Harley-Davidson, Inc. 2012 Q2 Form 10-Q Summary
Business context and reporting period
Harley-Davidson operates through Motorcycles & Related Products and Financial Services. This unaudited filing covers the three and six months ended July 1, 2012, compared with the periods ended June 26, 2011. Financial statements include consolidated variable-interest entities used for asset-backed financing. The former MV Agusta business remains classified as discontinued operations.
Key financial metrics
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Total revenue | $1.730 billion | $1.506 billion | $3.159 billion | $2.731 billion |
| Operating income | $391.5 million | $301.9 million | $667.0 million | $494.9 million |
| Net income | $247.3 million | $190.6 million | $419.3 million | $309.8 million |
| Diluted EPS | $1.07 | $0.81 | $1.81 | $1.31 |
| Operating margin | 22.6% | 20.1% | 21.1% | 18.1% |
| Net margin | 14.3% | 12.7% | 13.3% | 11.3% |
| Operating cash flow | Not separately provided | Not separately provided | $288.2 million | $473.0 million |
Motorcycles revenue increased 17.1% to $1.569 billion in Q2 and 18.3% to $2.842 billion for the first six months. Motorcycle operating income increased 40.8% to $309.6 million in Q2 and 50.1% to $517.6 million for the first half. Financial Services operating income was essentially flat at $82.0 million in Q2 and declined 0.4% to $149.3 million for the first half.
At July 1, 2012, cash and cash equivalents were $1.071 billion, marketable securities were $135.8 million, and total liquidity including available credit facilities was $2.168 billion. Total debt was $5.330 billion, including $3.991 billion of corporate debt and $1.339 billion of term asset-backed securitization debt. Shareholders’ equity was $2.666 billion.
Material changes versus the prior comparable period
- Q2 net income increased 29.7%, while diluted EPS increased 32.1%, supported primarily by higher motorcycle shipments, improved gross margin and lower restructuring expense.
- Worldwide motorcycle shipments increased 25.0% in Q2 to 83,502 units and 22.5% for the first half to 147,765 units. Worldwide independent-dealer retail sales increased 2.8% in Q2 and 9.3% for the first half.
- Motorcycle gross profit increased 20.4% in Q2 and 24.4% for the first half. Benefits came from volume, pricing, restructuring savings, productivity and lower raw-material costs; foreign currency and product mix were unfavorable factors.
- Financial Services revenue declined 3.2% in Q2 and 3.3% for the first half because of lower interest income from a declining retail finance portfolio. Lower funding costs largely offset the revenue decline.
- Operating cash flow fell to $288.2 million from $473.0 million, primarily due to increased HDFS wholesale lending activity, working-capital changes and pension funding. The company made a voluntary $200 million pension contribution during the first half.
- Cash declined $455.5 million during the first half, compared with a $48.5 million decline in the prior-year period. Financing outflows included $172.7 million of share repurchases, $71.6 million of dividends and net debt-related outflows.
- The finance-receivables allowance declined to $114.2 million from $144.4 million at June 26, 2011. Annualized retail loan losses improved to 0.58% from 1.06%, and the 30-day delinquency rate improved to 2.68% from 3.53%.
- Restructuring expense declined to $6.2 million in Q2 and $17.7 million for the first half, compared with $13.6 million and $36.6 million, respectively, in the prior-year periods.
Guidance, outlook, risks and unusual items
- Management reaffirmed 2012 worldwide motorcycle shipment guidance of 245,000 to 250,000 units, including expected third-quarter shipments of 51,000 to 56,000 units.
- Third-quarter shipments and production were expected to decline year over year because of planned downtime related to the York enterprise resource planning implementation. Fourth-quarter production was also expected to decline because of flexible-production implementation, fewer fiscal-quarter days and elevated prior-year production.
- Full-year 2012 gross-margin guidance remained 34.75% to 35.75%; the company expected unfavorable currency effects and lower gross margins in the third and fourth quarters.
- Full-year effective tax-rate guidance remained approximately 35.5%, and capital-expenditure guidance remained $190 million to $210 million, including approximately $35 million related to restructuring.
- Management expected 2012 Financial Services operating income to decline from 2011 because of a contracting retail receivables portfolio, tighter prime-lending margins and fewer allowance releases, while remaining profitable.
- Combined restructuring expense guidance for 2009 through 2013 was revised to $490 million to $510 million, including $40 million to $50 million expected in 2012. The company expected cumulative annual savings of $315 million to $335 million after completion.
- The $600 million asset-backed commercial-paper conduit facility was scheduled to expire September 7, 2012; the company intended to renew it. In July 2012, after the reporting date, the company issued $675.3 million of secured notes through a term asset-backed securitization.
- Material uncertainties include economic and consumer-demand conditions, especially in Europe; foreign exchange, interest-rate and commodity-price volatility; dealer financial capacity; HDFS credit and funding risk; supply-chain and production disruptions; ERP implementation risk; labor and restructuring execution; product recalls and warranty costs; and environmental and product-liability matters.
- The EPA continued to investigate motorcycle emissions certifications, aftermarket parts and emissions-related warranty claims. The company stated that any potential remedy could include fines or other relief, but the impact could not be reasonably estimated.
- The company estimated its share of future York environmental response costs at approximately $2.3 million, while additional costs remained uncertain. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting.
Investor verification priorities
- Verify whether shipment growth reflects sustainable retail demand or temporary inventory and calendar effects associated with the York ERP implementation and model-year transition.
- Reconcile the $2.168 billion liquidity figure with debt maturities, restricted finance receivables and the September 2012 conduit-facility expiration.
- Monitor motorcycle gross margin against the 34.75% to 35.75% full-year target, particularly currency, production-volume and restructuring effects.
- Assess HDFS portfolio contraction, allowance releases, delinquencies, charge-offs and funding costs.
- Track restructuring spending, workforce reductions, New Castalloy closure activities and projected savings against revised guidance.
- Review the EPA investigation, York environmental remediation, product recalls and warranty reserves for potential unrecorded exposure.
- Confirm the effect of the July 2012 $675.3 million securitization and the company’s refinancing of near-term debt obligations.