes our infotainment business, which was previously reported in our Automotive segment, and Aha Mobile (“Aha”), a business we acquired in September 2010, which was previously reported in our Other segment. The Lifestyle segment includes our automotive audio business, which was previously reported in our Automotive segment, our Consumer segment, which was previously reported as a standalone segment, and our luxury home audio business, which was previously reported in our Professional segment. Our Professional segment includes our Professional segment, as previously reported, excluding our luxury home audio business. Our Other segment primarily includes compensation, benefit and occupancy costs for corporate employees, net of allocations, expenses associated with new technology innovation and our corporate brand identity campaign.

Prior period segment amounts throughout the consolidated financial statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations have been reclassified to conform to the current segment structure. For additional information about our segments, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Item 7 of Part II of this report and Note 17 – Business Segment Data in the Notes to the Consolidated Financial Statements located in Item 8 of Part II of this report.

Infotainment

Our Infotainment segment designs, manufactures and markets infotainment systems for vehicle applications to be installed primarily as original equipment by automotive manufacturers. Our infotainment systems are a combination of information and entertainment components that may include or control GPS navigation, traffic information, voice-activated telephone and climate control, rear seat entertainment, wireless Internet access, hard disk recording and MP3 playback. We expect future infotainment systems to also integrate driver safety capabilities such as lane guidance, traffic sign recognition, pre-crash emergency braking, adaptive cruise control and night vision. Global customers for our infotainment systems include BMW, Audi/Volkswagen, Daimler AG, Toyota/Lexus, Chrysler, Hyundai/Kia, Porsche, PSA Peugeot Citroën and Subaru. We also produce a Harman/Kardon branded infotainment system for Harley-Davidson touring motorcycles.

Lifestyle

Our Lifestyle segment designs, manufactures and markets automotive audio systems for vehicle applications to be installed primarily as original equipment by automotive manufacturers, and a wide range of mid- to high-end loudspeaker and electronics for home, multimedia and mobile applications. Our Lifestyle products are marketed worldwide under brand names including JBL, AKG, Harman/Kardon, Infinity, Mark Levinson, Revel,

 

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Logic 7, Lexicon and Selenium. Global customers for our premium audio systems include BMW, Daimler AG, Chrysler, Toyota/Lexus, Hyundai/Kia, Porsche, Land Rover, PSA Peugeot Citroën, General Motors, Rolls Royce and Jaguar. Home applications include dedicated home audio and theater systems, as well as distributed systems that provide multi-zone high-quality audio and video. Multimedia applications comprise a wide-range of innovative accessories such as earbuds and noise cancelling headphones that enhance the sound of portable electronic devices. Our branded home audio products for multimedia applications are primarily designed to enhance sound for Apple’s iPad®, iPod® and iPhone®, as well as other MP3 players. We provide transducers and built-in speakers for leading notebook computers, such as Dell and Toshiba. Additionally, we provide an extensive line of audio systems for personal computers that are recognized for their award winning design and high fidelity. Aftermarket mobile products include speakers, amplifiers and digital signal processors that deliver high-quality in-car audio. Our home audio products are sold in specialty audio stores, mass-market retail stores such as Apple, Best Buy, Target, Media Markt and Fnac, and through online retailers, such as Amazon.com.

Professional

Our Professional segment designs, manufactures and markets an extensive range of loudspeakers, power amplifiers, digital signal processors, microphones, headphones, mixing consoles and IDX information delivery systems used by audio professionals in concert halls, stadiums, airports, houses of worship and other public spaces. For example, our Professional products are used in prestigious venues and at important events such as the GRAMMY® Awards, Super Bowl XLVI, the Oscars®, the Country Music Awards, the Indian National Games, New York’s Lincoln Center, Gotham Center and City Center theaters and the Museum of Science Planetarium in Boston. We design products for recording, broadcast, cinema and music reproduction applications. We also provide high-quality products to the sound reinforcement, music instrument support and broadcast and recording segments of the professional audio market.

Our Professional segment also offers complete systems solutions for professional installations and users around the world. Our products can be linked by our HiQnet® network protocol, which provides a central digital network for audio professionals to control different aspects of a complex system. We believe that we are well equipped to provide turnkey systems solutions for professional audio applications that offer the customer improved performance, reliability, ease of installation and reduced cost. Our Professional segment products are marketed globally under a number of brand names, including JBL Professional®, AKG, Crown, Soundcraft, Lexicon, DigiTech, dbx, BSS, Studer and Selenium.

Other

Our Other segment primarily includes compensation, benefit and occupancy costs for corporate employees, net of allocations, expenses associated with new technology innovation and our corporate brand identity campaign.

Acquisitions

On July 22, 2011, we and our wholly-owned subsidiary, Harman Holding Limited, acquired all of the issued and outstanding shares of MWM Acoustics, LLC and certain related entities (“MWM Acoustics”), a leading provider of high performance embedded acoustic solutions. The operating results of MWM Acoustics are included in our Consolidated Statements of Income from the date of the acquisition within our Lifestyle segment.

Results of Operations

Our results of operations depend on our sales of audio products and electronic systems in the Infotainment, Lifestyle and Professional markets. Our products are sold worldwide, the largest markets of which are the United States and Germany. Significant portions of our net sales are denominated in Euros.

 

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Our Strengths

World-class brand portfolio

We believe that our brands and the innovative technologies they represent, many of which Harman pioneered, have helped establish our Company as a leader in the primary markets we serve. We have successfully leveraged our brands across our Infotainment, Lifestyle and Professional segments, which promotes brand reinforcement and recognition across markets.

Innovation and technological expertise

We believe that our technological innovation, the quality of our products and our reputation for on-time delivery have resulted in Harman being awarded a substantial amount of Infotainment and Lifestyle business. As of June 30, 2012, we have a cumulative estimated $16.1 billion of future awarded Infotainment and Lifestyle automotive business, which represents the estimated future lifetime net sales for all customers. This amount does not represent firm customer orders. We calculate our awarded business using various assumptions, which we update annually, including global vehicle production forecasts, customer take rates for our products, revisions to product life cycle estimates and the impact of annual price reductions, among other factors. We update our estimates quarterly by adding the value of new awards received and subtracting sales recorded during the quarter.

Our management uses the amount of our future awarded business for short- and long-term budgeting and forecasting, development of earnings guidance and for planning future corporate investment and other activities, such as capital expenditures and restructuring. Our future awarded business is also an input used to approximate our enterprise value. We believe our investors utilize this information for a number of reasons, including to evaluate our future financial performance over time, to model our financial results of operations, to understand the risks inherent in our current operating plan, and as an input to approximate our enterprise value. However, our estimates of future awarded automotive business are forward-looking statements and may not actually be achieved. See the risk factor “We may not realize sales represented by awarded business” in Item 1A “Risk Factors” of Part I of this report.

Seasoned management team with extensive global experience

Our senior management team possesses substantial experience leading technology-oriented companies, promoting profitable growth through continuous value-added innovation and providing guidance, leadership and cost-discipline through challenging economic conditions.

Our Growth Strategy

Continued growth through innovation

We are focused on the next generation of audio and infotainment solutions that will blend advances in wireless networking, streaming audio, hands-free connectivity, driver assistance, safety systems and more. Our advanced software capabilities and acoustic expertise will work together to define emerging standards across all of our segments.

We believe we can grow our business with automotive manufacturers through an increase in the number of models offering our audio and infotainment systems; increases in per-vehicle content through the provision of integrated infotainment and premium branded audio systems; higher penetration levels of high-level audio and infotainment systems within existing models; and by providing systems that will continue to integrate advanced driver assistance and safety measures as they evolve.

We have developed a new mid-range infotainment system that we believe will deliver industry-leading performance at an affordable price that will allow us to penetrate the emerging mid-range automotive market. We also are developing, through our GreenEdge initiative, environmentally friendly technologies to reduce power

 

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consumption and product weight, a growing area of opportunity for environmentally conscious customers. We have partnered with Lotus Engineering (UK) to develop active noise management applications for both conventional and hybrid/electric cars. We believe that this technology will be an important component for conventional, hybrid and electric vehicles in the future.

We believe our innovative networking and control technologies will provide us with significant growth opportunities across all of our segments. Our HiQnet technology simplifies the interaction of our products and provides users with an incentive to purchase complete HiQnet compatible systems. We are also playing a leading role in developing the emerging Ethernet AV standard, which we believe will be the basis for the next-generation of infotainment and professional technology. This technology will allow higher audio and video bandwidth and transport capabilities, and we believe it will open up significant new market opportunities.

Expansion into emerging markets

We believe significant opportunities exist to grow our business in all three of our business segments in emerging markets such as Brazil, Russia, India and China. To execute this strategy, we have hired dedicated country managers and staff in these markets. We also are repositioning our research and development and production capabilities, and are developing distribution channels to be able to meet the demand for our products in these markets. Harman do Brasil (formerly known as Selenium), our wholly-owned subsidiary, has an established market presence and distribution channel in Brazil and Latin America which is driving new business opportunities across all of our segments in this region. We expect our market share to continue to grow significantly in these countries.

Products

Infotainment

We believe that we are a leader in the development and manufacture of high-quality, digitally-integrated infotainment systems for automobiles. In recent years, the automotive industry experienced increased demand for information and entertainment in automotive vehicles. We have developed leading technical competencies to address this demand. In fiscal year 2012, we supplied infotainment systems for vehicles manufactured by BMW, Audi/Volkswagen, Daimler AG, Toyota/Lexus, Chrysler, Hyundai/Kia, Porsche, PSA Peugeot Citroën and Subaru.

Lifestyle

We believe that we are a leader in the development and manufacture of high-quality, high fidelity, digitally-integrated premium branded audio systems for automobiles. We continue to leverage our expertise in the design and manufacture of premium branded audio systems, as well as our reputation for quality associated with our brand names. As a result of our well-established relationships with automobile manufacturers, our engineers are engaged early in the vehicle design process to develop systems that optimize acoustic performance and minimize weight and space requirements. Our Infinity branded car audio systems are offered by Hyundai and Kia in the U.S. BMW, Daimler AG, Land Rover, General Motors and Chrysler provide Harman/Kardon branded audio systems in their vehicles. Our premium Mark Levinson digital audio system is offered by Lexus. Lexicon branded audio systems are offered as an option in certain Hyundai vehicles. Toyota and PSA Peugeot Citroën offer our JBL branded audio systems. Hyundai and Kia also offer our JBL branded audio systems in the South Korean market. Our JBL Professional branded audio system is offered in Ferrari’s new F12 model. We also have an exclusive license with Bowers & Wilkins to develop, manufacture, sell and service premium automotive audio systems under the Bowers & Wilkins brand name.

We manufacture loudspeakers under the Harman/Kardon, Infinity, Revel and JBL brand names for the home audio market. These loudspeaker lines include models designed for two-channel stereo and multi-channel surround sound applications for the home in a wide range of performance choices, including floor standing,

 

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bookshelf, powered, low frequency, in-wall, wireless and all-weather, as well as in styles and finishes ranging from high gloss lacquers to genuine wood veneers. The JBL, Infinity and Selenium product lines also include car loudspeakers, subwoofers, amplifiers and digital signal processors sold in the aftermarket. The JBL and Infinity products also include marine speakers intended for use on boats.

We also offer a broad range of home audio electronics under the Harman/Kardon, Lexicon and Mark Levinson brand names. Our Harman/Kardon home electronics line includes audio/video receivers featuring Logic 7, Dolby Digital® and DTS® surround sound processing capabilities and multi-channel amplifiers, DVD players, Blu-ray players and CD players. We design high-end home audio electronics, including amplifiers, digital signal processors, multi format digital media players and transports and surround sound processors that we market under the renowned Mark Levinson and Lexicon brands.

In the multimedia market, we offer branded iPad, iPod and iPhone docking devices such as JBL On Stage™, JBL On Beat™, JBL On Beat Xtreme™, Harman/Kardon Go +Play™, and PC-related devices such as JBL Creature™ II and Harman/Kardon Soundsticks® III. We also offer a variety of headphone devices under the JBL, Harman/Kardon and AKG brand names. Our products add greater functionality for computers, cellular telephones and electronic devices.

Professional

Our Professional products include loudspeakers and electronic equipment that are marketed under what we believe are some of the most respected brand names in the industry.

The Professional market is increasingly moving to digital technology and we believe that we are a leader in this market. Our Professional segment derives value from our ability to share research and development, engineering talent, technical expertise and other digital resources among our business units. Loudspeaker, amplifiers, signal processing, mixing, microphones and headphones each have substantial digital engineering resources and work together to achieve common goals.

Our Professional loudspeakers are well known for high quality and superior sound. JBL Professional branded products include studio monitors, loudspeaker systems, powered loudspeakers, sound reinforcement systems, cinema systems, surround sound systems and industrial loudspeakers. Our Selenium branded products include line arrays, screen and portable systems and related technologies for public sound reinforcement.

Our Professional electronic products are recognized for high quality and reliability. We market these products on a worldwide basis under various trademarks, including Crown, Soundcraft, Lexicon, BSS, DigiTech, AKG, dbx and Studer. These products are often sold in conjunction with our JBL Professional loudspeakers and certain other products, such as Crown amplifiers.

We produce sound mixing consoles ranging from digital consoles for broadcast studios to compact professional mixers for personal recording, home studios and sound reinforcement. Our consoles are sold to four main market areas: sound reinforcement, recording studios, broadcast studios and musical instrument dealers. Our mixing consoles are sold primarily under the Soundcraft and Studer brands. We produce many types of signal processing products, equalizers, and special effects devices that are used in live sound applications and in recording studios to produce sound effects and refine final mixes. These products are sold under the Lexicon, DigiTech, BSS and dbx brand names.

We produce microphones, stereo headphones, surround-sound headphones and other professional audio products, which are marketed under the AKG brand name.

We also produce professional amplifiers and powered loudspeakers under the Crown and JBL brand names. We believe the integration of loudspeakers and electronics enhances our ability to provide complete systems solutions to the professional audio market. Our other professional products include switching systems, digital audio workstations and turnkey broadcasting studio installations marketed primarily under the Studer brand name.

 

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With our HiQnet network protocol we can configure, connect and control a complete professional sound system from microphone to speaker on one unified digital network. This system provides enhanced productivity and facilitates real-time problem diagnosis and correction from a central location.

Our IDX information delivery system is a seamless audio and visual information delivery solution that provides a highly flexible and scalable way to communicate important information to those trying to navigate complex spaces such as today’s airports, transit stations and other public spaces.

Manufacturing

We believe that our manufacturing capabilities are essential to maintaining and improving product quality and performance. Our manufacturing facilities are located in North America, Europe, Asia and South America. Our facilities have been designed to emphasize worker safety and compliance with environmental, health and safety regulations.

Our European manufacturing facilities for our Infotainment segment are located in Germany, France and Hungary. We also have manufacturing facilities in the U.S., Mexico and China. These facilities are used to manufacture infotainment systems.

Our European manufacturing facilities for our Lifestyle segment are located in Germany, France and Hungary. These facilities are used to manufacture automotive audio systems. Our North American manufacturing facilities are located in Mexico for automotive audio components and Kentucky for automotive electronics. We also manufacture automotive audio and electronic components in China. Our Lifestyle segment primarily uses original design manufacturers and outsources the manufacture of its home audio products to generate cost efficiencies, deliver products faster, and better serve our customers. These manufacturers are primarily based in China. We also have a facility in Brazil that produces aftermarket automotive audio products.

In North America, our principal Professional segment’s manufacturing facility is located in Mexico for loudspeakers, and in Utah and Indiana for electronic products, including amplifiers and effects devices. Our Professional segment’s electronics manufacturing in Europe includes mixing consoles in the United Kingdom and microphones and headphones in Austria. Our Professional segment’s electronics manufacturing in Brazil includes electronic loudspeakers, amplifiers and other components. Our Professional segment’s manufacturing in China includes audio electronics and loudspeakers.

Suppliers

We use rare earth minerals in our products, specifically rare earth neodymium magnets. A significant disruption in the supply of neodymium would have a material impact on our consolidated results of operations. We also use externally sourced microchips in many of our products. A significant disruption in our microchip supply chain and an inability to obtain alternative sources would have a material impact on our consolidated results of operations. Several independent suppliers manufacture loudspeakers and electronic products. The loss of any one of these suppliers could have a material impact on our consolidated results of operations or consolidated financial condition.

Distribution Channels

Infotainment

We primarily sell our Infotainment systems directly to automobile manufacturers in the U.S., Europe, India, Japan, China and South Korea, where they are installed as original equipment.

 

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Lifestyle

We primarily sell our Lifestyle automotive audio systems directly to automobile manufacturers in the U.S., Europe, India, Japan, China and South Korea, where they are installed as original equipment. In both our foreign and domestic markets, we sell our Lifestyle home audio products to dealers who sell directly to the end user and to distributors who resell our products to retailers. We market our products as one brand to the ultimate consumer who chooses what brand of sound system to purchase for their home or their automobile. Our goal is to make Harman brands the preferred brand in both the home and automotive audio applications.

Home, multimedia and mobile aftermarket products are offered through audio specialty stores, discount stores, department stores, mail order firms and Internet merchants. Automotive and computer manufacturers also offer branded audio products as options. We concentrate primarily on the higher quality, higher priced segments of the audio market and compete based upon the strength of our brand names, the quality of our products, our ability to provide integrated systems and our comprehensive marketing, engineering and manufacturing resources.

Professional

In the U.S. we primarily sell our Professional products to dealers via manufacturer’s representatives. Outside the U.S. we sell directly to distributors. Manufacturer’s representatives are paid sales agents and distributors buy and hold the inventory and sell directly to dealers in their markets. Both manufacturer’s representatives and distributors have a defined geographic region. In the broadcast and recording market, we primarily solicit business directly with the end users. We also sell our Professional products in retail stores and direct to customers over the Internet.

Trademarks and Patents

We market our products under numerous brand names that are protected by both pending and registered trademarks around the world. Our trademark registrations cover use of trademark rights in connection with various products, such as loudspeakers, speaker systems, speaker system components and other electrical and electronic devices. We have registered or taken other protective measures for many of these trademarks in substantially all major industrialized countries. As of June 30, 2012, we had 1,919 trademark registrations and 366 pending trademark applications around the world.

We have a history of innovation and, with more than 2,771 patents and 1,624 pending patent applications, at June 30, 2012, covering various audio, infotainment and software technologies and products, we continue to take our technology and products into new areas. While we consider our patents on the whole to be important, we do not consider any single patent, any group of related patents or any single license essential to our operations in the aggregate. The expiration of the patents individually and in the aggregate would not have a material effect on our financial condition or results of operations.

Seasonality

We experience seasonal fluctuations in sales and earnings. Historically, our first fiscal quarter ending September 30th is generally the weakest due to automotive model year changeovers and the summer holidays in Europe. Sales of our Lifestyle home audio products are generally significantly higher in the second quarter of our fiscal year, due to increased demand for these products during the holiday buying season. Our sales and earnings also vary due to the timing of the release of new products, customer acceptance of our products, product offerings by our competitors and general economic conditions.

 

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Key Customers/Industry Concentration

We are subject to various risks related to our dependence on key customers. Net sales to BMW accounted for 19 percent and net sales to Audi/Volkswagen accounted for 14 percent of our total consolidated net sales for the fiscal year ended June 30, 2012. Accounts receivable, net due from BMW and Audi/Volkswagen accounted for 13 percent and 11 percent, respectively, of total consolidated accounts receivable, net at June 30, 2012. We anticipate that BMW and Audi/Volkswagen will continue to account for a significant portion of our net sales and accounts receivable, net for the foreseeable future.

For the fiscal year ended June 30, 2012, approximately 74 percent of our net sales were to automobile manufacturers. Our automotive customers are not contractually obligated to any long-term purchase of our products. The loss of BMW or Audi/Volkswagen or any of our other significant automotive customers would have a material adverse effect on our consolidated net sales, results of operations and financial condition.

Backlog Orders

We manufacture our infotainment and automotive audio systems on a just-in-time basis. We maintain sufficient inventories of finished goods to promptly meet customer orders for our Lifestyle home audio and Professional segment customers. As a result, we do not consider the level of backlog to be an important indication of our future performance. Our backlog was approximately $23.8 million at June 30, 2012. We expect to deliver these products within the next 12 months.

Warranty Liabilities

We warrant our products to be free from defects in materials and workmanship for periods ranging from six months to six years from the date of purchase, depending on the business segment and product. Our dealers and warranty service providers normally perform warranty service in field locations and regional service centers, using parts and replacement finished goods we supply on an exchange basis. Our dealers and warranty service providers also install updates we provide to correct defects covered by our warranties. Estimated warranty liabilities are based upon past experience with similar types of products, the technological complexity of certain products, replacement cost and other factors. If estimates of warranty provisions are no longer adequate based on our analysis of current activity, incremental provisions are recorded as warranty expense in our Consolidated Statement of Income. We take these factors into consideration when assessing the adequacy of our warranty provision for periods still open to claim.

Competition

The industries that we serve are fragmented and competitive and include numerous manufacturers offering products that vary widely in price, quality and distribution methods.

Infotainment

In the infotainment market, we compete with Alpine, Bosch, Panasonic, Continental, Visteon, Mitsubishi Electronics, Aisin Seiki, Delphi and Denso in the sale of infotainment systems to automotive manufacturers. We believe our competitive position is enhanced by our technical expertise in designing and integrating navigation, speech recognition and human-machine interfaces into complete infotainment systems uniquely adapted to the specific requirements of each automobile model.

Lifestyle

In the automotive audio market, we compete with Bose, Pioneer ASK, Foster Electric, Bang & Olufsen, Delphi and Panasonic in the sale of audio systems to automotive manufacturers. We believe our competitive position is enhanced by our technical expertise in designing and integrating audio systems uniquely adapted to

 

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the specific requirements of each automobile model. In the automobile after-market category we compete against speaker/amplifier brands such as Rockford Fosgate, Polk Audio and MTX and full range brands such as Alpine, Kenwood, Pioneer and Sony.

In the home audio market, principal competitors in the loudspeaker market include Bose, Klipsch, Polk Audio, Bowers & Wilkins, Delphi and Boston Acoustics. Competition in the home audio and home electronics market remains intense and is dominated by large Asian manufacturers such as Yamaha, Sony, Denon, Onkyo, Pioneer and Marantz. We also compete in the luxury electronics market with our Mark Levinson and Lexicon brands. Our principal competitors in this high-end market include Krell, McIntosh, Audio Research, Meridian, Linn and Classe.

In the multimedia market, we supply Apple stores and other retailers with JBL and Harman/Kardon speaker systems that serve Apple’s iPad, iPod and iPhone as well as other MP3 players. Our principal competitors for these products are Bose, Altec Lansing, Klipsch, iHome, Bowers & Wilkins and Phillips. We also offer Harman/Kardon and JBL speaker systems to personal computer retailers. In this market, our principal competitors are Creative Labs, Altec Lansing, Logitech, Klipsch and Cyber Acoustics. We sell headphones online and through various retailers. Our principal competitors for these products are Beats, Pioneer, Sony, Bowers & Wilkins, Apple, Skull Candy and Bose. The home audio and multimedia markets are characterized by the short life cycle of products and a need for continuous design and development efforts. Our competitive strategy is to compete in the higher-quality segments of this market and to continue to emphasize our ability to provide system solutions to customers, including a combination of loudspeakers, electronics products, integrated surround sound and home theater systems.

