Harley-Davidson (HOG) has witnessed a profit of $68.7 million or 29 cents per share in the first quarter of 2010, outperforming the Zacks Consensus Estimate of 26 cents per share. However, profits were lower than $128.1 million or 55 cents per share in the year-ago quarter.

Revenue from Motorcycles and Related Products fell 19% to $1.04 billion in the quarter. Nevertheless, Harley showed a profit due to its aggressive restructuring actions, incorporated in its go-forward business strategy.

The actions included the discontinuation of its Buell product line and the divestment of its MV Agusta unit in order to focus solely on the Harley-Davidson brand. In the first quarter, the company successfully implemented a new labor agreement at its York facility that was in line with its restructuring strategy.

Motorcycles and Related Products

Revenues from Harley-Davidson motorcycles dipped 20% to $808.8 million due to lower shipments. The motorcycle maker’s shipments declined 28% to 53,674 units to worldwide dealers and distributors.

Harley’s worldwide dealer retail sales of new motorcycles went down 18.2% during the quarter. In the U.S., retail unit sales fell 24.3% while international retail sales decreased 2.8%. Retail sales were up 1.2% in Europe, up 1.5% in Canada, down 9.8% in the Asia-Pacific and down 7.8% in Latin America.

Revenue from Parts and Accessories ebbed 12.1% to $149.1 million and revenue from General Merchandise – which includes MotorClothes apparel – was down 11.9% to $66.3 million.

Gross margin went down to 36.6% during the quarter from 37.1% in the year-ago period. The operating margin decreased to 12.2% from 18.1% in the prior-year quarter, driven by higher restructuring costs and lower revenue in the quarter.

Harley reiterated its expectations to ship 201,000–212,000 motorcycles to dealers and distributors worldwide in 2010, a reduction of 5%–10% from 2009. In the second quarter, the company anticipates it will ship 55,000–60,000 motorcycles. The company continues to expect gross margin to be between 32%–33.5% for the full year.

Financial Services

Harley’s Financial Services segment returned to profit after its continuous losses since the fourth quarter of 2008. The segment earned $26.7 million during the quarter, an increase of $15.5 million from the year-ago level. The profitability was attributable to an improved credit performance in the retail motorcycle loan portfolio and to a lower cost of funds.

Restructuring Activities

Harley continues to expect its restructuring activities to result in total one-time charges of $430 million–$460 million into 2012, including charges of $175 million–$195 million in 2010. In 2010, the company continues to expect savings of $135 million to $155 million from previously announced restructuring activities. Upon completion of the restructuring actions, annual savings could go up to $240 million to $260 million.

Financial Position

Cash and cash equivalents totaled $1.44 billion as of March 28, 2010 compared to $884.6 million at the end of the year-ago period. Long-term debt amounted to $3.26 billion as of the above period. Long-term debt to capitalization ratio stood at 61%.

In the first three months of 2009, Harley had a net cash flow of $200.8 million, in sharp contrast to a cash outflow from operating activities of $227 million in the prior-year period. Meanwhile, capital expenditures reduced to $14.6 million in the period under review from $20 million in the same period last year.

For the full year, capital expenditures are expected in the range of $235 million and $255 million, including $95 million to $110 million to support restructuring activities.

Estimate Revisions Trend

Over the last 30 days, out of the 12 analysts covering the stock, one has revised upward the estimate for full year 2010, while one has revised it downward. Due to the revisions of estimates by the same number of analysts in the opposite directions, we maintain our Zacks #1 Rank (Strong Buy) for the stock.

With respect to earnings surprises, the stock has performed well over the trailing four quarters, (with the first quarter of 2009 the worst of the four). The average earnings surprise was 5.55%. This implies that Harley has beaten the Zacks Consensus Estimate by the same magnitude over the last four quarters.

The current Zacks Consensus Estimates for the second quarter and full-year 2010 are profits of 37 cents and $1.02, respectively. The upside potential of these estimates, essentially a proxy for future earnings surprises, are minus 10.81% and minus 4.90%, respectively.
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