Harley-Davidson Reports 2008 Results

MILWAUKEE, Jan. 23 /PRNewswire-FirstCall/ — Harley-Davidson Inc. (NYSE:HOG) reported decreased revenue, net income and earnings per share for the fourth quarter of 2008 compared to the year-ago quarter. The Company said it plans lower motorcycle shipments in 2009 and made public its overall strategy to deal with the current economic environment.

“We have a strong core business anchored by a uniquely powerful brand, but we are certainly not immune to the current economic conditions,” said Jim Ziemer, Chief Executive Officer, Harley-Davidson Inc. “We have a clear strategy to not only deal with the economic conditions, but also strengthen our long-term operations and financial results. We are executing that strategy with confidence and conviction.”

Fourth-Quarter and Full-Year Results

Revenue for the quarter was $1.29 billion compared to $1.39 billion in the year-ago quarter, a 6.8 percent decrease. Net income for the quarter was $77.8 million compared to $186.1 million in the fourth quarter 2007, a decrease of 58.2 percent. Fourth quarter diluted earnings per share were $0.34, a 56.4 percent decrease compared to last year’s $0.78.

Revenue for the full year 2008 was $5.59 billion compared to $5.73 billion in 2007, a 2.3 percent decline. Full-year net income was $654.7 million, compared to $933.8 million in 2007. Diluted earnings per share were $2.79, a decrease of 25.4 percent compared to $3.74 in 2007. The full-year results are below the previously provided company guidance.

For the full year, wholesale shipments of Harley-Davidson(R) motorcycles were 303,479 units, an 8.2 percent decrease compared to 330,619 units in 2007.

2009 Shipment Plan, Gross Margins

In the first quarter of 2009, the Company plans to ship between 74,000 and 78,000 new Harley-Davidson motorcycles, a 3.0 percent to 8.5 percent increase versus the first quarter of 2008. However, for the full year 2009, the Company plans to ship between 264,000 and 273,000 new Harley-Davidson motorcycles, a 10 percent to 13 percent reduction from 2008.

“We reduced our production levels prudently in 2008, helping our dealers achieve lower inventory levels,” said Ziemer, “and we’re going to show similar discipline in 2009. That’s not only critical for the health of our business, but for our dealers’ businesses, as well.”

For the full year 2009, the Company expects gross margins to be between 30.5 percent and 31.5 percent, which compares to 34.5 percent for the full year 2008. The decrease is primarily due to an expected unfavorable shipment mix versus 2008, the allocation of fixed costs over fewer units, and expected unfavorable foreign currency exchange rates versus 2008. Given the volatility of the current economic environment, the Company also indicated it would not provide EPS guidance for 2009.

Strategy for the Current Economic Environment

The Company is executing a three-part strategy that includes a number of measures to deal with the impact of the recession and worldwide slowdown in consumer demand, with the intent of strengthening its operations and financial results going forward.

“Our strategy is focused on three critical areas: to invest in the Harley- Davidson brand, get our cost-structure right, and obtain funding for HDFS to help our dealers sell motorcycles and our retail customers to buy them,” said Ziemer

Investing in the Brand

The Company is reinforcing its support of the Harley-Davidson brand, accelerating its ongoing marketing efforts to reach out to emerging rider groups, including younger and diverse riders. In addition, the Company will continue to focus on product innovations targeted at specific growth opportunities with its strong core customer base and new riders.

In the U.S., the Company said its Sportster(R) motorcycle trade-up program is being well-received by dealers and consumers and is generating new floor traffic during the winter months. The program lets riders who already own a qualifying Sportster motorcycle, or who buy a new Sportster motorcycle, receive back the original Manufacturer’s Suggested Retail Price value when they trade up to a Harley-Davidson Big Twin or VRSC motorcycle at participating dealerships.

Outside the U.S., the Company will continue to support the product, dealer development and marketing activities which, during the last several years, have helped drive strong retail sales growth.

“Among other things, the Harley-Davidson brand stands for strength and resilience, and we’re managing the business in this economic climate in ways that we believe will build long-term value into the brand,” said Ziemer.

Adjusting the Cost Structure

As a result of motorcycle volume reduction and the Company’s commitment to improve its cost structure, Harley-Davidson plans to:

–  Consolidate its two engine and transmission plants in the Milwaukee area into its facility in Menomonee Falls, Wis.

