Harman Kardon 2008 Annual Report Download - page 42

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Our sales and earnings may vary due to the production schedules of our automotive customers, customer
acceptance of our products, the timing of new product introductions, product offerings by our competitors
and general economic conditions. Since our businesses operate using local currencies, our reported sales
and earnings may also fluctuate due to foreign currency exchange rates, especially for the Euro.
On October 22, 2007, we announced that we had entered into an agreement with KKR and GSCP and
companies formed by investment funds affiliated with KKR and GSCP, to terminate the merger
agreement we had entered into with these parties in April 2007, without litigation or payment of a
termination fee. In connection with the settlement, we sold $400 million of our 1.25 percent Convertible
Senior Notes due 2012 (“Notes”).
The Board determined that this settlement would permit us to better focus our time and attention on
operations and ongoing restructuring efforts by avoiding the cost and distraction involved in potentially
protracted litigation with KKR and GSSP regarding the termination of the merger agreement. The
proceeds from the sale of the Notes were used to repurchase an aggregate of 7,224,779 shares of our
common stock through an accelerated share repurchase program.
In addition to terminating the merger agreement, we appointed new members to the executive
management team and Board of Directors during fiscal year 2008. One of our primary focal points
during the year was to develop a strategic plan that would optimize our manufacturing, engineering and
administrative organizations. This plan also includes more aggressive penetration of emerging markets
and matching our technology efforts with evolving market trends.
Our profitability was down in fiscal year 2008 due to lower gross profit margin, restructuring charges,
higher warranty costs, continued high R&D to support the record number of launches in our Automotive
division, and expenses related to the merger termination. The decrease in gross profit margin was
primarily related to several new Automotive platform launches, called “Start of Production” (SOPs),
which typically start their life cycle at their lowest margins, higher Automotive warranty costs and lower
Consumer margins. We were also adversely affected by weakening economies in the U.S. and Europe.
We believe fiscal 2009 will be a challenging year as we execute our strategic plan. However, we feel
these initiatives are necessary to return our company to long-term profitable growth.
Critical Accounting Policies
The methods, estimates and judgments we use in applying our accounting policies, in conformity with
generally accepted accounting principles in the United States (“GAAP”), have a significant impact on the
results we report in our financial statements. We base our estimates on historical experience and on
various other assumptions that we believe to be reasonable under the circumstances. The estimates affect
the carrying values of assets and liabilities. Actual results may differ from these estimates under different
assumptions or conditions. Our accounting policies are more fully described in Note 1, Summary of
Significant Accounting Policies, of our consolidated financial statements located in Item 8 of Part II.
However, we believe the following policies merit discussion due to their higher degree of judgment,
estimation, or complexity.