Harman Beats on Q3 Earnings, Revs - Analyst Blog

Harman International Industries Inc. HAR reported earnings of $1.12 per share in the third quarter of fiscal 2014, which comprehensively beat the Zacks Consensus Estimate by 12 cents. Earnings per share jumped 41.8% from the year-ago quarter due to robust revenue growth and margin expansion.

Revenues

Revenues increased 32.3% from the year-ago quarter to $1.40 billion and were ahead of the Zacks Consensus Estimate of $1.26 billion. The year-over-year increase was primarily due to strong performance across its business segments. Sales in China jumped 60.0% on a year-over-year basis.

Infotainment revenues jumped 29.3% from the year-ago quarter to $736.0 million, primarily due to higher automotive production, production expansion into new car lines and higher take rate.

Car makers such as BMW, Daimler and VW Group selected Harman's technology in their car lines in the quarter. Harman won customer awards from Toyota TM to supply infotainment solutions across its car models in Europe.

The company has already started integrating Apple's AAPL CarPlay and Google Automotive Link into its embedded infotainment solutions.

Lifestyle revenues soared 43.1% on a year-over-year basis to $468.0 million primarily due to robust sales in Harman's home and multimedia product lines and car audio business.

During the quarter, Harman signed a partnership agreement with Japan-based Softbank. Per the agreement, the company shipped one million Harman Kardon Onyx Studio wireless speakers to Softbank.

The company continues to win customer awards from the likes of Chrysler, Lexus, Toyota as well as Chinese automakers Brilliance, Great Wall and Dongfeng.

Professional division revenues jumped 21.2% from the year-ago quarter to $200.0 million, primarily driven by strong performance by Martin Professional and strong demand for audio products. The division launched 50 new products.

Margins

In the third quarter, gross margin expanded 40 basis points (bps) on a year-over-year basis due to favorable product mix, higher sales volume on fixed production costs and lower costs due to productivity initiatives.

Selling, general and administrative (SG&A) expense as a percentage of revenues decreased 90 bps on a year-over-year basis. The improvement was primarily related to operating leverage from higher sales.

Operating margin expanded 150 bps to 7.7% in the quarter. Infotainment operating margin expanded 300 bps that fully offset 60 bps and 30 bps contraction, respectively, in Lifestyle and Professional operating margin.

Net income was $78.0 million or $1.12 per share compared with $55.2 million or 79 cents in the year-ago quarter.

Balance Sheet & Cash Flow    

As of Mar 31, 2014, cash and cash equivalents were $566.9 million compared with $515.0 million as of Dec 31, 2013. Total debt was $244.3 million at the end of the quarter. The company had $746.0 million available under its revolving credit facility.

Guidance

Harman expects revenues to be approximately $5,275 billion much higher than previous expectation of $5,100 billion. The revenue outlook is better than the Zacks Consensus Estimate of $5,112 billion.

EBITDA is projected to be $550.0 million for the fiscal year. Earnings of $4.36 per share were much better than the Zacks Consensus Estimate of $4.22.

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 top line and profitability in 2014 and beyond.

Moreover, Harman continues to expand due to its partnerships with the likes of Apple and Google (GOOGL), which is a significant positive. However, intensifying competition from Sony Corp. SNE remains a concern.

Currently, Harman carries a Zacks Rank #3 (Hold).