–  Consolidate paint and frame operations at its assembly facility in York, Pa.

–  Close its distribution facility in Franklin, Wis., consolidating Parts and Accessories and General Merchandise distribution through a third party.

–  Discontinue its domestic transportation fleet operation.

The planned volume reduction and restructuring actions are expected to result in the elimination of about 1,100 jobs over 2009 and 2010, including about 800 hourly production positions and about 300 non-production, primarily salaried positions. About 70 percent of the workforce reduction is expected to occur in 2009.

“We obviously need to make adjustments to address the current volume declines,” said Ziemer. “But we are also determined to do that in a way that will make us more competitive for the long term. Our management group will engage with union leaders, through our partnering relationship, regarding these changes.”

On a combined basis, Harley-Davidson expects the volume reduction and changes to operations to result in one-time charges of approximately $110 million to $140 million over 2009 and 2010, and ongoing annual savings of approximately $60 million to $70 million upon completion of the restructuring actions.

Obtaining Additional Funding for HDFS

The Company said it is evaluating a range of options to provide the necessary liquidity for the wholesale and retail lending activities of Harley- Davidson Financial Services (HDFS).

“We’re evaluating options in order to obtain the necessary funding to support Harley-Davidson dealers and customers throughout the year,” said Tom Bergmann, Chief Financial Officer of Harley-Davidson, Inc. and interim President of HDFS.

Additional Detail on 2008 Results

Motorcycles and Related Products Segment - Fourth Quarter Results

Revenue from Harley-Davidson motorcycles was $1.02 billion, a decrease of $95.4 million or 8.5 percent versus the same period last year. Shipments of Harley-Davidson motorcycles totaled 76,581 units, down 4,625 units or 5.7 percent compared to last year’s fourth quarter.

Revenue from Parts and Accessories (P&A), which consists of Genuine Motor Parts and Genuine Motor Accessories, totaled $152.1 million, lower by $13.1 million or 7.9 percent compared to the year-ago quarter. Revenue from General Merchandise, which consists of MotorClothes(R) apparel and collectibles, totaled $69.0 million, a decline of $4.4 million or 6.0 percent from the year- ago quarter.

Gross margin for the fourth quarter of 2008 was 31.6 percent of revenue compared to 35.7 percent for the fourth quarter last year. This decrease is primarily due to unfavorable shipment mix versus last year’s fourth quarter, higher product costs and the cost of the Sportster motorcycle trade-up promotion. Fourth quarter operating margin decreased to 12.0 percent from 18.1 percent in the fourth quarter of 2007, reflecting the impact of lower revenue in the fourth quarter of 2008 compared to the year-ago period.

Motorcycle Retail Sales Data

During the fourth quarter, worldwide retail sales of Harley-Davidson motorcycles decreased 13.1 percent compared to the fourth quarter of 2007. U.S. retail sales of Harley-Davidson motorcycles were down 19.6 percent for the quarter. The overall heavyweight motorcycle market in the U.S. decreased 25.5 percent for the same period.

Retail sales of Harley-Davidson motorcycles grew 0.7 percent in the Company’s international markets during the fourth quarter of 2008 compared to the year-ago period. Fourth quarter retail sales increased 1.4 percent in Canada; the Europe Region was up 3.4 percent; the Asia Pacific Region was down 8.9 percent; and the Latin America Region was up 28.0 percent.

For the full-year 2008, worldwide retail sales of Harley-Davidson motorcycles declined 7.1 percent compared to the prior year. U.S. retail sales of Harley-Davidson motorcycles declined 13.0 percent for the full year while the U.S. heavyweight market was down 7.0 percent for the same period. International retail sales of Harley-Davidson motorcycles increased 10.3 percent for the full year 2008.

Full year data are listed in the accompanying tables.

Financial Services Segment

Harley-Davidson Financial Services (HDFS) recorded an operating loss of $24.9 million for the fourth quarter, $63.5 million lower than the operating income in the year-ago quarter. The decrease is primarily due to a $35.1 million write-down of retained securitization interests and a $28.4 million write-down to fair value of finance receivables held for sale. The write-downs were due to higher projected credit losses and an increase in the discount rate used for the valuation of receivables.

“Our priorities for HDFS in 2009 are to continue to obtain funding for its lending activities, manage credit losses in this challenging environment and provide support to the Harley-Davidson dealer network,” said Bergmann.

