Harley-Davidson, Inc. 10-Q Summary: Quarter Ended April 1, 2007
Business Context and Reporting Period
This Form 10-Q covers the three-month period ended April 1, 2007. Harley-Davidson, Inc. operates through two primary segments: Motorcycles & Related Products and Financial Services. The quarter was significantly impacted by a labor strike at the York, Pennsylvania assembly plant, which began on February 2, 2007, and concluded on February 22, 2007, after the union rejected a proposed agreement. The strike resulted in approximately four weeks of lost production.
Key Financial Metrics
| Metric | Q1 2007 | Q1 2006 | Change |
|---|---|---|---|
| Net Revenue | $1,178.9 million | $1,285.1 million | -8.3% |
| Gross Profit | $423.0 million | $493.2 million | -14.2% |
| Gross Margin | 35.9% | 38.4% | -250 bps |
| Operating Income | $289.4 million | $359.2 million | -19.4% |
| Net Income | $192.3 million | $234.6 million | -18.0% |
| Diluted EPS | $0.74 | $0.86 | -14.0% |
| Cash from Operations | $519.6 million | $365.7 million | +42.1% |
| Cash & Equivalents | $310.0 million | $196.5 million | +57.8% |
| Total Finance Debt | $1,353.5 million | $1,093.6 million | +23.8% |
Material Changes vs. Prior Period
- Volume Decline: Wholesale motorcycle shipments decreased by 11,745 units (14.8%) to 70,319 units, primarily due to the strike. Domestic shipments fell 19.1%, while international shipments declined only 1.1%.
- Revenue Mix: Despite lower unit volumes, revenue was partially offset by wholesale price increases ($14 million) and favorable foreign currency exchange rates ($15 million). Parts and accessories revenue grew 2.9%.
- Cost Pressures: Cost of goods sold per unit increased due to strike-related inefficiencies, higher raw material surcharges ($10 million), and foreign currency impacts ($4 million).
- Financial Services: Operating income from Financial Services increased 14.2% to $58.9 million, driven by higher interest income and securitization gains, though offset by a $3.5 million impairment charge on retained securitization interests.
- Share Count: Diluted EPS decline was mitigated by a reduction in weighted-average shares outstanding (15.4 million fewer shares) due to ongoing stock repurchases.
Guidance, Outlook, and Risks
- Outlook: The Company expects 2007 second-quarter shipments to range between 94,000 and 97,000 units. First-half 2007 shipment growth is projected at 1.5% to 3.4%.
- Earnings Guidance: Due to the strike, the expected annual earnings-per-share growth rate for 2007 has been revised down to 4% to 6% (previously 11% to 17%). The Company expects margins to return to 11% to 17% growth in 2008 and 2009.
- Capital Expenditures: Expected to be between $300 million and $325 million for 2007, funded by internal cash flows.
- Risks & Contingencies:
- Legal: Ongoing shareholder class action and derivative lawsuits regarding 2005 production announcements; a new security breach lawsuit regarding a lost laptop; and a long-standing cam bearing class action awaiting a Wisconsin Supreme Court decision.
- Environmental: Estimated $7.7 million in future remediation costs for the York facility, with reserves established.
- Operational: Risks related to supply chain management, raw material costs, and potential future work stoppages.
Investor Verification Checklist
- Verify the impact of the York strike resolution on Q2 and H2 production schedules and inventory levels.
- Monitor the status of the Wisconsin Supreme Court decision regarding the cam bearing class action lawsuit.
- Track the progression of the shareholder securities litigation and the SEC inquiry regarding 2005 disclosures.
- Assess the sustainability of the Financial Services segment's credit loss rates, which rose to 2.28% annualized in Q1 2007.
- Confirm the execution of the revised 2007 capital expenditure plan, specifically regarding the powertrain facility expansion and museum construction.