Harman Kardon 2011 Annual Report Download - page 61

Download and view the complete annual report

Please find page 61 of the 2011 Harman Kardon annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 128

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105
  • 106
  • 107
  • 108
  • 109
  • 110
  • 111
  • 112
  • 113
  • 114
  • 115
  • 116
  • 117
  • 118
  • 119
  • 120
  • 121
  • 122
  • 123
  • 124
  • 125
  • 126
  • 127
  • 128

(3) Refer to Note 12 – Leases in the Notes to the Consolidated Financial Statements.
(4) Refer to Note 13 – Income Taxes in the Notes to the Consolidated Financial Statements. All uncertain tax
positions are included in fiscal year 2012 as timing of such payments cannot be estimated.
Equity
Total shareholders’ equity at June 30, 2011 was $1,424 billion compared with $1.135 billion at June 30,
2010. The increase is primarily due to current year operating income and favorable foreign currency translation,
partially offset by losses from hedging instruments. There were no shares of our common stock repurchased
during the fiscal year ended June 30, 2011.
Business Outlook
Our future outlook may continue to be impacted by a contraction of consumer discretionary spending and by
changes in foreign currency exchange rates. The recent constraints in the supply of rare earth minerals,
specifically neodymium, used in our products, will increase our costs by approximately $85 million in fiscal year
2012 and may continue to have a negative impact on our profitability. We are currently investigating alternative
design solutions utilizing other materials and also have initiated discussions about potential price increases with
our customers. To date, we believe our actions will be successful in mitigating approximately $30 million of the
impact from this cost increase. By the end of the first quarter of fiscal 2012, we will have better information
about this situation and will provide updated information at that time. In spite of this, we expect our overall year-
over-year profitability to improve.
In June 2011, we achieved our goal of $400 million in our STEP change cost savings program, previously
announced in February 2008. We believe this developed a culture of efficiency, which will enable us to remain
competitive.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We are required to include information about potential effects of changes in interest rates and currency
exchange rates in our periodic reports filed with the SEC.
Interest Rate Sensitivity/Risk
At June 30, 2011, interest on approximately 99 percent of our borrowings was determined on a fixed rate
basis. The interest rates on the balance of our debt are subject to changes in U.S. and European short-term
interest rates. To assess exposure to interest rate changes, we have performed a sensitivity analysis assuming a
hypothetical 100 basis point increase or decrease in interest rates across all outstanding debt and investments.
Our analysis indicates that the effect on fiscal year 2011 income from continuing operations before income taxes
of such an increase and decrease in interest rates would be approximately $9.4 million.
Foreign Currency Risk
We maintain significant operations in Germany, the United Kingdom, France, Austria, Hungary, Mexico,
China and Brazil. As a result, we are subject to market risks arising from changes in these foreign currency
exchange rates, principally the change in the value of the Euro versus the U.S. Dollar. Refer to Note 10 –
Derivatives in the Consolidated Financial Statements for additional discussion on our financial risk management.
Our subsidiaries purchase products and raw materials and sell our products in various currencies. As a
result, we may be exposed to cost changes relative to local currencies in these markets. To mitigate these
transactional risks, we enter into foreign exchange contracts. Also, foreign currency positions are partially
offsetting and are netted against one another to reduce exposure. We presently estimate the effect on projected
2012 income before income taxes, based upon a recent estimate of foreign exchange transactional exposure, of a
uniform strengthening or uniform weakening of the transaction currency rates of 10 percent, would be to increase
or decrease income from continuing operations before income taxes by approximately $16.4 million. As of
June 30, 2011, we had hedged a portion of our estimated foreign currency transactions using foreign exchange
contracts, including forwards and options.
43