Harman International Reports First Quarter Fiscal Year 2009 Results

Harman International Industries, Incorporated (NYSE:HAR) today announced results for the first quarter ended September 30, 2008. Net sales for the first quarter were $869 million, an 8 percent decrease compared to $947 million for the same period last year. Earnings per diluted share in the first quarter were $0.40 compared to $0.55 in the same period last year. Excluding restructuring and merger-related costs, non-GAAP earnings per diluted share were $0.51 for the first quarter compared to $0.62 for the same period last year.

"We, like others, are feeling the impact of the current global economic situation,” said Dinesh C. Paliwal, Harman’s Chairman and Chief Executive Officer. "Although our premium audio and automotive customers are relatively more resilient to such cycles, we are taking aggressive actions both to reduce our costs during this period and to strengthen our competitive position for the future.”

Summary of Operations

Net sales for the quarter ended September 30, 2008 were $869 million, an 8 percent decrease compared to the prior year period. All three segments reported lower sales compared to the same period in the prior year. The effects of foreign currency translation had a positive impact on net sales of $48 million during the quarter. Exclusive of foreign currency translation, net sales were 13% lower than the same period in the prior year. The decline in overall net sales was attributable to overall weakness in the automotive market and the Company’s restructuring of its loss-making personal navigation device (PND) businesses.

Gross profit as a percentage of net sales, on a non-GAAP basis, increased by 60 basis points to 28.5 percent for the quarter ended September 30, 2008 compared to 27.9 percent of sales in the same period last year. This increase is related to improvement in margins in the Professional and Consumer Divisions.

Selling, general and administrative expenses (SG&A) as a percentage of net sales, on a non-GAAP basis, increased by 40 basis points for the quarter ended September 30, 2008 compared to the same period in the prior year. Despite the benefits received from restructuring programs, SG&A expenses as a percentage of net sales have increased due to lower net sales. Foreign exchange adversely impacted SG&A expenses by $10.0 million during the quarter. SG&A expenses, overall in dollars, decreased $13.8 million when compared to the same period in the prior year. The decrease reflects the benefit from stock option forfeitures and reductions in engineering costs in fiscal 2009. Engineering, a significant component of our SG&A, decreased to $86.7 million for the quarter ended September 30, 2008 compared to $87.8 million in the same period last year. Foreign exchange adversely impacted engineering expenses by $5.5 million during the quarter.

Operating income as a percent of sales on a non-GAAP basis was 4.9%, same as in the first quarter of 2008. On a GAAP basis, operating income for the quarter ended September 30, 2008 was $32 million, or 3.7 percent of sales, compared to $41 million, or 4.4 percent of sales in the same period last year. The decrease in operating income percentage was primarily driven by higher SG&A expenses as a percentage of net sales due to lower sales as a result of the weakening economy and declining demand in the automotive industry, combined with lower gross margin as a result of restructuring expenses incurred during the quarter.

The company’s liquidity position remains solid. At September 30, 2008, we have a cash and cash equivalent balance of $195 million along with a $300 million revolving credit facility in place with favorable pricing and a June 2010 maturity. Our debt levels are moderate with the main outstanding debt instrument being the $400 million convertible notes with a coupon of 1.25% due in October 2012. While we always pay close attention to cash, in this time of uncertainty we have doubled our focus on liquidity management as evidenced by the $18 million of cash from operating activities generated in the quarter ending September 30, 2008, contrasted with the ($102) million outflow recorded during the same period of the prior year.

Automotive net sales for the quarter ended September 30, 2008 decreased $56 million, or 8 percent compared to the same period last year. Foreign currency translation had a positive impact on net sales of $41 million during the quarter. The reduction in net sales is primarily attributable to Daimler’s strategic decision to move to dual sourcing on select Mercedes models. Lower production volumes by some of the major automakers, specifically Chrysler and Toyota, have also negatively impacted sales, as has our strategic decision in fiscal 2008 to restructure the PND business. These reductions have been partially offset by increases in net sales relating to the launch of our new platforms included in various Audi, BMW and Hyundai models.

Automotive gross profit as a percentage of net sales, on a non-GAAP basis, was basically flat, reflecting only a 10 basis points change.

Automotive SG&A expenses as a percentage of sales, on a non-GAAP basis, increased 1.7 percentage points for the quarter ended September 30, 2008 compared to the same period last year. The primary reason is an increase in R&D spending as a percentage of net sales is based on our commitments to support new automotive infotainment systems for programs launching in fiscal 2009, during a period of reduced sales volume from existing customer systems. SG&A expenses, in terms of absolute dollars, were flat compared with the prior year. Foreign exchange adversely impacted SG&A expenses by $8.1 million during the quarter.

