Harman Swings To Profit, Shares Up

Harman International Industries Inc.’s (HAR: 42.21 +1.02 +2.48%) second-quarter earnings beat the Zacks Consensus Estimate by $0.41. Shares were up 16.0% yesterday, in response to the news.
 
Revenue 

Revenue of $937.5 million was up 23.8% sequentially and 24.0% year over year. The results were a reflection of stronger demand across most end markets served by the company. 

The Automotive segment generated 71% of revenue, a sequential increase of 23.0% and a year-over-year increase of 29.2%. The strength in the last quarter was driven by new premium-branded automotive systems and focused marketing programs, which brought in design wins at many of the top automotive OEMs, such as Daimler AG (DAI: 46.24 -0.15 -0.32%), BMW and Toyota Motor Corp (TM: 75.69 +1.09 +1.46%), among others. Order growth was also robust, assuring that the last quarter trend would continue.
 
Consumer generated 14% of revenue, a sequential increase of 51.2% and a year-over-year increase of 9.5%. The strength in the last quarter was largely driven by seasonally stronger retail sales on account of the holiday season. However, the increase from the year-ago quarter is indicative of the success of the company’s new products.
 
The Professional business generated another 14% of revenue, up 9.9% sequentially and 17.7% from the year-ago quarter. New deployments by individual achievers and professional organizations drove sales in the last quarter. The company also made a position at the 2010 GRAMMY awards held last week. 

The Other products category, which includes the company’s QNX platform, generated the remaining 1% of revenue, with sales flat sequentially and down 10% from the year-ago quarter. However, the QNX platform did see some interesting developments in the last quarter. The QNX software platform and Alcatel-Lucent (ALU: 3.18 -0.08 -2.45%) launched the first joint product called a concept vehicle. The segment won a million dollar deal at tier-one auto supplier Denso Corporation of Japan and was also chosen for next generation medical systems applications by Abbott Laboratories (ABT: 53.26 -0.09 -0.17%) and Enigma Diagnostics. 

Margins 

The pro forma gross margin for the quarter was 27.9%, up 150 basis points (bps) sequentially and 452 bps from the year-ago quarter. The sequential increase was mostly on account of higher volumes, which helped utilization rates. 

Operating expenses (SG&A) of $192.5 million were just slightly lower than that in the previous quarter, although they were significantly lower than that in the year-ago quarter. The lower costs were largely attributable to positive currency impact. 

Net Profit 

Excluding the impact of restructuring charges, goodwill impairment charges, loss on the deconsolidation of VIE and the associated tax impact, the pro forma net income was $33.9 million or 3.6% net income margin, compared to net loss of $1.9 million or 0.3% in the previous quarter and net income of $6.3 million or net income margin of 0.8% in the year-ago quarter. Our pro forma estimate may differ from management’s presentation due to the inclusion/exclusion of some items that were not considered by management.
 
Including the special items, the GAAP EPS was $0.23, compared to -$0.14 in the September 2009 quarter and -$5.45 in the December quarter of last year. The company took a goodwill impairment charge of $325.4 million in the year-ago quarter, which was the main reason for the GAAP loss in that period.
 
Balance Sheet
 
Inventories were up 0.4% in Dec, although inventory turns increased from 6.1X to 7.4X. Days sales outstanding (DSOs) went down from 61 to around 49, reflecting good collection in the last quarter. The company ended with cash and short term investments of $629.8 million, up $89.7 million during the quarter. 

Estimate Revisions
 
Estimate revisions have been limited over the past thirty days, with just one out of 6 analysts covering the stock raising estimates for the December quarter and the fiscal year ended in June 2010. However, the surprise history is very encouraging, with the trend showing higher positive surprises in each successive quarter.

In the last four quarters, the stock has beaten the Zacks Consensus Estimate by around $0.08 on an average. We expect the surprises to continue in the following quarters, which should drive further upside to the shares. Thus we reiterate our short term Buy (Zacks Rank #2) recommendation.