Maybe things don’t seem as gloomy as they did during the mild economic panic of last year, but the economy is definitely in a low-power mode, affecting every industry, including motorcycles. On July 16th, Harley-Davidson released its second-quarter 2009 results, revealing a grim picture of the company’s sales and outlook.
Like last quarter, H-D’s profits are well down on the prior-year quarter, sinking to $19.8 million from $222.8 million in the same period last year. Harley faces two major challenges: a 35 percent drop in domestic sales (H-D claims the drop in sales of all brands of heavyweight motorcycles nationwide was 48 percent in the same period), and the struggles of its financing division, HDFS. A $72 million “credit loss provision” and $28 million write-off of goodwill related to HDFS contributed to poor earnings.
Things probably won’t improve much anytime soon. H-D is now projecting between 212,000 and 228,000 units will be shipped worldwide for 2009, 25 to 30 percent less than last year. The report also announces that in addition to the approximately 1700 positions that will be eliminated through 2010, an additional 1000 will be eliminated; 700 in manufacturing, and 300 elsewhere in the company.
As we reported last quarter, the Motor Company’s management is aggressively taking steps to weather the tough times. Operations are being consolidated – H-D is considering moving or shutting down the York engine plant – the brand will be strengthened with new models and manufacturing processes will be streamlined, and HDFS will be infused with still more capital. We’ll see if these changes will do the trick, and keep the Motor Company roaring along.
revenue, net income and diluted earnings per share for the second quarter of
2009 compared to the year-ago period.
Net income of $19.8 million and diluted earnings per share of $0.08 were
primarily affected by the planned 27.6 percent reduction in motorcycle
shipments compared to the year-ago period and by two non-cash charges related
to HDFS: a $72.7 million credit loss provision for a one-time reclassification
of motorcycle loan receivables; and a one-time $28.4 million charge to write
off the total goodwill associated with HDFS.
Worldwide retail unit sales of new Harley-Davidson® motorcycles were
down 30.1 percent compared to the year-ago quarter. Retail new Harley-Davidson
motorcycle sales in the
were down 35.1 percent and declined 18.2 percent in international markets
compared to last year’s second quarter. Industry-wide retail sales of heavyweight
motorcycles in the
declined 48.1 percent for the same period.
“While the
underlying fundamentals of the Harley-Davidson brand remain strong and our dealers’
retail motorcycle sales declined less than our competitors, it is obviously a
very tough environment for us right now, given the continued weak consumer spending in the overall economy
for discretionary purchases,” said Harley-Davidson, Inc.
President and CEO Keith Wandell.
In light of the decline in retail motorcycle sales, the Company also
lowered its 2009 shipment expectations for Harley-Davidson motorcycles. The
Company now plans to ship between 212,000 and 228,000 Harley-Davidson
motorcycles to dealers and distributors worldwide in 2009, or 25 percent to 30
percent fewer than the 303,479 shipped in 2008. Prior 2009 guidance was for
shipments of 264,000 to 273,000 motorcycles. In the third quarter of 2009, the
Company expects to ship 52,000 to 57,000 Harley-Davidson motorcycles.
As a result of the lowered shipment volume, the Company will implement
a further reduction this year of approximately 700 positions in the hourly
production workforce. Harley-Davidson will also be reducing the non-production,
primarily salaried headcount by an approximate 300 additional positions,
including a reduction at HDFS. The Company plans to offer a voluntary
separation incentive package to eligible salaried employees. Earlier this year,
the Company had announced workforce reductions totaling about 1,400 to 1,500 hourly
production positions in 2009 and 2010 and about 300 non-production, primarily
salaried positions.
“We continue to
take these difficult actions to manage through the current challenges and we
also continue to take major steps in creating the operational effectiveness
that is essential to our long-term future,” said Wandell. “We are
committed to doing what is required to enable Harley-Davidson to operate as a competitive
business and employer over the long haul.”
The Company continues to expect full-year gross margins to be between
30.5 percent and 31.5 percent.
Details of Harley-Davidson, Inc. Second-Quarter
and Six-Month Results
Second Quarter. Net income for the quarter was $19.8 million, compared to $222.8
million in the second quarter of 2008, on revenue of $1.15 billion compared to
$1.57 billion in the year-ago period. Diluted earnings per share for the second
quarter were $0.08, compared to diluted earnings per share of $0.95 in last
year’s second quarter.
