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HARMAN INTERNATIONAL INDUSTRIES INC /DE/ - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations(Edgar Glimpses Via Acquire Media NewsEdge) General The following discussion should be read in conjunction with the accompanying unaudited Condensed Consolidated Financial Statements and the related notes included in Item 1 of this Quarterly Report on Form 10-Q, and Management's Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K, for the fiscal year ended June 30, 2013 (our "2013 Annual Report"). This discussion contains forward-looking statements which are based on our current expectations and experience and our perception of historical trends, current market conditions, including customer acceptance of our new products, current economic data, expected future developments, foreign currency exchange rates, and other factors that we believe are appropriate under the circumstances. These statements involve risks and uncertainties that could cause actual results to differ materially from those suggested in the forward-looking statements. Unless otherwise indicated, "Harman," "Company," "we," "our," and "us" are used interchangeably to refer to Harman International Industries, Incorporated and its consolidated subsidiaries. All amounts are in thousands unless otherwise indicated. Executive Overview We believe we are a worldwide leader in the development, manufacture and marketing of high quality, high-fidelity audio products, lighting solutions and electronic systems, as well as digitally integrated audio and infotainment systems for the automotive industry. We have developed a broad range of product offerings which we sell in our principal markets under our renowned brand names, including AKG®, Crown®, JBL®, Infinity®, Harman/Kardon®, Lexicon®, dbx®, BSS®, Studer®, Soundcraft®, Mark Levinson®, Becker®, DigiTech®, Revel®, Logic 7®, Martin®, Aha®and Selenium®. We have built these brands by developing our engineering, manufacturing and marketing competencies, and have employed these resources to establish our company as a leader in the markets we serve. We report our business on the basis of four segments. Our Infotainment, Lifestyle and Professional segments are based on our strategic approach to the markets and customers we serve. Our fourth segment, Other, primarily includes compensation, benefit and occupancy costs for corporate employees, net of allocations and expenses associated with new technology innovation and our corporate brand identity campaign. We believe that innovation is an important element to gaining market acceptance of our products and strengthening our market position. We have a history of leveraging our continuous technological innovation across all of the markets we serve. We have a well-deserved reputation for delivering premium audio and infotainment solutions across a full spectrum of applications. We believe that our technological innovation, the quality of our products and our reputation for on-time delivery have resulted in Harman being awarded a substantial amount of Infotainment and Lifestyle business. As of June 30, 2013, we have a cumulative estimated $19.0 billion of future awarded Infotainment and Lifestyle automotive business, which represents the estimated future lifetime net sales for all customers. This amount does not represent firm customer orders. We report our awarded business primarily based on award letters from our customers. To validate these awards, we use various assumptions, which we update annually, including global vehicle production forecasts, customer take rates for our products, revisions to product life cycle estimates and the impact of annual price reductions and exchange rates, among other factors. These assumptions are updated and reported externally on an annual basis. We update our estimated awarded business quarterly by adding the value of new awards received and subtracting sales recorded during the quarter. These quarterly updates do not include any assumptions for increased take rates, revisions to product life cycle, or any other factors. We believe our currently awarded automotive business will position us well for follow-on and new business with these existing customers. Our management uses the amount of our future awarded business for short- and long-term budgeting and forecasting, development of earnings guidance and for planning future corporate investment and other activities, such as capital expenditures and restructuring. Our future awarded business is also an input used to approximate our enterprise value. We believe our investors utilize this information for a number of reasons, including evaluating our future financial performance over time, to model our financial results of operations, to understand the risks inherent in our current operating plan, and as an input to approximate our enterprise value. However, our estimates of future awarded automotive business are forward-looking statements and may not actually be achieved. See the risk factor "We may not realize sales represented by awarded business" in Item 1A "Risk Factors" of Part I of our 2013 Annual Report. Our products are sold worldwide, with the largest markets located in the United States and Germany. In the United States, our primary manufacturing facilities are located in Kentucky and Indiana. Outside of the United States, we have manufacturing facilities in Austria, Brazil, China, Denmark, Hungary, France, Germany, Mexico, the Netherlands and the United Kingdom. Our sales and earnings may vary due to the production schedules and model year changeovers of our automotive customers, the holiday buying season for home audio products, customer acceptance of our products, the timing of new product introductions, product offerings by our competitors, fluctuations in the timing of contractual agreements for customer reimbursements for research, 31-------------------------------------------------------------------------------- Table of Contents development and engineering expenses ("RD&E") and general economic conditions. Since most of our businesses