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: March 31, 2002
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.
32,487,676 shares of Common Stock, $.01 par value, at April 30, 2002
HARMAN INTERNATIONAL INDUSTRIES, INCORPORATED
AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION PAGE NO.
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
March 31, 2002 and June 30, 2001 3
Condensed Consolidated Statements of Operations -
Three and nine months ended March 31, 2002 and 2001 4
Condensed Consolidated Statements of Cash Flows -
Nine months ended March 31, 2002 and 2001 5
Notes to Condensed Consolidated Financial Statements 6-17
Item 2. Management's Discussion and Analysis of the
Results of Operations and Financial Condition 17-23
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 23-24
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 24
Item 6. Exhibits and Reports on Form 8-K 25
SIGNATURES 26
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
HARMAN INTERNATIONAL INDUSTRIES, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, 2002 AND JUNE 30, 2001
($000s omitted except per share amounts)
March 31, June 30,
ASSETS 2002 2001
-------------- --------------
Current assets
Cash and cash equivalents $ 84,430 2,748
Receivables (less allowance for doubtful
accounts of $12,133 at March 31,
2002 and $11,457 at June 30, 2001) 317,253 315,817
Inventories 326,907 317,500
Other current assets 72,529 72,806
-------------- --------------
Total current assets 801,119 708,871
-------------- --------------
Property, plant and equipment, net 283,545 264,136
Excess of cost over fair value of assets
acquired, net 155,462 145,258
Other assets 60,529 44,120
-------------- --------------
Total assets $ 1,300,655 1,162,385
-------------- --------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Short-term borrowings $ 7,199 19,394
Current portion of long-term debt 4,216 5,544
Accounts payable 134,691 151,478
Accrued liabilities 181,939 173,739
-------------- --------------
Total current liabilities 328,045 350,155
-------------- --------------
Borrowings under revolving credit
facility --- 108,072
Senior long-term debt 459,398 235,750
Other non-current liabilities 46,781 44,537
Minority interest 6,130 929
Shareholders' equity
Preferred stock, $.01 par value --- ---
Common stock, $.01 par value 382 377
Additional paid-in capital 302,851 297,515
Accumulated other comprehensive income:
Unrealized gains on hedging derivatives 4,446 2,785
Foreign currency translation adjustment (86,787) (92,288)
Minimum pension liability adjustment (472) ---
Retained earnings 380,520 351,525
Less common stock held in treasury (140,639) (136,972)
-------------- --------------
Total shareholders' equity 460,301 422,942
-------------- --------------
Total liabilities and shareholders' equity $ 1,300,655 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 NINE MONTHS ENDED MARCH 31, 2002 AND 2001
($000s omitted except per share amounts)
Three Months Ended Nine Months Ended
March 31, March 31,
2002 2001 2002 2001
--------- --------- ---------- ----------
Net sales $458,310 435,658 1,324,751 1,268,810
Cost of sales 334,828 339,316 970,110 941,165
--------- --------- ---------- -----------
Gross profit 123,482 96,342 354,641 327,645
Selling, general and
administrative expenses 96,373 114,823 291,647 290,300
--------- --------- ---------- -----------
Operating income (loss) 27,109 (18,481) 62,994 37,345
Other expense
Interest expense 6,073 7,249 17,673 18,594
Miscellaneous, net 405 174 1,082 425
--------- --------- ---------- -----------
Income (loss) before income taxes 20,631 (25,904) 44,239 18,326
Income tax expense (benefit) 5,983 (7,512) 12,830 5,319
--------- --------- ---------- -----------
Net income (loss) $ 14,648 (18,392) 31,409 13,007
--------- --------- ---------- -----------
Basic earnings (loss) per share $ .45 (0.57) .98 .40
--------- --------- ---------- -----------
Diluted earnings (loss) per share $ .43 (0.57) .93 .38
--------- --------- ---------- -----------
Weighted average shares
outstanding - basic 32,333 31,998 32,174 32,383
--------- --------- ---------- -----------
Weighted average shares
outstanding - diluted 33,939 31,998 33,728 33,842
--------- --------- ---------- -----------
See accompanying Notes to Condensed Consolidated Financial Statements.
