Harley-Davidson (HOG) disappointed in its third quarter results, posting a net income of $26.5 million or 11 cents per share compared to the Zacks Consensus Estimate of 22 cents per share. Compared to the year-ago quarter, net income tumbled 84% from $166.5 million and earnings per share collapsed 84.5% from 71 cents. The company addressed lower motorcycle shipments and the effects of the economy on retail and wholesale loan performance at Harley-Davidson Financial Services for the decline in earnings.

Revenue and Gross Margin

Total revenue during the quarter fell 21% to $1.12 billion. Revenue from Harley-Davidson motorcycles (which includes brands such as Harley-Davidson, Buell and MV Agusta) decreased 22% to $803.3 million. The company shipped 54,236 motorcycles to dealers and distributors worldwide, down 27% from the year-ago quarter. However, the shipment was in line with the guidance of 52,000 to 57,000 units.

Revenue from Parts and Accessories dropped 14% to $221.8 million. Revenue from General Merchandise fell 16% to $70.7 million.

Gross margin decreased marginally to 33% of revenue from 34% in the year-ago quarter. Operating margin declined to 9.5% from 16.4% in the same quarter of 2008. This can be attributed to lower gross margin, restructuring charges and impairment charges.

Retail Sales

Worldwide retail sales of Harley-Davidson motorcycles decreased 21%. In the U.S., sales declined 24%; and the international markets dipped 13%. Industry-wide U.S. retail heavyweight (651cc+) motorcycle sales declined 36% during the quarter.

Harley-Davidson Financial Services

Harley-Davidson Financial Services (HDFS) showed an operating loss of $31.5 million compared to an operating profit of $36 million in the third quarter of 2008. This decrease can be attributed to a higher provision for credit losses in both retail and wholesale portfolios as well as increased interest expense.

HDFS continues to successfully access the credit markets to fund its lending activities. On Oct. 9, HDFS completed a $700 million term securitization transaction with a weighted average interest rate of 1.2%.

Restructuring Activities

As a part of Harley-Davidson’s go-forward business strategy, the company has decided to discontinue its Buell product line and divest its MV Agusta unit in order to focus solely on the Harley-Davidson brand. This, along with previously announced restructuring activities, are expected to result in one-time charges of $215 million to $245 million over 2009 and 2010, or an increase of $55 million from the estimate provided July 16, 2009. The company estimates annual ongoing savings from restructuring of $140 million to $150 million.

Income Tax Rate

Harley-Davidson’s effective income tax rate for the quarter was 62% compared to 38% in the same quarter last year. This increase can be attributed to the tax implications of MV Agusta, including the non-deductible write down of goodwill and the impact of reduced company earnings. The company anticipates its full-year effective tax rate on continuing operations, excluding MV Agusta, to be 59%.

Financial Position

Cash and cash equivalents totaled $1.52 billion as of Sept. 27, 2009 compared to $504 million at the end of the year-ago period. Long-term debt amounted to $3.84 billion as of the above period. Long-term debt to capitalization ratio stood at 63%.

In the first nine months of 2009, cash flow provided by operations was $511 million and capital expenditures were $89 million. For the full year, capital expenditures are expected to be $125 million to $145 million, including $15 million to $25 million related to restructuring activities.


Harley-Davidson has narrowed down its guidance for full-year 2009 shipments. The company now expects to ship 222,000 to 227,000 motorcycles to dealers, including 35,000 to 40,000 units in the upcoming quarter. The company continues to expect full-year gross margins in the range of 30.5%-31.5%.

We recommend the shares of Harley-Davidson as Neutral.
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