Note 9 – Debt

Short Term Borrowings

At June 30, 2013 and 2012, we had $4.9 million and $0.2 million of short-term borrowings outstanding, respectively. At June 30, 2013, we maintained lines of credit of $55.7 million primarily in Denmark, Hungary, the U.S., Austria, Brazil and India. At June 30, 2012, we maintained lines of credit of $17.8 million primarily in Hungary, the U.S., Austria and Brazil.

We classify our debt based on the contractual maturity dates of the underlying debt instruments. We defer costs associated with debt issuance over the applicable term of the debt. These costs are amortized to Interest expense, net in our Consolidated Statements of Income.

New Credit Agreement

On October 10, 2012, we and Harman Holding GmbH & Co. KG (“Harman KG”), entered into a Multi-Currency Credit Agreement (the “New Credit Agreement”) with a group of banks. The New Credit Agreement provides for (i) a five-year unsecured multi-currency revolving credit facility (the “New Revolving Credit Facility”) in the amount of $750.0 million (the “Aggregate Revolving Commitment”) with availability in currencies other than the United States Dollar of up to $550.0 million and (ii) a five-year unsecured United States Dollar term loan facility (the “Term Facility” and collectively with the New Revolving Credit Facility, the “Facilities”) in the amount of $300.0 million (the “Aggregate Term Commitment” and collectively with the Aggregate Revolving Commitment, the “Aggregate Commitment”). Up to $60.0 million of the Aggregate Revolving Commitment is available for letters of credit. Subject to certain conditions set forth in the New Credit Agreement, the Aggregate Commitment may be increased by up to $250.0 million. We may select interest rates for the Facilities equal to (i) LIBOR plus an applicable margin or (ii) a base rate plus an applicable margin, which in each case is determined based on our credit rating. We pay a facility fee on the Aggregate Revolving Commitment, whether drawn or undrawn, which is determined based on our credit rating. Any proceeds from borrowings under the Facilities may be used for general corporate purposes.

The New Credit Agreement includes certain financial condition covenants, including covenants that do not permit us to allow (i) our ratio of consolidated EBITDA to consolidated cash interest expense to be less than 3.5:1.0 or (ii) our ratio of consolidated total debt to consolidated EBITDA to exceed 3.5:1.0, or following certain acquisitions, 4.0:1.0, each calculated as of the end of the applicable fiscal quarter on a rolling four-quarter basis. The terms “consolidated EBITDA,” “consolidated cash interest expense,” and “consolidated total debt” are defined in the New Credit Agreement.

The New Credit Agreement also contains certain negative covenants that limit, among other things, our ability to pay dividends, permit certain of our subsidiaries to incur debt, incur liens, make fundamental changes, sell assets, undertake transactions with affiliates and undertake sale and leaseback transactions. The Facilities are subject to acceleration upon certain specified events of default, including failure to make timely payments, breaches of representations or covenants, or a change of control, as such term is defined in the New Credit Agreement.

On October 10, 2012, in connection with the execution of the New Credit Agreement, we, Harman KG, and certain of our subsidiaries, entered into a guarantee agreement (the “New Guarantee Agreement”), that provides that the obligations under the New Credit Agreement are guaranteed by us and each of the subsidiary guarantors named therein.

Upon the signing of the New Credit Agreement, we voluntarily terminated the Multi-Currency Credit Agreement, entered into on December 1, 2010, as amended on December 15, 2011 and July 2, 2012 (the “Credit Agreement”), as well as the guarantee and collateral agreement entered into in connection with the Credit Agreement. There were no outstanding borrowings under the Credit Agreement as of October 10, 2012, and no early termination penalties were incurred by us as a result of the termination of the Credit Agreement. All of the approximately $8.7 million of letters of credit that were previously outstanding under the Credit Agreement were deemed to be issued and outstanding under the New Credit Agreement.

