Harley-Davidson, Inc. — 2017 Q1 Form 10-Q Summary
Business context and reporting period
Harley-Davidson operates through two segments: Motorcycles & Related Products and Financial Services. The filing covers the unaudited three months ended March 26, 2017, compared with the three months ended March 27, 2016. The company designs, manufactures and sells motorcycles, parts, accessories and merchandise through independent dealers, while Harley-Davidson Financial Services provides retail and dealer financing primarily in the United States and Canada.
Key financial metrics
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Total revenue | $1.502 billion | $1.750 billion | Down 14.2% |
| Motorcycles revenue | $1.329 billion | $1.577 billion | Down 15.7% |
| Financial Services revenue | $173.2 million | $173.4 million | Down 0.1% |
| Operating income | $291.5 million | $388.8 million | Down 25.0% |
| Net income | $186.4 million | $250.5 million | Down 25.6% |
| Diluted EPS | $1.05 | $1.36 | Down 22.8% |
| Operating margin | 19.4% | 22.2% | Down approximately 2.8 points |
| Motorcycles gross margin | 35.9% | 37.4% | Down approximately 1.5 points |
| Cash flow from operations | $159.9 million | $41.1 million | Increase of $118.8 million |
| Capital expenditures | $24.0 million | $39.0 million | Down $15.0 million |
Cash and cash equivalents were $839.7 million at March 26, 2017, compared with $760.0 million at December 31, 2016 and $694.0 million at March 27, 2016. Total cash, current marketable securities and available credit facilities were approximately $2.009 billion. Total debt was $6.971 billion, compared with $7.113 billion a year earlier. Shareholders’ equity was $1.993 billion.
Finance receivables, net, totaled $7.146 billion, including a $184.0 million allowance for credit losses. Retail annualized credit losses increased to 2.31% from 1.98% in the prior-year quarter, and the on-balance-sheet retail loan 30-day delinquency rate increased to 3.17% from 2.88%.
Material changes versus the prior comparable period
- Worldwide retail motorcycle sales declined 4.2%; U.S. retail sales declined 5.7% and international retail sales declined 1.8%.
- Wholesale motorcycle shipments declined 14.7% to 70,831 units, primarily because management significantly reduced shipments to allow U.S. dealers to sell through model-year 2016 inventory.
- Motorcycles segment operating income declined 28.2% to $238.8 million. Lower volume and shipment mix, including fewer Touring motorcycles, were the principal adverse factors. Price increases and favorable foreign-currency effects partially offset the decline.
- Motorcycles segment revenue declined 15.7%, while gross profit declined 19.1%. Selling, administrative and engineering expense declined 7.4%, partly reflecting spending timing.
- Financial Services operating income declined 6.6% to $52.6 million. Higher credit-loss provisions, driven by unfavorable retail portfolio performance and a higher reserve rate, more than offset lower interest expense and slightly higher other income.
- Operating cash flow improved substantially, primarily because of more favorable changes related to wholesale financing, despite lower net income.
- The company issued $500 million of medium-term notes during the quarter, including $150 million of floating-rate notes due in 2019 and $350 million of 2.40% notes due in 2020, while repaying $400 million of maturing medium-term notes.
- The company repurchased approximately 1.4 million shares for $79.8 million and paid $64.6 million in dividends. The quarterly dividend increased to $0.365 per share from $0.350.
Guidance, outlook, risks and unusual items
- Management expects full-year 2017 dealer motorcycle shipments to be flat to modestly down versus 2016 and expects second-quarter shipments of 80,000 to 85,000 units, compared with 88,160 units in the prior-year quarter.
- Management expects full-year gross margin as a percentage of revenue, selling, administrative and engineering expense, and Motorcycles segment operating margin to be approximately in line with 2016.
- Management expects Financial Services operating income to decline in 2017 because the $9.3 million gain from a 2016 off-balance-sheet securitization is not expected to recur.
- Capital expenditures are expected to be $200 million to $220 million, funded by operating cash flow. The expected full-year effective tax rate is approximately 34.5%.
- Management expects improved motorcycle availability, new model introductions, ridership initiatives, international dealer expansion and easier year-over-year comparisons to support retail sales in the remainder of 2017. The company expects U.S. industry conditions to remain soft for the full year.
- Key risks include weak motorcycle demand, competitive pricing, used-motorcycle values, dealer financial condition, credit losses, funding costs and access to capital markets, foreign-currency movements, commodity costs, recalls, product liability, regulatory matters, cybersecurity, supply-chain disruptions and weather.
- The EPA consent decree relating to emissions matters remained subject to court approval. The company had a reserve and stated that finalization was not expected to materially affect financial condition or results of operations; potential remedies beyond the reserve were not reasonably estimable if approval failed.
- NHTSA was investigating possible brake failures in certain 2008–2011 motorcycles with ABS. The company did not consider a loss probable, had not recorded a reserve and could not reasonably estimate potential future costs.
- The Canadian asset-backed commercial paper facility was scheduled to expire June 30, 2017, and the U.S. conduit facilities December 13, 2017. Management expected to renew both facilities.
- The company adopted new stock-compensation and inventory accounting guidance in 2017 without a material financial statement impact. It anticipated that the future credit-loss standard would increase annual credit-loss provisions and the related allowance.
Most important facts for investors to verify
- Whether the planned shift of motorcycle shipments from the first quarter to the second half of 2017 occurred without creating excess dealer inventory.
- Progress in worldwide retail sales, particularly U.S. industry demand, European market share and Asia Pacific recovery.
- Trends in HDFS retail delinquencies, charge-offs, reserve rates and sub-prime loan exposure.
- Renewal and pricing of the Canadian and U.S. asset-backed commercial paper facilities and continued access to commercial paper and debt markets.
- Whether full-year gross-margin, operating-margin, expense, capital-expenditure and tax-rate guidance was achieved.
- Developments in the EPA settlement, York environmental remediation, NHTSA investigation, warranty and recall liabilities.
- The sustainability of share repurchases and dividend increases relative to operating cash flow and debt maturities.