Harman Kardon 2007 Annual Report Download - page 40

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Gross Profit
Gross profit margin decreased 1.4 percentage points in fiscal 2007 to 34.1 percent when compared to the
prior year. The decline was primarily due to competition in the Consumer multimedia market.
Automotive product mix and higher manufacturing costs also contributed to the decrease in gross profit
margin. These lower margins were partially offset by increased margins in our Professional business.
Our restructuring program did not affect our gross profit margin since the efficiencies will primarily be
obtained by workforce reductions. The costs associated with the workforce reductions are reported in our
selling, general and administrative costs. The restructuring program is discussed in detail under the
caption Restructuring and Merger Costs.
Fiscal 2006 gross profit margin increased 1.5 percentage points to 35.5 percent. The increase was
primarily due to gross profit margin improvements across all of our reportable business segments. Each
of these segments was able to leverage higher sales against fixed factory costs.
A summary of our gross profit by reportable business segment is presented below:
Percent Percent Percent
Fiscal of net Fiscal of net Fiscal of net
($000s omitted) 2007 sales 2006 sales 2005 sales
Automotive $ 872,838 35.0% 805,152 36.0% 739,746 34.8%
Consumer
126,392 25.4% 160,212 32.5% 123,983 29.8%
Professional
216,976 38.7% 193,129 37.3% 172,973 35.5%
Other/Unallocated
(5,000) --- (5,923) --- (5,000) ---
0
Total $ 1,211,206 34.1% 1,152,570 35.5% 1,031,702 34.0%
Automotive – Automotive gross profit margin decreased 1.0 percentage point to 35.0 percent in fiscal
2007 when compared fiscal 2006. The decrease is primarily related to higher manufacturing costs and
product mix. During fiscal 2007, we went into full production at our new manufacturing facility in
Washington, Missouri. This factory will primarily produce infotainment systems for Chrysler. Since our
new Chrysler program began late in fiscal 2007, the factory’s overhead costs were not fully leveraged
during the year. We anticipate our Washington, Missouri factory will operate at full capacity during
fiscal 2008. Gross profit margin was also negatively affected by lower production for the Mercedes-Benz
C-Class. We expect to move into full production for the new C-Class in fiscal 2008.
In fiscal 2006, Automotive gross profit margin increased 1.2 percentage points compared to fiscal 2005.
The increase was primarily due to leveraging fixed factory costs against higher sales in that year.
Automotive also incurred lower warranty costs in fiscal 2006 which benefitted our gross profit margins
due partially to favorable tooling cost reimbursements from our customers.
Consumer – Consumer gross profit margin declined 7.1 percentage points in fiscal 2007 to 25.4 percent
when compared to the prior fiscal year. Gross profit margins in fiscal 2006 were particularly high due to
the success of high-margin multimedia products, including the JBL OnStage and OnTour. In fiscal 2007,
increased competition in the multimedia market resulted in lower prices and margins. We anticipate an
improvement in margins in fiscal 2008 due to the introduction of accessory products for a new generation
of MP3 players and music-enabled cell phones, such as Apple’s iPhone.