Harman International Industries Inc. F3Q08 (Qtr End 03/31/08) Earnings Call Transcript

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 |  About: Harman International Ind. Inc. (HAR)
by: SA Transcripts

Harman International Industries Inc. (NYSE:HAR)

F3Q08 (Qtr End 03/31/08) Earnings Call

May 6, 2008 4:30 pm ET

Executives

Dinesh Paliwal - CEO

Kevin Brown - CFO

Analysts

Chris Ceraso - Credit Suisse

Scot Ciccarelli - RBC Capital Markets

Sean Kernan - Schafer Capital Management

Operator

Good afternoon and welcome to the Harman International Industries third quarter fiscal 2008 earnings release conference call. Now, at this point, all of your phone lines are muted or in a listen-only mode. However, later during the conference, there will be opportunities for questions and those instructions will be given at that time. As a reminder, today's conference call is being recorded.

Ladies and gentlemen, if I may have your full attention, certain statements made by the Company during this call are forward-looking statements. These statements include the Company's beliefs and expectations as to the future events and trends affecting the Company's business and are subject to risks and uncertainties. Persons participating on the call today are advised to review the reports filed by Harman International with the Securities and Exchange Commission regarding these risks and uncertainties.

Well, with that being said, here with our opening remarks, is our Harman International's Industries Chief Executive Officer Dinesh Paliwal. Please go ahead, Mr. Paliwal.

Dinesh Paliwal

Thank you, Anna, and good afternoon ladies and gentlemen. And thank you for joining the Harman third quarter investor and analyst call. I am joined in Washington today by Kevin Brown, our Chief Financial Officer; and Robert Lardon, Vice President, Strategy and Investor Relations.

I look forward to talking with many of you in the weeks ahead, as we maintain a proactive dialogue with Harman keys stakeholders. It is clear to all that our company is working in extraordinarily difficult times. Challenges include an economic climate that is very tenuous and several areas of our business are under particular pressure.

As consumer spending and automobiles sales pullback, that places special stress on Harman and its competitors. As the PND, a portable navigation device market undergoes an era of commoditization and price reduction, we as everyone are affected.

Those are the external influences. The center piece of our internal challenge is that our record accumulation of new automotive OEM business placed exceptional pressure on our engineering resources and you may recall I've shared this challenge with you earlier.

The consequence of these internal and external pressures has been a heavy demand on management and the requirement for new perspective. This has been a very eventful quarter, as we continue a series of important strategic initiatives to strengthen Harman's performance.

Net sales for the quarter ended March 31, 2008 were $1.33 billion, a 17% increase compared to $833 million for the same period last year. Net loss per diluted share in the third quarter was $0.06 compared to net earnings of $1.07 in the same period last year.

Excluding restructuring charges earnings per diluted share were $0.31 for the quarter. Gross profit as the percentage of net sales decreased 9.3 percentage points to 25.3% for the quarter. This performance translates to an operating loss of $7 million or 0.6%, or six tenth of a percent of sales compared to operating income of $102 million or 11.6% of sales in the same period last year.

Despite robust growth in revenue, our profit progress was interrupted in the third quarter by unprecedented warranty issues, which combined with other factors for a $0.49 impact on earnings per diluted share. The majority of this impact is related to an engineering change made on a product a couple of years ago, that had been in production for a number of years.

Due to a supplier discontinuation, Harman deployed a new memory chip with existing software. Overtime, this software and memory chip combination developed an incompatibility. Although, Harman worked closely with the customer to validate this engineering change at the time after modification, the testing specifications did not anticipate this particular failure mode.

Although, no supplier can guarantee that such a problem will never occur, we believe our quality processes are robust and we continue to strengthen these processes as part of our continuous improvement efforts. They should avoid similar difficulties in future I believe.

Third quarter performance was also impacted by lower than expected sales and margins from our consumer division. This decline was primarily due to increased priced competition during a period of general economic weakness and to delayed introductions of some of our new products.