A key factor affecting earnings was the one-time reclassification of
finance receivables from held-for-sale to held-for-investment and the related
$72.7 million non-cash provision to establish the related initial credit loss
allowance.
In addition, as a result of Harley-Davidson’s lower shipment
volume projections, the Company recorded a non-cash, one-time $28.4 million impairment
charge to write off the goodwill recorded in connection with the 1995 purchase
of HDFS.
The Company believes HDFS continues to have significant strategic value
despite the write-off of remaining goodwill caused by the current economic
environment.
Six Months. For the first six months of
2009, Company revenue totaled $2.44 billion, a 15.1 percent decrease from the
year-ago period. Diluted earnings per share were $0.59,
a decrease of 66.1 percent compared to the same period last year. Net income
was $137.1 million, compared to $410.4 million in the first half of 2008.
Strategy for the Current Economic Environment
In early 2009, Harley-Davidson announced a three-part strategy for
managing through the global economic downturn and strengthening its operations
and financial results going forward. That strategy consists of: 1) investing in
the brand; 2) creating the appropriate cost structure; and 3) obtaining funding
to support the lending activities of HDFS.
Brand
Investment
Reductions in
Harley-Davidson’s motorcycle shipment plans for 2009 reflect the
Company’s intense focus on maintaining brand strength. “When it
comes to protecting and enhancing the brand, managing supply in line with
demand is one of the most important things we can do. We plan to ship fewer
Harley-Davidson motorcycles worldwide this year than we anticipate dealers will
sell at retail,” Wandell said.
At the same time, Harley-Davidson
continues to make significant investments in product development and marketing,
and the Company is more focused than ever on making those investments work
harder and smarter, according to Wandell. “We’ve got a great lineup
of motorcycles and one of our top priorities is to reduce complexity and improve
efficiency throughout our product development and manufacturing processes,”
said Wandell.
On July 25, 2009,
Harley-Davidson Motor Company introduces 2010 model year motorcycles at its
Summer Dealer Meeting in
Cost
Structure
The Company earlier this year announced plans to consolidate its two
Milwaukee-area powertrain (engine and transmission) plants into one facility;
consolidate paint and frame operations at its
Parts and Accessories distribution center and consolidate those operations with
General Merchandise distribution through a third-party logistics company. In
April, the Company completed the transition of its
operations to a third-party provider as part of its restructuring initiatives.
Powertrain Consolidation Accelerated.
Production shutdowns and
line rate adjustments will be implemented at Harley-Davidson powertrain
operations in Menomonee Falls and
to achieve the newly-announced unit volume reduction. As a result of the volume
reduction and production shutdowns, the Company expects to accelerate and
substantially complete the planned consolidation of the powertrain operations by
mid-2010.
Sportster® and V-Rod® motorcycle final assembly operations and V-Rod
motorcycle powertrain production in Kansas City, and production of Sportster motorcycle
powertrains in Wauwatosa will be shut down for approximately 14 weeks in 2009,
including the entire fourth quarter. The Company anticipates that other
production operations will be shut down for a total of approximately five weeks
over the rest of 2009.
On a combined basis, Harley-Davidson now expects the volume reductions
and restructuring activities to result in one-time charges of approximately $160
million to $190 million over the course of 2009 and 2010, an increase of $40 million
from earlier estimates, including $50.0 million incurred during the first half
of 2009. The Company now estimates ongoing annual savings of approximately $140
million to $150 million, or $70 million greater than previously estimated, upon
completion of the announced restructuring actions. Savings in 2009 are now estimated
to be $70 million to $85 million.
Harley-Davidson has determined that the Company’s
or sustainable. The Company has undertaken a “two path” study to
determine whether major, additional restructuring at
can achieve cost and efficiency targets to make the operations viable, or
alternatively, whether the Company will relocate the
operations to another
location. The Company expects to make a decision on the status of the
year.
HDFS
Funding
Harley-Davidson continues
to focus intently on the funding needs of HDFS and, utilizing a variety of
funding paths, has provided liquidity for expected HDFS lending activities
through the end of this year and into 2010. The Company continues to evaluate
additional funding actions to diversify funding sources and balance long-and
short-term HDFS debt needs, as well as provide sufficient liquidity for new
loan originations.