Professional

The market for professional sound systems is highly competitive. We believe that we have historically held a leading market position in the professional loudspeaker market and have complemented our professional loudspeaker line by adding digital professional electronic products and broadcast and recording equipment. We compete by utilizing our ability to provide systems solutions to meet the complete audio requirements of our professional customers. With our HiQnet networking protocol software, our professional brand products can communicate and operate together. We offer products for most professional audio applications.

Our principal competitors in the sound reinforcement market include Telex, Electro Voice, Mackie, QSC, Meyer Sound Laboratories, Sennheiser, Peavey, Shure, Audio Technica, and Yamaha. Principal competitors in the recording and broadcast markets include Yamaha, Sennheiser, Loud Technologies, Inc., Lawo, Harris Corporation, DigiDesign/M-Audio, Genelec, KRK, TC Electronics, Stagetec and Sony. In the music instrument market, competitors for our products include Yamaha, Peavey, QSC, Shure, Sennheiser, Line 6, Dunlop, Zoom, Audio Technica and Roland. We also compete in the industrial and architectural sound market. Our competitors within this market include Siemens, Peavey and Tannoy.

Environmental Regulation

We are subject to various Federal, state, local and international environmental laws and regulations, including those governing the use, discharge and disposal of hazardous materials and, increasingly, the recycling of our products and their packaging.

In Europe, we are subject to the European Union’s (“EU”) Directive on the Restriction of Use of Certain Hazardous Substances in Electrical and Electronics Equipment (“EU RoHS”). This directive restricts the placement into the EU market of electrical and electronic equipment containing certain hazardous materials, including lead, mercury, cadmium and chromium. We are also subject to the EU’s Waste Electrical and Electronic Equipment Directive, which regulates the collection, recovery and recycling of waste from certain electronic products.

 

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The EU has also enacted the Registration, Evaluation, Authorization and Restriction of Chemicals (“REACH”) regulation. REACH requires manufacturers and importers of articles to register the substances contained in the articles if the substances are intended to be released under normal or reasonably foreseeable conditions of use. Because the substances contained in our products are not intended to be released under normal or reasonably foreseeable conditions of use, we do not believe we or the importers of our products have an obligation under REACH to register those substances.

Certain of our Lifestyle products will require submission of energy-use profiles in accordance with the EU Energy Using Products Directive. We are modifying the design and energy-use profiles of our products to comply with applicable laws and regulations. Additionally, the U.S. Department of Energy has promulgated a regulation pertaining to external power supplies and compliance with the energy efficiency standards that were established under the Energy Independence and Security Act of 2007. We will address these requirements as necessary. Our products may also become subject to further energy efficiency requirements if and when required under U.S. federal climate change legislation.

In China, we are subject to China’s law on Management Methods on the Control of Pollution Caused by Electronic Information Products (“China RoHS”), which is substantially similar to the EU RoHS. The China RoHS requires the disclosure and marking of certain substances, including lead, mercury, cadmium and chromium in certain electronic products.

We believe that our facilities are in substantial compliance with current laws and regulations. We expect further laws similar to the EU RoHS and China RoHS, and those governing product and packaging recycling, to be introduced in other jurisdictions, many or most of which could impose additional costs, including fees to cover recycling costs. The need for and cost of our compliance with such legislation cannot yet be determined but it could be substantial.

Research and Development

We believe that continued investment in product research and development is critical to our success. Expenditures for research and development were $331.9 million, $304.6 million and $322.7 million for the fiscal years ended June 30, 2012, 2011 and 2010, respectively. We expect to continue to devote significant resources to research and development to sustain our competitive position.

Number of Employees

At June 30, 2012, we had 11,366 full-time employees, including 4,169 employees located in North America and 7,197 employees located outside of North America.

Foreign Operations

Information about our foreign operations is set forth in Note 17 – Business Segment Data in the Notes to the Consolidated Financial Statements located in Item 8 of Part II of this report.

Corporate Information

We were incorporated in the state of Delaware in 1980. Our principal executive offices are located at 400 Atlantic Street, Suite 1500, Stamford, Connecticut 06901. Our telephone number is (203) 328-3500.

 

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Subsequent Events

Amendment to Revolving Credit Facility

Effective July 2, 2012, we and our wholly owned subsidiary, Harman Holding GmbH & Co. KG (“Harman KG”), entered into the Second Amendment (the “Second Amendment”) to the Multi-Currency Credit Agreement dated as of December 1, 2010, as amended on December 15, 2011 (the “Credit Agreement”), with a group of banks. The Second Amendment amends the Credit Agreement by, among other things, (a) allowing us and our subsidiaries to enter into certain internal legal entity restructuring transactions subject in certain circumstances to various conditions, (b) in connection with such internal legal entity restructuring transactions, providing for the release of certain security interests created by the Guarantee and Collateral Agreement dated as of December 1, 2010, and (c) making certain other amendments to facilitate the foregoing.

Dividend Declaration

On August 10, 2012, we declared a cash dividend of $0.15 per share for the quarter ended June 30, 2012. The quarterly dividend will be paid on September 4, 2012 to each stockholder of record as of the close of business on August 20, 2012.

Shares Repurchased

Between July 1, 2012 through August 10, 2012, we repurchased 129,966 shares of our common stock at a total cost of $4.8 million in connection with our share buyback program.

Website Information

Our corporate website is located at www.harman.com. We make available free of charge on our investor relations website under “SEC Filings” our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and any amendments to those reports, as soon as reasonably practicable after we electronically file or furnish such materials to the U.S. Securities and Exchange Commission (“SEC”). Our website also provides access to reports filed by our directors, executive officers and certain significant stockholders pursuant to Section 16 of the Securities and Exchange Act of 1934, as amended (the “Exchange Act”). In addition, our Corporate Governance Guidelines, Codes of Ethics and Business Conduct, and the charters for the three committees of our Board of Directors are available on our website. The information on our website is not incorporated by reference into this report. In addition, the SEC maintains a website, www.sec.gov, that contains reports, proxy and information statements and other information that we file electronically with the SEC.

 

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Item 1A. Risk Factors

In addition to the other information included in this report, you should carefully consider the risk factors described below.

Decreased demand and pricing pressure from our customers in the automotive industry may adversely affect our results of operations.

For the fiscal year ended June 30, 2012, approximately 74 percent of our sales were to automobile manufacturers. As a result, our financial performance depends, in large part, on conditions in the automotive industry, which is highly dependent on general economic conditions and has experienced significant difficulty. As a result, we have experienced and may continue to experience reductions in orders from our original equipment manufacturer customers. If one or more of our significant automotive customers experiences, or continues to experience, continued or increased financial difficulty, as a result of a prolonged economic downturn or otherwise, this would have a further adverse effect on our business due to further decreased demand, the potential inability of these companies to make full payment on amounts owed to us, or both. In addition, our customer supply agreements generally provide for reductions in pricing of our products over the period of production. Pricing pressures may intensify as a result of cost cutting initiatives of our customers. If we are unable to generate sufficient production cost savings in the future to offset future price reductions, our results of operations may be adversely affected.

A decrease in consumer discretionary spending would likely reduce our sales.

Our sales are dependent on discretionary spending by consumers, which could be materially adversely impacted by economic conditions affecting disposable consumer income and retail sales. In addition, our sales of audio, electronic and infotainment products to automotive customers are dependent on the overall success of the automobile industry, and of premium automobiles in particular, as well as the willingness of automobile purchasers to pay for the option of a premium branded automotive audio system or a multi-function digital infotainment system. Global demand for, and production of, premium vehicles, including certain vehicle models that incorporate our products, could decline in a difficult economic environment. This decline could have a negative impact on our results of operations.

We have significant operations in Europe which may be adversely impacted by the continued economic challenges in Europe.

The global economic recession that began in 2008 resulted in significantly lower demand and decreased profitability across all of our segments and major markets. While North America and Asia have shown an improved, but somewhat uneven recovery, Europe remains stagnant with continued economic and financial challenges. Recent events in Europe have elevated concerns that macroeconomic conditions will worsen and economic recovery will be delayed. If weak economic conditions persist or worsen, there could be a number of negative effects on our business, including our customers or potential customers reducing or delaying orders, the insolvency of one or more of our key suppliers, which could result in production delays, and our customers being unable to obtain credit. Approximately 39 percent of our sales in fiscal 2012 were made to end consumers in Europe. Should conditions worsen in these markets, customer demand for our products may deteriorate which would have a negative impact on our results of operations.

A significant portion of our sales are denominated in Euros, which sales may be adversely impacted by the eurozone crisis.

Approximately 53 percent of our sales in fiscal 2012 were denominated in Euros. Certain eurozone countries in which we operate have received financial aid packages from the European Union in the form of loans and restructuring of their sovereign debt and have introduced comprehensive fiscal austerity measures. If

 

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dissolution and replacement of the Euro currency and the potential reintroduction of individual European Union currencies should occur as a result of the continued eurozone crisis, it could have a negative impact on our results of operations and could expose us to increased foreign exchange risk.

The current economic environment may adversely affect consumer spending patterns and the availability and cost of credit.

Our ability to make scheduled payments or to refinance our obligations with respect to indebtedness will depend on our operating and financial performance, which in turn is subject to prevailing economic conditions. Disruptions in the financial markets, including the bankruptcy and restructuring of major financial institutions, may adversely impact the availability and cost of credit in the future. The disruptions in the financial markets have also had an adverse effect on the global economy, which has negatively impacted consumer spending patterns. This may result in reductions in sales of our products, longer sales cycles, slower adoption of new technologies and increased price competition. There can be no assurances that government responses to the disruptions in the financial markets will restore consumer confidence, stabilize the markets or increase liquidity and the availability of credit.

We may not realize sales represented by awarded business.

Our current estimate of $16.1 billion of awarded business at June 30, 2012 in our Infotainment and Lifestyle segments is calculated using certain assumptions from our customers, including projected future sales volumes with respect to the applicable platforms. Orders from our customers with respect to these platforms are not made pursuant to contractual obligations and our customers can terminate arrangements with us at any time without penalty. Therefore, our actual platform sales volumes, and thus the ultimate amount of revenue that we derive from such platforms, are not committed. If actual production orders from our customers are not consistent with the projections we use in calculating the amount of our awarded business, we could realize substantially less revenue over the life of these projects than the currently projected estimate.

Failure to maintain relationships with our largest customers and failure by our customers to continue to purchase expected quantities of our products due to changes in market conditions would have an adverse effect on our operations.

We anticipate that our automotive customers, including BMW and Audi/Volkswagen, will continue to account for a significant portion of our sales for the foreseeable future. However, none of BMW, Audi/Volkswagen, or any of our other automotive customers is obligated to any long-term purchases of our products. The loss of sales to BMW or Audi/Volkswagen, or to any of our other significant automotive customers would have a material adverse effect on our consolidated net sales, results of operations and financial condition.

Strategic decisions by our customers to expand dual sourcing arrangements could have an adverse effect on our operations.

Automakers customarily maintain dual sourcing arrangements and we cannot assure you that our customers will not further expand dual sourcing arrangements in the future, which could have a material adverse effect on our consolidated net sales, results of operations and financial condition.

Failure to deliver products on time to our automotive customers could adversely affect our financial results.

We have products in various stages of development for our automotive customers. If we do not complete our development efforts in time to meet our customers’ vehicle production requirements, we could be subject to monetary penalties and damage our customer relationships, which could have a material adverse effect on our consolidated sales, results of operations and financial condition.

 

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Natural disasters and geo-political events could adversely affect our financial performance.

The occurrence of one or more natural disasters, such as hurricanes, cyclones, typhoons, floods, earthquakes, and tsunamis, and geo-political events, such as civil unrest or terrorist attacks, in a country in which we operate or in which our suppliers are located could adversely affect our operations and financial performance. Such events could result in physical damage to, or the complete loss of, one or more of our properties, the lack of an adequate work force in a market, the inability of customers to reach or have transportation to our channel partners directly affected by such events, the evacuation of the populace from areas in which our channel partners are located, changes in the purchasing patterns of consumers and in consumers’ disposable income, the temporary or long-term disruption in the supply of materials and products from some local and overseas suppliers, the disruption in the transport of goods from overseas, the disruption or delay in the delivery of goods to our facilities within a country in which we are operating, the reduction in the availability of our products in stores, the disruption of utility services to our facilities, and disruption in our communications with our facilities. These events and their impacts could otherwise disrupt and have a material adverse effect on our consolidated net sales, results of operations and financial condition.

Bankruptcy of a significant customer could have a material adverse effect on our liquidity, financial condition and results of operations.

A significant portion of our revenues are derived from sales to customers in the automotive industry, where companies have experienced financial difficulties. As part of the bankruptcy process, our pre-petition receivables may not be realized, customer manufacturing sites may be closed or contracts voided. The bankruptcy of a major customer could have a material adverse effect on our liquidity, financial condition and results of operations.

We depend on our suppliers for key production materials and any disruption in the supply of such materials could interrupt product manufacturing and increase product costs.

Many of our suppliers have significantly decreased their manufacturing capacity and inventory levels. These steps taken by our suppliers make us more vulnerable to disruptions in the supply chain. In the near term, an increase in our demand for parts may place an undue strain on our suppliers. Additionally, the supply of raw materials including, without limitation, petroleum, copper, steel, aluminum, synthetic resins, rare metals and rare earth minerals, such as neodymium used in the production of loudspeakers, has been and could continue to be significantly constrained, which is likely to result in continued elevated price levels. Furthermore, the Dodd-Frank Wall Street Reform and Consumer Protection Act included disclosure requirements regarding the use of “conflict” minerals mined from the Democratic Republic of Congo and adjoining countries (DRC) and procedures regarding a manufacturer’s efforts to prevent the sourcing of such “conflict” minerals. While final rules are not yet implemented, these rules could limit the number of suppliers who can provide us DRC “conflict free” components and parts, and we may not be able to obtain DRC conflict free products or supplies in sufficient quantities or at competitive prices for our operations. We may also face challenges with our customers and suppliers if we are unable to sufficiently verify that the metals used in our products are conflict free. As a result, we may not be able to obtain the materials necessary to manufacture our products, which could force us to cease production or search for alternative supply sources, possibly at a higher cost. Such disruptions may have a material adverse effect on our business, financial condition, results of operations and cash flows.

We may lose market share if we are unable to compete successfully against our current and future competitors.

The audio and video product markets that we serve are fragmented, highly competitive, rapidly changing and characterized by intense price competition. Many manufacturers, large and small, domestic and foreign, offer audio and video systems that vary widely in price and quality and are marketed through a variety of channels, including audio and video specialty stores, discount stores, department stores, mail order firms and the Internet. Some of our competitors have financial and other resources greater than ours. We cannot assure you that we will continue to compete effectively against existing or new competitors that may enter our markets. We also compete indirectly with automobile manufacturers that may improve the quality of original equipment audio and electronic systems, reducing demand for our aftermarket mobile audio products, or change the designs of their cars to make installation of our aftermarket products more difficult or expensive.

 

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If we do not continue to develop, introduce and achieve market acceptance of new and enhanced products, our sales may decrease.

Our business is based on the demand for premium audio and video products. In order to increase sales in current markets and gain entry into new markets, we must innovate to maintain and improve existing products, while successfully developing and introducing distinctive new and enhanced products that anticipate changing consumer preferences and capitalize upon emerging technologies. We may experience difficulties that delay or prevent the development, introduction or market acceptance of new or enhanced products. Furthermore, we may be unable to detect and correct defects in some of our products before we ship them. Delays or defects in new product introduction may result in loss of sales or delays in market acceptance. Even after introduction, our new or enhanced products may not satisfy consumer preferences and product failures may cause consumers to reject our products. As a result, these products may not achieve market acceptance and our brand image could suffer. In addition, our competitors may introduce superior designs or business strategies, impairing our distinctive image and our products’ desirability, which may cause consumers to defer or forego purchases of our products.

Our success depends substantially on the value of our brands and our implementation of a sufficient brand protection program.

Our success is dependent in large part upon our ability to maintain and enhance the value of our brands, and our customers’ connection to our brands. Brand value can be severely damaged even by isolated incidents, particularly if the incidents receive considerable negative publicity or result in litigation. Some of these incidents may relate to our growth strategies, our development efforts in domestic and foreign markets, or the ordinary course of our business. Other incidents may arise from events that are or may be beyond our ability to control and may damage our brands, such as counterfeit and knock-off products, litigation and claims, and illegal activity targeted at us or others. Consumer demand for our products and our brands’ value could diminish significantly if any such incidents or other matters erode consumer confidence in us or our products, and if we do not implement a brand protection program that sufficiently addresses the issue of counterfeit and knock-off products, among other things, either of which would likely result in lower net sales and, ultimately, lower income, which in turn could materially and adversely affect our business and results of operations.

Covenants in our existing debt agreements restrict our operations.

Our revolving credit facility and the indenture for our Convertible Senior Notes, as amended, contain provisions that limit our operating and financing activities. Together, they limit our ability to, among other things:

 

   

incur additional indebtedness;

 

   

use a substantial portion of proceeds from sales of debt, equity or assets to fund working capital, capital expenditures, product development and other corporate requirements;

 

   

create or assume liens;

 

   

enter into sale-leaseback transactions;

 

   

engage in mergers or consolidations;

 

   

make capital expenditures or investments;

 

   

sell assets; and

 

   

modify or prepay certain material debt.

Because of the restrictions in these debt agreements, we may have difficulty securing additional financing in the form of additional indebtedness. In addition, our revolving credit facility contains other and more restrictive covenants, including financial covenants that require us to achieve specified financial and operating results and maintain compliance with specified financial ratios. We may have to curtail some of our operations to maintain

 

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compliance with these covenants. A violation of any of these covenants could result in a default under these debt agreements, which could permit the lenders to accelerate the repayment of any borrowings outstanding at that time, and the lenders under the revolving credit facility could act on the collateral package granted in connection with the revolving credit facility. A default or acceleration under our debt agreements would result in increased capital costs and could adversely affect our ability to operate our business and our results of operations and financial condition.

Currency fluctuations may reduce profits on our foreign sales or increase our costs, either of which could adversely affect our financial results.

A significant amount of our assets and operations are located, and the majority of our revenue is derived from sales outside the United States. Consequently, we are subject to fluctuations in foreign currency exchange rates, especially the Euro. Translation losses resulting from currency fluctuations may adversely affect the profits from our foreign operations and have a negative impact on our financial results. In addition, we purchase certain foreign-made products. Although we hedge a portion of our foreign currency exposure and, due to the multiple currencies involved in our business, foreign currency positions partially offset and are netted against one another to reduce exposure, we cannot assure you that fluctuations in foreign currency exchange rates will not make these products more expensive to purchase. Increases in our cost of purchasing these products could negatively impact our financial results if we are not able to pass those increased costs on to our customers.

Our operations could be harmed by factors including political instability and changes in regulations that govern international transactions.

The risks inherent in international trade may reduce our international sales and harm our business and the businesses of our distributors and suppliers. These risks include:

 

   

changes in tariff regulations;

 

   

political instability, war, terrorism and other political risks;

 

   

establishing and maintaining relationships with local distributors and dealers;

 

   

lengthy shipping times and accounts receivable payment cycles;

 

   

import and export licensing requirements;

 

   

compliance with foreign laws and regulations, including unexpected changes in taxation and regulatory requirements;

 

   

greater difficulty in safeguarding intellectual property rights than in the United States; and

 

   

difficulty in staffing and managing geographically diverse operations.

These and other risks may, among other things, increase the relative price of our products compared to those manufactured in other countries, reducing the demand for our products.

Our business could be adversely affected by a strike or work stoppage at one of our manufacturing plants or at a facility of one of our significant customers or at a common carrier or major shipping location.

Workers at certain of our facilities and those of our automotive customers are unionized and may incur work stoppages or strikes. A work stoppage at our facilities or those of our automotive customers, or at a common carrier or major shipping location, could have a material adverse effect on our net sales, results of operations and financial condition. The risk of issues of this type at our facilities may be exacerbated by the implementation of our current or future cost reduction initiatives, which may involve significant staff reductions and facility relocations.

 

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Obligations to correct product defects covered by our warranties could adversely affect our financial results.

We warrant our products to be free from defects in materials and workmanship for periods ranging from six months to six years. Costs to correct product defects may exceed our estimates and adversely affect our results of operations and financial condition.

If we are unable to enforce or defend our ownership and use of our intellectual property rights, our business may decline.

Our future success will depend, in substantial part, on our intellectual property. We seek to protect our intellectual property rights, but our actions may not adequately protect the rights covered by our patents, patent applications, trademarks and other proprietary rights, and prosecution of our claims could be time consuming and costly. In addition, the intellectual property laws of some foreign countries do not protect our proprietary rights as do the laws of the United States. Despite our efforts to protect our proprietary information, third parties may obtain, disclose or use our proprietary information without our authorization, which could adversely affect our business. From time to time, third parties have alleged that we infringe their proprietary rights. These claims or similar future claims could subject us to significant liability for damages, result in the invalidation of our proprietary rights, limit our ability to use infringing intellectual property or force us to license third-party technology rather than dispute the merits of any infringement claim. Even if we prevail, any associated litigation could be time consuming and expensive and could result in the diversion of our time and resources.

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.

We are currently involved in litigation arising out of or relating to the events leading up to the termination of the proposed acquisition of our Company in October 2007 and certain earnings guidance provided by us. In addition, similar litigation has been and may be initiated against us and others based on the alleged activities and disclosures at issue in the pending litigation. We cannot predict the outcome of any such proceeding or the likelihood that further proceedings will be instituted against us. In the event that there is an adverse ruling in any legal proceeding, we may be required to make payments to third parties that could harm our business or cash flows 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.

We have deferred tax assets in our consolidated financial statements.

Our consolidated financial statements include net deferred tax assets of $361.6 million as of June 30, 2012, which relate to temporary differences between the assets and liabilities in the consolidated financial statements and the assets and liabilities in the calculation of taxable income. The valuation of deferred tax assets is based on various projections for future taxable income reversing taxable temporary differences and tax planning strategies. Thus, when actual taxable income differs from projections, it may become necessary to adjust the valuation of our deferred tax assets, which would impact our results of operations and financial condition.

Harman International Industries, Incorporated is a holding company with virtually no operations of its own and therefore our cash flow and ability to service debt is dependent upon distributions from our subsidiaries.

Our ability to service our debt and pay dividends is dependent upon the operating earnings of our subsidiaries. The distribution of those earnings, or advances or other distributions of funds by those subsidiaries to Harman International Industries, Incorporated, all of which could be subject to statutory or contractual restrictions, are contingent upon the subsidiaries’ earnings and are subject to various business considerations.

 

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Our success depends upon our ability to attract and retain key employees and the succession of senior management.

Our success largely depends on the performance of our management team and other key employees. If we are unable to attract and retain talented, highly qualified senior management and other key people, our future operations could be adversely affected. In addition, if we are unable to effectively provide for the succession of senior management, including our chief executive officer, our business may be materially adversely affected. While we follow a disciplined, ongoing succession planning process and have succession plans in place for senior management and other key executives, these do not guarantee that the services of qualified senior executives will continue to be available to us at particular moments in time.

Any acquisitions we make could disrupt our business and materially harm our financial condition, results of operations and cash flows.

