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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarterly Period Ended: September 30, 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
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(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 by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act)
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.
32,269,908 shares of Common Stock, $.01 par value, at October 31, 2002
HARMAN INTERNATIONAL INDUSTRIES, INCORPORATED AND SUBSIDIARIES
INDEX PAGE NO.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
September 30, 2002 and June 30, 2002 3
Condensed Consolidated Statements of Operations -
Three months ended September 30, 2002 and 2001 4
Condensed Consolidated Statements of Cash Flows -
Three months ended September 30, 2002 and 2001 5
Notes to Condensed Consolidated Financial Statements 6-13
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition 14-20
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 21-22
Item 4. Controls and Procedures 23
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 23
SIGNATURES 24
CERTIFICATIONS 26-27
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
HARMAN INTERNATIONAL INDUSTRIES, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2002 AND JUNE 30, 2002
(000s omitted except per share amounts)
September 30, June 30,
ASSETS 2002 2002
----------- -----------
Current assets
Cash and cash equivalents $ 66,443 116,253
Receivables (less allowance for doubtful
accounts of $21,084 at September 30,
2002 and $18,211 at June 30, 2002) 327,229 335,019
Inventories 354,815 329,935
Other current assets 88,939 95,556
----------- -----------
Total current assets 837,426 876,763
----------- -----------
Property, plant and equipment, net 332,391 325,812
Excess of cost over fair value of assets
acquired, net 199,202 199,239
Other assets 97,187 78,466
----------- -----------
Total assets $1,466,206 1,480,280
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current portion of long-term debt $ 2,742 4,255
Accounts payable 157,426 193,110
Accrued liabilities 238,816 236,106
----------- -----------
Total current liabilities 398,984 433,471
----------- -----------
Senior long-term debt 491,564 470,424
Other non-current liabilities 48,391 47,523
Minority interest 2,224 2,233
Shareholders' equity
Preferred stock, $.01 par value --- ---
Common stock, $.01 par value 383 383
Additional paid-in capital 310,725 310,166
Accumulated other comprehensive income:
Unrealized gains(loss) on hedging derivatives (1,684) (1,499)
Foreign currency translation adjustment (46,990) (44,686)
Minimum pension liability adjustment (2,903) (2,907)
Retained earnings 414,801 405,811
Less common stock held in treasury (149,289) (140,639)
----------- -----------
Total shareholders' equity 525,043 526,629
----------- -----------
Total liabilities and shareholders' equity $1,466,206 1,480,280
----------- -----------
See accompanying Notes to Condensed Consolidated Financial Statements.
3
HARMAN INTERNATIONAL INDUSTRIES, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
(000s omitted except per share amounts)
Three Months Ended
September 30,
2002 2001
---------- ----------
Net sales $ 490,759 399,009
Cost of sales 346,024 295,288
---------- ----------
Gross profit 144,735 103,721
Selling, general and
administrative expenses 124,736 90,377
---------- ----------
Operating income 19,999 13,344
Other expense
Interest expense 5,909 6,092
Miscellaneous, net 844 165
---------- ----------
Income before income taxes 13,246 7,087
Income tax expense 3,444 2,056
---------- ----------
Net income $ 9,802 5,031
---------- ----------
Basic earnings per share $ 0.30 0.16
---------- ----------
Diluted earnings per share $ 0.29 0.15
---------- ----------
Weighted average shares
outstanding - basic 32,478 32,076
---------- ----------
Weighted average shares
outstanding - diluted 33,982 33,655
---------- ----------
See accompanying Notes to Condensed Consolidated Financial Statements.
