Harley’s Profits More than Fourfold

Harley-Davidson, Inc. (HOG) showed more than fourfold increase in profits to $139.3 million or 59 cents per share in the second quarter of the year from $33.4 million or 14 cents per share. With this, the motorcycle maker also outperformed the Zacks Consensus Estimate of 42 cents per share during the quarter. Revenues from Motorcycles and Related Products were flat at $1.14 billion in the quarter.

Harley’s profit was attributable to its aggressive restructuring actions, incorporated in its go-forward business strategy. The actions included the new labor agreements at its facilities as well as discontinuation of its Buell product line and the divestment of its MV Agusta unit in order to focus solely on the Harley-Davidson brand.

Motorcycles and Related Products

Revenues from Harley-Davidson motorcycles inched up 2.8% to $831.6 million due to marginally higher shipments. The motorcycle maker’s global shipments increased to 59,046 units from 58,179 units in the second quarter of 2009.

Harley’s worldwide dealer retail sales of new motorcycles went down 5.5% to 78,946 units during the quarter. In the U.S., retail unit sales fell 8.4% to 49,841 units while international retail sales decreased marginally by 0.2% to 29,105 units. Retail sales were up 5% in Europe, up 2% in Canada, down 15% in the Asia Pacific and up 15% in Latin America.

Revenues from Parts and Accessories rose marginally by 0.2% to $231.8 million and revenues from General Merchandise – which includes MotorClothes apparel – were down 3.2% to $67.4 million.

Gross margin increased slightly to 35% during the quarter from 34.1% in the year-ago period. The operating margin decreased to 13.9% from 15.3% in the prior-year quarter, driven by higher restructuring costs and lower revenue in the quarter.

Harley reiterated its expectations to ship 201,000–212,000 motorcycles to dealers and distributors worldwide in 2010, a reduction of 5%–10% from 2009. In the third quarter of the year, the company anticipates to ship 53,000–58,000 motorcycles. The company expects gross margin to be between 32.5%–34% for the full year, up from the prior estimate of 32%–33.5%.

Financial Services

Revenues in the Financial Services segment rose 40% to $173.7 million. The segment reported an operating income of $60.8 million in sharp contrast to an operating loss of $90.5 million in the year-ago quarter. The profitability was attributable to an improved credit performance in the retail motorcycle loan portfolio and to a lower cost of funds.

Restructuring Activities

Harley continues to expect its restructuring activities to result in total one-time charges of $430 million–$460 million into 2012, including charges of $175 million–$195 million in 2010. In 2010, the company continues to expect savings of $135 million to $155 million from previously announced restructuring activities. Upon completion of the restructuring actions, annual savings could go up to $240 million to $260 million.

At the beginning of the year, the company successfully implemented the new labor agreement at its York facility that was in line with its restructuring strategy. The company will also begin negotiations on new labor agreements in its Wisconsin facility in this month.

The new agreement would take effect upon the expiration of the existing contracts in April 2012. Through the new agreements, the company will be able to close significant cost gaps in its Milwaukee-area and Tomahawk production operations and improve flexibility to meet seasonal and other customer-driven production needs. If the company does not succeed in achieving these objectives by September this year, it would relocate its Wisconsin production operations to another location within the U.S.

Financial Position

Cash and cash equivalents totaled $1.41 billion as of June 27, 2010 compared to $1.02 billion at the end of the year-ago period. Long-term debt amounted to $3.17 billion as of the above period. Long-term debt to capitalization ratio was flat at 60% compared to the end of the previous quarter.

In the first half of 2010, Harley had an operating cash flow of $726 million, in sharp contrast to an operating cash outflow of $125 million in the prior year period. This can be mainly attributable to the significant improvement in profit during the quarter.

Meanwhile, capital expenditures reduced to $45.8 million in the period under review from $49.1 million in the same period last year. For the full year, capital expenditures are expected in the range of $235 million and $255 million, including $95 million to $110 million to support restructuring activities.

Despite the impressive results, we believe the company’s aging customer base and slow recovery in the markets, reflecting its sluggish worldwide retail sales, will continue to negatively affect the company. As a result, we have recommended the shares of the company as Hold (Zacks#3 Rank) in the short term (1–3 months) and Neutral in the long term (6+ months).

HARLEY-DAVIDSON (HOG): Free Stock Analysis Report
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