Harman International Industries Inc. (HAR) reported earnings of $1.25 per share in the fourth quarter of fiscal 2014, which beat the Zacks Consensus Estimate by 3 cents. Earnings per share (EPS) jumped 37.4% from the year-ago quarter due to robust revenue growth and margin expansion.
Revenues
Revenues increased 22.2% from the year-ago quarter to $1.44 billion and beat the Zacks Consensus Estimate of $1.40 billion. The year-over-year increase was primarily due to strong performance across its business segments.
Infotainment revenues jumped almost 26% from the year-ago quarter to $773 million, primarily due to higher automotive production, production expansion into new car lines and higher take rate.
During the quarter, Harman won new business awards worth $2.5 billion. Car makers such as Bentley and Maserati selected Harman’s technology in their car lines. The company won a contract from Scania/MAN to develop infotainment system for commercial vehicles, which paves the way for Harman to enter this new market. The company also secured eCall solution contract from Ssangyong.
At the end of the quarter, Harman’s total backlog was $16.2 billion. The company has already started integrating Apple’s (AAPL) CarPlay and Google’s (GOOGL) Automotive Link into its embedded infotainment solutions.
Lifestyle revenues soared 21.8% on a year-over-year basis to $424 million primarily due to robust sales in Harman’s home and multimedia product lines and car audio business.
During the quarter, Harman won contracts from Alfa Romeo, Hyundai, Kia and Toyota (TM). The company expanded relationship with Ford. At the end of the quarter, car audio backlog stood at $4.3 billion.
During the quarter, Harman acquired St. Louis-based Yurbuds LLC. Harman believes that with the addition of Yurbuds to its portfolio, the company will be able to develop next generation headphones designed especially for athletes.
Professional division revenues increased 12.7% from the year-ago quarter to $248 million, primarily driven by strong demand for audio and lighting products. The division launched 44 products during the quarter.
During the fourth quarter, Harman completed the acquisition of AMX LLC from The Duchossois Group for a sum of $365 million. The acquisition expands Harman’s product portfolio and establishes it as a leading supplier of turnkey AV solutions.
Margins
In the reported quarter, gross margin expanded 60 basis points (bps) on a year-over-year basis due to higher sales volume on fixed production costs.
Selling, general and administrative (SG&A) expense as a percentage of revenues decreased 40 bps on a year-over-year basis. The improvement was primarily related to operating leverage from higher sales.
Operating margin expanded 90 bps to 8.3% in the quarter. Infotainment operating margin expanded 200 bps that fully offset 100 bps and 150 bps contraction, respectively, in Lifestyle and Professional operating margin.
Net income was $87.5 million or $1.25 per share compared with $63.4 million or 91 cents in the year-ago quarter.
Balance Sheet & Cash Flow
As of Jun 30, 2014, cash and cash equivalents were $581.3 million compared with $566.9 million as of Mar 31, 2014. Total debt was $555 million at quarter-end. The company had $445.0 million available under its revolving credit facility.
Guidance
For fiscal 2015, Harman expects revenues of approximately $6.0 billion much higher than $5.3 billion in 2014. The revenue outlook is better than the Zacks Consensus Estimate of $5.9 billion. Infotainment, Lifestyle and Professional revenues are forecasted to be $3.1 billion, $1.8 billion and $1.1 billion, respectively.
For fiscal 2015, EBITDA is projected to be $685.0 million, much higher than $555 million in 2014. Infotainment, Lifestyle and Professional EBITDA are forecasted to be $375 million, $265 million and $175 million, respectively.
Harman expects fiscal 2015 EPS to be $5.25, slightly lower than the Zacks Consensus Estimate of $5.46.
For fiscal 2016, Harman expects revenues of approximately $6.85 billion. Infotainment, Lifestyle and Professional revenues are forecasted to be $3.7 billion, $1.95 billion and $1.2 billion, respectively.
Fiscal 2016 EBITDA is projected to be $880.0 million. Infotainment, Lifestyle and Professional EBITDA are forecasted to be $490 million, $310 million and $215 million, respectively.
Our Take
We believe that Harman’s new manufacturing capacities, growing product pipeline, solid patent portfolio, new awards as well as product launches will boost the top line and profitability in 2015 and beyond.
Moreover, Harman continues to expand due to its partnerships with the likes of Apple and Google, which is a significant positive. However, intensifying competition from Sony Corp. remains a concern.
Currently, Harman carries a Zacks Rank #3 (Hold).
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