4
HARMAN INTERNATIONAL INDUSTRIES, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
($000s omitted)
2002 2001
--------- ---------
Cash flows from operating activities:
Net income $ 9,802 5,031
Adjustments to reconcile
net income to net cash
provided by operating activities:
Depreciation 18,035 14,386
Amortization of intangible assets 2,570 4,579
Changes in assets and liabilities:
Decrease (increase) in:
Receivables 7,470 18,857
Inventories (25,197) (13,622)
Other current assets 6,066 3,366
Increase (decrease) in:
Accounts payable (35,641) 587
Accrued liabilities 4,499 (17,715)
Other operating activities 166 1,059
--------- ---------
Net cash provided by (used in)
operating activities $(12,230) 16,528
--------- ---------
Cash flows from investing activities:
Capital expenditures (26,114) (23,596)
Purchased and capitalized software
expenditures (996) (5,963)
Other items, net 1,749 100
--------- ---------
Net cash used in investing activities $(25,361) (29,459)
--------- ---------
Cash flows from financing activities:
Borrowings on (repayments of)
lines of credit $ --- (7,088)
Proceeds from issuance of long-term debt (2,703) 27,257
Net proceeds from (repayments of)
long-term debt (630) (73)
Share repurchases (8,649) (1,574)
Dividends paid to shareholders (812) (801)
Proceeds from exercise of stock options 558 818
--------- ---------
Net cash provided by (used in)
financing activities $(12,236) 18,809
--------- ---------
Effect of exchange rates on cash 17 91
--------- ---------
Net increase (decrease) in
cash and cash equivalents $(49,810) 5,969
Cash and cash equivalents
at beginning of period 116,253 2,748
--------- ---------
Cash and cash equivalents at end of period $ 66,443 8,717
--------- ---------
Supplemental disclosures of cash flow information:
Interest paid $ 10,340 8,105
Income taxes paid $ 616 157
See accompanying Notes to Condensed Consolidated Financial Statements.
5
HARMAN INTERNATIONAL INDUSTRIES, INCORPORATED AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Note 1. Basis of Presentation
The accompanying unaudited, condensed consolidated financial
statements at September 30, 2002 and for the three months ended
September 30, 2002 and 2001 have been prepared pursuant to rules
and regulations of the Securities and Exchange commission for interim
reporting. These consolidated financial statements do not include all
information and footnote disclosures normally included in the annual
financial statements. However, in the opinion of management, the
accompanying unaudited, condensed consolidated financial statements
contain all adjustments, consisting of normal recurring adjustments
and accruals, necessary to present fairly, in all material respects,
the consolidated financial position, results of operations and cash flows
for the periods presented. Operating results for the three months ended
September 30, 2002 are not necessarily indicative of the results that may
be expected for the fiscal year ending June 30, 2003 due to seasonal and
other factors.
Where necessary, prior years' information has been reclassified to
conform to the fiscal 2003 consolidated financial statement presentation.
These financial statements should be read in conjunction with the
audited consolidated financial statements and accompanying notes
included in the Company's Annual Report on Form 10-K for the fiscal
year ended June 30, 2002.
Note 2. Inventories
Inventories consist of the following:
September 30, June 30,
($000s omitted) 2002 2002
------------ ----------
Finished goods and inventory
purchased for resale $ 139,396 133,685
Work in process 54,251 54,132
Raw materials and supplies 161,168 142,118
------------ ----------
Total inventories $ 354,815 329,935
------------ ----------
6
HARMAN INTERNATIONAL INDUSTRIES, INCORPORATED AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
The Company calculates inventory reserves using a combination of
lower of cost or market analysis and analysis of usage data. Lower of
cost or market analysis is typically applied to those units that represent
a high portion of the total value on-hand. In some cases, lower of cost
or market analysis is applied to a broader population of similar inventory
items. The high-value units typically represent a small percentage of the
total inventory, so identification of obsolescence or valuation reserve
requirements for the balance of the inventory on-hand is accomplished
using either historic or forecast usage data to identify slow-moving or
obsolete units.
Note 3. Comprehensive Income
Comprehensive income and its components for the three months ended
September 30, 2002 and 2001 are presented below.
Three Months Ended
September 30,
($000s omitted) 2002 2001
--------- ---------
Net income $ 9,802 5,031
Other comprehensive income (loss):
Foreign currency translation (2,304) 19,304
Unrealized gains (losses) on hedging (185) (1,417)
Minimum pension liability adjustment 4 (494)
--------- ---------
Total other comprehensive income $ 7,317 22,424
--------- ---------
The components of accumulated other comprehensive income as of
September 30, 2002 and June 30, 2002 and the activity for the three
months ended September 30, 2002 are presented below.