operate using local currencies, our reported sales and earnings may also fluctuate due to fluctuations in foreign currency exchange rates, especially with respect to the value of the Euro and the U.S. Dollar. We believe significant opportunities exist to grow our business in all three of our business segments in emerging markets such as Brazil, Russia, India and China ("BRIC"). During the three months ended March 31, 2014, sales increased $40.9 million in these emerging markets to $168.6 million, an increase of 32.0 percent over the same period in the prior fiscal year. Excluding China, the BRIC countries sales decreased $6.9 million to $40.7 million, a decrease of 14.6 percent during the three months ended March 31, 2014, compared to the same period in the prior fiscal year. During the nine months ended March 31, 2014, sales increased $104.9 million in these emerging markets to $501.4 million, an increase of 26.5 percent over the same period in the prior fiscal year. Excluding China, the BRIC countries sales increased $5.8 million to $134.1 million, an increase of 4.5 percent during the nine months ended March 31, 2014 compared to the same period in the prior fiscal year. We expect our market share to continue to grow significantly in these countries. We continue to roll out our global marketing campaign featuring some of the world's most prominent artists and celebrities such as Maroon 5, Linkin Park, Mariano Rivera and Tim McGraw, in order to increase brand awareness and support growth and market share gains across our entire business. Critical Accounting Policies Recently Adopted Accounting Standards For the nine months ended March 31, 2014, there were no significant changes to our critical accounting policies and estimates from those disclosed in the consolidated financial statements and the related notes included in our 2013 Annual Report, except for recently adopted accounting standards disclosed in Note 2 - New Accounting Standards in the Notes to the Condensed Consolidated Financial Statements for the nine months ended March 31, 2014. Recently Issued Accounting Standards Refer to Note 2 - New Accounting Standards in the Notes to the Condensed Consolidated Financial Statements for a summary of recently issued accounting standards. Results of Operations Net Sales Net sales for the three months ended March 31, 2014 were $1.404 billion compared to $1.062 billion in the same period in the prior year, an increase of 32.3 percent, or an increase of 30.6 percent excluding foreign currency translation. Net sales increased in all of our segments. The increase was primarily due to higher automotive production volumes and take rates, a large order from a mobile telecommunications customer, accelerated sales of new products launched earlier in the year in the home and multimedia business, and favorable foreign currency translation of $13.6 million. Net sales for the nine months ended March 31, 2014 were $3.904 billion compared to $3.116 billion in the same period in the prior year, an increase of 25.3 percent, or an increase of 22.9 percent excluding foreign currency translation. Net sales increased in all of our segments. The increase was primarily due to new scalable infotainment business, the acquisition of Martin Professional A/S ("Martin"), higher automotive production volumes and take rates, a large order from a mobile telecommunications customer, accelerated sales of new products launched earlier in the year in the home and multimedia business, improved economic conditions in Europe and favorable foreign currency translation of $61.6 million. A summary of our net sales by business segment is presented below: Three Months Ended March 31, Nine Months Ended March 31, 2014 % 2013 % 2014 % 2013 % Net sales: Infotainment $ 735,567 52.4 % $ 568,657 53.6 % $ 2,066,024 52.9 % $ 1,669,484 53.6 % Lifestyle 468,177 33.3 % 327,254 30.8 % 1,232,402 31.6 % 990,528 31.8 % Professional 200,387 14.3 % 165,316 15.6 % 605,297 15.5 % 452,501 14.6 % Other 104 - 545 - 341 - 3,094 - Total $ 1,404,235 100.0 % $ 1,061,772 100.0 % $ 3,904,064 100.0 % $ 3,115,607 100.0 % 32 -------------------------------------------------------------------------------- Table of Contents Infotainment - Net sales for the three months ended March 31, 2014 increased $166.9 million, or 29.4 percent, compared to the same period in the prior year, and increased 26.2 percent excluding foreign currency translation. The increase in net sales was driven by higher automotive production volumes, the expansion of recent production launches across car lines, higher take rates and favorable foreign currency translation of $14.2 million. Net sales for the nine months ended March 31, 2014 increased $396.5 million, or 23.8 percent, compared to the same period in the prior year, and increased 19.8 percent excluding foreign currency translation. The increase in net sales was driven by higher automotive production volumes, increases in new scalable infotainment systems and higher take rates, the expansion of recent production launches across car lines, improved economic conditions in Europe and favorable foreign currency translation of $54.8 million. Lifestyle - Net sales for the three months ended March 31, 2014 increased $140.9 million, or 43.1 percent, compared to the same period in the prior year, and increased 42.5 percent excluding foreign currency translation. The increase in net sales was driven by a large order from a mobile telecommunications customer, accelerated sales of new products launched earlier in the year in the home and multimedia business, higher automotive audio sales as a result of higher automotive production volumes and increased take rates and favorable foreign currency translation of $1.2 million. Net sales for the nine months ended March 31, 2014 increased $241.9 million, or 24.4 percent, compared to the same period in the prior year, and increased 23.0 percent excluding foreign currency translation. The increase in net sales was driven by accelerated sales of new products launched earlier in the year in the home and multimedia business, higher automotive audio sales as a