Business Segment Second-Quarter and
Six-Month Results
Motorcycles
and Related Products Segment
Second
Quarter. Revenue from Harley-Davidson motorcycles during the
second quarter of 2009 was $808.7 million, a decrease of $375.7 million or 31.7
percent versus the same period last year. The Company
shipped 58,179 Harley-Davidson motorcycles in the second quarter of 2009
compared to 80,326 motorcycles shipped in the year-ago period and within the
Company’s guidance for this year’s first quarter.
Revenue from Parts and
Accessories (P&A), which consists of Genuine Motor Parts and Genuine Motor
Accessories, totaled $231.5 million, a decrease of $34.2 million or 12.9
percent versus the year-ago quarter. Revenue from General Merchandise, which includes
MotorClothesâ apparel, totaled $69.6
million, a decrease of $7.2 million or 9.4 percent from the year-ago quarter.
Gross margin for the second
quarter of 2009 was 33.5 percent of revenue compared to 35.7 percent for the second
quarter last year. Operating margin was 14.5 percent, compared to 20.1 percent
in the second quarter of 2008. Gross and operating margins were adversely
affected during the quarter by the shipment volume reduction.
Six Months. Through the first six months of
this year, shipments of Harley-Davidson motorcycles were 132,849 units, a 12.7
percent decrease compared to last year’s 152,194 units. Harley-Davidson
motorcycle revenue through six months was $1.82 billion, down 17.2 percent
compared to last year’s $2.20 billion. Six-month P&A revenue totaled
$401.2 million, a 10.4 percent decrease from last year’s $447.6 million.
General Merchandise revenue totaled $144.8 million, a 10.0 percent decrease
compared to $160.8 million during the same period in 2008. Gross margin through
six months was 35.3 percent and operating margin was 16.2 percent, compared to
36.1 percent and 20.1 percent respectively in last year’s first half.
Motorcycle
Retail Sales
Second
Quarter. During the second quarter, worldwide retail sales of
Harley-Davidson motorcycles decreased 30.1 percent compared to the prior-year
quarter. In the
retail sales of Harley-Davidson motorcycles decreased 35.1 percent from the
year-ago period. Industry-wide retail sales of heavyweight motorcycles in the
48.1 percent during the quarter.
In international markets,
retail sales of Harley-Davidson motorcycles decreased 18.2 percent during the second
quarter of 2009 compared to the second quarter of 2008.
Six Months. For the first half of 2009,
worldwide retail sales of Harley-Davidson motorcycles declined 23.6 percent
compared to the prior year.
retail sales of Harley-Davidson motorcycles declined 26.1 percent for the first
half of the year while the
heavyweight market segment was down 40.0 percent for the same period, compared
to the year-ago period. International retail sales of Harley-Davidson
motorcycles decreased 17.8 percent for the first six months of 2009 compared to
2008.
First half
data are listed in the accompanying tables.
Financial
Services Segment
Harley-Davidson
Financial Services recorded an operating loss of $62.1 million for the second quarter,
compared to operating income of $37.1 million in the year-ago quarter. In
addition to the effects of the finance receivables reclassification HDFS recorded $15.0 million in writedowns on retained securitization
interests due to expected higher credit losses compared to a $6.3 million
write-down in the year ago period. For the first half of 2009, HDFS reported an
operating loss of $50.9 million, compared to operating income
of $72.1 million for the prior-year period. In addition, the Company wrote off
$28.4 million of goodwill associated with HDFS.
Income
Tax Rate
The Company’s
second-quarter effective income tax rate was 71.6 percent, compared to 36.0
percent in the same quarter last year. This increase was due primarily to
the non-deductible goodwill write-off and the tax implications of MV Agusta,
which the Company acquired in August 2008. The Company expects its
full-year 2009 effective tax rate to be approximately 55 percent due to the items
listed above as well as the previously reported one-time tax charge of $22.5
million in the first quarter of 2009 and the implications of reduced shipments on
earnings for the remainder of the year.
Cash Flow
Cash and cash equivalents totaled $1.03 billion as of June
28, 2009, compared to $803.4 million at the end of the year-ago period. Cash
used by operations was $164.4 million and capital expenditures were $57.3
million during the second quarter of 2009. For the
full year, capital expenditures are now expected to be $145 million to $175 million,
including $20 million to $30 million related to restructuring activities.
