Harley-Davidson, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 28, 2015; comparative periods ended June 29, 2014. The company operates through Motorcycles & Related Products and Financial Services. Financial statements are unaudited and prepared under U.S. GAAP.
Financial performance and key metrics
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Total revenue | $1.824 billion | $2.001 billion | $3.497 billion | $3.727 billion |
| Operating income | $462.5 million | $547.7 million | $872.6 million | $958.6 million |
| Net income | $299.8 million | $354.2 million | $569.7 million | $620.1 million |
| Diluted EPS | $1.44 | $1.62 | $2.71 | $2.82 |
| Operating margin | 25.4% | 27.4% | 25.0% | 25.7% |
| Cash dividends per share | $0.310 | $0.275 | $0.620 | $0.550 |
- Motorcycles: Q2 revenue declined 10.0% to $1.651 billion and operating income fell 19.6% to $380.6 million. Motorcycle shipments decreased 7.6% to 85,172 units. Motorcycle gross profit was $647.2 million, implying a segment gross margin of approximately 39.2%, compared with approximately 39.5% in the prior-year quarter.
- Financial Services: Q2 revenue increased 4.3% to $173.6 million and operating income increased 10.0% to $81.9 million. The improvement reflected higher average retail and wholesale receivables and other income, partly offset by lower yields.
- Cash flow: Six-month operating cash flow was $613.9 million, compared with $570.6 million in 2014. Investing cash use was $481.7 million, including $85.2 million of capital expenditures and $406.1 million of net finance-receivable originations. Financing activities provided $214.4 million.
- Liquidity: Cash and cash equivalents were $1.248 billion and current marketable securities were $52.5 million at June 28, 2015. Reported liquidity, including available credit facilities, totaled approximately $3.135 billion. Management targets at least 12 months of projected liquidity needs.
- Debt: Total debt was $6.227 billion, versus $5.359 billion at June 29, 2014. Debt included $3.934 billion of medium-term notes, $2.017 billion of term asset-backed securitization debt, $160.9 million under the Canadian conduit and $115.0 million of unsecured commercial paper. The company was in compliance with applicable covenants.
- Finance receivables: Net finance receivables totaled $7.148 billion, with an allowance for credit losses of $139.2 million. Annualized losses on retail motorcycle loans were 1.08%, compared with 0.97% in the prior-year period; 30-day retail delinquency was 2.71%, compared with 2.68%.
Material changes versus the prior comparable period
- Q2 net income declined 15.3% and operating income declined 15.6%; six-month net income declined 8.1% and operating income declined 9.0%.
- Worldwide independent-dealer retail sales declined 1.4% in Q2 and in the first six months. Q2 U.S. retail sales declined 0.7% and international retail sales declined 2.7%.
- Motorcycle results were pressured by lower shipment volume, unfavorable foreign exchange, less favorable product mix, increased marketing costs and $16.4 million of recall costs in Q2. Price increases, productivity gains and lower raw-material costs provided partial offsets.
- Financial Services credit-loss provision increased 14.1% to $41.4 million for the first six months, primarily due to higher retail losses, increased receivables and sub-prime originations.
- Lower diluted share counts from repurchases moderated the EPS decline. The company spent $358.4 million on share repurchases and paid $129.7 million in dividends during the first six months.
Guidance, outlook, risks and unusual items
- Management reaffirmed 2015 worldwide motorcycle shipments of 276,000 to 281,000 units, approximately 2% to 4% above 2014, including expected third-quarter shipments of 54,000 to 59,000 units.
- Motorcycles segment operating margin guidance remained 18.0% to 19.0%; gross margin was expected to increase modestly. Selling, administrative and engineering expense was expected to increase modestly because of recall and market-action costs.
- Financial Services operating income was expected to increase modestly. Capital expenditures were projected at $240 million to $260 million, funded by operating cash flow. The expected full-year effective tax rate was approximately 35.5%.
- Foreign exchange remained a major risk. Based on July 20, 2015 exchange rates, management estimated an approximately 4.25% adverse impact on full-year Motorcycles revenue and approximately 5% adverse impact in Q3, with corresponding gross-margin pressure.
- The company cited aggressive competitor discounting, weaker international currencies, economic weakness in certain markets, dealer financial condition, credit losses, funding costs, supply-chain and product-quality risks, recalls, cybersecurity, weather and regulatory matters as key risks.
- On August 4, 2015, the company completed the acquisition of Canadian distribution assets and rights for $62 million. The transaction was expected to reduce 2015 EPS by approximately $0.04 because of transition costs and become accretive beginning in 2016.
- In July 2015, the company issued $750 million of senior unsecured notes, consisting of $450 million due in 2025 at 3.50% and $300 million due in 2045 at 4.625%, intending to use the proceeds for share repurchases.
- The EPA emissions investigation could result in fines or other relief. The company has a reserve but stated that the ultimate loss could differ materially and that additional remedies could not reasonably be estimated. York, Pennsylvania environmental remediation costs also remain uncertain.
- The U.S. asset-backed commercial-paper conduit, with $600 million of availability, was scheduled to expire October 30, 2015; management expected renewal. The Canadian conduit was renewed through June 30, 2016 with borrowing capacity increased to C$240 million.
Investor verification points
- Verify whether shipment guidance, motorcycle retail sales and market share stabilized after the Q2 declines.
- Assess the effect of currency movements, competitor discounting and market-action spending on the Motorcycles segment margin.
- Monitor HDFS retail credit losses, sub-prime mix, delinquencies and allowance coverage.
- Reconcile the planned $750 million debt-funded share repurchases with leverage, liquidity and future interest obligations.
- Review the financial impact and execution risks of the Canadian direct-distribution transition.
- Review developments in the EPA investigation, York environmental remediation, recalls and product-liability matters.