Income Tax Rate

The Company’s fourth quarter effective income tax rate was 36.9 percent compared to 35.5 in the same quarter last year. The 2008 fourth quarter increase was primarily related to the tax implications of MV Agusta, which the Company acquired in August 2008.

Harley-Davidson, Inc. - Twelve Month Results

For the full year of 2008, revenue totaled $5.59 billion, down 2.3 percent from last year’s $5.73 billion. Shipments of Harley-Davidson motorcycles were 303,479 units, compared to last year’s 330,619 units. Harley-Davidson motorcycle revenue was $4.28 billion, down 3.8 percent compared to last year’s $4.45 billion. P&A revenue was $858.7 million, down 1.1 percent compared to last year’s $868.3 million. General Merchandise revenue increased to $313.8 million, a 2.8 percent increase compared to $305.4 million in the full year of 2007.

HDFS operating income was $82.8 million, a 61.0 percent decrease from last year’s $212.2 million.

Cash Flow

Cash and marketable securities totaled $593.6 million as of December 31, 2008. Cash used by operations was $684.6 million, and capital expenditures were $232.2 million during the full year of 2008.

For the full year of 2009, capital expenditures, excluding those associated with restructuring activities, are expected to be between $180 million and $200 million. The Company expects restructuring activities to result in additional capital expenditures of $10 million to $20 million in 2009.

Stock Repurchase

The Company did not repurchase shares in the fourth quarter of 2008. For the full year 2008, the Company repurchased 6.4 million shares of its common stock at a cost of $250.4 million. On December 31, 2008, the Company had 232.8 million shares of common stock outstanding.

As of December 31, 2008, there were 16.7 million shares remaining on a board-approved share repurchase authorization. An additional board-approved share repurchase authorization is in place to offset option exercises.

Company Background

Harley-Davidson, Inc. is the parent company for the group of companies doing business as Harley-Davidson Motor Company (HDMC), Buell Motorcycle Company (Buell), MV Agusta and Harley-Davidson Financial Services (HDFS). Harley-Davidson Motor Company produces heavyweight custom, touring and cruiser motorcycles. Buell produces American sport performance motorcycles. MV Agusta produces premium, high-performance sport motorcycles sold under the MV Agusta(R) brand and lightweight sport motorcycles sold under the Cagiva(R) brand. HDFS provides wholesale and retail financing and insurance programs primarily to Harley-Davidson and Buell dealers and customers.

Forward-Looking Statements

The Company intends that certain matters discussed in this release 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 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 release. Certain of such risks and uncertainties are described below. 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 release are only made as of the date of this release, and the Company disclaims any obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances.

The Company’s ability to meet the targets and expectations noted depends upon, among other factors, the Company’s ability to (i) effectively execute the Company’s restructuring plans within expected costs, (ii) manage the risks that our independent dealers may have difficulty adjusting to the recession and slowdown in consumer demand,  (iii) manage supply chain issues, (iv) anticipate the level of consumer confidence in the economy, (v) continue to have access to reliable sources of capital funding and adjust to fluctuations in the cost of capital, (vi) manage the credit quality, the loan servicing and collection activities, and the recovery rates of HDFS’ loan portfolio, (vii) continue to realize production efficiencies at its production facilities and manage operating costs including materials, labor and overhead, (viii) manage production capacity and production changes, (ix) provide products, services and experiences that are successful in the marketplace, (x) develop and implement sales and marketing plans that retain existing retail customers and attract new retail customers in an increasingly competitive marketplace, (xi) sell all of its motorcycles and related products and services to its independent dealers, (xii) continue to develop the capabilities of its distributor and dealer network, (xiii) manage changes and prepare for requirements in legislative and regulatory environments for its products, services and operations, (xiv) adjust to fluctuations in foreign currency exchange rates, interest rates and commodity prices,  (xv) adjust to healthcare inflation, pension reform and tax changes, (xvi)  retain and attract talented employees, (xvii) detect any issues with our motorcycles or manufacturing processes to avoid delays in new model launches, recall campaigns, increased warranty costs or litigation, (xvii) implement and manage enterprise-wide information technology solutions and secure data contained in those systems, and (xix) successfully integrate and profitably operate MV Agusta Group.

In addition, the Company could experience delays or disruptions in its operations as a result of work stoppages, strikes, natural causes, terrorism or other factors. Other factors are described in risk factors that the Company has disclosed in documents previously filed with the Securities and Exchange Commission. Many of these risk factors are impacted by the current turbulent capital, credit and retail markets and our ability to adjust to the recession.

