Harley-Davidson, Inc. 2009 Q2 Form 10-Q Summary
Business context and reporting period
Harley-Davidson operates through Motorcycles & Related Products and Financial Services, including Harley-Davidson Motor Company, Buell, MV Agusta and Harley-Davidson Financial Services (HDFS). This unaudited quarterly report covers the three and six months ended June 28, 2009, compared with the periods ended June 29, 2008. Results were materially affected by the global recession, weaker motorcycle demand, reduced wholesale shipments and deterioration in HDFS credit performance.
Key financial metrics
| Metric | Q2 2009 | Q2 2008 | Six months 2009 | Six months 2008 |
|---|---|---|---|---|
| Net revenue | $1.154 billion | $1.573 billion | $2.444 billion | $2.879 billion |
| Gross profit | $386.3 million | $561.9 million | $863.1 million | $1.038 billion |
| Gross margin | 33.5% | 35.7% | 35.3% | 36.1% |
| Income from operations | $70.7 million | $345.9 million | $302.8 million | $636.9 million |
| Operating margin | 6.1% | 22.0% | 12.4% | 22.1% |
| Net income | $19.8 million | $222.8 million | $137.1 million | $410.4 million |
| Diluted EPS | $0.08 | $0.95 | $0.59 | $1.74 |
| Dividends per share | $0.10 | $0.33 | $0.20 | $0.63 |
Q2 net income fell 91.1% and diluted EPS fell 91.6%. Six-month net income declined 66.6% and diluted EPS declined 66.1%. The Q2 effective tax rate was 71.6%, versus 36.0% in the prior-year quarter; the six-month rate was 53.3%, versus 36.0%.
- Motorcycles segment Q2 revenue declined 26.6% to $1.154 billion and operating income declined 47.0% to $167.6 million. Six-month revenue declined 15.1% to $2.444 billion and operating income declined 31.4% to $396.2 million.
- HDFS Q2 operating loss was $90.5 million, compared with $37.1 million of operating income in the prior-year quarter. The six-month operating loss was $79.3 million, compared with $72.1 million of income.
- HDFS financial services expense increased to $186.1 million in Q2 from $69.7 million, primarily due to credit-loss provisions and higher funding costs.
- Managed retail motorcycle loans totaled $5.92 billion. Loans 30 days or more past due were $262.4 million, or approximately 4.97% of managed retail loans, versus 4.65% a year earlier. Annualized losses were 2.69%, versus 2.14%.
- Cash and cash equivalents were $1.031 billion at June 28, 2009, compared with $593.6 million at December 31, 2008 and $803.4 million at June 29, 2008.
- Six-month operating cash flow was negative $164.4 million, compared with negative $39.0 million in 2008. Investing cash flow was negative $60.1 million, while financing cash flow provided $644.7 million.
- Total debt was $4.729 billion at June 28, 2009, up from $2.978 billion a year earlier and $3.915 billion at December 31, 2008. Debt included $1.010 billion of unsecured commercial paper, $600.5 million of asset-backed conduit debt, $600.0 million of senior unsecured notes and $486.1 million of on-balance-sheet securitization debt.
- Shareholders’ equity was $2.253 billion at June 28, 2009. The company remained in compliance with applicable debt covenants.
Material changes versus the prior comparable period
- Worldwide Harley-Davidson retail sales declined 30.1% in Q2 and 23.6% in the first half. U.S. retail sales declined 35.1% in Q2 and 26.1% in the first half.
- Q2 Harley-Davidson wholesale shipments declined 27.6% to 58,179 units; first-half shipments declined 12.7% to 132,849 units. Custom motorcycle shipments declined 46.9% in Q2 and 23.7% in the first half, partly offset by higher Sportster shipments.
- The company reclassified $3.14 billion of finance receivables from held for sale to held for investment because of the structure of the May 2009 securitization and its planned future securitization approach. This generated a $72.7 million increase in the allowance for credit losses.
