SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended: December 31, 2001
Commission File Number: 1-9764
HARMAN INTERNATIONAL INDUSTRIES, INCORPORATED
--------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 11-2534306
---------------------------------- --------------------------------------
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
1101 PENNSYLVANIA AVENUE, NW WASHINGTON, D.C. 20004
--------------------------------------------------------------------------------
(Address of principal executive offices) (Zip code)
(202) 393-1101
------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
YES X NO
------- -------
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
32,311,344 shares of Common Stock, $.01 par value, at January 31, 2002.
HARMAN INTERNATIONAL INDUSTRIES, INCORPORATED AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION PAGE NO.
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
December 31, 2001 and June 30, 2001 3
Condensed Consolidated Statements of Operations -
Three and six months ended December 31, 2001 and 2000 4
Condensed Consolidated Statements of Cash Flows -
Six months ended December 31, 2001 and 2000 5
Notes to Condensed Consolidated Financial Statements 6-13
Item 2. Management's Discussion and Analysis of the
Results of Operations and Financial Condition 14-17
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Changes in Securities and Use of Proceeds 19
Item 3. Defaults Upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 20
SIGNATURES 21
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
HARMAN INTERNATIONAL INDUSTRIES, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2001 AND JUNE 30, 2001
($000s omitted except per share amounts)
December 30, June 30,
ASSETS 2001 2001
-------------- --------------
Current assets
Cash and cash equivalents $ 5,301 2,748
Receivables (less allowance for doubtful
accounts of $12,168 at December 31,
2001 and $11,457 at June 30, 2001) 310,717 315,817
Inventories 335,061 317,500
Other current assets 68,593 72,806
-------------- --------------
Total current assets 719,672 708,871
-------------- --------------
Property, plant and equipment, net 274,623 264,136
Excess of cost over fair value of assets
acquired, net 144,468 145,258
Other assets 58,696 44,120
-------------- --------------
Total assets $ 1,197,459 1,162,385
-------------- --------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Short-term borrowings $ 14,921 19,394
Current portion of long-term debt 223,800 5,544
Accounts payable 121,752 151,478
Accrued liabilities 180,553 173,739
-------------- --------------
Total current liabilities 541,026 350,155
-------------- --------------
Borrowings under revolving credit
facility --- 108,072
Senior long-term debt 162,166 235,750
Other non-current liabilities 47,035 44,537
Minority interest 945 929
Shareholders' equity
Preferred stock, $.01 par value --- ---
Common stock, $.01 par value 381 377
Additional paid-in capital 301,029 297,515
Accumulated other comprehensive income:
Unrealized gains on hedging derivatives 2,422 2,785
Foreign currency translation adjustment (83,108) (92,288)
Minimum pension liability adjustment (479) ---
Retained earnings 366,681 351,525
Less common stock held in treasury (140,639) (136,972)
-------------- --------------
Total shareholders' equity 446,287 422,942
-------------- --------------
Total liabilities and shareholders' equity $ 1,197,459 1,162,385
-------------- --------------
See accompanying Notes to Condensed Consolidated Financial Statements.
3
HARMAN INTERNATIONAL INDUSTRIES, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 2001 AND 2000
($000s omitted except per share amounts)
Three Months Ended Six Months Ended
December 31, December 31,
2001 2000 2001 2000
---------- ---------- --------- ---------
Net sales $ 467,432 438,176 866,441 833,152
Cost of sales 339,994 316,583 635,282 601,849
---------- ---------- --------- ---------
Gross profit 127,438 121,593 231,159 231,303
Selling, general and
administrative expenses 104,897 81,910 195,274 175,477
---------- ---------- --------- ----------
Operating income 22,541 39,683 35,885 55,826
Other expense
Interest expense 5,508 5,615 11,600 11,345
Miscellaneous, net 512 48 677 251
---------- ---------- --------- ---------
Income before income taxes 16,521 34,020 23,608 44,230
Income tax expense 4,791 9,866 6,847 12,831
---------- ---------- --------- ---------
Net income $ 11,730 24,154 16,761 31,399
---------- ---------- --------- ---------
Basic earnings per share $ .37 .75 .52 .96
---------- ---------- --------- ---------
Diluted earnings per share $ .35 .72 .50 .92
---------- ---------- --------- ---------
Weighted average shares
outstanding - basic 32,116 32,130 32,096 32,573
---------- ---------- ---------- --------
Weighted average shares
outstanding - diluted 33,525 33,764 33,595 34,118
---------- ---------- ---------- --------
See accompanying Notes to Condensed Consolidated Financial Statements.
