Harley-Davidson, Inc. 2011 Second-Quarter Form 10-Q Summary
Business Context and Reporting Period
Harley-Davidson operates through Motorcycles & Related Products and Financial Services. The unaudited report covers the three and six months ended June 26, 2011, compared with June 27, 2010. The company produces heavyweight motorcycles and provides retail and wholesale financing through Harley-Davidson Financial Services. MV Agusta was sold in August 2010 and is presented as a discontinued operation.
Key Financial Metrics
| Metric | Three Months 2011 | Three Months 2010 | Six Months 2011 | Six Months 2010 |
|---|---|---|---|---|
| Total revenue | $1.506 billion | $1.309 billion | $2.731 billion | $2.516 billion |
| Operating income | $301.9 million | $218.8 million | $494.9 million | $371.5 million |
| Operating margin | 20.1% | 16.7% | 18.1% | 14.8% |
| Income from continuing operations | $190.6 million | $139.3 million | $309.8 million | $208.0 million |
| Net income | $190.6 million | $71.2 million | $309.8 million | $104.5 million |
| Diluted EPS | $0.81 | $0.30 | $1.31 | $0.45 |
| Cash dividends per share | $0.125 | $0.10 | $0.225 | $0.20 |
| Operating cash flow | Not separately provided | Not separately provided | $473.0 million | $726.0 million |
- Motorcycles revenue increased 18.0% in the second quarter and 10.6% in the first half. Motorcycle gross profit was $468.3 million in the second quarter and $820.1 million in the first half.
- Financial Services operating income increased 34.9% to $82.1 million in the second quarter and 71.4% to $150.0 million in the first half.
- Worldwide retail sales increased 5.6% in the second quarter and 4.8% in the first half. Harley-Davidson wholesale shipments increased 13.2% to 66,815 units in the second quarter and 7.0% to 120,642 units in the first half.
- At June 26, 2011, cash and cash equivalents were $973.5 million and marketable securities were $244.6 million, for total immediately available investments of $1.218 billion.
- Total debt was $5.441 billion, including $1.853 billion of term asset-backed securitization debt held by consolidated variable interest entities. Current liabilities were $2.197 billion and shareholders’ equity was $2.531 billion.
- Total finance receivables were $6.108 billion before the $144.4 million credit-loss allowance. Retail receivables were $5.374 billion and wholesale receivables were $733.8 million.
- Available credit facilities totaled $1.013 billion, consisting of $413.2 million of global facilities and a $600.0 million asset-backed conduit facility. The conduit facility had no borrowings outstanding but was scheduled to expire in September 2011.
Material Changes Versus the Prior Comparable Period
- Second-quarter revenue increased 15.0%, operating income increased 38.0%, income from continuing operations increased 36.8%, and net income increased 167.8%. The net-income comparison benefited substantially from the $68.1 million after-tax MV Agusta loss recorded in the second quarter of 2010.
- First-half revenue increased 8.5%, operating income increased 33.2%, income from continuing operations increased 48.9%, and net income increased 196.5%. The prior-year period included a $103.5 million after-tax loss from discontinued operations.
- Motorcycles operating income increased $61.9 million in the second quarter and $60.9 million in the first half, driven primarily by higher shipments and lower restructuring expense. Benefits were partly offset by higher growth, engineering, raw-material and manufacturing costs.
- Financial Services benefited from lower interest expense and improved credit performance. The provision for credit losses was a benefit of $6.8 million in the second quarter and a benefit of $1.2 million in the first half, versus expense of $9.3 million and $41.1 million, respectively, in the prior-year periods.
- The allowance for finance credit losses declined to $144.4 million from $183.0 million at June 27, 2010. Annualized losses on managed retail loans declined to 1.06% from 2.04%, and the 30-day delinquency rate declined to 3.53% from 4.50%.
- Operating cash flow declined $253.0 million to $473.0 million, primarily because of a voluntary $200.0 million pension contribution and increased finance-receivable originations. Cash used in investing activities was $190.0 million, while cash used in financing activities was $329.7 million.
- Debt declined from $6.534 billion at June 27, 2010, primarily because of lower securitization debt, although unsecured commercial paper and medium-term notes increased. The company issued $450 million of medium-term notes in March 2011 and repurchased $297 million of senior unsecured notes in the fourth quarter of 2010.
Guidance, Outlook, Commentary and Risks
- On July 19, 2011, management raised 2011 shipment guidance to 228,000 to 235,000 motorcycles from 215,000 to 228,000. Third-quarter shipment guidance was 60,000 to 65,000 units.
- Full-year gross-margin guidance was raised to 34.0% to 35.0% from 33.5% to 35.0%. Capital expenditures remained projected at $210 million to $230 million, including $70 million to $85 million for restructuring. Management expected operating cash flow to fund 2011 capital expenditures.
- The company continued to expect an approximately 35% effective income-tax rate for continuing operations, excluding discrete items. A potential IRS audit settlement in the second half of 2011 could reduce tax expense.
- Japan-related supply constraints following the March 2011 earthquake and tsunami had been substantially mitigated, but management continued to cite supply-chain execution, raw-material costs, York facility inefficiencies, economic recovery and consumer confidence as risks.
- Combined restructuring costs were revised to $490 million to $505 million through 2012, with 2011 expense estimated at $80 million to $90 million. Ongoing annual savings after completion were expected to be approximately $305 million to $325 million.
- The company expects restructuring and transformation at York to be largely complete in the first half of 2012. New seven-year labor agreements in Kansas City and Wisconsin are expected to improve flexibility and reduce required full-time hourly union positions when implemented in 2012.
- Material contingencies include a possible EPA enforcement action concerning motorcycle emissions, aftermarket parts and emissions-related warranty claims. The company stated that the potential impact could not yet be reasonably estimated.
- The company reserved approximately $5.3 million for its share of York, Pennsylvania environmental remediation costs, but stated that additional costs, if any, could not be reasonably estimated. Product-liability litigation, warranty and recall costs also remain ongoing exposures.
- HDFS depends on continued access to commercial-paper, bank, securitization and other capital markets. The company was in compliance with its debt covenants at June 26, 2011, including the minimum interest-coverage requirement.
Most Important Facts for Investors to Verify
- Whether improved retail demand and shipment growth support the raised 2011 guidance without creating excessive dealer inventory.
- Whether the Financial Services credit-loss benefit is sustainable, given management’s warning that a similar benefit may not recur in 2012.
- The renewal or replacement of the $600.0 million asset-backed conduit facility before its September 2011 expiration.
- Progress, costs and savings from the York, Kansas City and Wisconsin restructuring programs, including the effect on manufacturing efficiency and margins.
- Exposure and potential outcomes from the EPA investigation and unresolved York environmental remediation matters.
- Liquidity after debt maturities, pension and postretirement obligations, finance-receivable growth and planned capital expenditures.