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| HOG > SEC Filings for HOG > Form 10-Q on 30-Oct-2008 | All Recent SEC Filings |
30-Oct-2008
Quarterly Report
Harley-Davidson, Inc. is the parent company for the groups of companies doing business as Harley-Davidson Motor Company (HDMC), Buell Motorcycle Company (Buell), MV Agusta Group (MVAG), and Harley-Davidson Financial Services (HDFS). HDMC produces heavyweight motorcycles and offers a line of motorcycle parts, accessories, general merchandise and related services. HDMC manufactures five families of motorcycles: Touring, Dyna®, Softail®, Sportster ® and VRSC™. Buell produces premium sport performance motorcycles and offers a line of motorcycle parts, accessories and apparel. MVAG 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.
The Company operates in two business segments: Motorcycles & Related Products (Motorcycles) and Financial Services (Financial Services). The Company's reportable segments are strategic business units that offer different products and services. They are managed separately based on the fundamental differences in their operations.
The "% Change" figures included in this section were calculated using unrounded dollar amounts and may differ from calculations using the rounded dollar amounts presented.
Overview and Outlook(1)
The Company's 2008 third quarter net revenue and net income were down 7.7% and 37.1%, respectively, compared to the third quarter of 2007. The Company's third quarter financial performance reflected a 13.7% decrease in shipments of Harley-Davidson motorcycles and lower operating income from Financial Services as the challenging U.S. economic environment continued to impact the Company's results during the third quarter of 2008.
Worldwide retail sales of Harley-Davidson motorcycles in the third quarter of 2008 were down 9.6%. U.S retail sales of Harley-Davidson motorcycles in the third quarter of 2008 were down 15.5% while international retail sales were up 11.3%. However, sales growth in certain European countries slowed more during the third quarter of 2008 than the Company anticipated as a result of deteriorating economic conditions. The Company continues to carefully monitor all of its markets in light of the challenging economy and remains committed to shipping fewer Harley-Davidson motorcycles to its worldwide dealer network than it expects they will sell at retail in 2008.
HDFS has maintained its position as a stable, consistent source of financing for dealers and retail customers despite turbulent conditions in the credit markets. Going forward, the Company believes HDFS will continue to have access to capital markets and, in the event that capital market conditions worsen, has developed contingency plans to obtain appropriate funding as discussed under "Liquidity and Capital Resources".
On October 16, 2008, the Company announced a narrowed 2008 shipment expectation for Harley-Davidson motorcycles of 303,500 to 306,000 units. This compares to the previous range of 303,500 to 307,500 units. At the same time, the Company also provided a narrowed expectation for 2008 diluted earnings per share of $3.00 to $3.10, which compares to the previous range of $3.00 to $3.18.
(1) Note Regarding Forward-Looking Statements
The Company intends that certain matters discussed in this report are "forward-looking statements" intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. These forward-looking statements can generally be identified as such by reference to this footnote or because the context of the statement will include words such as the Company "believes," "anticipates," "expects," "plans," or "estimates" or words of similar meaning. Similarly, statements that describe future plans, objectives, outlooks, targets, guidance or goals are also forward-looking statements. Such forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those anticipated as of the date of this report. Certain of such risks and uncertainties are described in close proximity to such statements or elsewhere in this report, including under the caption "Cautionary Statements" included in this report, and in Item 1A "Risk Factors" of the Company's Annual Report on Form 10-K for the year ended December 31, 2007. Shareholders, potential investors, and other readers are urged to consider these factors in evaluating the forward-looking statements and cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements included in this report are made only as of the date indicated, or if no date is indicated as of the filing of this report (October 30, 2008), and the Company disclaims any obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances.
The Company believes that the near-term global economic environment will be challenging for the business and it will continue to make prudent decisions to manage through this difficult environment. At the same time, the Company is optimistic about its long-term business prospects and plans to continue to reinvest in the business. This was evidenced during the quarter by the acquisition of MVAG which will enhance the Company's presence in Europe and its penetration into the performance segment of the motorcycle market.
Results of Operations for the Three Months Ended September 28, 2008
Compared to the Three Months Ended September 30, 2007
Consolidated Results
Three months ended
September 28, September 30, (Decrease) %
(in millions, except earnings per share and effective income tax rate) 2008 2007 Increase Change
Operating income from motorcycles & related products $ 234.0 $ 358.3 $ (124.3 ) (34.7 )%
Operating income from financial services $ 35.6 $ 49.5 $ (13.9 ) (28.0 )%
Investment income $ 2.8 $ 5.4 $ (2.6 ) (48.6 )%
Interest expense $ 1.2 - $ 1.2 N/M
Net income $ 166.5 $ 265.0 $ (98.5 ) (37.1 )%
Diluted earnings per share $ 0.71 $ 1.07 $ (0.36 ) (33.6 )%
Effective income tax rate 38.2 % 35.5 %
As discussed in Overview and Outlook, the decrease in Motorcycles operating
income during the third quarter was driven by a decrease in shipments of
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Investment income was lower during the third quarter of 2008 due to the decrease in average marketable securities during the same period. Interest expense during the third quarter relates to consolidated debt incurred in connection with the acquisition of MVAG.