On October 10, 2012, we borrowed $300.0 million under the Term Facility to finance, in part, the repayment of all the outstanding $400.0 million principal amount of Convertible Senior Notes and accrued and unpaid interest thereon. See “Convertible Senior Notes” below for additional information.

At June 30, 2013, there were no outstanding borrowings and approximately $6.8 million of outstanding letters of credit under the New Revolving Credit Facility and $285.0 million of outstanding borrowings under the Term Facility, of which $30.0 million is included in our Consolidated Balance Sheet as Current portion of long-term debt and $255.0 million is classified as Long-term debt. At June 30, 2013, unused available credit under the New Revolving Credit Facility was $743.2 million. In connection with the New Credit Agreement, we incurred $6.1 million of fees and other expenses which are included within Other assets in our Consolidated Balance Sheet at June 30, 2013. These costs will be amortized over the term of the New Credit Agreement to Interest expense, net in our Consolidated Statements of Income on a straight-line basis. In addition, during the year ended June 30, 2013, we wrote off $1.1 million of debt issuance costs, to Interest expense, net, associated with the Credit Agreement, which represented the portion of these costs that were attributed to the Credit Agreement.

Convertible Senior Notes

At June 30, 2012, we had $400.0 million of Convertible Senior Notes outstanding, which were originally issued on October 23, 2007 (the “Issuance Date”) and were due on October 15, 2012. The Convertible Senior Notes were issued at par and we paid interest at a rate of 1.25 percent per annum on a semiannual basis. On October 15, 2012, the maturity date for the Convertible Senior Notes, we repaid all of the outstanding $400.0 million principal amount of Convertible Senior Notes and accrued and unpaid interest thereon held by affiliates of Kohlberg Kravis Roberts & Co. (“KKR”) and Goldman Sachs Capital Partners (“GSCP”) and other investors. The repayment of principal was funded by $300.0 million of borrowings under the Term Facility and $100.0 million of cash on hand.

The initial conversion rate on the Convertible Senior Notes was 9.6154 shares of our common stock per $1,000 principal amount of the Convertible Senior Notes (which was equal to an initial conversion price of approximately $104 per share). The conversion rate was subject to adjustment in specified circumstances described in the Indenture.

Accounting guidance issued by the FASB requires the issuer of convertible debt instruments with cash settlement features to account separately for the liability and equity components of the instrument. Under this guidance, the debt is recognized at the present value of its cash flows discounted using the issuer’s nonconvertible debt borrowing rate at the time of issuance and the equity component is recognized as the difference between the proceeds from the issuance of the note and the fair value of the liability, net of taxes. The reduced carrying value on the convertible debt results in a debt discount that is accreted back to the convertible debt’s principal amount through the recognition of noncash interest expense over the expected life of the debt, which results in recognizing interest expense on these borrowings at effective rates approximating what we would have incurred had nonconvertible debt with otherwise similar terms been issued.

In accordance with this guidance, we measured the fair value of the debt components of the Convertible Senior Notes at the Issuance Date using an effective interest rate of 5.6 percent. As a result, we attributed $75.7 million of the proceeds received to the conversion feature of the Convertible Senior Notes at the Issuance Date, which was netted against the face value of the Convertible Senior Notes as a debt discount. This amount represented the excess proceeds received over the fair value of the Convertible Senior Notes at the Issuance Date and was accreted back to the principal amount of the Convertible Senior Notes through the recognition of noncash interest expense over the expected life of the Convertible Senior Notes. In addition, we recorded $48.3 million within additional paid-in capital in our Consolidated Balance Sheets which represented the equity component of the Convertible Senior Notes, which was net of deferred taxes. The effect of this guidance has resulted in a decrease to net income and earnings per share for all periods presented; however, there was no effect on our cash interest payments.