4
HARMAN INTERNATIONAL INDUSTRIES, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED MARCH 31, 2002 AND 2001
($000s omitted)
2002 2001
------------ ------------
Cash flows from operating activities:
Net income $ 31,409 13,007
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 42,683 42,805
Amortization of intangible assets 13,913 11,180
Loss on disposition of assets --- 2,678
Changes in assets and liabilities:
(Increase)decrease in:
Receivables 2,073 (14,199)
Inventories (7,376) (64,668)
Other current assets 3,432 2,316
(Decrease) increase in:
Accounts payable (18,883) (38,374)
Accrued liabilities (3,039) 10,054
Other operating activities 1,475 260
------------ ------------
Net cash provided by (used in)
operating activities $ 65,687 (34,941)
------------ ------------
Cash flows from investing activities:
Payment for purchase of companies,
net of cash acquired $ (2,778) ---
Proceeds from disposition of assets 849 ---
Capital expenditures (61,220) (56,547)
Collections of loans, net --- 12,259
Purchased and capitalized software
expenditures (17,808) (11,127)
Other items, net (823) 4,514
------------ ------------
Net cash used in investing activities $ (81,780) (50,901)
------------ ------------
Cash flows from financing activities:
Borrowings on (repayments of) lines of credit $ (12,620) (3,651)
Proceeds from issuance of long-term debt 350,832 159,642
Repayments of long-term debt (238,961) ---
Debt issuance cost (449) (1,179)
Shares repurchased (3,667) (66,968)
Dividends paid to shareholders (2,414) (2,427)
Proceeds from exercise of stock options 5,336 2,997
------------ ------------
Net cash provided by (used in)
financing activities $ 98,057 88,414
------------ ------------
Effect of exchange rates on cash (282) (638)
------------ ------------
Net increase in cash and cash equivalents $ 81,682 1,934
Cash and cash equivalents
at beginning of period 2,748 4,365
------------ ------------
Cash and cash equivalents at end of period $ 84,430 6,299
------------ ------------
Supplemental disclosures of cash flow information:
Interest paid $ 18,372 15,955
Income taxes paid $ 3,928 12,506
Supplemental schedule of non-cash
investing activities:
Fair value of assets acquired $ 19,199 ---
Cash paid for the assets 2,778 ---
------------ ------------
Liabilities assumed $ 16,421 ---
------------ ------------
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
March 31, 2002 and for the three and nine months ended March 31,
2002 and 2001, 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 March 31, 2002 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 fiscal year ended
June 30, 2001.
The results of operations for the three and nine months ended March 31,
2002, are not necessarily indicative of the results to be expected for
the full year.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation - The consolidated financial statements include the
accounts of the Company and subsidiaries after the elimination of
significant intercompany transactions and accounts.
Revenue Recognition - The Company recognizes revenue from product
sales upon shipment of goods when passage of title to goods transfer
to the customer. Substantially all revenue transactions involve the
delivery of a physical product. The Company does not have multiple
element arrangements that contain undelivered products or services
at shipment.
Sales Discounts - The Company provides certain customers product
discounts and sales incentives including prompt payment discounts,
volume incentive programs, rebates and dealer order incentives.
The Company reports revenues net of discounts and other sales
incentives.
6
HARMAN INTERNATIONAL INDUSTRIES, INCORPORATED AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(continued)
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Cost of Sales - Cost of sales includes items such as material,
labor, manufacturing overhead and cost of goods purchased.
In addition, expenses incurred for manufacturing depreciation
and engineering, warehousing, shipping and handling, sales
commissions and customer service are also included in cost
of sales.
Selling, General and Administrative Expenses - Selling, general
and administrative expenses include non-manufacturing salaries
and benefits, occupancy costs, professional fees, research and
development costs as well as selling expenses, advertising expenses
and other operating expenses.
Advertising Costs - The Company expenses advertising costs as
incurred. When production costs are incurred for future advertising
costs, the amount is recorded as an asset and is subsequently
expensed when the advertisement is first put into service.
Amortization of intangibles - Amortization of intangibles includes
amortization of goodwill, amortization of purchased and deferred
software costs and amortization of debt issuance costs.
Cash Equivalents - Cash equivalents includes investments with
maturities of less than three months.
Inventories - Inventories are valued at the lower of cost or
market. Cost is determined principally by the first-in,
first-out method.
Property, Plant and Equipment - Property, plant and equipment is
recorded 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 provided
primarily using the straight-line method over useful lives
estimated from 3 to 50 years.
Income Taxes - The deferred income tax asset or liability is
determined by applying currently enacted tax laws and rates to
the expected reversal of the cumulative temporary differences
between the carrying value of assets and liabilities for
financial statement and income tax purposes. Deferred income
tax expense is measured by the change in the net deferred income
tax asset or liability during the year.
7
HARMAN INTERNATIONAL INDUSTRIES, INCORPORATED AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(continued)
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Foreign Currency Translation - Assets and liabilities in foreign
functional currencies are translated into U.S. dollars based upon
the prevailing currency exchange rates in effect at the balance
sheet date. Translation gains and losses are not included in the
determination of net income but are accumulated in a separate
component of shareholders' equity. These translation gains and
losses are a component of comprehensive income.