The Company’s ability to sell its motorcycles and related products and services and to meet its financial expectations also depends on the ability of the Company’s independent dealers to sell its motorcycles and related products and services to retail customers. The Company depends on the capability and financial capacity of its independent dealers and distributors to develop and implement effective retail sales plans to create demand for the motorcycles and related products and services they purchase from the Company. In addition, the Company’s independent dealers and distributors may experience difficulties in operating their businesses and selling Harley-Davidson motorcycles and related products and services as a result of weather, economic conditions or other factors.

TABLES FOLLOW

Harley-Davidson, Inc.
Condensed Consolidated Statements of Income
(In thousands, except per share amounts)

(Unaudited) (Unaudited)  (Unaudited)
Three months ended      Twelve months ended
December 31, December 31, December 31, December 31,
2008         2007         2008        2007

Net revenue              $1,292,591  $1,386,354  $5,594,307  $5,726,848
Gross profit                408,686     494,534   1,930,819   2,114,100
Operating expenses          254,009     243,945     964,429     883,457
Operating income from
motorcycles & related
products                 154,677     250,589     966,390   1,230,643

Financial services income    64,875      96,232     376,970     416,196
Financial services expense   89,797      57,678     294,205     204,027
Operating (loss) income
from financial services    (24,922)     38,554      82,765     212,169

Corporate expenses            5,649       3,488      20,131      17,251
Income from operations      124,106     285,655   1,029,024   1,425,561
Investment income             2,462       2,826       9,495      22,258
Interest expense              3,316           -       4,542           -
Income before provision
for income taxes           123,252     288,481   1,033,977   1,447,819
Provision for income taxes   45,443     102,404     379,259     513,976
Net income                  $77,809    $186,077    $654,718    $933,843

Earnings per common share:
Basic                       $0.34       $0.78       $2.80       $3.75
Diluted                     $0.34       $0.78       $2.79       $3.74

Weighted-average common
shares:
Basic                     231,786     239,390     234,225     249,205
Diluted                   232,037     239,845     234,477     249,882

Cash dividends per common
share                        $0.33       $0.30       $1.29       $1.06

Harley-Davidson, Inc.
Condensed Consolidated Balance Sheets
(In thousands)

(Unaudited)
December 31,      December 31,
2008              2007
ASSETS
Current assets:
Cash and cash equivalents                 $593,558          $402,854
Marketable securities                            -             2,475
Accounts receivable, net                   296,258           181,217
Finance receivables held for sale        2,443,965           781,280
Finance receivables held for
investment, net                         1,378,461         1,575,283
Inventories                                400,908           349,697
Other current assets                       264,731           174,508
Total current assets                         5,377,881         3,467,314

Finance receivables held for
investment, net                               817,102           845,044
Other long-term assets                       1,633,642         1,344,248
$7,828,625        $5,656,606

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable & accrued
liabilities                              $865,108          $785,124
Short-term debt                          1,738,649           722,447
Current portion of long-term debt                -           397,508
Total current liabilities                    2,603,757         1,905,079

Debt                                         2,176,238           980,000
Pension liability and postretirement
healthcare benefits                           758,411           244,082
Other long-term liabilities                    174,616           151,954

Total shareholders' equity                   2,115,603         2,375,491
$7,828,625        $5,656,606

Note:  On January 1, 2008 the Company recorded a reduction to shareholders' equity of $18.1 million ($11.2 million, net of tax) to adopt provisions of Statement of Financial Accounting Standard No. 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106 and 132(R)" that require sponsors of defined benefit pension and postretirement plans to measure the funded status of those plans as of the date of the year-end statement of financial position.