On the brighter side, our professional division enjoyed both higher sales and gross profits during the third quarter. Excluding the restructuring costs associated with the transfer of some activities from our facility in Southern California to an expanded plant in Mexico, our professional division operating income was higher than same period last year.

Ladies and gentlemen, I am the first to recognize that this consolidated third quarter performance puts our credibility to the test. The warrantee costs issue in the third quarter was very disappointing and has delayed our earnings progress. But we are taking decisive actions to strengthen the culture of accountability, which in turn drives a renewed commitment to operational excellence. As part of this commitment, we continue to execute on a number of key initiatives that will dramatically reshape our company.

During the third quarter, the Company engaged in a comprehensive five-year strategic planning process committing to a series of specific goals regarding global footprint optimization, technology and product portfolio, human resources and internal business processes.

Planned highlights include defined reductions in the number of Harman engineering and manufacturing locations, significant cost migration to emerging countries, additional management resources with proven restructuring expertise, and a sharper focus on translating our core skills into winning products.

We presented this plan to the Harman Board this week and we will draw upon our Board's expertise, which I would like to say is an extremely distinguished board and brings collective wisdom and many areas, which are very appropriate to us to fine tune and execute our strategy.

This strategic planning initiative represents a milestone for Harman. It clearly identifies our challenges, defines specific short and long-term corrective actions and provides a roadmap to capitalize on the significant opportunities that lie ahead. I intend to meet the challenges and seize the opportunities with a clear set of goals and metrics that is a prerequisite for every member of our team.

Among Harman's many goals, leveraging opportunities in the emerging countries is paramount. In fact it has become even more urgent. I personally visited our manufacturing site in Hungary, a couple weeks ago to inspect the progress in expanding this facility to support additional products being migrated from other countries.

Our expanded automotive plant in Suzhou, China it essentially complete and ramping up. I visited this plant sometime back. Our Tijuana, Mexico facility is adding resources ahead of the announced transfer of a number of our JBL professional products now built in California.

Our engineering footprint will also undergo transformation. I have appointed a seasoned manager to accelerate the goal of reducing the number of Harman automotive engineering sites while shifting some activities to lower cost locations.

I reviewed the latest detailed specification for a development and engineering center in India a week ago. As we leverage the emerging markets to evolve our resource footprint, we must also do a better job in seizing the market opportunities these areas provide.

Our recent automotive launch for Korea's, SsangYong and a [new launch] from Japan's automotive company Subaru are important steps to strengthen Harman's role in Asia, where growing lifestyles and disposable income are fueling a hunger for premium branded technologies from the west. Our new alliance with Bowers & Wilkins adds a rich dimension to Harman's automotive brand portfolio around the world.

A recent study shows that China currently has about one movie screen per a half a million people, compared to one movie screen every 8,000 people in America. This suggests rich opportunity for our professional business, which enjoys by far the largest markets share in cinema sound system in the United States.

In India where more money is now spent in producing movies than in Hollywood, Pro division team had just completed last week a multi city road show, which provided some 4000 audio professionals from all over the country with a hands-on Harman experience.

Before I share some additional comments, on how the team will translate opportunities into results, I will ask Kevin Brown to provide a closer look at the quarterly numbers. Kevin?

Kevin Brown

Thank you Dinesh. I will provide certain information on a non-GAAP basis to give you a better understanding of our results exclusive of restructuring and merger related costs.

Restructuring costs were $33.4 million during the third quarter and $34.1 million for the nine-month period. There were no merger-related costs during the third quarter but we did incur $13.8 million of merger related costs during the nine-month period.

A reconciliation of our GAAP to non-GAAP result was included in our press release earlier today, which is available on our website.

Net sales for the third quarter were $1.03 billion, a 17% increase compared to the same quarter of last year. Gross profit margin was 25.3% compared to 34.6% a year ago. We incurred an operating loss of $6.6 million during the quarter compared to operating income of $102.3 million last year.

