Harley-Davidson Reports Second Quarter 2009 Results, Lowers Full-Year Shipment Plans, and Provides Restructuring Update
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Earnings Drop Reflects Impact of Lower Shipments, One-Time Reclassification of Finance Receivables and Goodwill Write-Off Related to HDFS Decline in Retail Motorcycle Sales Prompts Shipment Reduction, Additional Workforce Reduction
MILWAUKEE, July 16 -- Harley-Davidson, Inc. reported decreased revenue, net income and diluted earnings per share for the second quarter of 2009 compared to the year-ago period.
Net income of $19.8 million and diluted earnings per share of $0.08 were primarily affected by the planned 27.6 percent reduction in motorcycle shipments compared to the year-ago period and by two non-cash charges related to HDFS: a $72.7 million credit loss provision for a one-time reclassification of motorcycle loan receivables; and a one-time $28.4 million charge to write off the total goodwill associated with HDFS.
Worldwide retail unit sales of new Harley-Davidson motorcycles were down 30.1 percent compared to the year-ago quarter. Retail new Harley-Davidson motorcycle sales in the U.S. were down 35.1 percent and declined 18.2 percent in international markets compared to last year's second quarter. Industry-wide retail sales of heavyweight motorcycles in the U.S. declined 48.1 percent for the same period.
"While the underlying fundamentals of the Harley-Davidson brand remain strong and our dealers' retail motorcycle sales declined less than our competitors, it is obviously a very tough environment for us right now, given the continued weak consumer spending in the overall economy for discretionary purchases," said Harley-Davidson, Inc. President and CEO Keith Wandell.
In light of the decline in retail motorcycle sales, the Company also lowered its 2009 shipment expectations for Harley-Davidson motorcycles. The Company now plans to ship between 212,000 and 228,000 Harley-Davidson motorcycles to dealers and distributors worldwide in 2009, or 25 percent to 30 percent fewer than the 303,479 shipped in 2008. Prior 2009 guidance was for shipments of 264,000 to 273,000 motorcycles. In the third quarter of 2009, the Company expects to ship 52,000 to 57,000 Harley-Davidson motorcycles.
As a result of the lowered shipment volume, the Company will implement a further reduction this year of approximately 700 positions in the hourly production workforce. Harley-Davidson will also be reducing the non-production, primarily salaried headcount by an approximate 300 additional positions, including a reduction at HDFS. The Company plans to offer a voluntary separation incentive package to eligible salaried employees. Earlier this year, the Company had announced workforce reductions totaling about 1,400 to 1,500 hourly production positions in 2009 and 2010 and about 300 non-production, primarily salaried positions.
"We continue to take these difficult actions to manage through the current challenges and we also continue to take major steps in creating the operational effectiveness that is essential to our long-term future," said Wandell. "We are committed to doing what is required to enable Harley-Davidson to operate as a competitive business and employer over the long haul."
The Company continues to expect full-year gross margins to be between 30.5 percent and 31.5 percent.
Details of Harley-Davidson, Inc. Second-Quarter and Six-Month Results
Second Quarter. Net income for the quarter was $19.8 million, compared to $222.8 million in the second quarter of 2008, on revenue of $1.15 billion compared to $1.57 billion in the year-ago period. Diluted earnings per share for the second quarter were $0.08, compared to diluted earnings per share of $0.95 in last year's second quarter.
A key factor affecting earnings was the one-time reclassification of finance receivables from held-for-sale to held-for-investment and the related $72.7 million non-cash provision to establish the related initial credit loss allowance.
In addition, as a result of Harley-Davidson's lower shipment volume projections, the Company recorded a non-cash, one-time $28.4 million impairment charge to write off the goodwill recorded in connection with the 1995 purchase of HDFS.
The Company believes HDFS continues to have significant strategic value despite the write-off of remaining goodwill caused by the current economic environment.
Six Months. For the first six months of 2009, Company revenue totaled $2.44 billion, a 15.1 percent decrease from the year-ago period. Diluted earnings per share were $0.59, a decrease of 66.1 percent compared to the same period last year. Net income was $137.1 million, compared to $410.4 million in the first half of 2008.
Strategy for the Current Economic Environment
In early 2009, Harley-Davidson announced a three-part strategy for managing through the global economic downturn and strengthening its operations and financial results going forward. That strategy consists of: 1) investing in the brand; 2) creating the appropriate cost structure; and 3) obtaining funding to support the lending activities of HDFS.