4
HARMAN INTERNATIONAL INDUSTRIES, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED DECEMBER 31, 2001 AND 2000
($000s omitted)
2001 2000
------------ ------------
Cash flows from operating activities:
Net income $ 16,761 31,399
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 28,481 28,519
Amortization of intangible assets 9,242 7,758
Changes in assets and liabilities:
(Increase) decrease in:
Receivables 9,082 (15,592)
Inventories (13,642) (70,408)
Other current assets 7,251 (4,170)
(Decrease) increase in:
Accounts payable (32,021) (24,134)
Accrued liabilities 1,832 (3,953)
Other operating activities 1,727 477
------------ -----------
Net cash provided by (used in)operating activities $ 28,713 (50,104)
------------ -----------
Cash flows from investing activities:
Investment in unconsolidated subsidiaries $ (5,788) --
Proceeds from disposition of assets 849 --
Loan collections --- 12,259
Capital expenditures (36,422) (45,256)
Purchased and capitalized software expenditure (11,945) (7,148)
Other items, net 1,192 2,563
------------ ------------
Net cash used in investing activities $ (52,114) (37,582)
------------ ------------
Cash flows from financing activities:
Borrowings on (repayments of) lines of credit $ (5,076) 2,316
Net proceeds from long-term debt 32,854 155,228
Shares repurchases (3,667) (66,968)
Dividends paid to shareholders (1,605) (1,621)
Proceeds from exercise of stock options 3,518 2,218
------------ ------------
Net cash provided by(used in)financing activities $ 26,024 91,173
------------ ------------
Effect of exchange rates on cash (70) (438)
------------ ------------
Net increase(decrease)in cash and cash equivalents $ 2,553 3,049
Cash and cash equivalents
at beginning of period 2,748 4,365
------------ ------------
Cash and cash equivalents at end of period $ 5,301 7,414
------------ ------------
Supplemental disclosures of cash flow information:
Interest paid $ 11,031 11,940
Income taxes paid $ 561 8,391
See accompanying Notes to Condensed Consolidated Financial Statements.
5
HARMAN INTERNATIONAL INDUSTRIES, INCORPORATED AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
NOTE A - BASIS OF PRESENTATION
The Company's Condensed Consolidated Financial Statements as of
December 31, 2001, and for the three and six months ended December
31, 2001 and 2000, have not been audited by the Company's
independent auditors; however, in the opinion of management, the
accompanying unaudited Condensed Consolidated Financial Statements
contain all adjustments (consisting of only normal recurring accruals)
necessary to present fairly the consolidated financial position of the
Company and subsidiaries as of December 31, 2001 and the results of
their operations and their cash flows for the periods presented.
Where necessary, prior years' information has been reclassified to
conform to the current year consolidated financial statement
presentation.
These financial statements should be read in conjunction with the
consolidated financial statements and related notes thereto included in
the Company's Annual Report on Form 10-K for the year ended June
30, 2001.
The results of operations for the three and six months ended December
31, 2001, are not necessarily indicative of the results to be expected for
the full year.
NOTE B COMPREHENSIVE INCOME
Comprehensive income and its components for the three and six months
ended December 31, 2001 and 2000 are presented below.
Three months Ended Six months Ended
December 31, December 31,
($000s omitted) 2001 2000 2001 2000
---------- ---------- --------- ---------
Net income $ 11,730 24,154 16,761 31,399
Other comprehensive income (loss):
Foreign currency translation adjustments (10,124) 16,022 9,180 (4,751)
Unrealized gains (losses) on
hedging derivatives 1,054 (2,100) (363) (21)
Minimum pension liability adjustment 15 --- (479) ---
---------- ---------- ---------- ----------
Total comprehensive income (loss) $ 2,675 38,076 25,099 26,627
---------- ---------- ---------- ----------
6
HARMAN INTERNATIONAL INDUSTRIES, INCORPORATED AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (continued)
NOTE B COMPREHENSIVE INCOME (continued)
The components of accumulated other comprehensive income as of
December 31, 2001 and June 30, 2001 and the activity for the six
months ended December 31, 2001 are presented below.
