HARLEY-DAVIDSON, INC. quarterly report, Q1 FY2018

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 months ended April 1, 2018, compared with March 26, 2017. The Motorcycles segment designs, manufactures and sells motorcycles, parts, accessories and merchandise through independent dealers; Financial Services provides retail and wholesale motorcycle financing and related insurance and licensing services.

Key financial metrics

Metric	Q1 2018	Q1 2017	Change
Total revenue	$1.542 billion	$1.502 billion	+2.7%
Operating income	$236.4 million	$289.2 million	-18.2%
Net income	$174.8 million	$186.4 million	-6.2%
Diluted EPS	$1.03	$1.05	-1.9%
Operating margin	15.3%	19.3%	Down approximately 4.0 points
Effective tax rate	24.1%	34.5%	Down 10.4 points
Operating cash flow	$191.6 million	$159.9 million	+$31.7 million

Motorcycles revenue increased 2.7% to $1.364 billion, but segment operating income fell 26.9% to $172.8 million. Motorcycle gross profit declined slightly to $473.8 million, with a gross margin of approximately 34.7% versus 35.7%.
Financial Services revenue increased 2.9% to $178.2 million, while operating income increased 20.8% to $63.6 million. The provision for credit losses declined 31.1% to $30.1 million, partly offset by higher interest expense.
Worldwide retail motorcycle sales declined 7.2% to 51,086 units. U.S. retail sales declined 12.0%, while international retail sales increased 0.2%. Wholesale shipments declined 9.7% to 63,944 motorcycles.
Cash, cash equivalents and restricted cash totaled $819.3 million at quarter-end, including $753.5 million of cash and cash equivalents. Total liquidity, including cash and available credit and conduit facilities, was $1.913 billion.
Total debt was $7.018 billion, including $1.037 billion of unsecured commercial paper, $4.515 billion of medium-term notes, $742.1 million of senior unsecured notes and $724.3 million of secured debt. Current debt obligations included $1.037 billion of short-term debt and $1.873 billion of current long-term debt.
Finance receivables, net, totaled $7.126 billion, supported by an allowance for credit losses of $190.4 million. Retail loans 30 days or more delinquent represented 3.31% of retail motorcycle loans, compared with 3.17% in the prior-year quarter.
Capital expenditures were $28.4 million. The Company paid $62.7 million in dividends and used $73.0 million to repurchase common stock. The quarterly dividend increased to $0.370 per share from $0.365.

Material changes versus the prior comparable period

Operating income declined primarily because of $46.8 million of restructuring expense, higher selling, administrative and engineering costs, lower shipment volume, higher raw-material costs and manufacturing inefficiencies.
Revenue and gross profit benefited from favorable product mix, model-year pricing and foreign currency exchange rates, but these benefits did not offset volume and manufacturing-cost pressures.
Financial Services results improved because of lower credit losses and higher interest income, although funding costs increased.
The 2017 Tax Cuts and Jobs Act reduced the effective tax rate and partially offset the decline in pre-tax income.
Diluted weighted-average shares declined to 169.2 million from 177.1 million, primarily due to share repurchases, limiting the effect of lower net income on EPS.
Comprehensive income increased to $268.2 million from $200.1 million, largely because of a $96.4 million pre-tax pension and postretirement benefit remeasurement gain recorded in other comprehensive income.
The Company adopted new revenue recognition, pension-cost presentation and restricted-cash guidance. Revenue recognition adoption increased opening retained earnings by $6.0 million, net of tax; comparative income information was not restated for the revenue standard.

Guidance, outlook, risks and unusual items

Management expects 2018 worldwide motorcycle shipments of 231,000 to 236,000 units, approximately 2% to 4% below 2017.
Full-year Motorcycles operating margin is expected to be approximately 9.5% to 10.5%, pressured by $120 million to $140 million of manufacturing optimization costs.
The manufacturing optimization plan consolidates the Kansas City assembly plant into York, Pennsylvania, and closes wheel operations in Adelaide, Australia. The plan is expected to eliminate approximately 890 jobs and add approximately 450 York jobs by 2019, with total restructuring and consolidation costs of $170 million to $200 million through 2019.
Management expects Financial Services operating income to be flat to modestly down for 2018, as lower net interest income is expected to offset lower credit-loss provisions.
The Company expects a 2018 effective tax rate of approximately 23.5% to 25.0% and capital expenditures of $250 million to $270 million, including approximately $50 million for the manufacturing plan.
Management expects second-quarter shipments of 67,500 to 72,500 motorcycles and second-quarter Motorcycles operating margin to decline approximately five percentage points year over year because of shipment mix, manufacturing-plan costs, lower fixed-cost absorption and higher marketing and product-development spending.
Key risks include continued weakness in U.S. motorcycle demand, used-motorcycle pricing, tariffs and raw-material costs, foreign exchange, execution of the manufacturing plan, dealer financial health, credit losses, funding costs, product recalls, litigation, environmental obligations, cybersecurity and access to capital markets.
The EPA consent settlement remained subject to court approval. The Company had recorded an accrual and stated that an approved settlement would not materially affect its financial condition or results of operations; potential remedies beyond the reserve were not reasonably estimable if approval were denied.
The NHTSA investigation into certain ABS-equipped motorcycles was formally closed in late April 2018 after a voluntary brake-fluid-flush recall. The Company believes its $29.4 million accrual is adequate.
The U.S. conduit facilities had a December 2018 expiration date, and the Canadian conduit facility had a June 2018 expiration date; management expected renewal. The Company entered a new $780 million five-year credit facility on April 6, 2018, after the quarter-end balance-sheet date.

Important facts for investors to verify

Whether the planned second-half shipment rebound is sufficient to achieve the 231,000-to-236,000-unit full-year guidance.
The actual cash cost, timing and savings realization from the manufacturing optimization plan.
U.S. retail demand, dealer inventory levels, market share and the effect of tariffs and steel and aluminum prices on margins.
Credit-loss trends, delinquency rates and reserve adequacy within HDFS, particularly for sub-prime retail borrowers.
Refinancing and renewal of maturing debt, commercial paper and conduit facilities, and the effect of higher interest rates on Financial Services earnings.
Potential revisions to provisional tax estimates under the 2017 Tax Cuts and Jobs Act.
Final resolution and costs of EPA, environmental, product-liability and recall matters.
The effect of the new revenue, lease and expected-credit-loss accounting standards when subsequently adopted.