Excluding restructuring charges third quarter operating income was $26.8 million. The net loss for the quarter was $3.3 million, which resulted in a net loss of $0.06 per diluted share, excluding restructuring charges net income was $18.7 million and earnings per diluted share were $0.31 for the quarter.

For the nine months ended March 31, 2008 net sales were $3.04 billion, compared to $2.6 billion for the same period of last year, an increase of 15%. Gross profit margin was 27.2% versus 34.6% a year ago. Operating income was $95.7 million compared to $305 million last year.

Excluding restructuring and merger-related costs, operating income was $143.7 million. Net income for the nine month period was $76.1 million and earnings per diluted share were $1.20. Excluding restructuring and merger-related costs, net income was $106.6 million and earnings per diluted share were $1.68.

Foreign currency translation positively impacted our third quarter results as the Euro strengthened approximately 14% compared to the same period of last year. As a result foreign currency translation improved sales by approximately $75 million in the quarter, and increased our selling, general and administrative expenses by $15 million.

The positive impact on earnings per diluted share was $0.13 in the quarter. In addition to the anticipated gross profit decline, due to automotive new product introductions and the PND business, third quarter gross profit was impacted by the automotive warranty costs and consumer division decline that Dinesh spoke of.

Selling, general and administrative expenses for the third quarter, was $65 million higher than last year. This includes $33 million of restructuring costs. The remaining increase was primarily due to engineering costs and foreign currency translation.

The third quarter effective tax rate of 72.6% was higher than the 30.5% last year due to a relatively small net loss during the period. The effective tax rate includes a $1 million benefit related to a change in German Tax Law, which lowers their effective tax rate and a release of a $3.4 million reserve upon the expiration of statute of limitations.

Our March 31 balance sheet had a cash balance of $131 million and total debt of $463 million. Our debt balance includes the proceeds from the issuance of $400 million of convertible notes, which were used to purchase and retire 7.2 million shares of the company stock.

Cash flow from operations for the third quarter was $117 million. During the quarter we use cash to meet capital expenditures of $28 million and tax payments of $44 million.

Depreciation and amortization was $38 million during the quarter. Accounts receivable on March 31, 2008 were $587 million and inventory was $426 million. Our inventory balances decreased year-to-year, primarily due to lower PND inventories.

I will now turn it back to Dinesh for some closing comments before we take your questions.

Dinesh Paliwal

Thank you, Kevin. Ladies and gentlemen, I will say once again that I share your disappointment in our third quarter results. I've been here before in my career and I have faced what some claims were in surmountable challenges to effective execution. But I have also experienced the special joy of overcoming those challenges to engineer a comeback and the satisfaction that comes with every milestone achieved.

Reaching these milestones one-by-one requires hard and methodical work. It requires both patience and a shared commitment. It also requires a team that is battle tested and focused on execution. In a separate press release today we have announced a significant realignment of the Harman Executive Committee. These changes recognize that facing up to its special challenges requires a team with special expertise. They also address the culture of accountability that I mentioned earlier.

Effective June 1st, Herbert Parker will join Harman as Chief Financial Officer. Herbert brings more than 25 years of extensive financial control experience. Most recently with the $30 billion power and automation group ABB, where his background includes assignment in Australia, China, Switzerland, and the United States. I have had the privilege to work with Herbert in the past and I look forward to tapping his deep turnaround experience in driving details and accountability at every level of our operations.

Kevin Brown who for personal reasons will not be making the move to Harman's new corporate headquarters in Connecticut will remain with the Company through our fiscal year end closing. I sincerely thank Kevin for both his dedication and his support to ensure a smooth transition.

Also joining us with an effective data to be determined in near future is Dr. Klaus Blickle in the position of Chief Executive Officer for our Automotive Business. Klaus brings to Harman more than 20 years of global experience in the automotive sector, including the leading engineering company EDAG Group, where he is CEO and industry leaders such as Audi, Cosworth, American Special Vehicles Corporation and Tesma Inc.