Cumulative Hedging Minimum Other
Translation Derivative Pension Comprehensive
($000s omitted) Adjustment Gain/(Loss) Liability income (loss)
------------ ------------ ---------- --------------
June 30, 2002 $ (44,686) $ (1,499) $ (2,907) $ (49,092)
Foreign currency
translation
adjustments (2,304) --- --- (2,304)
Change in fair
value of foreign
currency cash
flow hedges --- (185) --- (185)
Pension liability
adjustment --- --- 4 4
------------ ------------ ---------- --------------
September 30, 2002 $ ( 46,990) $ (1,684) $ (2,903) $ (51,577)
------------ ------------ ---------- --------------
7
HARMAN INTERNATIONAL INDUSTRIES, INCORPORATED AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Note 4. Earnings Per Share
Three Months Ended September 30,
2002 2001
------------------ ------------------
($000s omitted except per share amounts) Basic Diluted Basic Diluted
-------- -------- -------- --------
Net income $ 9,802 9,802 5,031 5,031
-------- -------- -------- --------
Weighted average shares
outstanding 32,478 32,478 32,076 32,076
Employee stock options --- 1,504 --- 1,579
-------- -------- -------- --------
Total weighted average
shares outstanding 32,478 33,982 32,076 33,655
-------- -------- -------- --------
Earnings per share $ 0.30 0.29 0.16 0.15
-------- -------- -------- --------
During the quarter ended September 30, 2002, the difference between
basic and diluted earnings per share is due to the potential dilutive
impact of options to purchase common stock. Options to purchase
51,859 shares of common stock at prices ranging from $48.23 to $48.26
per share during the first quarter of 2002 and options to purchase
25,304 shares of common stock at prices ranging from $37.78 to $45.00
per share during the first quarter of 2001 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.
Note 5. Stock Options
The Company has adopted the fair value method of SFAS 123 effective
July 1, 2002, applying it to all new options granted after July 1, 2002
and recognizing expense over the vesting period of those options. The
Company expensed $0.2 million for stock options granted during the
quarter ended September 30, 2002.
8
HARMAN INTERNATIONAL INDUSTRIES, INCORPORATED AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Note 6. Segmentation
The Company designs, manufactures and markets high quality audio
products and electronics systems for the consumer and professional
markets. The Company is organized into segments by the end-user
markets they serve - consumer and professional.
The Consumer Systems Group designs, manufactures and markets audio
and infotainment systems for vehicles and designs, manufactures and
markets loudspeakers and electronics for home audio, video and
computer applications. Consumer products are marketed worldwide
under brand names including JBL, Harman Kardon, Infinity, Revel,
Becker, Lexicon, Mark Levinson and Proceed.
The Professional Group designs, manufactures and markets
loudspeakers and electronics used by audio professionals in concert
halls, stadiums, airports and other buildings and recording, broadcast,
cinema and music reproduction applications. Professional products are
marketed worldwide under brand names including JBL, AKG, Crown,
Studer, Soundcraft, DOD, Digitech, and dbx.
The following table reports external sales and operating income (loss)
by segment for the three months ended September 30, 2002 and 2001.
Three Months Ended
September 30,
($000s omitted) 2002 2001
----------- -----------
Net sales:
Consumer Systems Group $ 389,755 294,051
Professional Group 101,004 104,958
Other --- ---
----------- -----------
Total $ 490,759 399,009
----------- -----------
Operating income (loss):
Consumer Systems Group $ 31,596 16,260
Professional Group 174 4,402
Other (11,771) (7,318)
----------- -----------
Total $ 19,999 13,344
----------- -----------
Other operating (loss) is primarily comprised of corporate expenses net
of subsidiary allocations.
9
HARMAN INTERNATIONAL INDUSTRIES, INCORPORATED AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Note 7. 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.
As of September 30, 2002, the Company has contracts maturing through
June 2003 to purchase and sell the equivalent of approximately $15.6
million of various currencies to hedge forecasted future foreign currency
purchases and sales. The Company recorded approximately $0.4
million in net gains from cash flow hedges of forecasted foreign
currency transactions in the three months ended September 30, 2002.
As of September 30, 2002, the amount 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
approximately $0.3 million.