We may, from time to time, consider acquisitions of complementary companies, products or technologies. Acquisitions involve numerous risks, including difficulties in the integration of the acquired businesses, the diversion of our management’s attention from other business concerns, the assumption of unknown liabilities, undisclosed risks impacting the target and potential adverse effects on existing business relationships with our current customers and suppliers. In addition, any acquisitions could involve the incurrence of substantial additional indebtedness or dilution to our stockholders. We cannot assure you that we will be able to successfully integrate any acquisitions that we undertake or that such acquisitions will perform as planned or prove to be beneficial to our operations and cash flows. Any such failure could materially harm our financial condition, results of operations and cash flows.

Increased IT security requirements, vulnerabilities, threats and more sophisticated and targeted computer crime could pose a risk to our systems, networks, products, solutions, services and data.

Increased global IT security requirements, vulnerabilities, threats and more sophisticated and targeted computer crime pose a risk to the security of our systems and networks and the confidentiality, availability and integrity of our data. We also may have access to sensitive, confidential or personal data or information in certain of our businesses that is subject to privacy and security laws, regulations and customer-imposed controls. Despite our efforts to protect sensitive, confidential or personal data or information, our facilities and systems and those of our third-party service providers may be vulnerable to security breaches, theft, misplaced or lost data, programming and/or human errors that could potentially lead to the compromising of sensitive, confidential or personal data or information, improper use of our systems, software solutions or networks, unauthorized access, use, disclosure, modification or destruction of information, defective products, production downtimes and operational disruptions, which in turn could adversely affect our reputation, competitiveness and results of operations.

The demand for our infotainment products may be eroded by replacement technologies becoming available on mobile handsets and tablets.

Sales of our infotainment products represented more than half of our net sales in fiscal 2012. GPS/navigation technologies are increasingly being incorporated into devices such as mobile handsets and tablets. Mobile handsets are frequently GPS-enabled and many companies are now offering navigation software for such devices. In future years, if auto makers choose to replace embedded infotainment systems with mobile handset devices, the acceptance of this technology by consumers may negatively impact the demand for our infotainment products. If we do not continue to innovate to develop new and compelling products that capitalize upon new technologies, this could have a material adverse impact on our results of operations.

 

Item 1B. Unresolved Staff Comments

None.

 

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Item 2. Properties

Our corporate headquarters are located at 400 Atlantic Street, 15th floor, Stamford, Connecticut, 06901. Certain information regarding our principal facilities are described in the table below.

 

Location

   Segments    Size
(Sq. Ft.)
     Owned
or
Leased
     Percentage
Utilization
 

Ittersbach, Germany

   Infotainment

Lifestyle

     565,000         Owned         100

Nova Santa Rita, Brazil

   Professional

Lifestyle

     432,000         Owned         100

Dandong, China

   Lifestyle

Professional

     323,000         Leased         30

Atlanta, Georgia

   Lifestyle      305,000         Leased         100

Moreno Valley, California

   Lifestyle

Professional

     301,000         Leased         100

Northridge, California

   Lifestyle

Professional

     238,000         Leased         68

Straubing, Germany

   Infotainment

Lifestyle

     235,000         Owned         100

Elkhart, Indiana

   Professional      223,000         Owned         86

Szekesfehervar, Hungary

   Infotainment

Lifestyle

     222,000         Owned         100

Chateau du Loir, France

   Infotainment

Lifestyle

     221,000         Owned         75

Worth-Schaidt, Germany

   Infotainment

Lifestyle

     204,000         Owned         100

Tijuana, Mexico

   Professional

Lifestyle

     198,000         Leased         100

Vienna, Austria

   Professional

Lifestyle

     193,000         Leased         40

Queretaro, Mexico

   Infotainment

Lifestyle

     188,000         Leased         70

Bridgend, United Kingdom

   Lifestyle      168,000         Leased         100

Franklin, Kentucky

   Infotainment

Lifestyle

     152,000         Owned         100

Farmington Hills, Michigan

   Infotainment

Lifestyle

     151,000         Leased         100

Suzhou, China

   Infotainment

Lifestyle

     145,000         Owned         100

Sandy, Utah

   Professional      127,000         Leased         100

Juarez, Mexico

   Lifestyle      109,000         Leased         100

We also own or lease other facilities that are not considered principal properties. We believe that our facilities are suitable and adequate for our present needs and that suitable additional or substitute facilities will be available, if required.

 

Item 3. Legal Proceedings

At June 30, 2012, we were subject to legal claims and litigation arising in the ordinary course of business, including the matters described below. The outcome of these legal actions cannot be predicted with certainty; however, management, based upon advice from legal counsel, believes such actions are either without merit or will not have a material adverse effect on our financial condition, results of operations or cash flows.

 

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In re Harman International Industries, Inc. Securities Litigation

On October 1, 2007, a purported class action lawsuit was filed by Cheolan Kim (the “Kim Plaintiff”) against Harman and certain of our officers in the United States District Court for the District of Columbia (the “Court”) seeking compensatory damages and costs on behalf of all persons who purchased our common stock between April 26, 2007 and September 24, 2007 (the “Class Period”). The original complaint alleged claims for violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, (the “Exchange Act”) and Rule 10b-5 promulgated thereunder.

The complaint alleged that the defendants omitted to disclose material adverse facts about Harman’s financial condition and business prospects. The complaint contended that had these facts not been concealed at the time the merger agreement with Kohlberg Kravis Roberts & Co. and Goldman Sachs Capital Partners was entered into, there would not have been a merger agreement, or it would have been at a much lower price, and the price of our common stock therefore would not have been artificially inflated during the Class Period. The Kim Plaintiff alleged that, following the reports that the proposed merger was not going to be completed, the price of our common stock declined, causing the plaintiff class significant losses.

On November 30, 2007, the Boca Raton General Employees’ Pension Plan filed a purported class action lawsuit against Harman and certain of our officers in the Court seeking compensatory damages and costs on behalf of all persons who purchased our common stock between April 26, 2007 and September 24, 2007. The allegations in the Boca Raton complaint are essentially identical to the allegations in the original Kim complaint, and like the original Kim complaint, the Boca Raton complaint alleges claims for violations of Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5 promulgated thereunder.

On January 16, 2008, the Kim Plaintiff filed an amended complaint. The amended complaint, which extended the Class Period through January 11, 2008, contended that, in addition to the violations alleged in the original complaint, Harman also violated Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5 promulgated thereunder by “knowingly failing to disclose “significant problems” relating to its portable navigation device sales forecasts, production, pricing, and inventory” prior to January 14, 2008. The amended complaint claimed that when “Defendants revealed for the first time on January 14, 2008 that shifts in PND sales would adversely impact earnings per share by more than $1.00 per share in fiscal 2008,” that led to a further decline in our share value and additional losses to the plaintiff class.

On February 15, 2008, the Court ordered the consolidation of the Kim action with the Boca Raton action, the administrative closing of the Boca Raton action, and designated the short caption of the consolidated action as In re Harman International Industries, Inc. Securities Litigation, civil action no. 1:07-cv-01757 (RWR). That same day, the Court appointed Arkansas Public Retirement System as lead plaintiff (“Lead Plaintiff”) and approved the law firm Cohen, Milstein, Hausfeld and Toll, P.L.L.C. to serve as lead counsel.

On March 24, 2008, the Court ordered, for pretrial management purposes only, the consolidation of Patrick Russell v. Harman International Industries, Incorporated, et al. with In re Harman International Industries, Inc. Securities Litigation.

On May 2, 2008, Lead Plaintiff filed a consolidated class action complaint (the “Consolidated Complaint”). The Consolidated Complaint, which extends the Class Period through February 5, 2008, contends that Harman and certain of our officers and directors violated Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5 promulgated thereunder, by issuing false and misleading disclosures regarding our financial condition in fiscal year 2007 and fiscal year 2008. In particular, the Consolidated Complaint alleges that defendants knowingly or recklessly failed to disclose material adverse facts about MyGIG radios, portable navigation devices and our capital expenditures. The Consolidated Complaint alleges that when Harman’s true financial condition became known to the market, the price of our common stock declined significantly, causing losses to the plaintiff class.

 

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On July 3, 2008, defendants moved to dismiss the Consolidated Complaint in its entirety. Lead Plaintiff opposed the defendants’ motion to dismiss on September 2, 2008, and defendants filed a reply in further support of their motion to dismiss on October 2, 2008. The motion is now fully briefed. As of June 30, 2012, the case remained open with no new developments.

Patrick Russell v. Harman International Industries, Incorporated, et al.

Patrick Russell (the “Russell Plaintiff”) filed a complaint on December 7, 2007 in the United States District Court for the District of Columbia and an amended purported putative class action complaint on June 2, 2008 against Harman and certain of our officers and directors alleging violations of the Employee Retirement Income Security Act of 1974 (“ERISA”) and seeking, on behalf of all participants in and beneficiaries of the Savings Plan, compensatory damages for losses to the Savings Plan as well as injunctive relief, imposition of a constructive trust, restitution, and other monetary relief. The amended complaint alleges that from April 26, 2007 to the present defendants failed to prudently and loyally manage the Savings Plan’s assets, thereby breaching their fiduciary duties in violation of ERISA by causing the Savings Plan to invest in our common stock notwithstanding that the stock allegedly was “no longer a prudent investment for the Participants’ retirement savings.” The amended complaint further claims that, during the Class Period, defendants failed to monitor the Savings Plan fiduciaries, failed to provide the Savings Plan fiduciaries with, and to disclose to Savings Plan participants, adverse facts regarding Harman and our businesses and prospects. The Russell Plaintiff also contends that defendants breached their duties to avoid conflicts of interest and to serve the interests of participants in and beneficiaries of the Savings Plan with undivided loyalty. As a result of these alleged fiduciary breaches, the amended complaint asserts that the Savings Plan has “suffered substantial losses, resulting in the depletion of millions of dollars of the retirement savings and anticipated retirement income of the Savings Plan’s Participants.”

On March 24, 2008, the Court ordered, for pretrial management purposes only, the consolidation of Patrick Russell v. Harman International Industries, Incorporated, et al. with In re Harman International Industries, Inc. Securities Litigation.

Defendants moved to dismiss the complaint in its entirety on August 5, 2008. The Russell Plaintiff opposed the defendants’ motion to dismiss on September 19, 2008, and defendants filed a reply in further support of their motion to dismiss on October 20, 2008. The motion is now fully briefed. As of June 30, 2012, the case remained open with no new developments.

Executive Officers of the Registrant

Executive officers are appointed by our Board of Directors and hold office at the pleasure of the Board until the next annual meeting of shareholders or until their successors are elected and qualified. Each of our current executive officers is identified below together with information about each officer’s age, position and employment history for the last five years.

 

Name

  

Position

   Age  

Dinesh C. Paliwal

   Chairman, President and Chief Executive Officer      54   

Herbert K. Parker

   Executive Vice President and Chief Financial Officer      54   

Blake Augsburger

   Executive Vice President, President—Professional Division and Country Manager, North America      49   

Sachin Lawande

   Executive Vice President and Co-President—Lifestyle and Infotainment Divisions      45   

Michael Mauser

   Executive Vice President and Co-President—Infotainment and Lifestyle Divisions      49   

Dr. I.P. Park

   Executive Vice President and Chief Technology Officer      49   

David Slump

   Executive Vice President, Corporate Development      44   

John Stacey

   Executive Vice President and Chief Human Resources Officer      47   

Todd A. Suko

   Executive Vice President and General Counsel      45   

 

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Dinesh C. Paliwal became Chairman, President and Chief Executive Officer of Harman on July 1, 2008. Mr. Paliwal joined our Company on July 1, 2007 as President, Chief Executive Officer and Vice Chairman and was elected a director on August 13, 2007. Prior to joining our Company, Mr. Paliwal served as President of Global Markets and Technology of ABB Ltd from January 2006 until June 2007 and as President and CEO of ABB North America from January 2004 until June 2007.

Herbert K. Parker joined our Company in June 2008 as Executive Vice President and Chief Financial Officer. From August 15, 2008 until October 1, 2008, Mr. Parker also served as our principal accounting officer. Prior to joining our Company, he served as Chief Financial Officer of ABB North America from January 2006 to May 2008.

Blake Augsburger joined our Company in 2001 as the President of Crown International. In 2006, Mr. Augsburger was promoted to Executive Vice President and President- Professional Division. Mr. Augsburger also serves as Country Manager for North America. In 2011, Mr. Augsburger was named to the board of directors of Lakeland Financial.

Sachin Lawande joined our Company in 2001, and has served as our Executive Vice President and Co-President, Lifestyle and Infotainment Divisions since July 1, 2011. From January 2009 to February 2012, Mr. Lawande served as our Chief Technology Officer. From April 2010 to June 30, 2011, Mr. Lawande served as Co-President—Automotive Division. From 2008 to January 2009, Mr. Lawande served as Harman’s Chief Innovation Officer, where he was responsible for guiding software strategy and key development partnerships and was instrumental in launching an offshore development center in India as part of Harman’s strategy for optimizing its global footprint. From 2001 through 2008, Mr. Lawande served in various positions with QNX Software Systems, most recently as Vice President, Engineering Services.

Michael Mauser joined our Company in 1997, and has served as Executive Vice President and Co-President—Infotainment and Lifestyle Divisions since July 1, 2011. From April 2010 through June 30, 2011, Mr. Mauser served as Executive Vice President and Co-President—Automotive Division. From May 2005 until April 2010, Mr. Mauser served as Senior Vice President, Finance and Chief Financial Officer of our Automotive Division.

Dr. I.P. Park joined our Company in February 2012 as Executive Vice President and Chief Technology Officer. Prior to joining our Company, he served as Vice President of Intelligent Computing Laboratory at Samsung Electronics, from September 2006 through December 2011. While at Samsung, Dr. Park headed advanced software R&D teams responsible for developing Samsung’s future software technologies, and he provided leadership in core software research, standardization and open source activities.

David Slump has served as our Executive Vice President, Corporate Development since July 1, 2011. From January 2009 through June 30, 2011, he served as President—Consumer Audio Division. From January 2009 to May 2010, he also served as our Vice President, Corporate Development. Prior to joining our Company, from 2008 to January 2009, Mr. Slump served as Senior Vice President for Landis + Gyr Holdings, a leader in the energy management industry, where he directed the company’s global brand strategy and evaluated portfolio and architecture investments. From 2007 until 2008, he served as President and Chief Executive Officer of Cellnet + Hunt Group. From 2003 to 2007, Mr. Slump held a variety of positions with General Electric, most recently as General Manager, Global Marketing.

John Stacey joined our Company in February 2008 as Executive Vice President and Chief Human Resources Officer. Prior to joining our Company, he was Vice President, People for InBev North America, InBev Central and Eastern Europe from 2005 through January 2008.

Todd A. Suko joined our Company in October 2008 as Executive Vice President and General Counsel. From October 2008 through December 2011 he also served as Secretary. Prior to joining our Company Mr. Suko

 

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served as Vice President, General Counsel and Secretary for UAP Holding Corp. and United Agri Products from 2001 to September 2008. Mr. Suko is a member of the bar in Washington, DC and Virginia and is a Commander in the United States Navy Reserve.

 

Item 4. Mine Safety Disclosures

Not applicable

 

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Part II

 

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Our common stock is listed on the New York Stock Exchange and is reported on the New York Stock Exchange Composite Tape under the symbol HAR. As of July 31, 2012, there were approximately 105 record holders of our common stock.

The table below sets forth the reported high and low sales prices for our common stock, as reported on the New York Stock Exchange, for each quarterly period for fiscal years ended June 30, 2012 and 2011.

 

     Years Ended June 30,  
     2012      2011  

Market Price

   High      Low      High      Low  

First quarter ended September 30

   $ 47.93       $ 28.58       $ 35.62       $ 28.11   

Second quarter ended December 31

     44.78         26.20         48.88         32.54   

Third quarter ended March 31

     51.11         38.54         52.54         42.66   

Fourth quarter ended June 30

     49.82         35.70         50.99         42.51   

Our Board of Directors reinstated the payment of a cash dividend in the third quarter of fiscal year 2011, which had been suspended in the third quarter of fiscal year 2009. During fiscal year 2012, we declared and paid cash dividends of $0.30 per share, with dividends of $0.075 declared in each quarter. During fiscal year 2011, we declared cash dividends of $0.05 per share, with a dividend of $0.025 declared in the third and fourth quarters only.

On October 26, 2011, we announced that our Board of Directors authorized the repurchase of up to $200 million of our common stock. This buyback program allows us to purchase shares of our common stock in accordance with applicable securities laws on the open market, or through privately negotiated transactions, through October 25, 2012. We will determine the timing and the amount of any repurchases based on an evaluation of market conditions, share price and other factors. We entered into an agreement with an external broker, which provides the structure under which the program may be facilitated. This agreement and the buyback program may be suspended or discontinued at any time. As of June 30, 2012, we have repurchased 3,246,409 shares under the buyback program.

The following table provides information about shares acquired in connection with our share buyback program during the fourth quarter of fiscal year 2012:

 

Period

   Total Number
of Shares
Acquired
During
Period
     Average Price
Paid Per Share
     Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs
     Maximum Dollar
Amount
of Shares That May
Yet Be Purchased
Under the
Programs
 

April 1 – April 30

     0      $ 0        —        

May 1 – May 31

     1,000,400        40.57        1,000,400     

June 1 – June 30

     2,246,009        37.08        2,246,009     
  

 

 

       

 

 

    

Total

     3,246,409      $ 38.16        3,246,409      $ 76,053,033   
  

 

 

    

 

 

    

 

 

    

 

 

 

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” located in Item 7 of Part II of this report.

 

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Item 6. Selected Financial Data

The following table presents selected historical financial data derived from the audited Consolidated Financial Statements for each of the five fiscal years presented. The information should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” located in Item 7 of Part II of this report, and the audited Consolidated Financial Statements and the Notes to the Consolidated Financial Statements located in Item 8 of Part II of this report.

 

(In thousands except per share data)

   2012(1) (3)      2011(1)      2010(1) (2)      2009(2)     2008  

Net sales

   $ 4,364,078       $ 3,772,345       $ 3,364,428       $ 2,854,895      $ 4,072,359   

Operating income (loss)

   $ 300,246       $ 190,051       $ 85,555       $ (503,812   $ 132,167   

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

   $ 329,541       $ 135,916       $ 35,178       $ (422,345   $ 95,966   

Income (loss) from discontinued operations, net of income taxes

   $ 0       $ 0       $ 123,591       $ (9,159   $ 5,757   

Net income (loss)

   $ 329,541       $ 135,916       $ 164,058       $ (430,752   $ 101,302   

Net income (loss) attributable to Harman International Industries, Incorporated

   $ 329,541       $ 135,916       $ 158,769       $ (431,504   $ 101,723   

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

             

Basic

   $ 4.62       $ 1.91       $ 0.50       $ (7.19   $ 1.56   

Diluted

   $ 4.57       $ 1.90       $ 0.50       $ (7.19   $ 1.54   

Earnings (loss) per share from discontinued operations:

             

Basic

   $ 0.00       $ 0.00       $ 1.76       $ (0.16   $ 0.09   

Diluted

   $ 0.00       $ 0.00       $ 1.75       $ (0.16   $ 0.09   

Earnings (loss) per share:

             

Basic

   $ 4.62       $ 1.91       $ 2.26       $ (7.34   $ 1.65   

Diluted

   $ 4.57       $ 1.90       $ 2.25       $ (7.34   $ 1.64   

Weighted average shares outstanding:

             

Basic

     71,297         70,992         70,350         58,766        61,472   

Diluted

     72,083         71,635         70,595         58,766        62,182   

Total assets

   $ 3,169,464       $ 3,058,495       $ 2,556,215       $ 2,473,497      $ 2,802,971   

Total debt

   $ 395,688       $ 381,014       $ 377,837       $ 577,296      $ 361,737   

Total equity

   $ 1,529,611       $ 1,423,658       $ 1,134,892       $ 1,007,918      $ 1,382,108   

Dividends per share

   $ 0.30       $ 0.05       $ 0.00       $ 0.025      $ 0.05   

 

(1)

Fiscal year includes the consolidated balance sheets of MWM Acoustics and certain related entities (now known as Harman Embedded Audio), which we acquired on July 22, 2011, 3dB Research Limited (now known as Harman International Industries Canada Limited), which we acquired on February 10, 2011, Aha, which we acquired on September 13, 2010, and Eletrônica Selenium S.A. (now known as Harman do Brasil), which we acquired on June 1, 2010. The results of operations for all acquired companies are included in our Consolidated Statements of Income starting from the date of the respective acquisition.

(2) 

Includes a goodwill impairment charge of $12.3 million and $317.7 million in fiscal years 2010 and 2009, respectively.

(3) 

Net income includes a non-cash benefit of $124.2 million related to a reduction of our deferred tax valuation allowance on certain of our net U.S. deferred tax assets.

 

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with the information presented in other sections of this Annual Report on Form 10-K, including “Item 1. Business,” “Item 6. Selected Financial Data,” and “Item 8. Financial Statements and Supplementary Data.” This discussion contains forward-looking statements which are based on our current expectations and experience and our perception of historical trends, current market conditions, including customer acceptance of our new products, current economic data, expected future developments, including foreign currency exchange rates, and other factors that we believe are appropriate under the circumstances. These statements involve risks and uncertainties that could cause actual results to differ materially from those suggested in the forward-looking statements. See “Risk Factors” included in Item 1A of Part I of this report. Unless otherwise indicated, “Harman,” the “Company,” “we,” “our,” and “us” are used interchangeably to refer to Harman International Industries, Incorporated and its consolidated subsidiaries. All amounts are in thousands unless otherwise indicated.

Executive Overview

We believe we are a worldwide leader in the development, manufacturing and marketing of high quality, high fidelity audio products and electronic systems, as well as digitally integrated audio and infotainment systems for the automotive industry. We have developed a broad range of product offerings which we sell in our principal markets under our renowned brand names, including AKG®, Crown®, JBL®, Infinity®, Harman/Kardon®, Lexicon®, dbx®, BSS®, Studer®, Soundcraft®, Mark Levinson®, Becker®, Revel®, Logic 7® and Selenium®. We have built these brands by developing our engineering, manufacturing and marketing competencies, and have employed these resources to establish our company as a leader in the markets we serve.

We report our business on the basis of four segments. Our Infotainment, Lifestyle and Professional segments are based on our strategic approach to the markets and customers we serve. Our fourth segment, Other, primarily includes compensation, benefit and occupancy costs for corporate employees, net of allocations and expenses associated with new technology innovation and our corporate brand identity campaign.

We believe that innovation is an important element to gaining market acceptance of our products and strengthening our market position. We have a history of leveraging our continuous technological innovation across all of the markets we serve. We have a well-deserved reputation for delivering premium audio and infotainment solutions across a full spectrum of applications. We believe that our technological innovation, the quality of our products and our reputation for on-time delivery have resulted in Harman being awarded a substantial amount of Infotainment and Lifestyle business. As of June 30, 2012, we have a cumulative estimated $16.1 billion of future awarded Infotainment and Lifestyle automotive business, which represents the estimated future lifetime net sales for all customers. This amount does not represent firm customer orders. We calculate our awarded business using various assumptions, which we update annually, including global vehicle production forecasts, customer take rates for our products, revisions to product life cycle estimates and the impact of annual price reductions, among other factors. We update our estimates quarterly by adding the value of new awards received and subtracting sales recorded during the quarter. We believe our currently awarded automotive business will position us well for follow-on and new business with these existing customers.

