Harman Kardon 2007 Annual Report Download - page 41

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28
Consumer gross profit margin improved 2.7 percentage points in fiscal 2006 compared to the prior year,
primarily due to increased sales of high-margin multimedia products and leveraging fixed factory costs
against an 18 percent sales growth in fiscal 2006. Warranty costs were lower in fiscal 2006 due primarily
to costs incurred the previous year to extend claim periods on certain products and to replace a chip in one
of our products.
Professional – Professional gross profit margin increased 1.4 percentage points to 38.7 percent when
compared to the prior year. The improvement is 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. We anticipate that we
will be able to maintain these higher gross margins in fiscal 2008.
Gross profit margin in fiscal 2006 was 1.8 percentage points higher than fiscal 2005. The improvement
was primarily due to lower factory overhead costs and improved factory efficiencies, leveraged against
higher sales. AKG and Soundcraft/Studer made significant progress over the past year to increase
manufacturing efficiencies and concentrate on selling higher margin core products. In prior years, these
business units had incurred substantial costs to improve factory operations and eliminate lower margin
products.
Selling, General and Administrative Expenses
Selling, general and administrative (“SG&A”) expenses as a percent of net sales were 23.2 percent in
fiscal 2007 compared to 23.3 percent in the prior year. Research and Development (“R&D”) costs are the
largest component of our SG&A expenses. In fiscal 2007, R&D costs were $356.7 million or 10.0
percent of net sales. In fiscal 2006, R&D costs were $302.0 million, or 9.3 percent of net sales. The
increase was primarily due to costs incurred to support new infotainment system awards from automotive
customers. We expect R&D costs, as a percentage of net sales, to decrease approximately 1 percentage
point in fiscal 2008 due to the increasing scalability of our infotainment systems and the beginning of
production for certain automotive programs. SG&A expenses also include employee compensation and
benefit costs. We have recorded stock-based compensation expense under the fair value based method
since fiscal 2003, including $15.4 million, $16.6 million and $14.3 million in fiscal 2007, 2006 and 2005,
respectively.
Our fiscal 2006 SG&A expenses were 23.3 percent of net sales, an increase of 0.8 percentage points
compared to fiscal 2005. The increase was primarily due to higher R&D costs to support new
infotainment system programs for automakers.