Excess of Cost over Fair Value of Assets Acquired - The net
excess of cost over fair value of assets acquired is amortized
over periods from 3 to 40 years, using the straight-line method.
The Company will implement SFAS 142 in fiscal year beginning
July 1, 2002, except for acquisitions in fiscal 2002, which
are recorded under SFAS 142.
Purchased and Deferred Software Costs - Purchased and deferred
software costs, net, are included in other assets on the balance
sheet. Deferred costs are principally comprised of costs to acquire
or develop automotive navigation, telecommunications and networking
software. Software costs are capitalized subsequent to the
establishment of technological feasibility.
Research and Development - Research and development costs are
expensed as incurred.
Stock Option Plan - Pursuant to SFAS No. 123, "Accounting for
Stock-Based Compensation," the Company has elected to continue
to apply the provisions of APB Opinion No. 25 for stock-based
compensation accounting and reporting.
Use of Estimates - Estimates and assumptions have been made
relating to the reporting of assets and liabilities and the
disclosure of contingent assets and liabilities at the balance
sheet date and the reporting of revenues and expenses during
the reporting periods to prepare these financial statements in
conformity with generally accepted accounting principles.
Actual results could differ from those estimates.
8
HARMAN INTERNATIONAL INDUSTRIES, INCORPORATED AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(continued)
NOTE C - COMPREHENSIVE INCOME
Comprehensive income and its components for the three and nine
months ended March 31, 2002 and 2001 are presented below.
Three Months Ended Nine Months Ended
March 31, March 31,
($000s omitted) 2002 2001 2002 2001
-------- -------- -------- --------
Net income $14,648 (18,392) 31,409 13,007
Other comprehensive income (loss):
Foreign currency translation adjustments 3,679 (20,071) 5,501 (24,822)
Unrealized gains (losses) on
hedging derivatives 2,024 1,582 1,661 1,561
Minimum pension liability adjustment 7 --- (472) ---
-------- -------- -------- --------
Total comprehensive income (loss) $20,358 (36,881) 38,099 (10,254)
-------- -------- -------- --------
The components of accumulated other comprehensive income as of
March 31, 2002 and June 30, 2001 and the activity for the nine
months ended March 31, 2002 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 5,501 --- --- 5,501
Change in fair
value of foreign
currency cash
flow hedges --- 1,661 --- 1,661
Pension liability
adjustment --- --- (472) (472)
------------ ------------ ----------- -------------
March 31, 2002 $ ( 86,787) $ 4,446 $ (472) $ (82,813)
------------ ------------ ----------- -------------
9
HARMAN INTERNATIONAL INDUSTRIES, INCORPORATED AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(continued)
NOTE D - EARNINGS PER SHARE INFORMATION
Three Months Ended March 31,
2002 2001
---------------- ----------------
($000s omitted except per share amounts) Basic Diluted Basic Diluted
------- ------- -------- -------
Net income $14,648 14,648 (18,392) (18,392)
------- ------- -------- --------
Weighted average shares
outstanding 32,333 32,333 31,998 31,998
Employee stock options --- 1,606 --- ---
------- ------- -------- --------
Total weighted average
shares outstanding 32,333 33,939 31,998 31,998
------- ------- -------- --------
Earnings per share $ .45 .43 (0.57) (0.57)
------- ------- -------- --------
Nine Months Ended March 31,
2002 2001
------------------ ------------------
($000s omitted except per share amounts) Basic Diluted Basic Diluted
-------- -------- -------- --------
Net income $31,409 31,409 13,007 13,007
-------- -------- -------- --------
Weighted average shares
outstanding 32,174 32,174 32,383 32,383
Employee stock options --- 1,554 --- 1,459
-------- -------- -------- --------
Total weighted average
shares outstanding 32,174 33,728 32,383 33,842
-------- -------- -------- --------
Earnings per share $ .98 .93 .40 .38
-------- -------- -------- --------
The difference between basic and diluted earnings per share is
due to the potential dilutive impact of options to purchase common
stock. These options did not have a dilutive impact on the three
months ended March 31, 2001 because the Company incurred a loss.
As a result, diluted loss per share equaled basic loss per share.
10
HARMAN INTERNATIONAL INDUSTRIES, INCORPORATED AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(continued)
NOTE D - EARNINGS PER SHARE INFORMATION (continued)
Options to purchase 19,000 shares of common stock at prices
ranging from $42.01 to $45.00 per share during the nine months
ended March 31, 2002 and options to purchase 9,872 shares of
common stock at prices ranging from $42.01 to $45.00 per share
during the nine months ended March 31, 2001 were not included
in the computation of diluted earnings per share because
these options would have been antidilutive. There were no
antidilutive options to purchase shares of common stock at
March 31, 2002.