Our management uses the amount of our future awarded business for short- and long-term budgeting and forecasting, development of earnings guidance and for planning future corporate investment and other activities, such as capital expenditures and restructuring. Our future awarded business is also an input used to approximate our enterprise value. We believe our investors utilize this information for a number of reasons, including evaluating our future financial performance over time, to model our financial results of operations, to understand the risks inherent in our current operating plan, and as an input to approximate our enterprise value. However, our estimates of future awarded automotive business are forward-looking statements and may not actually be achieved. See the risk factor “We may not realize sales represented by awarded business” in Item 1A “Risk Factors” of Part I of this report.

 

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

Our sales and earnings may vary due to the production schedules and model year changeovers of our automotive customers, the holiday buying season for home audio products, customer acceptance of our products, the timing of new product introductions, product offerings by our competitors and general economic conditions. Since most of our businesses operate using local currencies, our reported sales and earnings may also fluctuate due to foreign currency exchange rates, especially for the Euro.

We believe significant opportunities exist to grow our business in all three of our business segments in emerging markets such as Brazil, Russia, India and China. To execute on this strategy, we have hired dedicated country staff and managers in these markets. During the fiscal year ended June 30, 2012, sales grew in these emerging markets to $528.6 million, an increase of $123.7 million, or 30.6 percent over the prior fiscal year. During the fiscal year ended June 30, 2011, sales grew in these emerging markets to $404.9 million, an increase of $163.6 million, or 67.8 percent over the prior fiscal year. We expect our market share to continue to grow significantly in these countries.

We continue to focus our efforts on improving our cost structure to enable us to remain competitive. We continue to roll out our global marketing campaign, featuring some of the world’s most prominent artists such as Jennifer Lopez, Sir Paul McCartney and Tim McGraw, in order to increase brand awareness and support growth and market share gains across our entire business.

Critical Accounting Policies

The methods, estimates and judgments we use in applying our accounting policies, in conformity with generally accepted accounting principles in the United States (“GAAP”), have a significant impact on the results we report in our consolidated financial statements. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. The estimates affect the carrying values of assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions. Our accounting policies are more fully described in Note 1 – Summary of Significant Accounting Policies in the Notes to the Consolidated Financial Statements located in Item 8 of Part II of this report. However, we believe the following policies merit discussion due to their higher degree of judgment, estimation, or complexity.

Revenue Recognition

Revenue is generally recognized at the time of product shipment or delivery, depending on when the passage of title to goods transfers to unaffiliated customers and when all of the following have occurred: a firm sales agreement is in place, pricing is fixed or determinable and collection is reasonably assured. Sales are reported net of estimated returns, discounts, rebates and incentives. Substantially all of our revenue transactions involve the delivery of a physical product. Royalty income, which is not material, is recorded when earned based upon contract terms with licensees which provide for royalties.

We enter into incentive agreements with certain automotive customers which relate to a specific program award. These incentives are generally based on fixed payments paid by us to the automotive manufacturer, and are generally deferred, if certain criteria are met. The deferability criteria include the existence of legally enforceable rights, management’s ability and intent to enforce the recoverability clauses and the ability to generate future earnings from the agreement in excess of the deferred amounts. Capitalized amounts are amortized, generally as a reduction to revenue, over the related program award term based on our estimate of future volumes. Our estimates are reviewed regularly and the cumulative impact of a revision in estimates is recorded in the period such revisions become probable and estimable.

 

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Allowance for Doubtful Accounts

Our products are sold to customers in many different markets and geographic locations. Methodologies for estimating bad debt reserves include specific reserves for known collectability issues and percentages applied to aged receivables based on historical experience. We must make judgments and estimates regarding accounts receivable that may become uncollectible. These estimates affect our bad debt reserve and results of operations. We base these estimates on many factors including historical collection rates, the financial stability and size of our customers as well as the markets they serve and our analysis of aged accounts receivable. Our judgments and estimates regarding collectability of accounts receivable have an impact on our consolidated financial statements.

Inventories

Inventories are stated at the lower of cost or market. Cost is determined principally by the first-in, first-out method. We establish reserves for our inventory which require us to analyze the aging and forecasted demand for our inventories, to forecast future product sales prices, pricing trends and margins, and to make judgments and estimates regarding obsolete, damaged or excess inventory. Markdown percentages are determined based on our estimate of future demand and selling prices for our products. Future sales prices are determined based on current and forecasted market expectations, as well as terms that have been established for future orders under automotive platform arrangements. Our inventory reserves primarily relate to our raw materials as our finished goods are primarily produced to order. We calculate inventory reserves on raw materials by reviewing the levels of raw materials on-hand and comparing this to estimates of historical consumption and future demand in order to assess whether we have excess materials on-hand. If it is determined that excess materials are in inventory, an appropriate inventory reserve is established. Inventory reserves on finished goods are primarily determined through inventory turnover measures. Products showing low turnover rates are assigned a percentage reserve based on future estimates of sales volumes and margins. We make adjustments to our inventory reserves based on the identification of specific situations and increase our inventory reserves accordingly. As changes in future economic or industry conditions occur, we revise the estimates that were used to calculate our inventory reserves.

If actual conditions are less favorable than those we have projected, we may need to increase our reserves for excess and obsolete inventories. Any increases in our reserves will adversely impact our results of operations. Such reserves are not reduced until the product is sold.

At June 30, 2012 and 2011 our inventory reserves were $61.9 million and $73.3 million, respectively. The decrease was primarily due to foreign currency translation. Refer to Note 4 – Inventories in the Notes to the Consolidated Financial Statements for more information.

Goodwill

We assess goodwill for potential impairments annually each April 30, or during the year if an event or other circumstance indicates that we may not be able to recover the carrying amount of the asset. Application of the goodwill impairment test requires judgment, including the identification of reporting units, assignment of assets and liabilities to reporting units, assignment of goodwill to reporting units, and determination of the fair value of each reporting unit. We estimate the fair value of each reporting unit using a discounted cash flow methodology. This requires us to use significant judgment, including estimation of future cash flows, which is dependent on internal forecasts, estimation of the long-term rate of growth for our business, the useful life over which cash flows will occur, determination of our weighted average cost of capital, and relevant market data.

In evaluating goodwill for impairment, we may first assess qualitative factors to determine whether it is more likely than not (that is, a likelihood of more than 50 percent) that the fair value of a reporting unit is less than its carrying amount. If we conclude that it is not more likely than not that the fair value of a reporting unit is less than its carrying value, then no further testing of the goodwill assigned to the reporting unit is required. However, if we conclude that it is more likely than not that the fair value of a reporting unit is less than its carrying value, then we perform a two-step goodwill impairment test to identify potential goodwill impairment and measure the amount of goodwill impairment to be recognized, if any.

 

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The first step compares the fair value of each reporting unit to its carrying value, with fair value of each reporting unit determined using established valuation techniques, specifically the market and income approaches. If the results of the first step indicate that the fair value of a reporting unit is less than its carrying value, the second step of this test is conducted wherein the amount of any impairment is determined by comparing the implied fair value of goodwill in a reporting unit to the recorded amount of goodwill for that reporting unit. The implied fair value of goodwill is calculated as the excess of fair value of the reporting unit over the amounts assigned to its assets and liabilities. Should the fair values of the goodwill so calculated be less than the carrying value, an impairment is recognized.

Other Intangible Assets

Intangible assets primarily consist of patents, trademarks and distribution agreements and are amortized over periods ranging from 10 months to 17 years. Other intangible assets are amortized on a straight-line basis over their estimated economic lives. We believe that the straight-line method of amortization reflects an appropriate allocation of the cost of the intangible assets to earnings in proportion to the amount of economic benefits obtained annually by our Company.

Impairment of Long-Lived Assets

We review the recoverability of our long-lived assets, including buildings, equipment and other definite-lived intangible assets, when events or changes in circumstances occur that indicate that the carrying value of the asset may not be recoverable. The assessment of possible impairment is based on our ability to recover the carrying value of the asset from the expected future cash flows (undiscounted and without interest charges) of the related operations. If these cash flows are less than the carrying value of such asset, an impairment loss is recognized for the difference between estimated fair value and carrying value. Our primary measure of fair value is based on discounted cash flows. We will continue to monitor the need for impairment tests, which could result in additional non-cash impairment charges. We recognized $0.6 million and $1.2 million in impairment charges related to facilities that were held-for-sale in the fiscal years ended June 30, 2012 and 2010, respectively. We did not record any impairment charges for long-lived assets in the fiscal year ended June 30, 2011.

Pre-Production and Development Costs

We incur pre-production and development costs related to infotainment systems that we develop for automobile manufacturers pursuant to long-term supply arrangements. Portions of these costs are reimbursable under separate agreements and are recorded as unbilled costs in our Consolidated Balance Sheets in Other current assets and Other assets, once an agreement is signed. We believe that the terms of our supply contracts and our established relationships with these automobile manufacturers reasonably assure that we will collect the reimbursable portions of these contracts.

Accrued Warranties

We warrant our products to be free from defects in materials and workmanship for periods ranging from six months to six years from the date of purchase, depending on the business segment and product. Our dealers and warranty service providers normally perform warranty service in field locations and regional service centers, using parts and replacement finished goods we supply on an exchange basis. Our dealers and warranty service providers also install updates we provide to correct defects covered by our warranties. Estimated warranty liabilities are based upon past experience with similar types of products, the technological complexity of certain products, replacement cost and other factors. If estimates of warranty provisions are no longer adequate based on our analysis of current activity, incremental provisions are recorded as warranty expense in our Consolidated Statement of Income. We take these factors into consideration when assessing the adequacy of our warranty provision for periods still open to claim. Refer to Note 6 – Accrued Warranties in the Notes to the Consolidated Financial Statements for more information.

 

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Income Taxes and Tax Valuation Allowances

We record the estimated future tax effects of temporary differences between the tax basis of assets and liabilities and amounts reported in our Consolidated Balance Sheets, as well as operating loss and tax credit carryforwards. We evaluate all available positive and negative evidence in each tax jurisdiction regarding the recoverability of any asset recorded in our Consolidated Balance Sheets and provide valuation allowances to reduce our deferred tax assets to an amount we believe is more likely than not to be realized. We regularly review our deferred tax assets for recoverability considering historical profitability, our ability to project future taxable income, the expected timing of the reversals of existing temporary differences and tax planning strategies. If we continue to operate at a loss in certain jurisdictions or are unable to generate sufficient future taxable income within the defined lives of such assets, we could be required to increase our valuation allowance against all or a significant portion of our deferred tax assets. This increase in valuation allowance could result in substantial increases in our effective tax rate and could have a material adverse impact on our operating results. Conversely, if and when our operations in some jurisdictions become sufficiently profitable before what we have estimated in our current forecasts, we would be required to reduce all or a portion of our current valuation allowance and such reversal would result in an increase in our earnings in such period. We recorded a total non-cash tax benefit from continuing operations of $126.3 million for the year ended June 30, 2012, of which $124.2 million was recorded as a discrete benefit in the third quarter of fiscal year 2012. Refer to Note 13 – Income Taxes in the Notes to the Consolidated Financial Statements for more information. Adjustments to our valuation allowance from continuing operations, through charges to income tax (benefit) expense, were $0.2 million and $4.8 million for the years ending June 30, 2011 and 2010, respectively.

The calculation of our tax liabilities involves evaluating uncertainties in the application of complex tax regulations. We recognize liabilities for unrecognized tax positions in the U.S. and other tax jurisdictions based on our estimate of whether and the extent to which additional taxes will be due. If payment of these amounts ultimately proves to be unnecessary, the reversal of the liabilities would result in additional tax benefits recognized in the period in which we determine the liabilities are no longer necessary. If our estimate of tax liabilities proves to be less than the ultimate assessment, a further charge to expense would result. We recognize interest and penalties related to income tax matters in income tax expense.

Severance and Exit Costs

We recognize liabilities for severance and exit costs based upon the nature of the liability incurred. For involuntary separation programs that are conducted according to the guidelines of our written involuntary separation plan or according to the provisions of collective bargaining agreements or statutes, we recognize the liability when it is probable and reasonably estimable. For one-time termination benefits, such as additional severance pay, and other exit costs, such as lease and other contract termination costs, the liability is measured and originally recognized at fair value in the period in which the liability is incurred, with subsequent changes recognized in earnings in the period of change. Refer to Note 15 – Restructuring in the Notes to the Consolidated Financial Statements for more information.

Share-Based Compensation

Share-based compensation expense is recognized based on the estimated fair value of stock options and similar equity instruments awarded to employees. Refer to Note 14 – Shareholders’ Equity and Share-Based Compensation in the Notes to the Consolidated Financial Statements for more information.

Discontinued Operations

The results of operations of businesses that have been sold are presented separately as Income from discontinued operations, net of income taxes, in our Consolidated Statements of Income, in the current and prior periods, where applicable. Refer to Note 3 – Discontinued Operations in the Notes to the Consolidated Financial Statements for more information.

 

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Change in Segments

Effective July 1, 2011, we revised our business segments in order to better align them with our strategic approach to the markets and customers we serve. While our Professional segment was largely unaffected, we reorganized our Automotive and Consumer segments and created two new segments, Infotainment and Lifestyle. The Infotainment segment includes our infotainment business, which was previously reported in our Automotive segment, and Aha Mobile, (“Aha”), a business we acquired in September 2010, which was previously reported in our Other segment. Our Lifestyle segment includes our automotive audio business, which was previously reported in our Automotive segment, our Consumer segment, which was previously reported as a standalone segment, and our luxury home audio business, which was previously reported in our Professional segment. Our Professional segment includes our Professional segment, as previously reported, excluding our luxury home audio business. Prior period segment amounts throughout the consolidated financial statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations have been reclassified to conform to the current segment structure.

Results of Operations

Net Sales

Fiscal year 2012 net sales were $4.364 billion, an increase of 15.7 percent compared to the prior fiscal year or 17.4 percent excluding foreign currency translation. Foreign currency translation had an unfavorable impact of $54.4 million when compared to the prior fiscal year. The increase in net sales was primarily in our Infotainment and our Lifestyle segments, and was partially driven by new infotainment product launches and higher production volumes partially driven by a temporary increase in sales due to the inability of a competitor to supply its customers, increases in sales of our audio products to automotive manufacturers, surcharges to certain automotive audio customers to recover increased costs on rare earth minerals, increases in net sales of scalable and mid-level infotainment systems and the addition of MWM Acoustics LLC and certain related entities (“MWM Acoustics”) in our Lifestyle segment.

Fiscal year 2011 net sales were $3.772 billion, an increase of 12.1 percent compared to the prior fiscal year or 12.7 percent excluding foreign currency translation. Foreign currency translation had an unfavorable impact of $17.4 million when compared to the prior fiscal year. Each of our three business segments reported higher net sales compared to the prior fiscal year although the increase in overall net sales was primarily attributable to our Infotainment and Professional segments.

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

 

     Year Ended June 30,  
      2012      Percentage     2011      Percentage     2010      Percentage  

Infotainment

   $ 2,401,562         55.0   $ 2,088,599         55.4   $ 1,836,194         54.6

Lifestyle

     1,330,798         30.5     1,087,270         28.8     1,023,532         30.4

Professional

     630,731         14.5     595,687         15.8     504,029         15.0

Other

     987         0.0     789         0.0     673         0.0
  

 

 

      

 

 

      

 

 

    

Total

   $ 4,364,078         100.0   $ 3,772,345         100.0   $ 3,364,428         100.0
  

 

 

      

 

 

      

 

 

    

Infotainment—Infotainment net sales increased 15.0 percent in fiscal year 2012 compared to the prior fiscal year, or 17.3 percent excluding foreign currency translation. The increase in net sales was driven by increases in scalable infotainment system net sales, new product launches, higher production volumes and extension of current product offerings on new vehicle platforms, partially offset by unfavorable foreign currency translation of $40.6 million. In addition, we had a temporary increase in net sales in the first quarter of fiscal year 2012 due to the inability of one of our competitors to supply its customers, as a result of the Japanese earthquake and tsunami in March 2011.

 

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Infotainment net sales increased 13.7 percent in fiscal year 2011 compared to the prior fiscal year, or 14.5 percent excluding foreign currency translation. The increase in net sales was primarily due to new infotainment business awards with European automobile manufacturers and overall production recovery, partially offset by unfavorable foreign currency translation of $12.8 million and the exit of the PND distribution channel in January 2010, which contributed $68.0 million of net sales in fiscal year 2010.

Lifestyle—Lifestyle net sales increased 22.4 percent in fiscal year 2012 compared to the prior fiscal year, or 23.8 percent excluding foreign currency translation. The increase in net sales was primarily due to higher automotive audio net sales in Europe and North America, surcharges to certain automotive audio customers to recover increased costs on rare earth minerals, the addition of MWM Acoustics, and increases in home and multimedia product sales, partially offset by unfavorable foreign currency translation of $12.2 million.

Lifestyle net sales increased 6.2 percent in fiscal year 2011 compared to the prior fiscal year, or 7.2 percent excluding foreign currency translation. The increase in net sales was primarily due to higher automotive audio net sales, and increased home audio market share in Latin America, aided by $41.0 million of Harman do Brasil (formerly known as Selenium) net sales, partially offset by unfavorable foreign currency translation of $9.2 million.

Professional—Professional net sales increased 5.9 percent in fiscal year 2012 compared to the prior fiscal year, both including and excluding foreign currency translation. The increase in net sales was primarily due to new product introductions and the development of emerging market distribution channels, partially offset by unfavorable foreign currency translation of $1.6 million.

Professional net sales increased 18.2 percent in fiscal year 2011 compared to the prior fiscal year, or 17.1 percent excluding foreign currency translation. The increase in net sales was primarily due to increased market share in Latin America, aided by $39.0 million of Harman do Brasil net sales, improvements in overall market conditions, specifically within our loudspeaker, digital signal processing, mixing and microphone/headphone business units and favorable foreign currency translation of $4.6 million.

Gross Profit

Gross profit as a percentage of net sales increased 0.9 percentage points to 27.1 percent in fiscal year 2012 compared to the prior fiscal year. Gross profit as a percentage of net sales increased in our Infotainment segment primarily due to higher sales volumes leveraged over a lower cost base driven by productivity improvement programs and favorable product mix. Gross profit as a percentage of net sales declined in our Lifestyle and Professional segments due to higher costs for rare earth neodymium magnets, a key component in speakers and investments in production capacity to support future growth.

Gross profit as a percentage of net sales decreased 0.1 percentage points to 26.2 percent in fiscal year 2011 compared to the prior fiscal year. The decrease in gross profit as a percentage of net sales was primarily in our Infotainment and Lifestyle segments and was primarily due to unfavorable product mix and reduced material cost savings due to tighter component and raw material supply constraints, partially offset by improved leverage of fixed overhead costs due to higher sales volumes.

 

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

 

     Year Ended June 30,  
      2012      Percentage
of Net
Sales
    2011      Percentage
of Net
Sales
    2010     Percentage
of Net
Sales
 

Infotainment

   $ 557,349         23.2   $ 405,491         19.4   $ 365,950        19.9

Lifestyle

     382,943         28.8     337,931         31.1     326,310        31.9

Professional

     242,147         38.4     243,115         40.8     196,608        39.0

Other

     1,707         *        813         *        (3,710     *   
  

 

 

      

 

 

      

 

 

   

Total

   $ 1,184,146         27.1   $ 987,350         26.2   $ 885,158        26.3
  

 

 

      

 

 

      

 

 

   

 

* Not meaningful.

Infotainment— Gross profit as a percentage of net sales increased 3.8 percentage points to 23.2 percent for the year ended June 30, 2012 compared to the prior fiscal year. The increase in gross profit as a percentage of net sales was primarily due to higher sales volumes leveraged over a lower cost base driven by productivity improvement programs and favorable product mix related to increases in scalable infotainment systems net sales.

Infotainment gross profit as a percentage of net sales decreased 0.5 percentage points to 19.4 percent in fiscal year 2011 compared to the prior fiscal year. The decrease in gross profit as a percentage of net sales was primarily due to unfavorable product mix, specifically an increase in lower margin infotainment business. Gross profit was also negatively impacted by a $3.7 million customer claim related to defective third-party software. These decreases were partially offset by improved leverage of fixed overhead costs due to higher sales volumes and savings achieved through our STEP Change cost reduction program.

Lifestyle—Lifestyle gross profit as a percentage of net sales decreased 2.3 percentage points to 28.8 percent in fiscal year 2012 compared to the prior fiscal year. The decrease in gross profit as a percentage of net sales was primarily due to the dilutive impact from our implementation of a rare earth mineral cost surcharge program and investments in production capacity to support future growth. The surcharges only recover the increased cost of the rare earth minerals and therefore provide no gross profit, resulting in a decline in gross profit as a percentage of net sales.

Lifestyle gross profit as a percentage of net sales decreased 0.8 percentage points to 31.1 percent in fiscal year 2011 compared to the prior fiscal year. The decrease in gross profit as a percentage of net sales was primarily due to a temporary reduction in higher margin automotive audio business due to customer production facility shutdowns as a result of the earthquake and tsunami in Japan. Our gross profit was also negatively impacted by a raw material price increase related to supply constraints of rare earth minerals used in the manufacture of speakers. These decreases were partially offset by favorable gross margin in our home audio business from Harman do Brasil, lower inventory write-offs in our home audio business, improved leverage of fixed overhead costs due to higher sales volumes and savings achieved through our STEP Change cost reduction program and lower warranty expense.

Professional—Professional gross profit as a percentage of net sales decreased 2.4 percentage points to 38.4 percent in fiscal year 2012 compared to the prior fiscal year. The decrease in gross profit as a percentage of net sales was primarily due to higher net costs for rare earth neodymium magnets, a key component in speakers, investments in production capacity to support future growth and higher freight costs.

Professional gross profit as a percentage of net sales increased 1.8 percentage points to 40.8 percent in fiscal year 2011 compared to the prior fiscal year. The increase in gross profit as a percentage of net sales was primarily due to our pricing power, a favorable product mix shift, lower restructuring charges, savings achieved through our STEP Change cost reduction program and new product introductions.

 

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Selling, General and Administrative Expenses

Selling, general and administrative expenses (“SG&A”) were $884.2 million in fiscal year 2012 compared to $813.8 million in the prior fiscal year, an increase of $70.4 million. The increase in SG&A was primarily due to higher research and development (“R&D”) expenses of $27.2 million and higher selling and advertising expenses, partially offset by favorable foreign currency translation of $9.1 million and the receipt of $4.0 million of business interruption insurance proceeds related to the Japanese earthquake and tsunami. As a percentage of net sales, SG&A decreased 1.3 percentage points to 20.3 percent in fiscal year 2012 compared to the prior fiscal year. R&D expenses were $331.9 million, or 7.6 percent of net sales, in fiscal year 2012 compared to $304.6 million, or 8.1 percent of net sales, in the prior fiscal year.

SG&A were $813.8 million in fiscal year 2011 compared to $774.2 million in the prior fiscal year, an increase of $39.6 million. The increase in SG&A was primarily due to higher overall selling and marketing expenses and SG&A attributable to Harman do Brasil, partially offset by favorable foreign currency translation of $7.6 million and a $5.9 million decrease in charges for claims related to infotainment supply arrangements compared to the prior fiscal year. As a percentage of net sales, SG&A decreased 1.4 percentage points to 21.6 percent in fiscal year 2011 compared to the prior fiscal year. R&D expenses were $304.6 million, or 8.1 percent of net sales, in fiscal year 2011 compared to $322.7 million, or 9.6 percent of net sales, in the prior fiscal year.