result of higher automotive production volumes and increased take rates, a large order from a mobile telecommunications customer, improved economic conditions in Europe and favorable foreign currency translation of $11.1 million. Professional - Net sales for the three months ended March 31, 2014 increased $35.1 million, or 21.2 percent, compared to the same period in the prior year, and increased 22.5 percent excluding foreign currency translation. The increase in net sales was driven by the Martin acquisition and increased demand for audio products, partially offset by unfavorable foreign currency translation of $1.8 million. Net sales for the nine months ended March 31, 2014 increased $152.8 million, or 33.8 percent, compared to the same period in the prior year, and increased 35.1 percent excluding foreign currency translation. The increase in net sales was driven by the Martin acquisition, increased demand for audio products, improved economic conditions in Europe, partially offset by unfavorable foreign currency translation of $4.4 million. Gross Profit Gross profit as a percentage of net sales increased 0.6 percentage points to 26.0 percent for the three months ended March 31, 2014 compared to 25.4 percent of net sales in the same period in the prior year. The increase in overall gross profit as a percentage of net sales was in our Infotainment and Professional segments due to improved leverage of fixed costs over a higher net sales base, lower costs due to productivity initiatives, an increased mix of scalable infotainment systems and lower restructuring expenses in our Professional segment. Our gross profit as a percentage of net sales decreased in our Lifestyle segment due to a higher proportion of revenue coming from home and multimedia business versus the higher margin automotive audio business. Gross profit as a percentage of net sales increased 1.0 percentage point to 27.3 percent for the nine months ended March 31, 2014 compared to 26.3 percent of net sales in the same period in the prior year. The increase in overall gross profit as a percentage of net sales was in our Infotainment and Lifestyle segments due to improved leverage of fixed costs over a higher net sales base, lower costs due to productivity initiatives, an increased mix of scalable infotainment systems and lower restructuring expenses, partially offset by unfavorable product mix. Our gross profit as a percentage of net sales decreased in our Professional segment due to the inclusion of Martin in the nine months ended March 31, 2014. 33 -------------------------------------------------------------------------------- Table of Contents A summary of our gross profit by business segment is presented below: Three Months Ended March 31, Nine Months Ended March 31, Percentage Percentage Percentage Percentage 2014 of Net Sales 2013 of Net Sales 2014 of Net Sales 2013 of Net Sales Gross profit: Infotainment $ 157,596 21.4 % $ 109,577 19.3 % $ 464,100 22.5 % $ 351,235 21.0 % Lifestyle 130,726 27.9 % 97,959 29.9 % 374,045 30.4 % 294,674 29.7 % Professional 76,408 38.1 % 61,108 37.0 % 227,390 37.6 % 172,315 38.1 % Other 43 * 551 * 337 * 1,011 * Total $ 364,773 26.0 % $ 269,195 25.4 % $ 1,065,872 27.3 % $ 819,235 26.3 % * Percent not meaningful. Infotainment - Gross profit as a percentage of net sales increased 2.1 percentage points to 21.4 percent for the three months ended March 31, 2014 compared to the same period in the prior year. The increase in gross profit as a percentage of net sales was primarily due to improved leverage of fixed costs over a higher net sales base, lower costs due to productivity initiatives and an increased mix of scalable infotainment systems. Gross profit as a percentage of net sales increased 1.5 percentage points to 22.5 percent for the nine months ended March 31, 2014 compared to the same period in the prior year. The increase in gross profit as a percentage of net sales was primarily due to improved leverage of fixed costs over a higher net sales base, lower costs due to productivity initiatives and an increased mix of scalable infotainment systems. Lifestyle - Gross profit as a percentage of net sales decreased 2.0 percentage points to 27.9 percent for the three months ended March 31, 2014 compared to the same period in the prior year. The decrease in gross profit as a percentage of net sales was due to a higher proportion of revenue coming from home and multimedia business versus the higher margin automotive audio business. Gross profit as a percentage of net sales increased 0.7 percentage points to 30.4 percent for the nine months ended March 31, 2014 compared to the same period in the prior year. The increase in gross profit as a percentage of net sales was due to improved leverage of fixed costs over a higher net sales base and lower restructuring expenses, partially offset by unfavorable product mix. Professional - Gross profit as a percentage of net sales increased 1.1 percentage points to 38.1 percent for the three months ended March 31, 2014 compared to the same period in the prior year. The increase in gross profit as a percentage of net sales was primarily due to lower restructuring expenses. Gross profit as a percentage of net sales decreased 0.5 percentage points to 37.6 percent for the nine months ended March 31, 2014 compared to the same period in the prior year. The decrease in gross profit as a percentage of net sales was primarily due to the inclusion of Martin in the nine months ended March 31, 2014, partially offset by lower restructuring expenses, lower manufacturing expenses resulting from cost saving initiatives and favorable product mix due to new product introductions. Selling, General and Administrative Expenses Selling, general and administrative expenses ("SG&A") were $263.3 million for the three months ended March 31, 2014 compared to $230.9 million in the same period in the prior year, an increase of $32.4 million. As a percentage of net sales, SG&A decreased 2.9 percentage points in the three months ended March 31, 2014 compared to the same period in the prior year due to improved operating leverage on