Harman Reports Sluggish 3Q

A developer of audio products and electronic systems, Harman International Industries Inc. ( HAR - Snapshot Report ) reported third quarter 2012 earnings of 79 cents per share, in line with the Zacks Consensus Estimate. Earnings jumped 14.5% year over year from 69 cents.

Quarter Details

Revenues decreased 5.0% year over year to $998.2 million in the third quarter of 2012, and was also short of the Zacks Consensus Estimate of $1.09 billion. The sluggish year-over-year growth was primarily attributed to weak performance across all the operating segments.

Infotainment revenue decreased 7.0% year over year to $561.0 million. Both the Lifestyle division and Professional division revenue declined 2.7% year over year to $292.0 million and $144.0 million, respectively.

Sales in BRIC (Brazil, Russia, India and China) increased 23.0% year over year, primarily attributable to a 27.0% upside in revenue from China.

Gross profit decreased 3.8% year over year to $278.3 million, primarily due to declining revenue. However, gross margin expanded 40 basis points (“bps”) to 27.9% in the reported quarter.

Segment wise, Infotainment division gross profit declined 11.1% year over year while Lifestyle division gross profit climbed 5.6% from the prior-year quarter. Professional revenue remained flat on a year over year basis in the reported quarter.

Selling, general and administrative (SG&A) expense decreased 6.7% year over year to $199.0 million in the third quarter. However, SG&A, as a percentage of revenue declined 40 bps to 19.9% in the reported quarter driven by productivity improvement across the company’s cost base.

Operating income was up 4.1% year over year to $79.3 million. Operating margin expanded 60 bps to 7.9% based on lower SG&A expense.

Net income was $54.7 million, up 9.8% from $49.8 million in the prior-year quarter.

As of September 30, 2012, cash and cash equivalents were $698.6 million compared with $820.4 million as of June 30, 2012. Liquidity was $1.2 billion, including a $541.0 million credit facility.

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 are expected to boost top-line and profitability over the long term.

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

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).