Harley-Davidson, Inc. 2012 Q1 Form 10-Q Summary
Business context and reporting period
Harley-Davidson operates through Motorcycles & Related Products and Financial Services. This unaudited report covers the three months ended April 1, 2012, compared with the three months ended March 27, 2011. The company manufactures heavyweight motorcycles and provides retail and wholesale financing through Harley-Davidson Financial Services.
Key financial metrics
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Total revenue | $1.430 billion | $1.225 billion | +16.7% |
| Motorcycles revenue | $1.273 billion | $1.063 billion | +19.8% |
| Financial Services revenue | $156.3 million | $161.9 million | -3.4% |
| Operating income | $275.5 million | $193.0 million | +42.7% |
| Income from continuing operations | $172.0 million | $119.3 million | +44.3% |
| Diluted EPS | $0.74 | $0.51 | +45.1% |
| Net cash used by operating activities | $73.6 million | $104.9 million | Improved by $31.3 million |
Motorcycles gross profit was $456.5 million, representing an approximately 35.8% segment gross margin versus approximately 33.1% in the prior-year quarter. Consolidated operating margin was approximately 19.3%, compared with 15.8% in Q1 2011, and net margin was approximately 12.0%, compared with 9.7%.
Motorcycle wholesale shipments increased 19.4% to 64,263 units. Worldwide independent-dealer retail sales increased 20.3%, including 25.5% in the United States and 11.2% internationally. Financial Services operating income was $67.4 million, essentially flat year over year.
At April 1, 2012, cash and cash equivalents were $1.276 billion and marketable securities were $134.9 million. The company reported $2.549 billion of total liquidity, consisting of cash and marketable securities plus available credit facilities. Total debt was $5.568 billion, including $1.754 billion of term asset-backed securitization debt held by variable interest entities.
Cash declined by $250.6 million during the quarter to $1.276 billion. Investing activities provided $32.0 million, while financing activities used $209.9 million. Capital expenditures were $24.7 million. The company contributed $200.0 million in cash to pension plans during the quarter; management stated that no additional pension contributions were required in 2012.
Material changes versus the prior comparable period
- Motorcycles operating income increased $83.0 million, or 66.4%, driven by higher shipments, improved gross margin, restructuring savings and lower restructuring expense.
- Motorcycle revenue increased $210.3 million, or 19.8%; higher volume and pricing were partly offset by unfavorable mix and foreign currency effects.
- Restructuring expense declined to $11.5 million from $23.0 million. Combined restructuring expense since 2009 totaled approximately $467.3 million through the first quarter of 2012.
- Financial Services operating income decreased $0.5 million. Lower interest expense and improved credit performance were offset by lower interest income and a smaller allowance release than in 2011.
- The allowance for finance-credit losses declined to $122.5 million from $159.7 million. Annualized losses on retail motorcycle loans improved to 1.00% from 1.58%, and the 30-day delinquency rate declined to 2.56% from 3.68%.
- The company repurchased approximately 459,000 shares for $20.7 million and paid $35.9 million in dividends, or $0.155 per share.
- On April 13, 2012, the company entered into a new $675.0 million five-year credit facility maturing in April 2017, replacing a facility scheduled to mature in April 2013.
Guidance, outlook, risks and unusual items
- Management raised 2012 worldwide motorcycle shipment guidance to 245,000–250,000 units from 240,000–245,000. Second-quarter shipment guidance was 79,000–84,000 units.
- Full-year 2012 gross margin guidance remained 34.75%–35.75%, with currency expected to be a headwind and product mix slightly unfavorable. Management expected second-quarter gross margin to be level to slightly below Q1 and second-half margins to decline from first-half levels.
- Full-year effective tax rate guidance was approximately 35.5%, and capital expenditure guidance was $190 million–$210 million, including approximately $35 million for restructuring-related activities.
- An enterprise resource planning system implementation at the York facility was moved to July 2012. The implementation and model-year transition are expected to reduce production volumes during the third quarter.
- Management expects Financial Services operating income to decline in 2012 but remain positive, reflecting a contracting retail finance portfolio, tighter prime-lending margins and the absence of the approximately $40 million of allowance releases recognized in 2011.
- Restructuring plans include closing New Castalloy in Australia, reducing the workforce by approximately 200 employees by mid-2013, and implementing flexible production capabilities. Total restructuring expense from 2009 through 2013 was estimated at $500 million–$520 million.
- The $600 million asset-backed commercial paper conduit facility was scheduled to expire in September 2012, creating a refinancing or renewal consideration.
- Material risks include consumer demand and dealer financial condition, access to capital markets, funding costs, credit losses, foreign currency, interest rates, commodity prices, supply-chain disruptions, labor implementation, ERP execution, recalls, warranty claims and environmental matters.
- The EPA continued to investigate motorcycle emissions certifications, aftermarket parts and emissions-related warranty claims. The company could not reasonably estimate any potential enforcement or remediation impact.
- The company had a $3.3 million reserve for its estimated share of York, Pennsylvania environmental response costs, but stated that additional costs could not yet be reasonably estimated.
Important facts for investors to verify
- Whether shipment growth and unusually mild first-quarter weather represent sustainable retail demand or a timing shift from later selling periods.
- Progress and production disruption associated with the July 2012 York ERP implementation and 2013 model-year transition.
- Execution of restructuring plans, related costs, expected savings and the timing of flexible workforce implementation.
- Renewal or replacement of the $600 million conduit facility before its September 2012 expiration and continued access to commercial paper and other funding sources.
- Trends in HDFS retail receivables, delinquencies, charge-offs, allowance releases and net interest margins.
- Exposure to currency, commodity and interest-rate movements, particularly as management projected currency pressure for the remainder of 2012.
- Potential costs or penalties from the EPA investigation, York environmental remediation, product liability claims, recalls and warranty obligations.