higher sales and relatively low SG&A related to the large order from a mobile telecommunications customer, partially offset by higher marketing costs related to our brand-awareness campaign, and unfavorable foreign currency translation of $2.6 million. RD&E increased $21.1 million to $84.0 million, or 6.0 percent of net sales in the three months ended March 31, 2014, compared to $62.9 million, or 5.9 percent of net sales in the same period in the prior year, primarily due to higher gross spending and lower customer reimbursements. SG&A were $793.2 million for the nine months ended March 31, 2014 compared to $633.5 million in the same period in the prior year, an increase of $159.7 million. As a percentage of net sales, SG&A was flat in the nine months ended March 31, 2014 compared to the same period in the prior year. The increase in SG&A was primarily in support of increased net sales, a reduction of $12.5 34-------------------------------------------------------------------------------- Table of Contents million in contingent consideration in the prior year related to the acquisition of MWM Acoustics, higher marketing costs related to our brand-awareness campaign, higher restructuring costs, the inclusion of Martin in the nine months ended March 31, 2014 and unfavorable foreign currency translation of $10.0 million. RD&E increased $36.3 million to $248.7 million, or 6.4 percent of net sales in the nine months ended March 31, 2014, compared to $212.4 million, or 6.8 percent of net sales in the same period in the prior year, primarily due to higher gross spending to support new products and unfavorable foreign currency translation of $5.3 million. A summary of SG&A by business segment is presented below: Three Months Ended March 31, Nine Months Ended March 31, Percentage Percentage Percentage Percentage 2014 of Net Sales 2013 of Net Sales 2014 of Net Sales 2013 of Net Sales SG&A: Infotainment $ 97,283 13.2 % $ 88,370 15.5 % $ 308,670 14.9 % $ 255,103 15.3 % Lifestyle 79,345 16.9 % 74,528 22.8 % 230,320 18.7 % 184,153 18.6 % Professional 51,595 25.7 % 40,314 24.4 % 150,693 24.9 % 112,008 24.8 % Other 35,117 * 27,721 * 103,518 * 82,236 * Total $ 263,340 18.8 % $ 230,933 21.7 % $ 793,201 20.3 % $ 633,500 20.3 % * Percent not meaningful. Infotainment - SG&A increased $8.9 million to $97.3 million for the three months ended March 31, 2014 compared to the same period in the prior year. The increase in SG&A was primarily in support of increased net sales, higher RD&E, higher restructuring costs and unfavorable foreign currency translation of $1.5 million. As a percentage of net sales, SG&A decreased 2.3 percentage points to 13.2 percent for the three months ended March 31, 2014 compared to the same period in the prior year. RD&E increased $14.5 million to $54.0 million, or 7.3 percent of net sales in the three months ended March 31, 2014, compared to $39.5 million, or 6.9 percent of net sales in the same period in the prior year, primarily due to lower customer reimbursements and higher gross spending. SG&A increased $53.6 million to $308.7 million for the nine months ended March 31, 2014 compared to the same period in the prior year. The increase in SG&A was primarily in support of increased net sales, higher RD&E, higher restructuring costs, higher amortization expense and unfavorable foreign currency translation of $8.1 million. As a percentage of net sales, SG&A decreased 0.4 percentage points to 14.9 percent for the nine months ended March 31, 2014 compared to the same period in the prior year. RD&E increased $26.0 million to $164.0 million, or 7.9 percent of net sales in the nine months ended March 31, 2014, compared to $138.0 million, or 8.3 percent of net sales in the same period in the prior year, primarily due to higher gross spending, lower customer reimbursements and unfavorable foreign currency translation of $4.4 million. Lifestyle - SG&A increased $4.8 million to $79.3 million for the three months ended March 31, 2014, compared to the same period in the prior year, primarily in support of increased net sales, higher marketing costs related to our brand-awareness campaign and unfavorable foreign currency translation of $1.1 million, partially offset by lower restructuring costs. As a percentage of net sales, SG&A decreased 5.9 percentage points to 16.9 percent for the three months ended March 31, 2014 compared to the same period in the prior year due to improved operating leverage on higher sales and relatively low SG&A related to the large order from a mobile telecommunications customer. RD&E increased $2.9 million to $16.4 million, or 3.5 percent of net sales in the three months ended March 31, 2014 compared to $13.5 million, or 4.1 percent of net sales in the same period in the prior year due to higher gross spending to support new product introductions. SG&A increased $46.1 million to $230.3 million for the nine months ended March 31, 2014, compared to the same period in the prior year, primarily in support of increased net sales, a reduction of $12.5 million in contingent consideration in the prior year related to the acquisition of MWM Acoustics, higher marketing costs related to our brand-awareness campaign and unfavorable foreign currency translation of $2.2 million, partially offset by lower restructuring costs. As a percentage of net sales, SG&A increased 0.1 percentage points to 18.7 percent for the nine months ended March 31, 2014 compared to the same period in the prior year. RD&E increased $1.8 million to $47.7 million, or 3.9 percent of net sales in the nine months ended March 31, 2014 compared to $45.9 million, or 4.6 percent of net sales in the same period in the prior year due to higher gross spending to support new product introductions. Professional - SG&A increased $11.3 million to $51.6 million for the three months ended March 31, 2014, compared to the same period in the prior year, primarily due to higher expenses and higher amortization expense related to intangible assets acquired in the acquisitions of Martin and Duran Audio BV ("Duran"). As a percentage of net sales, SG&A increased 1.3 percentage points