Cumulative Hedging Minimum Other
Translation Derivative Pension Comprehensive
($000s omitted) Adjustment Gain/(Loss) Liability income(loss)
------------ ------------ ------------ -------------
June 30, 2001 $ (92,288) $ 2,785 $ --- $ (89,503)
Foreign currency
translation
adjustments 9,180 --- --- 9,180
Change in fair
value of foreign
currency cash
flow hedges --- (363) --- (363)
Pension liability
Adjustment --- --- (479) (479)
------------ ------------ ------------ -------------
December 31, 2001 $ ( 83,108) 2,422 ( 479) (81,165)
------------ ------------ ------------ -------------
NOTE C EARNINGS PER SHARE INFORMATION
Three Months Ended December 31,
2001 2000
------------------- -------------------
($000s omitted except per share amounts) Basic Diluted Basic Diluted
--------- -------- --------- --------
Net income $ 11,730 11,730 24,154 24,154
--------- -------- --------- --------
Weighted average shares
outstanding 32,116 32,116 32,130 32,130
Employee stock options -- 1,409 -- 1,634
--------- -------- --------- --------
Total weighted average
shares outstanding 32,116 33,525 32,130 33,764
--------- -------- --------- --------
Earnings per share $ .37 .35 .75 .72
--------- -------- --------- --------
7
HARMAN INTERNATIONAL INDUSTRIES, INCORPORATED AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (continued)
NOTE C EARNINGS PER SHARE INFORMATION (continued)
Six Months Ended December 31,
2001 2000
------------------ ------------------
($000s omitted except per share amounts) Basic Diluted Basic Diluted
-------- -------- -------- --------
Net income $16,761 16,761 31,399 31,399
-------- -------- -------- --------
Weighted average shares
outstanding 32,096 32,096 32,573 32,573
Employee stock options --- 1,499 --- 1,545
-------- -------- -------- ---------
Total weighted average
shares outstanding 32,096 33,595 32,573 34,118
-------- -------- -------- ---------
Earnings per share $ .52 .50 .96 .92
-------- -------- -------- ---------
The difference between basic and diluted earnings per share was due to
the potential dilutive impact of options to purchase common stock.
Options to purchase 22,000 shares of common stock at prices ranging
from $41.00 to $45.00 per share during the second quarter of 2001 and
options to purchase 10,815 shares of common stock at prices ranging
from $42.00 to $45.00 during the second quarter of 2000 were not
included in the computation of diluted earnings per share because the
exercise prices were greater than the average market price of the
common stock and therefore such options would be antidilutive.
Options to purchase 20,940 shares of common stock at prices ranging
from $41.00 to $45.00 per share during the six months ended December
31, 2001 and options to purchase 5,408 shares of common stock at
prices ranging from $42.01 to $45.00 per share during the six months
ended December 31, 2000 were not included in the computation of
diluted earnings per share because they would be antidilutive.
NOTE D SEGMENTATION
The Company is engaged in the design, manufacture and marketing of
high fidelity audio products. Our businesses are organized based on the
end-user markets served consumer and professional.
8
HARMAN INTERNATIONAL INDUSTRIES, INCORPORATED AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (continued)
NOTE D SEGMENTATION (continued)
The Consumer Systems Group manufactures loudspeakers and
electronics for high fidelity audio and video reproduction in the home,
with computers and in vehicles. Home applications include two
channel audio, multi-channel audio/video and personal computer audio.
Vehicle applications include audio, video, navigation, telematics, multi-
media and wireless internet. Consumer products are marketed under
brand names including JBL, Harman Kardon, Infinity, Becker, Revel,
Lexicon, Mark Levinson and Proceed.
