HOG

Business Context and Reporting Period

Company: Harley-Davidson, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2008
Segments: Motorcycles & Related Products (HDMC, Buell, MV Agusta) and Financial Services (HDFS).
Overview: The Company operates globally, manufacturing heavyweight motorcycles and providing financing/insurance services. In 2008, the Company acquired MV Agusta. The reporting period was significantly impacted by the global economic recession, tightening credit markets, and lower consumer confidence.

Key Financial Metrics (2008)

Material Changes vs. Prior Period

• Revenue Decline: Consolidated net revenue decreased 2.8% to $5.97 billion. Motorcycles segment revenue fell 2.3% due to an 8.2% drop in Harley-Davidson unit shipments, partially offset by favorable foreign currency exchange rates and product mix changes.
• Profitability Drop: Net income fell 29.9% to $654.7 million. Operating income for the Motorcycles segment declined 21.5%, while Financial Services operating income plummeted 61.0%.
• Financial Services Strain: The Financial Services segment faced significant headwinds due to capital market disruptions. Income from securitizations dropped 86.2% due to a $41.4 million write-down of retained interests and a loss on the 2008 securitization transaction. Credit losses increased, with the provision for finance credit losses rising to $39.6 million from $11.2 million in 2007.
• Debt Increase: Total debt increased by approximately $1.81 billion to $3.91 billion. This was driven by HDFS funding a greater percentage of its business through debt rather than securitization due to market volatility, and debt incurred to finance the MV Agusta acquisition.
• Market Share: U.S. retail sales of Harley-Davidson motorcycles decreased 13.0%, while international retail sales grew 10.3%. U.S. market share in the heavyweight segment dropped to 45.5% from 48.7% in 2007.

Guidance, Outlook, and Risks

2009 Guidance and Strategy

On January 23, 2009, the Company announced a three-part strategy to address the recession: investing in the brand, restructuring operations, and securing funding for HDFS.

• Shipments: Plans to ship between 264,000 and 273,000 Harley-Davidson motorcycles in 2009, a decrease of 10% to 13% compared to 2008.
• Gross Margin: Expected to be between 30.5% and 31.5% for 2009, lower than 2008 due to higher fixed costs per unit and unfavorable currency impacts.
• Restructuring: Plans to eliminate approximately 1,100 positions (800 hourly, 300 salaried) over 2009 and 2010. Estimated one-time charges range from $110 million to $140 million, with $80 million to $100 million expected in 2009.
• Capital Expenditures: Planned at $180 million to $200 million for 2009.

Key Risks and Contingencies

• Liquidity and Funding: HDFS relies heavily on external capital markets. Disruptions in credit markets have increased funding costs and limited access to securitization. The Company is pursuing unsecured debt, extending credit facilities, and accessing the Federal Reserve's TALF program.
• Credit Quality: Rising delinquency rates (30-day delinquency rate increased to 6.29% from 6.15%) and higher credit losses in the retail loan portfolio.
• Restructuring Execution: Risks associated with executing cost-cutting measures, including union negotiations and facility consolidations.
• Pension Funding: Due to market declines, the Company expects to make additional contributions of $40 million to $80 million to pension plans in 2009.
• Legal Proceedings: Ongoing shareholder class action and derivative lawsuits regarding securities laws and ERISA violations; environmental remediation costs at the York, PA facility (estimated $6.2 million).

Investor Verification Checklist

• HDFS Liquidity: Verify the Company's ability to refinance the $500 million asset-backed commercial paper conduit facility maturing March 31, 2009, and the $950 million credit facility maturing July 2009.
• Credit Loss Trends: Monitor the 30-day delinquency rate and provision for credit losses in the Financial Services segment for further deterioration in 2009.
• Restructuring Costs: Track the actual costs incurred against the $110 million to $140 million estimate and the timeline for realizing the projected $60 million to $70 million annual benefit starting in 2011.
• Market Demand: Assess whether the projected 10-13% decline in 2009 shipments aligns with actual retail sales data in the U.S. and international markets.
• Debt Ratings: Monitor credit rating actions (Fitch and S&P downgraded HDFS short-term ratings in early 2009) and their impact on borrowing costs and access to the Commercial Paper Funding Facility.