HARLEY-DAVIDSON, INC. quarterly report, Q2 FY2010

Harley-Davidson, Inc. 2010 Q2 Form 10-Q Summary

Business context and reporting period

Harley-Davidson filed an unaudited Form 10-Q for the quarter and six months ended June 27, 2010, compared primarily with the periods ended June 28, 2009. The company operates through Motorcycles & Related Products and Financial Services. MV Agusta is presented as a discontinued operation and Buell production ceased in October 2009.

Key financial metrics

Metric	Three months ended June 27, 2010	Three months ended June 28, 2009	Six months ended June 27, 2010	Six months ended June 28, 2009
Total revenue	$1.309 billion	$1.260 billion	$2.516 billion	$2.643 billion
Operating income	$218.8 million	$83.7 million	$371.5 million	$325.9 million
Income from continuing operations	$139.3 million	$33.4 million	$208.0 million	$161.4 million
Net income	$71.2 million	$19.8 million	$104.5 million	$137.1 million
Diluted EPS	$0.30	$0.08	$0.45	$0.59
Cash dividends per share	$0.10	$0.10	$0.20	$0.20

Approximate consolidated margins were 16.7% operating and 10.6% from continuing operations in the second quarter, versus 6.6% and 2.7%, respectively, in the prior-year quarter. Six-month operating and continuing-operations margins were approximately 14.8% and 8.3%.

Motorcycles revenue declined 0.1% in the second quarter and 10.0% year to date. Motorcycle operating income declined 9.3% in the quarter and 29.9% year to date.
Financial Services revenue increased 40.1% in the quarter and 50.3% year to date. Segment operating income was $60.8 million in the quarter and $87.5 million year to date, compared with losses in the prior-year periods.
Second-quarter worldwide Harley-Davidson retail sales declined 5.5%; U.S. retail sales declined 8.4%, while international retail sales declined 0.2%. First-half worldwide retail sales declined 10.7%.
Harley-Davidson wholesale shipments increased 1.5% in the second quarter but declined 15.2% for the first half.
Six-month operating cash flow from continuing operations was $726.0 million, compared with cash used of $125.0 million in the prior-year period. Investing cash flow was $69.5 million provided, while financing cash flow was $984.7 million used, primarily due to $1.007 billion of securitization-debt repayments.
Capital expenditures were $45.8 million in the first half, compared with $49.1 million in the prior-year period.
Cash and cash equivalents were $1.415 billion at June 27, 2010, compared with $1.630 billion at December 31, 2009 and $1.023 billion at June 28, 2009. Restricted cash held by variable interest entities was $344.6 million.
Total debt was $6.534 billion at June 27, 2010, compared with $4.729 billion at June 28, 2009. The increase primarily reflected consolidation of securitization entities under newly adopted accounting guidance.
Finance receivables, net, including receivables held by variable interest entities, were $6.374 billion. The allowance for finance credit losses was $183.0 million.

Material changes versus the prior comparable period

Financial Services results improved substantially because the second quarter and first half of 2009 included a $72.7 million credit-loss provision from a receivables reclassification and a $28.4 million goodwill impairment. Lower credit-loss provisions, improved retail-loan credit performance and lower funding costs also contributed.
Effective January 1, 2010, Harley-Davidson adopted accounting guidance requiring consolidation of formerly off-balance-sheet securitization entities. This added restricted finance receivables, restricted cash and approximately $1.89 billion of securitization debt at adoption. Prior periods were not restated, reducing comparability.
Motorcycles profitability was pressured by lower first-half shipment volume, higher restructuring expense, higher operating expenses, unfavorable foreign-exchange and hedging effects, raw-material costs and manufacturing costs. Product mix and productivity gains partially offset these pressures.
Restructuring expense was $30.1 million in the second quarter and $78.4 million in the first half, compared with $15.1 million and $50.0 million, respectively, in the prior-year periods.
MV generated a second-quarter net loss of $68.1 million and a first-half net loss of $103.5 million, including a $111.8 million first-half impairment charge. The company expected to complete the MV divestiture during 2010.

Guidance, outlook, risks and unusual items

Management reiterated 2010 Harley-Davidson shipment guidance of 201,000 to 212,000 motorcycles and expected third-quarter shipments of 53,000 to 58,000 units.
Full-year 2010 gross-margin guidance was increased to 32.5% to 34.0% from 32.0% to 33.5%. Management expected less favorable product mix, foreign-exchange pressure and higher raw-material costs in the second half.
Management expected a 2010 effective income-tax rate of approximately 36.0% for continuing operations and capital expenditures of approximately $235 million to $255 million, including $95 million to $110 million related to restructuring.
Total restructuring and impairment costs were expected to be approximately $430 million to $460 million from 2009 through 2012, with approximately 30% non-cash. Expected 2010 expense was $175 million to $195 million, with eventual annual savings of approximately $240 million to $260 million.
Labor negotiations began in July 2010 for Wisconsin production employees. Management stated that production could be moved to another U.S. location if cost and flexibility objectives were not achieved by mid-September 2010; related financial effects were not included in existing restructuring estimates.
HDFS had no borrowings under its $600 million asset-backed commercial-paper conduit facility at June 27, 2010. The facility was subsequently extended from July 28 to September 10, 2010.
The company stated that 2010 HDFS funding needs were substantially met, but identified funding-market access, borrowing costs, credit quality, loan losses, dealer financial condition and capital-market ratings as material risks. Moody’s and Fitch had negative outlooks at June 27, 2010; Fitch revised its outlook to stable on July 30, 2010.
The EPA was investigating motorcycle emissions certifications, aftermarket parts and emissions-related warranty claims. Potential remedies could include fines or other relief, but the company could not estimate the effect.
The company reserved approximately $5.9 million for its estimated share of future York, Pennsylvania environmental response costs. A state shareholder derivative lawsuit remained pending, and potential losses could not be estimated.

Important facts for investors to verify

Assess comparability of 2010 and 2009 Financial Services results after consolidation of securitization entities and the related increase in reported debt.
Reconcile reported net income with continuing-operations earnings, including the MV discontinued-operation losses and impairment charges.
Monitor motorcycle retail demand, dealer inventory, wholesale shipments and the company’s ability to achieve the 2010 shipment and margin guidance.
Verify execution, remaining costs and savings from the restructuring plan, including the outcome of Wisconsin labor negotiations.
Review HDFS credit-loss trends, delinquencies, recoveries, funding availability, debt maturities and compliance with financial covenants.
Follow the MV divestiture, EPA inquiry, environmental remediation and pending derivative litigation for potential cash or earnings effects.