The Professional Group manufactures loudspeakers and electronics
used by audio professionals in concert halls, cinemas, recording studios,
broadcasting operations and live music events. Professional products
are marketed worldwide under brand names including JBL, AKG,
Studer, Soundcraft, Crown, DOD, Digitech and dbx.
The following table reports external sales and operating income (loss)
by segment for the three and six months ended December 31, 2001.
Three Months Ended Six Months Ended
December 31, December 31,
($000s omitted) 2001 2000 2001 2000
---------- ---------- ---------- ----------
Net sales:
Consumer Systems Group $ 363,379 326,406 657,430 611,765
Professional Group 104,053 109,206 209,011 216,360
Other --- 2,564 --- 5,027
---------- ---------- ---------- ----------
Total $ 467,432 438,176 866,441 833,152
---------- ---------- ---------- ----------
Operating income (loss):
Consumer Systems Group $ 26,871 35,357 44,331 58,780
Professional Group 1,691 6,584 6,093 10,453
Other (6,021) (2,258) (14,539) (13,407)
---------- ---------- ---------- ----------
Total $ 22,541 39,683 35,885 55,826
---------- ---------- ---------- ----------
Consumer Systems Group sales for the three and six months ended December
31, 2000 were reduced by $16.6 million for a non-recurring repurchase of
inventory from a European consumer electronics distributor. Other operating
income (loss) is primarily comprised of corporate expenses net of
subsidiary allocations.
9
HARMAN INTERNATIONAL INDUSTRIES, INCORPORATED AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (continued)
NOTE E - INVENTORIES
Inventories consist of the following:
December 31, June 30,
($000s omitted) 2001 2001
-------------- --------------
Finished goods and inventory
purchased for resale $ 143,433 145,349
Work in process 44,409 38,572
Raw materials and supplies 147,219 133,579
-------------- --------------
Total inventories $ 335,061 317,500
-------------- --------------
NOTE F DERIVATIVES
The Company uses foreign currency forward contracts to hedge a
portion of its forecasted transactions. These forward contracts are
designated as foreign currency cash flow hedges and recorded at fair
value in the statement of financial position. The recorded fair value is
balanced by an entry to other comprehensive income (loss) in the
statement of financial position until the underlying forecasted foreign
currency transaction occurs. When the transaction occurs, the gain or
loss from the derivative designated as a hedge of the transaction is
reclassified from accumulated other comprehensive income (loss) to the
same income statement line item in which the foreign currency gain or
loss on the underlying hedged transaction is recorded. If the underlying
forecasted transaction does not occur, the amount recorded in
accumulated other comprehensive income (loss) is reclassified to the
miscellaneous, net line of the income statement in the then-current
period.
Because the amounts and the maturities of the derivatives approximate
those of the forecasted exposures, changes in the fair value of the
derivatives are highly effective in offsetting changes in the cash flows
of the hedged items. Any ineffective portion of the derivatives is
recognized in current earnings. The ineffective portion of the
derivatives, which was immaterial for all periods presented, primarily
results from discounts or premiums on forward contracts.
10
HARMAN INTERNATIONAL INDUSTRIES, INCORPORATED AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (continued)
NOTE F DERIVATIVES (continued)
As of December 31, 2001, the Company had contracts maturing through
June 2002 to purchase and sell the equivalent of approximately $9.8
million of various currencies to hedge future foreign currency purchases
and sales. The Company recorded approximately $51,000 in net losses
from cash flow hedges related to forecasted foreign currency
transactions in the six months ended December 31, 2001. These losses
were offset by equivalent gains on the underlying hedged items. The
amount as of December 31, 2001, that will be reclassified from
accumulated other comprehensive income (loss) to earnings within the
next twelve months that is associated with these hedges is not material.
The Company has also purchased forward contracts to hedge future
cash flows due from foreign consolidated subsidiaries under operating
lease agreements. As of December 31, 2001, the Company had such
contracts in place to purchase and sell the equivalent of approximately
$53.7 million of various currencies to hedge quarterly lease
commitments through March 2006. The Company recorded $0.1
million in net gains from cash flow hedges related to the purchase of
these forward contracts in the six months ended December 31, 2001.