Brand Investment
Reductions in Harley-Davidson's motorcycle shipment plans for 2009 reflect the Company's intense focus on maintaining brand strength. "When it comes to protecting and enhancing the brand, managing supply in line with demand is one of the most important things we can do. We plan to ship fewer Harley-Davidson motorcycles worldwide this year than we anticipate dealers will sell at retail," Wandell said.
At the same time, Harley-Davidson continues to make significant investments in product development and marketing, and the Company is more focused than ever on making those investments work harder and smarter, according to Wandell. "We've got a great lineup of motorcycles and one of our top priorities is to reduce complexity and improve efficiency throughout our product development and manufacturing processes," said Wandell.
On July 25, 2009, Harley-Davidson Motor Company introduces 2010 model year motorcycles at its Summer Dealer Meeting in Denver.
Cost Structure
The Company earlier this year announced plans to consolidate its two Milwaukee-area powertrain (engine and transmission) plants into one facility; consolidate paint and frame operations at its York, Pa. facilities into one plant; and close its Franklin, Wis. Parts and Accessories distribution center and consolidate those operations with General Merchandise distribution through a third-party logistics company. In April, the Company completed the transition of its U.S. transportation fleet operations to a third-party provider as part of its restructuring initiatives.
Powertrain Consolidation Accelerated. Production shutdowns and line rate adjustments will be implemented at Harley-Davidson powertrain operations in Menomonee Falls and Wauwatosa, Wis., and at motorcycle assembly operations in York, Pa. and Kansas City, Mo., to achieve the newly-announced unit volume reduction. As a result of the volume reduction and production shutdowns, the Company expects to accelerate and substantially complete the planned consolidation of the powertrain operations by mid-2010.
Sportster and V-Rod motorcycle final assembly operations and V-Rod motorcycle powertrain production in Kansas City, and production of Sportster motorcycle powertrains in Wauwatosa will be shut down for approximately 14 weeks in 2009, including the entire fourth quarter. The Company anticipates that other production operations will be shut down for a total of approximately five weeks over the rest of 2009.
On a combined basis, Harley-Davidson now expects the volume reductions and restructuring activities to result in one-time charges of approximately $160 million to $190 million over the course of 2009 and 2010, an increase of $40 million from earlier estimates, including $50.0 million incurred during the first half of 2009. The Company now estimates ongoing annual savings of approximately $140 million to $150 million, or $70 million greater than previously estimated, upon completion of the announced restructuring actions. Savings in 2009 are now estimated to be $70 million to $85 million.
York Study Underway. Since the announcement of the original consolidation plans in January, Harley-Davidson has determined that the Company's York operations are not currently competitive or sustainable. The Company has undertaken a "two path" study to determine whether major, additional restructuring at York can achieve cost and efficiency targets to make the operations viable, or alternatively, whether the Company will relocate the York operations to another U.S. location. The Company expects to make a decision on the status of the York operations later this year.
HDFS Funding
Harley-Davidson continues to focus intently on the funding needs of HDFS and, utilizing a variety of funding paths, has provided liquidity for expected HDFS lending activities through the end of this year and into 2010. The Company continues to evaluate additional funding actions to diversify funding sources and balance long-and short-term HDFS debt needs, as well as provide sufficient liquidity for new loan originations.
Business Segment Second-Quarter and Six-Month Results Motorcycles and Related Products Segment
Second Quarter. Revenue from Harley-Davidson motorcycles during the second quarter of 2009 was $808.7 million, a decrease of $375.7 million or 31.7 percent versus the same period last year. The Company shipped 58,179 Harley-Davidson motorcycles in the second quarter of 2009 compared to 80,326 motorcycles shipped in the year-ago period and within the Company's guidance for this year's first quarter.
Revenue from Parts and Accessories (P&A), which consists of Genuine Motor Parts and Genuine Motor Accessories, totaled $231.5 million, a decrease of $34.2 million or 12.9 percent versus the year-ago quarter. Revenue from General Merchandise, which includes MotorClothes apparel, totaled $69.6 million, a decrease of $7.2 million or 9.4 percent from the year-ago quarter.
Gross margin for the second quarter of 2009 was 33.5 percent of revenue compared to 35.7 percent for the second quarter last year. Operating margin was 14.5 percent, compared to 20.1 percent in the second quarter of 2008. Gross and operating margins were adversely affected during the quarter by the shipment volume reduction.
