Past, Present and Future Harman International 2004 Annual Report
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Harman International 2004 Annual Report Past, Present and Future Our cover is a rendering of the new Shanghai, China Oriental Arts Center. Now under construction for the 2008 Olympics, it will incorporate two concert halls, an opera house and an eleven hundred seat theater. The Oriental Arts Center is one of many totally new theatres, athletic stadia and performing art centers being built to serve the most expansive Olympics in history. Harman International has received a number of significant awards and we expect to be very well represented. China is a compelling and sometimes tantalizing story for everyone. Our past, our present and our future are writ large there. Ten years ago Harman found a voracious market for our quality home audio equipment. That was the past. Numbers of very competent Chinese manufactures have developed in the years since, and have produced excellent products with increasingly recognized Chinese brand names. That is not a promising busi- ness situation for us, although our upcoming new media centers may generate revived interest—at least for a time. Our present is represented on the cover of this report. As China surges economically, its need for supportive infrastructure grows exponentially. Our professional systems are without peer, and we expect that part of our business to grow and flourish everywhere, but especially in China. It is clearly our present. The great opportunity before us, not surprisingly, is in automotive. Predictably, China is developing as a major market for automobiles and, consequently, for our Infotainment systems. We are the leader in Europe today and we are confident that we will be the leader in North America. Asia, and, especially, China will follow. It is our future. Financial Highlights Five-Year Summary 00 01 02 03 04 (in thousands, except per share data, for the fiscal years ended June 30) Net Sales $1,677,939 $1,716,547 $1,826,188 $2,228,519 $2,711,374 Operating Income 121,722 71,228 103,221 166,894 254,465 Income Before Income Taxes 102,829 45,099 80,177 142,471 227,520 Net Income 72,838 32,364 57,513 105,428 157,883 Diluted EPS 1.03 0.48 0.85 1.55 2.27 Total Assets 1,137,505 1,159,385 1,480,280 1,703,658 1,988,810 Total Debt 277,324 368,760 474,679 503,068 394,925 Cash and Cash Equivalents 4,365 2,748 116,253 147,911 377,708 Shareholders’ Equity 486,333 422,942 526,629 655,785 874,996 Note: The Company reported special charges of $36.3 million in 2001. Net Sales Earnings Per Share (in billions) (diluted) $3.00 $2.50 2.27 $2.75 2.71 $2.00 $2.50 1.55 $2.25 2.23 $1.50 $2.00 1.83 1.03 $1.75 1.72 $1.00 1.68 0.85 $1.50 $0.50 0.48 $1.25 $1.00 $0.00 2000 2001 2002 2003 2004 2000 2001 2002 2003 2004 Message from The Executive Chairman Past, Present and Future Fiscal 2004 was an excellent year. Our Company Now, the center of our involvement is the achieved new records in sales and earnings, and we ubiquitous Harman Infotainment System. completed the year with an exemplary balance sheet. Sales rose 22 percent above the prior year and earnings per share increased a robust 46 percent. The OEM automotive systems business is our keystone The year-end balance sheet displayed enormous and, clearly, the basis for our continuing success. progress with cash at $378 million and inventory Originally, the business was centered in top quality levels lower than at the start of the year despite audio systems for the automakers. Now, the center increased sales. We experienced a record 6.2 turns of our involvement is the ubiquitous Harman of inventory during the year. Bernie Girod and Infotainment System. We nourished our consumer Frank Meredith review the year’s financials in and professional businesses over the years because greater detail later in this report. they helped to fuel the OEM business by generating awareness and respect for our brands. Now we identify During the year we received two major awards from bright future prospects in each. Chrysler for new fully functional Navigation/ Infotainment Systems. The awards represent a break- Our Professional Group is very much on the way. through in our efforts to establish Harman as “the Sales are growing in all significant product and Infotainment source” in North America—even as we geographic areas. We have developed a fully rationalized have achieved that role in Europe. One or another of and integrated organization, and with our HiQNet, our two new Chrysler-centric systems is expected to all Harman professional brands can communicate be used across the range of Chrysler vehicles. and operate together seamlessly. Beginning in Fiscal 2007 applications should grow to serve virtually every Chrysler platform. It was a Our consumer home business