10
HARMAN INTERNATIONAL INDUSTRIES, INCORPORATED AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Note 7. Derivatives (continued)
The Company has entered into cross currency swaps to hedge future
cash flows due from foreign consolidated subsidiaries under operating
lease agreements. As of September 30, 2002, the Company had swap
contracts in place to purchase and sell the equivalent of approximately
$44.7 million of various currencies in order to hedge quarterly lease
commitments through March 2006. The Company recorded a $0.2
million net loss related to these contracts in the three months ended
September 30, 2002. As of September 30, 2002, the amount 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 loss of $0.6 million.
The Company entered into swap contracts in August 2001 and October
2001 to effectively convert interest on $150 million principal amount of
its 7.32 percent senior notes due July 1, 2007, from a fixed rate to a
floating rate. The Company also entered into swap contracts in March
2002 and April 2002 to effectively convert interest on $200 million of
the $300 million principal amount of its 7.125 percent senior notes due
February 15, 2007, from a fixed rate to a floating rate.
The objective of the swap contracts is to offset changes in the fair
value of the Company's fixed rate debt caused by interest rate fluctuations.
The interest rate swap contracts are carried at fair value on the
Company's consolidated balance sheet and the related hedged portion of
fixed-rate debt is carried at remaining principal due net of the
valuation adjustment for the change in fair value of the debt obligation
attributable to the hedged risk. The valuation adjustment at September
30, 2002, was a positive $31.1 million.
Changes in the fair value of the interest rate swaps and the offsetting
changes in the carrying value of the hedged fixed-rate debt are
recognized in interest expense in the Company's consolidated statement
of operations.
At September 30, 2002, the Company had contracts maturing through
June 2003 to purchase and sell the equivalent of $231.3 million of
various currencies to hedge foreign currency denominated loans to
foreign subsidiaries. These loans are of a long-term investment nature.
11
HARMAN INTERNATIONAL INDUSTRIES, INCORPORATED AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Note 7. Derivatives (continued)
Therefore, foreign currency gains and losses on these loans are not
included in the determination of net income, but are reported in the
same manner as translation adjustments. Adjustments to the carrying
value of the foreign currency forward contracts offset the gains and
losses on the underlying loans and are also recorded as translation
adjustments. The translation adjustment on these contracts was a
negative $5.0 million at September 30, 2002, and is included in equity
adjustment from foreign currency translation on the balance sheet.
Note 8. Commitments and Contingencies
The Company and its subsidiaries are involved in several legal actions.
The outcome 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 the
Company's financial position or results of operations.
Note 9. Change in Accounting for Goodwill and Other
Intangible Assets
On July 1, 2002, the Company adopted Statement of Financial
Accounting Standard No. 141, "Business Combinations" (SFAS 141)
and Statement of Financial Accounting Standard No. 142 "Goodwill
and other Intangible Assets" (SFAS 142).
SFAS 141 requires that the purchase method of accounting be used for
all business combinations initiated after June 30, 2001. The adoption
of SFAS 141 did not have a material effect on the Company's results of
operations or financial position.
SFAS 142 requires that goodwill and intangible assets with indefinite
useful lives no longer be amortized, but instead be tested for impairment
at least annually. SFAS 142 also requires intangible assets with finite
useful lives be amortized over their respective estimated useful lives
and reviewed for impairment in accordance with SFAS No. 121,
"Accounting for Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of."
12
HARMAN INTERNATIONAL INDUSTRIES, INCORPORATED AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Note 9. Change in Accounting for Goodwill and Other
Intangible Assets (continued)
The Company adopted the provisions of SFAS 142 in the first quarter of
fiscal 2003. The Company made determinations as to what its reporting
units are and the amounts of goodwill and other assets and liabilities
allocated to those reporting units. The Company completed its initial
impairment assessment as of July 1, 2002, which indicated no
impairment of goodwill or intangible assets. In accordance with SFAS
142, amortization of goodwill was discontinued as of June 30, 2002.
During the first quarter of 2001, the Company recorded approximately
$1.9 million of expense for amortization of goodwill in pretax earnings.