He has managed businesses in China, Canada, Germany, United Kingdom and the United States. Dr. Blickle has a doctored degree in physics and his deep understanding of the global automotive value chain will be instrumental in executing on our substantial order book and in strengthening OEM relationships around the world.

Concurrent with this appointment, Helmut Schinagel will be promoted to the role of Chief Technology Officer for Harman International. Helmut's dual perspective of technology and operations will help and show that we engage both internal and external stakeholders to test drive new developments early in the cycle. Helmut's senior technical roles at BMW, where he worked prior to joining Harman, Bosch, Siemens have earned deep respect across the industry.

Dr. Eric Geiger who has served our company since 1993 will retire in August following an absolutely distinguished career of more than 40 years. Drawing upon his deep experience as Chief Technology Officer, Eric will continue to support Harman International in a consulting rule under my direction. I sincerely thank Eric for both his passion and his expertise. And I look forward to continue working with him.

David Karch has been appointed to the new executive committee position of group Senior Vice President, Operational Excellence, effective immediately. In his most recent role as Head of Manufacturing for Harman Automotive Business, Dave has been instrumental in the value focused expansion of our resources in Asia, Eastern Europe and Mexico.

Blending this with his superb credentials in industrial engineering and management, Dave's charter will include accelerating migration of the Company's global footprint in manufacturing, engineering, supply chain and strengthening our processes for quality and productivity.

The fact that Harman continues to attract such top talent is a profound recommendation for our company's real potential. I fully recognize that we face substantial challenges, but I must acknowledge a number of fundamental bright spots.

Our key customer relationships are stronger than ever. And we continue to be invited as a premium bidder for new state-of-the-art infotainment platforms. We're making solid progress in execution of our record backlog encompassing 13 platform launches during 2008 and 2009. We have several long-term supply and technology agreements in the final stages, which we expect to announce in coming weeks.

Our professional division continues to lead and grow at both, top and bottom line. We have strengthened our team with several seasoned global executive whose skills match our strategic needs. And we are well underway in execution of the restructuring and cost reduction initiatives that will deliver sustainable savings for the future.

Ladies and gentlemen, I am personally committed and I believe I can speak for both the Harman Board members and executive management team that we have agreed on the responsibilities and the actions to address the critical issues of our company. We will take the steps that are necessary to unlock our company’s potential.

Thank you very much for your attention. And we will now open the call for your questions. Anna?

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from Chris Ceraso from Credit Suisse. Please go ahead.

Chris Ceraso - Credit Suisse

Thanks. Good afternoon.

Dinesh Paliwal

Hello Chris.

Chris Ceraso - Credit Suisse

I have a few items. First, can you tell us in dollar terms how much the warranty charge was in the automotive division in the quarter?

Kevin Brown

Certainly. First the warrantee actions totaled in round numbers about $40 million in the quarter.

Chris Ceraso - Credit Suisse

And how much is that a one-time item or is it something that you expect that you have some tail to it as vehicles over time the chips go better. Can you explain how this works?

Dinesh Paliwal

Chris, certainly no one can guarantee that unforeseen situation will never happen but we have no indication that this problem exists out there. We have come to know this and we have addressed that, and we are not aware of any such problem.

Chris Ceraso - Credit Suisse

Okay. I think Kevin you said in your remarks that the warrantee and some other items totaled $0.49. Did I get that right?

Dinesh Paliwal

Yeah, it is correct.

Chris Ceraso - Credit Suisse

What else is in there other than the warrantee?

Kevin Brown

That's the total of warrantee items in the quarter. The one that we spoke of is the predominant and the single largest warrantee item that accounts for most of that cost. That is the chip that Dinesh explained.

Chris Ceraso - Credit Suisse

Okay. One other number's question then a couple of strategic ones. $4.4 million of total tax benefits, I think you mentioned. Is that included in the $0.31 that you called out as the operating number, or did you strip those out?