is one of the few operat- significant event for us this past year. ing profitably in the consumer electronics space, and we are actively migrating the substantial know-how If, as I wrote last year, Fiscal 2003 was a year of and intellectual property we have developed in our transformation, Fiscal 2004 declared the true arrival automotive business to it. of Harman International. Our Consumer and Eric Clapton at Professional groups grew stronger as the year We claim a special role in the automotive OEM world. The Royal Albert developed. Each begins Fiscal 2005 with strong That role arises out of three multi-layered and mutually Hall, London May expectations that the year will show significant interdependent factors. The first is perspective. Many 8th, 2004 growth in earnings and in stature. speak the vocabulary of integration, but most really 3 The latest Maybach ‘super-luxury sedans’ get the super-technology they deserve. At the heart of the Maybach is a Cockpit Management and Data system (COMAND) developed by Harman/Becker. The COMAND includes full map DVD Navigation with seamless operation of integrated telephone and dual zone Infotainment systems. Our comprehensive voice activation control system (including Navigation input) keeps the driver of this $367,000 luxury vehicle free of distraction. think of it as an assembly of complete, fully delineated that the adopting company possess those requisite core functionalities. We regard such thinking as analog in competencies to be integrated. It is the second of the the sense that it promotes a patchwork of boxes, each three multi-layered factors. For example, a company box representing a fully-formed function. Such an must possess serious voice-recognition and control approach is costly and self-limiting. Our approach to technology. We have it in our Temic and Wavemakers integration is digital, and the consequence is a seam- units. We see no equivalent competency elsewhere. less system of greater efficiency and significantly Indeed, many of our competitors are customers of reduced cost. One might argue that “if that’s all there our Temic, Margi, CAA and Wavemakers subsidiaries. is to it, nothing prevents others from achieving it.” Further, through an August 2004 technical agreement Nothing perhaps but history, tradition, organization, with QNX Software Systems, we can now develop convention and practice. We observe such orthodox scalable automotive software suites. They, in turn, thinking and practice in competitor firms as they promise an advanced platform which will eliminate present themselves during technical panels. We costly and difficult abstraction and interface layers. observe it and we caution ourselves. Beyond developing or acquiring such critical We note, too, that PC makers eye our market eagerly— resources, it is our responsibility to encourage the and, so far, unsuccessfully. In contrast to the traditional leaders in each to adopt the Harman mindset. That computer, the software framework of our system is does not come automatically, but success in achieving designed so that each sub module carries its own pro- it across the board is central to our progress. cessing. Each module takes the input it requires from the bus and delivers its output back to the bus. It processes Finally, the third factor: we have over two million its task in real time on its own small, self-contained vehicles on the road which are active expressions of processor. As a result, in our systems one can enjoy our technology and our experience. We pay great telephone conversations, movies, navigation and attention to the feedback available from those radio—all going on simultaneously and without delay. “laboratories on wheels,” and that feedback And we have developed a new electrical bus system continually influences our thinking and actions. called MOST which is ideal for hybrid cars. Even as we There is no substitute for those two million plus vehicles. are very much into the third generation of this advanced technology, most others are struggling to Because the third generation of our technology carries find a foothold in the first. profound implications for efficiency and cost, we have developed a new business plan which moves us five Assume for the moment that the mindset driving our years beyond our present plan. Fiscal Year 2005 is the Company is adopted by others. Then it becomes essential middle year in the current plan which ends in Fiscal 6 Rock in Introducing On Stage.t The dynamic bass and clear, accurate sound you expect from JBL comes home in a compact sound system designed specifically for the iPod.r Plug your iPod into On Stage’s power dock and charge the battery while experiencing your favorite music in legendary JBL sound. For more information, visit your nearest Apple Store or jbl.com/OnStage.