Harley-Davidson Inc. (HOG) witnessed a 74% rise in profit to $119.3 million in the first quarter of 2011 from $68.7 million in the same quarter of prior year. However, the company failed to meet the Zacks Consensus Estimate by 2 cents per share by posting a profit of 51 cents per share, up from 29 cents per share in the first quarter of 2010.

The improvement in profit was attributable to impressive new motorcycle sales globally, especially in Europe, despite some headwinds in the U.S., as well as higher operating earnings in the company’s Financial Services segment. Revenues in the quarter rose marginally by 1.5% to $1.22 billion from $1.21 billion a year ago.

Motorcycles and Related Products

Revenues from Motorcycles and Related Products grew 2.5% to $1.06 billion driven by a marginal rise in shipments. Revenue from Harley-Davidson motorcycles increased 3% to $833.4 million.

The company shipped 53,827 motorcycles to global dealers and distributors, up from 53,674 motorcycles in the first quarter of 2010. Harley’s worldwide dealer retail sales of new motorcycles rose 3.5% globally, including a 0.5% decline in the U.S. and an 11.3% rise in international markets.

Revenues from Parts and Accessories escalated 10.2% to $164.3 million and revenues from General Merchandise – which includes MotorClothes apparel – dipped 5.6% to $62.6 million.

Gross margin deteriorated to 33.1% from 36.6% in the year-ago period. It was adversely affected by temporary production inefficiencies related to the restructuring and transformation of production operations and foreign exchange and raw materials costs. Harley had an operating profit of $193 million (11.8%) in the quarter compared with $152.8 million (12.2%) in the year-ago period.

Harley-Davidson Financial Services (HDFS)

Revenues in the Financial Services segment ebbed 5% to $161.9 million. The segment reported an operating income of $67.9 million, up 154.6% from $26.7 million in the year-ago quarter. This was attributable to continued improvement in credit performance.

Restructuring Activities

In the quarter, Harley incurred restructuring charges of $23 million. The company revised its forecast to incur one-time charges, related to restructuring activities that began in 2009, to $510 million–$525 million in 2012 (including charges of $95 million to $105 million in 2011), up from the prior estimate of $495 million–$510 million.

The company reiterated its guidance to achieve savings of $210 million to $230 million in 2011 and $305 million to $325 million in 2012 from restructuring activities.

Financial Position

Harley had cash and cash equivalents of $932.5 million as of March 27, 2011 compared with $1.44 billion in the corresponding period of 2009. Long-term debt decreased to $2.96 billion from $3.26 billion a year ago. Consequently, long-term debt to capitalization ratio reduced to 56% from 61% a year ago.

In the quarter, Harley had an operating cash outflow of $104.9 million in contrast to an inflow of $200.8 million in the prior year period. Meanwhile, capital expenditures increased to $27.7 million from $14.6 million in the same quarter of 2010.

Looking Forward

Given the supply chain interruption arising from the March 11 earthquake and tsunami in Japan, Harley expects to ship 215,000 to 228,000 motorcycles to dealers and distributors worldwide in 2011 compared with the prior shipment guidance of 221,000 to 228,000 motorcycles. In the second quarter of 2011, the company anticipates to ship 62,000 to 67,000 motorcycles.

Harley expects gross margin to be between 33.5% and 35.0% in 2011, versus previous guidance of 34.0% to 35.0%. It continues to expect full-year capital expenditure of $210 million – $230 million, including $60 million – $75 million to support restructuring activities.

Harley-Davidson commands roughly 50% of the U.S. market, providing advantages of scale over others. Furthermore, the company maintains an extremely strong franchise. It has a network of over 680 independent U.S. dealers (over 1,300 worldwide), 55% of which exclusively market Harley-Davidson branded motorcycles.

However, the company has an aging customer base. In addition, its U.S. market has not recovered. As a result, the company retained a Zacks #3 Rank on its stock, which translated to a ‘Hold’ rating for the short term (1 to 3 months) and we reiterate our “Neutral” recommendation on the stock for the long term (more than 6 months).

 
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