Harley-Davidson, Inc. — Q1 2015 Form 10-Q Summary
Business context and reporting period
Unaudited results for the three months ended March 29, 2015, compared with March 30, 2014. Harley-Davidson operates through Motorcycles & Related Products and Financial Services, which provides retail and wholesale financing and related programs.
Key financial metrics
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Total revenue | $1.673 billion | $1.726 billion | (3.1%) |
| Operating income | $410.1 million | $410.9 million | (0.2%) |
| Net income | $269.9 million | $265.9 million | 1.5% |
| Diluted EPS | $1.27 | $1.21 | 5.0% |
| Operating margin | 24.5% | 23.8% | +0.7 pts |
| Net margin | 16.1% | 15.4% | +0.7 pts |
| Operating cash flow | $174.7 million | $203.6 million | (14.2%) |
- Motorcycles revenue declined 3.9% to $1.511 billion; segment operating income declined 0.6% to $345.5 million. Gross profit was $590.3 million, representing an approximately 39.1% gross margin.
- Financial Services revenue increased 5.2% to $162.4 million and operating income increased 2.3% to $64.7 million. The provision for credit losses rose 29.1% to $26.2 million.
- Worldwide Harley-Davidson motorcycle retail sales declined 1.3% to 56,661 units; wholesale shipments declined 1.4% to 79,589 units.
- Cash and cash equivalents were $1.169 billion, and current marketable securities were $57.2 million at March 29, 2015. Total reported liquidity, including credit availability, was approximately $3.109 billion.
- Total debt was $5.928 billion, including $1.771 billion of term asset-backed securitization debt, $3.933 billion of medium-term notes, $154.0 million under the Canadian conduit and $70.3 million of unsecured commercial paper.
- Finance receivables, net, were $6.849 billion, with an allowance for credit losses of $132.8 million. Retail annualized losses were 1.56%, compared with 1.33% in the prior-year quarter.
- The company repurchased $192.7 million of common stock and paid $65.5 million of dividends during the quarter. The quarterly dividend was $0.310 per share.
Material changes versus the prior comparable period
- Motorcycle revenue was pressured by lower shipments, unfavorable foreign exchange and lower Parts & Accessories sales. Model-year pricing, productivity gains and lower manufacturing costs substantially offset these effects.
- Key currencies, including the euro, yen, Brazilian real and Australian dollar, were weaker on a weighted-average basis, reducing motorcycle revenue by an estimated $53.7 million and gross profit by approximately $39.5 million.
- Financial Services benefited from higher average receivables and other income, but faced lower yields, higher credit losses and increased reserve rates.
- Net income increased despite lower operating income because interest expense declined following the 2014 repayment of $303 million of senior unsecured notes and the effective tax rate decreased to 34.4% from 35.0%.
- Debt increased year over year as the company issued $600 million of medium-term notes and $700 million of secured notes through a term asset-backed securitization. Unsecured commercial paper declined from $974.2 million to $70.3 million.
- Operating cash flow declined primarily because of higher working capital needs and greater cash outflows related to wholesale finance receivables.
Guidance, outlook, risks and unusual items
- Management revised 2015 worldwide motorcycle shipment guidance to 276,000–281,000 units, versus prior guidance of 282,000–287,000 units and 2014 shipments of approximately 268,000 units.
- Motorcycles segment operating margin guidance remained 18.0%–19.0%; gross margin was expected to be flat to modestly higher than 2014. Selling, administrative and engineering expense was expected to be flat to down.
- Management expected Financial Services operating income to decline modestly in 2015 because of higher credit losses, tighter net interest margins, competition and rising borrowing costs.
- 2015 capital expenditure guidance was $240 million–$260 million, expected to be funded by operating cash flow. The full-year effective tax rate was expected to be approximately 35.5%.
- Management expected second-quarter 2015 motorcycle gross margin to be approximately 2.5 percentage points below the prior-year quarter, primarily due to currency, lower production and unfavorable product mix.
- The company entered an agreement to acquire direct Canadian distribution rights, expected to close around August 4, 2015. Consideration includes $50 million in cash, approximately $15 million for inventory and receivables, assumed liabilities and other obligations. Management expected approximately $0.04 of 2015 EPS dilution from transition costs and expected the model to be accretive beginning in 2016.
- Material risks include aggressive competitor discounting, foreign currency volatility, weather, weaker international economies, dealer and distributor financial condition, higher HDFS credit losses, funding and interest-rate risk, product recalls and warranty costs, environmental matters and the execution of the Canada distribution transition.
- The EPA investigation regarding emissions-related matters could result in fines or other relief. The company has a reserve but stated that the ultimate loss could materially differ from the reserve and that additional remedies cannot currently be estimated.
- The company also has ongoing environmental obligations related to its York, Pennsylvania facility. The company is responsible for 47% of specified future response costs, but cannot reasonably estimate any additional costs beyond its current reserve.
- The U.S. asset-backed commercial paper facility expires October 30, 2015, and the Canadian facility expires June 30, 2015; management expected to renew both facilities.
Important facts for investors to verify
- Whether aggressive competitive discounting and foreign exchange pressure continue to reduce retail demand, market share and motorcycle margins.
- Actual 2015 motorcycle shipments versus the revised 276,000–281,000 guidance range and the effect of production discipline on dealer inventories.
- Trends in HDFS retail losses, delinquencies, sub-prime exposure, reserve rates and funding costs.
- Renewal of the Canadian and U.S. conduit facilities and the company’s ability to refinance upcoming debt maturities.
- Closing costs, assumed liabilities, revenue impact and earnings contribution from the Canada Distributor Transaction.
- Final outcomes and potential incremental costs associated with the EPA investigation, York environmental remediation and product liability matters.