Harley-Davidson, Inc. 10-Q Summary
Business Context and Reporting Period
This filing covers the quarterly period ended September 24, 2006. Harley-Davidson, Inc. operates through two primary segments: Motorcycles & Related Products (manufacturing heavyweight motorcycles, parts, accessories, and apparel) and Financial Services (providing wholesale and retail financing and insurance). The company reported strong growth in both wholesale shipments and retail sales during the quarter.
Key Financial Metrics
| Metric | Q3 2006 | Q3 2005 | 9M 2006 | 9M 2005 |
|---|---|---|---|---|
| Net Revenue | $1,635.9 million | $1,431.2 million | $4,298.1 million | $3,999.9 million |
| Gross Profit | $652.3 million | $561.3 million | $1,661.8 million | $1,526.0 million |
| Operating Income | $484.0 million | $410.9 million | $1,217.6 million | $1,119.4 million |
| Net Income | $312.7 million | $265.0 million | $790.7 million | $729.6 million |
| Diluted EPS | $1.20 | $0.96 | $2.96 | $2.57 |
| Cash from Operations (9M) | $1,286.5 million (vs. $1,186.9 million) | |||
| Finance Debt (Total) | $996.4 million (as of Sept 24, 2006) | |||
| Cash & Marketable Securities | $952.7 million (as of Sept 24, 2006) |
Margins: Gross margin for the Motorcycles segment was 39.9% in Q3 2006 (up from 39.2% in Q3 2005) and 38.7% for the nine-month period (up from 38.2%).
Material Changes vs. Prior Period
- Revenue Growth: Net revenue increased 14.3% in Q3 and 7.5% for the nine months ended September 24, 2006. This was driven by a 10.8% increase in Harley-Davidson motorcycle shipments in Q3 and a 6.2% increase for the nine-month period.
- Profitability: Net income rose 18.0% in Q3 and 8.4% for the nine-month period. Diluted EPS grew 25.0% in Q3, aided by a reduction in weighted-average shares outstanding due to stock repurchases.
- Product Mix: Shipments of higher-priced Touring models increased as a percentage of total shipments to 37.1% in Q3 2006, up from 33.4% in the prior year, positively impacting revenue and margins.
- Financial Services: Operating income from Financial Services increased 16.0% in Q3, driven by higher interest income and securitization gains, partially offset by higher interest expenses.
- Share Repurchases: The company repurchased 17.2 million shares for $911.0 million during the first nine months of 2006. In Q3 alone, 7.36 million shares were repurchased.
Guidance, Outlook, and Risks
- Guidance Changes: The company streamlined its guidance, discontinuing annual shipment targets and growth rate guidance for Parts & Accessories and Financial Services. It will now provide quarterly shipment ranges.
- 2006 Shipment Target: The full-year 2006 wholesale motorcycle shipment target is narrowed to 349,000 to 351,000 units. Based on 256,348 units shipped through Q3, the Q4 plan is approximately 92,600 to 94,600 units.
- Earnings Outlook: The company expects to deliver earnings-per-share growth of 11% to 17% annually through 2009, driven by revenue growth, margin expansion, and free cash flow.
- Capital Expenditures: Expected annual capital expenditures for 2006 are estimated between $225 million and $250 million.
- Legal & Contingencies:
- Shareholder Litigation: Multiple consolidated class action and derivative lawsuits are pending regarding the company's April 2005 production guidance announcement. An SEC inquiry is ongoing. The company believes allegations are without merit.
- Cam Bearing Lawsuit: A long-standing class action regarding rear cam bearings is pending a decision from the Wisconsin Supreme Court following oral arguments in September 2006.
- Environmental: The company estimates its share of future remediation costs at the York, PA facility to be approximately $7.7 million, for which reserves have been established.
Investor Verification Checklist
- Verify the sustainability of the 10.8% shipment growth in Q3, particularly the high mix of Touring models, and whether this mix will normalize in Q4 as management expects.
- Monitor the outcome of the Wisconsin Supreme Court decision regarding the Cam Bearing lawsuit, which could impact warranty reserves or result in damages.
- Assess the impact of the expiration of the federal R&D tax credit on the effective tax rate, which rose to 36.0% in 2006 (vs. 35.5% in 2005), and the likelihood of retroactive reinstatement.
- Review the raw material cost trends, as surcharges increased to $34.0 million in the first nine months of 2006, with full-year costs expected to be 30% higher than 2005.
- Confirm the status of the SEC inquiry related to the 2005 production guidance and the potential financial exposure from the consolidated shareholder lawsuits.