Harley-Davidson Races Past Estimates

Zacks

Harley-Davidson Inc. (HOG) posted an impressive 32% rise in earnings to $1.07 per share in the second quarter of the year from 81 cents in the year-ago quarter, surpassing the Zacks Consensus Estimate by 2 cents. Total profit rose 30% to $247.3 million from $190.6 million a year ago.

Total revenue (including Financial Services) in the quarter rose 15% to $1.7 billion, driven by higher motorcycles and related products sales. It exceeded the Zacks Consensus Estimate of $1.6 billion. Operating income zoomed 30% to $391.5 million from $301.9 million in the second quarter of 2011.

Motorcycles and Related Products

Revenues from Motorcycles and Related Products grew 17% to $1.6 billion driven by higher shipments. Revenue from Harley-Davidson motorcycles increased 22% to $1.2 billion. Operating income from Motorcycles and Related Products surged 41% to $309.6 million (19.7% of sales) from $219.8 million (16.4%) a year ago.

The company’s shipment rose 25% to 83,502 motorcycles to dealers and distributors worldwide during the quarter from 66,815 motorcycles in the second quarter of 2011. Harley’s worldwide dealer retail sales of new motorcycles inched up 3% to 85,714 units, including 55,761 units in the U.S. (up 4%) and 29,953 units (up 0.5%).

Meanwhile, retail unit sales grew 10% and 38% in Asia-Pacific and Latin America, respectively, and fell 6% in Europe, the Middle East and Africa (:EMEA) from the year-ago level. 

Revenues from motorcycle parts and accessories scaled up 4% to $265.6 million and from general merchandise, including MotorClothes apparel and accessories, went up 3% to $75.1 million during the quarter.

Harley-Davidson Financial Services

Revenues in the Financial Services segment dipped 3% to $160.6 million in the quarter. The segment reported a flat operating income of $82.0 million compared with $82.1 million in last year’s quarter.

Restructuring Activities

In the quarter, Harley incurred restructuring charges of $6.2 million. The company now expects lower one-time charges, related to restructuring activities that began in 2009, of $490 million to $510 million through 2013, including $40 million to $50 million in 2012 compared with the prior estimate of $500 million–$520 million through 2013, including $50 million to $60 million in 2012.

The company reiterated its guidance to achieve cumulative savings of $275 million–$295 million in 2012 from the restructuring activities, which will rise to $315 million–$335 million beginning in 2014.

Share Repurchase

Harley repurchased 3.1 million shares of its common stock for $150.1 million during the quarter. At the end of the quarter, the company had roughly 227 million shares outstanding and 17.2 million shares remaining under board-approved share repurchase authorizations.

Financial Position

Cash and cash equivalents totaled $1.1 billion as of July 1, 2012 compared with $973.5 million as of June 26, 2011. Total debt increased slightly to $4.0 billion as of July 1, 2012 compared with $3.6 billion as of June 26, 2011. As a result, debt-to-capitalization increased 1 percentage point to 60% from the year-ago level.

In the first half of 2012, Harley had an operating cash flow of $288.2 million, down from $473.0 million in the prior-year period. Meanwhile, capital expenditures decreased to $60.1 million from $69.3 million in the same period last year.

Looking Ahead

For the upcoming quarter, Harley expects worldwide shipments to fall between 9% and 17% to 51,000–56,000 motorcycles due to the implementation of ERP and surge production at its York, PA facility. However, the company expects shipments to rise between 5% and 7% to 245,000–250,000 motorcycles for the full year 2012.

For the full year, the company continues to expect capital expenditures between $190 million and $210 million, including $35 million dedicated to restructuring activities.

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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