A developer of audio products and electronic systems, Harman International Industries Inc. (HAR) reported first quarter 2012 earnings of 69 cents per share, comprehensively beating the Zacks Consensus Estimate of 50 cents. Earnings per share (EPS) surged 97.0% year over year from 35 cents.
Operating Performance
Gross profit increased 29.4% year over year to $289.3 million. Gross margin increased 80 basis points (bps) to 27.5% in the quarter. The increase was driven by strong growth in the Infotainment division arising from higher demand and sales price increase, which was more than enough to offset higher neodymium costs.
Gross margin for the Infotainment division increased 500 bps to 23.9% in the reported quarter. However, the same for Consumer division and Professional division decreased 420 bps and 230 bps, respectively, in the reported quarter.
Selling, general and administrative (SG&A) expense increased 17.6% year over year to $214.0 million in the first quarter. However, SG&A as a percentage of revenue declined 130 bps to 20.4% in the reported quarter driven by productivity improvement across the company’s cost base.
Operating income was up 91.5% year over year to $76.2 million. Operating margin expanded 250 bps to 7.3% based on a higher gross profit base and lower SG&A expense. Net income was $49.8 million, up 97.6% year over year from $25.2 million reported in the prior-year quarter.
Revenue
Revenues increased 25.5% year over year to $1.05 billion in the first quarter of 2012. The strong year-over-year growth was driven by double-digit revenue growth in the Infotainment and Lifestyle divisions.
Infotainment revenue increased 35.2% to $603.0 million. The Lifestyle division earned revenues of $300.0 million, up 19.5% year over year. The Professional division witnessed a year-over-year growth of 5.7% to reach $148.0 million in the first quarter.
Infotainment awarded business backlog amounted to $11.4 billion, while scalable platform revenue came in at $4.6 billion. Automotive awarded backlog was $3.1 billion. Sales from the BRIC countries shot up 91% year over year in the reported quarter.
Balance Sheet
As of September 30, 2011, cash and cash equivalents were $398.4 million compared with $603.9 million as of June 30, 2011. Liquidity was $1.2 billion, including a $543.0 million credit facility.
Outlook
Harman expects robust operating margin growth going forward (2013-2014), based on the strong performance of 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 is doubling its manufacturing capacity in Hungary, China and Mexico, which will help the company address the growing demand for Automotive and Professional products. Harman boasts a solid product pipeline that is supported by more than 3500 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 Bose Corp., Boston Acoustics Inc., Pioneer Corp., Yamaha Corp., Rockford Corp. (ROFO), Panasonic Corp. (PC) and Sony Corp. (SNE), which may hurt its profitability going forward.
Harman shares have decreased 25.2% year to date compared with a 4.4% decline in S&P 500. We believe the strong first quarter results are already priced in the stock. We expect the stock to remain range bound due to the sluggish macro economic environment in the near term.
We maintain our Underperform 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).
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