Harley-Davidson, Inc. 2015 Form 10-K Summary
Business context and reporting period
Harley-Davidson reported for the fiscal year ended December 31, 2015; the filing was dated February 18, 2016. The company operates through two segments: Motorcycles & Related Products, which designs, manufactures and sells motorcycles, parts, accessories and merchandise, and Financial Services, which provides dealer and consumer financing and insurance-related products primarily in the United States and Canada.
Worldwide independent-dealer retail sales declined 1.3% to 264,627 motorcycles. U.S. retail sales declined 1.7%, international sales declined 0.5%, and the company’s U.S. 601+cc market share declined to 50.2% from 53.3%.
Financial performance and key metrics
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Total revenue | $5.995 billion | $6.229 billion | (3.7%) |
| Motorcycles revenue | $5.309 billion | $5.568 billion | (4.7%) |
| Financial Services revenue | $686.7 million | $660.8 million | 3.9% |
| Operating income | $1.156 billion | $1.281 billion | (9.8%) |
| Net income | $752.2 million | $844.6 million | (10.9%) |
| Diluted EPS | $3.69 | $3.88 | (4.9%) |
| Operating cash flow | $1.100 billion | $1.147 billion | (4.1%) |
| Capital expenditures | $260.0 million | $232.3 million | 11.9% |
| Total debt | $6.890 billion | $5.505 billion | 25.2% |
| Total equity | $1.840 billion | $2.909 billion | (36.8%) |
Consolidated operating margin was approximately 19.3%, compared with 20.6% in 2014, and net margin was approximately 12.5%, compared with 13.6%. The Motorcycles segment generated $875.5 million of operating income, down 12.7%, with an operating margin of approximately 16.5%. Financial Services operating income increased 0.9% to $280.2 million.
Motorcycles operating income was pressured by unfavorable foreign exchange, lower shipment volume, unfavorable product mix and higher selling, administrative and engineering expenses. Model-year price increases, lower raw-material prices and manufacturing efficiencies partially offset these factors. Motorcycle shipments declined 1.6% to 266,382 units.
Financial Services revenue benefited from higher average receivables and increased licensing and insurance revenue. The provision for credit losses increased 25.2% to $101.3 million. Retail motorcycle loan losses rose to 1.42% from 1.22%, and the 30-day delinquency rate increased to 3.78% from 3.61%.
Cash and cash equivalents were $722.2 million and current marketable securities were $45.2 million at year-end. Including available credit facilities, reported liquidity totaled approximately $1.535 billion. Operating cash flow was reduced by lower net income, increased wholesale lending and a $155.2 million inventory investment. The company spent $1.537 billion on share repurchases and paid $249.3 million in dividends, or $1.24 per share.
Material changes versus the prior comparable period
- Revenue declined $233.1 million, primarily because of lower Motorcycles revenue and currency effects.
- Motorcycles operating income declined $127.7 million; foreign exchange and hedging effects reduced gross profit by an estimated $121 million, while shipment mix reduced gross profit by approximately $30 million.
- Financial Services operating income increased $2.4 million despite higher credit-loss provisions.
- The company issued $750 million of senior unsecured notes in July 2015 and used the proceeds to repurchase common stock, increasing leverage and interest expense.
- Share repurchases totaled 28.0 million shares for $1.537 billion, reducing diluted weighted-average shares to 203.7 million from 217.7 million.
- The company acquired Canadian distribution rights and related assets from Fred Deeley Imports for $59.9 million. The transaction created $28.6 million of goodwill and $20.8 million of intangible assets; the transaction involved a related party because a company director was an equity owner of Deeley Imports.
- The company recorded approximately $30 million of fourth-quarter reorganization costs, including approximately $23 million of Motorcycles operating expense, $5 million of Motorcycles cost of goods sold and $2 million of Financial Services expense.
- Year-end inventory increased to $585.9 million from $448.9 million, partly reflecting higher fourth-quarter production ahead of 2016 shipments.
Guidance, outlook, commentary and risks
Management expects 2016 motorcycle shipments of 269,000 to 274,000 units, representing approximately 1% to 3% growth over 2015. It expects Motorcycles operating margin of 16% to 17%, compared with 16.5% in 2015, and expects gross margin to decline year over year.
The company plans to increase customer-facing marketing spending by approximately 65% and new-product-development spending by approximately 35% in 2016, representing an estimated $70 million increase in demand-generation spending. Management expects full-year selling, administrative and engineering expense to be flat to modestly higher, Financial Services operating income to decline modestly, capital expenditures of $255 million to $275 million, and an effective tax rate of approximately 34.5%.
Management identified continued competitive discounting, new competitor products, foreign-exchange pressure, Brazil’s economic weakness and broader macroeconomic challenges as significant headwinds. At January 2016 exchange rates, the company estimated an approximately 1% adverse impact on 2016 Motorcycles revenue and an approximately $60 million unfavorable gross-margin impact.
- Key risks include discretionary consumer demand, weather, used-motorcycle values, excess industry supply and reliance on independent dealers.
- Foreign exchange, commodity prices and interest rates may materially affect revenue, margins and Financial Services earnings.
- HDFS faces rising consumer credit losses, subprime exposure, delinquency risk and dependence on capital-market funding.
- The company borrowed $750 million to fund repurchases, increasing leverage and the risk of credit-rating pressure.
- Regulatory risks include CFPB supervision, consumer-lending requirements, emissions and noise standards, environmental matters and potential EPA enforcement.
- The company disclosed ongoing EPA and York, Pennsylvania environmental matters for which ultimate costs could materially differ from recorded reserves.
- Other risks include recalls, product liability, cybersecurity, supply-chain disruption, union negotiations, pension and healthcare obligations, international operations and ERP implementation.
The company reported effective disclosure controls and effective internal control over financial reporting. Ernst & Young issued unqualified opinions on the consolidated financial statements and internal controls.
Important facts for investors to verify
- Whether 2016 shipment growth and the 16% to 17% Motorcycles operating-margin target were achieved despite competitive discounting and currency pressure.
- Trends in U.S. market share, global retail sales, dealer inventory and motorcycle shipment mix.
- HDFS retail credit losses, delinquency rates, subprime portfolio performance, allowance adequacy and recovery values of repossessed motorcycles.
- Debt maturities, refinancing needs, commercial-paper access, credit ratings and compliance with financial covenants.
- Whether increased marketing and product-development spending generates sustainable revenue and earnings growth.
- Resolution and potential additional cost of the EPA investigation and York environmental remediation.
- Impact of share repurchases and dividends on leverage, liquidity, equity and per-share earnings.
- Execution of the Canadian distribution integration, ERP implementation and planned international dealer expansion.