for the 35 -------------------------------------------------------------------------------- Table of Contents three months ended March 31, 2014 compared to the same period in the prior year. RD&E increased $2.5 million to $10.0 million, or 5.0 percent of net sales in the three months ended March 31, 2014 compared to $7.5 million, or 4.6 percent of net sales in the same period in the prior year, primarily due to the inclusion of Martin and Duran in the three months ended March 31, 2014. SG&A increased $38.7 million to $150.7 million for the nine months ended March 31, 2014, compared to the same period in the prior year, primarily due to the inclusion of Martin in the nine months ended March 31, 2014 and higher amortization expense related to intangible assets acquired in the acquisitions of Martin and Duran. As a percentage of net sales, SG&A increased 0.1 percentage points to 24.9 percent for the nine months ended March 31, 2014 compared to the same period in the prior year. RD&E increased $5.9 million to $28.0 million, or 4.6 percent of net sales in the nine months ended March 31, 2014 compared to $22.1 million, or 4.9 percent of net sales in the same period in the prior year, primarily due to the inclusion of Martin and Duran in the nine months ended March 31, 2014. Other - Other SG&A includes compensation, benefit and occupancy costs for corporate employees, new technology innovation and expenses associated with our corporate brand identity campaign. Other SG&A increased $7.4 million to $35.1 million in the three months ended March 31, 2014 compared to the same period in the prior year, primarily due to increased stock compensation expense, marketing costs and RD&E. Other SG&A increased $21.3 million to $103.5 million in the nine months ended March 31, 2014 compared to the same period in the prior year, primarily due to increased stock compensation expense, marketing costs and RD&E. Restructuring Our restructuring program that is designed to improve our global footprint, cost structure, technology portfolio, human resources and internal processes continues. For the three and nine months ended March 31, 2014 and 2013, we continued to refine and expand on activities launched in prior years. During the three and nine months ended March 31, 2014, we launched additional programs to drive functional efficiencies and improve our cost structure and global footprint. During the three and nine months ended March 31, 2013, significant new programs were launched focused on achieving further productivity improvements by consolidating operations and relocating certain functions to lower cost countries. A summary and components of our restructuring initiatives are presented below and include accruals for new programs as well as revisions to estimates, both increases and decreases, to programs accrued in prior periods: Severance Third Party Facility Closure Asset Related Contractor and Other Impairments Costs Termination Costs Related Costs (1) Total Liability, June 30, 2013 $ 23,563 $ 1,014 $ 33,848 $ 0 $ 58,425 Expense (2) 20,000 4,213 3,954 5,541 33,708 Accumulated depreciation offset 0 0 0 (5,541 ) (5,541 ) Payments (30,336 ) (5,274 ) (10,094 ) 0 (45,704 ) Foreign currency translation 1,175 47 1,485 0 2,707 Liability, March 31, 2014 $ 14,402 $ 0 $ 29,193 $ 0 $ 43,595 Liability, June 30, 2012 $ 19,938 $ 17 $ 10,839 $ 0 $ 30,794 Expense (2) 25,076 52 1,704 2,221 29,053 Accumulated depreciation offset 0 0 0 (2,221 ) (2,221 ) Payments (11,655 ) (72 ) (4,364 ) 0 (16,091 ) Foreign currency translation 65 3 19 0 87 Liability, March 31, 2013 $ 33,424 $ 0 $ 8,198 $ 0 $ 41,622 (1) Credits related to restructuring charges for accelerated depreciation and inventory provisions are recorded against the related assets in Property, plant and equipment, net or Inventories in our Condensed Consolidated Balance Sheets and do not impact the restructuring liability. (2) Restructuring expenses noted above are primarily in SG&A in our Condensed Consolidated Statements of Income. Asset impairments which consist of accelerated depreciation and inventory provisions are primarily in Cost of sales in our Condensed Consolidated Statements of Income. Restructuring liabilities are recorded in Accrued liabilities and Other non-current liabilities in our Condensed Consolidated Balance Sheets. 36-------------------------------------------------------------------------------- Table of Contents Restructuring expenses by reporting business segment are presented below: Three Months Ended Nine Months Ended March 31, March 31, 2014 2013 2014 2013 Infotainment $ (299 ) $ 11,236 $ 17,551 $ 10,941 Lifestyle 1,802 13,867 7,493 14,618 Professional 1,150 1,658 3,123 1,273 Total 2,653 26,761 28,167 26,832 Asset Impairments 2,086 1,226 5,541 2,221 Total $ 4,739 $ 27,987 $ 33,708 $ 29,053 Goodwill During the three and nine months ended March 31, 2014, we recorded $4.4 million and $20.0 million, respectively, of goodwill in our Professional segment associated with the acquisitions of Duran and Martin. During the three and nine months ended March 31, 2013, we recorded $57.7 million of goodwill, in each period, in our Professional segment associated with the acquisition of Martin and zero and $0.6 million, respectively, of goodwill in our Infotainment segment associated with the acquisition of certain assets of Interchain Solutions Private Limited ("Interchain"). Refer to Note 23 - Acquisitions in the Notes to the Condensed Consolidated Financial Statements for more information. We did not recognize any goodwill impairment charges in our Condensed Consolidated Statements of Income in the three and nine months ended March 31, 2014 and 2013. The contingent purchase price associated with the acquisition of innovative Systems GmbH ("IS") is calculated pursuant to the terms of an agreement between the parties. Certain terms of the agreement are currently subject to a dispute between the parties and the matter has been submitted to arbitration. On November 5, 2013, the arbitration panel reached a partial judgment on some of the disputed matters covering the period from February 2009 through January 