The amount as of December 31, 2001 that will be reclassified from
accumulated other comprehensive income (loss) to earnings within the
next twelve months that is associated with these hedges is a gain of $0.6
million.
The Company entered into swap agreements in August 2001 and
October 2001 to convert interest on the $150 million, 7.32% Senior
Notes due July 1, 2007, from a fixed rate to a variable rate. The
objective of the swap agreements is to offset interest rate risk and
associated changes in the fair value of the Company's fixed rate debt.
The swap agreement terms match the interest payment terms and the
maturity terms of the underlying bonds. The swap agreements are
accounted for as a fair value hedge.
NOTE G LEGAL PROCEEDINGS
The Company was a defendant in a lawsuit entitled Bose Corporation v.
JBL, Inc., and Infinity Systems, Inc., United States District Court,
District of Massachusetts. In this case, Bose sued JBL and Infinity for
infringement of a U.S. patent issued to Bose relating to the use of
elliptical ports in loudspeaker cabinets.
11
HARMAN INTERNATIONAL INDUSTRIES, INCORPORATED AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (continued)
NOTE G LEGAL PROCEEDINGS (continued)
On September 1, 2000, the District Court issued a judgment in favor of
Bose in the amount of $5.7 million. In addition, the District Court
initially issued a permanent injunction prohibiting JBL and Infinity
from the manufacture and sale of loudspeakers in the United States
utilizing elliptical ports. The judgment was increased to $7.2 million,
plus interest, to account for sales for the five months preceding the
District Court's judgment and for sales made from JBL and Infinity
inventory between September 27, 2000 and November 26, 2000 as
permitted by the District Court's September 27, 2000 modification of its
permanent junction. The Company appealed the District Court's
decision to the United States Court of Appeals.
On December 17, 2001 the Court of Appeals affirmed the District
Court's judgment in the lawsuit. The judgment is approximately $8.3
million. The Company filed a petition for reconsideration and rehearing
en banc with the Court of Appeals, however that petition has been
denied.
The Company has been notified by the United States Patent and
Trademark Office that it will reexamine the patent which was the
subject of the lawsuit. The Company has filed a motion with the
District Court to stay execution of the judgment pending the outcome of
the reexamination of the patent by the Patent and Trademark Office.
The Company is also considering appealing this case to the United
States Supreme Court.
Management believes the Company should prevail as a result of the
reexamination. It has, however, recorded an $8.3 million charge or
$0.18 per share in the current quarter ending December 31, 2001. The
charge is without any future operating effect because the simple port
design, which was the subject of the Bose suit, was discontinued over
two years ago.
There are various other legal claims pending against the Company and
its subsidiaries, but, in the opinion of management, liabilities, if any,
arising from such claims will not have a material effect upon the
consolidated financial condition or results of operations of the
Company.
12
HARMAN INTERNATIONAL INDUSTRIES, INCORPORATED AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (continued)
NOTE H RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 141 ("SFAS
141"), "Business Combinations," and Statement of Financial
Accounting Standards No. 142 ("SFAS 142"), "Goodwill and Other
Intangible Assets." SFAS 141 requires that the purchase method of
accounting be used for all business combinations initiated after June 30,
2001. SFAS 141 also specifies criteria intangible assets acquired in a
purchase method business combination must meet to be recognized and
reported apart from goodwill, noting that any purchase price allocable
to an assembled workforce may not be accounted for separately. SFAS
142 requires that goodwill and intangible assets with indefinite useful
lives no longer be amortized to earnings, but instead be tested for
impairment at least annually in accordance with the provisions of SFAS
142. The amortization of goodwill ceases upon adoption of SFAS 142
which is effective for fiscal years starting after December 15, 2001.
The Company has elected not to early adopt the provisions of Statement
142. Because of the extensive effort needed to comply with adopting
the Statement, it is not practicable to reasonably estimate the impact of
adopting this Statement on the Company's financial statements at the
date of this report, including whether any transitional impairment losses
will be required to be recognized as the cumulative effect of a change in
accounting principle. The Company will adopt the provisions of SFAS
142 effective July 1, 2002.