We continued to incur costs relating to our restructuring programs, which were designed to address our global footprint, cost structure, technology portfolio, human resources and internal processes. We recorded restructuring charges in SG&A of $6.0 million, $16.5 million and $13.5 million in fiscal years 2012, 2011 and 2010, respectively. Restructuring is further described under the caption “Restructuring” later in this discussion.

A summary of our SG&A by business segment is presented below:

 

     Year Ended June 30,  
      2012      Percentage
of Net
Sales
    2011      Percentage
of Net
Sales
    2010      Percentage
of Net
Sales
 

Infotainment

   $ 377,125         15.7   $ 344,388         16.5   $ 350,258         19.1

Lifestyle

     241,039         18.1     236,277         21.7     228,876         22.4

Professional

     159,559         25.3     152,447         25.6     126,023         25.0

Other

     106,477         *        80,697         *        69,032         *   
  

 

 

      

 

 

      

 

 

    

Total

   $ 884,200         20.3   $ 813,809         21.6   $ 774,189         23.0
  

 

 

      

 

 

      

 

 

    

 

* Not meaningful.

Infotainment—Infotainment SG&A increased $32.7 million to $377.1 million in fiscal year 2012 compared to the prior fiscal year. The increase in SG&A was primarily due to $29.2 million of higher R&D expenses, partially offset by favorable foreign currency translation of $5.7 million. As a percentage of net sales, SG&A decreased 0.8 percentage points to 15.7 percent in fiscal year 2012 compared to the prior fiscal year. R&D expenses increased $29.2 million to $231.0 million, or 9.6 percent of net sales in fiscal year 2012, compared to $201.8 million, or 9.7 percent of net sales in the prior fiscal year. The increase in R&D expenses was primarily related to new product launches.

Infotainment SG&A decreased $5.9 million to $344.4 million in fiscal year 2011 compared to the prior fiscal year. The decrease in SG&A was primarily due to a net decrease in R&D expenses of $23.0 million, favorable foreign currency translation of $4.8 million and a $5.9 million decline in charges related to infotainment supply arrangements, partially offset by higher general and administrative expenses. As a percentage of net sales, SG&A decreased 2.6 percentage points to 16.5 percent in fiscal year 2011 compared to the prior fiscal year. R&D expenses decreased $23.0 million to $201.8 million, or 9.7 percent of net sales in fiscal year 2011 compared to $224.8 million, or 12.2 percent of net sales in the prior fiscal year.

 

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Lifestyle—Lifestyle SG&A increased $4.8 million to $241.0 million in fiscal year 2012 compared to the prior fiscal year. The increase in SG&A was primarily due to higher selling expenses, increased start-up costs in emerging markets and the addition of MWM Acoustics. These increases were partially offset by the receipt of $4.0 million of business interruption insurance proceeds related to the Japanese earthquake and tsunami and favorable foreign currency translation of $2.6 million. As a percentage of net sales, SG&A decreased 3.6 percentage points to 18.1 percent in fiscal year 2012 compared to the prior fiscal year. R&D expenses increased $2.1 million to $58.3 million, or 4.4 percent of net sales in fiscal year 2012, compared to $56.3 million, or 5.2 percent of net sales in the prior fiscal year.

Lifestyle SG&A increased $7.4 million to $236.3 million in fiscal year 2011 compared to the prior fiscal year. The increase in SG&A was primarily due to additional SG&A related to Harman do Brasil and higher selling expenses in Europe related to the home audio and multimedia business, partially offset by a net decrease in R&D expenses of $4.0 million. As a percentage of net sales, SG&A decreased 0.7 percentage points to 21.7 percent in fiscal year 2011 compared to the prior fiscal year. R&D expenses decreased $4.0 million to $56.3 million, or 5.2 percent of net sales in fiscal year 2011 compared to $60.2 million, or 5.9 percent of net sales in the prior fiscal year.

Professional—Professional SG&A increased $7.1 million to $159.6 million in fiscal year 2012 compared to the prior fiscal year. The increase in SG&A was primarily due to higher restructuring expenses and higher selling expenses, partially offset by lower R&D expenses. As a percentage of net sales, SG&A decreased 0.3 percentage points to 25.3 percent in fiscal year 2012 compared to the prior fiscal year. R&D expenses decreased $2.1 million to $33.5 million, or 5.3 percent of net sales in fiscal year 2012, compared to $35.6 million, or 6.0 percent of net sales in the prior fiscal year.

Professional SG&A increased $26.4 million to $152.4 million in fiscal year 2011 compared to the prior fiscal year. The increase in SG&A was primarily due to SG&A attributable to Harman do Brasil, higher R&D expenses and unfavorable foreign currency translation of $0.9 million. As a percentage of net sales, SG&A increased 0.6 percentage points to 25.6 percent in fiscal year 2011 compared to the prior fiscal year. R&D expenses increased $2.6 million to $35.6 million, or 6.0 percent of net sales, compared to $33.0 million or 6.6 percent of net sales in the prior fiscal year.

Other—Other SG&A primarily includes compensation, benefit and occupancy costs for our corporate employees and expenses associated with new technology innovation and our corporate brand identity campaign. Other SG&A increased $25.8 million to $106.5 million in fiscal year 2012 primarily due to higher R&D expenses associated with new corporate technology, investments in new technology innovation utilizing new and emerging technologies which are currently not product specific and higher advertising and marketing expenses related to the launch of our global brand awareness campaign.

Other SG&A increased $11.7 million to $80.7 million in fiscal year 2011 primarily due to higher R&D expenses associated with new corporate technology, higher advertising expenses and higher corporate development expenses.

Sale of Intellectual Property

Effective February 15, 2011, we entered into an agreement with a third party pursuant to which we monetized certain intellectual property rights. Income of $0.3 million and $16.5 million was recognized in connection with this transaction in our Infotainment segment and is included in the Consolidated Statement of Income for the fiscal years ended June 30, 2012 and 2011, respectively under the line item Sale of intellectual property.

 

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Loss on Deconsolidation of Variable Interest Entity

In December 2009, we determined that we were no longer the primary beneficiary of a joint venture which was considered a variable interest entity and previously required consolidation. Since we were no longer the primary beneficiary, in December 2009 we deconsolidated the Harman Navis, Inc. joint venture which resulted in an overall loss of $13.1 million in our Infotainment segment and is included in our Consolidated Statement of Income as loss on deconsolidation of variable interest entity for the fiscal year ended June 30, 2010. The loss resulted primarily from the difference between the fair value of the consideration received for the disposal of our equity interest and the net asset value of the joint venture that was deconsolidated.

Restructuring

Our restructuring program that is designed to improve our global footprint, cost structure, technology portfolio, human resources and internal processes continues. During fiscal year 2012, we continued to refine and expand on activities launched in prior years and significant new programs were launched to: (i) optimize certain research and development and supply chain functions; (ii) outsource certain manufacturing capabilities; and (iii) divest or sublease facilities no longer needed to support current operations. In fiscal year 2011, we announced the relocation of certain manufacturing activities from Washington, Missouri to Mexico and the outsourcing of certain manufacturing activities to third party suppliers. In fiscal year 2010, we announced the relocation of certain manufacturing activities from the United Kingdom to Hungary, a consolidation and optimization of our manufacturing capabilities in China and the exit of the PND distribution channel in Germany.

A summary and components of our restructuring initiatives are presented below and include accruals for new programs as well as revisions to estimates, both increases and decreases, to programs accrued in prior periods:

 

     Severance
Related
Costs
    Third Party
Contractor
Termination Costs
    Facility Closure
and Other
Related Costs
    Asset
Impairments(1)
    Total  

Liability, June 30, 2009

   $ 67,930      $ 308      $ 8,633      $ 0      $ 76,871   

Expense(2)

     10,049        (277     3,222        4,880        17,874   

Accumulated depreciation offset

     0        0        0        (4,880     (4,880

Payments

     (41,186     (33     (4,299     0        (45,518

Foreign currency translation

     (3,757     2        6        0        (3,749
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liability, June 30, 2010

   $ 33,036      $ 0      $ 7,562      $ 0      $ 40,598   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Expense(2)

     10,541        0        4,542        5,564        20,647   

Accumulated depreciation offset

     0        0        0        (5,564     (5,564

Payments

     (15,231     0        (4,346     0        (19,577

Foreign currency translation

     3,416        0        102        0        3,518   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liability, June 30, 2011

   $ 31,762      $ 0      $ 7,860      $ 0      $ 39,622   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Expense(2)

     (1,008     315        7,146        2,696        9,149   

Accumulated depreciation offset

     0        0        0        (2,696     (2,696

Payments

     (8,434     (298     (4,169     0        (12,901

Foreign currency translation

     (2,382     0        2        0        (2,380
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liability, June 30, 2012

   $ 19,938      $ 17      $ 10,839      $ 0      $ 30,794   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

Credits related to restructuring charges for accelerated depreciation and inventory provisions are recorded against the related assets in Property, plant & equipment, net or Inventories in our Consolidated Balance Sheets and do not impact the restructuring liability.

(2) 

Restructuring expenses noted above are primarily in SG&A in our Consolidated Statements of Income. Asset impairments, which consist of accelerated depreciation and inventory provisions are primarily in Cost of sales in our Consolidated Statements of Income.

 

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Restructuring liabilities are recorded in Accrued liabilities and Other non-current liabilities in our Consolidated Balance Sheets.

Restructuring expenses by reporting business segment are presented below:

 

     Year Ended June 30,  
     2012     2011      2010  

Infotainment

   $ (1,458   $ 5,949       $ (3,330

Lifestyle

     169        7,062         13,689   

Professional

     8,459        1,835         2,191   

Other

     (717     237         444   
  

 

 

   

 

 

    

 

 

 

Total

     6,453        15,083         12,994   

Asset impairments

     2,696        5,564         4,880   
  

 

 

   

 

 

    

 

 

 

Total

   $ 9,149      $ 20,647       $ 17,874   
  

 

 

   

 

 

    

 

 

 

Goodwill

In September 2011, we adopted Accounting Standards Update (“ASU”) 2011-08, “Intangibles-Goodwill and Other (Topic 350): Testing Goodwill for Impairment” (“ASU 2011-08”), under which an entity may first assess qualitative factors in determining whether it is “more likely than not” that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. In fiscal year 2012, we did not elect to first assess the qualitative factors in evaluating our goodwill for impairment; therefore, we proceeded with our quantitative goodwill impairment test. Refer to the heading “Goodwill” above and Note 1 – Summary of Significant Accounting Policies in the Notes to the Consolidated Financial Statements for more information.

We test for impairment at the reporting unit level on an annual basis as of April 30th of every year and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying value. Refer to Note 1 – Summary of Significant Accounting Policies in the Notes to the Consolidated Financial Statements for more information on how we test goodwill for impairment. The annual goodwill impairment tests conducted as of April 30, 2012 and 2011 indicated that the fair value of each reporting unit was substantially in excess of its carrying value and, as such, no impairments were deemed to exist.

Effective July 1, 2011, we revised our business segments in order to better align them with our strategic approach to the markets and customers we serve. Under this new structure, our reportable segments consist of the Infotainment, Lifestyle, Professional and Other segments. Our reporting units are the same as our reportable segments with the exception of our Lifestyle segment, which consists of two reporting units, automotive audio and home audio. In connection with this realignment, we reallocated our goodwill to our new reporting units based on each reporting unit’s relative fair value. We also performed a goodwill impairment test as of July 1, 2011 using our new reporting units and determined that the fair value of each of our reporting units exceeded its carrying value, therefore, no impairments were deemed to exist as of this date. Refer to Note 17 – Business Segment Data in the Notes to the Consolidated Financial Statements for more information.

During the first half of fiscal year 2010, we determined that goodwill related to our Infotainment segment and a reporting unit within our Lifestyle segment were impaired and we recognized impairment charges of $7.4 million and $4.9 million, respectively, in our Consolidated Statement of Income for the fiscal year ended June 30, 2010. During the second half of fiscal year 2010, as a result of the sustained improvements in the operating results of these reporting units due to improvements in economic conditions and realized savings resulting from our cost cutting initiatives, we performed a goodwill impairment test which demonstrated that the calculated fair value of our reporting units exceeded the respective carrying values and therefore no impairments

 

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existed in any of our reporting units. As a result, we ceased recognizing goodwill impairment charges associated with incremental goodwill that was recognized related to contingent purchase price arrangements.

Goodwill was $180.8 million at June 30, 2012 compared with $119.4 million at June 30, 2011. The increase in goodwill in the fiscal year ended June 30, 2012 versus the prior fiscal year is primarily related to goodwill associated with to the MWM Acquisition of $79.8 million offset to a certain extent by foreign currency translation. Refer to Note 2 – Acquisitions in the Notes to the Consolidated Financial Statements for more information.

Goodwill was $119.4 million at June 30, 2011 compared with $105.9 million at June 30, 2010. The increase in goodwill in the fiscal year ended June 30, 2011 versus the prior fiscal year is primarily related to foreign currency translation, contingent purchase price consideration associated with the acquisition of innovative Systems GmbH (“IS”) of $5.7 million and goodwill related to the acquisition of 3dB Research Limited of $0.6 million, offset by approximately $4.5 million of purchase price adjustments for prior year acquisitions, primarily related to the acquisition of Eletrônica Selenium S.A. Refer to Note 2 – Acquisitions in the Notes to the Consolidated Financial Statements for more information. The contingent purchase price consideration associated with the acquisition of IS is calculated pursuant to the terms of an agreement between the parties. On March 31, 2011, the IS sellers sent us a letter to exercise their option to have the value of the future contingent purchase consideration determined by a major international accounting firm. The parties are currently disputing certain terms under such agreement and until such time as the dispute is resolved we will not be able to calculate the final purchase price.

The changes in the carrying amount of goodwill by business segment for the fiscal years ended June 30, 2012 and 2011 were as follows:

 

     Infotainment     Lifestyle     Professional     Other      Total  

Balance, June 30, 2010

   $ 3,701      $ 33,112      $ 69,109      $ 0       $ 105,922   

Acquisitions and adjustments

     0        (1,476     (2,426     0         (3,902

Contingent purchase price consideration associated with the acquisition of IS

     3,465        2,272        0        0         5,737   

Other adjustments(1)

     903        5,259        5,438        0         11,600   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Balance, June 30, 2011

   $ 8,069      $ 39,167      $ 72,121      $ 0       $ 119,357   

Acquisitions and adjustments

     0        79,757        0        0         79,757   

Contingent purchase price consideration associated with the acquisition of IS

     (1,258     (825     0        0         (2,083

Other adjustments(1)

     (955     (8,154     (7,111     0         (16,220
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Balance, June 30, 2012

   $ 5,856      $ 109,945      $ 65,010      $ 0       $ 180,811   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

(1) 

The other adjustments to goodwill primarily consist of foreign currency translation adjustments.

Operating Income

Fiscal year 2012 operating income was $300.2 million, or 6.9 percent of net sales. This represents an increase of 1.9 percentage points compared to the prior fiscal year. The increase in operating income was primarily due to higher net sales.

Fiscal year 2011 operating income was $190.1 million, or 5.0 percent of net sales. This represents an increase of 2.5 percentage points compared to the prior fiscal year. The increase in operating income was primarily due to higher net sales.

 

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A summary of our operating income (loss) by business segment is presented below:

 

     Year Ended June 30,  
     2012     Percentage
of Net
Sales
    2011     Percentage
of Net
Sales
    2010     Percentage
of Net
Sales
 

Infotainment

   $ 180,529        7.5   $ 77,384        3.7   $ (4,885     (0.3 )% 

Lifestyle

     141,899        10.7     101,883        9.4     92,567        9.0

Professional

     82,588        13.1     90,668        15.2     70,584        14.0

Other

     (104,770     *        (79,884     *        (72,711     *   
  

 

 

     

 

 

     

 

 

   

Total

   $ 300,246        6.9   $ 190,051        5.0   $ 85,555        2.5
  

 

 

     

 

 

     

 

 

   

 

* Not meaningful.

Interest Expense, Net

Interest expense is reported net of interest income in our Consolidated Statements of Income. Interest expense, net was $20.1 million, $22.6 million and $30.2 million for the fiscal years ended June 30, 2012, 2011 and 2010, respectively. Gross interest expense was $27.0 million, $32.5 million and $33.8 million for the fiscal years ended June 30, 2012, 2011 and 2010, respectively, of which $19.1 million, $19.3 million and $17.4 million, respectively, was non-cash interest expense associated with the amortization of the debt discount on the 1.25 percent Convertible Senior Notes due October 2012 (the “Convertible Senior Notes”), and the amortization of debt issuance costs on the Convertible Senior Notes and our revolving credit facilities, and $7.9 million, $13.2 million and $16.4 million was cash interest expense for the fiscal years ended June 30, 2012, 2011 and 2010, respectively. Interest income was $6.9 million, $9.9 million and $3.6 million for the fiscal years ended June 30, 2012, 2011 and 2010, respectively. Refer to the heading “Revolving Credit Facility” below for more information on our revolving credit facility.

Cash interest expense primarily relates to interest for the Convertible Senior Notes, our short-term borrowings and our revolving credit facility. Interest income primarily relates to interest earned on our cash and cash equivalents, short-term investment balances and the variances from year to year are due to fluctuations in those balances and changes in interest rates. Non-cash interest expense is associated with the amortization of the debt discount on the Convertible Senior Notes and amortization of debt issuance costs on the Convertible Senior Notes and our revolving credit facilities. The decrease in interest expense, net in fiscal year 2012 compared with the prior fiscal year is primarily due to lower cash interest expense. The decrease in interest expense, net in fiscal year 2011 compared with the prior fiscal year is due to the fact that we had no borrowings under the existing revolving credit facility in fiscal year 2011 and lower overall interest rates.

Foreign Exchange Losses, Net

Foreign currency exchange gains and losses resulting from the remeasurement of certain foreign currency denominated monetary assets and liabilities are included in Foreign exchange losses, net in our Consolidated Statements of Income. Effective July 1, 2011, we changed the functional currency of two of our foreign subsidiaries to the U.S. Dollar to reflect a change in the currency in which such subsidiaries primarily generate and expend cash. In addition, we recognized approximately $1.4 million as Foreign exchange losses, net in our Consolidated Statements of Income in fiscal year 2012, due to the revaluation of certain derivative instruments held at these subsidiaries because we did not meet the requisite documentation requirements to attain hedge accounting treatment. As of January 1, 2012, the documentation was amended to achieve hedge accounting treatment going forward. We also include gains and losses from forward points on certain derivative foreign currency forward contracts that are excluded from hedge effectiveness testing in Foreign exchange losses, net in our Consolidated Statements of Income. Refer to Note 10 – Derivatives in the Notes to the Consolidated Financial Statements for more information.

 

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Miscellaneous, Net

We recorded miscellaneous expenses, net, of $5.8 million, $6.3 million and $5.3 million in fiscal years 2012, 2011 and 2010, respectively, primarily consisting of bank charges. Bank charges were $5.7 million, $5.9 million and $5.3million in fiscal years 2012, 2011 and 2010, respectively.

Income Taxes

Our fiscal year 2012, 2011and 2010 effective tax rate was a benefit of 26.2 percent, an expense of 15.2 percent and an expense of 17.5 percent, respectively. The effective tax rate was lower than the U.S. Federal statutory rate of 35 percent due to income mix, U.S. federal income tax credits and rate differentials between the U.S. and foreign jurisdictions. In addition, the fiscal year 2012 tax benefit was primarily due to the reversal of a portion of the U.S. valuation allowance. Refer to Note 13 – Income Taxes in the Notes to the Consolidated Financial Statements for more information.

Subsequent Events

Amendment to Revolving Credit Facility

Effective July 2, 2012, we and our wholly owned subsidiary, Harman Holding GmbH & Co. KG (“Harman KG”), entered into the Second Amendment (the “Second Amendment”) to the Multi-Currency Credit Agreement dated as of December 1, 2010, as amended on December 15, 2011 (the “Credit Agreement”), with a group of banks. The Second Amendment amends the Credit Agreement by, among other things, (a) allowing us and our subsidiaries to enter into certain internal legal entity restructuring transactions subject in certain circumstances to various conditions, (b) in connection with such internal legal entity restructuring transactions, providing for the release of certain security interests created by the Guarantee and Collateral Agreement dated as of December 1, 2010, and (c) making certain other amendments to facilitate the foregoing.

Dividend Declaration

On August 10, 2012, we declared a cash dividend of $0.15 per share for the quarter ended June 30, 2012. The quarterly dividend will be paid on September 4, 2012 to each stockholder of record as of the close of business on August 20, 2012.

Shares Repurchased

Between July 1, 2012 through August 10, 2012, we repurchased 129,966 shares of our common stock at a total cost of $4.8 million in connection with our share buyback program.

Liquidity and Capital Resources

We primarily finance our working capital requirements through cash generated by operations, borrowings under our revolving credit facility and trade credit. Cash and cash equivalents were $617.4 million at June 30, 2012 compared to $603.9 million at June 30, 2011. During the fiscal year ended June 30, 2012, our cash and cash equivalent balance increased $13.5 million. The increase in cash was primarily due to higher net income and higher accounts payable and accrued liabilities, partially offset by the repurchase of treasury shares, capital expenditures, increases in other current assets, higher purchases of inventories and accounts receivable related to higher net sales, foreign currency translation, the acquisition of MWM Acoustics, the payment of dividends and the funding of new product development.

We believe that our existing cash and cash equivalents of $617.4 million and our short-term investments of $203.0 million at June 30, 2012, together with our expected future operating cash flows, and our availability of $541.3 million under our existing revolving credit facility, will be sufficient to cover our working capital needs,

 

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debt service, including the repayment of the Convertible Senior Notes in October 2012, our share buy-back program, capital expenditures, including major investments related to manufacturing and research facilities in emerging markets, acquisitions, purchase commitments and quarterly dividends for at least the next 12 months. We have $400 million principal amount of Convertible Senior Notes that become due in October 2012, which is in the second quarter of fiscal year 2013. We intend to use a combination of borrowings under our revolving credit facility, cash on hand and/or new debt financing to repay the $400 million in the second quarter of fiscal year 2013, which represents the entire amount outstanding as of June 30, 2012.

Our ability to maintain positive liquidity going forward depends on our ability to continue to generate cash from operations and maintain access to the financial markets, both of which are subject to general economic, financial, competitive, legislative, regulatory and other market factors beyond our control. We earn a significant amount of our operating income outside the U.S., the majority of which is deemed to be permanently reinvested in foreign jurisdictions. For at least the next 12 months, we have sufficient cash in the U.S., availability under our existing revolving credit facility and forecasted domestic cash flow to sustain our operating activities and cash commitments for investing and financing activities, such as quarterly dividends and repayment of debt. In addition, we expect existing foreign cash and cash equivalents, short-term investments, and cash flows from operations to continue to be sufficient to fund our foreign operating activities and cash commitments for investing activities, such as material capital expenditures, for at least the next 12 months. As of June 30, 2012, Cash and cash equivalents and Short-term investments of $204.1 million and $30.0 million, respectively, were held in the U.S. and $413.3 million and $173.0 million, respectively, were held by us in foreign jurisdictions. We repatriated $100 million of cash to the U.S. from Germany in fiscal year 2012, which we previously had provided tax on. As of June 30, 2011, Cash and cash equivalents and Short-term investments of $74.3 million and $70.7 million, respectively, were held by us in the U.S. and $529.6 million and $246.6 million, respectively, were held by us in foreign jurisdictions. Below is a more detailed discussion of our cash flow activities during fiscal year 2012.