Harley-Davidson, Inc.
Condensed Consolidated Statements of Cash Flows
(In thousands)

(Unaudited)
Twelve months ended
December    December    December
31,         31,         31,
2008        2007        2006
Net cash (used by) provided by
operating activities                   ($684,649)   $798,146    $761,780

Cash flows from investing activities:
Capital expenditures                   (232,169)   (242,113)   (219,602)
Finance receivables held for
investment, net                       (159,631)   (145,381)   (151,624)
Collection of retained securitization
interests                               93,747     118,175     101,641
Net change in marketable securities       2,543     657,735     253,512
Acquisition of business, net of cash
acquired                               (95,554)          -           -
Other, net                               (2,183)      2,789     (19,186)
Net cash (used by) provided by
investing activities                    (393,247)    391,205     (35,259)

Cash flows from financing activities:
Proceeds from issuance of medium term
notes                                  993,550     398,144           -
Repayment of medium term notes         (400,000)          -           -
Net increase (decrease) in credit
facilities and unsecured commercial
paper                                761,065     (16,247)    493,125
Net borrowings of asset-backed
commercial paper                       490,000           -           -
Repayment of senior subordinated debt         -     (30,000)          -
Dividends                              (302,314)   (260,805)   (212,914)
Purchase of common stock for treasury  (250,410) (1,153,439) (1,061,968)
Excess tax benefits from share-based
payments                                   320       3,066      18,933
Issuance of common stock under
employee
stock option plans                      1,179      21,478     125,801
Net cash provided by (used by)
financing activities                   1,293,390  (1,037,803)   (637,023)

Effect of exchange rate changes on cash
and cash equivalents                    (24,790)     12,909       7,924

Net increase in cash and cash
equivalents                              190,704     164,457      97,422

Cash and cash equivalents:
At beginning of period                  402,854     238,397     140,975
At end of period                       $593,558    $402,854    $238,397

Net Revenue and Motorcycle
Shipment Data

(Unaudited)  (Unaudited) (Unaudited)
Three months ended     Twelve months ended
December   December    December    December
31,         31,         31,         31,
2008        2007        2008        2007
NET REVENUE (in thousands)
Harley-Davidson( R )
motorcycles               $1,022,908  $1,118,328  $4,278,241  $4,446,637
Buell( R ) motorcycles         33,382      27,739     123,086     100,534
Parts & Accessories           152,108     165,190     858,748     868,297
General Merchandise            69,005      73,424     313,835     305,435
Other                          15,188       1,673      20,397       5,945
$1,292,591  $1,386,354  $5,594,307  $5,726,848

HARLEY-DAVIDSON UNITS
Motorcycle shipments:
United States                57,081      59,092     206,309     241,539
International                19,500      22,114      97,170      89,080
Total                          76,581      81,206     303,479     330,619

Motorcycle product mix:
Touring                      26,196      29,142     101,887     114,076
Custom                       35,592      34,931     140,908     144,507
Sportster( R )               14,793      17,133      60,684      72,036
Total                          76,581      81,206     303,479     330,619

BUELL UNITS
Motorcycle shipments:
Buell                         3,895       3,137      13,119      11,513

Retail Sales of Harley-Davidson Motorcycles

Three months    Twelve months
ended            ended
December December December December
31,      31,      31,      31,
2008     2007     2008     2007
North America Region
United States                       29,502  36,680  218,939  251,772
Canada                               1,950   1,924   16,502   14,779
Total North America Region        31,452  38,604  235,441  266,551

Europe Region (Includes Middle East
and Africa)
Europe*                              6,441   6,272   40,725   38,866
Other                                  834     761    4,317    3,436
Total Europe Region                7,275   7,033   45,042   42,302

Asia Pacific Region
Japan                                3,152   3,737   14,654   13,765
Other                                2,873   2,873   10,595    9,689
Total Asia Pacific Region          6,025   6,610   25,249   23,454

Latin America Region                   2,003   1,565    8,037    5,467

Total Worldwide Retail Sales      46,755  53,812  313,769  337,774

Data Source (subject to update)

Data source for all 2007 and 2008 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(R) motorcycles are included in the Harley-Davidson Motorcycle Sales data.

* Data for Europe include Austria, Belgium, Denmark, Finland, France, Germany, Greece, Italy, Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, and the United Kingdom.

Heavyweight Market Data

Twelve months ended
December 31,      December 31,
2008              2007
United States(1)                          479,776           516,083

Eleven months ended
November 30,      November 30,
2008              2007
Europe(2)                                 383,526           372,117

1 - United States industry data includes 651+cc models, derived from submission of motorcycle retail sales by each major manufacturer to an independent third party.

2 - Europe data includes Austria, Belgium, Denmark, Finland, France, Germany, Greece, Italy, Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, and the United Kingdom.  Industry retail motorcycle registration data includes 651+cc models, derived from information provided by Giral S.A., an independent agency.  Europe market data is reported on a one-month lag.

Source: Harley-Davidson Inc.