In October 2001, the FASB issued Statement of Financial Accounting
Standards No. 144 ("SFAS 144"), "Accounting for the Impairment or
Disposal of Long-Lived Assets," which addresses financial accounting
and reporting for the impairment or disposal of long-lived assets. While
SFAS 144 supersedes SFAS 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of," it
retains many of the fundamental provisions of that statement. The
standard is effective for fiscal years beginning after December 15, 2001.
13
HARMAN INTERNATIONAL INDUSTRIES, INCORPORATED AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
COMPARISON OF THE THREE AND SIX MONTH PERIODS ENDED
DECEMBER 31, 2001 AND 2000
Net sales for the three months ended December 31, 2001 were $467.4
million compared to $438.2 million in the same period last year, an
increase of 7 percent. For the six months ended December 2001, sales
increased 4 percent to $866.4 million versus $833.2 million in the same
period last year.
The Consumer Systems Group reported sales of $363.4 million for the
three months ended December 2001. Sales to the personal computer
manufacturers increased due to higher sales to Dell and an increase in
aftermarket sales. Sales to the automakers increased 13 percent over
last year's second quarter. In the United States Harman/Becker reported
increased sales to Toyota and Chrysler while higher sales to BMW and
the auto aftermarket contributed to increased sales in Europe.
The Consumer Systems Group reported sales of $657.4 million for the
six months ended December 31, 2001, an increase of 7 percent over the
prior year. Sales to the automakers increased 11 percent during the
period as aggressive dealer incentive programs drove higher vehicle
sales. In North America and Asia, Mark Levinson digital audio system
shipments to Lexus and JBL system sales to Toyota were higher than
the prior year, offsetting lower sales to Chrysler. In Europe,
Harman/Becker reported increased sales to BMW for systems
supporting the 3-series and higher than planned volumes for the new 7-
series Infotainment system. Multimedia sales to Dell and the
aftermarket were above last year's levels partially offset by lower sales
to Apple and Compaq. Consumer audio product sales approximated the
same prior year period.
The Professional Group reported sales of $104.1 million for the quarter,
a 5 percent decrease from last year's $109.2 million. JBL sales increase
for the quarter is due to returned momentum in the cinema business in
the United States and Europe. However, lower sales at AKG and Studer
were reported.
14
Professional Group sales for the six months ended December 31, 2001
were $209.0 million, a 3 percent decrease from last year after adjusting
for the sale of a unit in the prior year. JBL Professional reported
increased sales above last year's levels while the remainder of the group
experienced modest sales declines.
The gross profit margin for the quarter ended December 2001 was 27.3
percent ($127.4 million) compared to 27.7 percent ($121.6 million) in
the same period last year. Gross profit margin for the six months ended
December 2001 was 26.7 percent ($231.2 million) compared to 27.8
percent ($231.3 million) last year. The gross profit margin for the
second quarter and the first half decreased due to higher fixed overhead
relating to our new facilities in Kentucky, Mexico and China, and
Chrysler price reductions.
Selling, general and administrative costs as a percentage of sales were
22.4 percent ($104.9 million) for the second quarter and 22.5 percent
($195.3 million) for the six months ended December 2001. Selling,
general and administrative costs were 18.7 percent of sales ($81.9
million) for the second quarter and 21.1 percent ($175.5 million) for the
six months ended December 2000. Selling, general and administrative
costs for the three and six months ending December 2001 increased
from the prior year due a litigation charge of $8.3 million and higher
research and development costs. In December 2001, the United States
Court of Appeals affirmed a judgment in the Bose Corporation vs JBL
Incorporated lawsuit. The litigation charge was recorded due to the
December 2001 appellate court affirmation of a patent infringement
judgment against the Company, as discussed in Item 1. Legal
Proceedings in Part II to this report.
Operating income as a percent of sales was 4.8 percent ($22.5 million)
for the second quarter and 4.1 percent ($35.9 million) for the six months
ended December 2001. Last year, operating income as a percent of
sales was 9.1 percent ($39.7 million) for the second quarter and 6.7
percent ($55.8 million) for the first half. Operating income was lower
than last year due to the increase in fixed overhead costs and the $8.3
million Bose litigation charge.