The following is a pro forma presentation of reported net income,
adjusted for the exclusion of goodwill amortization net of related
income tax effect:
Three months ended
September 30,
2002 2001
(In thousands, except EPS) --------------------
Reported net income $ 9,802 5,031
Goodwill amortization, net of tax --- 1,376
--------- ---------
Adjusted net income $ 9,802 6,407
--------- ---------
Basic EPS, as reported $ 0.30 0.16
Goodwill amortization, net of tax --- 0.04
--------- ---------
Adjusted Basic EPS $ 0.30 0.20
--------- ---------
Diluted EPS, as reported $ 0.29 0.15
Goodwill amortization, net of tax --- 0.04
--------- ---------
Adjusted diluted EPS $ 0.29 0.19
--------- ---------
13
HARMAN INTERNATIONAL INDUSTRIES, INCORPORATED AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Harman International Industries, Incorporated designs, manufactures
and markets high quality audio products and electronic systems for the
consumer and professional markets. The Company is organized into
segments based on the end-user markets they serve. The Consumer
Systems Group designs, manufactures and markets loudspeakers, audio
electronics and infotainment systems for vehicles and designs,
manufactures and markets loudspeakers and electronics for home audio,
video and computer applications. The Professional Group designs,
manufactures and markets loudspeakers and electronics used by audio
professionals in concert halls, stadiums, airports and other buildings
and recording, broadcast, cinema and music reproduction applications.
The Company's primary manufacturing facilities in the U.S. are located
in California, Indiana, Kentucky and Utah. The Company's primary
international manufacturing facilities are located in Germany, Austria,
the United Kingdom, Mexico, France, Sweden, China and Hungary. The
Company's products are sold worldwide with the largest markets being
the U.S. and Germany.
The Company experiences seasonal fluctuations in sales and earnings.
Variations in seasonal demand among end-user markets may cause
operating results to vary from quarter to quarter.
RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTH PERIODS ENDED
SEPTEMBER 30, 2002 AND 2001
Sales
Net sales for the Company increased 23 percent in the first quarter
ended September 30, 2002 to $490.8 million, compared to $399.0
million in the same period a year ago.
14
Presented below is a summary of sales by business segment:
Three Months Ended
September 30,
(000s omitted) 2002 % 2001 %
--------- ----- -------- -----
Net sales:
Consumer Systems Group $ 389,755 79% 294,051 74%
Professional Group 101,004 21% 104,958 26%
--------- ----- -------- -----
Total $ 490,759 100% 399,009 100%
--------- ----- -------- -----
The Consumer Systems Group reported net sales of $389.8 million, an
increase of 33 percent over the same prior year period. Sales to
automotive customers increased 48 percent. Harman/Becker reported
substantial sales increases to European automotive customers as
shipments of our new infotainment systems were made to Mercedes-
Benz, BMW, Audi, and Porsche. Strong sales to Asian automotive
customers were offset by lower sales to Chrysler. Consumer audio
product sales of $73.6 million were 6 percent above last year.
Professional Group sales for the quarter were $101.0 million, a slight
decrease from sales of $105.0 million in the first quarter of fiscal 2002.
Sales increases at JBL Professional and AKG were offset by modest
sales declines at the other professional businesses.
Gross profit
The gross profit margin for the quarter ended September 30, 2002 was
29.5 percent ($144.7 million) compared to 26.0 percent ($103.7 million)
in the same period last year. Gross profit margins were higher than in
the prior period due to an increased proportion of higher margin sales to
automotive customers and improved margins from sales of consumer
products in the international markets. Improved margins in the
international markets are primarily due to new product introductions.
Selling, General and Administrative Expenses
Selling, general and administrative costs as a percentage of sales were
25.4 percent ($124.7 million) for the first quarter compared to 22.7
percent ($90.4 million) for same period last year. Selling, general and
administrative costs for the first quarter increased from the prior year
15
due to the acquisitions of TEMIC and CAA, unusual bad debt expense
of $3.5 million primarily recorded to cover the bankruptcy of Music and
Recording Superstores (Mars), a professional retailer, and increased
engineering efforts on a year-over-year basis.
