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Harman (HAR) Q1 Earnings, Revenues Top Estimates; Up Y/Y

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Harman International Industries Inc. HAR reported better-than-expected first quarter fiscal 2016 results. Non-GAAP (excluding restructuring, non-recurring charges and acquisition-related items) earnings per share came in at $1.48, beating the Zacks Consensus Estimate of $1.41 and increasing 13% from $1.31 reported in the year-ago quarter.
 

Harman International Industries Inc. (HAR) - Earnings Surprise | FindTheCompany

 

Revenues of $1630.9 million also came ahead of the Zacks Consensus Estimate of $1612.8 million and grew 14.1% year over year. Moreover, excluding the foreign currency translation effect, revenues grew 23% year over year.

On a non GAAP basis, gross margin grew 80 basis points (bps) to 30% while operating margin, too increased 80 bps to 9.7%. Non GAAP EBITDA margin was up 60 bps to 12.1%.

Segment Details

Connected Car segment revenues grew 8% to $755 million, mainly due to expansion of new platforms and higher automotive production. On a non GAAP basis, gross margin at the segment improved 10 bps to 23.7% while operating margin grew 110 bps to 11.7%.

Lifestyle Audio revenues increased 14% year over year to $462 million led by new products along with Bang & Olufsen acquisition. Auto makers such as Audi, BMW, Hyundai and Toyota Motor Corp. TM selected Harman’s technology for their car lines. On a non GAAP basis, gross margin at the segment improved 30 bps to 32.7% whereas operating margin decreased 90 bps to 12%.

Professional division revenues decreased 3% from the year-ago quarter to $247 million. On a non GAAP basis, gross margin at the segment improved 90 bps to 41.6%, driven by favourable product mix while operating margin grew 20 bps to 11.3%.

Revenues at the company’s Connected Services division were $174 million, up 157% year over year. In the quarter, Harman started to provide product development services to clients like Pepsico, Inc. PEP United Healthcare and Mozilla. On a non GAAP basis, gross margin at the segment improved 810 bps to 33.1% while operating margin grew 300 bps to 11.3%.

Balance Sheet & Cash Flow    

As of Sep 30, 2015, cash and cash equivalents were $402.2 million compared with $649.5 million at the end of the previous quarter. Long-term debt was $797.6 million as of Sep 30, 2015 compared with $797.5 million as of Jun 30, 2015. The company had $937 million available under its revolving credit facility.

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 strategic partnerships.

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 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 deals with Harman and therefore the termination of any contract would significantly impact results.

Currently, Harman carries a Zacks Rank #3 (Hold). Other better ranked stock in same sector is Sony Corp. SNE which carries a Zacks Rank #1 (Strong Buy).

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