Harman Kardon 2008 Annual Report Download - page 48

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particularly in the multimedia market, and general economic weakness in North America and Europe.
The mobile market has also become increasingly competitive and gross margins on PNDs and in-vehicle
iPod adapters were pressured downward during the fiscal year.
Consumer gross profit margin declined 7.1 percentage points in fiscal 2007 compared to the prior 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 compared to the prior year.
Professional – Professional gross profit margin improved 1.1 percentage points in fiscal 2008. The
improvement was primarily due to higher sales of products enabled with the HiQnet protocol and
manufacturing efficiency improvements. We have been able to lower certain costs on HiQnet products as
we achieve economies of scale with additional product generations. Further initiatives to reduce
manufacturing costs include the migration of some production from our Northridge, California facility to
our expanded facility in Tijuana, Mexico.
Gross profit margin in fiscal 2007 was 1.4 percentage points higher than fiscal 2006. The improvement
was due primarily to leveraging fixed costs against an increase in net sales. The introduction of high-
margin products enabled with the HiQnet protocol in fiscal 2007 also contributed to the improvement in
gross profit margin. In particular, Soundcraft/Studer introduced new digital mixing consoles that are
produced in more efficient factories after significant investments in new technologies over the past few
years. Professional’s overall gross profit margin improvement was partially offset by higher than
expected material costs at Crown.
Selling, General and Administrative Expenses
Selling, general and administrative (“SG&A”) expenses, as a percent of net sales, were 23.6 percent in
fiscal 2008 compared to 23.2 percent in the prior year. Research and Development (“R&D”) costs are the
largest component of our SG&A expenses. In fiscal 2008, R&D costs were $395.9 million or 9.6 percent
of net sales. These costs were $356.7 million or 10.0 percent of net sales in fiscal 2007. R&D costs were
higher in fiscal 2008 to support infotainment system programs for automotive customers. We expect
R&D costs as a percent of net sales to be approximately the same in fiscal 2009 as we continue to develop
a record number of infotainment system programs in our Automotive division. Employee compensation
and benefit costs are also included in SG&A expenses. We have recorded stock-based compensation
expense under the fair value based method since fiscal 2003, including $23.7 million, $15.4 million and
$16.6 million in fiscal years 2008, 2007 and 2006, respectively.
Our fiscal 2007 SG&A expenses were 23.2 percent of net sales, essentially flat to fiscal 2006. R&D costs
were higher due to new infotainment systems development for automotive customers. However, SG&A
as a percentage of sales was lower due to sales growth.
We incurred costs associated with restructuring programs in each of the past three fiscal years. These
programs are designed to address our global footprint, cost structure, technology portfolio, human
resources and internal processes. These costs are described under the caption Restructuring Programs
later in this discussion.