Operating income
Operating income as a percent of sales was 4.1 percent ($20.0 million)
for the quarter ended September 30, 2002, compared to 3.3 percent
($13.3 million) for the same period in the prior year. Operating income
increased due to higher gross margins on Consumer Systems Group
sales and the effect of adopting SFAS 142, eliminating the amortization
of goodwill, partially offset by higher selling, general and administrative
costs. Goodwill amortized in the three months ending September 30,
2001 was $1.9 million.
Interest expense
Interest expense for the three months ended September 30, 2002 was
$5.9 million compared to $6.1 million in the same quarter last year.
The weighted average interest rate was 5.1 percent for the quarter
ended September 30, 2002 compared to 6.3 percent in the same period
last year. Weighted average borrowings were $462.9 million for September
30, 2002 compared to weighted average borrowings of $389.1 million
for the same period last year. The Company was able to lower interest
expense through the use of interest rate swaps effectively converting
fixed rate debt to lower floating rates.
Miscellaneous expense
Miscellaneous expenses were $0.8 million for the three months ended
September 30, 2002 compared to $0.2 million in the same period last
year. The increase is primarily due to a writedown of an investment
by $0.4 million.
Income before taxes and minority interest
For the three months ended September 30, 2002, the Company reported
income before income taxes and minority interest of $13.2 million.
In the same period last year, the Company reported $7.1 million.
16
Income taxes
For the three months ended September 30, 2002, the Company reported
income tax expense of $3.4 million, or an effective tax rate of 26.0
percent, compared with income tax expense of $2.1 million, or an
effective tax rate of 29.0 percent for the same period last year.
The effective tax rates in both periods 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 determines its effective tax
rate based upon its current estimate of annual results.
Net income
Net income for the three months ended September 30, 2002 was $9.8
million, compared to $5.0 million reported for the same period last year.
Earnings per share
Basic earnings per share for the three months ended September 30, 2002
were $0.30, and diluted earnings per share were $0.29. In the same
period last year, basic earnings per share were $0.16 and diluted
earnings per share were $0.15.
Financial Condition/Liquidity and Capital Resources
The Company finances its working capital requirements primarily
through cash generated by operations, cash borrowings and normal trade
credit.
The Company's long-term debt at September 30, 2002, was comprised
primarily of $300 million of 7.125 percent senior notes, due February
15, 2007, and $150 million of 7.32 percent senior notes due July 1,
2007. In August 2002, the Company entered into a new multi-currency
revolving credit facility with a group of eight banks, which committed
$150 million to the Company for cash borrowings and letters of credit
through August 14, 2005. This new facility replaced the existing credit
facility that was scheduled to expire in September 2002. At September
30, 2002 the Company had no borrowings under its revolving credit
facility and outstanding letters of credit of $10.9 million. Unused
availability under the revolving credit facility was $139.1 million at
September 30, 2002. The rates for borrowings under the revolving
credit facility float with base rates. The Company also had mortgages,
capital leases and other long-term debt of $12.6 million at September
30, 2002.
17
Capital expenditures for the three months ended September 30, 2002
were $26.1 million. Capital expenditures for the three months ended
September 30, 2001 were $23.6 million. The increase from the prior
period is due to the introduction of new production lines to facilitate
new business with European automotive customers.
Net working capital at September 30, 2002 was $438.4 million,
compared with $443.3 million at June 30, 2002. Working capital
decreased slightly from June 30, 2002 due to a $49.8 million reduction
in cash from June 30, 2002 to September 30, 2002 due to seasonal cash
requirements. The working capital decrease was partially offset by
higher inventory levels associated with seasonal sales patterns and
lower accounts payable, primarily reflecting the timing of payments to
vendors.
Total shareholders' equity for the three months ended September 30,
2002 was $525.0 million compared with $526.6 million at June 30,
2002. The decrease is primarily due to common stock repurchases
totaling $8.6 million and negative foreign currency translation totaling
$2.3 million, partially offset by net income $9.8 million.
In the quarter ended September 30, 2002, the Company acquired and
placed in treasury 181,300 shares of common stock at a cost of $8.6
million.