2012 in the amount of €16.3 million. We are contesting the enforcement of the partial award. Until such time as the dispute is resolved, we cannot calculate the contingent purchase price. Operating Income Operating income for the three months ended March 31, 2014 was $101.4 million, or 7.2 percent of net sales, compared to operating income of $38.3 million, or 3.6 percent of net sales, in the same period in the prior year. The increase in operating income was primarily due to higher gross profit due to increased net sales in the three months ended March 31, 2014, partially offset by higher SG&A in support of increased net sales and higher marketing costs related to our brand-awareness campaign. Operating income for the nine months ended March 31, 2014 was $272.7 million, or 7.0 percent, of net sales compared to operating income of $185.7 million, or 6.0 percent of net sales, in the same period in the prior year. The increase in operating income was primarily due to higher gross profit due to increased net sales in the nine months ended March 31, 2014, partially offset by higher SG&A in support of increased net sales, a reduction of $12.5 million in contingent consideration in the prior year related to the acquisition of MWM Acoustics and higher marketing costs related to our brand-awareness campaign. Interest Expense, Net Interest expense is reported net of interest income in our Condensed Consolidated Statements of Income. Interest expense, net was $2.1 million and $1.6 million for the three months ended March 31, 2014 and 2013, respectively. Gross interest expense was $2.5 million and $2.1 million for the three months ended March 31, 2014 and 2013, respectively. The non-cash portion of gross interest expense was $0.5 million for each of the three month periods ended March 31, 2014 and 2013, associated with the amortization of debt issuance costs on the Multi-Currency Credit Agreement entered into on October 19, 2012 (the "New Credit Agreement"). The cash portion of gross interest expense was $2.0 million and $1.6 million for the three months ended March 31, 2014 and 2013, respectively. Interest income was $0.4 million and $0.5 million for the three months ended March 31, 2014 and 2013, respectively. Interest expense, net was $5.9 million and $11.3 million for the nine months ended March 31, 2014 and 2013, respectively. Gross interest expense was $7.4 million and $13.1 million for the nine months ended March 31, 2014 and 2013, respectively. The non-cash portion of gross interest expense was $1.6 million and $7.9 million for the nine months ended March 31, 2014 and 2013, respectively, 37 -------------------------------------------------------------------------------- Table of Contents associated with the amortization of debt issuance costs on the New Credit Agreement in the nine months ended March 31, 2014 and the amortization of the debt discount on the 1.25 percent convertible senior notes due and paid on October 15, 2012 (the "Convertible Senior Notes") and the amortization of debt issuance costs on the New Credit Agreement, the Convertible Senior Notes and the Multi-Currency Credit Agreement entered into on December 1, 2010 in the nine months ended March 31, 2013. The cash portion of gross interest expense was $5.8 million and $5.2 million for the nine months ended March 31, 2014 and 2013, respectively. Interest income was $1.5 million and $1.8 million for the nine months ended March 31, 2014 and 2013, respectively. Foreign Exchange Losses, Net Foreign currency exchange gains and losses resulting from the remeasurement of certain foreign currency denominated monetary assets and liabilities are included in Foreign exchange losses, net in our Condensed Consolidated Statements of Income. Miscellaneous, Net Net miscellaneous expenses of $2.7 million consisted primarily of bank charges, as well as $1.1 million of interest expense related to a disputed claim for the three months ended March 31, 2014, compared to $1.2 million in the same period in the prior year. Net miscellaneous expenses of $5.8 million consisted primarily of bank charges, as well as $1.1 million of interest expense related to a disputed claim, as well as bank charges for the nine months ended March 31, 2014, compared to $3.8 million in the same period in the prior year. Income Tax Expense, Net Our provision for income taxes is based on an estimated annual tax rate for the year applied to federal, state and foreign income. Income tax expense for the three months ended March 31, 2014 and 2013 was $22.4 million and $2.2 million, respectively. The effective tax rate for the three months ended March 31, 2014 and 2013 was 23.3 percent and 5.9 percent, respectively. The change in the effective tax rate for the three months ended March 31, 2014 compared to the same period in the prior year was primarily due to higher income in the U.S. that is subject to a tax rate higher than those in our key foreign jurisdictions and the retroactive reinstatement of the federal research and experimentation credit provision of the U.S. tax law that was recorded as a discrete tax benefit during the three months ended March 31, 2013. Income tax expense for the nine months ended March 31, 2014 and 2013 was $64.5 million and $34.2 million, respectively. The effective tax rate for the nine months ended March 31, 2014 and 2013 was 25.2 percent and 20.0 percent, respectively. The change in the effective tax rate for the nine months ended March 31, 2014 compared to the same period in the prior year was primarily due to higher income in the U.S. that is subject to a tax rate higher than those in our key foreign jurisdictions and discrete tax benefits that were recorded during the nine months ended March 31, 2013 related to the retroactive reinstatement of the federal research and experimentation credit provision and favorable tax rate changes in certain key jurisdictions. We have net deferred tax assets of $313.0 million primarily consisting of deferred deductions, research and experimentation credits, and foreign tax credits. We have evaluated all available evidence, both positive and negative, and