HARLEY-DAVIDSON, INC. quarterly report, Q1 FY2013

Harley-Davidson, Inc. — Q1 2013 Form 10-Q Summary

Reporting period: Three months ended March 31, 2013, compared with the three months ended April 1, 2012. The filing was dated May 9, 2013. Harley-Davidson operates through Motorcycles & Related Products and Financial Services, primarily through Harley-Davidson Motor Company and Harley-Davidson Financial Services.

Key Financial Metrics

Metric	Q1 2013	Q1 2012	Change
Total revenue	$1.571 billion	$1.430 billion	9.9% increase
Motorcycles revenue	$1.414 billion	$1.273 billion	11.1% increase
Financial Services revenue	$157.0 million	$156.3 million	0.4% increase
Operating income	$348.3 million	$275.5 million	26.4% increase
Net income	$224.1 million	$172.0 million	30.3% increase
Diluted EPS	$0.99	$0.74	33.8% increase
Operating margin	22.2%	19.3%	Improved
Net margin	14.3%	12.0%	Improved
Cash dividends per share	$0.210	$0.155	35.5% increase

Segment Performance

Motorcycles: Operating income increased 33.0% to $276.8 million. Gross profit increased 13.8% to $519.4 million, implying a gross margin of approximately 36.7%, compared with approximately 35.8% in the prior-year quarter.
Financial Services: Operating income increased 6.2% to $71.5 million. Lower funding costs more than offset higher credit-loss provisions and operating expenses.
Shipments: Worldwide wholesale motorcycle shipments increased 17.1% to 75,222 units, including a 22.7% increase in U.S. shipments and a 6.8% increase internationally.
Retail sales: Worldwide independent-dealer retail sales declined 9.1% to 54,254 units. U.S. retail sales declined 12.7%, while international sales declined 1.8%; Asia Pacific and Latin America growth was offset by weaker EMEA results.

Cash Flow, Liquidity and Debt

Operating cash flow was negative $108.5 million, compared with negative $73.6 million in Q1 2012. The outflow reflected increased HDFS wholesale lending activity and a $175.0 million voluntary pension contribution.
Investing activities provided $27.5 million, including $6.5 million of net cash inflow from finance receivables and $22.3 million of capital expenditures.
Financing activities provided $42.2 million, including $392.6 million of increased credit facilities and unsecured commercial paper, offset by $178.9 million of securitization debt repayments, $126.4 million of share repurchases and $47.3 million of dividends.
Cash and cash equivalents were $1.019 billion at March 31, 2013, compared with $1.068 billion at December 31, 2012 and $1.276 billion at April 1, 2012. Marketable securities were $135.2 million.
Total debt was $5.295 billion at March 31, 2013, compared with $5.568 billion at April 1, 2012. Debt included $687.7 million of unsecured commercial paper, $3.184 billion of medium-term and senior unsecured notes, $1.269 billion of term asset-backed securitization debt and $154.6 million under the Canadian conduit facility.
Total reported liquidity, including cash, marketable securities and available credit facilities, was approximately $2.458 billion. Management targets at least 12 months of projected liquidity needs.
The company remained in compliance with its debt covenants. Credit ratings were Moody’s P2/Baa1, Standard & Poor’s A2/BBB+, and Fitch F2/A-, with positive outlooks from Moody’s and Standard & Poor’s and a stable outlook from Fitch.

Material Changes Versus the Prior Comparable Period

Profitability improved substantially, driven by higher motorcycle shipments, improved gross margin, lower restructuring costs and favorable Financial Services funding costs.
Restructuring expense declined to $2.9 million from $11.5 million. The company expected approximately $13 million of restructuring expense for full-year 2013 and cumulative restructuring costs of approximately $495 million for 2009 through 2013.
Financial Services’ provision for credit losses increased 45.4% to $13.1 million. The allowance for credit losses declined to $106.8 million from $122.5 million a year earlier.
Retail credit indicators weakened modestly: annualized retail loan losses increased to 1.09% from 1.00%, and 30-day delinquencies increased to 2.92% from 2.56%.
The effective tax rate declined to 33.8% from 35.3%, favorably affected by reinstatement of the U.S. Federal Research and Development tax credit, including benefits recorded for 2012 and Q1 2013.
Share repurchases totaled $126.4 million, including 2.4 million shares acquired. The company reported 13.5 million shares remaining under board-approved repurchase authorizations at quarter-end.
Finance receivables increased to $6.034 billion from $5.782 billion at December 31, 2012, primarily due to higher wholesale receivables associated with increased motorcycle shipments.

Guidance, Outlook, Risks and Unusual Items

Management reaffirmed 2013 worldwide dealer shipment guidance of 259,000 to 264,000 motorcycles, including expected Q2 shipments of 80,000 to 85,000 units.
Full-year gross margin guidance remained 35.25% to 36.25%.
Financial Services operating income was expected to be modestly lower than in 2012 because approximately $17 million of prior-year credit-loss allowance releases may not recur and credit losses were expected to increase modestly.
Full-year effective tax rate guidance was approximately 34.8%, and capital expenditure guidance was $200 million to $220 million.
Management remained cautious regarding the U.S. economy and continued economic challenges in Europe, including low consumer confidence, high unemployment and constrained credit.
HDFS funding facilities totaling $641.98 million were scheduled to expire in August and September 2013; management expected to renew them. The U.S. conduit facility had a $600 million commitment and no borrowings outstanding at quarter-end.
In April 2013, after quarter-end, the company issued $650 million of secured notes through a term asset-backed securitization and repaid a $300 million intercompany HDFS term loan.
The company disclosed an ongoing EPA inquiry regarding emissions certifications, aftermarket parts and emissions-related warranty claims. Potential remedies could include fines or other relief, but the company could not reasonably estimate any impact.
The company reserved approximately $2.7 million for its estimated share of environmental remediation costs at its York, Pennsylvania facility, while additional costs remain uncertain. Product liability claims are covered by accruals and insurance that management believes are adequate.
Warranty and safety recall liabilities were $67.7 million at quarter-end, including $4.1 million related to safety recall campaigns.

Investor Verification Checklist

Verify that shipment growth converts into retail demand, particularly given the 9.1% decline in Q1 worldwide retail sales and higher U.S. dealer inventory.
Monitor HDFS retail delinquencies, annualized losses, recoveries, near-prime and sub-prime lending, and the adequacy of the $106.8 million credit-loss allowance.
Confirm renewal and pricing of the U.S. and Canadian commercial paper conduit facilities before their 2013 expirations.
Reconcile the company’s liquidity target with scheduled debt principal payments of $970.3 million during the remainder of 2013 and $5.295 billion in total principal payments.
Assess execution of restructuring plans, expected remaining charges and the realization of projected annual savings of approximately $320 million upon completion.
Review the EPA inquiry, York environmental remediation, warranty and recall exposure, and other product liability matters for developments that could create unquantified costs.
Evaluate the sustainability of the lower tax rate, improved gross margin and higher share repurchase and dividend activity.