Harley Revives, Not Yet Profitable

Jan.25.11 | About: Harley-Davidson, Inc. (HOG)

Harley-Davidson Inc. (NYSE:HOG) posted a narrower loss of $42.1 million or 18 cents per share in the fourth quarter of 2010 compared with a loss of $147.2 million or 63 cents per share in the year-ago quarter.

Excluding the one-time charge of $85.2 million that the company’s incurred on early repurchase of senior unsecured notes, the company recorded a profit of $43.1 million or 18 cents per share during the quarter. This was in contrast to the Zacks Consensus Estimate of a loss of 30 cents per share.

The decrease in loss was attributable to higher earnings in the company’s Financial Services segment, which more than offset the negative impact from lower retail sales of motorcycles. Revenues in the quarter went up 21% to $1.08 billion.

For full year 2010, Harley’s profit more than tripled to $259.7 million or $1.11 per share, from $70.6 million or 30 cents per share. The profit was higher than the Zacks Consensus Estimate of 98 cents per share.

Motorcycles and Related Products
Revenues from Motorcycles and Related Products rose 20% to $917.1 million due to increase in shipments. Revenue from Harley-Davidson motorcycles appreciated 26% to $697.8 million.

The company shipped 44,481 motorcycles to global dealers and distributors, up from 35,938 motorcycles in the fourth quarter of 2009. Harley’s worldwide retail sales of new motorcycles fell 1% globally, decreased 0.2% in the U.S. and declined 2.1% in international markets.

Revenues from Parts and Accessories inched up 3.3% to $149.4 million and revenues from General Merchandise – which includes MotorClothes apparel – dipped 7.9% to $61.5 million.

Gross margin improved to 29.6% from 20.3% in the year-ago period. It was positively impacted by product mix and foreign currency and adversely affected by higher fixed costs spread over fewer units and the exit of the Buell product line. Harley expects gross margin in the range of 34%–35% for the full year 2011. Harley had an operating loss of $6.8 million in the quarter compared with $221.8 million in the year-ago period.

In 2011, Harley expects to ship 221,000 to 228,000 motorcycles worldwide, a 5%–8% increase from 2010. In the first quarter of 2011, Harley anticipates to ship 51,000 to 56,000 motorcycles.

Harley-Davidson Financial Services (HDFS)
Revenues in the Financial Services segment surged 29% to $166.3 million. The segment reported an operating income of $43.5 million in sharp contrast to an operating loss of $7.1 million in the year-ago quarter. This was attributable to higher net interest income and lower provision for credit losses

Restructuring Activities
Harley lowered its forecast to take into account one-time charges, related to restructuring activities that began in 2009, to $495 million–$510 million in 2012 (including charges of $85 million to $95 million in 2011), down from the prior estimate of $505 million–$535 million.

In 2010, Harley incurred restructuring charges of $164 million and realized savings of $172 million, up from the guidance of $150 million–$165 million.

Consequently, the company anticipates savings of $210 million to $230 million in 2011 and $275 million to $295 million in 2012 from restructuring activities. It continues to expect annual ongoing savings of $290 million to $310 million, beginning in 2013, upon completion of the restructuring activities.

Financial Position
Harley’s cash and cash equivalents totaled $1.02 billion as of December 31, 2010 compared to $1.63 billion in the same period of 2009. Long-term debt decreased significantly to $2.52 billion from $5.45 billion a year ago. Consequently, long-term debt-to-capitalization ratio reduced to 53% from 72% a year ago.

In 2010, Harley had an operating cash flow of $1.16 billion, an increase from $609 million in the prior year period. This can be mainly attributable to an increase in profit.

Meanwhile, capital expenditures increased to $170.8 million in the period under review from $116.7 million in the same period last year. For the full year, the company anticipates capital expenditure to range between $210 million and $230 million, including $60 million to $75 million to support restructuring activities.

Our Take
Harley-Davidson dominates roughly 50% of the U.S. market, providing scale advantages over most competitors. Furthermore, the company maintains an extremely strong franchise. It has a network of over 680 independent U.S. dealers (over 1,300 worldwide), 55% of which exclusively market Harley-Davidson branded motorcycles. As a result, the company retained a Zacks #1 Rank on its stock, which translated to a ‘Strong Buy’ recommendation for the short term (1–3 months).