Harley-Davidson, Inc. — Form 10-Q Summary
Business context and reporting period
Harley-Davidson operates through Motorcycles and Related Products and Financial Services. This unaudited filing covers the quarter and six months ended June 30, 2019, compared with the periods ended July 1, 2018. The company sells motorcycles, parts, accessories and merchandise through independent dealers, while Harley-Davidson Financial Services provides retail and dealer financing.
Key financial metrics
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Total revenue | $1.633 billion | $1.713 billion | $3.017 billion | $3.255 billion |
| Operating income | $256.3 million | $323.9 million | $423.4 million | $560.4 million |
| Net income | $195.6 million | $242.3 million | $323.6 million | $417.1 million |
| Diluted EPS | $1.23 | $1.45 | $2.03 | $2.48 |
| Operating margin | 15.7% | 18.9% | 14.0% | 17.2% |
| Net margin | 12.0% | 14.1% | 10.7% | 12.8% |
| Cash dividends per share | $0.375 | $0.370 | $0.750 | $0.740 |
Six-month operating cash flow was $496.2 million, down from $735.9 million. Capital expenditures were $83.2 million, compared with $69.3 million. Cash, cash equivalents and restricted cash totaled $1.014 billion at June 30, 2019, including $924.6 million of cash and cash equivalents. Cash flow was reduced by $245.9 million during the first half, compared with a $283.5 million increase in the prior-year period.
Total debt was $7.452 billion at June 30, 2019, compared with $7.141 billion at July 1, 2018. Current debt included $405.7 million of commercial paper and $2.396 billion of current long-term debt. The company reported $1.954 billion of availability under credit and conduit facilities, producing total cash and stated availability of $2.878 billion. Shareholders’ equity was $1.911 billion.
Material changes versus the prior comparable period
- Second-quarter revenue declined 4.7%, while six-month revenue declined 7.3%. Motorcycles revenue fell 6.0% in the quarter and 9.0% year to date.
- Second-quarter net income decreased 19.3% and diluted EPS decreased 15.2%; six-month net income decreased 22.4% and diluted EPS decreased 18.1%.
- Motorcycles segment operating income declined 25.8% in the quarter and 30.5% year to date, primarily because of lower shipments, unfavorable mix, tariffs and manufacturing inefficiencies. Financial Services operating income declined 6.2% in the quarter and 6.8% year to date.
- Worldwide retail motorcycle sales declined 8.4% in the quarter and 6.6% in the first half. U.S. retail sales declined 8.0% in the quarter and 6.5% year to date; international sales declined 8.9% and 6.6%, respectively.
- Wholesale motorcycle shipments declined 5.3% in the quarter and 6.5% year to date.
- Financial Services revenue increased 5.6% in the quarter and 5.8% year to date, but provision for credit losses increased 39.7% and 24.4%, respectively. The first-half annualized retail credit loss rate rose to 1.82% from 1.56%, and the 30-day delinquency rate rose to 3.33% from 3.09%.
- Share repurchases totaled $104.6 million in the first half, including $95.5 million of discretionary repurchases. Approximately 13.7 million shares remained authorized for repurchase at June 30, 2019.
Guidance, outlook, risks and unusual items
- Management reduced 2019 motorcycle shipment guidance to 212,000–217,000 units from 217,000–222,000 units and reduced expected Motorcycles segment operating margin to 6%–7% from 8%–9%.
- 2019 incremental tariff costs were estimated at approximately $100 million. Second-quarter tariff costs were $34.4 million, and first-half tariff costs were $55.4 million.
- Management expects 2019 capital expenditures of $225 million–$245 million, a 24%–25% effective tax rate and sufficient operating cash flow to fund capital expenditures.
- European tariff mitigation was delayed. Production of lower-tariff motorcycles in Thailand for the European Union is expected to begin in late October 2019, with lower-tariff EU shipments expected to begin in early the second quarter of 2020. The transition is expected to constrain fourth-quarter shipments.
- The More Roads plan includes new products, broader customer access and stronger dealers. The company expected to launch model-year 2020 motorcycles, including LiveWire, its first electric motorcycle, in the third quarter of 2019. StaCyc was acquired for $14.9 million to expand the electric two-wheeler portfolio.
- The Manufacturing Optimization Plan had incurred $134.4 million through June 30, 2019. Total expected costs were $142 million–$152 million, with approximately 70% expected to be cash charges. Estimated annual ongoing savings were $65 million–$75 million.
- Lease accounting adoption resulted in approximately $60 million of right-of-use assets and lease liabilities. The company also expects adoption of the credit-loss standard in 2020 to initially increase its allowance for credit losses and reduce retained earnings.
- Material risks include weak motorcycle demand, tariffs and trade policy, foreign exchange and commodity prices, manufacturing execution, dealer health, credit losses, funding costs, product recalls, environmental matters, cybersecurity and the ability to launch products accepted by customers.
- The EPA consent decree remained subject to court approval. The company has an accrual and stated that finalization would not materially affect financial condition or results; if approval is denied, the potential impact beyond the current reserve cannot reasonably be estimated. The scope and cost of additional York, Pennsylvania environmental remediation also remained uncertain.
Most important facts for investors to verify
- Whether motorcycle retail demand and wholesale shipments stabilize, particularly in the United States and developed international markets.
- The timing and effectiveness of Thailand production in reducing European tariffs, and the effect of the delayed transition on 2019 shipments and margins.
- Whether the 6%–7% 2019 Motorcycles operating-margin guidance remains achievable amid tariffs, mix, marketing spending and manufacturing inefficiencies.
- Trends in HDFS retail credit losses, delinquencies, allowance adequacy and the effect of the new loan-management system.
- Liquidity and refinancing needs, including the November 29, 2019 expiration of the U.S. conduit facilities and substantial 2019–2021 debt maturities.
- Actual costs and savings from the Manufacturing Optimization Plan and the company’s ability to fund capital expenditures, dividends and repurchases while maintaining liquidity.
- Potential financial effects of the EPA proceeding, York environmental remediation and product warranty or recall matters.