Harley-Davidson, Inc. (NYSE: HOG) has reported first-quarter 2010 income from continuing operations of $68.7 million, or $0.29 per share. First quarter earnings included operating income from Financial Services of $26.7 million, marking a return to profitability for the Company’s Harley-Davidson Financial Services (HDFS) subsidiary. Revenue from Motorcycles and Related Products was $1.04 billion in the first quarter.
While the global retail sales of the HD bikes declined 18.2% during the 1st quarter, this is an improvement from the decline of the past 3 fiscal quarters. Further, it breaks down that U.S. sales were down 24.3% and international sales were down 2.8%.
Keith Wandell, President and CEO of Harley-Davidson stated that the company is encouraged by the Q1 progress and that the company is seeing "directional improvement" with the dealerships retail sales as the industry enters the key selling season. Wandell goes on to caution that with the global economic conditions, HD will continue to factor that into the management of the business.
Revenue from Harley-Davidson motorcycles during the first quarter of 2010 of $808.8 million was down 20.0 percent compared to the year-ago period. In line with guidance, the Company shipped 53,674 Harley-Davidson motorcycles to dealers and distributors worldwide during the quarter, compared to shipments of 74,670 motorcycles in the first quarter of 2009. The decline in units will help illustrate why HD opted to close certain dealerships around the U.S.
Revenue from Parts and Accessories totaled $149.1 million during the quarter, down 12.1 percent, and revenue from General Merchandise, which includes MotorClothes® apparel, was $66.3 million, down 11.9 percent compared to the year-ago period.
Gross margin was 36.6 percent in the first quarter, compared to 37.1 percent in the year-ago period. First-quarter operating margin decreased to 12.2 percent from 18.1 percent in the first quarter of 2009, driven by higher restructuring costs and the impact of lower revenue in the first quarter of 2010 compared to the year-ago period.
Motorcycle Retail Sales Data
During the first quarter of 2010, worldwide dealer retail sales of new Harley-Davidson motorcycles decreased 18.2% compared to the prior-year quarter. In the U.S., retail sales of new Harley-Davidson motorcycles declined 24.3% for the quarter and industry-wide heavyweight motorcycle (651cc-plus) retail unit sales declined 21.4%.
International retail sales of new Harley-Davidson motorcycles decreased 2.8% during the quarter, compared to the year-ago period, after double-digit declines in each of the prior four quarters. In the first quarter of 2010, the Europe region was up 1.2%, Canada was up 1.5%, the Asia Pacific region was down 9.8% and the Latin America region was down 7.8%, compared to the year-ago period.
Guidance
The Company reiterated its expectation to ship 201,000 to 212,000 Harley-Davidson motorcycles to dealers and distributors worldwide in 2010, a reduction of five to ten percent from 2009. In the second quarter of 2010, the Company expects to ship 55,000 to 60,000 Harley-Davidson motorcycles. The Company continues to expect gross margin to be between 32.0 percent and 33.5 percent for the full year. The Company also continues to expect full-year capital expenditures of between $235 million and $255 million, including $95 million to $110 million to support restructuring activities.
Financial Services Segment
First-quarter operating income from Financial Services was $26.7 million, an increase of $15.5 million compared to the year-ago quarter. The return to profitability for HDFS after three consecutive quarters of operating losses was primarily driven by improved credit performance in the retail motorcycle loan portfolio and by a lower cost of funds.
Restructuring Update
Previously announced restructuring activities that began in 2009 are proceeding on schedule and on budget. The Company continues to expect those activities to result in total one-time charges of $430 million to $460 million into 2012, including charges of $175 million to $195 million in 2010. In 2010, the Company continues to expect savings of $135 million to $155 million from previously announced restructuring activities, increasing to expected annual ongoing savings of approximately $240 million to $260 million upon completion of the restructuring.
Income Tax Rate
The Company’s first quarter effective income tax rate from continuing operations was 47.2% compared to 45.4% in the same quarter last year. The rate increase was generally due to the tax impact of the recently enacted federal healthcare reform legislation and the expiration of the federal research and development tax credit, partially offset by the non-recurrence of a one-time tax charge related to a change in Wisconsin tax law in the first quarter of 2009. Relative to the tax impact of healthcare reform, the Company incurred a one-time tax charge of $13.3 million in the first quarter of 2010 associated with the taxation of Medicare Part D retiree prescription drug reimbursements. The Company now expects its 2010 full-year effective tax rate from continuing operations to be approximately 40.5%.
Cash Flow
Cash and marketable securities totaled $1.48 billion as of March 28, 2010, compared to $884.6 million at the end of last year’s first quarter. Cash provided by operating activities of continuing operations was $200.8 million and capital expenditures were $14.6 million during the first quarter of 2010.
Discontinued Operations
The Company is in discussions with potential buyers regarding its previously announced intention to sell MV Agusta. For the first quarter of 2010, Harley-Davidson, Inc. incurred a $35.4 million loss from discontinued operations, comprised of operating losses as well as a fair value adjustment of $28.6 million net of taxes. Including discontinued operations, the Company reported earnings per share of $0.14.
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