Diluted earnings per share in the third quarter of 2008 were down 33.6% from the same quarter last year on lower net income which more than offset the positive impact of fewer weighted-average shares outstanding. Diluted earnings per share during the third quarter of 2008 were positively impacted by a decrease in the weighted-average shares outstanding, which were 233.4 million in the third quarter of 2008 compared to 247.6 million in the third quarter of 2007. The decrease in weighted-average shares outstanding was driven by the Company's repurchases of common stock over the last year. The Company's third quarter 2008 share repurchases are discussed in further detail under "Liquidity and Capital Resources."
The Company's effective income tax rate for the third quarter of 2008 was 38.2% compared to 35.5% in the same quarter last year. The increase was due primarily to a one-time $16.6 million non-deductible in-process research and development charge for MVAG and the expiration of the federal research and development tax credit as of December 31, 2007. In October 2008, the federal research and development tax credit was reinstated for two years retroactive to January 1, 2008 continuing through December 31, 2009. The Company expects its full year effective tax rate for 2008 will be approximately 35.5%.(1)
Motorcycle Unit Shipments & Net Revenue
The following table includes wholesale motorcycle unit shipments for the
Motorcycles & Related Products segment:
Three months ended
September 28, September 30, (Decrease) %
2008 2007 Increase Change
Motorcycle Unit Shipments
United States 49,953 66.9 % 65,756 76.0 % (15,803 ) (24.0 )%
International 24,751 33.1 % 20,779 24.0 % 3,972 19.1
Harley-Davidson motorcycle units 74,704 100.0 % 86,535 100.0 % (11,831 ) (13.7 )
Touring motorcycle units 24,008 32.1 % 28,461 32.9 % (4,453 ) (15.6 )
Custom motorcycle units* 34,322 45.9 % 39,488 45.6 % (5,166 ) (13.1 )
Sportster motorcycle units 16,374 21.9 % 18,586 21.5 % (2,212 ) (11.9 )
Harley-Davidson motorcycle units 74,704 100.0 % 86,535 100.0 % (11,831 ) (13.7 )
Buell motorcycle units 2,760 2,639 121 4.6 %
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* Custom motorcycle units, as used in this table, include Dyna, Softail, VRSC and CVO models.
During the third quarter of 2008, the Company shipped 74,704 Harley-Davidson motorcycles, a decrease of 11,831 motorcycles, or 13.7%, from the same quarter last year. The Company's shipments in the U.S. in 2008 continued to be negatively impacted by the challenging economic environment, but were consistent with previously announced plans to ship 23,000 to 27,000 fewer Harley-Davidson motorcycles in 2008 than were shipped in 2007. The Company's shipments in international markets grew during the third quarter, and the percentage of units shipped to international customers increased, consistent with the Company's strategic focus on global markets.
The following table includes net revenue for the Motorcycles & Related Products segment (in millions):
Three months ended
September 28, September 30, (Decrease) %
2008 2007 Increase Change
Net Revenue
Harley-Davidson motorcycles $ 1,051.0 $ 1,182.6 $ (131.6 ) (11.1 )%
Buell motorcycles 26.1 22.5 3.6 15.9
1,077.1 1,205.1 (128.0 ) (10.6 )
Parts & Accessories 259.0 251.5 7.5 3.0
General Merchandise 84.0 83.2 0.8 1.0
Other 2.7 1.6 1.1 N/M
Net revenue $ 1,422.8 $ 1,541.4 $ (118.6 ) (7.7 )%
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Motorcycles segment net revenue decreased $118.6 million, or 7.7%. Net revenue was lower by approximately $134 million primarily due to the 13.7% lower shipment volume. In addition, product mix changes decreased revenue by approximately $8 million. Partially offsetting the unfavorability in volume and product mix was favorability of approximately $2 million from wholesale price increases on Harley-Davidson motorcycles and favorability resulting from changes in foreign currency exchange rates of approximately $22 million.
