Harley-Davidson Inc. (HOG) revealed a 37% rise in profits to $190.6 million or 81 cents per share in the second quarter of the year, compared to $139.3 million or 59 cents per share last year.
The motorcycle maker surpassed the Zacks Consensus Estimate of 70 cents per share.
Results were driven by higher shipment volumes.
Operating income increased 38% to $301.9 million from $218.8 million a year ago. Gross margin was flat at 35%, compared with the year-ago period. The company expects gross margin between 34% and 35% for 2011 versus the prior estimate of 33.5% to 35.0%.
Revenue from Motorcycles and Related Products increased 18% to $1.34 billion in the quarter. Operating income rose 39% to $219.8 million (16.4% of sales) from $157.9 million (13.9%) on higher shipment volume and operating margin improvement.
Revenue from Harley-Davidson Motorcycles swelled 21% to $1.01 billion on shipments of 66,815 motorcycles to dealers and distributors worldwide, which is in line with its guidance of 62,000 to 67,000 motorcycles for the quarter. Shipments rose 13% from 59,046 motorcycles in the second quarter of 2010.
Harley upgraded its motorcycle shipment guidance for 2011. The company now expects to ship 228,000 to 235,000 units during the year, compared with 210,494 units in 2010 and the prior guidance of 215,000 to 228,000 units. In the third quarter of 2011, the company anticipates to ship 60,000 to 65,000 motorcycles.
The increase in shipment guidance reflects ongoing efforts to manage supply in line with demand following strong second-quarter retail sales, as well as the company’s increased confidence in its ability to minimize the impact of potential supply chain disruptions resulting from the earthquake and tsunami in Japan on March 11.
On a worldwide basis, Harley’s retail sales inched up 5.6% from last year's quarter. Dealers sold 53,599 motorcycles in the U.S., a 7.5% increase on a year-over-year basis. Retail sales grew 2.4% to 29,797 motorcycles in international markets.
Revenues from Motorcycle Parts and Accessories rose 10% to $255.4 million, while revenues from General Merchandise, which includes MotorClothes Apparel and Accessories, went up 8% to $72.9 million.
Revenues in the Financial Services segment dipped 4.5% to $165.9 million. However, operating income of $82 million increased 35% from $60.8 million in the year-ago quarter led by continued improvement in credit performance.
Restructuring Activities
In the first half of 2011, Harley incurred restructuring charges of $36.6 million, including $13.6 million in the quarter under study.
The company revised its forecast to incur one-time charges, related to restructuring activities that began in 2009 and would run till 2012, to $490 million to $505 million in 2012, down from the prior estimate of $510 million–$525 million. This included charges of $80 million to $90 million in 2011, down from the prior forecast of $95 million to $105 million.
The company continues to expect savings of $210 million to $230 million on a cumulative basis from restructuring activities in 2011 and $305 million to $325 million when the restructuring is fully implemented in 2012.
Financial Position
Cash and cash equivalents totaled $973.5 million as of June 26, 2011, compared with $1.41 billion at the end of the year-ago period. Long-term debt amounted to $2.89 billion as of the above date. The long-term debt to capitalization ratio was 53%, compared with 60% at the end of the previous quarter.
In the first half of 2010, Harley had an operating cash flow of $473 million, down from $726 million in the prior year period. Meanwhile, capital expenditures increased to $69.3 million from $45.8 million in the same period last year. For the full year, capital expenditures are expected between $210 million and $230 million, including $70 million to $85 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.
However, the company has an aging customer base. In addition, its U.S. market has not recovered. As a result, the company retains a Zacks #3 Rank on its stock, which translated to a ‘Hold’ rating for the short term (1 to 3 months). We reiterate our “Neutral” recommendation on the stock for the long term (more than 6 months).
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