The Company will continue to have cash requirements to support
seasonal working capital needs, capital expenditures, interest and
principal payments, dividends and share repurchases. The Company
intends to use cash on hand, cash generated by operations and
borrowings under its existing revolving credit facility to meet these
needs. The Company believes that cash from these sources will be
adequate to meet its cash requirements over the next 12 months.
The Company has dividend restrictions under its revolving credit
agreement and the indenture under which the Company's 7.32 percent
senior notes due July 2007 were issued. The most restrictive of these
covenants would limit the Company's ability to make dividend
payments and to purchase capital stock to $40.5 million at September
30, 2002 and for the remainder of fiscal 2003. Neither the credit
agreement nor the indentures for the senior notes restrict the Company
from transferring assets to or from its subsidiaries in the form of loans,
advances or cash dividends.
18
The Company is subject to various risks, including dependence on key
customers, economic conditions affecting disposable consumer income
and fluctuations in currency exchange rates. A disruption in the
operations of one of our key customers, such as an automotive strike,
could have a material adverse effect on the Company. In fiscal 2002,
sales to DaimlerChrysler accounted for 20.6 percent of the Company's
sales and accounts receivable due from DaimlerChrysler accounted for
19.0 percent of total consolidated accounts receivable at June 30, 2002.
We expect DaimlerChrysler to continue to be a significant customer in
the current fiscal year.
During September 2002 a lockout of workers at West coast ports halted
shipments of several of our products and caused the Company to incur
unusual air freight charges. As the lockout began in late September the
effect of the lockout on the results for the three months ended
September 30, 2002 was minimal. Although the lockout has ended for
the time being, it is not possible to predict whether the lockout will
resume or its impact on the Company and its customers if it were to
resume. The Company currently estimates the impact of the lockout on
earnings per share for the second quarter of fiscal 2003 to be
approximately $0.07 to $0.10 including lost sales and air freight costs.
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 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. 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.
19
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 condition 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 purchasers to
pay for the option of a premium branded automotive
audio system and/or a multi-functional infotainment
system;
- model-year changeovers in the automotive industry;
- the ability to satisfy contract performance criteria,
including technical specifications and due dates;
- competition in the consumer and/or professional
markets in which we operate;
- 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,
or a common carrier;
- work stoppage or slowdown at West coast ports;
- the loss of one or more significant customers,
including our automotive customers;
- the 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.
20
ITEM 3. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
The Securities and Exchange Commission requires that registrants
include information about potential effects of market risks, including
changes in interest rates and currency exchange rates in their financial
statements. Since June 30, 2002 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.
Interest rate risk
The Company entered into swap agreements in August 2001 and
October 2001 to effectively convert interest on $150 million principal
amount of 7.32 percent senior notes due July 1, 2007 from a fixed rate
to a floating rate. The Company entered into a swap agreement in
March 2002 and April 2002 to effectively convert interest on $200
million of the $300 million principal amount of its 7.125 percent senior
notes due February 15, 2007, from a fixed rate to a floating rate.
To assess exposure to interest rate changes, the Company prepares a
sensitivity analysis assuming a hypothetical 100 basis point increase in
interest rates across all maturities. At September 30, 2002, this analysis
indicated that such an increase would reduce net income, on an annualized
basis, by approximately $2.8 million. Based on June 30, 2002 positions,
the effect on fiscal 2002 net income of such an increase in interest
rates was estimated to be $2.3 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.
Foreign currency risk
The Company maintains significant operations in Germany, the United
Kingdom, France, Austria, Hungary, Switzerland, Mexico, China and
Sweden. As a result, exposure to foreign currency gains and losses
exists. A portion of foreign currency exposure is hedged by incurring
liabilities, including loans, denominated in the local currency where
subsidiaries are located.
21
The subsidiaries of the Company purchase products and raw materials in
various currencies. As a result, the Company may be exposed to cost
increases relative to local currencies in the markets to which it sells.
To mitigate such adverse trends, the Company enters into foreign exchange
contracts and other hedging activities. Also foreign currency positions
are partially offsetting and are netted against one another to reduce
exposure.