The automotive division continues to execute on its order backlog, with successful product launches during the quarter including production ramp up of the new Porsche high-end infotainment system for the Carrera and Cayenne models; the BMW high-end Infotainment System for its 7 Series; the new Audi high and mid level infotainment systems for its A6 model; an infotainment system for the new Ferrari California model; and an Infinity branded audio system for the GM Europe Insignia model.

The Company was selected by Mercedes-Benz to supply Harman Kardon branded audio systems for its SLK-Class and A-/B-Class models, both scheduled to appear in late 2011; and for the Mercedes SL-Class, scheduled for showrooms in mid 2012.

Consumer net sales for the quarter ended September 30, 2008 decreased $13.5 million, or 11 percent, compared to the same period last year. Foreign currency translation had a positive impact on net sales of $6 million during the quarter. The consumer retail environment continues to be challenging as the economy slows. The decline in net sales from the previous quarter is primarily attributable to our exit of the loss making PND business and other unprofitable products.

Consumer gross profit as a percentage of net sales, on a non-GAAP basis, increased 2.0 percentage points for the quarter ended September 30, 2008 compared to the same period in the prior year. The improvement in gross margin results from a favorable product mix during the quarter as the Consumer division exited the PND market, where competitive pressures have adversely affected margins in the prior year.

Consumer SG&A expenses as a percentage of sales, on a non-GAAP basis, remained nearly flat, decreasing 10 basis points for the quarter ended September 30, 2008 compared to the same period last year. Engineering expenses were $5.8 million, or 5.5 percent of sales, for the quarter ended September 30, 2008 compared to $8.9 million, or 7.4 percent of sales, in the same period last year. The reduction in engineering spending was a result of restructuring activities initiated during the third and fourth quarter of fiscal 2008, including the closure of our facility in Bedford, MA and the consolidation of engineering resources across our other facilities.

The Consumer Division hosted its share of more than 220,000 visitors to the IFA Consumer Electronics Show in Berlin, Germany during September with a 40,000 sq. ft. display encompassing a broad range of Harman brands. The division’s products received more than a dozen industry or media awards during the quarter, including designation of JBL LS80 loudspeakers as Best Speaker of the Year by the European Imaging and Sound Association. EH Publishing selected the JBL Control NOW loudspeaker as a Product of the Year. The JBL Synthesis One Multichannel Audio System was inducted into the Custom Electronic Design and Installation Association Product Hall of Fame.

Professional net sales for the quarter ended September 30, 2008 decreased $8.4 million, or 6 percent compared to the same period last year. Foreign currency translation had a positive impact on net sales of $1 million during the quarter. The decrease in sales compared to the same period last year was primarily due to continued softness in the small project contracting business in the U.S. The weakening economy also contributed to a decrease in net sales across a number of our Professional brands.

Professional Gross profit as a percentage of net sales, on a non-GAAP basis, increased 1.7 percentage points for the quarter ended September 30, 2008 compared to the same period in the prior year. The increase in gross margin was primarily due to a favorable product mix which includes the sale of recently-introduced new products and benefits from lower manufacturing costs.

Professional SG&A expenses as a percentage of sales, on a non-GAAP basis, increased 0.5 percentage points for the quarter ended September 30, 2008 compared to the same period last year. The increase as a percentage of net sales results primarily from higher R&D spending as the Professional divisions launches new products in fiscal 2009. Research and development expenses were $9.4 million, or 6.8 percent of sales, for the quarter ended September 30, 2008 compared to $9.2 million, or 6.4 percent of sales, in the same period last year.

The Harman Professional Division continues to be a supplier of choice to world-class venues and entertainers. The new Indianapolis Colts’ Lucas Oil stadium has been fully outfitted with Harman systems, including more than 350 amplifiers and some 4,000 speakers for the 63,000 seat facility. Harman professional systems were also used at many prestigious events throughout the quarter, including Bruce Springsteen’s world concert tour, the Miss Universe Pageant in Vietnam, the Oktoberfest in Munich, and both national political conventions. Artists such as Billy Joel, Melissa Etheridge, Kanye West and Keith Urban performed with Harman systems, and the division introduced more than a dozen new products during the quarter.

Strategic Initiatives

To improve its cost structure and competitive position, the Company is moving forward aggressively with a 24-month program called STEP Change which is expected to produce $400 million in sustainable annual savings by 2011. The definition phase was completed on schedule at the end of the first quarter, with nearly 250 cost reduction and productivity improvement initiatives identified for action.

In September, the Company opened a new engineering and development center in Bangalore, India in partnership with leading global solutions provider Wipro Technologies. Beginning with the approximately 250 engineers from this engagement, the Company plans to grow its resource footprint in India to more than 1,000 people by 2011, significantly strengthening its global engineering and development capabilities.

