HARMAN Reports Third Quarter Fiscal 2016 Results

HARMAN International Industries, Incorporated (NYSE:HAR), the premier connected technologies company for automotive, consumer and enterprise markets, today announced results for the third quarter ended March 31, 2016.

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Net sales for the third quarter were $1.6 billion, an increase of 11 percent compared to the prior year or 12 percent excluding the impact of foreign currency translation (ex-FX). Connected Car net sales increased five percent (six percent ex-FX) primarily due to higher take rates. Lifestyle Audio net sales increased 11 percent (12 percent ex-FX) due to the acquisition of Bang & Olufsen Automotive, higher car audio take rates and higher consumer audio sales. Net sales in Professional Solutions decreased four percent (three percent ex-FX) mainly due to lower demand in Brazil and certain European markets, as well as channel rationalization to support a solutions-based go-to-market structure. Connected Services net sales were $166 million compared to $67 million in the prior year, primarily due to the expansion of the Company’s services portfolio as a result of the acquisition of Symphony Teleca (STC).

On a GAAP basis, third quarter operating income increased 48 percent to $135 million compared to $92 million in the prior year and EBITDA increased 41 percent to $186 million compared to $132 million in the prior year. Earnings per diluted share increased 23 percent to $1.22 compared to $0.99 in the prior year. The Company recorded $13 million of restructuring, non-recurring charges and acquisition-related items compared to $23 million in the prior year. The decrease was primarily due to lower restructuring costs compared to the prior year.

Excluding restructuring, non-recurring charges and acquisition-related items, third quarter operating income increased 30 percent to $148 million compared to $114 million in the prior year, and EBITDA increased 26 percent to $189 million compared to $150 million in the prior year. Earnings per diluted share were $1.36 compared to $1.22 in the prior year.

“For the 12th consecutive quarter, HARMAN has delivered top and bottom line growth, and in the quarter, we grew EBITDA 26 percent year-over-year. Our Connected Car and Lifestyle Audio divisions, which represent approximately 75 percent of our revenue, continue to deliver strong results. In our Professional Solutions division, we are taking decisive actions to improve performance and better position HARMAN for growth,” said Dinesh C. Paliwal, the Company’s Chairman, President and CEO.

“HARMAN is capitalizing on the robust demand for seamless, secure connectivity across the full vehicle market. On top of the record $6.2 billion in automotive awards we announced in fiscal 2015, I am very pleased with the additional $3.5 billion of new automotive awards secured year-to-date, including a breakthrough display audio infotainment award.”

Summary of Operations – Gross Margin and SG&A (Non-GAAP)

Gross margin for the third quarter of fiscal year 2016 increased 160 basis points to 30.4 percent. The improvement was primarily due to the impact of higher sales volume leveraging a more efficient fixed production cost base and productivity initiatives.

In the third quarter of fiscal year 2016, SG&A expense as a percentage of net sales increased 30 basis points to 21.3 percent compared to 21.0 percent in the prior year due to higher selling and marketing expenses.

2016 Guidance Update

HARMAN updated its financial outlook for fiscal 2016. The Company now forecasts fiscal 2016 revenue of approximately $6.825 billion and operational earnings per share of $6.20. The majority of the revenue and EPS reduction is related to weakness in the Professional Solutions division as well as supply constraints as a result of the recent earthquakes in Japan.

Investor Call Today April 28, 2016

At 11:00 a.m. EDT today, HARMAN’s management will host an analyst and investor conference call to discuss the third quarter results. Those who wish to participate via audio in the earnings conference call should dial 1 (888) 224-7971 (U.S.) or +1 (303) 223-2684 (International) ten minutes before the call and reference HARMAN, Access Code: 21809222.

In addition, HARMAN invites you to visit the Investors section of its website at: www.harman.com where visitors can sign-up for email alerts and conveniently download copies of historical earnings releases and supporting slide presentations, among other documents. The fiscal third quarter earnings release and supporting materials were posted on the site at approximately 8:00 a.m. EDT today.

A replay of the call will also be available following its completion at approximately 1:00 p.m. EDT. The replay will be available through Friday, July 29, 2016 at 1:00 p.m. EDT. To listen to the replay, dial 1 (800) 633-8284 (U.S.) or +1 (402) 977-9140 (International), Access Code: 21809222. If you need technical assistance, call the toll-free Global Crossing Customer Care Line at 1 (800) 473-0602 (U.S.) or +1 (303) 446-4604 (International).

