Harman International Industries Inc. (HAR) reported earnings of 79 cents per share in the third quarter of 2013, which comfortably surpassed the Zacks Consensus Estimate by 16 cents. Earnings increased 6.8% from 74 cents per share in the year-ago quarter.
Revenues
Revenues decreased 3.1% year over year to $1.06 billion in the quarter, almost in line with the Zacks Consensus Estimate. The year-over-year decline was primarily due to weak performance across Infotainment and Lifestyle segments. Macro-economic headwinds and slowdown in the automotive sector in Europe had a significant negative impact on Harman’s top line in the quarter.
Infotainment revenues decreased 6.7% year over year to $569.0 million. The decline reflects lower automotive production volumes in Western Europe, primarily due to weak demand.
Lifestyle revenues decreased 1.5% on a year-over-year basis to $327.0 million. The results were negatively affected by lower automotive production volumes and lower neodymium surcharges. However, strong demand for portable home and multimedia products partially offset the year-over-year decline.
During the quarter, Harman won a number of awards from customers such as Toyota (TM), Lexus, Kia, Mercedes and Ferrari.
Professional division revenues jumped 7.8% year over year to $165.0 million, primarily driven by strong performance from Martin Professional, which was acquired in Feb 2013.
Margins
Gross margin contracted 110 basis points (“bps”) from the year-ago quarter to 25.7%. The contraction was primarily due to the negative impact of lower sales volume on fixed production costs.
Infotainment gross margin declined 370 bps, which was partially offset by a 230 bps expansion in Lifestyle gross margin and 20 bps increase in Professional gross margin.
Selling, general and administrative (SG&A) expense as a percentage of revenues decreased 110 bps on a year-over-year basis. This was primarily due to higher recovery of customer project engineering costs.
The lower-than-expected increase in SG&A expense positively impacted operating margins, which remained flat at 6.2% at the end of third quarter of 2013.
Net income as percentage of revenues was 5.2% compared with 4.9% in the year-ago quarter.
Balance Sheet & Cash Flow
As of Mar 31, 2013, cash and cash equivalents were $432.2 million compared with $607.5 million as of Dec 31, 2012. Liquidity was $1.18 billion, including a $743.0 million credit facility.
Outlook
Harman forecasts revenues to be in the mid-to-high end of its earlier announced range of $4.175 billion to $4.250 billion for fiscal 2013. Operating profit and EBITDA are expected to meet the high end of the earlier announced guidance range of $265.0 million to $280.0 million and $385.0 million to $400.0 million, respectively.
Harman now expects earnings of $3.00 per share, slightly upfrom its earlier guided range of $2.70 to $2.90.
Recommendation
We believe that Harman’s new manufacturing capacities; growing product pipeline, solid patent portfolio, new awards as well as launch of new products will boost top line and profitability over the long term. Moreover, Harman continues to expand due to its partnerships with the likes of Apple (AAPL).
Meanwhile, Harman faces tough competition from Sony Corp. (SNE),which may hurt its profitability going forward. We expect the stock to remain range bound due to the sluggish macroeconomic environment particularly in Europe in the near term.
Currently, Harman has a Zacks Rank #3 (Hold).
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