Operating Activities

For the fiscal year ended June 30, 2012, our net cash provided by operating activities was $268.5 million, compared to $331.8 million in the prior fiscal year. The decrease in operating cash flows compared to the prior fiscal year was primarily due to increases in other current assets related to the surcharge on rare earth minerals, higher accounts receivable related to increased sales, and higher purchases of inventories in anticipation of future sales, partially offset by higher operating income and lower payments to vendors for accounts payable and accrued liabilities. At June 30, 2012, working capital, excluding cash, short-term investments, current portion of long-term debt and short-term debt, was $309.6 million, compared with $141.5 million at June 30, 2011. The increase was primarily due to higher accounts receivable, inventory and other current assets, as well as lower accrued liabilities and accrued warranties.

Investing Activities

Net cash provided by investing activities was $64.7 million for the fiscal year ended June 30, 2012, compared to $434.5 million used in investing activities in the prior fiscal year. The increase in net cash provided by investing activities compared to the prior fiscal year was primarily due to higher net maturities of short-term investments, partially offset by the acquisition of MWM Acoustics and higher capital expenditures. Short-term investments consist of commercial paper, short-term deposits and government bonds, time deposits, and treasury bills with original maturities of greater than three months and less than one year. Capital expenditures for the fiscal year ended June 30, 2012 were $112.5 million, in support of new Infotainment and Lifestyle awards, compared to $108.4 million for the prior fiscal year. Capital spending was also higher due to expansion of production capacity, increases in information technology related programs and product improvement programs. We expect that our run rate for capital expenditures will slightly increase during fiscal year 2013.

 

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Financing Activities

Net cash used in financing activities was $147.6 million in the fiscal year ended June 30, 2012, compared to $8.4 million used in financing activities in the prior fiscal year. The increase in cash used was primarily due to the repurchase of $123.9 million of our common stock and $21.2 million of dividends paid to shareholders.

Our total debt, including short-term borrowings, at June 30, 2012 was $400.7 million, or $395.7 million, net of discount, primarily comprised of $400.0 million of the Convertible Senior Notes which are shown net of a discount of $5.0 million in our Consolidated Balance Sheet at June 30, 2012, due to the accounting guidance which is more fully described in Note 9 – Debt in the Notes to the Consolidated Financial Statements. Also included in total debt are $0.6 million of other short-term and long-term borrowings.

Our total debt, including short-term borrowings, at June 30, 2011 was $402.6 million, or $381.0 million, net of discount, and was primarily comprised of $400.0 million of the Convertible Senior Notes, which are shown net of a discount of $21.6 million in our Consolidated Balance Sheet at June 30, 2011. Also included in total debt are $2.6 million of other short-term borrowings and capital lease obligations.

Revolving Credit Facility

On December 1, 2010 we and Harman KG, entered into a Multi-Currency Credit Agreement with a group of banks, as amended on December 15, 2011(the “Credit Agreement”). At June 30, 2012 and 2011, we had no borrowings under the Credit Agreement and had outstanding letters of credit of $8.7 million and $7.3 million, respectively. At June 30, 2012 and 2011, unused available credit under the Credit Agreement was $541.3 million and $542.7 million, respectively. If we experience a significant decline in our operating results, we could violate our debt covenants and, absent a waiver from our lenders or an amendment to the Credit Agreement, we could be in default under the Credit Agreement. As a result, our debt under the Credit Agreement could become due, which would have a material adverse effect on our financial condition and results of operations. A default under the Credit Agreement could also lead to an event of default under the indenture governing the Convertible Senior Notes (the “Indenture”), as amended, and accelerate the maturity of the Convertible Senior Notes. As of June 30, 2012, we were in compliance with all the financial covenants of the Credit Agreement. We believe we will be in compliance with these covenants for at least the next 12 months.

Guarantee and Collateral Agreement

In connection with the Credit Agreement, we and Harman KG entered into a guarantee and collateral agreement (the “Guarantee and Collateral Agreement”) which provides, among other things, that the obligations under the Credit Agreement are guaranteed by us and each of the subsidiary guarantors party thereto, and that the obligations generally are secured by liens on substantially all of our assets and certain of our subsidiary guarantors’ assets.

The term of the Guarantee and Collateral Agreement corresponds with the term of the Credit Agreement, which matures on December 1, 2015. Under the terms of this Guarantee and Collateral Agreement, we have effectively guaranteed the payment of the full amount of borrowings under the Credit Agreement, including outstanding letters of credit, upon maturity. The potential amount of future payments that we would be required to pay under the Guarantee and Collateral Agreement is the amount that we have borrowed under the Credit Agreement, including outstanding letters of credit. At June 30, 2012, we had no borrowings under the Credit Agreement and had outstanding letters of credit of $8.7 million.

Convertible Senior Notes

We had $400 million of Convertible Senior Notes outstanding at June 30, 2012 and 2011, which are more fully described in Note 9 – Debt in the Notes to the Consolidated Financial Statements. The Convertible Senior Notes are reported in Current portion of long-term debt in our Consolidated Balance Sheets at June 30, 2012, as

 

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they are due in October 2012, which is in less than one year. At June 30, 2012, we were in compliance with all covenants under the Indenture and we believe that we will be in compliance with these covenants for the remaining term of the Indenture, which is less than 12 months.

Dividends

On June 27, 2012, we announced that our annual cash dividend would double in fiscal year 2013 to $0.60 per share. The dividends will be paid in quarterly increments of $0.15 per share, effective July 1, 2012.

Off-Balance Sheet Arrangements

We utilize off-balance sheet arrangements in our operations when we enter into operating leases for land, buildings and equipment in the normal course of business, which are not included in our Consolidated Balance Sheets. In addition, we had outstanding letters of credit of $8.7 million and $7.3 million at June 30, 2012 and 2011, respectively, which were not included in our Consolidated Balance Sheets.

Contractual Obligations

We have obligations and commitments to make future payments under various agreements and for uncertain tax positions. The following table details our obligations by due date:

 

    Year Ending June 30,              
     2013     2014     2015     2016     2017     Thereafter     Total  

Short term borrowings

  $ 227      $ 0      $ 0      $ 0      $ 0      $ 0      $ 227   

Current portion of long-term debt(1)

    400,400        0        0        0        0        0        400,400   

Firm commitments for capital expenditures

    11,241        0        0        0        0        0        11,241   

Purchase obligations(2)

    139,843        0        0        0        0        0        139,843   

Other long-term obligations(1) (3)

    0        10        10        10        10        12        52   

Non-cancelable operating leases(4)

    35,244        30,102        26,250        24,483        23,950        18,215        158,244   

Pension obligations(5)

    8,937        8,555        8,950        9,510        11,417        52,828        100,197   

Uncertain tax positions(6)

    34,200        0        0        0        0        0        34,200   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total contractual cash obligations

  $ 630,092      $ 38,667      $ 35,210      $ 34,003      $ 35,377      $ 71,055      $ 844,404   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

Amount includes $400 million principal amount of our Convertible Senior Notes. Refer to Note 9 – Debt in the Notes to the Consolidated Financial Statements for more information and for interest payments associated with our short-term borrowings, current portion of long-term debt and long-term debt.

(2) 

Includes amounts committed under enforceable agreements for purchase of goods and services with defined terms as to quantity, price and timing of delivery.

(3) 

Amount is included in Other non-current liabilities in the Consolidated Balance Sheet at June 30, 2012.

(4) 

Refer to Note 12 – Leases in the Notes to the Consolidated Financial Statements for more information.

(5) 

Refer to Note 16 – Retirement Benefits in the Notes to the Consolidated Financial Statements for more information.

(6) 

Refer to Note 13 – Income Taxes in the Notes to the Consolidated Financial Statements. All uncertain tax positions are included in fiscal year 2013 as timing of such payments cannot be estimated.

Equity

Total shareholders’ equity at June 30, 2012 was $1.529 billion compared with $1.424 billion at June 30, 2011. The increase is primarily due to increased net income, net unrealized gains on hedging, and share-based compensation, partially offset by the repurchase of shares of our common stock, unfavorable foreign currency translation, the payment of dividends and an unfavorable pension liability adjustment. During the fiscal year

 

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ended June 30, 2012, we entered into an agreement with an external broker which provides the structure under which our share buyback program is being facilitated. There were 3,246,409 shares of our common stock repurchased during the fiscal year ended June 30, 2012 at a total cost of $123.9 million.

Business Outlook

Our future outlook may be negatively impacted due to changes in global economic conditions, in particular the European sovereign debt crisis and the foreign currency transaction and translation exposure. This may drive a contraction in consumer discretionary spending. Each quarter we update our estimated cost increases related to the recent constraints in the supply of rare earth minerals, specifically rare earth neodymium magnets, used in our products. We do not expect this to have a material negative impact on our profitability in future years. We are currently investigating alternative design solutions utilizing other materials and also have successfully negotiated price increases with some of our customers and are still in negotiations with other customers. To date, we believe our actions, principally price adjustments negotiated with our customers, will be successful in mitigating the impact from this cost increase. Accordingly, we expect our overall year-over-year profitability to improve unless global economic conditions significantly worsen.

Recently Issued Accounting Standards

Intangible Assets: In July 2012, the Financial Accounting Standards Board “FASB”) issued Accounting Standards Update (“ASU”) 2012-02, “Testing Indefinite-Lived Intangible Assets for Impairment,” which allows companies to perform a qualitative assessment to determine whether further impairment testing of indefinite-lived intangible assets is necessary, similar in approach to the goodwill impairment test. The new guidance allows an entity the option to first assess qualitatively whether it is more likely than not (that is, a likelihood of more than 50 percent) that an indefinite-lived intangible asset is impaired, thus necessitating that it perform the quantitative impairment test. An entity is not required to calculate the fair value of an indefinite-lived intangible asset and perform the quantitative impairment test unless the entity determines that it is more likely than not that the asset is impaired. The new guidance is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted for annual and interim impairment tests performed as of a date before July 27, 2012, if the financial statements for the most recent annual or interim period have not yet been issued. We will adopt the provisions of this new guidance on July 1, 2013. We do not expect the adoption of the new provisions to have a material impact on our financial condition or results of operations.

Balance Sheet: In December 2011, the FASB issued ASU 2011-11, “Balance Sheet (Topic 210), Disclosures about Offsetting Assets and Liabilities,” which requires companies to disclose information about financial instruments that have been offset and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial condition. Companies will be required to provide both net (offset amounts) and gross information in the notes to the financial statements for relevant assets and liabilities that are offset. The new guidance is effective retrospectively for fiscal years and interim periods within those fiscal years beginning on or after January 1, 2013. We will adopt the provisions of this new guidance on July 1, 2013. We do not expect the adoption of the new provisions to have a material impact on our financial condition or results of operations.

Comprehensive Income: In June 2011, the FASB issued ASU 2011-05, “Comprehensive Income (Topic 220): Presentation of Comprehensive Income” (“ASU 2011-05”). The new guidance requires that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both cases, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. If presented in a single continuous statement, the entity is required to present the components of net income and total net income, the components of other comprehensive income and a total for other comprehensive income, along with the total of comprehensive

 

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income in that statement. If presented in the two-statement approach, the first statement, which is the statement of net income, should present components of net income and total net income followed consecutively by a second statement, which is the statement of other comprehensive income, that should present the components of other comprehensive income, total other comprehensive income and a total amount for comprehensive income. Regardless of the method used, the entity is required to present on the face of the financial statements reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement where the components of net income and the components of other comprehensive income are presented. In December 2011, the FASB issued ASU 2011-12, “Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05” (“ASU 2011-12”). ASU 2011-12 temporarily deferred the requirement to present on the face of the financial statements reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement where the components of net income and the components of other comprehensive income are presented. The guidance in ASU 2011-05, as amended, is effective retrospectively for fiscal years, and interim periods within those fiscal years beginning after December 15, 2011. We will adopt the provisions of this new guidance on July 1, 2012. We do not expect the adoption of the new provisions to have a material impact on our financial condition or results of operations.

 

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

We are required to include information about potential effects of changes in interest rates and currency exchange rates in our periodic reports filed with the SEC.

Interest Rate Sensitivity/Risk

At June 30, 2012, interest on approximately 99 percent of our borrowings was determined on a fixed rate basis. The interest rates on the balance of our debt are subject to changes in U.S. and European short-term interest rates. To assess exposure to interest rate changes, we have performed a sensitivity analysis assuming a hypothetical 100 basis point increase or decrease in interest rates across all outstanding debt and investments. Our analysis indicates that the effect on fiscal year 2012 income from continuing operations before income taxes of such an increase and decrease in interest rates would be approximately $6.5 million.

Foreign Currency Risk

We maintain significant operations in Germany, the United Kingdom, France, Austria, Hungary, Mexico, China and Brazil. As a result, we are subject to market risks arising from changes in these foreign currency exchange rates, principally the change in the value of the Euro versus the U.S. Dollar. Refer to Note 10 – Derivatives in the Notes to the Consolidated Financial Statements for additional discussion on our financial risk management.

Our subsidiaries purchase products and raw materials and sell our products in various currencies. As a result, we may be exposed to cost changes relative to local currencies in these markets. To mitigate these transactional risks, we enter into foreign exchange contracts. Also, foreign currency positions are partially offsetting and are netted against one another to reduce exposure. We presently estimate the effect on projected fiscal year 2013 income before income taxes, based upon a recent estimate of foreign exchange transactional exposure, of a uniform strengthening or uniform weakening of the transaction currency rates of 10 percent, would be to increase or decrease income from continuing operations before income taxes by approximately $22.5 million. As of June 30, 2012, we had hedged a portion of our estimated foreign currency transactions using foreign exchange contracts, including forwards and options.

 

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We presently estimate the effect on projected fiscal year 2013 income before income taxes, based upon a recent estimate of foreign exchange translation exposure (translating the operating performance of our foreign subsidiaries into U.S. Dollars), of a uniform strengthening or weakening of the U.S. Dollar by 10 percent, would be to increase or decrease income from continuing operations before income taxes by approximately $12.4 million.

Changes in currency exchange rates, principally the change in the value of the Euro compared to the U.S. dollar have an impact on our reported results when the financial statements of foreign subsidiaries are translated into U.S. dollars. Over half our sales are denominated in Euros. The average exchange rate for the Euro versus the U.S. dollar for the fiscal year ended June 30, 2012 decreased 1.8 percent from the same period in the prior fiscal year.

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 Europe are sold in the U.S. Sales of these products are affected by the value of the U.S. Dollar relative to the Euro. Any weakening of the U.S. Dollar could depress the demand for these European manufactured products in the U.S. 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. In addition, our foreign currency hedging program is designed to limit our exposure.

Actual gains and losses in the future may differ materially from the hypothetical gains and losses discussed above based on changes in the timing and amount of interest rate and foreign currency exchange rate movements and our actual exposure and hedging transactions.

 

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Item 8. Consolidated Financial Statements and Supplementary Data

Management’s Report on Internal Control over Financial Reporting

The management of Harman International Industries, Incorporated is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control system was designed to provide reasonable assurance to our management and Board of Directors regarding the preparation and the fair presentation of published financial statements. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

We assessed the effectiveness of our internal control over financial reporting as of June 30, 2012. In making this assessment, we used the framework set forth by the Committee of Sponsoring Organizations of the Treadway Commission in “Internal Control—Integrated Framework.” Our assessment included an evaluation of such elements as the design and operating effectiveness of key financial reporting controls, process documentation, accounting policies, overall control environment and information systems control environment. Based on our assessment, we have concluded that, as of June 30, 2012, our internal control over financial reporting was effective.

The effectiveness of our internal control over financial reporting, as of June 30, 2012, has been audited by KPMG LLP (“KPMG”), an independent registered public accounting firm. KPMG’s report on our internal controls over financial reporting is included herein.

/s/    DINESH C. PALIWAL        

Dinesh C. Paliwal

Chairman, President and Chief Executive Officer

/s/    HERBERT K. PARKER        

Herbert K. Parker

Executive Vice President and Chief Financial Officer

August 10, 2012

 

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Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders

Harman International Industries, Incorporated:

We have audited Harman International Industries, Incorporated and subsidiaries’ (“the Company”) internal control over financial reporting as of June 30, 2012, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Harman International Industries, Incorporated’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of June 30, 2012, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Harman International Industries, Incorporated and subsidiaries as of June 30, 2012 and 2011, and the related consolidated statements of income, shareholders’ equity and comprehensive income and cash flows for each of the years in the three-year period ended June 30, 2012, and our report dated August 10, 2012 expressed an unqualified opinion on those consolidated financial statements.

 

/s/ KPMG LLP

Stamford, Connecticut

August 10, 2012

 

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Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders

Harman International Industries, Incorporated:

We have audited the accompanying consolidated balance sheets of Harman International Industries, Incorporated and subsidiaries (“the Company”) as of June 30, 2012 and 2011, and the related consolidated statements of income, shareholders’ equity and comprehensive income and cash flows for each of the years in the three-year period ended June 30, 2012. In connection with our audits of the consolidated financial statements, we also have audited the related financial statement schedule for each of the years in the three-year period ended June 30, 2012. These consolidated financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Harman International Industries, Incorporated and subsidiaries as of June 30, 2012 and 2011, and the results of their operations and their cash flows for each of the years in the three-year period ended June 30, 2012, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Harman International Industries, Incorporated’s internal control over financial reporting as of June 30, 2012, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated August 10, 2012 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

 

/s/ KPMG LLP

Stamford, Connecticut

August 10, 2012

 

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HARMAN INTERNATIONAL INDUSTRIES, INCORPORATED AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

     June 30,  

(in thousands)

   2012     2011  

Assets

    

Current assets

    

Cash and cash equivalents

   $ 617,356      $ 603,892   

Short-term investments

     203,014        317,322   

Receivables, net

     582,835        579,272   

Inventories

     427,597        423,137   

Other current assets

     285,443        184,532   
  

 

 

   

 

 

 

Total current assets

     2,116,245        2,108,155   

Property, plant and equipment, net

     430,234        470,300   

Goodwill

     180,811        119,357   

Deferred tax assets, long-term, net

     308,768        229,941   

Other assets

     133,406        130,742   
  

 

 

   

 

 

 

Total assets

   $ 3,169,464      $ 3,058,495   
  

 

 

   

 

 

 

Liabilities and Shareholders’ Equity

    

Current liabilities

    

Current portion of long-term debt

   $ 395,409      $ 386   

Short-term debt

     227        1,785   

Accounts payable

     505,694        473,486   

Accrued liabilities

     368,002        436,537   

Accrued warranties

     97,289        122,396   

Income taxes payable

     15,279        12,991   
  

 

 

   

 

 

 

Total current liabilities

     1,381,900        1,047,581   

Convertible senior notes

     0        378,401   

Pension liability

     168,099        142,114   

Other non-current liabilities

     89,854        66,741   
  

 

 

   

 

 

 

Total liabilities

     1,639,853        1,634,837   
  

 

 

   

 

 

 

Commitments and contingencies

     —          —     

Preferred stock

     0        0   

Common stock

     961        956   

Additional paid-in capital

     943,971        915,433   

Accumulated other comprehensive income

     29,709        136,733   

Retained earnings

     1,726,486        1,418,106   

Less: Common stock held in treasury

     (1,171,516     (1,047,570
  

 

 

   

 

 

 

Total shareholders’ equity

     1,529,611        1,423,658   
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 3,169,464      $ 3,058,495   
  

 

 

   

 

 

 

See accompanying Notes to the Consolidated Financial Statements.

 

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HARMAN INTERNATIONAL INDUSTRIES, INCORPORATED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

 

     Year Ended June 30,  

(in thousands, except earnings per share data)

   2012     2011     2010  

Net sales

   $ 4,364,078      $ 3,772,345      $ 3,364,428   

Cost of sales

     3,179,932        2,784,995        2,479,270   
  

 

 

   

 

 

   

 

 

 

Gross profit

     1,184,146        987,350        885,158   

Selling, general and administrative expenses

     884,200        813,809        774,189   

Sale of intellectual property

     (300     (16,510     0   

Loss on deconsolidation of variable interest entity

     0        0        13,122   

Goodwill impairment

     0        0        12,292   
  

 

 

   

 

 

   

 

 

 

Operating income

     300,246        190,051        85,555   

Other expenses:

      

Interest expense, net

     20,126        22,576        30,215   

Foreign exchange losses, net

     13,152        952        946   

Miscellaneous, net

     5,815        6,303        5,317   
  

 

 

   

 

 

   

 

 

 

Income from continuing operations before income taxes

     261,153        160,220        49,077   

Income tax (benefit) expense, net

     (68,388     24,304        8,610   
  

 

 

   

 

 

   

 

 

 

Income from continuing operations, net of income taxes

     329,541        135,916        40,467   
  

 

 

   

 

 

   

 

 

 

Gain on sale of discontinued operations, net of income taxes

     0        0        114,197   

Income from discontinued operations, net of income taxes

     0        0        9,394   
  

 

 

   

 

 

   

 

 

 

Net income from discontinued operations

     0        0        123,591   
  

 

 

   

 

 

   

 

 

 

Net income

     329,541        135,916        164,058   

Less: Net income attributable to noncontrolling interest

     0        0        5,289   
  

 

 

   

 

 

   

 

 

 

Net income attributable to Harman International Industries, Incorporated

   $ 329,541      $ 135,916      $ 158,769   
  

 

 

   

 

 

   

 

 

 

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

      

Income from continuing operations, net of income taxes

   $ 329,541      $ 135,916      $ 40,467   

Less: Net income attributable to noncontrolling interest

     0        0        5,289   
  

 

 

   

 

 

   

 

 

 

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

   $ 329,541      $ 135,916      $ 35,178   
  

 

 

   

 

 

   

 

 

 

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

      

Basic

   $ 4.62      $ 1.91      $ 0.50   
  

 

 

   

 

 

   

 

 

 

Diluted

   $ 4.57      $ 1.90      $ 0.50   
  

 

 

   

 

 

   

 

 

 

Earnings per share from discontinued operations:

      

Basic

   $ 0.00      $ 0.00      $ 1.76   
  

 

 

   

 

 

   

 

 

 

Diluted

   $ 0.00      $ 0.00      $ 1.75   
  

 

 

   

 

 

   

 

 

 

Earnings per share:

      

Basic

   $ 4.62      $ 1.91      $ 2.26   
  

 

 

   

 

 

   

 

 

 

Diluted

   $ 4.57      $ 1.90      $ 2.25   
  

 

 

   

 

 

   

 

 

 

Weighted Average Shares Outstanding:

      

Basic

     71,297        70,992        70,350   
  

 

 

   

 

 

   

 

 

 

Diluted

     72,083        71,635        70,595   
  

 

 

   

 

 

   

 

 

 

See accompanying Notes to the Consolidated Financial Statements.