- HDFS recorded a $28.4 million goodwill impairment charge. It also recognized $15.0 million of Q2 and $32.2 million of six-month impairment losses on retained securitization interests.
- The allowance for finance credit losses increased to $114.3 million from $35.9 million at June 29, 2008, reflecting worsening credit conditions and the receivable reclassification.
- Restructuring expense was $15.1 million in Q2 and $50.0 million in the first half, versus $11.5 million in Q2 and the first half of 2008. Approximately 800 employees had left under the 2009 plan by quarter-end.
- The company reduced dividends and substantially curtailed share repurchases. First-half dividends were $46.9 million, versus $148.6 million in 2008; only 677 shares were acquired during the quarter for employee tax withholding.
Guidance, outlook, risks and unusual items
- For 2009, management lowered expected Harley-Davidson shipments to 212,000–228,000 units, from prior guidance of 264,000–273,000 units. Q3 guidance was 52,000–57,000 units.
- Full-year 2009 gross-margin guidance was reaffirmed at 30.5%–31.5%. Management expected productivity, favorable raw-material costs and product mix to offset lower volumes, higher fixed costs per unit and foreign-exchange pressure.
- 2009 capital expenditures were reduced to approximately $145 million–$175 million, including $20 million–$30 million for restructuring-related spending. Management expected to fund capital expenditures with internally generated funds.
- Following additional shipment reductions announced July 16, 2009, total restructuring charges for 2009–2010 were expected at $160 million–$190 million, including $50.0 million recorded in the first half. Expected annual savings upon completion were approximately $140 million–$150 million.
- The company planned additional reductions of approximately 700 hourly production positions and 300 non-production positions, including approximately 100 HDFS positions. Potential additional restructuring at the York, Pennsylvania facility was not included in the stated cost estimates.
- Management expected a 2009 effective tax rate of approximately 55%, reflecting the nondeductible goodwill impairment, Wisconsin tax-law changes, MV-related tax effects and lower expected earnings.
- HDFS funding was supported by a $600 million senior unsecured note offering, a $1.20 billion asset-backed commercial-paper conduit facility, a new $625 million 364-day credit facility and a $500 million May 2009 TALF-eligible securitization. A further $700 million TALF-eligible securitization was completed July 14, 2009.
- Key liquidity risks include refinancing of the conduit facility and $625 million credit facility in April 2010, higher funding costs, reduced access to commercial paper and potential further credit deterioration. Credit ratings were under pressure; Fitch and Standard & Poor’s subsequently downgraded long-term ratings after quarter-end.
- The company expected additional pension contributions of approximately $40 million–$80 million during the second half of 2009.
- The company is subject to shareholder, derivative and ERISA litigation for which management could not estimate potential losses. It reserved approximately $6.2 million for its share of York environmental remediation costs.
- Adoption of SFAS Nos. 166 and 167 on January 1, 2010 was expected to result in consolidation of finance-receivable securitization trusts not currently consolidated, potentially materially changing reported assets, liabilities and leverage.
Facts investors should verify
- Whether retail demand and dealer inventory levels stabilized after the significant Q2 shipment and retail-sales declines.
- Actual HDFS delinquencies, charge-offs, allowance adequacy and further impairment risk in retained securitization interests.
- Execution, timing and total cost of restructuring, particularly the unresolved York facility decision.
- Availability and cost of HDFS funding as the conduit facility and 364-day credit facility approach April 2010 maturities.
- Compliance with debt covenants and the effect of subsequent credit-rating downgrades on commercial-paper access.
- Actual 2009 gross margin, capital expenditures, shipment volumes and effective tax rate compared with management guidance.
- The balance-sheet and leverage effects of adopting SFAS Nos. 166 and 167 and consolidating additional securitization trusts.
- Potential cash requirements for pension contributions, litigation, environmental remediation and other contingencies.