- The Washington Times - Monday, January 29, 2007

Share prices of Harman International Industries Inc. fell 6 percent Friday after the audio-systems manufacturer disappointed Wall Street with its second-quarter overhead expenses.

While the D.C. company posted record quarterly profits of $81.4 million ($1.22 per diluted share) for the three months ended Dec. 31 — a 12-percent jump over last year — executives noted that research and development costs are eating up a bigger slice of revenue than they expected.

“We realize the growth and demand of our services has compelled growth in our engineering capacity,” Sidney Harman, the company’s chairman and chief executive officer, told reporters and analysts on a conference call. Research and development “has grown year by year, and it has consistently exceeded budget.”

The company expects research and development costs to top its previous estimate of $276 million by $33 million for fiscal 2007, Mr. Harman said, attributing the “engineering bulge” to research associated with unanticipated new business.

In a research note to clients, Peter C. Friedland, an analyst with Soleil Securities, said he is not overly concerned “since the unanticipated R & D appears to be in support of recently awarded infotainment programs.”

Harman divides its business into three segments: automotive, which makes audio and infotainment systems for original equipment manufacturers; consumer, which makes audio, video and electronic systems for home and mobile systems; and professional, which makes loudspeakers and electronic systems for concert halls, stadiums and the like.

The company does business worldwide, with its biggest markets in the United States and Germany.

Automotive sales in the second quarter climbed 15 percent to 632.3 million. Consumer and professional sales both reported an increase of 5 percent to $163 million and $136.4 million, respectively.

Mr. Harman touted the company’s exclusive contract with BMW to provide infotainment systems as a source of incremental business totaling $800 million over four years. Production on that contract begins in fiscal 2009, he said.

“One of the most progressive automakers in the world has committed itself to us across the board,” he said. “I see this as a very consequential award.”

The company, which markets its car audio and electronic systems to luxury automakers, also has deals with Audi and Chrysler.

On the consumer front, the company continues to develop its personal navigation device, which is the second-most-popular brand in Germany. In the U.S., Harman faces increased competition, but its technology is differentiated as the highest priced in the market.

Mr. Harman said the company hopes to win its first award for driver-assistance technology — covering functions such as night vision, collision-warning systems, traffic information and automatic parking, for example — in the near future.

“The point for us is not to get an award that we can label ‘driver-assist,’ ” Mr. Harman said, “But to move forward with our most fundamental strength: the ability to integrate these many, now disparate, disaggregated though still developing driver-assist functions” into one system.

Analysts apparently have faith in Harman, as seven out of 13 rate the stock as a “buy,” according to Bloomberg News.

Shares of Harman closed down $2.89 at $93.01 on the New York Stock Exchange yesterday.

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