 

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HARMAN INTERNATIONAL INDUSTRIES, INCORPORATED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

     Year Ended June 30,  

(in thousands)

   2012     2011     2010  

Cash flows from operating activities:

      

Net income attributable to Harman International Industries, Incorporated

   $ 329,541      $ 135,916      $ 158,769   

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

      

Income from discontinued operations, net of tax

     0        0        (9,394

Gain on sale of QNX Entities

     0        0        (114,197

Goodwill impairment

     0        0        12,292   

Loss on deconsolidation of variable interest entity

     0        0        13,122   

Depreciation and amortization

     122,225        123,264        127,654   

Deferred income tax (benefit) expense

     (99,306     (8,926     3,954   

Noncontrolling interest

     0        0        5,289   

Loss on disposition of assets

     1,377        1,272        593   

Share-based compensation

     17,370        17,973        21,320   

Non-cash interest expense

     19,149        19,258        12,250   

Changes in operating assets and liabilities, net of acquired businesses:

      

Decrease (increase) in:

      

Receivables, net

     (50,709     (4,222     (144,100

Inventories

     (36,725     (25,534     (40,055

Other current assets

     (84,866     9,733        (10,194

Increase (decrease) in:

      

Accounts payable

     62,046        49,707        180,064   

Accrued warranties

     (10,348     23,067        20,586   

Accrued other liabilities

     2,914        (12,535     (17,344

Income taxes payable

     3,596        5,378        (5,410

Other operating activities

     (7,757     (2,601     (23,773
  

 

 

   

 

 

   

 

 

 

Net cash from continuing operations provided by operating activities

     268,507        331,750        191,426   

Net cash from discontinued operations provided by operating activities

     0        0        49,013   
  

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

     268,507        331,750        240,439   
  

 

 

   

 

 

   

 

 

 

Cash flows from investing activities:

      

Purchases of short-term investments

     (559,283     (599,495     0   

Maturities of short-term investments

     673,591        282,173        0   

Acquisitions, net of cash received

     (70,535     (14,800     (63,843

Deconsolidation of variable interest entity

     0        0        (11,347

Proceeds from sale of QNX Entities, net of cash paid

     0        0        199,560   

Proceeds from asset dispositions

     2,865        3,005        2,531   

Capital expenditures

     (112,536     (108,357     (60,033

Other items, net

     1,247        2,974        0   
  

 

 

   

 

 

   

 

 

 

Net cash from continuing operations (used in) provided by investing activities

     (64,651     (434,500     66,868   

Net cash from discontinued operations (used in) provided by investing activities

     0        0        (167
  

 

 

   

 

 

   

 

 

 

Net cash (used in) provided by investing activities

     (64,651     (434,500     66,701   
  

 

 

   

 

 

   

 

 

 

Cash flows from financing activities:

      

Net decrease in short-term borrowings

     (1,308     (12,461     0   

Net repayments under revolving credit facility

     0        0        (228,890

Cash dividends paid to shareholders

     (21,161     (3,525     0   

Repurchase of common stock

     (123,946     0        0   

Share-based payment arrangements

     11,342        9,544        1,557   

Debt issuance costs for revolving credit facility

     (0     (7,002     0   

Other items, net

     (12,573     5,066        5,073   
  

 

 

   

 

 

   

 

 

 

Net cash used in financing activities

     (147,646     (8,378     (222,260
  

 

 

   

 

 

   

 

 

 

Effect of exchange rate changes on cash

     (42,746     69,450        (25,669
  

 

 

   

 

 

   

 

 

 

Net (decrease) increase in cash and cash equivalents

     13,464        (41,678     59,211   

Cash and cash equivalents at beginning of period

     603,892        645,570        586,359   
  

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 617,356      $ 603,892      $ 645,570   
  

 

 

   

 

 

   

 

 

 

Supplemental Disclosure of Cash Flow Information:

      

Accrued and contingent acquisition-related liabilities equivalents at end of period

   $ 28,017      $ 6,937      $ 17,725   

See accompanying Notes to the Consolidated Financial Statements.

 

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HARMAN INTERNATIONAL INDUSTRIES, INCORPORATED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME

 

Years Ended June 30, 2012, 2011 and 2010

 
    Common Stock     Additional
Paid-in
Capital
    Accumulated
Other
Comprehensive
Income (Loss)
    Retained
Earnings
    Treasury
Stock
    Harman
Shareholders’
Equity
    Non-
controlling
Interest
    Total
Equity
 

($ in thousands, except

per share data)

  Number of
Shares
    $.01
Par
Value
               

Balance, June 30, 2009

    69,329,778      $ 949      $ 869,609      $ 57,198      $ 1,126,946      $ (1,047,570   $ 1,007,132      $ 786      $ 1,007,918   
                 

 

 

 

Net income attributable to Harman International Industries, Incorporated

    0        0        0        0        158,769        0        158,769        0        158,769   

Foreign currency translation

    0        0        0        (66,500     0        0        (66,500     0        (66,500

Unrealized gain on hedging derivatives, net of tax

    0        0        0        27,749        0        0        27,749        0        27,749   

Pension liability adjustment, net of tax

    0        0        0        (13,599     0        0        (13,599     0        (13,599

Unrealized loss on available-for-sale securities, net of tax

    0        0        0        (1,182     0        0        (1,182     0        (1,182
                 

 

 

 

Comprehensive income

                    105,237   
                 

 

 

 

Restricted stock unit vesting

    68,699        0        0        0        0        0        0        0        0   

Exercise of stock options, net of shares received

    131,542        3        1,556        0        0        0        1,559        0        1,559   

Share-based compensation, net of tax

    0        0        20,964        0        0        0        20,964        0        20,964   

Noncontrolling interest

    0        0        0        0        0        0        0        (786     (786
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, June 30, 2010

    69,530,019      $ 952      $ 892,129      $ 3,666      $ 1,285,715      $ (1,047,570   $ 1,134,892      $ 0      $ 1,134,892   

Net income attributable to Harman International Industries, Incorporated

    0        0        0        0        135,916        0        135,916        0        135,916   

Foreign currency translation

    0        0        0        164,079        0        0        164,079        0        164,079   

Unrealized loss on hedging derivatives, net of tax

    0        0        0        (41,892     0        0        (41,892     0        (41,892

Pension liability adjustment, net of tax

    0        0        0        9,117        0        0        9,117        0        9,117   

Unrealized gain on available-for-sale securities, net of tax

    0        0        0        1,763        0        0        1,763        0        1,763   
                 

 

 

 

Comprehensive income

                    268,983   
                 

 

 

 

Restricted stock unit vesting

    44,948        0        0        0        0        0        0        0        0   

Exercise of stock options, net of shares received

    345,284        4        9,544        0        0        0        9,548        0        9,548   

Share-based compensation, net of tax

    0        0        13,760        0        0        0        13,760        0        13,760   

Dividends ($0.10 per share)(1)

    0        0        0        0        (3,525     0        (3,525     0        (3,525
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, June 30, 2011

    69,920,251      $ 956      $ 915,433      $ 136,733      $ 1,418,106      $ (1,047,570   $ 1,423,658      $ 0      $ 1,423,658   

Net income attributable to Harman International Industries, Incorporated

    0        0        0        0        329,541        0        329,541        0        329,541   

Foreign currency translation

    0        0        0        (136,240     0        0        (136,240     0        (136,240

Unrealized gain on hedging derivatives, net of tax

    0        0        0        49,480        0        0        49,480        0        49,480   

Pension liability adjustment, net of tax

    0        0        0        (20,144     0        0        (20,144     0        (20,144

Unrealized loss on available-for-sale securities, net of tax

    0        0        0        (120     0        0        (120     0        (120
                 

 

 

 

Comprehensive income

                    221,517   
                 

 

 

 

Restricted stock unit vesting

    189,525        0        0        0        0        0        0        0        0   

Exercise of stock options, net of shares received

    422,949        5        11,342        0        0        0        11,347        0        11,347   

Share-based compensation, net of tax

    0        0        17,196        0        0        0        17,196        0        17,196   

Dividends ($0.30 per share)(1)

    0        0        0        0        (21,161     0        (21,161     0        (21,161

Treasury stock repurchases

    (3,246,409     0        0        0        0        (123,946     (123,946     0        (123,946
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, June 30, 2012

    67,286,316      $ 961      $ 943,971      $ 29,709      $ 1,726,486      $ (1,171,516   $ 1,529,611      $ 0      $ 1,529,611   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

  

 

(1) 

Cash dividends declared on common stock were $0.075 in all four quarters of fiscal year 2012 and $0.025 in each of the third and fourth quarters of fiscal year 2011. There were no dividends declared on common stock in the first and second quarters of fiscal year 2011 and in all quarters of fiscal year 2010.

See accompanying Notes to the Consolidated Financial Statements.

 

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Harman International Industries, Incorporated and Subsidiaries

Notes to the Consolidated Financial Statements

(Dollars in thousands, except per share data and unless otherwise indicated)

Note 1 – Summary of Significant Accounting Policies

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

Description of Business: We believe we are a worldwide leader in the development, manufacture and marketing of high-quality, high-fidelity audio products and electronic systems. We have developed, both internally and through a series of strategic acquisitions, a broad range of product offerings sold under renowned brand names in our principal markets. We also believe we are a leader in digitally integrated audio and infotainment systems for the automotive industry. Our AKG®, Crown®, JBL®, Infinity®, Harman/Kardon®, Lexicon®, dbx®, Studer®, Soundcraft®, Mark Levinson®, Becker®, Revel®, Logic 7® and Selenium® brand names are well-known worldwide for premium quality and performance.

Principles of Consolidation: The consolidated financial statements include the accounts of Harman International Industries, Incorporated and our controlled subsidiary companies. All significant intercompany accounts and transactions have been eliminated. Operating results of acquired businesses are included in the Consolidated Statements of Income from the date of acquisition.

We consolidate variable interest entities if we are deemed to be the primary beneficiary of the entity. Operating results for variable interest entities in which we are determined to be the primary beneficiary are included in the Consolidated Statements of Income from the date such determination is made.

Reclassifications: Where necessary, information for prior fiscal years has been reclassified to conform to the fiscal year 2012 financial statement presentation. Effective July 1, 2011, we revised our business segments in order to better align them with our strategic approach to the markets and customers we serve. Refer to Note 17 – Business Segment Data for more information. The reclassification of historical segment information had no impact on our basic financial statements.

Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America (“GAAP”) requires that we make estimates and assumptions that affect the reported amount of assets and liabilities, as well as the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amount of revenues and expenses during the reporting period. Significant estimates are used for, but not limited to: (i) inventory valuation; (ii) depreciable lives of fixed assets; (iii) goodwill and other asset impairments; (vi) restructuring and related charges; (v) the evaluation of the recoverability of pre-production and development contract costs; (vi) warranty liabilities; (vii) allowance for doubtful accounts; (viii) contingency and litigation reserves; (ix) income tax reserves and valuation allowances; (x) accounting for business combinations; (xi) sales discounts and sales allowances, (xii) pension, post-retirement and other employee benefits and (xiii) losses on infotainment supply arrangements. Various assumptions go into the determination of these estimates. The process of determining significant estimates requires consideration of factors such as historical experience, current and expected economic conditions, and actuarial methods. We reevaluate these significant factors and make changes and adjustments where facts and circumstances indicate that changes are necessary. The accounting estimates used in the preparation of our consolidated financial statements will change as new events occur, as more experience is acquired, as additional information is obtained and as our operating environment changes. Actual results could differ from those estimates and the differences could have a material impact on our consolidated financial statements.

Changes in Estimates: In the ordinary course of accounting for items discussed above, we make changes in estimates as appropriate, and as we become aware of circumstances affecting those estimates. Such changes and

 

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refinements in estimation methodologies are reflected in reported results of operations in the period in which the changes are made and, if material, their effects are disclosed in the Notes to the Consolidated Financial Statements.

Revenue Recognition: Revenue is generally recognized at the time of product shipment or delivery, depending on when the passage of title to goods transfers to unaffiliated customers and when all of the following have occurred: a firm sales agreement is in place, pricing is fixed or determinable and collection is reasonably assured. Sales are reported net of estimated returns, discounts, rebates and incentives. Substantially all of our revenue transactions involve the delivery of a physical product. Royalty income, which is not material, is recorded when earned based upon contract terms with licensees which provide for royalties.

We enter into incentive agreements with certain automotive customers which relate to a specific program award. These incentives are generally based on fixed payments paid by us to the automotive manufacturer, and are generally deferred, if certain criteria are met. The deferability criteria include the existence of legally enforceable rights, management’s ability and intent to enforce the recoverability clauses and the ability to generate future earnings from the agreement in excess of the deferred amounts. Capitalized amounts are amortized, generally as a reduction to revenue, over the related program award term based on our estimate of future volumes. Our estimates are reviewed regularly and the cumulative impact of a revision in estimates is recorded in the period such revisions become probable and estimable.

Sales Discounts: We offer product discounts and sales incentives including prompt payment discounts, volume incentive programs, rebates and dealer order incentives. We report revenues net of discounts and other sales incentives.

Cost of Sales: Cost of sales includes material, labor and overhead for products manufactured by us and cost of goods produced for us on a contract basis. Expenses incurred for manufacturing depreciation and engineering, warehousing, shipping and handling, sales commissions, warranty and customer service are also included in cost of sales.

Allowance for Doubtful Accounts: We reserve an estimated amount for accounts receivable that may not be collected. Methodologies for estimating the allowance for doubtful accounts are primarily based on specific identification of uncollectible accounts. Historical collection rates and customer credit worthiness are considered in determining specific reserves. At June 30, 2012 and 2011, we had $6.0 million and $7.0 million, respectively, reserved for possible uncollectible accounts receivable. As with many estimates, management must make judgments about potential actions by third parties in establishing and evaluating our allowance for doubtful accounts.

Infotainment Supply Arrangements: We have arrangements with our infotainment customers to provide products that meet predetermined technical specifications and delivery dates. In the event we do not satisfy the performance obligations under these arrangements, we may be required to indemnify the customer. We accrue for any loss that we expect to incur under these arrangements when the loss is probable and can be reasonably estimated.

Accrued Warranties: We warrant our products to be free from defects in materials and workmanship for periods ranging from six months to six years from the date of purchase, depending on the business segment and product. Our dealers and warranty service providers normally perform warranty service in field locations and regional service centers, using parts and replacement finished goods we supply on an exchange basis. Our dealers and warranty service providers also install updates we provide to correct defects covered by our warranties. Estimated warranty liabilities are based upon past experience with similar types of products, the technological complexity of certain products, replacement cost and other factors. If estimates of warranty provisions are no longer adequate based on our analysis of current activity, incremental provisions are recorded as warranty expense in our Consolidated Statement of Income. We take these factors into consideration when assessing the adequacy of our warranty provision for periods still open to claim. Refer to Note 6 – Accrued Warranties for more information.

 

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Selling, General and Administrative Expenses: Selling, general and administrative expenses (“SG&A”) include non-manufacturing salaries and benefits, share-based compensation expense, occupancy costs, professional fees, research and development costs (“R&D”), amortization of intangibles, advertising and marketing costs and other operating expenses.

Advertising Expenses: We expense advertising costs as incurred. When production costs are incurred for future advertising, these costs are recorded as an asset and subsequently expensed when the advertisement is first put into service.

R&D Expenses: R&D expenses are expensed as incurred. R&D expenses, net of customer reimbursements, were $331.9 million, $304.6 million and $322.7 million for the fiscal years ending June 30, 2012, 2011 and 2010, respectively.

Interest Expense, net: Interest expense, net, includes interest expense and amortization of original issue discount on debt securities and debt issuance costs, net of interest income.

Foreign exchange losses, net: Foreign exchange losses, net includes gains and losses from forward points on certain derivative foreign currency forward contracts that are excluded from hedge effectiveness testing. It also includes gains and losses resulting from the remeasurement of certain foreign currency denominated monetary assets and liabilities. Effective July 1, 2011, we changed the functional currency of two or our foreign subsidiaries to the U.S. dollar to reflect a change in the currency in which such subsidiaries primarily generate and expend cash. Refer to Note 10 – Derivatives for more information.

Cash and Cash Equivalents: Cash and cash equivalents include cash on hand, money-market funds and investments with original maturities of three months or less.

Restricted Cash and Investments: We have a deferred compensation arrangement with certain foreign employees which requires us to maintain cash on hand. At June 30, 2012 and 2011, such restricted cash amounts were $7.2 million and $8.0 million, respectively, and were included in Other assets in our Consolidated Balance Sheets.

Short-Term Investments: Short-term investments consist of investments in commercial paper, short-term deposits, government bonds, time deposits and treasury bills with original maturities of greater than three months and less than one year.

Inventories: Inventories are stated at the lower of cost or market. Cost is determined principally by the first-in, first-out method. We establish reserves for our inventory which requires us to analyze the aging and forecasted demand for our inventories, to forecast future product sales prices, pricing trends and margins, and to make judgments and estimates regarding obsolete, damaged or excess inventory. Markdown percentages are determined based on our estimate of future demand and selling prices for our products. Future sales prices are determined based on current and forecasted market expectations, as well as terms that have been established for future orders under automotive platform arrangements. Our inventory reserves primarily relate to our raw materials as our finished goods are primarily produced to order. We calculate inventory reserves on raw materials by reviewing the levels of raw materials on-hand and comparing this to estimates of historical consumption and future demand in order to assess whether we have excess materials on-hand. If it is determined that excess materials are in inventory, an appropriate inventory reserve is established. Inventory reserves on finished goods are primarily determined through inventory turnover measures. Products showing low turnover rates are assigned a percentage reserve based on future estimates of sales volumes and margins. We make adjustments to our inventory reserves based on the identification of specific situations and increase our inventory reserves accordingly. As changes in future economic or industry conditions occur, we revise the estimates that were used to calculate our inventory reserves. Refer to Note 4 – Inventories for more information.

 

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Property, Plant and Equipment, net: Property, plant and equipment is stated at cost or, in the case of capitalized leases, at the present value of the future minimum lease payments. Depreciation and amortization of property, plant and equipment is computed primarily using the straight-line method over the asset’s useful life. Refer to Note 5 – Property, Plant and Equipment, net for more information.

Goodwill: We assess goodwill for potential impairments annually each April 30th, or during the year if an event or other circumstance indicates that we may not be able to recover the carrying amount of the asset. Application of the goodwill impairment test requires judgment, including the identification of reporting units, assignment of assets and liabilities to reporting units, assignment of goodwill to reporting units, and determination of the fair value of each reporting unit. We estimate the fair value of each reporting unit using a discounted cash flow methodology. This requires us to use significant judgment, including estimation of future cash flows, which is dependent on internal forecasts, estimation of the long-term rate of growth for our business, the useful life over which cash flows will occur, determination of our weighted average cost of capital, and relevant market data.

In evaluating goodwill for impairment, we first may assess qualitative factors to determine whether it is more likely than not (that is, a likelihood of more than 50 percent) that the fair value of a reporting unit is less than its carrying amount. If we conclude that it is not more likely than not that the fair value of a reporting unit is less than its carrying value, then no further testing of the goodwill assigned to the reporting unit is required. However, if we conclude that it is more likely than not that the fair value of a reporting unit is less than its carrying value, then we perform a two-step goodwill impairment test to identify potential goodwill impairment and measure the amount of goodwill impairment to be recognized, if any.

The first step compares the fair value of each reporting unit to its carrying value, with fair value of each reporting unit determined using established valuation techniques, specifically the market and income approaches. If the results of the first step indicate that the fair value of a reporting unit is less than its carrying value, the second step of this test is conducted wherein the amount of any impairment is determined by comparing the implied fair value of goodwill in a reporting unit to the recorded amount of goodwill for that reporting unit. The implied fair value of goodwill is calculated as the excess of fair value of the reporting unit over the amounts assigned to its assets and liabilities. Should the fair values of the goodwill so calculated be less than the carrying value, an impairment is recognized. Refer to Note 8 – Goodwill for more information.

Other Intangible Assets: Other intangible assets primarily consist of patents, trademarks, distribution agreements and non-compete agreements and are amortized over periods ranging from 10 months to 17 years. Other intangible assets are amortized on a straight-line basis over their estimated economic lives. We believe that the straight-line method of amortization reflects an appropriate allocation of the cost of the intangible assets to earnings in proportion to the amount of economic benefits obtained annually by our Company.

Impairment of Long-Lived Assets: We review the recoverability of our long-lived assets, including buildings, equipment and other definite-lived intangible assets, when events or changes in circumstances occur that indicate that the carrying value of the asset may not be recoverable. The assessment of possible impairment is based on our ability to recover the carrying value of the asset from the expected future cash flows (undiscounted and without interest charges) of the related operations. If these cash flows are less than the carrying value of such asset, an impairment loss is recognized for the difference between estimated fair value and carrying value. Our primary measure of fair value is based on discounted cash flows. We will continue to monitor the need for impairment tests, which could result in additional impairment charges. We recognized $0.6 million and $1.2 million in impairment charges related to facilities that were held-for-sale in the fiscal years ended June 30, 2012 and 2010, respectively. We did not record any impairment charges for long-lived assets in the fiscal year ended June 30, 2011.

Pre-Production and Development Costs: We incur pre-production and development costs related to infotainment systems that we develop for automobile manufacturers pursuant to long-term supply arrangements.

 

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Portions of these costs are reimbursable under separate agreements and are recorded as unbilled costs in our Consolidated Balance Sheets in Other current assets and Other assets, once an agreement is signed.

At June 30, 2012 and 2011, unbilled costs were $54.8 million and $40.5 million, respectively, related to pre-production costs. At June 30, 2012 and 2011 unbilled costs reimbursable in the next 12 months totaled $26.0 million and $13.5 million, respectively, and were recorded in other current assets in our Consolidated Balance Sheets. Unbilled costs reimbursable in subsequent years at June 30, 2012 and 2011 totaled $28.8 million and $27.0 million, respectively, and were recorded in Other assets in our Consolidated Balance Sheets. At June 30, 2012 and 2011, we had fixed assets of $17.3 million and $18.0 million, respectively, for molds, dies and other tools included in our Consolidated Balance Sheets, which our customers will eventually purchase and own pursuant to long-term supply arrangements.

Income Taxes: Deferred income tax assets or liabilities are computed based on the temporary differences between the financial statement and income tax basis of assets and liabilities using the statutory marginal income tax rate in effect for the years in which the differences are expected to reverse. Deferred income tax expenses or credits are based on the changes in the deferred income tax assets or liabilities from period to period. We record a valuation allowance to reduce our deferred tax assets to the amount that we believe is more likely than not to be realized. In determining the need for, and the amount of a valuation allowance, we consider our ability to forecast earnings, future taxable income, carryback losses, if any, and we consider feasible tax planning strategies. We believe the estimate of our income tax assets, liabilities and expenses are “critical accounting estimates” because if the actual income tax assets, liabilities and expenses differ from our estimates the outcome could have a material impact on our results of operations. Adjustments to our valuation allowance from continuing operations, through charges to income tax (benefit) expense were $(124.2) million, $0.2 million and $4.8 million for the years ending June 30, 2012, 2011 and 2010, respectively.

The calculation of our tax liabilities involves evaluating uncertainties in the application of complex tax regulations. We recognize liabilities for uncertain tax positions in the U.S. and other tax jurisdictions based on our estimate of whether and the extent to which additional taxes will be due. If payment of these amounts ultimately proves to be unnecessary, the reversal of the liabilities would result in additional tax benefits recognized in the period in which we determine the liabilities are no longer necessary. If our estimate of tax liabilities proves to be less than the ultimate assessment, a further charge to expense would result. We recognize interest and penalties related to income tax matters in income tax expense. Refer to Note 13 – Income Taxes, for more information

Retirement Benefits: We provide postretirement benefits to certain employees. Employees in the United States are covered by a defined contribution plan. Our contributions to this plan are based on a percentage of employee contributions. Effective January 1, 2010, we reinstated all the matching contributions to the defined contribution plan, which were previously suspended effective January 1, 2009. These plans are funded on a current basis. We also have a Supplemental Executive Retirement Plan (“SERP”) in the United States that provides retirement, death and termination benefits, as defined, to certain key executives designated by our Board of Directors.