Kevin Brown

No that's included.

Chris Ceraso - Credit Suisse

That's included, okay. On the turn around efforts, can you quantify yet how much you're generating in terms of savings on things like outsourcing the PCB manufacture, if you doing that had any other the engineering relocating re-sourcing, that kind of stuff? Can you quantify any of that yet?

Dinesh Paliwal

Chris, not so far. We haven't seen any savings we said on the February 5th call that from the time you'll start executing these changes. We are talking about three, four, five quarters depending on what the activity is. However, the good news is that we have started executing in all areas, whether it's in manufacturing or engineering and I expect those savings to start to show-up perhaps in a three or four quarter's timeframe.

And that's what we are counting on. That's a part of our strategic financial plan and the strategic planning process included that were the sustainable savings we can count on and those are based on a thorough analysis of each situation.

Chris Ceraso - Credit Suisse

Can you give us an update on the Chrysler program; any change in the profit profile there and maybe let us know what the mix of business has been between the high level systems the Chrysler and the mid level systems?

Dinesh Paliwal

Let me start by saying there is no new development in terms of change in profitability or loss. As I've said before we have two parts of the Chrysler program with us. One unfortunately loses money and the other one is slightly profitable. So in net-net situation is not something we like to have.

However, there are some discussions going on with Chrysler. They would like to see us grow the volume and that mix we're yet to see what the mix is going to be and what impact will it have. But you can count on one thing; we are not going to accept the mix which was hurting our bottom-line. We will only take the mix and they're aware of it.

So I'll hold the horses until it will happen but that's the situation. In terms of giving you a little more update on Chrysler. As of third quarter, we are now on all Chrysler platforms, more than 15 that have been launched.

Further in the model year 2009 version of Ram truck and Cavalier Compass will be launched with Harman's MyGIG product in '09. According to Chrysler management including the CEO and executives, the MyGIG is an extremely successful program launch and I wish we can improve out profitability. But we have not succeeded so far but we're working on all possibilities to improve the profitability.

Chris Ceraso - Credit Suisse

Do you know how many folks are taking the high level system versus how many are taking the low level system?

Dinesh Paliwal

Our mix in the quarter, Chris, was about 50/50 in what shipped. Now, that's in our shipments, not necessarily in sales. We do know that take rates that we've seen so far have been healthy and have met our expectations.

Chris Ceraso - Credit Suisse

Okay. That's great. Thank you very much.

Dinesh Paliwal

Thank you, Chris.

Operator

(Operator Instructions). And I have a question for Scot Ciccarelli from RBC Capital Markets. Please go ahead.

Scot Ciccarelli - RBC Capital Markets

Hi, guys. It's Scot Ciccarelli.

Dinesh Paliwal

Hi, Scot.

Scot Ciccarelli - RBC Capital Markets

Hello, Dinesh. A couple of questions. The warranty issue; was this concentrated with a single customer or across multiple platforms.

Dinesh Paliwal

We like to say good news or bad news. It is isolated to a customer. The prominent part of the warranty cost.

Scot Ciccarelli - RBC Capital Markets

Okay. And what has your, I guess, conversation or interaction been with that customer. I mean, obviously, they can't be happy whether you are trying to fund it. But what is that due to relationship?

Dinesh Paliwal

No impact whatsoever because this happened a couple of years ago to a product, which has been in introduction for a while. And you see, Scot, any changes that are done, they are done jointly with full agreement, with full validation, with a test process typically defined by our OEM customer. So that was all done to their satisfaction and this thing developed as I said incompatibility between the new chip and the software, which was already in use.

So, we jointly determined before it becomes any significant problem. And we have put together a joint action program, so that it can be managed and controlled. And the customer is quite pleased with the resolution. I know that several senior managers from both sides were involved in this discussion. I personally had some involvement to find out that our customer was putting it behind, because we have a number of new activities going on and they are by the way proceeding with this customer.

