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Motorcycle icon Harley Davidson announced worse than expected fourth-quarter earnings Tuesday sending $HOG shares crashing over 8% with sales and guidance way under expectations.

Harley Davidson Looking Back

Reaction > Harley Davidson NYSE: HOG 

Jan 30 11:00 AM EST 50.87 -4.04 (-8.07%)

Earnings:

Diluted EPS $0.05 vs estimates of $0.45. Adversely impacted by a $53.1 million income tax charge related to enactment of the 2017 Tax Cuts and Jobs Act and a $29.4 million pre-tax charge for a voluntary product recall.

Revenue growth of 12.2% to $1.05 billion beating Street expectations of $1.01 billion

Segments

Motorcycles

  • $HOG shipped 47.2K bikes in Q4, an 11.3% increase compared to last year.
  • Motorcycle segment revenues rose 17.0% to $801.7 million,
  • Despite Q4 strength worldwide total FY17 shipments were down 6.7% to 242,788 vehicles.
  • Harley-Davidson’s retail motorcycle sales in the United States declined 11.1% to 23,195 units. I
  • nternational sales decreased 7.7% to 18,947 motorcycles from 20,533 in the prior-year quarter.
  • All the regions posted a sales decline from the previous-year quarter. 
  • Canada had a 4.9% gain,
  • Latin America’s sales reduced 7.1%.
  • Middle East and Africa (EMEA) region’s sales fell 5.5% 
  • Asia-Pacific region had a 11.8% drop.

Parts & Accessories

Sales fell 0.8% to $168 million. 

General Merchandise 

Sales, including MotorClothes apparel and accessories fell 2.3% to $71.2 million.

Harley Davidson Financial Services (HDFS)

Revenues rose 2.4% to $182 million and operating income improved 5.9% to $63.7 million from the year-ago figure of $60.1 million.

Preview of AlphaGraphic

Outlook

Restructure

  • Harley announced plans to further improve its manufacturing operations and cost structure by commencing a multi-year manufacturing optimization initiative anchored by the consolidation of its motorcycle assembly plant in Kansas City, Mo. into its plant in York, Pa.
  • The company expects the elimination of about 800 jobs in Kansas City with about 450 jobs added in York as capacity shifts to that facility in 2019.
  • The company expects to incur restructuring and other consolidation costs of $170-200 million and capital investment of about $75 million during the next two years and expects ongoing annual cash savings of $65-75 million after 2020.
  • Harley anticipates 2018 capital expenditures of $250-270 million which includes about $50 million to support manufacturing optimization.

Sales

Expect international retail growth but do not expect a break from the challenges in the U.S. motorcycle industry. 

  • For 2018 Harley anticipates full-year motorcycle shipments to be about 231,000-236,000 motorcycles.
  • In Q1, Harley expects to ship about 60,000-65,000 motorcycles.
  • These assumptions include expectations for U.S. dealer retail sales to be down, partially offset by growth in international retail sales.

Operating margins

  • As percent of revenue for the motorcycle segment are expected between 9.5-10.5% for the full year 2018 including manufacturing optimization costs of $120-140 million.
  • Gross margins as a percentage of revenue is expected to benefit from pricing of the 2018 model year and 2019 motorcycles with a more favorable foreign currency exchange environment than last year.
  • But Harley expects these positives to be more than offset by rising steel and aluminum costs and increased manufacturing expenses.

Project Livewire

Harley highlighted Project LiveWire, $HOG's all electric bike is being prepped for market within the next 18 months.

Taxes

Harley noted its 2017 effective tax rate was 39.6% compared to 32.4% in the prior year. The company expects its 2018 full-year effective tax rate to be about 23.5-25.0%, down considerably with benefit of the new tax legislation.

Cash Position

  • Harley-Davidson had cash and cash equivalents of $687.5 million as of Dec 31, 2017 compared with $760 million as of Dec 31, 2016.
  • Long-term debt was lowered to $4.6 billion from $4.7 billion as of Dec 31, 2016.
  • For the fiscal year ending Dec 31, 2017, Harley-Davidson’s operating cash inflow declined to $1 billion from $1.2 billion a year-ago.
  • Capital expenditures decreased to $206 million from $256 million in the preceding-year period.

Source: Harley Davidon, AlphaStreet

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