General Information

HARMAN (harman.com) designs and engineers connected products and solutions for automakers, consumers, and enterprises worldwide, including connected car systems, audio and visual products, enterprise automation solutions; and connected services. With leading brands including AKG®, Harman Kardon®, Infinity®, JBL®, Lexicon®, Mark Levinson® and Revel®, HARMAN is admired by audiophiles, musicians and the entertainment venues where they perform around the world. More than 25 million automobiles on the road today are equipped with HARMAN audio and connected car systems. The Company’s software services power billions of mobile devices and systems that are connected, integrated and secure across all platforms, from work and home to car and mobile. HARMAN has a workforce of approximately 29,000 people across the Americas, Europe, and Asia and reported sales of $6.7 billion during the 12 months ended March 31, 2016. The Company’s shares are traded on the New York Stock Exchange under the symbol NYSE:HAR.

A reconciliation of the non-GAAP measures included in this press release to the most comparable GAAP measures is provided in the tables contained at the end of this press release. HARMAN does not intend for this information to be considered in isolation or as a substitute for other measures prepared in accordance with GAAP.

Forward-Looking Information

Except for historical information contained herein, the matters discussed in this earnings presentation are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. One should not place undue reliance on these statements. The Company bases these statements on particular assumptions that it has made in light of its industry experience, as well as its perception of historical trends, current market conditions, current economic data, expected future developments and other factors that the Company believes are appropriate under the circumstances. These statements involve risks, uncertainties and assumptions that could cause actual results to differ materially from those suggested in the forward-looking statements, including but not limited to: (1) the Company’s ability to maintain profitability if there are delays in its product launches or increased pricing pressure from its customers; (2) the loss of one or more significant customers, the loss of a significant platform with an automotive customer or the in-sourcing of certain services by the Company’s automotive customers; (3) fluctuations in currency exchange rates, particularly with respect to the value of the U.S. Dollar and the Euro; (4) fluctuations in the price and supply of raw materials including, without limitation, petroleum, copper, steel, aluminum, synthetic resins, rare metals and rare-earth minerals, or shortages of materials, parts and components; (5) the inability of the Company’s suppliers to deliver products at the scheduled rate and disruptions arising in connection therewith; (6) the Company’s ability to maintain a competitive technological advantage through innovation and leading product designs; (7) the Company’s ability to integrate successfully its recently completed and future acquisitions; (8) the Company’s ability to attract and retain qualified senior management and to prepare and implement an appropriate succession plan for its critical organizational positions; (9) the Company’s failure to maintain the value of its brands and implementing a sufficient brand protection program; and (10) other risks detailed in the Harman International Industries, Incorporated Annual Report on Form 10-K for the fiscal year ended June 30, 2015 and other filings made by the Company with the Securities and Exchange Commission. The Company undertakes no obligation to publicly update or revise any forward-looking statement except as required by law.

This earnings release also makes reference to the Company’s awarded business or “backlog”, which represents the estimated future lifetime net sales for all customers. The Company's future awarded business does not represent firm customer orders. The Company reports its awarded business primarily based on written award letters. To validate these awards, the Company uses various assumptions including global vehicle production forecasts, customer take rates for the Company’s products, revisions to product life cycle estimates and the impact of annual price reductions and exchange rates, among other factors. These assumptions are updated and reported externally on an annual basis.

APPENDIX

Connected Car

Net sales in the third quarter of fiscal 2016 were $767 million, an increase of five percent (six percent ex-FX) compared to the prior year. The increase in net sales was due to higher take rates.

On a non-GAAP basis in the third quarter of fiscal 2016, gross margin increased 370 basis points to 26.4 percent compared to the prior year primarily due to the impact of higher sales volume leveraging a more efficient fixed production cost base, lower warranty costs and supplier productivity. SG&A expenses as a percent of sales increased 110 basis points to 13.6 percent compared to the prior year due to higher information technology costs to support future business.

Connected Car Highlights

HARMAN continues to expand and diversify its Connected Car offerings with global automakers. The Company secured embedded infotainment business with a new North American customer to provide a display audio solution across multiple car lines. HARMAN won a global expansion award from a European OEM to support higher take rates, as well a platform refresh for 2017 vehicles. In addition, the Company received a follow-on award to expand the next generation integrated telematics program for Daimler.

HARMAN launched embedded infotainment solutions in a number of new vehicles, including the Audi Q2 crossover, the Seat (VW) Alteca SUV and Maserati (FCA) Levante supercar. In Japan, HARMAN launched an embedded infotainment system featuring Apple CarPlay on the new Suzuki Ignis. The Company also launched model refreshes and line extensions featuring its embedded infotainment solutions in the Porsche Macan, 911, and 718 Boxster, as well as the Mercedes Benz C-class convertible, GLC Coupe and AMG GLC43.

HARMAN continued to reinforce its leadership in technology innovations that advance connectivity, driver safety, and autonomous driving. During the Geneva Motor Show, HARMAN demonstrated its full suite of connected car technologies through the LIVS (Life-enhancing Intelligent Vehicle System) automotive compute platform. The Company also expanded its partnership with NXP to add V2X support, which allows ADAS alerts to be delivered to vehicles from other cars and surrounding infrastructure to warn drivers about potentially hazardous traffic situations.

