Harman Kardon 2010 Annual Report Download - page 75

Harman International Industries, Incorporated and Subsidiaries
(Dollars in thousands, except per-share data and unless otherwise indicated)
and warranty service providers also install updates we provide to correct defects covered by our warranties.
Estimated warranty liabilities are based upon past experience with similar types of products, the technological
complexity of certain products, replacement cost and other factors. If estimates of warranty provisions are no longer
adequate based on our analysis of current activity, incremental provisions are recorded as warranty expense in our
Consolidated Statement of Operations. We take these factors into consideration when assessing the adequacy of our
warranty provision for periods still open to claim. Refer to Note 6 – Accrued Warranties for further information.
Selling, General and Administrative Expenses: Selling, general and administrative expenses (“SG&A”)
include non-manufacturing salaries and benefits, share-based compensation expense, occupancy costs,
professional fees, research and development costs (“R&D”), amortization of intangibles, advertising and
marketing costs and other operating expenses.
Advertising Expenses: We expense advertising costs as incurred. When production costs are incurred for
future advertising, these costs are recorded as an asset and subsequently expensed when the advertisement is first
put into service.
R&D: R&D is expensed as incurred. Our expenditures for research and development, net of customer
reimbursements, were $322.7 million, $325.1 million and $392.4 million for the fiscal years ending June 30,
2010, 2009 and 2008, respectively.
Interest Expense, net: Interest expense, net, includes interest expense and amortization of original issue
discount on debt securities and debt issuance costs, net of interest income.
Cash and Cash Equivalents: Cash and cash equivalents includes cash on hand, money-market funds and
investments with original maturities of three months or less.
Restricted Cash and Investments: We have a deferred compensation arrangement with certain foreign
employees which requires us to maintain cash on hand. At June 30, 2010 and June 30, 2009, such restricted cash
amounts were $6.2 million and $4.2 million, respectively, and were included in other assets in our Consolidated
Balance Sheets.
Short Term Investments: Short Term Investments consist of investments in time deposits and treasury
bills with original maturities of greater than three months and less than one year.
Inventories, net: Inventories, net are stated at the lower of cost or market. Cost is determined principally by
the first-in, first-out method. We establish reserves for our inventory which requires us to analyze the aging and
forecasted demand for our inventories, to forecast future product sales prices, pricing trends and margins, and to
make judgments and estimates regarding obsolete, damaged or excess inventory. Markdown percentages are
determined based on our estimate of future demand and selling prices for our products. Future sales prices are
determined based on current and forecasted market expectations, as well as terms that have been established for
future orders under automotive platform arrangements. Our inventory reserves primarily relate to our raw
materials as our finished goods are primarily produced to order. We calculate inventory reserves on raw materials
by reviewing the levels of raw materials on-hand and comparing this to estimates of historical consumption and
future demand in order to assess whether we have excess materials on-hand. If it is determined that excess
materials are in inventory, an appropriate inventory reserve is established. Inventory reserves on finished goods
are primarily determined through inventory turnover measures. Products showing low turnover rates are assigned
a percentage reserve based on future estimates of sales volumes and margins. We make adjustments to our
inventory reserves based on the identification of specific situations and increase our inventory reserves
accordingly. As changes in future economic or industry conditions occur, we revise the estimates that were used
to calculate our inventory reserves. Refer to Note 4 – Inventories, net for more information.
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