NOTE E - SEGMENTATION
The Company manufactures and markets audio electronics and
loudspeakers for the consumer and professional markets. Our
businesses are organized based on the end-user markets served
- consumer and professional. The consumer products sold by
the Company are used in the home, in vehicles and with computers.
The professional products sold by the Company are used in live
performances, in theaters, in recording studios and in
industrial installations. The Company's products are sold
worldwide with the predominant markets being the U.S. and
Europe. Consumer sales accounted for approximately 76% of
the Company's total sales for the nine months ended
March 31, 2002 and 74% of the Company's sales for the nine
months ended March 31, 2001. Professional sales accounted
for 24% of the Company's total sales for the nine months
ended March 31, 2002 and 26% for the nine months ended
March 31, 2001.
The Consumer Systems Group designs, manufactures and markets
loudspeakers and electronics for high fidelity audio and video
reproduction in the home, in vehicles and with computers.
Home applications include two-channel audio, multi-channel
audio/video and personal computer audio. Vehicle applications
include car audio, video and navigation systems. Vehicle
applications also include integrated infotainment systems
that manage functions such as car audio, video and navigation
and other functions such as climate control, telecommunications
and internet access, which are provided by other manufacturers
and service providers. Consumer products are marketed
worldwide under brand names including JBL, Infinity,
Harman Kardon, Lexicon, Becker, Mark Levinson, Proceed,
Revel and AudioAccess.
11
HARMAN INTERNATIONAL INDUSTRIES, INCORPORATED AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(continued)
NOTE E - SEGMENTATION (continued)
The Professional Group designs, manufactures and markets
loudspeakers and electronics used in the sound reinforcement,
music instrument support and broadcast and recording segments
of the professional audio market. Professional products are
used at concert halls, cinemas, recording studios, broadcasting
operations and live music events. Professional products are
marketed worldwide under brand names including JBL Professional,
Soundcraft, Crown, DOD, Digitech, dbx, AKG, Lexicon, BSS and
Studer.
The following table reports external sales and operating income
(loss) by segment for the three and nine months ended
March 31, 2002 and 2001.
Three Months Ended Nine Months Ended
March 31, March 31,
($000s omitted) 2002 2001 2002 2001
---------- ---------- ---------- ----------
Net sales:
Consumer Systems Group $ 354,554 325,269 1,011,984 937,034
Professional Group 103,756 107,399 312,767 323,759
Other --- 2,990 --- 8,017
---------- ---------- ---------- ----------
Total $ 458,310 435,658 1,324,751 1,268,810
---------- ---------- ---------- ----------
Operating income (loss):
Consumer Systems Group $ 30,759 5,986 75,090 64,898
Professional Group 3,110 (18,359) 9,203 (8,002)
Other (6,760) (6,108) (21,299) (19,551)
---------- ---------- ---------- ----------
Total $ 27,109 (18,481) 62,994 37,345
---------- ---------- ---------- ----------
Consumer Systems Group net sales for the nine months ended March 31,
2001 were reduced by $16.6 million for a non-recurring repurchase
of inventory from a European consumer distributor. Other operating
income (loss) is primarily comprised of corporate expenses net of
subsidiary allocations.
12
HARMAN INTERNATIONAL INDUSTRIES, INCORPORATED AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (continued)
NOTE F - INVENTORIES
Inventories consist of the following:
March 31, June 30,
($000s omitted) 2002 2001
---------- ----------
Finished goods and inventory
purchased for resale $ 134,377 145,349
Work in process 46,905 38,572
Raw materials and supplies 145,625 133,579
---------- ----------
Total inventories $ 326,907 317,500
---------- ----------
NOTE G - 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.
13
HARMAN INTERNATIONAL INDUSTRIES, INCORPORATED AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (continued)
NOTE G - DERIVATIVES (continued)
As of March 31, 2002, the Company had contracts maturing
through December 2002 to purchase and sell the equivalent
of approximately $9.9 million of various currencies to hedge
forecasted future foreign currency purchases and sales. The
Company recorded approximately $32,000 in net losses from
hedges related to forecasted foreign currency transactions in
the nine months ended March 31, 2002. These losses were offset
by equivalent gains on the underlying hedged items. As of
March 31, 2002, the amount that will be reclassified from
accumulated other comprehensive income (loss) to earnings
within the next twelve months associated with these hedges
was approximately $42,000.
