I. Information Risk
The overall performance of HARMAN’s operating is in a rising trend after the 2008 financial crises. Its sales are keeping growing from 2009 to 2011; it has even returning to profitability from 2009’s negative net income (Table 1). It leaves a positive image to the investors. However, further research may reveal some noteworthy points.
The reason of increasing sales is partly caused by its sale of intellectual property in 2011. HARMAN monetized certain intellectual property rights at the price of $16.5 million in 2011, and recent data shows this company is keeping selling its property right in 2012, which indirectly helps increase the net income later on. Investors may need to pay attention to this part when analyzing its operating performance.
HARMAN has written down its goodwill in 2009 and 2010 within past standard, and it adopted “Accounting Standards Update” in 2011. Under the new goodwill impairment test, no impairment was deemed to exist in 2011 for the fair value had excess the carrying value. Comparing to the $12 million and $317 million of goodwill impairment in 2010 and 2009 respectively, the increasing net income performance in 2011 had also take advantage from this change.
Another concern lies in the gain on sale of discontinued operations. HARMAN has received $114 million by sales of its discontinued operations, which accounts for 70% of its total net income in 2010. Based on this concern, HARMAN’s performance on 2011 is more valuable for it collects revenue only from its main business.
HARMAN estimated its warranties provision by its history experience. Due to its various products type, the warranty periods in HARMAN are ranging from six months to six years from the date of purchase, and the company is seemingly using a more conservative way for estimation the warranty expense. This factor significantly influences the accuracy of estimation of its warranties expense. HARMAN has adjusted to increase additional warranty payment to $3.6 million and $11 million in 2010 and 2012 respectively. The uncertainly of estimated warranty expense also caused the risk in analyzing its operating performance.
HARMAN’s major business is in European, which means it has an important issue of controlling and balancing its assets against the foreign currency and interest risk. Any economic change happens in these European countries could cause HARMAN a huge lose, and leaves a problem of an accurate analysis and forecasting.
In terms of the risk of foreign currency, principally the change in the value of the Euro versus U.S. Dollar, HARMAN is facing a chronic loss in the last three years (Table 2). Even HRAMAN has reported that they are using foreign exchange contracts to hedge the price risk associated with foreign denominated purchase of materials used in their manufacturing process and to manage currency risk associated with their foreign currency denominated intercompany loans, investor should still have doubts on their managing performance for no more detail has been released on how they manager and control these investment. As table 3 shows the unrealized gain or loss on hedging derivatives is in an unstable trend, all the information indicates that this company’s investing performance is vulnerable to the change of world economy.
Another point need be mentioned is that one of the component in the statement of cash flow in investing activity “Other items”, which has recorded a loss of $2 million and a gain of $3 million and accounts 4% and 1% on the total cash flow change in investing activities in 2009 and 2011 respectively, has not be explained the reason in HARMAN’s annual report. Lack of information on certain change increase the information risk in this company’s accounting quality.
In HARMAN’s annual report, it is keeping 96% and 99% of its borrowing on a fixed rate basis in 2010 and 2012 respectively; the