Harman Realignment Puts Luxury Home and Car Audio in One Division and Infotainment in Another

Hit by vehicle production disruptions from the earthquake and tsunami in Japan and a rise in the price of neodymium for magnets used in high-end loudspeakers, Harman International said net income plunged 86 percent from a year ago in its fiscal Q4 to $18.87 million. Revenue of $1 billion for Q4 2011 compared with $850 million for the 2010 quarter, the company said. While “revenues were strong” in the company’s infotainment business, said CEO Dinesh Paliwal, they couldn’t “offset the loss of profit associated with the change in product mix,” resulting in a hit of 30 cents of earnings per share in the quarter, he said. Increases in July indicate the situation “is improving,” he said, and the company expects vehicle production to return to normal levels in the near term.

Expenditures for neodymium, a rare earth metal, jumped by $85 million in fiscal 2012, Paliwal said. To date, the company has identified $30 million in “cost mitigation actions,” he said. Harman is also working with product design teams to find substitute materials, he said. Harman will pass along price increases to distributors, channel partners and auto makers to further lower the cost impact, he said. Anyone buying neodymium is in a “tough spot” and “lucky to get allocation,” Paliwal said. Prices, set by the Chinese government, which has a corner on the neodymium market, have gone up 1,000 percent, he said. With Harman’s scale, it’s able to guarantee allocation for now, but the company will have to re-tool and make adjustments, he said. By the end of fiscal Q1, the company will have “much better information” about customer negotiations for price increases and product design changes, he said.

Harman also announced a reorganization of its consumer and automotive divisions into Lifestyle and Infotainment divisions “to meet market trends and consumer demands,” Paliwal said. Over the past few years Harman has instituted a program to revitalize operations and as part of the program it is realigning the organization to leverage resources, he said. Beginning with a consumer campaign launching in September, the company will integrate brand marketing across vertical markets, channels, and customers in all geographies, he said.

Products in the Infotainment division include navigation, hands-free telephony, Internet and wireless connectivity, and in-vehicle safety systems including camera, infrared, and laser technologies. Citing Strategy Analytics research, Paliwal said that by 2015, one in every five cars produced worldwide, or 21 million new vehicles, will have an infotainment system, up from 11 million in 2010. Harman’s Infotainment division is expected to generate $2.1 billion revenue from brands including Audi, BMW, Chrysler, Ferrari, Fiat, Hyundai, Mercedes Benz, Porsche, Peugeot, Toyota, Volvo and Volkswagen, he said.

In the Lifestyle division, which includes AKG, Harman Kardon, JBL, Mark Levinson, Infinity, and Lexicon brands, the company hopes to leverage consumer research, technology trends, R&D, and procurement of its luxury home audio and branded car audio businesses. Automotive brands incorporating Harman technology include BMW, Chrysler, Ferrari, Fiat, GM, Harley-Davidson, Hyundai, Jaguar, Land Rover, Lexus, Mercedes Benz, Rolls Royce, Subaru and Toyota. Premium audio penetration will increase by 45 percent over the next five years in the car market, Paliwal said, citing iSuppli figures. The home and car audio segments represent $1 billion in revenue, he said.

Harman closed down Wednesday 80 cents to $29.24.