Harley-Davidson, Inc. Form 10-Q Summary
Business Context and Reporting Period
Harley-Davidson operates through Motorcycles & Related Products and Financial Services. The filing covers the three and nine months ended September 25, 2011, compared with the periods ended September 26, 2010. Results exclude MV Agusta, which was sold in August 2010 and presented as a discontinued operation.
Financial Performance and Key Metrics
| Metric | Q3 2011 | Q3 2010 | 9M 2011 | 9M 2010 |
|---|---|---|---|---|
| Total revenue | $1.397 billion | $1.260 billion | $4.128 billion | $3.776 billion |
| Operating income | $242.7 million | $152.4 million | $737.6 million | $523.9 million |
| Income from continuing operations | $183.6 million | $93.7 million | $493.4 million | $301.7 million |
| Net income | $183.6 million | $88.8 million | $493.4 million | $193.3 million |
| Diluted EPS | $0.78 | $0.38 | $2.09 | $0.82 |
| Operating margin | 17.4% | 12.1% | 17.9% | 13.9% |
- Motorcycles revenue increased 13.4% in Q3 and 11.5% for the first nine months. Motorcycle operating income rose 78.0% in Q3 to $180.7 million and 36.3% for nine months to $525.6 million.
- Financial Services operating income increased 21.9% in Q3 to $62.0 million and 53.2% for nine months to $212.0 million, primarily because of improved credit performance and lower credit-loss provisions.
- Motorcycle gross profit was $415.4 million in Q3, implying a 33.7% gross margin, compared with approximately 34.9% in Q3 2010. Management cited product mix, raw-material costs, foreign exchange and temporary York production inefficiencies as pressures.
- Net cash provided by operating activities from continuing operations was $901.6 million for the first nine months, down from $1.170 billion. The decrease primarily reflected a $200.0 million pension contribution and increased finance-receivable originations.
- Capital expenditures were $106.1 million versus $77.6 million in the prior-year period. Cash and cash equivalents were $1.429 billion and marketable securities were $179.3 million at September 25, 2011.
- Total debt was $5.575 billion, including $1.995 billion of term asset-backed securitization debt held by consolidated variable-interest entities. The company reported $976.991 million of credit-facility availability and total cash, marketable securities and availability of $2.585 billion.
- Finance receivables, net, including receivables held by variable-interest entities, totaled $5.906 billion. The allowance for credit losses was $132.6 million, down from $182.0 million at September 26, 2010.
- HDFS managed retail-loan 30-day delinquencies declined to 3.73% from 4.83%, and annualized losses declined to 1.11% from 2.04%.
Material Changes Versus the Prior Comparable Period
- Worldwide dealer retail sales increased 5.1% in Q3 and 4.9% for the first nine months. Harley-Davidson wholesale shipments increased 15.9% in Q3 and 9.9% for nine months.
- Operating results benefited from higher motorcycle volumes, lower restructuring expense, cost savings and improved Financial Services credit performance.
- Restructuring expense declined to $12.4 million in Q3 from $67.5 million and to $49.0 million for nine months from $145.8 million.
- Interest expense declined materially because of the prior-year repurchase of $297.0 million of senior unsecured notes. During Q3 2011, HDFS repurchased $44.4 million of medium-term notes and recognized an $8.7 million debt-extinguishment loss.
- The prior-year nine-month results included a $108.4 million after-tax loss from discontinued operations related to MV Agusta; no comparable loss was recorded in 2011.
- The company repurchased $97.5 million of common stock during the first nine months, including approximately 2.5 million shares under its discretionary repurchase program, and paid $82.6 million of dividends.
Guidance, Outlook, Commentary, Risks and Unusual Items
- Management reaffirmed expected 2011 worldwide dealer shipments of 228,000 to 235,000 motorcycles, including 45,500 to 52,500 units in the fourth quarter.
- 2011 gross-margin guidance was reduced to 33.5% to 34.5% from 34.0% to 35.0%, primarily because of unfavorable foreign-currency movements late in Q3.
- Capital-expenditure guidance remained $210 million to $230 million, including $70 million to $85 million for restructuring. Management expects operations to fund 2011 capital expenditures.
- Full-year 2011 effective tax-rate guidance was approximately 31%, helped by $29.7 million of favorable discrete tax items, including an IRS audit settlement and a Wisconsin tax-law change.
- Combined restructuring expense guidance was reduced to $480 million to $495 million through 2012, with estimated ongoing annual savings of $305 million to $325 million after completion. York production constraints are expected to continue for several quarters.
- Management expects 2012 Financial Services operating income to decline from 2011 because approximately $37 million of 2011 allowance releases are not expected to recur, the retail-loan portfolio is contracting and prime-lending margins may tighten. HDFS is nevertheless expected to remain profitable.
- On October 24, 2011, the company disclosed a voluntary recall involving approximately 308,474 motorcycles related to a rear brake-light switch. Estimated fourth-quarter 2011 cost is $10 million to $12 million.
- Key risks include consumer confidence, foreign-exchange and commodity-price volatility, dealer financial health, funding access and costs, credit losses and recoveries in HDFS, restructuring execution, production constraints, supply-chain disruptions, product recalls, litigation, environmental remediation and potential EPA enforcement related to emissions matters.
- The company has reserved approximately $4.3 million for its estimated share of York environmental response costs, but cannot reasonably estimate any additional costs that may result from the ongoing investigation.
Important Facts for Investors to Verify
- Whether motorcycle shipments and dealer retail demand remain consistent with the 2011 shipment guidance while York production constraints continue.
- The sustainability of improved HDFS credit performance and the effect of the nonrecurring 2011 allowance releases on 2012 earnings.
- Actual fourth-quarter gross margin relative to the revised 33.5% to 34.5% guidance, including foreign-exchange effects.
- Progress, costs and realized savings from the restructuring programs, particularly at York, Kansas City and Wisconsin facilities.
- The cash impact and final cost of the brake-light-switch recall and any additional warranty or recall obligations.
- Liquidity and refinancing requirements, including the September 2012 expiration of the $600 million asset-backed commercial-paper conduit facility and scheduled debt maturities.
- Potential exposure from EPA investigations, York environmental remediation and other product-liability or legal matters.