Thanks to Harley-Davidson's resurgent Financial Services division and the execution of company-wide restructuring, H-D's third-quarter report shows an increase in overall profits.
Despite an overall 7.7% decrease in the sales of motorcycles, Harley-Davidson’s third-quarter report reveals an increase in profits. Driven by Harley-Davidson’s Financial Services Division’s return to profitability, the Milwaukee-based motorcycle manufacturer reported a 2010 third-quarter income from continuing operations of $93.7 million or $.40 per share compared to income of $56.4 million, or $.24 per share for the same period last year.
Harley’s Financial Services reported operating income of $50.9 million in the third quarter, a major contrast to the $31.5 million loss reported in last year’s third quarter. The turn-around is credited to the lower cost of funds and an improvement in credit losses.
H-D’s projected restructuring costs are also down. The company anticipates savings in 2010 of $150 to $165 million, fueled in part by the recent labor agreements
it reached at its Milwaukee and Tomahawk plants. Workers recently approved a seven-year wage freeze and hundreds of full-time positions were eliminated by the new labor contract as Harley-Davidson threatened to move operations out of state if not approved. Its York plant also underwent similar concessions in December of 2009.
Motorcycle sales, however, continue to decline. Retail sales of new Harley-Davidson motorcycles decreased 7.7% overall, the average of a 9.4% decline in the United States and a 3.6% drop in international markets. Through three quarters, worldwide retail sales of Harley-Davidsons are down 13.4%. The company shipped 53,293 motorcycles to dealers and distributors worldwide during the quarter, down slightly from the 54,236 motorcycles shipped during the same quarter last year.
Revenue dipped slightly to $1.09 billion, a two percent drop from the $1.11 billion posted during the same period last year. Operating income from the motorcycle sales and related products segment was $101.5 million, down from $130.7 million in the year-ago period.
“Despite the continued challenges in the economy, we are making solid, steady progress at transforming our business,” President and CEO Keith Wandell said. “With our strategic focus on future growth initiatives and continuous improvement, we are positioning Harley-Davidson to succeed at today’s volumes, as well as to grow and restore greater profitability longer term.”
Here's a look at Harley-Davidson's Third-Quarter 2010 press release:
Retail Harley-Davidson Motorcycle Sales
During the third quarter of 2010, dealer retail sales of new Harley-Davidson motorcycles decreased 7.7 percent worldwide, 9.4 percent in the U.S. and 3.6 percent in international markets, compared to the prior-year quarter. Industry-wide U.S. heavyweight motorcycle (651cc-plus) retail unit sales decreased 14.4 percent in the third quarter compared to the year-ago period.
Through nine months, worldwide retail sales of Harley-Davidson motorcycles decreased 9.8 percent compared to the same period last year. U.S. retail sales of Harley-Davidson motorcycles decreased 13.4 percent for the first nine months of the year while the U.S. heavyweight market segment was down 14.6 percent for the same period, compared to the year-ago period. In international markets, retail sales of new Harley-Davidson motorcycles decreased 1.9 percent for the first nine months of 2010 compared to 2009.
“The Harley-Davidson brand has remarkable strength globally. Few products or brands rank as highly in terms of awareness and affinity on the part of customers and non-customers alike. We have continued to gain market share in the U.S. and Europe. Since 2008, we also have been the U.S. leader in new motorcycle sales to young adults for the entire on-road motorcycle category. Going forward, we will continue to build on this brand strength and leadership position,” said Wandell.
Third-quarter-and nine-month data are listed in the accompanying tables.
Harley-Davidson Motorcycles and Related Products Segment Financial Results
Third Quarter: Revenue from Harley-Davidson motorcycles in the third quarter of 2010 was $798.8 million, down 0.6 percent compared to the year-ago period. The Company shipped 53,293 Harley-Davidson motorcycles to dealers and distributors worldwide during the quarter, compared to shipments of 54,236 motorcycles in the third quarter of 2009.
Revenue from Parts and Accessories totaled $219.0 million during the quarter, down 1.2 percent, and revenue from General Merchandise, which includes MotorClothes® apparel, was $64.1 million, down 9.4 percent compared to the year-ago period.