based on the weight of all available evidence we continue to believe that our net deferred tax assets are fairly reflected in our Condensed Consolidated Balance Sheets. If the results of our operations do not meet our current expectations, our net deferred tax assets may become impaired. As of March 31, 2014, unrecognized tax benefits and the related interest were $37.2 million and $2.7 million, respectively, all of which would affect the tax rate if recognized. During the three and nine months ended March 31, 2014, we recorded tax reserves on uncertain tax positions in the amount of $1.1 million and $2.0 million, respectively. During the three and nine months ended March 31, 2014, we recorded additional interest expense on uncertain tax positions of $0.2 million and $0.7 million, respectively. Financial Condition Liquidity and Capital Resources We primarily finance our working capital requirements through cash generated by operations, borrowings under the New Credit Agreement and trade credit. Cash and cash equivalents were $566.9 million at March 31, 2014 compared to $454.3 million at June 30, 2013. During the nine months ended March 31, 2014, our cash and cash equivalents balance increased $112.6 million. The increase in cash was primarily due to cash provided by operating activities, largely driven by net income, partially offset by the repurchase of common stock, dividends and the repayment of debt from our term facility (the "Term Facility") under the New Credit Agreement. We also used cash to make investments in our manufacturing facilities, fund product development and meet the working capital needs of our business segments. 38 -------------------------------------------------------------------------------- Table of Contents We believe that our existing cash and cash equivalents of $566.9 million at March 31, 2014, together with our expected future operating cash flows, and our availability of $745.5 million under the New Credit Agreement, will be sufficient to cover our working capital needs, debt service, our share buyback program, capital expenditures, including major investments related to manufacturing and research facilities in emerging markets, acquisitions, purchase commitments, restructuring projects and quarterly dividends for at least the next 12 months. Our ability to maintain positive liquidity going forward depends on our ability to continue to generate cash from operations and maintain access to the financial markets, both of which are subject to general economic, financial, competitive, legislative, regulatory and other market factors beyond our control. We earn a significant amount of our operating income outside the U.S., the majority of which is deemed to be permanently reinvested in foreign jurisdictions. For at least the next 12 months, we have sufficient cash in the U.S., availability under our New Credit Agreement and forecasted domestic cash flow to sustain our operating activities and cash commitments for investing and financing activities, such as quarterly dividends and repayment of debt. In addition, we expect existing foreign cash and cash equivalents, short-term investments, and cash flows from operations to continue to be sufficient to fund our foreign operating activities and cash commitments for investing activities, such as material capital expenditures, for at least the next 12 months. As of March 31, 2014 Cash and cash equivalents of $200.8 million were held in the U.S. and Cash and cash equivalents of $366.1 million were held by us in foreign jurisdictions. As of June 30, 2013 Cash and cash equivalents and Short-term investments of $226.9 million and $10.0 million, respectively, were held in the U.S. and Cash and cash equivalents of $227.4 million were held by us in foreign jurisdictions. Below is a more detailed discussion of our cash flow activities during the nine months ended March 31, 2014 compared to the same period in the prior fiscal year. Operating Activities For the nine months ended March 31, 2014, our net cash provided by operations was $325.5 million compared to net cash used in operations of $37.3 million in the same period in the prior year. The increase in operating cash flows compared to the same period in the prior year was primarily due to lower payments for accounts payable, accrued liabilities and income taxes, and higher net income, partially offset by higher increases in accounts receivable. At March 31, 2014, working capital, excluding cash, short-term investments, and short-term debt, was $576.8 million, compared with $582.2 million at June 30, 2013. The decrease was primarily due to higher accounts payable, accrued liabilities and accrued warranties, partially offset by higher accounts receivable and inventory balances. Investing Activities Net cash used in investing activities was $104.5 million for the nine months ended March 31, 2014, compared to $30.2 million provided by investing activities in the same period in the prior year. The increase in net cash used in investing activities compared to the same period in the prior year was primarily due to higher net maturities of short-term investments in the prior year and higher capital expenditures in the current year and lower acquisitions, net of cash received in the current year. Short-term investments consist of commercial paper, short-term deposits and government bonds, time deposits, and treasury bills with original maturities of greater than three months and less than one year. Capital expenditures for the nine months ended March 31, 2014 were $92.5 million, in support of new Infotainment and Lifestyle awards, compared to $66.2 million for the same period in the prior year. We expect that our run rate for capital expenditures will slightly increase during fiscal year 2014. Financing Activities Net cash used in financing activities was $119.6 million in the nine months ended March 31, 2014, compared to $195.6 million used in financing activities in the same period in the prior year. The decrease in cash used in financing activities was primarily due to lower repayment of debt in the current year, net of higher