Fitch Ratings has affirmed the Issuer Default Rating (IDR) of Harley-Davidson Inc.'s (NYSE: HOG) at 'AA-' and maintains a Stable Rating Outlook.
Fitch has also affirmed the ratings and maintained a Stable Rating Outlook for HOG's 100% owned subsidiary, Harley-Davidson Financial Services, Inc.'s (Financial) and Harley-Davidson Funding Corporation.
Financial's ratings are as follows:
-- IDR 'AA-';
-- Short-term IDR 'F1+';
-- Senior unsecured 'AA-' .
Harley-Davidson Funding Corporation
-- Short-term IDR 'F1+';
-- Commercial Paper 'F1+'.
The rating affirmation and Stable Rating Outlook reflect HOG's continued strong cash generation from its leading market position in the core heavyweight motorcycle segment (651 CC+), continued revenue and shipment growth, new product introductions for Model Year 2007, and strong distribution network. HOG's conservative financial policies, which include maintaining a strong cash balance, and organic growth also were important to the affirmation.
Concerns include the potential for changes in the company's capital structure policies, with substantial share repurchase activity in 2005 and into the first half of 2006 coupled with dividend increases. Minor concerns include increased raw material costs and ongoing healthcare funding requirements, although superior margin performance has been unaffected. Cash generation remains strong, and Fitch looks favorably on HOG's 2005 move to pre-fund some of their postretirement healthcare benefit plans and further fund their pension plans.
For the first half of 2006 total motorcycle shipments increased 5,458 units or 3.5% to 159,302 bikes while retail sales increased 8.9%, indicating seasonally adjusted dealer inventories have decreased this year. Additionally, in the U.S. first half 2006, shipments declined 1.3% while retail sales grew 7.2. Unit growth is likely to continue through the second half of the year with the introduction of the TwinCAM 96(C) engine and 6B transmission that is on the majority of Harley's 2007 Touring, Softail and Dyna models.
The first half of 2006 ended June 25, 2006, showed continued growth in HOG's Motorcycle and related product businesses. Sales of $2.66 billion were up $93 million, or 3.6% and operating profit was up $19 million, or 3.1% from the prior year. Growth was driven by increased motorcycle revenue as well as slightly higher wholesale prices on HOG bikes. Operating margins on Motorcycle and related products continued to be stable at 23.9%.
In fiscal-year (FY) 2005, HOG repurchased 21.4 million shares of common stock for $1.05 billion and increased its dividend payments, at a cost of $54.6 million. In the first half of 2006, HOG has repurchased 9.9 million shares at a cost of $499.5mm and 10.1 million shares remain authorized to be repurchased. Raw material costs increased $34 million in 2005 and $20 million into the first half of 2006. In 2005, HOG contributed $113 million into its healthcare plan and $183 million into its pension plan. HOG does not expect to pre-fund their Healthcare Benefit Plans further in 2006. Cash and marketable securities totaled $1.05 billion as of June 25, 2006.
Financial's rating reflects the parent's strong market position and balance sheet, which showed $1.0 billion in cash and marketable securities with a nominal amount of debt at June 30, 2006. In addition, the ratings reflect consistent asset quality and adequate risk adjusted capitalization. Financial has a support agreement with HOG in which HOG must maintain Financial's fixed-charge coverage at 1.25 times (x) and minimum net worth of $40 million. Operating performance has slowed from the strong performance experienced from mid 2003 to late 2005, but nonetheless remains at favorable levels. Exposure to increased funding costs is well managed, but higher interest expense has nonetheless been the dominant factor behind declining margins. Fitch expects margins to continue to be pressured over the near term. Asset quality remains solid based on good collateral values, albeit declining, relatively high quality borrowers and sound risk management facilitated by a risk-based pricing matrix. Capitalization on an absolute and risk-adjusted basis looked at in conjunction with the financial strength of HOG is appropriate for the current rating. Capitalization has shown continued improvement over the past few years and is expected to continue the positive trend as capital has been retained in Financial.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.
