Harley-Davidson, Inc. 2012 Form 10-K Summary
Business context and reporting period
Harley-Davidson filed its annual report for the fiscal year ended December 31, 2012, filed February 22, 2013. The company operates through Motorcycles & Related Products and Financial Services. The motorcycle segment designs, manufactures and wholesales heavyweight Harley-Davidson motorcycles, parts, accessories and merchandise through independent dealers. Harley-Davidson Financial Services provides dealer and retail financing and insurance-related products, primarily in the United States and Canada.
The filing also provides unaudited fourth-quarter comparative data. Wholesale motorcycle shipments declined year over year in the fourth quarter as the company prepared to introduce seasonal surge manufacturing at its York facility in early 2013.
Financial performance and key metrics
| Metric | 2012 | 2011 | Change |
|---|---|---|---|
| Total revenue | $5.581 billion | $5.312 billion | 5.1% increase |
| Motorcycles segment revenue | $4.943 billion | $4.662 billion | 6.0% increase |
| Financial Services revenue | $637.9 million | $649.4 million | 1.8% decrease |
| Operating income | $1.000 billion | $830.0 million | 20.5% increase |
| Income from continuing operations | $623.9 million | $548.1 million | 13.8% increase |
| Net income | $623.9 million | $599.1 million | 4.1% increase |
| Diluted EPS from continuing operations | $2.72 | $2.33 | 16.7% increase |
| Cash dividends per share | $0.620 | $0.475 | 30.5% increase |
Motorcycles segment operating income rose 27.5% to $715.5 million, driven by 6.2% higher wholesale shipments, pricing, lower manufacturing costs and reduced restructuring expense. Motorcycles gross profit was $1.720 billion, implying a segment gross margin of approximately 34.8%, versus approximately 33.4% in 2011. Financial Services operating income increased 5.9% to $284.7 million, primarily because of lower interest expense.
- Worldwide dealer retail sales increased 6.2% to 249,849 motorcycles; U.S. retail sales rose 6.6%, while international retail sales rose 5.6%.
- Wholesale motorcycle shipments increased 6.2% to 247,625 units, including 160,477 U.S. units and 87,148 international units.
- U.S. heavyweight market share increased to 57.2% from 55.7% in 2011 based on registration data. European registrations declined 8.3%, and Harley-Davidson registrations in Europe declined 5.9%.
- HDFS retail motorcycle loan losses declined to 0.79% from 1.20%; the year-end 30-day delinquency rate increased modestly to 3.94% from 3.85%.
- The HDFS allowance for credit losses declined to $107.7 million from $125.4 million, while finance receivables totaled $5.782 billion, compared with $5.787 billion in 2011.
Cash flow, liquidity, debt and capital allocation
| Metric | 2012 | 2011 |
|---|---|---|
| Operating cash flow | $801.5 million | $885.3 million |
| Capital expenditures | $189.0 million | $189.0 million |
| Cash used in investing activities | $261.3 million | $63.5 million |
| Cash used in financing activities | $990.1 million | $308.9 million |
| Year-end cash and cash equivalents | $1.068 billion | $1.527 billion |
| Total debt | $5.103 billion | $5.723 billion |
| Total equity | $2.558 billion | $2.420 billion |
Including marketable securities and available credit facilities, reported liquidity was approximately $2.885 billion at year-end: $1.204 billion of cash and marketable securities and $1.681 billion of facility availability. The company reported positive credit outlooks from Moody’s and Standard & Poor’s; Fitch’s outlook was stable. The company remained in compliance with applicable debt covenants.
Cash returned to shareholders included $141.7 million of dividends and $311.6 million of share repurchases. The company repurchased 6.7 million shares during 2012, and 14.5 million shares remained available under the 2007 repurchase authorization.
Material changes versus the prior comparable period
- Revenue and operating income increased, led by higher motorcycle volume, pricing, manufacturing savings and lower restructuring costs.
- Net income growth was limited relative to continuing-operations income because 2011 included a $51.0 million tax benefit from discontinued operations related to the MV Agusta divestiture. There was no discontinued-operation income in 2012.
- Restructuring expense declined to $28.5 million from $68.0 million. Cumulative restructuring expense since 2009 was approximately $495 million expected through 2013, with anticipated ongoing annual savings of approximately $320 million upon completion.
- Total debt declined by $620.0 million, although the debt mix changed materially as HDFS issued medium-term notes, repaid securitization debt and increased Canadian asset-backed conduit borrowings.
- Cash declined by $458.8 million, principally reflecting financing outflows, including debt repayments, dividends and share repurchases.
- Pension and postretirement healthcare obligations increased, and accumulated other comprehensive loss reached $607.7 million. The company contributed $244.4 million to pension and postretirement plans in 2012, including a $200.0 million voluntary pension contribution.
Guidance, outlook, commentary and risks
For 2013, management expected to ship 259,000 to 264,000 motorcycles, including 71,000 to 76,000 in the first quarter. Full-year gross margin guidance was 35.25% to 36.25%, with expected benefits from restructuring savings, improved production efficiency, higher production volumes, pricing and mix, partly offset by currency, pension and material-cost pressures. Capital expenditures were expected to be $200 million to $220 million, funded by operating cash flow, and the effective tax rate was expected to be approximately 34.8%.
Management expected Financial Services operating income to be modestly lower in 2013 because a $17 million credit-loss allowance release in 2012 was not expected to recur. Credit losses were expected to rise modestly as HDFS expanded prudently structured near-prime and sub-prime lending and as recoveries normalized.
- Key execution issue: seasonal surge manufacturing at York began in early 2013; similar capabilities were planned for Kansas City in 2014. Failure to align production, dealer inventory and seasonal demand could affect sales and margins.
- International growth remains exposed to weak European demand, foreign exchange, tariffs, regulation, political and economic instability, and distribution execution.
- HDFS depends on access to capital markets and is exposed to funding costs, credit ratings, consumer delinquencies, dealer credit quality and motorcycle recovery values. The U.S. and Canadian conduit facilities were scheduled to expire in September and August 2013, respectively, with management expecting renewal.
- Material contingencies include an EPA investigation concerning motorcycle emissions certifications, aftermarket parts and emissions-related warranty claims. The company could not reasonably estimate any potential remedy.
- The company reserved approximately $3.2 million for its share of future York environmental remediation costs, but could not estimate additional costs that may arise from the ongoing investigation.
- Other risks include product liability, recalls and warranty claims, labor relations, supplier concentration, pension and healthcare costs, commodity and interest-rate exposure, cybersecurity, regulatory changes and maintaining brand strength.
Important facts for investors to verify
- Whether 2013 shipment growth and the York/Kansas City surge-production strategy improved availability without creating excess dealer inventory.
- Whether motorcycle gross-margin guidance was achieved after currency, pension and material-cost pressures.
- HDFS credit losses, delinquency trends, near-prime and sub-prime exposure, allowance adequacy and funding access.
- Debt maturities, renewal of the 2013 conduit facilities, credit ratings and compliance with interest-coverage and other covenants.
- Cash generation after pension contributions, capital expenditures, dividends and share repurchases.
- Progress and final costs associated with restructuring, New Castalloy closure, the EPA inquiry and York environmental remediation.
- The filing reports effective internal controls and an unqualified audit opinion from Ernst & Young; investors should nevertheless review the audited notes and subsequent filings for developments after December 31, 2012.