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Harman Reassuring Investors After Acquisition Falls Through

9/24/2007 11:09:00 AM Eastern

Washington — Harman International sought to reassure investors of its financial outlook following the announcement by Kohlberg Kravis Roberts and Goldman Sachs Group that they backed out of their plan to take the company private in an acquisition valued at about $8 billion.

The two investors claimed they were under no obligation to complete the planned merger, announced in April, because of "a material adverse change" in Harman’s business and because Harman breached the merger agreement, a Harman statement said.

Harman disagreed with both contentions but declined further comment and would not say whether it would seek other suitors. The deal was supposed to close in the third quarter.

To reassure investors dissatisfied that the company’s fourth-quarter 2007 financial performance fell short of their expectations, Harman said it “expects substantial margin improvement over the course of fiscal 2008” as it works through increased R&D costs in the fourth quarter of 2007, ended June, and the first quarter of fiscal 2008, ending this month. The increased R&D expenditures are “primarily related to recent automotive [electronics] platform awards,” the statement said.

At the same time, vice chairman and CEO Dinseh Paliwal admitted the company has “some near-term challenges” and that the company would “do whatever it takes to help us realize our full potential.” To that end, he said, “we will be looking critically at each of our divisions, and we expect to accelerate the restructuring of underperforming business units.”

Dr. Sidney Harman, executive chairman, contended, “Harman International is a sound company with exceptional market position and strong future prospects.” He added, “It is important for investors and our other constituents to be reminded of this, particularly in light of last Friday’s decision by our former merger partner.”

Harman issued its statement today after Harman’s stock fell on Friday after word of the deal’s collapse reached Wall Street. The company’s stock fell to $85 at the close of the trading day from an opening $97.7.

The company also estimated first-quarter 2008 revenues and operating profits and issued a full-year 2008 projection. The company estimates first-quarter 2008 revenues will hit $950 million, up about 15 percent from the year-ago quarter, and that operating profit would drop to about $40 million, down by more than half from the year-ago quarter’s $86.9 million.

For the full fiscal year, Harman estimates sales will jump about 15.5 percent to $4.1 billion, from $3.55 billion, and operating income and diluted earnings per share before merger-related costs will “equal or exceed last year’s record performance,” the company said. In fiscal 2007, operating income hit $397 million, and diluted EPS before merger costs was $4.14 million.

During fiscal 2007, net sales rose 9.4 percent to $3.55 billion, operating income slipped 2.7 percent to $386.4 million, but net income rose 23 percent to $314 million. Percentage growth occurred in each of the company’s three worldwide business segments: automotive, consumer and professional. Automotive sales rose 11 percent to $2.49 billion (or 6 percent excluding currency fluctuations); consumer sales rose 1 percent to $497.7 million (or 2 percent lower after currency fluctuations), and professional sales rose 8 percent to $560.7 million (or 7 percent higher after currency fluctuations).

In consumer products, the company attributed growth mainly to multimedia sales in Europe, including iPod accessories. Sales of Harman Kardon electronics were up in Europe but down in the United States. Consumer speaker sales were down in both the United States and Europe. Declining sales of consumer products in the United States were due primarily to the end of a distribution agreement with Circuit City.