In March, HARMAN completed the acquisition of TowerSec, a leading global provider of automotive cybersecurity solutions. TowerSec’s products, featuring intrusion detection and prevention systems as well as secure telematics offerings, will be integrated into HARMAN’s “5+1” cybersecurity framework.

Lifestyle Audio

Net sales in the third quarter of fiscal 2016 were $473 million, an increase of 11 percent (12 percent ex-FX) compared to the prior year primarily due to the acquisition of Bang & Olufsen Automotive, higher car audio take rates and higher consumer audio sales.

On a non-GAAP basis in the third quarter of fiscal 2016, gross margin improved by 370 basis points to 35.5 percent compared to the prior year, primarily due to improved operating leverage as a result of higher sales volume, the acquisition of Bang & Olufsen Automotive and supplier productivity. SG&A expenses as a percentage of sales increased 250 basis points to 22.0 percent primarily due to higher research and development to support new car audio awards.

Lifestyle Audio Highlights

HARMAN won new business awards with Lincoln, Toyota and Subaru. During the quarter, the Company launched branded car audio solutions in the Maserati Levante (Harman Kardon / Bowers & Wilkins), the Lincoln MKZ (Revel), the new Alfa Romeo Giulia (Harman Kardon) and the Ferrari GTC 4 Lusso (JBL Pro).

HARMAN inaugurated a new global development center in Suzhou, China. The center is now the Company’s largest comprehensive research and development center for car audio products worldwide.

The Company entered into a multi-year agreement with Lufthansa to supply award-winning AKG branded active noise cancelling headphones for all business class seats beginning in September 2016. This quarter, HARMAN’s Consumer Audio products were again recognized for their design and innovation, winning a record 23 Red Dot awards.

Professional Solutions

Net sales in the third quarter of fiscal 2016 were $232 million, a decrease of four percent (a decrease of three percent ex-FX) compared to the prior year. The decrease in net sales is primarily due to lower demand in Brazil and certain European markets, as well as channel rationalization to support a solutions-based go-to-market structure.

On a non-GAAP basis in the third quarter of fiscal 2016, gross margin decreased 780 basis points to 33.7 percent, driven by discounts on older inventory and to partially offset foreign currency impacts. In addition, the Company incurred incremental costs associated with migrating manufacturing to Hungary and reduced operating leverage as a result of lower sales. SG&A expense as a percentage of sales decreased 190 basis points to 30.6 percent compared to 32.5 percent in the prior year, driven by tighter expense controls.

Professional Solutions Highlights

HARMAN’s entertainment and enterprise solutions were selected by leading system integrators and installers around the world. Notable installations included Norwegian Cruise Line’s The Pride of America and Raymond James Stadium in Tampa Bay. The Company’s enterprise solutions were installed in meeting rooms across the globe for customers including eBay and Societe Generale. The Company’s solutions also powered a wide range of high-profile special events, music festivals and televised award shows, including the Super Bowl 50 Halftime Show and the 58th Annual Grammy Awards.

Connected Services

Net sales in the third quarter of fiscal 2016 were $166 million compared to $67 million in the prior year, driven primarily by the expansion of the Company’s services portfolio. On a non-GAAP basis, gross margin was 28.7 percent and SG&A expenses as a percentage of sales were 20.3 percent.

Connected Services Highlights

HARMAN secured business to provide product development services for Blackberry, British Telecom, Intel and Sony, among others. In addition, the Company continued to capitalize on its industry-leading over-the-air (OTA) software update technology, winning a cross-car line award with a global automaker. Over the air updates are the foundation technology for the connected car, allowing automakers to quickly enable new features, fix bugs, upgrade firmware, and offer a rich suite of end-to-end services.

In conjunction with the HARMAN Service Delivery Platform, the Company introduced its Automotive Service Provider Program. The program facilitates the integration of a variety of enterprise and vehicle-centric applications and services from leading providers. HARMAN added 10 new data, workflow and content service providers for its open platform, which enables automakers to provide a wide range of context-based services, including real-time traffic, location based services, shopping, parking, streaming audio and live news.

HARMAN also received a number of industry accolades for its products and services. Respected advisory firm Zinnov recognized the Company for the second time, naming HARMAN a top engineering services provider. HARMAN was placed in the “Leadership Zone” for the Information Services, New Media and Gaming categories. HfS Research also honored HARMAN with a place in its “Winner’s Circle”, recognizing the Company’s excellence in software product engineering services.

Other (Corporate)

Other (Corporate) SG&A expenses include compensation, benefit and occupancy costs for corporate employees, new technology innovation and expenses associated with the Company’s brand identity campaign. On a non-GAAP basis, Corporate SG&A as a percentage of total Company net sales decreased 60 basis points to 2.2 percent.