TM Toyota Motor Corporation

Harman International Industries Inc. (HAR) reported EPS of 59 cents in the second quarter of 2013, which missed the Zacks Consensus Estimate by 29 cents.

Revenues

Revenues decreased 6.3% year over year to $1.06 billion in the second quarter of 2013, almost in line with the Zacks Consensus Estimate. On a sequential basis, revenue increased 5.8%.

The sluggish year-over-year growth was primarily due to weak performance across all the operating segments. Macro-economic headwinds and slowdown in automotive sector in Europe had a significant negative impact on Harman’s top-line growth in the quarter.      

Infotainment revenue decreased 10.0% year over year and 3.7% sequentially to $540.0 million. The decline reflects lower automotive production volumes in Europe, primarily due to weak demand.

Harman announced a new division called Infotainment services that will serve its customer base of 15 million. The division will offer fourth generation long-term evolution (4G/LTE) technologies to vehicles currently on road, cloud-based services to cars and customer relationship management services.

Lifestyle revenue increased a modest 0.8% on a year-over-year basis to $372.0 million. On a sequential basis, revenue jumped 27.4% in the reported quarter. The results were negatively affected by lower European production volumes as well as the clash between China and Japan.

Harman won four awards from customers such as Toyota (TM), Lexus and Subaru. Its solutions were also selected by BMW. Harman’s JBL was the first brand to ship 250,000 docking stations for Apple’s (AAPL) iPhone 5 during the quarter.

Professional division revenue declined 8.9% year over year but remained flat sequentially at $144.0 million. Delays due to presidential elections in the United States and China and economic slowdown were primarily blamed for the weak results. 

Margins

Gross margin contracted 130 basis points (“bps”) from the year-ago quarter and 210 bps sequentially to 25.8% in the reported quarter. Gross margins in the Infotainment and Lifestyle segment declined on both year-over-year and sequential basis. However, Professional segment margins improved in the reported quarter.       

Selling, general and administrative (SG&A) expense as a percentage of revenue increased 190 bps on a year-over-year basis and 60 bps from the previous quarter.

The significant jump in SG&A negatively hurt operating margins, which declined 310 bps from the year-ago quarter and 250 bps from the previous quarter.

Net income declined 31.6% year over year and 25.1% sequentially to $40.9 million. EPS declined 29.1% from the year-ago quarter and 25.3% from the previous quarter.      

Balance Sheet & Cash Flow

As of Dec 31, 2012, cash and cash equivalents were $607.5 million compared with $698.6 million as of Sep 30, 2012. Liquidity was $1.35 billion, including a $741.0 million credit facility.

Outlook

Harman forecasts sales to be in the range of $4.18 billion to $4.25 billion for fiscal 2013. Operating profit is expected to be in the range of $265.0 million to $280.0 million and EBITDA in the range of $385.0 million to $400.0 million. EPS forecasted to be in the range of $2.70 to $2.90.

Harman expects the first half of 2013 to remain under pressure due to weak macro-economic condition in Europe.

The company also announced an operational restructuring program including reduction of 500 jobs in high cost countries, which will result in an annual savings of $30.0–$35.0 million beginning fiscal 2014.

Recommendation

We believe that Harman’s expanding new manufacturing capacities, growing product pipeline, solid patent portfolio, new awards as well as launch of new products will boost top-line and profitability over the long term.

However, Harman continues to face tough competition from Sony Corp. (SNE), which may hurt its profitability going forward. We expect the stock to remain range bound due to the sluggish macroeconomic environment particularly in Europe in the near term.

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

 
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