Harman International Industries Inc.’s (HAR) third-quarter earnings beat the Zacks Consensus Estimate by 2 cents, or 6.45%. However, shares fell 22.1% yesterday, as the company’s mid-term outlook disappointed investors.
Revenue
Revenue of $848.2 million was down 9.5% sequentially and up 41.8% year over year. The increase from the year-ago quarter was partly on account favorable currency impact, excluding which sales would have been up 36%. Harman also benefited from pent-up demand, which complemented the company’s strategic partnerships.
The Automotive segment generated 74% of revenue, a sequential decline of 5.7% and a year-over-year increase of 55.6% (48% when adjusted for currency). The strength in the last quarter was driven by market share gains and new product launches.
The new Harmon Kardon branded sound systems were installed into BMW series 1 and series 3 cars and Mercedes-Benz E-series cars. The company’s GreenEdge energy-saving technology was also showcased in the last quarter. Management expects segment revenue to grow at a CAGR of 8-11% over the next few years up to 2013.
Consumer generated 10% of revenue, down 36.2% sequentially (due to seasonality). The business was up 17.4% (13% when adjusted for currency) from the comparable year-ago quarter. The increase from the year-ago quarter is indicative of the success of the company’s new products.
The company has started an aggressive marketing program in Europe and also opened its first store-within-a-store in the U.S. Management expects segment revenue to grow at a CAGR of 4-7% over the next few years up to 2013.
The Professional business generated 15% of revenue, down 5.3% sequentially and up 10.5% (8% when adjusted for currency) from the year-ago quarter. New deployments by individual achievers and professional organizations drove sales in the last quarter. The company launched 49 new products in this category and new Harman audio systems were deployed at a number of sporting venues all over the U.S. Management expects segment revenue to grow at a CAGR of 5-8% over the next few years up to 2013.
The Other products category, which includes the company’s QNX platform, generated the remaining 1% of revenue, with sales up 22.2% sequentially and 10.0% from the year-ago quarter. Management did not provide additional details about this segment, since it has decided to sell off the QNX software systems business to Research in Motion (RIMM) for a cash consideration of $200 million.
The pro forma gross margin for the quarter was 26.8%, down 113 basis points (bps) sequentially and up 784 bps from the year-ago quarter. The sequential decline was volume-related, while the substantial increase from the year-ago quarter was due to higher sales, which drove up the utilization rate, thus helping absorption of fixed costs. The company also benefited from a better mix in the automotive business and productivity enhancement initiatives.
Operating expenses (SG&A) of $190.7 million were lower than in the previous quarter, although they were somewhat higher than in the year-ago quarter. The lower costs were largely attributable to positive currency impact.
Gross and operating margins of 23.0% and 4.9% in the Automotive segment declined sequentially but increased very substantially from the year-ago quarter. The Consumer division saw an 84 bp sequential increase in gross margin, offset by higher opex, resulting in a net sequential decline of 709 bps in operating margin.
Year-over-year comparisons were very favorable for both gross and operating margins. The Professional division did well on the margin improvement, with all compares positive. The three segments generated operating margins of 4.9%, 0.0% and 15.1% in the last quarter.
Excluding the impact of restructuring charges and the associated tax impact, the pro forma net income was $22.3 million or 2.6% net income margin, compared to income of $33.9 million or 3.6% in the previous quarter and net loss of $54.2 million or net income margin of 9.1% in the year-ago quarter.
Including the special items, the GAAP net income was $18.3 million ($0.26 per share) compared to $16.1 million ($0.23 per share) in the previous quarter and loss of $68.8 million ($1.17 per share) in the Mar quarter of last year.
Balance Sheet
Inventories were down 1.3% in March, with inventory turns flat at 7.4X. Days sales outstanding (DSOs) were also flat at around 49. The company ended with cash and short term investments of $424.4 million, down $205.5 million during the quarter.
Mid-Term Guidance
The company provided growth expectations for the four-year period from 2009-2013.
Accordingly, revenues are expected to grow at a CAGR [compound annual growth rate] of 7-10% during this period, with operating profit also growing 7-10% and earnings per share reaching $3.00-$4.00.
The Automotive Division operating profit is expected to grow 7-10%, Consumer Division 3-6% and Professional Division 16-19%.
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