Registration Rights Agreement

On October 23, 2007, we entered into a registration rights agreement (the “Registration Rights Agreement”) requiring us to register the Convertible Senior Notes and the shares contingently issuable upon conversion of the Convertible Senior Notes. On October 23, 2008, we filed an automatically effective registration statement with the Securities and Exchange Commission (“SEC”) to meet this requirement. We were required to keep the registration statement effective until the earlier of (a) such time as the Convertible Senior Notes and the shares contingently issuable under the Convertible Senior Notes (1) were sold under an effective registration statement or pursuant to Rule 144 of the Securities Act of 1933, (2) were freely transferable under Rule 144 more than one year following October 23, 2007, or (3) ceased to be outstanding, and (b) five years and three months following October 23, 2007.

On October 21, 2011, we entered into an Amendment to the Registration Rights Agreement with the holders of the Convertible Senior Notes, which provided for the postponement of our obligation to file a new registration statement covering the Convertible Senior Notes until such time as one of the holders of the Convertible Senior Notes demanded that we file a registration statement. Upon the receipt of such a demand, we would have seven business days to file a registration statement with the SEC covering the Convertible Senior Notes. On October 15, 2012, the Registration Rights Agreement was terminated in accordance with its terms upon the repayment of all outstanding principal and interest related to the Convertible Senior Notes.

Long-Term Debt and Current Portion of Long-Term-Debt

At June 30, 2013 and 2012, long-term debt and current portion of long-term debt consisted of the following:


	Face Value at June 30, 2013			Book Value at June 30, 2013			Face Value at June 30, 2012			Book Value at June 30, 2012
Term facility	$	285,000		$	285,000		$	0		$	0
Convertible senior notes due 2012, interest due semi-annually at 1.25 percent⁽¹⁾		0			0			400,000			400,000
Other obligations		43			43			452			452

Total debt⁽²⁾		285,043			285,043			400,452			395,461
Less: current portion of long-term debt		(30,000	)		(30,000	)		(400,400	)		(395,409	)

Total long-term debt	$	255,043		$	255,043		$	52		$	52

⁽¹⁾	Book value as of June 30, 2012 is presented net of unamortized discounts of $5.0 million, resulting from the adoption of new accounting guidance in fiscal year 2010. The fair value of the Convertible Senior Notes at June 30, 2012 was $395.0 million.

⁽²⁾	Other obligations of $52 are recorded in Other non-current liabilities in our Consolidated Balance Sheet at June 30, 2012.

At June 30, 2013, long-term debt maturing in each of the next five fiscal years and thereafter is as follows:


2014	$	30,000
2015		35,645
2016		43,135
2017		135,010
2018		41,253
Thereafter		0

Total	$	285,043

If we do not meet the forecast in our budgets, we could violate our debt covenants and, absent a waiver from our lenders or an amendment to the New Credit Agreement, we could be in default under the New Credit Agreement. As a result, our debt under the New Credit Agreement could become due, which would have a material adverse effect on our financial condition and results of operations. As of June 30, 2013, we were in compliance with all the financial covenants of the New Credit Agreement.

Interest expense is reported net of interest income in our Consolidated Statements of Income. Interest expense, net was $12.9 million, $20.1 million and $22.6 million for the fiscal years ended June 30, 2013, 2012 and 2011, respectively. Gross interest expense was $15.3 million, $27.0 million and $32.5 million for the fiscal years ended June 30, 2013, 2012 and 2011, respectively. The non-cash portion of gross interest expense was $8.5 million, $19.1 million and $19.3 million for the fiscal years ended June 30, 2013, 2012 and 2011, respectively, associated with the amortization of the debt discount on the Convertible Senior Notes and the amortization of debt issuance costs on the Convertible Senior Notes, the New Credit Agreement and the Credit Agreement. The cash portion of gross interest expense was $6.8 million, $7.9 million and $13.2 million for the fiscal years ended June 30, 2013, 2012 and 2011, respectively. Interest income was $2.4 million, $6.9 million and $9.9 million for the fiscal years ended June 30, 2013, 2012 and 2011, respectively.

Cash paid for interest, net of cash received was $6.8 million, $3.1 million and $5.0 million in the fiscal years ended June 30, 2013, 2012 and 2011, respectively.