Harley-Davidson, Inc. — 2009 Q3 Form 10-Q Summary
Business context and reporting period
Harley-Davidson designs and sells heavyweight motorcycles, parts, accessories and merchandise, and provides dealer and retail financing through Harley-Davidson Financial Services (HDFS). The filing covers the three and nine months ended September 27, 2009, compared with September 28, 2008. Results were significantly affected by the recession, weaker motorcycle demand, restructuring, impairment charges and deterioration in HDFS credit performance.
Key financial metrics
| Metric | Q3 2009 | Q3 2008 | 9M 2009 | 9M 2008 |
|---|---|---|---|---|
| Net revenue | $1.121 billion | $1.423 billion | $3.566 billion | $4.302 billion |
| Gross profit | $371.1 million | $484.1 million | $1.234 billion | $1.522 billion |
| Gross margin | 33.1% | 34.0% | 34.6% | 35.4% |
| Operating income | $69.6 million | $268.0 million | $372.4 million | $904.9 million |
| Operating margin | 6.2% | 18.8% | 10.4% | 21.0% |
| Net income | $26.5 million | $166.5 million | $163.6 million | $576.9 million |
| Diluted EPS | $0.11 | $0.71 | $0.70 | $2.45 |
| Cash dividends per share | $0.10 | $0.33 | $0.30 | $0.96 |
For the first nine months, operating cash flow was $511.1 million, compared with cash used of $221.2 million in the prior-year period. Investing cash use was $568.1 million, including $89.4 million of capital expenditures and $519.9 million of net investment in finance receivables. Financing cash flow was $980.5 million, driven primarily by $589.0 million of senior unsecured notes and $1.195 billion of securitization borrowings. Cash and cash equivalents increased to $1.524 billion from $593.6 million at December 31, 2008.
Total debt was $5.170 billion at September 27, 2009, up from $3.172 billion at September 28, 2008. Debt included $900.0 million of unsecured commercial paper, $570.1 million under the asset-backed commercial paper conduit, $400.9 million of credit facilities, $1.605 billion of medium-term notes, $600.0 million of senior unsecured notes and $1.094 billion of on-balance-sheet securitization debt. Current liabilities were $2.947 billion, including $1.325 billion of short-term debt and $668.2 million of current long-term debt.
Material changes versus the prior comparable period
- Q3 revenue declined 21.2% and net income declined 84.1%; nine-month revenue declined 17.1% and net income declined 71.6%.
- Harley-Davidson worldwide retail sales decreased 21.3% in Q3 and 22.9% for the first nine months. U.S. retail sales decreased 24.3% in Q3 and 25.5% year to date.
- Q3 Harley-Davidson wholesale shipments fell 27.4% to 54,236 units; nine-month shipments fell 17.5% to 187,085 units.
- Motorcycles segment operating income fell 54.5% in Q3 to $106.5 million and 38.1% year to date to $502.7 million. Lower volume was partly offset by cost reductions, favorable raw-material costs and product mix.
- Financial Services shifted to a $31.5 million Q3 operating loss from $35.6 million of income and a $110.8 million nine-month operating loss from $107.7 million of income. Higher interest expense and credit-loss provisions more than offset higher interest income.
- HDFS recorded a $137.8 million provision for finance credit losses in the first nine months, including a $72.7 million charge related to reclassifying $3.14 billion of receivables from held for sale to held for investment. The allowance for credit losses rose to $148.9 million from $40.1 million at year-end 2008.
- Managed retail-loan annualized losses increased to 2.70% from 1.97%, and 30-day delinquencies increased to 5.80% from 5.59%.
- Restructuring expense and other impairments were $50.7 million in Q3 and $100.7 million year to date, compared with $0.9 million and $12.5 million, respectively, in the prior-year periods. Goodwill impairment totaled $18.9 million for MV in Q3 and $28.4 million for HDFS in the first half.
Guidance, outlook, risks and unusual items
- Management projected 2009 Harley-Davidson shipments of 222,000 to 227,000 units, including 35,000 to 40,000 units in Q4, and reaffirmed full-year gross margin guidance of 30.5% to 31.5%.
- 2009 capital expenditures were reduced to approximately $125 million to $145 million. Management expected internally generated funds to cover capital expenditures.
- HDFS was expected to incur operating losses over the next several quarters because of seasonal resale-value pressure, rising unemployment-related losses, higher funding costs and large cash balances maintained to mitigate refinancing risk. Management expected HDFS to return to profitability as economic conditions improved.
- The 2009 restructuring plan targeted approximately 2,400 to 2,500 position reductions. Including the Buell wind-down, estimated one-time restructuring and impairment charges for 2009–2010 increased to $215 million to $245 million, with projected annual savings of $140 million to $150 million from 2011 onward.
- Harley-Davidson announced discontinuation of the Buell product line and plans to divest MV. Buell-related one-time costs were estimated at approximately $125 million, about 60% cash, with roughly $115 million expected in 2009. MV was expected to be reported as a discontinued operation beginning in Q4 2009; MV had a nine-month 2009 net loss of $52.6 million.
- The company expected additional pension contributions of approximately $40 million to $80 million in Q4 2009.
- The $600 million senior unsecured notes issued in February 2009 carry a 15% annual interest rate and mature in February 2014. The $625 million 364-day credit facility and the $1.20 billion asset-backed commercial paper facility mature in April 2010, creating refinancing risk.
- Adoption of SFAS 166 and SFAS 167 on January 1, 2010 was expected to result in consolidation of finance-receivable securitization trusts not currently consolidated, potentially materially increasing reported assets and liabilities.
- The company reserved approximately $5.9 million for its share of environmental remediation costs at the York, Pennsylvania facility. Federal securities and ERISA class actions were dismissed in October 2009, while shareholder derivative matters remained unresolved.
Investor verification points
- Verify the sustainability of HDFS funding before the April 2010 maturities and the effect of high-cost debt on earnings.
- Assess HDFS loan delinquencies, charge-offs, repossession recoveries, allowance adequacy and retained securitization-interest valuations.
- Reconcile reported cash growth with increased debt, restricted cash and finance-receivable funding requirements.
- Evaluate execution, cash costs and savings from the restructuring plan, including the Buell discontinuation and MV divestiture.
- Confirm the accounting and balance-sheet effects of SFAS 166 and SFAS 167 adoption.
- Monitor motorcycle retail demand, dealer inventory levels, shipment discipline and the effect of volume reductions on fixed-cost absorption and gross margin.