HARLEY-DAVIDSON, INC. quarterly report, Q1 FY2010

Harley-Davidson, Inc. — Form 10-Q Summary

Reporting period: Three months ended March 28, 2010, compared with the three months ended March 29, 2009. The company operates through Motorcycles & Related Products and Financial Services. MV Agusta is classified as a discontinued operation and is expected to be divested during 2010.

Key financial metrics

Metric	Q1 2010	Q1 2009	Change
Total revenue	$1.207 billion	$1.383 billion	(12.7%)
Motorcycles revenue	$1.037 billion	$1.278 billion	(18.9%)
Financial Services revenue	$169.8 million	$104.7 million	62.3%
Operating income	$152.8 million	$242.2 million	(36.9%)
Income from continuing operations	$68.7 million	$128.1 million	(46.3%)
Net income	$33.3 million	$117.3 million	(71.6%)
Diluted EPS	$0.14	$0.50	(72.0%)
Diluted EPS from continuing operations	$0.29	$0.55	(47.3%)
Operating cash flow from continuing operations	$200.8 million	$(227.0) million	Improved
Cash and cash equivalents	$1.443 billion	$884.6 million	At March 28, 2010

Margins: Consolidated gross margin was approximately 31.5%, versus 34.3% in the prior-year quarter. Operating margin was approximately 12.7%, versus 17.5%. Net margin was approximately 2.8%, versus 8.5%. These calculations include the reported revenue and income figures and are not company-defined non-GAAP measures.

Motorcycles operating income declined 45.4% to $126.1 million. The segment’s gross profit declined 19.9% to $379.5 million.
Financial Services returned to profitability, with operating income of $26.7 million versus $11.2 million. Improved retail credit performance and lower funding costs contributed to the improvement.
Financial Services provision for credit losses increased to $31.8 million from $5.9 million, primarily reflecting the larger finance receivables portfolio following consolidation of securitized receivables.
Worldwide Harley-Davidson retail sales declined 18.2%; U.S. retail sales declined 24.3% and international sales declined 2.8%.
Harley-Davidson wholesale shipments declined 28.1% to 53,674 units, including a 32.3% decline in U.S. shipments and an 18.0% decline internationally.
Cash dividends were $0.10 per share, totaling $23.5 million.

Liquidity, debt and cash flow

Continuing-operations operating cash flow was $200.8 million, compared with an operating cash use of $227.0 million in Q1 2009. Comparability is materially affected by the reclassification of retail lending cash flows from operating to investing activities after the 2010 accounting change.
Continuing-operations investing cash flow was $183.5 million, including $455.9 million of finance receivable originations and $654.0 million of collections. Capital expenditures were $14.6 million.
Continuing-operations financing cash flow was an outflow of $554.2 million, including $445.2 million of securitization debt repayments and $50.7 million of reductions in credit facilities and unsecured commercial paper.
Total debt was $7.026 billion at March 28, 2010, compared with $4.482 billion at March 29, 2009. The increase primarily reflects consolidation of previously off-balance-sheet securitization debt rather than a comparable increase in economic borrowing.
Debt held by variable interest entities was $3.607 billion, secured primarily by $4.06 billion of restricted finance receivables and $397.7 million of restricted cash. Creditors of these entities generally have recourse only to the VIE assets.
The company reported $1.443 billion of cash and cash equivalents plus $39.4 million of marketable securities at March 28, 2010. Liquidity includes restricted cash and finance receivables that are not freely available for general corporate purposes.
On April 29, 2010, the company and HDFS entered into new credit facilities totaling $1.35 billion, consisting of a $675 million 364-day facility and a $675 million three-year facility. The facilities replaced $1.58 billion of prior commitments.
The asset-backed commercial paper conduit facility was extended to July 28, 2010, while available borrowings were reduced from $1.20 billion to $600 million. No borrowings were outstanding under the facility at March 28, 2010.

Material changes and unusual items

Effective January 1, 2010, adoption of new consolidation guidance required HDFS to consolidate formerly unconsolidated securitization entities. The adoption increased finance receivables and debt, derecognized retained securitization interests, and changed the classification of related cash flows. The adoption did not affect the statement of operations at inception, but it substantially affects period-to-period comparability.
Restructuring expense was $48.2 million, compared with $34.9 million in Q1 2009. Cumulative restructuring and impairment expense under the 2009 plan reached $272.5 million.
The company expects total restructuring and impairment costs of approximately $430 million to $460 million from 2009 through 2012, including $175 million to $195 million in 2010. Expected ongoing annual savings after completion are approximately $240 million to $260 million.
MV generated a $41.8 million pretax loss, or a $35.4 million net loss, including a $35.0 million impairment charge. MV assets and liabilities were reported as discontinued operations.
The first-quarter effective tax rate was 47.2%. The company recorded $13.3 million of tax expense related to healthcare legislation and noted the expiration of the federal research and development tax credit. Full-year 2010 continuing-operations tax rate guidance was approximately 40.5%.
The company reported managed retail-loan annualized losses of 2.83%, down from 3.41%, and a 30-day delinquency rate of 4.57%, down from 4.89%. The allowance for finance credit losses was $192.1 million at quarter-end.

Guidance, outlook and risks

Management reiterated 2010 Harley-Davidson dealer shipment guidance of 201,000 to 212,000 motorcycles and second-quarter shipment guidance of 55,000 to 60,000 units.
Full-year 2010 gross margin guidance was reiterated at 32.0% to 33.5%.
2010 capital expenditure guidance was approximately $235 million to $255 million, including $95 million to $110 million related to restructuring. Management expects to fund capital expenditures with internally generated funds.
Management cited moderation in the rate of retail-sales decline but continued weakness in consumer demand and the broader motorcycle market.
Key risks include motorcycle demand and dealer financial health, execution and cost of restructuring, access to capital and funding costs for HDFS, credit losses and loan recoveries, foreign exchange and interest-rate volatility, product recalls and warranty costs, regulatory matters, environmental remediation, litigation, labor relations and the planned MV divestiture.
The EPA has requested information regarding emissions certifications, aftermarket parts and emissions-related warranty claims. The company cannot currently estimate the potential impact of any enforcement action.
The company has reserved approximately $5.9 million for its estimated share of future York, Pennsylvania environmental response costs, although groundwater remediation may continue beyond 2015.

Investor verification checklist

Verify the effect of VIE consolidation on debt, finance receivables, restricted cash, operating results and cash-flow classifications before making year-over-year comparisons.
Monitor wholesale shipments, retail demand, dealer inventories and the company’s ability to achieve 2010 shipment and gross-margin guidance.
Assess restructuring execution, remaining costs, workforce reductions and realization of projected savings.
Review HDFS credit-loss trends, delinquencies, allowance coverage, funding costs and access to committed liquidity.
Track the MV divestiture, additional impairment risk and cash-flow impact.
Review the EPA inquiry, environmental remediation obligations, pending derivative litigation and product-liability exposures.
Confirm subsequent financing amendments, covenant compliance and the availability of unrestricted cash versus restricted VIE assets.