The Company has also purchased forward contracts to hedge
future cash flows due from foreign consolidated subsidiaries
under operating lease agreements. As of March 31, 2002,
the Company had contracts in place to purchase and sell
the equivalent of approximately $53.3 million of various
currencies to hedge quarterly lease commitments through
March 2006. The Company recorded a $0.4 million net gain
from hedges related to the purchase of these forward
contracts in the nine months ended March 31, 2002. As of
March 31, 2002 the amount that will be reclassified from
accumulated other comprehensive income (loss) to earnings
within the next twelve months associated with these hedges
was a gain of $2.0 million.
The Company entered into swap agreements in August 2001 and
October 2001 to convert interest on $150 million principal
amount of its 7.32% senior notes due July 1, 2007 from a
fixed rate to a floating rate. The Company entered into a
swap agreement in March 2002 to convert interest on $150
million principal amount of its 7.125% senior notes due
February 15 2007, from a fixed rate to a floating rate.
The objective of the swap agreements is to offset changes
in the fair value of the Company's fixed rate debt caused
by interest rate fluctuations. The interest rate swap
agreements are reflected at fair value in the Company's
consolidated balance sheet and the related portion of
fixed-rate debt being hedged is reflected at an amount
equal to the sum of its carrying value plus an adjustment
representing the change in fair value of the debt
obligation attributable to the fair value risk being hedged.
14
HARMAN INTERNATIONAL INDUSTRIES, INCORPORATED AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (continued)
NOTE G - DERIVATIVES (continued)
Changes in the fair value of the interest rate swaps and
the offsetting changes in the adjusted carrying value of
the fixed-rate debt being hedged are recognized as adjustments
to interest expense in the Company's consolidated statement
of operations. The net effect of these adjustments is that
interest expense on the portion of fixed-rate debt being
hedged is recorded based on floating interest rates.
NOTE H - LEGAL PROCEEDINGS
There are various 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.
NOTE I - 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 the criteria intangible
assets acquired in a purchase method business combination
must satisfy in order 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 will cease 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 SFAS 142. Because of the extensive effort needed to
comply with adopting SFAS 142, it is not practicable to
estimate the impact of adopting SFAS 142 on the Company's
financial statements at the date
15
HARMAN INTERNATIONAL INDUSTRIES, INCORPORATED AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(continued)
NOTE I - RECENT ACCOUNTING PRONOUNCEMENTS (continued)
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 SFAS 121. SFAS
144 is effective for fiscal years beginning after December 15, 2001.
The Company will adopt the provisions of SFAS 144 effective
July 1, 2002.
In December 2001, the FASB Emerging Issues Task Force issued
EITF 01-09 "Accounting for Consideration Given by a Vendor to a
Customer," which provides that cash consideration given by a vendor
to a customer is presumed to be a reduction of the selling price and,
therefore, should be characterized as a reduction of revenue in the
statement of operations. The statement is effective for periods
beginning after December 15, 2001. The Company has adopted
EITF 01-09 and the impact of adopting EITF 01-09 was not material.
NOTE J - ACQUISITIONS
In October 2001 the Company acquired 26 percent of CAA AG (CAA),
which is based in Filderstadt, Germany. The Company subsequently
increased its ownership percentage to 27 percent in December 2001.
At December 31, 2001 the investment in CAA was accounted for by the
cost method as the Company had no significant influence over CAA.
In the quarter ended March 31, 2002, the Company increased its
ownership in CAA TO 82 percent. The Company has consolidated CAA
in its consolidated financial statements for the quarter ended
March 31, 2002. As of April 26, 2002 the Company's tender offer
for CAA expired. The Company presently owns 95 percent of CAA.
16
HARMAN INTERNATIONAL INDUSTRIES, INCORPORATED AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(continued)
NOTE J - ACQUISITIONS (continued)
CAA develops software platforms and provides services to
enable and facilitate system integration in customer service
functions. The purchase price in excess of net assets acquired
was approximately $16 million, of which approximately $14 million
was recorded as goodwill. The operations and results of operations
of CAA are not material to the Company.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
COMPARISON OF THE THREE AND NINE MONTH PERIODS ENDED MARCH 31, 2002 AND 2001
Net sales for the three months ended March 31, 2002 were $458.3
million compared to $435.7 million in the same period last year,
an increase of 5 percent. Excluding currency effects, net sales
rose 8 percent. For the nine months ended March 31, 2002, net sales
increased 4 percent to $1.325 billion versus $1.269 billion in the
same period last year. Excluding currency effects, net sales
increased 5 percent for the first nine months.
The Consumer Systems Group reported net sales of $354.6 million for
the three months ended March 31, 2002, an increase of 9 percent over
the prior year period, or 12 percent excluding currency effects.