Interest expense for the three months ended December 2001 was $5.5
million compared to $5.6 million in the same quarter last year. For the
six months ended December 2001, interest expense was $11.6 million,
compared to $11.3 million last year. Average borrowings outstanding
were $414.5 million for the second quarter of fiscal 2002 and $401.9
million for the first half, compared to $415.6 million and $378.9
million, respectively, for the same periods in the prior year.
15
The weighted average interest rate on borrowings was 5.3 percent for
the second quarter and 5.8 percent for the six months ended December
2001. The weighted average interest rates for the comparable periods in
the prior year were 5.4 percent and 6.0 percent, respectively.
Income before income taxes for the second quarter was $16.5 million,
compared to $34.0 million in the prior year. For the six months ended
December 2001, income before taxes was $23.6 million compared to
$44.2 million in the same period last year.
The effective tax rate for the three and six months ended December
2001, was 29.0 percent, equivalent to the same periods last year. The
effective tax rates were below the U.S. statutory rate due to utilization
of tax credits, realization of certain tax benefits for United States
exports and the utilization of tax loss carryforwards at certain foreign
subsidiaries. The Company calculates its effective tax rate based upon
its current estimate of annual results.
Net income for the second quarter was $11.7 million, compared to a net
income of $24.2 million reported for the same period last year. Net
income for the six months ended December 2001 was $16.8 million,
compared to $31.4 million in the same period last year. Excluding the
legal charge, net income was $17.6 million and $22.7 million for the
three and six months ended December 2001, respectively.
Basic earnings per share for the three months ended December 2001
were $.37, and diluted earnings per share were $.35. In the same period
last year, basic earnings per share were $.75 and diluted earnings per
share were $.72. Excluding the $8.3 million legal charge ($5.9 million
after-tax), basic earnings per share were $.55 and diluted earnings per
share were $.53.
Basic earnings per share for the six months ended December 2001 were
$.52, and diluted earnings per share were $.50. For the same period last
year, basic earnings per share were $.96 and diluted earnings per share
were $.92. Excluding the $8.3 million legal charge ($5.9 million after-
tax), basic earnings per share were $.70 and diluted earnings per share
were $.68.
FINANCIAL CONDITION / LIQUIDITY AND CAPITAL RESOURCES
Net working capital at December 31, 2001 was $178.6 million,
compared with $358.7 million at June 30, 2001. The working capital
decrease from June 30, 2001 is primarily due to the reclassification of
the Company's Term Loan and Revolving Credit Facility from non-
16
current to current. Also, lower inventories and other current assets
contributed to the decrease.
In the quarter ended December 31, 2001, the Company acquired and
placed in treasury 68,000 shares of its common stock at a cost of $2.1
million. In the first half of fiscal 2002, the Company acquired and
placed in treasury 118,000 shares of its common stock at a cost of $3.7
million.
In the quarter ended December 31, 2001, the company reclassified
borrowings under the Revolving Credit Facility from non-current to
current, due to its September 30, 2002 maturity date. Borrowings under
the Revolving Credit Facility at December 31, 2001 were $153.7
million, comprised of swing line borrowings of $3.8 million, which
were
included in short-term borrowings, and competitive advance borrowings
and revolving credit borrowings of $149.9 million.
Borrowings under the Revolving Credit Facility at June 30, 2001 were
$111.6 million, comprised of swing line borrowings of $3.5 million and
competitive advance borrowings and revolving credit borrowings of
$108.1 million. Borrowings under the Revolving Credit Facility
increased due to capital expenditures. The Company plans to refinance
its Term Loan and Revolving Credit Facility prior to their maturities on
August 30, 2002 and September 30, 2002, respectively.
FORWARD LOOKING STATEMENTS
Except for historical information contained herein, the matters
discussed are forward-looking statements within the meaning of Section
21E of the Securities Exchange Act. You should not place undue
reliance on these statements. 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 market conditions,
expected future developments 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, including but not
limited to the effect of changes in consumer confidence and spending,
automobile industry sales and production rates, model year changeovers
in the automotive industry, our ability to satisfy contract performance
criteria, availability of key components to the products we manufacture,
competitive products, currency exchange rates, the outcome of pending
or future litigation and other claims, labor disputes at our facilities or
those of our significant customers, general economic conditions and
other risks detailed in the Company's Annual Report on Form 10-K for
the fiscal year ended June 30, 2001 and other filings with the Securities
and Exchange Commission.