Six Months. Through the first six months of this year, shipments of Harley-Davidson motorcycles were 132,849 units, a 12.7 percent decrease compared to last year's 152,194 units. Harley-Davidson motorcycle revenue through six months was $1.82 billion, down 17.2 percent compared to last year's $2.20 billion. Six-month P&A revenue totaled $401.2 million, a 10.4 percent decrease from last year's $447.6 million. General Merchandise revenue totaled $144.8 million, a 10.0 percent decrease compared to $160.8 million during the same period in 2008. Gross margin through six months was 35.3 percent and operating margin was 16.2 percent, compared to 36.1 percent and 20.1 percent respectively in last year's first half.
Motorcycle Retail Sales
Second Quarter. During the second quarter, worldwide retail sales of Harley-Davidson motorcycles decreased 30.1 percent compared to the prior-year quarter. In the U.S., retail sales of Harley-Davidson motorcycles decreased 35.1 percent from the year-ago period. Industry-wide retail sales of heavyweight motorcycles in the U.S. declined 48.1 percent during the quarter.
In international markets, retail sales of Harley-Davidson motorcycles decreased 18.2 percent during the second quarter of 2009 compared to the second quarter of 2008.
Six Months. For the first half of 2009, worldwide retail sales of Harley-Davidson motorcycles declined 23.6 percent compared to the prior year. U.S. retail sales of Harley-Davidson motorcycles declined 26.1 percent for the first half of the year while the U.S. heavyweight market segment was down 40.0 percent for the same period, compared to the year-ago period. International retail sales of Harley-Davidson motorcycles decreased 17.8 percent for the first six months of 2009 compared to 2008.
First half data are listed in the accompanying tables. Financial Services Segment
Harley-Davidson Financial Services recorded an operating loss of $62.1 million for the second quarter, compared to operating income of $37.1 million in the year-ago quarter. In addition to the effects of the finance receivables reclassification HDFS recorded $15.0 million in writedowns on retained securitization interests due to expected higher credit losses compared to a $6.3 million write-down in the year ago period. For the first half of 2009, HDFS reported an operating loss of $50.9 million, compared to operating income of $72.1 million for the prior-year period. In addition, the Company wrote off $28.4 million of goodwill associated with HDFS.
Income Tax Rate
The Company's second-quarter effective income tax rate was 71.6 percent, compared to 36.0 percent in the same quarter last year. This increase was due primarily to the non-deductible goodwill write-off and the tax implications of MV Agusta, which the Company acquired in August 2008. The Company expects its full-year 2009 effective tax rate to be approximately 55 percent due to the items listed above as well as the previously reported one-time tax charge of $22.5 million in the first quarter of 2009 and the implications of reduced shipments on earnings for the remainder of the year.
Cash Flow
Cash and cash equivalents totaled $1.03 billion as of June 28, 2009, compared to $803.4 million at the end of the year-ago period. Cash used by operations was $164.4 million and capital expenditures were $57.3 million during the second quarter of 2009. For the full year, capital expenditures are now expected to be $145 million to $175 million, including $20 million to $30 million related to restructuring activities.
Company Background
Harley-Davidson, Inc. is the parent company for the group of companies doing business as Harley-Davidson Motor Company (HDMC), Buell Motorcycle Company (Buell), MV Agusta and Harley-Davidson Financial Services (HDFS). Harley-Davidson Motor Company produces heavyweight custom, touring and cruiser motorcycles. Buell produces American sport performance motorcycles. MV Agusta produces premium, high-performance sport motorcycles sold under the MV Agusta brand and lightweight sport motorcycles sold under the Cagiva brand. HDFS provides wholesale and retail financing and insurance programs primarily to Harley-Davidson and Buell dealers and customers.
Harley-Davidson, Inc.
