Zacks_Analysts' Blog : Harman Reports Strong 2Q - Analyst Blog

A developer of audio products and electronic systems, Harman International Industries Inc. (HAR) reported second quarter 2012 earnings of 83 cents per share, breezing past the Zacks Consensus Estimate of 76 cents. Earnings increased 5.0% year over year from 79 cents per share.

Quarter Details

Revenues increased 17.9% year over year to $1.13 billion in the second quarter of 2012. Revenue also surpassed the Zacks Consensus Estimate of $1.07 billion. The strong year-over-year growth was driven by double-digit revenue growth in the Infotainment and Lifestyle divisions.

Sales in BRIC (Brazil, Russia, India and China) increased 32.0% year over year, primarily due to a 44.0% upside in revenue from China. Infotainment awarded business backlog amounted to $10.9 billion, while scalable platform revenue came in at $4.4 billion. Automotive awarded backlog was $3.2 billion.

Infotainment revenue increased 19.8% year over year to $600.0 million. The Lifestyle division revenue jumped 20.2% year over year to $369.0 million. The Professional division witnessed a year-over-year growth of 7.5% to reach $158.0 million in the reported quarter.

Gross profit increased 12.9% year over year to $306.0 million. Gross margin decreased 110 basis points (bps) to 27.2% in the quarter. Gross margin for the Infotainment division increased 60 bps to 23.2% in the reported quarter. However, the same for Lifestyle and Professional division decreased 340 bps and 90 bps, respectively, in the reported quarter.

Selling, general and administrative (SG&A) expense increased 6.1% year over year to $210.0 million in the second quarter. However, SG&A, as a percentage of revenue declined 210 bps to 18.6% in the reported quarter driven by productivity improvement across the company’s cost base.

Operating income was up 31.5% year over year to $96.0 million. Operating margin expanded 90 bps to 8.5% based on a higher gross profit base and lower SG&A expense. Net income was $60.0 million, up 7.1% year over year from $56.0 million in the prior-year quarter.

Balance Sheet

As of December 31, 2011, cash and cash equivalents were $544.8 million compared with $398.4 million as of September 30, 2011. Liquidity was $1.3 billion, including a $543.0 million credit facility.

Outlook

Harman expects robust operating margin growth going forward (2013-2014) based on strong performance of the infotainment business. Harman expects to outperform the overall automotive sector going forward given the increasing adoption rate in emerging markets of Brazil, Russia, India and China.

Recommendation

Harman’s new manufacturing capacities in Hungary, China and Mexico are expected to help the company address the growing demand for Automotive and Professional products going forward. Harman boasts a solid product pipeline that is supported by more than 4000 patents, and the company intends to roll out new infotainment products in order to further drive sales.

However, Harman continues to face tough competition from Rockford Corp. (ROFO), Panasonic Corp. (PC) and Sony Corp. (SNE), which may hurt its profitability going forward. We expect the stock to remain range bound due to the sluggish macroeconomic environment in the near term.

We maintain our Neutral recommendation on a long-term basis (6-12 months). Currently, Harman has a Zacks #4 Rank, which implies a Sell rating on a short-term basis (1-3 months).