Harman Imposes Surcharge to Offset Rare Earth Material Costs

Harman didn’t disclose the size of the surcharge. But it negotiated price increases with some customers and was continuing discussions with others, the company said in a 10-Q filed with the SEC. The pass-through of neodymium cost increases contributed 5 percent to the Lifestyle Division’s increase in Q3 revenue, which rose to $332 million from $276 million. At the same time, the division’s gross profit margin shrank to 27.8 percent from 32.9 percent, due largely to the surcharge program, the company said. The Lifestyle group’s operating profit slipped to $29 million from $32 million. Harman’s professional products operating loss widened to $26.5 million from $20 million due partly to increased rare earth material prices, but sales improved to $152.8 million from $141.5 million.

In addition to the surcharge, Harman is “investigating alternative design solutions” using other materials. Harman didn’t disclose the alternate materials it was considering using, but other CE companies have shifted to ceramic. “To date, we believe our actions, principally price adjustments negotiated with our customers, will be successful in mitigating the impact from this cost increase,” Harman said. “In spite of this, we expect year-over-year profitability to improve."

Speaker makers have been struggling with the rising cost of rare earth materials for the better part of a year. Neodymium is used to make extremely powerful magnets found in speaker drivers, microphones, cellphones, hybrid motor vehicles and other products. China, which is the source of a majority of the world’s rare earth materials, imposed an unofficial export embargo in November 2010 to Japan, Europe and the U.S. The Chinese government later reduced export quotas, but raised taxes on refined rare earth products and said it wouldn’t approve new mining or capacity expansion projects through 2015.

Meanwhile, Harman has “a lot of discussions going on” with U.S. automakers about building its infotainment systems into their vehicles, Harman CEO Dinesh Paliwal said. Harman counts Chrysler among its customers but is working to “rebuild relationships” with General Motors and Ford, a company spokesman said. Harman had agreements with U.S. automakers several years ago, but those expired as the car manufacturers restructured and the CE supplier changed management.

Harman has since landed deals for infotainment systems -- audio and video combined with in-car navigation, noise cancellation and other technologies -- with Tata Motors in India for its Aria minivan as well as China’s Geely and BAIC Motors. Harman launched an infotainment system for the Ferrari F12 featuring speech-to-text and text-to-speech options for SMS messaging. Acura also has rolled out Harman’s cloud-based Aha Radio in Europe and the company demonstrated earlier this year 4G LTE technology combined with an infotainment system.

Harman’s infotainment division posted Q3 operating income of $43.6 million from $21.6 million, as sales jumped to $610 million from $529.9 million. Harman also recently secured a $2 billion follow-on order for infotainment systems from a “leading automaker,” although much of the revenue isn’t expected to be recognized until 2015, a Harman spokesman said. Harman didn’t identify the carmaker. The infotainment group posted revenue of $350 million through a nine-month period ended March 31 from Brazil, Russia, India and China (BRIC) markets and has secured another $500 million in orders from India and China, Paliwal said. Harman is targeting $1.5 billion in sales in BRIC markets by 2015, he said. It had $13.9 billion in awarded infotainment and Lifestyle automotive business as of March 31, the company said.

Lifestyle automotive is branded car audio systems such as those sold under the JBL and Mark Levinson brands. The Lifestyle division also includes Harman’s consumer audio business including components and speakers featuring the Harman Kardon, Revel, Mark Levinson and other banners. The automotive branded audio business typically accounts for about 60 percent of Lifestyle revenue, with consumer being the remaining 40 percent, a company spokesman said.

Harman’s overall Q3 net income improved to $173 million from $37 million a year earlier despite its taking $8 million in restructuring charges tied to the closing of a Washington, Mo. plant that laid off 237 workers. Production at the Washington factory, which opened in 2005 and peaked with 350 employees, was moved to Harman’s Juarez, Mexico plants.