Harley-Davidson, Inc. Form 10-Q Summary
Reporting period: Three months ended March 30, 2014, compared with the three months ended March 31, 2013. The filing was submitted May 8, 2014. Harley-Davidson operates through Motorcycles & Related Products and Financial Services.
Financial performance and key metrics
- Revenue: $1.726 billion, up 9.9% from $1.571 billion. Motorcycles revenue increased 11.1% to $1.572 billion; Financial Services revenue declined 1.7% to $154.4 million.
- Operating income: $410.9 million, up 18.0%. Operating margin was approximately 23.8%, compared with 22.2% in the prior-year quarter.
- Net income: $265.9 million, up 18.6% from $224.1 million. Diluted EPS was $1.21, compared with $0.99.
- Motorcycles segment: Operating income rose 25.6% to $347.7 million. Gross profit was $592.1 million, implying a gross margin of approximately 37.7%; segment operating margin was approximately 22.1%.
- Financial Services segment: Operating income fell 11.7% to $63.2 million, primarily because the provision for credit losses increased 55.1% to $20.3 million.
- Cash flow: Operating cash flow was $203.6 million, compared with cash used of $108.5 million in the prior-year quarter. Capital expenditures were $25.9 million. Net cash used in investing activities was $70.4 million and net cash used in financing activities was $266.0 million.
- Liquidity: Cash and cash equivalents were $935.8 million and current marketable securities were $92.9 million. Management reported total cash, marketable securities and available credit facilities of approximately $2.021 billion.
- Debt: Total debt was $5.095 billion, compared with $5.295 billion at March 31, 2013. The company repaid $303.0 million of senior unsecured notes in February 2014.
- Shareholder returns: The quarterly dividend increased to $0.275 per share from $0.210. The company repurchased 1.3 million shares for $87.7 million during the quarter.
- Credit portfolio: Net finance receivables were $6.438 billion. The allowance for credit losses was $114.5 million. Annualized losses on retail motorcycle loans were 1.33%, compared with 1.09% in the prior-year quarter, while retail 30-day delinquency improved to 2.66% from 2.92%.
Material changes versus the prior comparable period
- Worldwide wholesale motorcycle shipments increased 7.3% to 80,682 units, led by a 15.5% increase in Touring units and initial shipments of the Street model.
- Worldwide dealer retail sales increased 5.8% to 57,415 units; international retail sales increased 10.9%, while U.S. retail sales increased 3.0%.
- Motorcycles gross profit increased $72.7 million, benefiting from higher volume, pricing, favorable shipment mix, lower raw-material prices and manufacturing efficiencies. These benefits were partly offset by foreign-currency effects and Street platform start-up costs.
- Financial Services earnings declined because of higher credit losses, lower average yields and modestly higher operating expenses. Interest expense decreased because of lower funding costs.
- The effective tax rate increased to 35.0% from 33.8%, partly because 2014 did not include U.S. federal research and development tax credits that benefited the 2013 period.
- Operating cash flow improved substantially, partly because the prior-year period included a $175.0 million voluntary pension contribution; no qualified-plan pension contribution was required or planned for 2014.
Guidance, outlook, risks and unusual items
- Management reaffirmed 2014 worldwide motorcycle shipments of 279,000 to 284,000 units, representing growth of 7.1% to 9.0%, including expected second-quarter shipments of 92,000 to 97,000 units.
- The company continued to expect a 2014 Motorcycles operating margin of 17.5% to 18.5%, compared with 16.6% in 2013.
- Financial Services operating income was expected to decline modestly because of higher credit losses, tighter net interest margins and higher borrowing costs.
- 2014 capital expenditures were expected to be $215 million to $235 million and funded from operating cash flow. The expected full-year effective tax rate was approximately 35.5%.
- First-quarter retail sales were below management expectations because of severe U.S. weather. Management expected some sales to shift into the second quarter. The absence of Road Glide models from the 2014 lineup also affected U.S. comparisons.
- Street motorcycle launch costs were approximately $4 million in the quarter and were expected to continue into the second quarter. Management expected shipment mix to become less favorable in the second half of 2014 as Street production increased.
- On April 16, 2014, HDFS issued $850 million of secured notes at a weighted-average interest rate of 0.93%. On April 7, 2014, the company entered into a new $675 million five-year credit facility maturing in April 2019.
- Key risks include motorcycle demand and dealer performance, adverse weather, foreign-currency and commodity fluctuations, funding costs and access, higher HDFS credit losses, regulatory requirements, product recalls, warranty and litigation exposure, labor relations, supply-chain disruptions and environmental liabilities.
- The company faces an ongoing EPA inquiry concerning motorcycle emissions, aftermarket parts and emissions-related warranties. Potential remedies cannot currently be estimated. The company also recorded a $3.4 million reserve for its estimated share of York, Pennsylvania environmental response costs, while additional costs remain uncertain.
- The company reported compliance with applicable debt covenants and stated that disclosure controls were effective at quarter-end.
Important facts for investors to verify
- Whether the expected second-quarter sales shift and Street motorcycle launch support the full-year shipment target.
- Whether HDFS retail credit losses remain elevated and whether the allowance remains adequate as the finance receivables portfolio grows.
- Renewal of the Canadian conduit facility, which was scheduled to expire June 30, 2014, and the U.S. conduit facility, scheduled to expire September 12, 2014.
- The timing and funding of the $1.713 billion of debt principal payments scheduled during the remainder of 2014.
- Actual 2014 Motorcycles operating margin, capital expenditures, tax rate and cash generation relative to guidance.
- Developments in the EPA investigation, York environmental remediation, product liability matters and any warranty or recall activity.