Sales to automakers increased 16 percent as vehicle sales were generally
strong in North America and Europe. Sales to Toyota for the Camry
were well
17
above the prior year. Sales to Chrysler improved in the third
quarter compared to last year. Harman/Becker reported increased
sales in Europe due to robust shipments of infotainment systems
to BMW in support of the new 7 Series. Sales of aftermarket
navigation systems and increased purchases by Mercedes-Benz also
improved sales in Europe. Multimedia sales were higher to Apple
and the PC audio aftermarket.
The Consumer Systems Group reported net sales of $1.012 billion for
the nine months ended March 31, 2002, an increase of 8 percent over
the prior year, or 9 percent excluding currency effects. Sales of
consumer home audio products in the U.S. and Europe were slightly
lower than the previous nine-month period due to continued softness
in the consumer home market. Sales to automakers increased 13 percent
during the period due to overall strength in that market and aggressive
dealer incentive programs. Sales to the automakers in North America
increased 6 percent, as 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.
Harman/Becker sales to DaimlerChrysler were higher than the prior
year period. Multimedia sales to Dell, Toshiba and the PC aftermarket
were above last year's levels offset by lower sales to Apple.
The Professional Group reported net sales of $103.8 million for the
quarter, a 3 percent decrease from last year's $107.4 million after
adjusting for the sale of a business unit. JBL Professional and Crown
sales increased for the quarter due to new product introductions. The
International Professional business units reported lower sales versus
last year as they exited unprofitable product lines.
The Professional Group reported net sales of $312.8 million for
the nine months ended March 31, 2002, a 3 percent decrease from
last year's $323.8 million 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
sales declines.
The gross profit margin for the quarter ended March 31, 2002 was
26.9 percent ($123.5 million) compared to 22.1 percent ($96.3 million)
in the same period last year. Gross profit margin for the nine months
ended March 31, 2002 was 26.8 percent ($354.6 million) compared to
25.8 percent ($327.6 million) last year. During the third quarter
of last year
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gross profit was reduced by inventory write-downs totaling
$8.6 million and other special charges of $5.2 million. The
inventory writedowns reflected the reduction of inventory
carrying values to net realizable value resulting from decisions
to discontinue various product lines, change manufacturing
processes and terminate certain European distributors in connection
with the transition of the Company's international consumer business
to a direct to retailer model. The inventory writedowns were
recorded as a component of cost of sales and were substantially
complete at the end of fiscal 2001. Excluding these charges,
gross profit margin was 25.3 percent ($110.2 million) and 26.9
percent ($341.5 million) for the three and nine months ended
March 31, 2001, respectively. For the quarter, gross profit
margins are higher than prior periods due to increased sales
of products with higher margins. For the nine month period,
gross profit margins were consistent with the prior year period.
Selling, general and administrative costs as a percentage of
sales were 21.0 percent ($96.4 million) for the third quarter
and 22.0 percent ($291.6 million) for the nine months ended
March 31, 2002. Selling, general and administrative costs were
26.4 percent of sales ($114.8 million) for the quarter ended
March 31, 2001 and 22.9 percent ($290.3 million) for the nine
months ended March 31, 2001. Selling, general and administrative
costs for the third quarter and nine months ending March 31,
2002 decreased from the prior year due to the $22.4 million special
charge recorded in March 2001 to terminate distributors in Europe,
record severance costs for 250 employees, write-off fixed and
impaired assets as well as costs for factory closures in Argentina
and U.K. All such amounts were paid prior to June 30, 2001, except
payments of $3.3 million for severance and other costs made in
the first nine months of fiscal 2002 and additional payments of
$1.1 million for severance costs which will be made in future
periods. No material changes to the original charges were
necessary. Management believes that these initiatives have
lead to lower incremental costs. Excluding the charge, selling,
general and administrative costs as a percentage of sales were
21.2 percent ($92.4 million) and 21.1 percent ($267.8 million)
for the three and nine months ended March 31, 2001 respectively.
These levels are consistent with the current year periods.
Operating income as a percent of sales was 5.9 percent
($27.1 million) for the third quarter and 4.8 percent
($63.0 million) for the nine months ending March 31, 2002.
In the prior year, operating loss as a percent of sales was
4.2 percent ($18.5 million) for the third quarter and operating
income was 2.9 percent ($37.3 million) for the nine months
ended March 31, 2002. The increases in operating income for
the quarter and nine months ended March 31, 2002 were primarily
due to the $36.3 million charge
19
recorded in the prior year. Excluding the charge, operating
income as a percentage of sales was 4.1 percent ($17.9 million)
and 5.8 percent ($73.7 million) for the three and nine months
ended March 31, 2001, respectively. Compared to the prior year
and excluding the charge in 2001, operating income as a
percentage of sales was higher for the quarter due to higher
gross margins. Operating income as a percentage of sales for
the nine months ending March 31, 2002 compared to the prior
year period was lower than last year due to higher research
and development engineering costs and higher selling, general
and administrative expenses. Research and development
engineering costs increased due to initiatives supporting
new automotive programs.
