Harley Beats but Profits Fall


Harley-Davidson Inc. (HOG) posted a 24.4% fall in earnings to 59 cents per share in the third quarter of the year from 78 cents a year ago due to previously planned lower motorcycle shipments during the launch of an ERP production system at the company’s largest assembly plant in York. However, earnings exceeded the Zacks Consensus Estimate by a penny.

Total profit declined 27.0% to $134.0 million from $183.6 million in the third quarter of 2011. Consolidated revenues dipped 10.5% to $1.3 billion, driven by lower shipments. Nevertheless, it was higher than the Zacks Consensus Estimate of $1.1 billion. Operating income ebbed 10.5% to $217.1 million from $242.7 million in the third quarter of 2011.

Motorcycles and Related Products

Revenues from Motorcycles and Related Products went down 11.6% to $1.1 billion. Revenues from Harley-Davidson motorcycles sagged 16.1% to $774.0 million as shipments of motorcycles decreased 14.5% to 52,793 units from 61,745 units in the third quarter of 2011.

Harley’s worldwide dealer retail sales of new motorcycles fell marginally by 1.3% to 61,053 units in the quarter. In the U.S., retail sales dipped 5.4% to 40,402 units while international retail sales grew 7.6% to 20,651 units. In the quarter, unit sales rose 32.3% in Latin America, 9.8% in Asia Pacific and 1.8% in the Middle East and Africa (:EMEA) and fell 4.7% in North America.

Revenues from Motorcycle Parts and Accessories went down 0.8% to $233.7 million and revenues from General Merchandise – which includes MotorClothes apparel – appreciated 9.1% to $75.6 million.

Gross margin increased 1 percentage point to 34.7% from 33.7% in the year-ago period. However, operating margin declined 1.4 percentage points to 13.3% from 14.7% in the last year’s quarter.

Harley-Davidson Financial Services (:HDFS)

Revenues in the HDFS segment declined 2.1% to $161.0 million. However, operating income improved 16.7% of $72.4 million compared with $62.0 million in the third quarter of 2011 due to better year over year credit performance and lower interest expense.

Restructuring Activities

Harley’s restructuring expenditures reduced 25.8% to $9.2 million in the quarter. The company has lowered its forecast to incur one-time charges, related to restructuring activities that began in 2009, by $5 million to $35 million–$45 million for 2012 compared with the prior guidance.

Upon the completion of restructuring activities in 2013, Harley continues to expect restructuring activities to result in one-time cost of $490 million to $510 million. The company continues to expect cumulative savings of $275 million to $295 million in 2012 from the activities, resulting in cumulative annual ongoing savings of $315 million to $335 million beginning in 2014.

Share Repurchase

Harley repurchased 1.9 million shares of its common stock for $84.9 million during the quarter. At the end of the quarter, there were approximately 225 million shares outstanding and 15.3 million shares remaining under its board-approved share repurchase authorizations.

Financial Position

Harley’s cash and cash equivalents totaled $1.8 billion as of September 30, 2012 compared with $1.4 billion as of September 25, 2011. Total debt increased to $4.2 billion as of September 30, 2012 compared with $3.6 billion as of September 25, 2011. Consequently, debt-to-capitalization ratio rose to 60.7% from 57.9% as of September 25, 2011.

In the first nine months of 2012, Harley had an operating cash flow of $712.5 million, down 21.0% from $901.6 million in the year-ago period due to lower profits. Meanwhile, capital expenditures decreased to $95.3 million from $106.1 million in the same period of 2011.

Looking Ahead

Harley-Davidson reiterated its guidance to ship 245,000 to 250,000 motorcycles to dealers and distributors worldwide in 2012, a 5%–7% rise from 2011. In the fourth quarter of 2012, the company anticipates to ship 44,500 to 49,500 motorcycles, a 2%–12% decrease from the year-ago quarter.

Harley continues to expect gross margin of 34.8%–35.8% for 2012.  It also reiterated its capital expenditures guidance of $190 million–$210 million for the year.  

Our Take

Harley-Davidson commands 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.

However, an aging customer base and weakness in the global economy have led the company retain a Zacks #3 Rank on its stock, which translated to a Hold rating for the short-term (1 to 3 months), and we reiterate our Neutral recommendation on the stock for the long-term (more than 6 months).

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