Company
Background
Harley-Davidson,
Inc. is the parent company for the group of companies doing business as Harley-Davidson
Motor Company (HDMC), Buell Motorcycle Company (Buell), MV Agusta and
Harley-Davidson Financial Services (HDFS). Harley-Davidson Motor Company
produces heavyweight custom, touring and cruiser motorcycles. Buell produces
American sport performance motorcycles. MV Agusta produces premium,
high-performance sport motorcycles sold under the MV Agusta® brand and
lightweight sport motorcycles sold under the Cagiva® brand. HDFS provides
wholesale and retail financing and insurance programs primarily to
Harley-Davidson and Buell dealers and customers.
Forward-Looking Statements
The Company intends that certain matters discussed in this release are
“forward-looking statements” intended to qualify for the safe
harbor from liability established by the Private Securities Litigation Reform
Act of 1995. These forward-looking statements can generally be identified as
such because the context of the statement will include words such as the
Company “believes,” “anticipates,” “expects,”
“plans,” or “estimates” or words of similar meaning.
Similarly, statements that describe future plans, objectives, outlooks,
targets, guidance or goals are also forward-looking statements. Such
forward-looking statements are subject to certain risks and uncertainties that
could cause actual results to differ materially from those anticipated as of
the date of this release. Certain of such risks and uncertainties are described
below. Shareholders, potential investors, and other readers are urged to
consider these factors in evaluating the forward-looking statements and
cautioned not to place undue reliance on such forward-looking statements. The
forward-looking statements included in this release are only made as of the
date of this release, and the Company disclaims any obligation to publicly
update such forward-looking statements to reflect subsequent events or
circumstances.
The Company’s
ability to meet the targets and expectations noted depends upon, among other
factors, the Company’s ability to (i) effectively execute the Company’s
restructuring plans within expected costs and timing, (ii) successfully achieve
with our labor union partners flexible and cost-effective agreements to
accomplish restructuring goals and long-term competitiveness, (iii) manage the
risks that our independent dealers may have difficulty obtaining capital, and adjusting
to the recession and slowdown in consumer demand, (iv) manage supply chain
issues, (v) anticipate the level of consumer confidence in the economy, (vi)
continue to have access to reliable sources of capital funding and adjust to
fluctuations in the cost of capital, (vii) manage the credit quality, the loan
servicing and collection activities, and the recovery rates of HDFS’ loan
portfolio, (viii) continue to realize production efficiencies at its production
facilities and manage operating costs including materials, labor and overhead,
(ix) manage production capacity and production changes, (x) provide products,
services and experiences that are successful in the marketplace, (xi) develop
and implement sales and marketing plans that retain existing retail customers
and attract new retail customers in an increasingly competitive marketplace,
(xii) sell all of its motorcycles and related products and services to its
independent dealers, (xiii) continue to develop the capabilities of its
distributor and dealer network, (xiv) manage changes and prepare for
requirements in legislative and regulatory environments for its products,
services and operations, (xv) adjust to fluctuations in foreign currency
exchange rates, interest rates and commodity prices, (xvi) adjust to healthcare
inflation, pension reform and tax changes, (xvii) retain and attract talented
employees, (xviii) detect any issues with our motorcycles or manufacturing
processes to avoid delays in new model launches, recall campaigns, increased
warranty costs or litigation, (xix) implement and manage enterprise-wide
information technology solutions and secure data contained in those systems,
and (xx) successfully integrate and profitably operate MV Agusta Group.
In addition, the Company could experience delays or disruptions in its
operations as a result of work stoppages, strikes, natural causes, terrorism or
other factors. Other factors are described in risk factors that the Company has
disclosed in documents previously filed with the Securities and Exchange
Commission. Many of these risk factors are impacted by the current turbulent
capital, credit and retail markets and our ability to adjust to the recession.
The Company’s ability to sell its motorcycles and related
products and services and to meet its financial expectations also depends on
the ability of the Company’s independent dealers to sell its motorcycles
and related products and services to retail customers. The Company depends on
the capability and financial capacity of its independent dealers and
distributors to develop and implement effective retail sales plans to create
demand for the motorcycles and related products and services they purchase from
the Company. In addition, the Company’s independent dealers and
distributors may experience difficulties in operating their businesses and
selling Harley-Davidson motorcycles and related products and services as a
result of weather, economic conditions or other factors.