Interest expense for the three months ended March 31, 2002 was
$6.1 million compared to $7.2 million in the same quarter last
year. For the nine months ended March 31, 2002, interest expense
was $17.7 million, compared to $18.6 million last year.
Average borrowings outstanding were $438.6 million for the third
quarter of fiscal 2002 and $444.4 million for the first nine months,
compared to $440.6 million and $397.6 million, respectively, for
the same periods in the prior year.
The weighted average interest rate on borrowings was 5.5 percent
for the third quarter and 5.3 percent for the nine months ended
March 31, 2002. The weighted average interest rates for the
comparable periods in the prior year were 6.6 percent and 6.2
percent, respectively. The decrease in the weighted average
interest rate was primarily due to lower interest rates under
the floating interest rate formula in the Company's revolving
credit facility.
Income before income taxes for the third quarter was $20.6
million, compared to a loss before income taxes of $25.9
million in the prior year. For the nine months ended
March 31, 2002, income before taxes was $44.2 million compared
to $18.3 million in the same period last year.
The effective tax rate for the three and nine months ended
March 31, 2002, was 29.0 percent, equivalent to the effective
tax rates for 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.
20
Net income for the third quarter was $14.6 million, compared to
a net loss of $18.4 million reported for the same period last year.
Net income for the nine months ended March 31, 2002 was $31.4 million,
compared to $13.0 million in the same period last year. Excluding
the charge recorded in the prior year, net income was $7.4 million
and $38.8 million for the three and nine months ended March 31 2001,
respectively.
Basic earnings per share for the three months ended March 31, 2002
were $.45 and diluted earnings per share were $.43. In the same
period last year, basic and diluted loss per share were $.57.
Excluding the charge, in the prior year basic earnings per
share were $.23 and diluted earnings per share were $.22.
Basic earnings per share for the nine months ended March 31, 2002
were $.98 and diluted earnings per share were $.93. For the same
period last year, basic earnings per share were $.40 and diluted
earnings per share were $.38. Excluding the charge of $36.3 million
($25.8 million after-tax), in the prior year basic earnings per share
were $1.20 and diluted earnings per share were $1.15.
FINANCIAL CONDITION / LIQUIDITY AND CAPITAL RESOURCES
Net working capital at March 31, 2001 was $473.1 million, compared
with $358.7 million at June 30, 2001. The working capital increase
from June 30, 2001 is due to an increase in the cash balance at
March 31, 2002 due to the proceeds of the senior note offering
described below and an increase in inventory levels, primarily at
Harman/Becker. The increase is also due to lower current debt as
the majority of current debt was repaid with the proceeds of the
senior note offering.
Capital expenditures for the nine months ended March 31, 2002 were
$61.2 million. Capital expenditures for the nine months ended
March 31, 2001 were $56.5 million. The increase from the prior
period is due to the expansion of facilities and the introduction
of new production lines to facilitate new business with automotive
customers. The Company expects capital expenditures to be
approximately $120.0 million in fiscal 2003 and capital expenditures
will likely remain at this level for the next two to three years.
In the quarter ended March 31, 2002, no shares of the Company's
common stock were acquired and placed in treasury. In the first
nine
21
months 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 March 31, 2002 the Company completed a
private placement of $300,000,000 of its 7 1/8 percent notes
due February 15, 2007. The notes are senior obligations of
the Company. The proceeds from these notes were used
principally to prepay all $73.4 million outstanding under the
Company's term loan agreement and to refinance outstanding
borrowings under the revolving credit facility and other
short-term indebtedness.
At March 31, 2002, the Company had no outstanding borrowings
under its revolving credit facility. Borrowings under this
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.
In February 2002, the Company reduced the amount of its
revolving credit facility from $275 million to $125 million
after completing the senior note offering described above.
The Company plans to refinance the revolving credit facility
before it expires in September 2002 to fund seasonal borrowing
needs. Amounts borrowed under the revolving credit facility
may be borrowed by the Company or certain of its subsidiaries
in various currencies. The Company has guaranteed the
obligations of its subsidiaries for amounts borrowed by its
subsidiaries under the revolving credit facility.
Management believes that, with respect to its current
operations, cash on hand, funds from operations and borrowings
available under the Company's credit facilities will be sufficient
to pay principal and interest on outstanding notes, meet other debt
service requirements, fund presently anticipated capital
expenditures and meet working capital needs.