Scot Ciccarelli - RBC Capital Markets

I guess what my question really is, Dinesh, it seems like warranty issues have been a bit of a growing issue for the Company, although not as big as this one. It seem to be kind of a big one that you can't throw in there, but why should we believe that there aren't -- there are issues out there. I mean, it seems like we've kind of have that as a creeping issue. You're also talking about trying to outsource more things to India, China at lot lower costs geographies; isn't this like a real issue going forward?

Dinesh Paliwal

Scot, not really. Because, first of all, what happened actually happened in Germany, the software and chip comparability had nothing to do with China, India. I will answer your first part, then I come back to your second piece. So then, look, I would like to say that there will not be anything, but I don't think any supplier can guarantee that such an unforeseen unprecedented problem will never occur.

We can only try and we believe that our quality processes are very robust. And anytime anything happens, we learn something more from those towards the full further improvement. And look our track record has been pretty good. In terms of warranty expenses, business of this magnitude and complexity, you expected to be about 2% of the sales in warranty, which is very typical in any project business whether I come from my environment of ABB or another company. So that's very typical. And that's where we've been and if you take this unprecedented event out, that's where we are.

Now, your second piece, do we have concern or should we have concern when we talk about global footprint optimization? Absolutely, we should be thoughtful. We should evaluate everything we do. We will, I mean, my point is -- the company is very successful and making double-digit profit day-in and day-out. Even in my own company before, they are running double-digit mid-teens. They have 50/50 mix in terms of global footprint.

So, one has to be prudent to do things which are done rather well actually in China and India sometimes better than high cost countries. And to ensure that I don't want to take chances that so many chefs are in the kitchen, so I'll appoint, what I call a person who is a no-nonsense and doesn't accept any excuse, Dave Karch. He ran very successfully our manufacturing, operation worldwide and he has got the solid background.

He has started up successfully plants in Mexico and Hungary and in China. And he is been appointed at the Executive Committee level as a full time person to evaluate. He has financial background. He has a very strong engineering background and he will drive those.

And all such proposals would come to an executive committee to my approval and that’s how we are going to do it. And fortunately I have some experience in that area, and in fact doing several such transformations of manufacturing and engineering. So just to assure you, this is very near and dear to me. We are going to do it and we are going to do it prudently and carefully.

Scot Ciccarelli. - RBC Capital Markets

Okay. Thanks for that. Then I guess on a totally different topic and then I pass off the con here? Can you talk about the expected possibility of some of the new contracts, I mean you guys have kind of talked about the revenue opportunities of some of these new customers but we also know there is a lower margin mix kind coming into the frame work here as soon as the higher margin contracts kind of get to the end of ’08. Can you talk about expected possibility on some of the renewal contracts? Thanks.

Dinesh Paliwal

Sure. Again it is a very good question and I think we briefly touched on it on February fifth. When we put out a slight set and in the slide we graphically illustrated that contribution margin of our product mix would be slightly lower than the contribution margin we have in 2008. And what we said that after a nearly 75%, 80% of our product mix, we will shipping in 2009 and infotainment will come from new product launches, which we are right now in process of doing.

And every time you launched a new market it starts from its lowest contribution margins in its life cycle about 5,6,7 years. Therefore, we have a production mix which is unusual; at any given time you don’t have 75% to 80% new products in a total revenue mix.

So with that said we also know 100 to 150 basis points improvement year-over-year over the lifecycle, which we factor in, we work towards. That's the way our business works. In addition, while we are doing that we also shared with you on February 5th that manufacturing, engineering and supply chain related, we quantified actually, global supply chain. I quantified between two to three percentage points on the bottom line and some people questioned that's far to low.

I said look, we need to start with numbers where we as a team feel comfortable and if we exceed that's fine, but at least we need to start with a good number. Manufacturing we quantified two to three percentage points and here I'll take a second to share. We are actually quite advanced in discussions with partners those who do for living, things like producing printed circuit board assemblies.