Condensed Consolidated Statements of Income
(In thousands, except per share amounts)
(Unaudited)
Three months ended Six months ended
June 28, June 29, June 28, June 29,
2009 2008 2009 2008
---- ---- ---- ----
Net revenue $1,153,645 $1,572,569 $2,444,293 $2,878,882
Gross profit 386,278 561,924 863,061 1,038,061
Selling, administrative and
engineering expense 203,581 234,292 416,891 448,825
Restructuring expense 15,131 11,549 49,993 11,549
------ ------ ------ ------
Operating income from
motorcycles & related
products 167,566 316,083 396,177 577,687
Financial services income 123,967 106,840 228,634 200,129
Financial services expense 186,086 69,693 279,548 128,075
------- ------ ------- -------
Operating (loss) income
from financial services (62,119) 37,147 (50,914) 72,054
Corporate expense 6,312 7,367 14,082 12,825
Goodwill impairment 28,387 - 28,387 -
------ --- ------ ---
Income from operations 70,748 345,863 302,794 636,916
Investment income 317 2,240 2,270 4,282
Interest expense (1) 1,538 - 11,798 -
----- --- ------ ---
Income before provision for
income taxes 69,527 348,103 293,266 641,198
Provision for income taxes 49,777 125,316 156,169 230,830
------ ------- ------- -------
Net income $19,750 $222,787 $137,097 $410,368
======= ======== ======== ========
Earnings per common share:
Basic $0.08 $0.95 $0.59 $1.74
Diluted $0.08 $0.95 $0.59 $1.74
Weighted-average common
shares:
Basic 232,616 235,067 232,442 236,067
Diluted 233,520 235,314 233,088 236,277
Cash dividends per common
share $0.10 $0.33 $0.20 $0.63
(1) Interest expense for the six months ended June 28, 2009 includes $8.0
million related to the Company's $600.0 million senior unsecured
notes (Notes) issued in February 2009. This interest expense
represents a portion of the total interest incurred on the Notes
during the first quarter and corresponds to the initial temporary
investment of proceeds at corporate. Prior to the end of the first
quarter, the full proceeds were transferred to HDFS and, as a result,
the balance of interest expense on the Notes for the period has been
included in financial services expense.
Harley-Davidson, Inc.
Condensed Consolidated Balance Sheets
(In thousands)
(Unaudited) (Unaudited)
June 28, December 31, June 29,
2009 2008 2008
---- ---- ----
ASSETS
------
Current assets:
Cash and cash equivalents $1,031,194 $593,558 $803,400
Marketable securities - - 524
Accounts receivable, net 287,494 296,258 290,139
Finance receivables held for
sale (2) - 2,443,965 1,617,817
Finance receivables held for
investment, net 1,651,700 1,378,461 1,246,325
Inventories 435,043 400,908 341,396
Other current assets 358,663 264,731 206,624
------- ------- -------
Total current assets 3,764,094 5,377,881 4,506,225
Finance receivables held for
investment, net 3,472,325 817,102 934,534
Other long-term assets 1,528,267 1,633,642 1,342,994
--------- --------- ---------
$8,764,686 $7,828,625 $6,783,753
========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable & accrued
liabilities $852,543 $865,108 $841,263
Short-term debt 1,690,910 1,738,649 526,898
Current portion of long-term
debt - - 401,036
--- --- -------
Total current liabilities 2,543,453 2,603,757 1,769,197
Long-term debt 3,038,387 2,176,238 2,050,000
Pension liability and
postretirement healthcare
benefits 754,733 758,411 269,928
Other long-term liabilities 175,330 174,616 161,791
Total shareholders' equity 2,252,783 2,115,603 2,532,837
--------- --------- ---------
$8,764,686 $7,828,625 $6,783,753
========== ========== ==========
(2) During the second quarter of 2009, the Company reclassified its
finance receivables held for sale to finance receivables held for
investment, net due to a change in the Company's intent to structure
future securitization transactions in a manner that does not qualify
for accounting sale treatment under the provisions of Statement of
Financial Accounting Standards No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities."
