Harman International Industries Inc. HAR yesterday concluded fiscal 2015 on a strong note with better-than-expected fourth-quarter results. The company’s top line and bottom line improved year over year as well.
Harman reported non-GAAP earnings of $1.37 per share in the fourth quarter, which topped the Zacks Consensus Estimate of $1.32 and marked a year-over-year improvement of 9.6%. On a GAAP basis, earnings came in at $1.01 per share compared with 62 cents reported in the year-ago quarter.
The year-over-year growth in the bottom line resulted from robust revenue growth and improved gross margin across divisions.
Revenues
Revenues jumped 16% from the year-ago quarter to $1.679 billion and surpassed the Zacks Consensus Estimate of $1.564 billion. Moreover, excluding the foreign currency translation effect, revenues grew 28% year over year. The company witnessed strong revenue growth across all its divisions.
Infotainment revenues rose 7% from the year-ago quarter to $823 million, primarily backed by strong automotive production, expansion of the recently launched platforms and higher take rate. During the quarter, Deere & Company DE selected Harman to design an infotainment system for their John Deere farm equipment.
Lifestyle revenues increased 13% year over year to $479 million led by higher home and multimedia and car audio sales. Auto makers such as BMW, Daimler, Hyundai and Lexus selected Harman’s technology for their car lines.
Professional division revenues increased 15% from the year-ago quarter to $285 million, primarily driven by last-quarter’s buyout of AMX that broadened the company’s product portfolio to enterprise automation and control and video switching.
Revenues at the company’s newly formed Services division were $89 million. The segment includes the contribution from Symphony Teleca Corporation, acquired last year.
Margins
Total gross margin improved 210 basis points (bps) to 29.4% driven by favorable product mix. Gross margin at Infotainment and Lifestyle divisions improved 230 bps and 130 bps to 24.6% and 31%, respectively, mainly on the back of improved leverage on fixed production costs and benefits from footprint migration restructuring initiatives.
Gross margin at Professional division improved 140 bps to 40.1% primarily driven by expansion of product portfolio into enterprise automation and video switching.
Selling, general and administrative (SG&A) expense as a percentage of revenues increased 150 bps to 20.4% on a year-over-year basis, mainly due to increased investment in marketing, research and development, and expansion of product portfolio.
Non-GAAP operating income increased 24% year over year to $150 million. Operating margin expanded 60 bps to 8.9% in the quarter primarily driven by improved gross margin, partially offset by higher SG&A expenses as a percentage of total revenue.
Non-GAAP net income increased 14.2% year over year to $99.9 million or $1.37 per share.
Balance Sheet & Cash Flow
As of Jun 30, 2015, cash and cash equivalents were $649.5 million compared with $592.3 million at the end of the previous quarter. Long-term debt was $797.5 million at the end of the fiscal year. The company had $912 million available under its revolving credit facility.
During the fourth-quarter conference call, the company stated that it will issue fiscal 2016 outlook at Investor Day to be held on Aug 6.
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 fiscal 2016 and beyond. Moreover, the company continues to expand on the back of its partnerships with Apple AAPL and Google GOOGL, which is a significant positive.
However, the automotive market which accounts for approximately 69% of Harman’s net sales is not without challenges. The space is currently volatile, primarily due to the sluggish economic growth, which is likely to impact the company’s near-term performance.
Harman is also exposed to significant customer concentration risks with its top four customers accounting for roughly half of the revenues. None of these companies have long-term deal with Harman and therefore the termination of any contract would significantly impact results.
Currently, Harman carries a Zacks Rank #4 (Sell).
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