The company I came from uses nearly $100 circuit boards; they don't make any. We will use those suppliers who do for GE for TYCO, for United Health, Honeywell and ABB. So those discussions are quite advanced and again David Koch; he is the man responsible for those he is dealing with that engineering. That I think is a big bucket item for me personally, 2.50% to 3.50%. Realize we are at $300 million to $350 million engineering and 95% of that is in high cost. That is truly an imbalance, which is really not acceptable to me or will not be acceptable to any CEO.

You look around any company; my best example is Emerson right here. Emerson Electric and I've seen my own company, this is going to be changed, a serious transformation and we are already well advanced there in terms of discussions. How much we do in Germany.

We need to free up our top German competence to do things what new awards would require them to do. Right now we are tying them up to do maintenance on a 15-year old software system, which is unfortunate. We are asking them to work on things, which should have been outsourced, our standard items. So as many of those things are being carved out in the form of work packages very carefully documenting them, define them and then sort do the handholding and do it.

It’s engineering, so that way, I know I gave you a long answer but we quantify for you mixed margin improvement, 100 to 150 basis point. We defined last time supply chain manufacturing, engineering and we added those up. We came to a number around 10% to 14% and we say we need to give away 3% to 4% a year. So, we came to bottom line margin improvement beyond 2010, anywhere from 7% to 10%.

And that's a commitment my management team has given to the Board and that's the target we're going to factor in our management incentive compensation scheme, in our long-term scheme, LTI long-term incentive program. Everything would be driven from these and this is the area where I expect Scot, you and your fellow analyst community to measure us against. Quarterly, annually we will give you those targets and we will give you the dashboard, how do you measure us.

Scot Ciccarelli. - RBC Capital Markets

Okay, thanks a lot Dinesh.

Dinesh Paliwal

You're welcome.

Operator

And there are no further questions in queue at this time.

Dinesh Paliwal

Anna. Hello, Anna can you repeat please.

Operator

We have a question from [Sean Kernan from Schafer Capital Management]. Please go ahead.

Sean Kernan - Schafer Capital Management

Hello. I just wanted to clarify one thing. I apologize if you already spoke on this. The warranty issue, I am kind of confused, you said it was a $40 million number is that correct?

Dinesh Paliwal

Yes. That is correct. That's what we say.

Sean Kernan - Schafer Capital Management

Perfect. And the EPS, you said it was up $0.49 impact?

Dinesh Paliwal

That is correct.

Sean Kernan - Schafer Capital Management

Okay. So you had some net positive charges of [float] back correct? Am I incorrect? That's tax adjusted I suppose?

Dinesh Paliwal

Yes.

Sean Kernan - Schafer Capital Management

Okay. Thanks you very much. That answers my question.

Dinesh Paliwal

Very well, Sean. Thanks.

Sean Kernan - Schafer Capital Management

Thank you very much.

Operator

And we have a follow-up from Chris Ceraso from Credit Suisse. Please go ahead.

Chris Ceraso - Credit Suisse

Hi. Thanks. I thought someone might have gone through this, but can you just give us an update on how the seven launches for 2008 are progressing. How many are already launched? And have you had any kind of delays or missed windows or any kind of launch problems?

Dinesh Paliwal

Yeah. Sure. In fact, that is the area which keeps many busy being in Germany at least once or twice every month. And as I said before, this is a most critical and sensitive thing for us to succeed because that is what has separated Harman from our competitors. The good news is that we are pretty much on track. I know we had to incur huge amounts of engineering to keep ourselves on the mission.

We have launched Chrysler REN, Hyundai BH and SsangYong Chairman and other programs are well on track. For 2008 and 2009, we feel comfortable with the progress we are making.

Chris Ceraso - Credit Suisse

Okay. Great.