Harley-Davidson, Inc.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Six months ended
June 28, June 29,
2009 2008
---- ----
Net cash used by operating activities ($164,442) ($39,016)
Cash flows from investing activities:
Capital expenditures (57,323) (99,597)
Finance receivables held for investment, net (26,099) (73,365)
Collection of retained securitization interests 26,904 18,607
Net change in marketable securities - 2,019
Other, net (3,598) 1,193
------ -----
Net cash used by investing activities (60,116) (151,143)
Cash flows from financing activities:
Proceeds from issuance of medium term notes - 993,550
Proceeds from issuance of senior unsecured notes 589,255 -
Net borrowings of securitization debt 483,864 -
Net decrease in credit facilities and unsecured
commercial paper (392,366) (116,621)
Net borrowings of asset-backed commercial paper 87,706 -
Net change in restricted cash (76,658) -
Dividends (46,913) (148,591)
Purchase of common stock for treasury (296) (150,134)
Excess tax benefits from share-based payments 147 252
Issuance of common stock under employee stock option
plans 10 736
-- ---
Net cash provided by financing activities 644,749 579,192
Effect of exchange rate changes on cash and cash
equivalents 17,445 11,513
Net increase in cash and cash equivalents 437,636 400,546
Cash and cash equivalents:
At beginning of period 593,558 402,854
------- -------
At end of period $1,031,194 $803,400
========== ========
Net Revenue and Motorcycle
Shipment Data
(Unaudited)
Three months ended Six months ended
June 28, June 29, June 28, June 29,
2009 2008 2009 2008
---- ---- ---- ----
NET REVENUE (in thousands)
Harley-Davidson( R )
motorcycles $808,709 $1,184,369 $1,819,518 $2,197,838
Buell( R ) & MV Agusta( R )
motorcycles 39,934 41,518 71,199 63,593
Parts & Accessories 231,470 265,665 401,226 447,607
General Merchandise 69,601 76,790 144,792 160,796
Other 3,931 4,227 7,558 9,048
----- ----- ----- -----
$1,153,645 $1,572,569 $2,444,293 $2,878,882
========== ========== ========== ==========
MOTORCYCLE SHIPMENTS:
Harley-Davidson
United States 35,194 51,449 87,904 99,275
International 22,985 28,877 44,945 52,919
------ ------ ------ ------
Total Harley-Davidson 58,179 80,326 132,849 152,194
====== ====== ======= =======
Buell & MV Agusta 3,774 4,072 6,900 6,464
===== ===== ===== =====
MOTORCYCLE PRODUCT MIX:
Harley-Davidson
Touring 20,989 25,248 46,964 51,683
Custom 22,245 41,922 54,164 70,994
Sportster( R ) 14,945 13,156 31,721 29,517
------ ------ ------ ------
Total Harley-Davidson 58,179 80,326 132,849 152,194
====== ====== ======= =======
Retail Sales of Harley-Davidson Motorcycles
Three months ended Six months ended
June 28, June 29, June 28, June 29,
2009 2008 2009 2008
---- ---- ---- ----
North America Region
--------------------
United States 54,410 83,865 96,451 130,437
Canada 5,015 8,187 6,882 10,870
----- ----- ----- ------
Total North America Region 59,425 92,052 103,333 141,307
Europe Region (Includes Middle
East and Africa)
------------------------------
Europe* 15,327 16,728 22,894 25,803
Other 971 1,403 1,792 2,477
--- ----- ----- -----
Total Europe Region 16,298 18,131 24,686 28,280
Asia Pacific Region
-------------------
Japan 4,022 4,067 6,292 6,805
Other 2,403 2,850 5,051 5,412
----- ----- ----- -----
Total Asia Pacific Region 6,425 6,917 11,343 12,217
Latin America Region 1,420 2,401 2,789 4,258
-------------------- ----- ----- ----- -----
Total Worldwide Retail Sales 83,568 119,501 142,151 186,062
====== ======= ======= =======
Data Source (subject to update)
-------------------------------
Data source for all 2008 and 2009 retail sales figures shown above is
sales warranty and registration information provided by Harley-Davidson
dealers and compiled by the Company. The Company must rely on information
that its dealers supply concerning retail sales, and this information is
subject to revision.
Only Harley-Davidson( R ) motorcycles are included in the
Harley-Davidson Motorcycle Sales data.
* Data for Europe include Austria, Belgium, Denmark, Finland, France,
Germany, Greece, Italy, Netherlands, Norway, Portugal, Spain, Sweden,
Switzerland, and the United Kingdom.
Heavyweight Market Data
Six months ended
June 28, June 29,
2009 2008
---- ----
United States(1) 177,880 296,323
Five months ended
May 31, May 31,
2009 2008
---- ----
Europe(2) 164,844 202,872
(1) - United States industry data includes 651+cc models, derived from
submission of motorcycle retail sales by each major manufacturer to
an independent third party. This data is subject to revision and
update. As of the second quarter 2009, industry data includes
three-wheeled vehicles retroactive to 2008.
(2) - Europe data includes Austria, Belgium, Denmark, Finland, France,
Germany, Greece, Italy, Netherlands, Norway, Portugal, Spain,
Sweden, Switzerland, and the United Kingdom. Industry retail
motorcycle registration data includes 651+cc models, derived
from information provided by Giral S.A., an independent agency.
Europe market data is reported on a one-month lag. This data is
subject to revision and update.
