Harman Reports Strong 1Q - Analyst Blog

A developer of audio products and electronic systems, Harman International Industries Inc. (HAR) announced first quarter 2011 results. Earnings on a non-GAAP basis were 35 cents, well above the Zacks Consensus Estimate of 27 cents.

Harman reported strong earnings growth in the first quarter 2011, compared with a loss of 8 cents in the prior-year quarter based on strong revenue growth and stringent cost control.

Revenue

Revenues increased 12.0% year over year to $837.0 million. This was well above the Zacks Consensus Estimate of $810.0 million. Excluding foreign currency fluctuations, revenues increased 19.0% year over year in the quarter. The strong top-line growth was primarily driven by higher demand for Harman's products.

Harman achieved significant growth across all its sectors. Automotive sales increased 12.0% year over year (20.0% excluding foreign currency effect) to $607.0 million in the quarter.

The remaining two segments also achieved strong growth. Sales from the Consumer division increased 3.0% year over year (9.0% excluding foreign currency effects) to $86.0 million, while Professional division achieved a growth of 19.0% year over year (20.0% excluding foreign currency effects) to reach $144.0 million in the first quarter.

During the first quarter, Automotive received significant contracts from a number of auto companies such as Chrysler Group, Fiat, Toyota Motor Corp. (TM) and Daimler AG (DDAIF). Automotive order backlog was $12.0 billion at the end of the quarter.

The Consumer division booked more than $25.0 million in on-site orders at Berlin's IFA Consumer Electronics show during September. Harman's JBL brand also launched the new OnStage family of designer docking stations for iPod and iPhone users and the award-winning MS-8 Series of aftermarket amplifiers during the quarter.

The Consumer division strengthened its presence in China with the opening of a new flagship showroom in Shanghai during the quarter.

Margins

Gross margin increased 90 basis points to 26.7% in the first quarter of 2011. Higher sales based on improving factory utilization and productivity drove the results.

Selling, general and administrative (SG&A) expense decreased 3.0% year over year to $182.0 million in the first quarter. Harman remains well ahead of its scheduled $400.0 million in the STEP change permanent cost savings program and achieved 93.0% of its target at the end of the quarter. We believe an improved cost structure will drive profitability over the long term.

On a segmental basis, Automotive gross margin increased 10 basis points to 23.3% in the first quarter. Consumer division's gross margin expanded 230 basis points and Professional division achieved a growth of 140 basis points in the quarter.

Operating income increased to $40.0 million in the first quarter, compared with $3.0 million in the prior-year quarter. The year-over-year growth was primarily driven by higher sales, improved productivity and lower restructuring expense.

Balance Sheet

As of September 30, 2010, cash and short-term investments were $649.5 million, compared with $646.0 million as of June 30, 2010.

During the first quarter, Harman completed the acquisition of Aha Mobile, provider of on-demand mobile and location-based Internet content services.

Harman also announced a new $100.0 million investment in China, aimed at meeting rising demand in the region. This will include construction of two Greenfield factories in China for Automotive, Professional and Consumer products.

Outlook

Harman remains focused on profitable growth over the long term, both organic and inorganic. Harman remains optimistic on a long-term basis based on increasing demand for its products, mainly in the emerging markets of Brazil, China, Russia and India.

Harman doubled its manufacturing capacity in Hungary and China and established research and development and engineering centers in China and India. This will boost its top-line growth going forward. Harman expects to achieve $150.0 million in revenue in Brazil by 2015.

Our Take

We maintain an Underperform rating on a long-term basis (6-12 months) based on weak results from the Consumer division, which remains a concern.

Harman continues to face tough competition from Bose Corp., Boston Acoustics Inc., Pioneer Corp., Yamaha Corp., Rockford Corp. (ROFO), Panasonic Corp. (PC) and Sony Corp. (SNE), which may hurt its profitability going forward.

Currently, Harman has a Zacks #4 Rank, which implies a Sell rating on a short-term basis (1-3 months).

 
HARMAN INTL IND (HAR): Free Stock Analysis Report
 
Zacks Investment Research