repurchases of common stock and higher dividends to shareholders. New Credit Agreement On October 10, 2012, we and Harman Holding GmbH & Co. KG ("Harman KG") entered into the New Credit Agreement with a group of banks. At March 31, 2014 and June 30, 2013 there were no outstanding borrowings and approximately $4.5 million and $6.8 million of outstanding letters of credit, respectively, under the new revolving credit facility ("New Revolving Credit Facility") and $262.5 million and $285.0 million of outstanding borrowings under the Term Facility, respectively, of which $33.7 million and $30.0 million is included in each period in our Condensed Consolidated Balance Sheet as Current portion of long-term debt, respectively, and $228.8 million and $255.0 million is classified as Long-term debt, respectively. At March 31, 2014 and June 30, 2013, unused available credit under the New Revolving Credit Facility was $745.5 million and $743.2 million, respectively. If we do not meet the forecast in our budgets, we could violate our debt covenants and, absent a waiver from our lenders or an amendment to the New Credit Agreement, we could be in default under the New Credit Agreement. As a result, our debt under the New Credit Agreement could become due, which would have a material adverse effect on our financial condition and results of operations. As of March 31, 2014, we were in compliance with all the covenants of the New Credit Agreement. 39-------------------------------------------------------------------------------- Table of Contents At March 31, 2014, long-term debt maturing during each of the next five fiscal years and thereafter is as follows: 2014 $ 7,500 2015 35,625 2016 43,125 2017 135,000 2018 41,285 Thereafter 0 Total $ 262,535 Our total debt, including short-term borrowings, at March 31, 2014 was $278.0 million, primarily comprised of outstanding borrowings under the Term Facility of $262.5 million. Our total debt, including short-term borrowings, at June 30, 2013 was $290.0 million, primarily comprised of outstanding borrowings under the Term Facility of $285.0 million. Also included in total debt at June 30, 2013 is short-term debt and long-term borrowings of $5.0 million. Equity Total shareholders' equity at March 31, 2014 was $1.767 billion compared with $1.645 billion at June 30, 2013. The increase is primarily due to higher net income, favorable foreign currency translation and stock option exercises, partially offset by repurchases of common stock, dividends to shareholders and unrealized losses on hedging. Off-Balance Sheet Arrangements We utilize off-balance sheet arrangements in our operations when we enter into operating leases for land, buildings and equipment in the normal course of business, which are not included in our Condensed Consolidated Balance Sheets. In addition, we had outstanding letters of credit of $4.5 million and $6.8 million at March 31, 2014 and June 30, 2013, respectively, that were not included in our Condensed Consolidated Balance Sheets. Business Outlook Our future outlook is largely dependent upon changes in global economic conditions, which are showing signs of stabilization. We see signs of increased consumer discretionary spending, the lifting of delays in capital expenditure projects and increased automotive production rates, which we expect will result in improved demand for our products. We believe that these stabilized economic conditions will remain in place for at least the next quarter. We remain committed to our investment plans in the areas of RD&E and marketing. We also remain committed to pursuing incremental productivity and restructuring programs, which are expected to provide an accelerated rate of earnings growth in future years. Capital expenditures as a percentage of sales are expected to remain stable. Share Buy-Back Program On October 26, 2011, our Board of Directors authorized the repurchase of up to $200 million of our common stock (the "Buyback Program"). The Buyback Program allows us to purchase shares of our common stock in accordance with applicable securities laws on the open market, or through privately negotiated transactions. We entered into an agreement with an external broker that provided the structure under which the program was facilitated, which expired on October 25, 2012. The Buyback Program was set to expire on October 26, 2012, but on October 23, 2012 our Board of Directors approved an extension of the Buyback Program through October 25, 2013. On June 19, 2013 we entered into a new agreement with an external broker which expired on October 25, 2013 (the "10b5-1 Plan"). On June 26, 2013, our Board of Directors authorized the repurchase of up to an additional $200 million of our common stock (the "New Buyback Program") which expires on June 26, 2014. On August 26, 2013 we amended the 10b5-1 Plan to incorporate both board authorizations up until each of their respective expiration dates (the "Amended 10b5-1 Plan"). The Amended 10b5-1 Plan expires on June 25, 2014. During the three and nine months ended March 31, 2014, we did not repurchase any shares. During the nine months ended March 31, 2014 we repurchased 1,268,110 shares, at a cost of $84.5 million for a total cumulative buyback of 4,660,385 shares at a cost of $213.8 million under the Buyback Program and the New Buyback Program. 40-------------------------------------------------------------------------------- Table of Contents The Buyback Program was completed and therefore no additional shares may be repurchased under such program. The New Buyback Program may be suspended or discontinued at any time. We will determine the timing and the amount of any repurchases based on an evaluation of market conditions, share price and other factors. Subsequent Events Dividend Declaration On May 1, 2014 we declared a cash dividend of $0.30 per share for the quarter ended March 31, 2014. The quarterly dividend will be paid on May 27, 2014 to each stockholder of record as of the close of business on May 12, 2014. 41-------------------------------------------------------------------------------- Table of Contents |