Dinesh Paliwal

And Chris, we had a few positive developments like Subaru. There was an SOP, which was asked for cars to be in the dealers slot in June and we have successfully executed that, but we don't even count that in our 13. The 13 is a very large complex and we get here and there small bits for a quick turn on. We have done those as well. But we are on track; that's the message I want to give.

Chris Ceraso - Credit Suisse

Is that Subaru award just for audio or is that an infotainment award?

Dinesh Paliwal

Yes. Subaru is just for audio. And I also want to share since you talk about Subaru that Daimler-Benz has also awarded us a fairly significant order for their next generation SUV platform including M-Class. And that's something we're very happy about. That also validates their confidence in us and our strong relationship. We enjoy the programs we're working on.

Chris Ceraso - Credit Suisse

Can you give us an update on the progress in the PND business with combining the US and European operations that were two businesses?

Dinesh Paliwal

Good question. We combined PND actually when we had talked to you last February. That was done instantly. We appointed a man; his name is Kent Moerk, a Danish citizen and he has done a superb job for us. He is running as a single PND business. And I would say he has recuperated from rather a disaster situation we had when we told you the problems we had.

Of course this business is under duress; that's the only word come to mind. But we are managing this in a very careful manner, so that we maintain some sanity at the bottomline. But we merged it into one and primarily we are in automotive related PND business. We are not really selling in regular consumer space like our consumer division started once. So that has already stopped.

Kevin Brown

I guess, Chris, there is one fact I would give you to help you with that. And I noted a little bit in my remarks but as far as PND inventories go, we reduced our PND inventory level on a $1 basis by about 50% from what we were at the same quarter last year. So we've got that under better control now; we've been working that down.

Chris Ceraso - Credit Suisse

So, how big is that business now on kind of an annualized revenue basis and what kind of operating margin are you doing?

Dinesh Paliwal

On the unit basis, I think -- let me just see the numbers again. In third quarter Q3 we sold about 94,000 units. That is up from 84,000 we sold in third quarter '07 and for full year year-to-date in 2008 we have sold about 460,000 units, a marginally different story. This business has undergone almost 70% price reduction.

So that has hit us hard and we took a charge for that in the second quarter results we came out and we are pretty much on it. We had a few million dollar reduction that's reflected in our third quarter results in the bottom line; otherwise we're managing it to the barely breakeven point.

Kevin Brown

And just to add, it's about a $120 million in revenue on an annual basis, at its current run-rate.

Chris Ceraso - Credit Suisse

At about breakeven?

Kevin Brown

Yeah.

Chris Ceraso - Credit Suisse

Okay. Thanks a lot guys.

Dinesh Paliwal

Thank you.

Operator

And there are no further questions in queue at this time.

Dinesh Paliwal

All right, let me, in closing, let me say a couple of remarks. I sincerely want to thank you all for taking the time to listen to our progress, to listen to our direction and I do appreciate to your patience and your encouragement, and the kind of questions you have asked. We have hard work ahead, but we believe we are showing you that we are executing on some of the hard actions we described and many more to come and the team I have announced today is quite capable of undertaking.

We will deliver what we are sharing with you now in terms of actions. I look forward to speaking again soon and to providing a step by step update and give you all the progress report as we progress and as I said in my opening comments, I look forward to spending some time with several of you on a one-on-one group setting. Thank you again for listening.

Operator

Thank you.

Dinesh Paliwal

Now you can close the call now.

Operator

Thank you, Mr. Paliwal. Ladies and gentlemen, your host is making today's conference available by digitized replays for two weeks and by web replay for two weeks. The digitized replay is available starting is at 6:30 p.m. Eastern Time, May 6, 2008. Simply dial 800-475-6701, in the US or 320-365-3844 international and at the voice prompt, enter the conference confirmation number 920-226.

Alternatively, you may go to www.harman.com to listen to the web replay again. You will need to enter the conference confirmation number 920-226.

That does conclude our earnings release call for this quarter. Thank you very much for your participation, as well as using AT&T's Executive Teleconference. You may now disconnect.

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