Harley-Davidson, Inc. — Fiscal 2009 Form 10-K Summary
Business context and reporting period
Filed February 23, 2010, for the fiscal year ended December 31, 2009. Harley-Davidson operates through Motorcycles & Related Products and Financial Services (HDFS). The filing presents MV Agusta as a discontinued operation following the announced intent to divest it and reports the decision to exit the Buell product line.
Key financial metrics
| Metric | 2009 | 2008 | Change |
|---|---|---|---|
| Total revenue | $4.782 billion | $5.955 billion | Down 19.7% |
| Motorcycles revenue | $4.287 billion | $5.578 billion | Down 23.1% |
| Financial Services revenue | $494.8 million | $377.0 million | Up 31.3% |
| Operating income | $196.1 million | $1.059 billion | Down 81.5% |
| Income from continuing operations | $70.6 million | $684.2 million | Down 89.7% |
| Net income/(loss) | $(55.1) million | $654.7 million | Turned to loss |
| Diluted EPS | $(0.24) | $2.79 | Down $3.03 |
| Cash flow from continuing operations | $609.0 million | $(608.0) million | Improved |
| Capital expenditures | $116.7 million | $229.0 million | Down 49.0% |
| Cash and cash equivalents | $1.630 billion | $568.9 million | Up $1.062 billion |
| Total debt | $5.636 billion | $3.915 billion | Up $1.721 billion |
| Total equity | $2.108 billion | $2.116 billion | Nearly unchanged |
Motorcycles gross profit was $1.386 billion, implying a gross margin of approximately 32.3%, compared with approximately 34.6% in 2008. Consolidated operating margin was approximately 4.1%, versus approximately 17.8% in 2008. Continuing-operations net margin was approximately 1.5%.
- Worldwide Harley-Davidson retail sales fell 22.7% to 242,634 units; U.S. retail sales declined 25.8% and international sales declined 15.4%.
- Harley-Davidson wholesale shipments declined 26.5% to 223,023 units, including 144,464 U.S. units and 78,559 international units.
- Motorcycles operating income declined 67.8% to $314.1 million, pressured by lower volume, restructuring charges, Buell exit costs and fixed manufacturing costs allocated over fewer units.
- HDFS reported a $118.0 million operating loss versus $82.8 million of operating income in 2008. The result reflected higher credit-loss provisions, funding costs, securitization-related impairments and a $28.4 million goodwill impairment.
- HDFS’s provision for credit losses increased to $169.2 million from $39.6 million. Managed retail-loan annualized losses increased to 2.86% from 2.30%, and 30-day delinquencies rose to 6.51% from 6.29%.
- The allowance for finance-credit losses rose to $150.1 million from $40.1 million. Finance receivables held for investment, net, increased to $4.812 billion from $1.865 billion, primarily because $3.14 billion was reclassified from held-for-sale receivables.
Material changes versus the prior comparable period
- The recession and weaker discretionary demand materially reduced motorcycle retail sales, shipments, revenue and profitability.
- The Company recorded $224.3 million of restructuring and impairment expense in 2009, including approximately $221.0 million in the Motorcycles segment and $3.3 million in HDFS. Buell-related sales incentives and inventory adjustments reduced gross margin by an additional $44.8 million.
- The restructuring plan targets approximately 2,700 to 2,900 hourly production positions, approximately 720 Motorcycles non-production positions and approximately 100 HDFS salaried positions. Approximately 2,000 employees had left by December 31, 2009.
- MV generated a $125.8 million after-tax discontinued-operations loss, including a $115.4 million non-cash impairment charge. MV revenue was $56.7 million in 2009.
- HDFS completed four on-balance-sheet asset-backed securitizations in 2009, transferring $3.08 billion of retail loans and issuing $2.46 billion of secured notes. This increased reported assets and debt but provided funding during stressed capital markets.
- Total debt increased substantially, while the dividend was reduced to $0.10 per share quarterly, or $0.40 for the year, from $1.29 per share in 2008. Management stated that the reduction saved approximately $216 million of cash.
- Quarterly results deteriorated sharply in the fourth quarter: Motorcycles reported a $221.8 million operating loss, HDFS reported a $7.1 million operating loss, and consolidated net loss was $218.7 million, or $(0.94) per diluted share. The fourth-quarter results included significant restructuring and impairment effects.
Guidance, outlook, risks and unusual items
- For 2010, management expected Harley-Davidson shipments of 201,000 to 212,000 units, including 52,000 to 57,000 in the first quarter, and gross profit margin of 32.0% to 33.5%.
- Management expected 2010 capital expenditures of approximately $235 million to $255 million, including $95 million to $110 million related to restructuring, and believed internally generated funds would finance those expenditures.
- Total restructuring and impairment costs were expected to reach $430 million to $460 million from 2009 through 2012, excluding Buell exit costs. Expected ongoing annual savings were approximately $240 million to $260 million after completion.
- Management expected HDFS to move toward profitability in 2010, but also expected higher delinquencies and credit losses as a percentage of managed retail loans during 2010.
- HDFS had $325.1 million of commercial paper, $448.0 million of credit-facility debt, $2.103 billion of medium-term notes, $600.0 million of senior unsecured notes carrying a 15% coupon, and $2.160 billion of on-balance-sheet securitization debt at year-end.
- A $625.0 million 364-day credit facility and a $1.20 billion asset-backed commercial-paper conduit facility were scheduled to mature or expire in April 2010; the Company expected to renew a portion of these facilities.
- Credit ratings at December 31, 2009 were Moody’s P2/Baa1 with a negative outlook, Standard & Poor’s A2/BBB with a stable outlook, and Fitch F2/BBB+ with a negative outlook.
- Adoption of new consolidation guidance on January 1, 2010 was expected to increase finance receivables and debt by approximately $1.89 billion and produce an estimated after-tax retained-earnings charge of $35 million to $45 million.
- Key risks include continued economic weakness, excess motorcycle inventories and pricing pressure, dealer closures and financing constraints, HDFS credit losses and funding access, debt ratings, restructuring execution, union negotiations, supplier viability, foreign exchange and interest-rate exposure, pension and healthcare obligations, regulatory changes and litigation.
- The EPA was investigating motorcycle emissions certifications, aftermarket parts and emissions-related warranty claims. The filing states that any potential enforcement remedy could not yet be estimated.
- The Company reserved approximately $5.9 million for its estimated share of future remediation costs at the York, Pennsylvania facility. A state shareholder derivative lawsuit remained unresolved, although the Company stated that it considered the allegations meritless.
Important facts for investors to verify
- Whether motorcycle demand, wholesale shipments, dealer inventories and pricing improved sufficiently after the 2009 contraction.
- Whether HDFS returned to profitability and whether delinquency, loss and recovery rates stabilized or worsened.
- The refinancing or renewal status of the April 2010 credit and conduit facilities and the effect of funding costs on HDFS margins.
- Actual restructuring spending, employee reductions, facility closures and realized savings versus the $430 million to $460 million cost and $240 million to $260 million annual-savings targets.
- The completion and economics of the Buell exit and MV divestiture, including any additional impairment or separation costs.
- The effect of consolidating previously off-balance-sheet securitization trusts on debt, finance receivables, credit-loss allowances and retained earnings.
- Future dividend policy and capital allocation given the higher debt balance, reduced earnings and liquidity commitments.
- Developments in the EPA inquiry, York environmental remediation, product-liability matters and the remaining shareholder derivative litigation.