Harley Beats, Annual Profit Doubles

Harley-Davidson Inc. (HOG - Analyst Report) posted a profit of $54.6 million or 24 cents per share in the fourth quarter of 2011 in sharp contrast to a loss of $42.1 million or 18 cents per share in the same quarter of 2010. The profit was higher than the Zacks Consensus Estimate of 22 cents per share.

For the full year 2011, Harley’s profit more than doubled to $548.1 million or $2.33 per share from $259.7 million or $1.11 per share in 2010. The profit was close to the Zacks Consensus Estimate of $2.34 per share.

The improvement in profits was attributable to the company’s strong motorcycle sales and rebound in consumer confidence in the U.S.

Motorcycles and Related Products

Revenues from Motorcycles and Related Products rose 12% to $1.03 billion, which compared with the Zacks Consensus Estimate of $995 million. Revenues from motorcycle sales appreciated 13.5% to $791.9 million due to increase in shipments to 50,730 motorcycles in the quarter under study from 44,481 motorcycles in the fourth quarter of 2010.

Harley’s worldwide dealer retail sales of new motorcycles escalated 10.9% globally to 40,359 units, including an 11.8% rise to 23,753 units in the U.S. and a 9.7% increase to 16,606 units in the international markets.

For the full year, revenues from Motorcycles and Related Products rose 11.6% to $4.66 billion, which compared with the Zacks Consensus Estimate of $4.64 billion. Revenues from motorcycles sales went up 13.3% to $3.55 billion on shipments of 233,117 units to dealers and distributors worldwide, reflecting a 10.7% increase from 2010.

Worldwide retail sales grew 5.9% to 235,188 motorcycles, including a 5.8% rise to 151,683 units in the U.S., and a 6.1% increase to 83,505 units in the international markets during the year. This compared with the increase of 4.3% in industry-wide U.S. heavyweight motorcycle (651cc-plus) retail unit sales for the full year.

Revenues from Motorcycle Parts and Accessories (P&A) rose 7.9% to $161.2 million, while revenues from General Merchandise (including MotorClothes Apparel and Accessories) scaled up 12.8% to $69.3 million during the quarter.

For the full year, P&A revenues increased 9% to $816.6 million. Meanwhile, revenues from General Merchandise sales went up 5.8% to $274.1 million during the year.

Gross margin was 31.2% in the quarter compared with 29.6% in the same quarter of 2010. Operating margin from motorcycles and related products was 3.5% on operating income of $35.6 million compared with an operating loss of $6.8 million in the fourth quarter of 2010. For the full year, gross margin was 33.4% and operating margin was 12.0%, compared with 34.2% and 9.1%, respectively in 2010.

Harley-Davidson Financial Services (HDFS)

The Financial Services segment recorded an operating income of $56.8 million in the quarter under study, a 30.6% increase from $43.5 million in the year-ago quarter. The increase in income was attributable to continued improvement in credit performance at HDFS. For the full year, operating income from financial services surged 47.8% to $268.8 million from $181.9 million in 2010.

Restructuring Activities

In 2011, Harley-Davidson realized cumulative savings of $217 million from restructuring activities that began in 2009, which is in line with company estimates of $210 million–$230 million. Upon completion, the company continues to expect restructuring activities to generate annual ongoing savings of $315 million to $335 million, beginning in 2014.

For the full year 2011, Harley-Davidson incurred one-time restructuring charges of $68.0 million. The company expects restructuring activities to result in one-time charges between $500 million and $520 million through 2013, including $50 million to $60 million in 2012.

Financial Position

Harley’s cash and cash equivalents totaled $1.53 billion as of December 31, 2011 compared with $1.02 billion as of December 31, 2010. Total debt increased to $3.64 billion as of December 31, 2011 from $3.00 billion as of December 31, 2010 (all excluding debt held by variable interest entities). Consequently, long-term debt to capitalization ratio deteriorated slightly to 60% as of December 31, 2011 from 57.6% as of December 31, 2010.

In 2011, Harley had an operating cash flow of $885.3 million, a decrease from $1.16 billion in the prior year. Meanwhile, capital expenditures increased to $189.0 million in the year from $170.8 million in 2010.

Share Repurchase

Harley repurchased 3.5 million shares of common stock for $127.0 million during the quarter. At the end of 2011, the company had outstanding common stock of approximately 230.5 million and 18.6 million shares remaining to be repurchased under the board-approved share repurchase authorizations.

Outlook

Harley-Davidson expects to ship 240,000 to 245,000 motorcycles globally to dealers and distributors in 2012, reflecting a 3%–5% increase from 2011. In the first quarter of 2012, the company anticipates to ship 58,000 to 63,000 motorcycles.

For the full year, Harley-Davidson expects gross margin between 34.75% and 35.75%. The company also expects capital expenditures between $190 million and $210 million in 2012, which includes $25 million to support restructuring activities.  

Our Take

Harley-Davidson commands roughly 50% of the U.S. market, providing scale advantages over most competitors. 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. The company retains a Zacks #3 Rank on its stock, which translated to a Hold rating for the short term (1 to 3 months).

Read the full analyst report on HOG