Harley-Davidson, Inc. 2012 Q3 Form 10-Q Summary
Business context and reporting period
Harley-Davidson operates through Motorcycles & Related Products and Financial Services. The filing covers the three and nine months ended September 30, 2012, compared with September 25, 2011. The filing was submitted November 8, 2012. Financial statements are unaudited.
Key financial metrics
| Metric | Q3 2012 | Q3 2011 | Change |
|---|
| Total revenue | $1.250 billion | $1.397 billion | (10.5%) |
| Operating income | $217.1 million | $242.7 million | (10.5%) |
| Net income | $134.0 million | $183.6 million | (27.0%) |
| Diluted EPS | $0.59 | $0.78 | (24.4%) |
| Net margin | 10.7% | 13.1% | Down approximately 2.4 percentage points |
|
| Metric | First nine months 2012 | First nine months 2011 | Change |
|---|
| Total revenue | $4.410 billion | $4.128 billion | +6.8% |
| Operating income | $884.1 million | $737.6 million | +19.9% |
| Net income | $553.3 million | $493.4 million | +12.1% |
| Diluted EPS | $2.40 | $2.09 | +14.8% |
| Net margin | 12.5% | 12.0% | Up approximately 0.6 percentage points |
- Q3 Motorcycles revenue was $1.089 billion, down 11.6%; operating income was $144.8 million, down 19.9%. Motorcycle gross profit was $377.9 million, implying a segment gross margin of approximately 34.7%.
- Q3 Financial Services revenue was $161.0 million, down 2.1%, while operating income increased 16.7% to $72.4 million. Lower funding costs more than offset higher credit-loss provisions.
- Nine-month worldwide motorcycle shipments increased 10.0% to 200,558 units; Q3 shipments declined 14.5% to 52,793 units.
- Nine-month worldwide independent-dealer retail sales increased 6.0%, while Q3 retail sales declined 1.3%, including a 5.2% U.S. decline and a 7.6% international increase.
- Nine-month cash flow from operating activities was $712.5 million, down from $901.6 million. Capital expenditures were $95.3 million. Net cash increased $268.2 million to $1.795 billion.
- At September 30, 2012, marketable securities were $136.4 million, providing cash and marketable securities of $1.932 billion. Reported liquidity, including available credit facilities, totaled $3.503 billion.
- Total debt was $5.874 billion, consisting primarily of $4.182 billion of corporate debt and $1.692 billion of term asset-backed securitization debt. Debt was $5.575 billion at September 25, 2011.
- Finance receivables totaled $6.029 billion before a $113.1 million allowance for credit losses. Retail loans 90 days or more past due were $19.4 million. The retail loan annualized loss rate was 0.65% for the first nine months, compared with 1.11% in the prior-year period.
- The company paid $106.6 million in dividends and repurchased $258.0 million of common stock during the first nine months. The quarterly dividend was $0.155 per share.
Material changes versus the prior comparable period
- Q3 results were affected by planned lower production and shipments during implementation of a new enterprise resource planning system at the York assembly plant. The implementation also caused approximately $11 million of temporary inefficiencies in Q3.
- Q3 Motorcycle operating income declined despite lower restructuring costs and a higher gross-margin percentage, primarily because of lower shipment volume, unfavorable product mix and ERP-related manufacturing inefficiencies.
- For the first nine months, Motorcycle operating income rose 26.0%, supported by higher shipments, improved gross margin and lower restructuring expense. Selling and administrative expense increased because of investments in growth initiatives, higher warranty and recall costs, and six additional fiscal days.
- Financial Services operating income increased 4.6% for the first nine months. Interest expense declined 17.4%, but credit-loss provisions increased to $12.8 million from $5.0 million, primarily because prior-year allowance releases were larger.
- The effective tax rate increased to 35.3% from 30.4% for the first nine months and to 35.3% from 21.5% for Q3. The 2011 periods benefited from $29.7 million of discrete tax items related to an IRS audit settlement and Wisconsin tax law changes.
- Restructuring expense was $26.8 million for the first nine months, compared with $49.0 million. The company expects combined restructuring expense of $490 million to $510 million from 2009 through 2013.
Guidance, outlook, risks and unusual items
- Management reaffirmed 2012 motorcycle shipment guidance of 245,000 to 250,000 units, including expected Q4 shipments of 44,500 to 49,500 units, down 2% to 12% from the prior year.
- Full-year 2012 gross-margin guidance remained 34.75% to 35.75%. Management expected Q4 margin to be roughly in line with the prior year, with productivity and mix benefits offset by foreign exchange and lower production.
- Management expected 2012 Financial Services operating profit to be slightly higher than 2011, an effective tax rate of approximately 35.5%, and capital expenditures of $190 million to $210 million.
- Flexible production capabilities are expected to be implemented at York in early 2013 and Kansas City in 2014. The company expects lower year-end U.S. retail inventory in 2012 and 2013.
- Foreign-currency devaluation is expected to pressure margins over the next several quarters, although hedging is expected to provide some near-term mitigation.
- New Castalloy operations in Australia are expected to cease, with supply transition complete by mid-2013 and an expected workforce reduction of approximately 200 employees.
- The $400 million medium-term note maturity in December 2012 was expected to be funded with cash on hand. The U.S. asset-backed commercial paper conduit expires September 13, 2013, and the Canadian conduit expires August 30, 2013.
- Material contingencies include an ongoing EPA investigation involving emissions certifications, aftermarket parts and emissions-related warranty claims; the potential remedy cannot currently be estimated. The company also faces environmental remediation matters at its York facility, with an estimated current share of future response costs of approximately $1.8 million, while additional costs remain uncertain.
- Management stated that disclosure controls were effective at quarter-end and that the York ERP implementation did not materially impair internal control over financial reporting.
Important facts for investors to verify
- Whether the York ERP implementation and flexible-production changes are completed on schedule and within expected costs.
- Actual Q4 shipments, production levels, dealer inventories and gross margin versus guidance.
- The sustainability of HDFS credit performance, including retail loss rates, delinquencies and allowance adequacy.
- Funding availability and refinancing of the December 2012 note maturity and 2013 conduit expirations.
- Foreign-exchange effects, hedging coverage and the effect of lower production on manufacturing absorption.
- Progress and ultimate cost of restructuring, New Castalloy closure and labor-agreement implementation.
- Developments in the EPA investigation, York environmental remediation and product-liability or recall matters.