17
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Securities and Exchange Commission requires registrants to
include information about potential effects of market risk, including
changes in interest rates and currency exchange rates, in their financial
statements. There have been no material changes since June 30, 2001 in
the qualitative aspects of the Company's market risk profile or in the
potential effects of changes in currency exchange rates on the
Company's financial condition or results of operations.
In the six months ended December 31, 2001, the Company entered into
interest rate swap agreements converting the interest payments on its
$150 million, 7.32% bonds from a fixed rate to a variable rate. As a
result, the Company's exposure to changes in interest rates has
increased. The Company prepares a sensitivity analysis assuming a
hypothetical 100 basis point increase in interest rates across all
maturities to assess the potential effect of changes in interest rates.
At June 30, 2001, this analysis indicated that such market movements
would reduce net income, on an annualized basis, by approximately
$1.4 million. At December 31, 2001, this analysis indicated that such
market movements would reduce net income, on an annualized basis, by
approximately $2.7 million. See Note F to the financial statements
included in this report and the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 2001, for more information regarding
the Company's market risk.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company was a defendant in a lawsuit entitled Bose Corporation v.
JBL, Inc., and Infinity Systems, Inc., United States District Court,
District of Massachusetts. In this case, Bose sued JBL and Infinity for
infringement of a U.S. patent issued to Bose relating to the use of
elliptical ports in loudspeaker cabinets.
On September 1, 2000, the District Court issued a judgment in favor of
Bose in the amount of $5.7 million. In addition, the District Court
initially issued a permanent injunction prohibiting JBL and Infinity
from the manufacture and sale of loudspeakers in the United States
utilizing elliptical ports. The judgment was increased to $7.2 million,
plus interest, to account for sales for the five months preceding the
District Court's judgment and for sales made from JBL and Infinity
inventory between September 27, 2000 and November 26, 2000 as
18
permitted by the District Court's September 27, 2000 modification of its
permanent junction. The Company appealed the District Court's
decision to the United States Court of Appeals.
On December 17, 2001 the Court of Appeals affirmed the District
Court's judgment in the lawsuit. The judgment is approximately $8.3
million. The Company filed a petition for reconsideration and rehearing
en banc with the Court of Appeals, however that petition has been
denied.
The Company has been notified by the United States Patent and
Trademark Office that it will reexamine the patent which was the
subject of the lawsuit. The Company has filed a motion with the
District Court to stay execution of the judgment pending the outcome of
the reexamination of the patent by the Patent and Trademark Office.
The Company is also considering appealing this case to the United
States Supreme Court.
Management believes the Company should prevail as a result of the
reexamination. It has, however, recorded an $8.3 million charge or
$0.18 per share in the current quarter ending December 31, 2001. The
charge is without any future operating effect because the simple port
design, which was the subject of the Bose suit, was discontinued over
two years ago.
There are various other legal claims pending against the Company and
its subsidiaries, but, in the opinion of management, liabilities, if any,
arising from such claims will not have a material effect upon the
consolidated financial condition or results of operations of the
Company.
Item 2. Changes in Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
The Company's 2001 Annual Meeting of Shareholders was
held on November 5, 2001. Information regarding the
action taken at that meeting was included in the Company's
Quarterly Report on Form 10-Q for the period ended
September 30, 2001.
Item 5. Other Information
None.
19
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits required by Item 601 of Regulation S-K
None.
(b) Reports on Form 8-K
None.
20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
HARMAN INTERNATIONAL INDUSTRIES, INCORPORATED
(Registrant)
DATE: February 8, 2002 BY: /s/ Bernard A. Girod
--------------------------------
Bernard A. Girod
Vice Chairman and Chief
Executive Officer
DATE: February 8, 2002 BY: /s/ Frank Meredith
--------------------------------
Frank Meredith
Executive Vice President
and Chief Financial Officer
21