Harley-Davidson Motorcycle Retail Sales
The Company sells its motorcycles at wholesale to an independent network of dealers and distributors who in turn sell the Company's products at retail. Worldwide retail sales of Harley-Davidson motorcycles decreased 9.6% during the third quarter of 2008 relative to the same period last year. Retail sales of Harley-Davidson motorcycles decreased 15.5% in the United States while growing 11.3% internationally. The following table includes retail unit sales of Harley-Davidson motorcycles:
Harley-Davidson Motorcycle Retail Sales(a)
Heavyweight (651+cc)
Three months ended
September 28, September 30, (Decrease) %
2008 2007 Increase Change
North America Region
United States 59,000 69,810 (10,810 ) (15.5 )%
Canada 3,682 3,277 405 12.4
Total North America Region 62,682 73,087 (10,405 ) (14.2 )
Europe Region (Includes Middle East and
Africa)
Europe(b) 8,481 8,301 180 2.2
Other 1,006 920 86 9.3
Total Europe Region 9,487 9,221 266 2.9
Asia Pacific Region
Japan 4,697 3,808 889 23.3
Other 2,310 2,156 154 7.1
Total Asia Pacific Region 7,007 5,964 1,043 17.5
Latin America Region 1,776 1,254 522 41.6
Total Worldwide Retail Sales 80,952 89,526 (8,574 ) (9.6 )%
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(a) Data source for 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 motorcycles are included in the Harley-Davidson Motorcycle Retail Sales data.
(b) Data for Europe include Austria, Belgium, Denmark, Finland, France, Germany, Greece, Italy, Netherlands, Norway, Portugal, Spain, Sweden, Switzerland and the United Kingdom.
Cost of Goods Sold
Cost of goods sold was $938.8 million for the Motorcycles segment in the third quarter of 2008, a decrease of $11.3 million or 1.2% versus the corresponding period last year. Cost of goods sold was also impacted by the 13.7% decline in shipment volume, which resulted in a decrease of approximately $59 million. Additionally, changes in product mix resulted in a decrease of approximately $5 million. Partially offsetting these decreases were higher manufacturing costs of approximately $40 million. Manufacturing costs increased partially as the result of a higher fixed cost per unit due to allocating fixed costs to fewer units. Additionally, higher manufacturing costs were also the result of increased product cost as the Company invests in new models and increased product content, such as new features and options on the Company's motorcycles. Cost of goods sold also increased by approximately $7 million resulting from changes in foreign currency exchange rates. Raw material surcharges were approximately $6 million higher when compared to the prior year third quarter.
Gross Profit
Gross profit was $484.1 million for the Motorcycles segment for the third quarter 2008, a decrease of $107.3 million or 18.1% versus the same period last year. Gross margin for the third quarter of 2008 was 34.0% compared to 38.4% for the third quarter of 2007. The factors impacting the change in gross margin are detailed under "Motorcycle Unit Shipments and Net Revenue" and "Cost of Goods Sold" above.
Financial Services
The following table includes the condensed statements of operations for the
Financial Services segment (in millions):
Three months ended
September 28, September 30, Increase %
2008 2007 (Decrease) Change
Interest income $ 79.8 $ 43.6 $ 36.2 83.0 %
Income from securitizations 13.9 21.1 (7.2 ) (34.0 )
Other income 18.2 33.8 (15.6 ) (46.1 )
Financial services income 111.9 98.5 13.4 13.7
Interest expense 37.5 19.2 18.3 95.3
Operating expenses 38.8 29.8 9.0 30.3
Financial services expense 76.3 49.0 27.3 55.8
Operating income from financial services $ 35.6 $ 49.5 $ (13.9 ) (28.0 )%
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During the third quarter of 2008, interest income benefited from higher average retail outstanding receivables, partially offset by lower wholesale lending rates. Interest expense was higher in the third quarter of 2008 due to increased borrowings to support higher outstanding retail receivables, partially offset by lower borrowing rates as compared to the same period of 2007. The increase in retail receivables outstanding was driven by the lack of securitization transactions in the second and third quarters of 2008 due to capital market volatility. The increase in operating expenses in the third quarter of 2008 is primarily due to an increase in the provision for credit losses.
Income from securitizations in the third quarter of 2008 decreased as compared to the third quarter of 2007 primarily due to the absence of a securitization transaction during the third quarter of 2008. This compares to a $782.0 million securitization transaction that was completed in the third quarter of 2007 with a gain of $3.5 million. Income from securitizations also decreased due to lower income from retained securitization interests, which totaled $13.9 million in the third quarter of 2008 versus $17.5 million in the third quarter of 2007.