Gross margin was 34.9 percent in the third quarter, compared to 33.4 percent in the year-ago period. Third-quarter operating margin decreased to 9.3 percent in 2010 from 11.8 percent in the third quarter of 2009, largely the result of higher restructuring and selling, general and administrative charges.
Nine Months: Through the first nine months of 2010, the Company shipped 166,013 Harley-Davidson motorcycles, an 11.3 percent decrease compared to last year’s 187,085 units for the period. Revenue from Harley-Davidson motorcycles through nine months was $2.44 billion, a 7.0 percent decrease compared to the year-ago period. Nine-month P&A revenue was $599.8 million, a 3.7 percent decrease from the year-ago period. General Merchandise revenue was $197.7 million, an 8.3 percent decrease compared to the same period in 2009. Gross margin through nine months was 35.5 percent and operating margin was 11.8 percent, compared to 35.0 percent and 15.2 percent respectively in the year-ago period.
Financial Services Segment
Third Quarter: Operating income from financial services was $50.9 million in the third quarter of 2010, compared to an operating loss of $31.5 million in the year-ago quarter. The improvement in year-over-year operating income is largely the result of a lower cost of funds and improvement in credit losses.
Nine Months: Through nine months, operating income from financial services was $138.4 million, compared to an operating loss of $110.8 million in the first nine months of 2009. Nine-month 2009 results were affected by two non-recurring, non-cash charges totaling $101.1 million to establish a credit loss provision related to the reclassification of motorcycle loan receivables and to write off all HDFS goodwill.
The Company is narrowing its guidance for full-year 2010 shipments and now expects to ship 207,000 to 212,000 Harley-Davidson motorcycles to dealers, a decrease of approximately five to seven percent from 2009. Prior shipments guidance was 201,000 to 212,000 motorcycles. The Company is also refining its guidance for capital expenditures, which are now expected to be $190 million to $210 million for the full year, compared to prior guidance of $235 million to $255 million. Capital expenditures guidance for 2010 includes $75 million to $90 million to support restructuring activities, a revision from prior guidance of $95 million to $110 million for restructuring activities in 2010. Harley-Davidson continues to expect gross margin to be between 32.5 percent and 34.0 percent for the full year.
The Company has lowered the cost estimate to complete its restructuring activities and now expects previously announced restructuring activities, which began in 2009, to result in total one-time charges of $505 million to $535 million into 2012, compared to the prior cost estimate of $515 million to $545 million, including charges of $190 million to $210 million in 2010. The Company now expects savings in 2010 of $150 million to $165 million from restructuring activities and continues to expect annual ongoing savings of $290 million to $310 million beginning in 2013 upon completion of the restructuring activities.
Last month, Harley-Davidson announced that its Wisconsin labor unions had ratified new labor agreements to take effect in April 2012. Costs and savings related to the new Wisconsin labor agreements are included in the restructuring projections, and savings will first result in a financial benefit upon implementation of the agreements in 2012.
Income Tax Rate
Through nine months of 2010, the Company's effective income tax rate from continuing operations was 34.0 percent compared to 47.7 percent for the same period last year. The 2010 effective tax rate through the third quarter was favorably impacted by the settlement of an IRS audit and an increase in the tax benefit from domestic manufacturing, offset by the tax impact of federal healthcare reform legislation. The 2009 effective tax rate for the same period was unfavorably impacted by a one-time tax charge related to a Wisconsin tax law change and a non-deductible goodwill charge. The Company now expects its 2010 full-year effective tax rate from continuing operations to be approximately 34.0 percent.
Cash and marketable securities totaled $1.55 billion as of Sept. 26, 2010, compared to $1.52 billion at the end of last year’s third quarter. Through nine months, cash provided by operating activities from continuing operations was $1.17 billion, compared to $561.3 million in the year-ago period, and capital expenditures were $77.6 million in 2010, compared to $76.6 million in 2009.
In the third quarter, the Company completed the divesture of its MV Agusta subsidiary. For the third quarter of 2010, Harley-Davidson incurred a $4.9 million loss from discontinued operations, net of tax. Through the first nine months of 2010, Harley-Davidson incurred a $108.4 million loss net of tax from discontinued operations, comprised of operating losses as well as fair value adjustments. Including discontinued operations, the Company reported earnings per share of $0.38 in the third quarter of 2010.