Certain employees outside the United States are covered by non-contributory defined benefit plans. The defined benefit plans are funded in conformity with applicable government regulations. Generally, benefits are based on age, years of service, and the level of compensation during the final years of service. Refer to Note 16 – Retirement Benefits for more information.

Foreign Currency Translation: The financial statements of subsidiaries located outside of the United States generally are measured using the local currency as the functional currency. Assets, including goodwill, and liabilities of these subsidiaries are translated at the rates of exchange at the balance sheet date. The resulting translation adjustments are included in accumulated other comprehensive income (“AOCI”) in our Consolidated Balance Sheets. Income, expense and cash flow items are translated at average monthly exchange rates. Gains

 

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and losses from foreign currency transactions of these subsidiaries are included in net income attributable to Harman International Industries, Incorporated in our Consolidated Statements of Income.

Derivative Financial Instruments: We are exposed to market risks from changes in foreign currency exchange rates and interest rates which could affect our operating results, financial condition and cash flows. We manage our exposure to these risks through our regular operating and financial activities and when appropriate, through the use of derivative financial instruments. These derivatives are utilized to hedge economic exposures, as well as to reduce earnings and cash flow volatility resulting from shifts in market rates. We enter into limited types of derivative contracts, including foreign currency spot and forward and option contracts and an interest rate swap, to manage foreign currency and interest rate exposures. Our primary foreign currency exposure is the Euro. The fair market value of all our derivative contracts change with fluctuations in interest rates and currency rates, and are designed so that changes in their values are offset by changes in the values of the underlying exposures. Derivative financial instruments are held solely as risk management tools and not for trading or speculative purposes. We do not utilize derivatives that contain leverage features. On the date that we enter into a derivative that qualifies for hedge accounting, the derivative is designated as a hedge of the identified exposure. We document all relationships between hedging instruments and hedged items for which we apply hedge accounting treatment and assess the effectiveness of our hedges at inception and on an ongoing basis.

We record all derivative instruments as either assets or liabilities at fair value in our Consolidated Balance Sheets. Certain of these derivative contracts have been designated as cash flow hedges, whereby gains and losses are reported within AOCI in our Consolidated Balance Sheets, until the underlying transaction occurs, at which point they are reported in earnings as gains or losses in our Consolidated Statements of Income. Certain of our derivatives, for which hedge accounting is not applied, are effective as economic hedges. These derivative contracts are required to be recognized each period at fair value, with gains and losses reported in earnings in our Consolidated Statements of Income and therefore do result in some level of earnings volatility. The level of volatility will vary with the type and amount of derivative hedges outstanding, as well as fluctuations in the currency and interest rate markets during the period. The related cash flow impacts of all our derivative activities are reflected as cash flows from operating activities in our Consolidated Statements of Cash Flows. Refer to Note 10 – Derivatives for more information.

Interest Rate Management: We have an interest rate swap agreement to effectively convert the interest on an operating lease from a variable to a fixed rate. At the end of each reporting period, the fair value of the interest rate swap agreement is calculated. The fair value is recorded as an asset or liability. The effective gain or loss is recorded as a debit or credit to AOCI in our Consolidated Balance Sheets and any ineffectiveness is recorded immediately to rent expense in our Consolidated Statements of Income. Upon maturity, any gain or loss within AOCI is reclassified into earnings in the then-current period. Refer to Note 10 – Derivatives for more information.

Foreign Currency Management: The fair value of foreign currency related derivatives is included in our Consolidated Balance Sheets in other current assets and accrued liabilities. The earnings impact of cash flow hedges relating to forecasted purchases of inventory in foreign currency is reported in cost of sales to match the underlying transaction being hedged. Unrealized gains and losses on these instruments are deferred in AOCI in our Consolidated Balance Sheets until the underlying transaction is recognized in earnings. The earnings impact of cash flow hedges relating to the variability in cash flows associated with foreign currency denominated assets and liabilities is reported in cost of sales, SG&A or other expense in our Consolidated Statements of Income, depending on the nature of the assets or liabilities being hedged. The amounts deferred in AOCI in our Consolidated Balance Sheets associated with these instruments relate to spot-to-spot foreign currency differentials from the date of designation until the hedged transaction takes place.

Severance and Exit Costs: We recognize liabilities for severance and exit costs based upon the nature of the liability incurred. For involuntary separation programs that are conducted according to the guidelines of our written involuntary separation plan or according to the provisions of collective bargaining agreements or statutes,

 

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we recognize the liability when it is probable and reasonably estimable. For one-time termination benefits, such as additional severance pay, and other exit costs, such as lease and other contract termination costs, the liability is measured and originally recognized at fair value in the period in which the liability is incurred, with subsequent changes recognized in the period of change. Refer to Note 15 – Restructuring for more information.

Share-Based Compensation: Share-based compensation expense is recognized based on the estimated fair value of stock options and similar equity instruments awarded to employees. Refer to Note 14 – Shareholders’ Equity and Share-Based Compensation for more information.

AOCI: At June 30, 2012 and 2011 AOCI consisted of the following:

 

     June 30,  

Income/(Loss):

   2012     2011  

Cumulative translation adjustment

   $ 45,894      $ 182,134   

Pension liability adjustment

     (38,447     (18,303

Unrealized gains (losses) on hedging derivatives

     26,296        (23,184

Unrealized losses on available-for-sale securities

     (4,034     (3,914
  

 

 

   

 

 

 

Total AOCI

   $ 29,709      $ 136,733   
  

 

 

   

 

 

 

Share Buy-Back Program: On October 26, 2011, we announced that our Board of Directors authorized the repurchase of up to $200 million of our common stock. Refer to Note 14 – Shareholders’ Equity and Share-Based Compensation for more information. We repurchased 3.2 million of shares of our common stock for a total purchase price of $123.9 million in the fiscal year ended June 30, 2012.

Treasury Stock: We account for repurchased common stock under the cost method and include such treasury stock as a component of our shareholder’s equity in our Consolidated Balance Sheets. Retirement of treasury stock is recorded as a reduction of common stock and additional paid-in-capital in our Consolidated Balance Sheets at the time such retirement is approved by our Board of Directors. Refer to Note 14 – Shareholders’ Equity and Share-Based Compensation for more information on shares of our common stock that were repurchased and included as treasury stock during the fiscal year ended June 30, 2012.

Recently Adopted Accounting Pronouncements

Goodwill Impairment Testing: In September 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2011-08, “Intangibles-Goodwill and Other (Topic 350): Testing Goodwill for Impairment” (“ASU 2011-08”). The new guidance is intended to simplify how entities test goodwill for impairment. It includes provisions that permit an entity to first assess qualitative factors in determining whether it is “more likely than not” that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. The more-likely-than-not threshold is defined as having a likelihood of more than 50 percent. The new guidance is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted. We adopted the provisions of this new guidance in September 2011. The adoption of the new provisions did not have any impact on our financial condition or results of operations.

Intangibles, Goodwill and Other: In December 2010, the FASB issued ASU 2010-28, “Intangibles—Goodwill and Other (Topic 350): When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts.” The new guidance requires that reporting units with zero or negative carrying amounts perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. The new guidance is effective for us for fiscal years beginning after December 15, 2010. We adopted the provisions of this new guidance on July 1, 2011. The adoption of the new provisions did not have any impact on our financial condition or results of operations as we had no reporting units with zero or negative carrying amounts.

 

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

Fair Value: In May 2011, the FASB issued ASU 2011-04, “Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.” The new guidance does not extend the use of fair value accounting, but provides guidance on how to apply fair value accounting where its use is already required or permitted by other standards within GAAP or International Financial Reporting Standards (“IFRSs”). The new guidance also changes the wording used to describe many requirements in GAAP for measuring fair value and for disclosing information about fair value measurements and it clarifies the FASB’s intent about the application of existing fair value measurements. Provisions of the new guidance include a requirement that for recurring Level 3 fair value measurements, entities disclose quantitative information about unobservable inputs, a description of the valuation process used and qualitative details about the sensitivity of the measurements. In addition, for items not carried at fair value but for which fair value is disclosed, entities are required to disclose the level within the fair value hierarchy that applies to the fair value measurement disclosed. The new guidance applies prospectively and is effective for interim and annual periods beginning after December 15, 2011. We adopted the provisions of this new guidance on January 1, 2012 and expanded our disclosures on fair value measurements. Refer to Note 11 – Fair Value Measurements for more information. The adoption of the new provisions did not have any impact on our financial condition or results of operations.

Recently Issued Accounting Standards

Intangible Assets: In July 2012, the FASB issued ASU 2012-02, “Testing Indefinite-Lived Intangible Assets for Impairment,” which allows companies to perform a qualitative assessment to determine whether further impairment testing of indefinite-lived intangible assets is necessary, similar in approach to the goodwill impairment test. The new guidance allows an entity the option to first assess qualitatively whether it is more likely than not (that is, a likelihood of more than 50 percent) that an indefinite-lived intangible asset is impaired, thus necessitating that it perform the quantitative impairment test. An entity is not required to calculate the fair value of an indefinite-lived intangible asset and perform the quantitative impairment test unless the entity determines that it is more likely than not that the asset is impaired. The new guidance is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted for annual and interim impairment tests performed as of a date before July 27, 2012, if the financial statements for the most recent annual or interim period have not yet been issued. We will adopt the provisions of this new guidance on July 1, 2013. We do not expect the adoption of the new provisions to have a material impact on our financial condition or results of operations.

Balance Sheet: In December 2011, the FASB issued ASU 2011-11, “Balance Sheet (Topic 210), Disclosures about Offsetting Assets and Liabilities,” which requires companies to disclose information about financial instruments that have been offset and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial condition. Companies will be required to provide both net (offset amounts) and gross information in the notes to the financial statements for relevant assets and liabilities that are offset. The new guidance is effective retrospectively for fiscal years and interim periods within those fiscal years beginning on or after January 1, 2013. We will adopt the provisions of this new guidance on July 1, 2013. We do not expect the adoption of the new provisions to have a material impact on our financial condition or results of operations.

 

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Comprehensive Income: In June 2011, the FASB issued ASU 2011-05, “Comprehensive Income (Topic 220): Presentation of Comprehensive Income” (“ASU 2011-05”). The new guidance requires that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both cases, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. If presented in a single continuous statement, the entity is required to present the components of net income and total net income, the components of other comprehensive income and a total for other comprehensive income, along with the total of comprehensive income in that statement. If presented in the two-statement approach, the first statement, which is the statement of net income, should present components of net income and total net income followed consecutively by a second statement, which is the statement of other comprehensive income, that should present the components of other comprehensive income, total other comprehensive income and a total amount for comprehensive income. Regardless of the method used, the entity is required to present on the face of the financial statements reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement where the components of net income and the components of other comprehensive income are presented. In December 2011, the FASB issued ASU 2011-12, “Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05” (“ASU 2011-12”). ASU 2011-12 temporarily deferred the requirement to present on the face of the financial statements reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement where the components of net income and the components of other comprehensive income are presented. The guidance in ASU 2011-05, as amended, is effective retrospectively for fiscal years, and interim periods within those fiscal years beginning after December 15, 2011. We will adopt the provisions of this new guidance on July 1, 2012. We do not expect the adoption of the new provisions to have a material impact on our financial condition or results of operations.

Note 2 – Acquisitions

MWM Acoustics

On July 22, 2011 (the “Acquisition Date”), we and our wholly-owned subsidiary, Harman Holding Limited (“Harman Holding”), entered into an equity securities purchase agreement with a group of sellers (the “MWM Sellers”), to acquire all of the issued and outstanding equity interests of MWM Acoustics LLC and certain related entities (“MWM Acoustics”), a leading provider of high performance embedded acoustic solutions (the “MWM Acquisition”), for a purchase price of $80.0 million (the “Fixed Purchase Price”), plus a working capital adjustment of $0.1 million which was determined within 60 days of the Acquisition Date and has been paid. On the Acquisition Date, we and Harman Holding paid the MWM Sellers a total of $72.0 million. The remainder of the Fixed Purchase Price of $8.0 million will be payable on the later of December 31, 2012, or upon the resolution of any outstanding indemnification claims. The MWM Acquisition is also subject to a $57.0 million earn-out, which is payable contingent upon the achievement of certain financial targets in the fiscal year ended June 30, 2014. Our preliminary valuation of the contingent consideration is $22.1 million. The MWM Acquisition complements and expands our existing microphone and embedded acoustic business and provides access to MWM Acoustics’ blue-chip customer base.

 

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The total cost of the MWM Acquisition, including the fair value of the contingent consideration, was allocated to the assets acquired and liabilities assumed based on their fair values at the Acquisition Date, as follows:

 

     July 22, 2011  

Cash and cash equivalents

   $ 1,465   

Accounts receivable

     4,434   

Inventories

     1,062   

Other current assets

     42   
  

 

 

 

Current assets

     7,003   

Property, plant and equipment

     273   

Goodwill

     79,757   

Intangibles

     20,600   

Other noncurrent assets

     1,091   
  

 

 

 

Total assets

     108,724   
  

 

 

 

Accounts payable

     5,187   

Accrued liabilities

     206   
  

 

 

 

Total current liabilities

     5,393   

Other noncurrent liabilities

     1,125   
  

 

 

 

Total liabilities

     6,518   
  

 

 

 

Net assets

   $ 102,206   
  

 

 

 

Goodwill and intangibles were recorded in connection with the acquisition based on third-party valuations and management’s estimates for those acquired intangible assets. Goodwill was calculated as the excess of the consideration transferred over the net assets recognized and represents the future economic benefits arising from other assets acquired that could not be individually identified and separately recognized. Of the $79.8 million of goodwill recognized, approximately $35.6 million is deductible for tax purposes. Intangible assets included customer relationships of $19.2 million with an approximate useful life of 10 years and technology of $1.4 million with an approximate useful life of four years. Expenses of $0.9 million were recognized in connection with this acquisition and are included in SG&A in our Consolidated Statements of Income for the fiscal year ended June 30, 2012. The operating results of MWM Acoustics, now known as Harman Embedded Audio, are included in our Lifestyle segment. Pro-forma financial information has not been presented as the MWM Acquisition is not material to our results of operations.

3dB Research Limited

On February 10, 2011 (the “3dB Acquisition Date”), we acquired all of the issued and outstanding shares of 3dB Research Limited (“3dB”), a leading developer of music and signal processing technology, for a total purchase price of $3.0 million, which was subject to a working capital adjustment as of the 3dB Acquisition Date of $0.5 million. On the 3dB Acquisition Date, we paid $2.3 million in cash to the sellers, which consisted of 60 percent of the purchase price of $1.8 million plus a working capital adjustment of $0.5 million. The remainder of the purchase price of $1.2 million will be paid in three equal installments on the first, second and third anniversary dates of the 3dB Acquisition Date. The total cost of the acquisition was allocated to the assets acquired and the liabilities assumed based on their estimated fair values. The excess of the purchase price over the net assets acquired was allocated to intangible assets. We incurred less than $0.1 million of transaction costs in connection with this acquisition, which are included in SG&A in our Consolidated Statement of Income for the fiscal year ended June 30, 2011. The operating results of 3dB, now known as Harman International Industries Canada Limited, are included in our Professional segment. Pro-forma financial information has not been presented as 3dB is not material to our results of operations.

 

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Aha Mobile

On September 13, 2010 (the “Aha Acquisition Date”), we acquired Aha Mobile (“Aha”), a provider of on-demand mobile and location-based internet content services, for $1.8 million, which we paid in cash on the Aha Acquisition Date. The total cost of the acquisition was allocated to intangible assets, based on their estimated fair values. We incurred less than $0.1 million of transaction costs in connection with this acquisition, which are included in SG&A in our Consolidated Statement of Income for the fiscal year ended June 30, 2011. The operating results of Aha are included in our Infotainment segment. Pro-forma financial information has not been presented as Aha is not material to our results of operations.

Eletrônica Selenium S.A.

On June 1, 2010, Harman do Brasil Industria Eletrônica e Participacoes Ltda., an indirect wholly-owned subsidiary of Harman purchased all of the issued and outstanding shares of Eletrônica Selenium S.A. (“Selenium”) for an aggregate purchase price of $76.7 million, of which $65.1 million was paid at closing, and approximately $10 million of the remaining portion of the purchase price was due in June 2011. The remaining portion of the purchase price was $11.2 million after adjusting for foreign currency translation and was paid in June 2011. The remaining $1.6 million of the purchase price is payable subject to the resolution of certain contingencies. The results of operations for Selenium are included in our Consolidated Statements of Income as of June 1, 2010. Selenium, now known as Harman do Brasil, is a Brazilian manufacturer of loudspeaker products, using engineered technology based on international standards, and sells a full line of products including loudspeakers, high quality line arrays, multi-systems, amplifiers, drivers and other components related to the sound systems market. As a result of the acquisition, we expect to expand our distribution in Brazil and Latin America and drive more business opportunities in this region across our Infotainment, Lifestyle and Professional segments.

The total cost of the acquisition was allocated to the assets acquired and liabilities assumed based on their fair values at the acquisition date, as follows:

 

     June 1, 2010  

Cash and cash equivalents

   $ 1,259   

Accounts receivable, net

     14,788   

Inventories

     8,139   

Other current assets

     2,236   
  

 

 

 

Current assets

     26,422   

Property, plant and equipment, net

     8,903   

Goodwill

     56,661   

Intangibles

     14,168   
  

 

 

 

Total assets

     106,154   
  

 

 

 

Accounts payable

     1,880   

Short-term debt

     13,706   

Accrued liabilities

     11,389   

Income taxes payable

     1,522   
  

 

 

 

Total current liabilities

     28,497   

Long-term debt

     257   

Other liabilities

     679   
  

 

 

 

Total liabilities

     29,433   
  

 

 

 

Net assets

   $ 76,721   
  

 

 

 

Based on our final valuation, goodwill and intangibles were recorded in connection with the acquisition based on third-party valuations and management’s estimates for those acquired intangible assets. The final

 

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amount of goodwill recorded of $56.7 million decreased by $2.3 million during fiscal year 2011, as a result of final adjustments to the acquired net assets. Intangible assets included trade names of $8.9 million with an approximate 70 month life, distribution channels of $4.0 million with approximate useful lives ranging between 15 months to 35 months and a non-compete agreement of $1.3 million with an approximate 20 month to 60 month useful life. Expenses of $1.5 million were recognized in connection with this acquisition and are included in SG&A in our Consolidated Statement of Income for the fiscal year ended June 30, 2010.

Note 3 – Discontinued Operations

On April 9, 2010, we and our wholly-owned subsidiary, Harman Holding GmbH & Co. KG (“Harman KG”) entered into a share purchase agreement (the “Purchase Agreement”) to sell all of the issued and outstanding shares of QNX Software Systems Co., QNX Software Systems (Wavemakers), Inc. and QNX Software Systems, Inc. (collectively, the “QNX Entities”) for $200 million. The sale closed on June 1, 2010. In connection with this transaction, we recognized a gain of $152.7 million ($114.2 million, net of income taxes) in our Consolidated Statement of Income for the fiscal year ended June 30, 2010 which is included in income from discontinued operations, net of income taxes. The sale price was subject to a working capital adjustment of $0.1 million, which is also included in the gain. The results of operations for the QNX Entities have been reclassified to discontinued operations in all periods presented. The tax expense within discontinued operations for fiscal year 2010 includes an expense of $35.4 million relating to tax on previously permanently reinvested earnings. Following the sale of the QNX Entities, we intended to repatriate a portion of these earnings and therefore had recorded a deferred income tax liability as of June 30, 2010 as a result of our planned repatriation to the U.S. of the proceeds resulting from such sale. During the fiscal year ended June 30, 2012, we repatriated these earnings previously provided for.

The operations of the QNX Entities have been segregated from continuing operations and are reflected as discontinued operations in the Consolidated Statements of Income as follows:

 

     Year Ended
June  30, 2010
 

Net sales

   $ 35,309   

Gain on sale of discontinued operations, net of income taxes

     114,197   

Income from discontinued operations, net of income taxes

     9,394   

Net income from discontinued operations

     123,591   

Diluted earnings per share from discontinued operations

     1.75   

Note 4 – Inventories

At June 30, 2012 and 2011, inventories from continuing operations consisted of the following:

 

     June 30,  
     2012      2011  

Finished goods

   $ 161,124       $ 153,469   

Work in process

     69,577         67,534   

Raw materials

     196,896         202,134   
  

 

 

    

 

 

 

Inventories

   $ 427,597       $ 423,137   
  

 

 

    

 

 

 

At June 30, 2012 and 2011 our inventory reserves were $61.9 million and $73.3 million, respectively.

 

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Note 5 – Property, Plant & Equipment, net

At June 30, 2012 and 2011, property, plant and equipment from continuing operations consisted of the following:

 

     Estimated
Useful Lives
(in Years)
   June 30,  
      2012     2011  

Land

      $ 8,046      $ 11,974   

Buildings and improvements

   1-50      254,563        280,053   

Machinery and equipment

   3-20      1,002,539        1,050,892   

Furniture and fixtures

   3-10      29,423        30,769   
     

 

 

   

 

 

 

Property, plant and equipment, gross

        1,294,571        1,373,688   

Less accumulated depreciation and amortization

        (864,337     (903,388
     

 

 

   

 

 

 

Property, plant and equipment, net

      $ 430,234      $ 470,300   
     

 

 

   

 

 

 

Depreciation expense for the fiscal years ended June 30, 2012, 2011 and 2010 was $110.1 million, $115.5 million and $127.7 million, respectively.

Note 6 – Accrued Warranties

At June 30, 2012 and 2011, details of our accrued warranties from continuing operations consisted of the following:

 

     June 30,  
     2012     2011  

Accrued warranties, beginning of year

   $ 122,396      $ 99,329   

Warranty expense

     49,224        52,849   

Warranty payments (cash or in-kind)

     (60,319     (45,964

Other(1)

     (14,012     16,182   
  

 

 

   

 

 

 

Accrued warranties, end of year

   $ 97,289      $ 122,396   
  

 

 

   

 

 

 

 

(1) 

Other primarily represents foreign currency translation.

 

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Note 7 – Earnings Per Share

We apply the two-class method when computing earnings per share, which requires that net income per share for each class of shares entitled to dividends be calculated assuming all of our net income is distributed as dividends to these shareholders based on their contractual rights.

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

 

    Year Ended June 30,  
    2012     2011     2010  
    Basic     Diluted     Basic     Diluted     Basic     Diluted  

Numerator for Basic and Diluted Earnings per Share:

           

Income from continuing operations, net of income taxes

  $ 329,541      $ 329,541      $ 135,916      $ 135,916      $ 40,467      $ 40,467   

Less: Net income attributable to noncontrolling interest

    0        0        0        0        5,289        5,289   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

    329,541        329,541        135,916        135,916        35,178        35,178   

Income from discontinued operations, net of income taxes

    0        0        0        0        123,591        123,591   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Harman International Industries, Incorporated

  $ 329,541      $ 329,541      $ 135,916      $ 135,916      $ 158,769      $ 158,769   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Denominator for Basic and Diluted Earnings per Share:

           

Weighted average shares outstanding

    71,297        71,297        70,992        70,992        70,350        70,350   

Employee stock options

    0        786        0        643        0        245   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total weighted average shares outstanding

    71,297        72,083        70,992        71,635        70,350        70,595   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per