During the three months ended September 28, 2008, HDFS recorded a non-cash charge to earnings of $9.4 million from the lower of cost or estimated fair value on its finance receivables held for sale. HDFS uses discounted cash flow methodologies to estimate the fair value of finance receivables held for sale that incorporate appropriate assumptions for funding costs and credit enhancement, as well as estimates concerning credit losses and prepayments, that in management's judgment, reflect assumptions marketplace participants would use. Any amount by which cost exceeds fair value is accounted for as a valuation allowance with an offset to other income. The decline in fair value below cost was primarily due to higher estimated funding costs related to significant volatility in the capital markets. The charge to earnings was recorded in other income and was a primary factor for the decrease in other income in the third quarter of 2008 as compared to the same period of 2007.
Changes in the allowance for finance credit losses on finance receivables held for investment were as follows (in millions):
Three months ended
September 28, September 30,
2008 2007
Balance, beginning of period $ 35.9 $ 26.9
Provision for finance credit losses 8.0 2.0
Charge-offs, net of recoveries (7.1 ) (1.8 )
Balance, end of period $ 36.8 $ 27.1
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HDFS' periodic evaluation of the adequacy of the allowance for credit losses is generally based on HDFS' past loan loss experience, known and inherent risks in the portfolio, and current economic conditions. HDFS believes the allowance is adequate to cover estimated losses of principal in the existing portfolio.
Operating Expenses
The following table includes operating expenses for the Motorcycles segment and
Corporate (in millions):
Three months ended
September 28, September 30, Increase %
2008 2007 (Decrease) Change
Motorcycles and Related Products
Selling & administrative $ 210.9 $ 185.0 $ 25.9 14.0 %
Engineering 39.1 48.1 (9.0 ) (18.7 )
Corporate 1.7 2.3 (0.6 ) (27.7 )
Total operating expenses $ 251.7 $ 235.4 $ 16.3 6.9 %
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Total operating expenses, which include selling, administrative and engineering expenses, were 17.7% and 15.3% of net revenue for the third quarters of 2008 and 2007, respectively. Selling and administrative expenses were higher due primarily to the impact of the one-time $16.6 million expense related to the value of in-process research and development at MVAG during the third quarter of 2008 (see Note 4 of Notes to Condensed Consolidated Financial Statements for further discussion). Additionally, selling and administrative expenses increased due to higher international operating costs associated with the Company's international growth; however, this was partially offset by lower engineering spending during the third quarter of 2008 compared to the third quarter of 2007.
Results of Operations for the Nine Months Ended September 28, 2008
Compared to the Nine Months Ended September 30, 2007
Consolidated Results
Nine months ended
September 28, September 30, (Decrease) %
(in millions, except earnings per share and effective income tax rate amounts) 2008 2007 Increase Change
Operating income from motorcycles & related products $ 811.7 $ 980.1 $ (168.4 ) (17.2 )%
Operating income from financial services $ 107.7 $ 173.6 $ (65.9 ) (38.0 )%
Investment income $ 7.0 $ 19.4 $ (12.4 ) (63.8 )%
Interest expense $ 1.2 - $ 1.2 N/M
Net income $ 576.9 $ 747.8 $ (170.9 ) (22.8 )%
Diluted earnings per share $ 2.45 $ 2.95 $ (0.50 ) (16.9 )%
Effective income tax rate 36.7 % 35.5 %
The decrease in Motorcycles operating income during the nine months ended
September 28, 2008 was driven by a decrease in shipments of Harley-Davidson
motorcycles. In addition, lower operating income from Financial Services
contributed to the decrease in consolidated income from operations for the nine
months ended September 28, 2008 compared to the same period last year. Please
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Investment income was lower during the first nine months of 2008 due to the decrease in average marketable securities during the same period. Interest expense during the first three quarters relates to consolidated debt incurred in connection with the acquisition of MVAG.
Diluted earnings per share for the first nine months of 2008 were down 16.9% from the same period last year on lower net income which more than offset the positive impact of fewer weighted-average shares outstanding. Diluted earnings per share during the first nine months of 2008 were positively impacted by a decrease in the weighted-average shares outstanding, which were 235.3 million in the first nine months of 2008 compared to 253.3 million in the first nine months of 2007. The decrease in weighted-average shares outstanding was driven by the Company's repurchases of common stock over the last year. The Company's third quarter 2008 share repurchases are discussed in further detail under "Liquidity and Capital Resources."
The Company's effective income tax rate for the first nine months of 2008 was 36.7% compared to 35.5% in the same period last year. The increase was due primarily to the non-deductible in-process research and development charge for MVAG and the expiration of the federal research and development tax credit as of December 31, 2007. In October 2008, the federal research and development tax credit was reinstated for two years retroactive to January 1, 2008 continuing through December 31, 2009.
Diluted earnings per share during the first nine months of 2008 were positively . . .
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