The Company has dividend restrictions under its revolving
credit agreement and the indenture under which the Company's
senior notes due July 2007 were issued. At March 31, 2002 the
Company had the ability to make payments of approximately $74.1
million in dividends under the more restrictive of these agreements.
There are no restrictions on the Company from transfering assets
to or from its subsidiaries in the form of loans, advances or
cash dividends.
22
FORWARD LOOKING STATEMENTS
This report, contains forward-looking statements within the
meaning of Section 27A of the Securities Act and 21E of the
Exchange Act of 1934. You should not place undue reliance on
these statements. Forward-looking statements include, among
others, information concerning possible or assumed future results
of operations, capital expenditures, the outcome of pending legal
proceedings and claims, including environmental matters, goals
and objectives for future operations, including descriptions of
our business strategies and purchase commitments from customers.
These statements are typically identified by words such as
"believe," "anticipate," "expect," "plan," "intend," "estimate,"
and similar expressions. We base these statements on particular
assumptions that we have made in light of our industry
experience, as well as our perception of historical trends,
current conditions, expected future developments and other factors
that we believe are appropriate under the circumstances. As you
read and consider the information in this report, you should
understand that these statements are not guarantees of performance
or results. These statements involve risks, uncertainties
and assumptions.
Although we believe that these forward-looking statements are
based on reasonable assumptions, you should be aware that many
factors could affect our actual financial results or results of
operations and could cause actual results to differ materially
from those expressed in the forward-looking statements. These
factors include, among other things:
changes in consumer confidence and spending;
automobile industry sales and production rates
and the willingness of automobile purchases to
pay for the option of a premium branded
automotive audio system;
model-year changeovers in the automotive industry;
our ability to satisfy contract performance criteria,
including technical specifications and due dates;
competition in the consumer and/or professional
product markets in which we operate;
23
the outcome of pending or future litigation and
administrative claims, including patent and
environmental matters;
work stoppages at one or more of our facilities
or at a facility of one of our significant customers;
the loss of one or more significant customers,
including our automotive manufacturer customers;
our ability to adapt to technological advances and
innovation on a cost-effective and timely basis; and
general economic conditions.
In light of these risks and uncertainties, there can be no
assurance that the results and events contemplated by the
forward-looking statements contained in this report will in
fact transpire.
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. Since June 30, 2001 there have
been no material changes 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.
The Company entered into swap agreements in August 2001 and
October 2001 to convert interest on $150 million principal
amount of its 7.32% senior notes due July 1, 2007 from a fixed
rate to a floating rate. The Company entered into a swap
agreement in March 2002 to convert interest on $150 million
principal amount of its 7.125% senior notes due February 15, 2007,
from a fixed rate to a floating rate.
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 March 31, 2002, this analysis indicated
that such an increase would reduce net income, on an
24
annualized basis, by approximately $2.2 million. The Company
is subject to counterparty risk under the interest rate swaps
described above. The Company may be exposed to losses in the
event of nonperformance by counterparties or interest and
currency rate movements.
See Note G 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
There are various 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. Exhibits and Reports on Form 8-K
(a) Exhibits
4.1 Indenture, dated as of February 19, 2002 between
Harman International Industries, Incorporated and
J.P. Morgan Trust Company, National Association,
as Trustee (incorporated by reference to Exhibit
4.5 to the Company's Registration Statement on Form S-4,
Commission File Number 33-83688 ("Form S-4"))
4.2 Form of Initial Notes (incorporated by reference
to Exhibit 4.6 to the Form S-4)
4.3 Form of Exchange Notes (incorporated by reference
to Exhibit 4.7 to the Form S-4)
4.4 Registration Rights Agreement dated as of
February 13, 2002 between Harman International
Industries, Incorporated, Credit Suisse First
Boston Corporation, Bear, Stearns & Co. Inc. and
J.P. Morgan Securities, Inc. (incorporated by
reference to Exhibit 4.8 to the Form S-4)
25
(b) Reports on Form 8-K
During the quarter ended March 31, 2002, the Company
filed two Current Reports on Form 8-K, each under Item
5 (Other Events). These reports, dated February 8, 2002
and February 19, 2002, related to the offer and sale by
the Company of $300 million principal amount of senior
notes due February 15, 2007.
26
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: May 15, 2002 BY:/s/ Bernard A. Girod
---------------------------------
Bernard A. Girod
Vice Chairman and Chief
Executive Officer
DATE: May 15, 2002 BY:/s/ Frank Meredith
---------------------------------
Frank Meredith
Executive Vice President
and Chief Financial Officer
27