The Company has completed a new, world-class automotive systems operation in Suzhou, China. The 130,000 square foot facility is now producing a variety of speakers, amplifiers and electronic components for automakers and has been selected by BMW to produce audio systems for a version of the German automaker’s 5 Series built exclusively for the Chinese market.

The Company announced its intentions to close two engineering sites in Germany by June 30, 2009, consolidating activities into other facilities. Harman also announced its intentions to outsource its Automotive warranty service operation in the United States by the end of January.

The Company is continuing the sales and marketing activities necessary to communicate its value proposition and seize new business opportunities for the future, including the launch of a new brand advertising program during the first quarter, designed to raise its brand profile.

Harman has opened its new headquarters facility in Stamford, Connecticut, completing the consolidation of its decentralized corporate headquarters in Washington, DC and California.

"The current global financial climate is forcing every company to take a hard look at new ways to reduce costs and improve productivity,” said Dinesh Paliwal. "We acted early in this regard, long before the current crisis gained momentum, and we are now focused on the future as we leverage Harman’s prominent market positions, respected brand portfolio and talented people toward the brighter days we know will come.”

Investor Call on October 29, 2008

NOTE: For reference during its analyst and investor conference call, the Company has posted a set of informational slides on its web site at www.harman.com.

At 4:30 p.m. today, Harman's management will host an analyst and investor conference call to discuss the first quarter results. Those who wish to participate in the call should dial (800) 230-1951 (US) or +1 (612) 288-0340 (International), and reference Harman International.

A replay of the call will also be available following the completion of the call at approximately 6:30 p.m. EDT. The replay will be available through November 12, 2008. To listen to the replay, dial (800) 475-6701 (US) or +1 (320) 365-3844 (International), Access Code: 966620. AT&T will also web-cast the presentation.

The web-cast can be accessed at http://65.197.1.5/att/confcast, enter the Conference ID: 966620 and click Go. There will also be a link to the web-cast at www.harman.com. Participation through the web-cast will be in listen-only mode. If you need technical assistance, call the toll-free AT&T Conference Casting Support Help Line at (888) 793-6118 (US) or +1 (678) 749-8002 (International).

General Information

Harman International (www.harman.com) designs, manufactures and markets a wide range of audio and infotainment products for the automotive, consumer and professional markets. The Company maintains a strong presence in the Americas, Europe and Asia and employs more than 11,000 people worldwide. The Harman International family of brands spans some 15 leading names including AKG^®, Audioaccess^®, Becker^®, BSS^®, Crown^®, dbx^®, DigiTech^®, Harman Kardon^®, Infinity^®, JBL^®, Lexicon^®, Mark Levinson^®, Revel^®, QNX^®, Soundcraft^® and Studer^®. The Company’s stock is traded on the New York Stock Exchange under the Symbol HAR.

A reconciliation of the non-GAAP measures included in this press release to the most comparable GAAP measures is provided in the tables contained at the end of this press release.

Forward-Looking Information

Except for historical information contained herein, the matters discussed are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act. One should not place undue reliance on these statements. We base these statements on particular assumptions that we have made in light of our industry experience, as well as our perception of historical trends, current market conditions, current economic data, expected future developments and other factors that we believe are appropriate under the circumstances. These statements involve risks and uncertainties that could cause actual results to differ materially from those suggested in the forward-looking statements, including but not limited to (1) our ability to successfully implement our strategic initiatives and to achieve the intended benefits of those initiatives; (2) changes in consumer confidence and general economic conditions in the U.S. and Europe; (3) the effect of changes in consumer confidence; (4) a change in interest rates and availability of financing affecting consumer spending; (5) automobile industry sales and production rates; (6) our ability to effectively implement our restructuring programs and to realize the intended benefits of these programs; (7) fluctuations in currency exchange rates; (8) the loss of one or more significant customers, including our automotive customers; (9) model-year changeovers and customer acceptance in the automotive industry; (10) our ability to satisfy contract performance criteria at expected profit margins; (11) availability of key components for the products we manufacture; (12) customer acceptance of our consumer and professional products; (13) competition in the automotive, consumer or professional markets in which the Company operates, including pricing pressures for our products; (14) the outcome of pending or future litigation and other claims, including, but not limited to the current stockholder and ERISA lawsuits or any claims or litigation arising out of our business, labor disputes at our facilities and those of our customers or common carriers; and (15) other risks detailed in Harman International’s Annual Report on Form 10-K for the fiscal year ended June 30, 2008 and other filings made by Harman International with the Securities and Exchange Commission.