PC Panasonic Corp.

Harman International Industries Inc. (HAR) reported better-than-expected fourth quarter 2012 results with earnings beating the Zacks Consensus Estimate by a couple of cents. Revenues were slightly ahead of the Zacks Consensus Estimate of $1.08 billion.

Quarter Details

Revenues climbed 6% year over year (including unfavorable foreign currency exchange) to $1.09 billion, primarily driven by strong sales from the lifestyle and professional segments, which more than offset a weak performance from the Infotainment business.

Lifestyle revenue jumped 31% year over year (including unfavorable foreign currency exchange) to $330.0 million. Professional division witnessed a year-over-year growth of 2.9% (including unfavorable foreign currency exchange) to reach $172.0 million in the reported quarter. Infotainment revenue decreased 3.9% year over year (including unfavorable foreign currency exchange) to $588.0 million.

Non-GAAP gross profit increased 21.1% year over year to $299.2 million. Gross margin expanded from 23.9% in the year-ago quarter to 27.4% on the back of higher revenue base. Gross margin for the Infotainment division increased 480 bps to 23.2% in the reported quarter on a year-over-year basis. The same for Lifestyle division increased 400 bps, while Professional division suffered a 440 bps margin contraction in its gross margin.

Selling, general and administrative (SG&A) expense increased 7.9% year over year to $229.3 million in the fourth quarter. Operating income on non-GAAP basis was up 100.7% year over year to $69.8 million. Operating margin expanded 300 bps to 6.4%.

Non-GAAP net income was $48.0 million or 67 cents per share compared to $24 million or 34 cents per share in the year ago quarter.

Harman exited the quarter with cash and cash equivalents of $617.4 million compared with $640.6 million in the previous quarter.

Fiscal 2013 Outlook

Harman lowered its fiscal 2013 guidance on account of volatility in foreign currency exchange rates. Harman expects revenue in the range of $4.3 billion-$4.6 billion down from the earlier guided range of $4.55 billion-$4.8 billion.

Revenue from Infotainment division has been revised down from $2.5 billion-$2.65 billion to $2.3 billion-$2.5 billion. Likewise, the Lifestyle division revenue was guided down from $1.375 billion - $1.45 billion to $1.3 billion - $1.4 billion. Revenue from Professional division was also revised down from $675.0 million-$700 million to $665 million-$690 million.

Harman expects earnings to be in the range of $3.67-$3.92 per share (down from earlier guidance of $3.75-$4.00).

Recommendation

We believe that unfavorable foreign currency rates will negatively impact Harman’s result in the near term. However, Harman’s solid product pipeline, massive backlog and ongoing expansions in the BRIC countries are noteworthy.

Harman continues to face tough competition from Panasonic Corp. (PC) and Sony Corp. (SNE), which may hurt its profitability going forward.

We maintain our Neutral recommendation on a long-term basis (6-12 months). Currently, Harman has a Zacks #3 Rank, which implies a Hold rating on a short-term basis (1-3 months).

 
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