Some products made in the U.S. are sold outside the U.S. Sales of such
products are affected by the value of the U.S. dollar relative to other
currencies. Any long-term strengthening of the U.S. dollar could depress
the demand for these products and reduce sales. Competitive conditions
in the Company's markets may limit its ability to increase product pricing
in the face of adverse currency movements. However, due to the multiple
currencies involved in the Company's business and the netting effect of
various simultaneous transactions, the Company's foreign currency positions
are partially offsetting.
The Company is exposed to market risks arising from changes in foreign
exchange rates, principally the change in the value of the Euro versus
the U.S. dollar.
At June 30, 2002, the Company estimated the effect on 2003 net income,
based upon a recent estimate of foreign exchange transactional exposure,
of a uniform strengthening or uniform weakening of the transaction currency
pairs of 10 percent will decrease net income by $9 million or will increase
net income by $9 million.
At June 30, 2002, the Company estimated the effect on projected 2003
net income, 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
uniform weakening of U.S. dollar by 10 percent to decrease net income
$5.9 million or to increase net income $5.9 million.
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 the Company's actual exposure and hedging
transactions.
See Note 7 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, 2002 for more information regarding the Company's exposure to
market risk.
22
ITEM 4. CONTROLS AND PROCEDURES
The Company's Executive Chairman, Chief Executive Officer and
Chief Financial Officer have evaluated the effectiveness of the
Company's disclosure controls and procedures (as such term is defined
in Rules 13a-14(c) and 15d-14(c)) under the Securities Exchange Act of
1934 (the "Exchange Act") as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date"). Based on such
evaluation, such officers have concluded that, as of the Evaluation Date,
the Company's disclosure controls and procedures are effective in
alerting them on a timely basis to material information relating to the
Company (including its consolidated subsidiaries) required to be
included in the Company's periodic filings under the Exchange Act.
Since the Evaluation Date, there have not been any significant changes
in the Company's internal controls or in other factors that could
significantly affect such controls.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits required by Item 601 of Regulation S-K
99.1 - Certification of Sidney Harman, Bernie Girod
and Frank Meredith, Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
During the quarter ended September 30, 2002, the
Company furnished a Report on Form 8-K under Item
9 (Regulation FD Disclosure). The report, dated
August 14, 2002, contains the sworn statements of
the Company's Executive Chairman, Chief Executive
Officer and Chief Financial Officer filed with the
Securities and Exchange Commission ("SEC") as
required by the SEC's June 27, 2002 order.
23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
Harman International Industries, Inc. has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
HARMAN INTERNATIONAL INDUSTRIES, INCORPORATED
(Registrant)
Date: November 14, 2002 By: /s/ Bernard A. Girod
---------------------------------
Bernard A. Girod
Vice Chairman and Chief
Executive Officer
Date: November 14, 2002 By: /s/ Frank Meredith
---------------------------------
Frank Meredith
Executive Vice President
and Chief Financial Officer
24
CERTIFICATIONS
I, Sidney Harman, certify that:
1) I have reviewed this quarterly report on Form 10-Q of Harman
International Industries, Incorporated:
2) Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this quarterly report;
3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5) The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and
the audit committee of registrant's Board of Directors (or persons
performing the equivalent function);
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the registrant's
internal controls; and
6) The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
Date: November 14, 2002
/s/ Sidney Harman
- ----------------------------------
Executive Chairman
25
CERTIFICATIONS
I, Bernard A. Girod, certify that:
1) I have reviewed this quarterly report on Form 10-Q of Harman International
Industries, Incorporated:
2) Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this quarterly report;
3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5) The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's Board of Directors (or persons performing the
equivalent function);
d) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for
the registrant's auditors any material weaknesses in internal controls;
and
e) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6) The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: November 14, 2002
/s/ Bernard Girod
- ----------------------------------
Vice Chairman and Chief Executive Officer
26
CERTIFICATIONS
I, Frank Meredith, certify that:
1) I have reviewed this quarterly report on Form 10-Q of Harman
International Industries, Incorporated:
2) Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this quarterly report;
3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
f) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
g) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date"); and
h) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5) The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's Board of Directors (or persons performing the
equivalent function);
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses
in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6) The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: November 14, 2002
/s/ Frank Meredith
- ---------------------------------
Executive Vice President and Chief Financial Officer
27