Harley-Davidson, Inc. 2014 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2014; filed February 19, 2015. The company operates through Motorcycles & Related Products and Financial Services segments.
Business context
Harley-Davidson designs, manufactures and wholesales motorcycles, parts and accessories, general merchandise and related services through independent dealers worldwide. Harley-Davidson Financial Services provides wholesale and retail motorcycle financing and insurance-related products primarily in the United States and Canada. In 2014, the company launched seven Project Rushmore models, introduced Street 500 and Street 750 motorcycles, expanded flexible surge manufacturing and demonstrated the Project LiveWire electric motorcycle without committing to a commercial launch.
Key financial metrics
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Total revenue | $6.229 billion | $5.900 billion | +5.6% |
| Motorcycles revenue | $5.568 billion | $5.258 billion | +5.9% |
| Financial Services revenue | $660.8 million | $641.6 million | +3.0% |
| Operating income | $1.281 billion | $1.154 billion | +11.0% |
| Net income | $844.6 million | $734.0 million | +15.1% |
| Diluted EPS | $3.88 | $3.28 | +18.3% |
| Operating cash flow | $1.147 billion | $977.1 million | +17.4% |
| Capital expenditures | $232.3 million | $208.3 million | +11.5% |
| Total debt | $5.505 billion | $5.259 billion | +4.7% |
| Total equity | $2.909 billion | $3.009 billion | -3.3% |
Consolidated operating margin was approximately 20.6% and net margin was approximately 13.6%. The Motorcycles segment generated $1.003 billion of operating income, up 15.2%, implying an approximately 18.0% operating margin. Financial Services operating income declined 1.9% to $277.8 million.
- Worldwide dealer retail sales increased 2.7% to 267,999 motorcycles; U.S. retail sales rose 1.3% and international retail sales rose 5.4%.
- Wholesale motorcycle shipments increased 3.9% to 270,726 units, including approximately 9,900 Street motorcycles.
- Motorcycles gross profit increased 8.7% to $2.025 billion. Benefits from volume, pricing, product mix and manufacturing productivity were partly offset by unfavorable foreign exchange and Street launch costs.
- Financial Services provision for credit losses increased 34.9% to $80.9 million. Annual retail motorcycle loan losses rose to 1.22% from 1.09%, while the 30-day delinquency rate improved to 3.61% from 3.71%.
- Cash and cash equivalents were $906.7 million, and cash plus marketable securities totaled approximately $964.0 million. Available credit facilities totaled approximately $1.224 billion, for stated liquidity of approximately $2.188 billion.
- Dividends paid totaled $238.3 million, or $1.10 per share. Share repurchases totaled $615.6 million for 9.3 million shares.
Fourth-quarter results
| Metric | Q4 2014 | Q4 2013 |
|---|---|---|
| Motorcycles revenue | $1.031 billion | $1.032 billion |
| Motorcycles operating income | $35.9 million | $60.7 million |
| Financial Services revenue | $169.0 million | $158.3 million |
| Financial Services operating income | $62.4 million | $61.3 million |
| Net income | $74.5 million | $75.4 million |
| Diluted EPS | $0.35 | $0.34 |
Material changes versus the prior comparable period
- Profitability improved primarily because of higher motorcycle shipments, model-year pricing, favorable product mix and lower manufacturing costs.
- Foreign currency depreciation, particularly involving the euro, yen, Brazilian real and Australian dollar, reduced motorcycle revenue and gross profit.
- Financial Services earnings declined despite higher revenue because of increased retail credit-loss provisions and pressure on retail yields.
- Interest expense fell substantially because the company repaid $303 million of senior unsecured notes in February 2014 and refinanced other debt at favorable rates.
- The company issued $1.0 billion of medium-term notes in 2014, issued $850 million of asset-backed securitization debt and repaid $500 million of notes maturing in December.
- Pension and postretirement obligations deteriorated. The pension and SERPA plans moved from a $206.0 million funded position at year-end 2013 to a $77.3 million liability at year-end 2014, principally because of lower discount rates and revised mortality assumptions.
- Other comprehensive income declined by $182.3 million, primarily because of pension and postretirement actuarial losses and foreign-currency translation losses.
Guidance, outlook and management commentary
- For 2015, management expected motorcycle shipments of 282,000 to 287,000 units, representing approximately 4% to 6% growth over 2014.
- Expected 2015 Motorcycles operating margin was 18% to 19%, compared with 18% in 2014.
- Management expected modest gross-margin improvement from pricing, higher production and productivity, partly offset by unfavorable currency, higher pension expense and adverse mix from increased Street shipments.
- Financial Services operating income was expected to decline modestly because of higher credit losses, tighter net interest margins and higher borrowing costs.
- 2015 capital expenditures were estimated at $240 million to $260 million and were expected to be funded by operating cash flow. The expected effective tax rate was approximately 35.5%, excluding potential discrete items and the expired federal research and development credit.
- Management stated that the company generally had sufficient funding for 2015, but noted dependence on capital markets and expected renewal of the $600 million U.S. conduit facility and the Canadian conduit facility, both scheduled to expire in 2015.
Risks, contingencies and unusual items
- Demand is sensitive to economic conditions, discretionary spending, credit availability and weather. The company depends on independent dealers and distributors for retail execution and wholesale collections.
- HDFS faces retail and wholesale credit risk, funding and liquidity risk, interest-rate risk and potential increases in losses from sub-prime lending and lower repossession recoveries.
- Foreign-exchange volatility, commodity prices, interest rates, international operations, regulatory changes, emissions requirements, cybersecurity, supply-chain disruptions, product liability and recalls could materially affect results.
- The EPA investigation into motorcycle emissions, aftermarket parts and related warranty claims is expected to result in enforcement action. A reserve exists, but the company cannot reasonably estimate any exposure beyond the recorded reserve.
- Environmental remediation at the York, Pennsylvania facility remains ongoing. The company is responsible for 47% of covered future response costs, but cannot reasonably estimate potential additional costs beyond current reserves.
- The company reported 24 voluntary motorcycle recalls during the prior three years at an aggregate cost of $30.0 million. The 2014 warranty and recall liability was $69.3 million, including $9.8 million attributable to safety recalls.
- At year-end 2014, unrecognized tax benefits were $64.2 million and accrued interest and penalties were $25.3 million; ultimate settlement amounts could differ from recorded amounts.
- The company adopted tax presentation guidance in 2014 without material impact and was evaluating the effect of the new revenue-recognition standard required for fiscal years beginning after December 15, 2016.
Investor verification points
- Verify the sustainability of motorcycle shipment growth, particularly Street and international volumes, versus retail demand and dealer inventory.
- Assess whether the 18% to 19% Motorcycles margin outlook adequately reflects currency pressure, pension costs, product mix and launch investments.
- Monitor HDFS credit losses, delinquencies, reserve coverage, sub-prime exposure and net interest margins.
- Review debt maturities, securitization funding, conduit renewals, credit ratings and liquidity relative to HDFS funding needs.
- Quantify potential EPA enforcement, York remediation and product-liability exposures beyond currently recorded reserves.
- Evaluate the effect of pension discount rates, mortality assumptions and postretirement healthcare costs on future cash contributions and earnings.
- Confirm the effect of share repurchases and dividends on per-share earnings, leverage and available capital for business investment.