Harley-Davidson, Inc. — 2011 Form 10-K Summary
Business context and reporting period
Annual report for the fiscal year ended December 31, 2011, filed February 23, 2012. Harley-Davidson operates through two segments: Motorcycles & Related Products, which designs, manufactures and wholesales heavyweight motorcycles and related products, and Financial Services, which provides dealer and retail financing, insurance and related products primarily in the United States and Canada.
The company exited the Buell product line and completed the sale of MV Agusta in 2010. MV Agusta is presented as a discontinued operation. The filing includes fourth-quarter supplementary data, but the primary reporting period is the full year 2011.
Financial performance and key metrics
| Metric | 2011 | 2010 | Change |
|---|---|---|---|
| Total revenue | $5.312 billion | $4.859 billion | +9.3% |
| Motorcycles segment revenue | $4.662 billion | $4.177 billion | +11.6% |
| Financial Services revenue | $649.4 million | $682.7 million | -4.9% |
| Operating income | $830.0 million | $560.6 million | +48.0% |
| Income from continuing operations | $548.1 million | $259.7 million | +111.1% |
| Net income | $599.1 million | $146.5 million | +308.8% |
| Diluted EPS | $2.55 | $0.62 | +311.3% |
| Operating cash flow from continuing operations | $885.3 million | $1.163 billion | -23.9% |
| Total assets | $9.674 billion | $9.431 billion | +2.6% |
| Total debt | $5.723 billion | $5.752 billion | -0.5% |
| Total shareholders' equity | $2.420 billion | $2.207 billion | +9.7% |
Motorcycles operating income increased to $561.2 million from $378.8 million. Wholesale Harley-Davidson motorcycle shipments rose 10.7% to 233,117 units, while worldwide independent-dealer retail sales rose 5.9% to 235,188 units. Motorcycle gross profit was $1.556 billion, implying a segment gross margin of approximately 33.4%, compared with approximately 34.2% in 2010. Higher volume, pricing, favorable currency and mix were partly offset by higher raw-material and fuel costs and restructuring-related inefficiencies.
Financial Services operating income increased 47.8% to $268.8 million despite lower revenue. The principal drivers were improved credit performance and lower interest expense. Annual losses on retail motorcycle loans declined to 1.20% from 2.11%, and the 30-day delinquency rate declined to 3.85% from 5.07%. The provision for credit losses fell to $17.0 million from $93.1 million.
Liquidity at December 31, 2011 included $1.527 billion of cash and cash equivalents, $153.4 million of marketable securities and $915.9 million of availability under global credit facilities and an asset-backed commercial paper conduit facility, for total reported liquidity of approximately $2.596 billion. The company paid $111.0 million of dividends and repurchased $224.5 million of common stock during 2011.
Material changes versus the prior comparable period
- Profitability improved substantially, reflecting higher motorcycle shipments, lower restructuring expense, stronger Financial Services credit performance and the absence of the $85.2 million debt-extinguishment loss recorded in 2010.
- Motorcycles segment restructuring expense declined to $68.0 million from $163.5 million, although temporary manufacturing inefficiencies increased to approximately $32 million from $9 million.
- Financial Services revenue decreased because of lower average finance receivables, but interest expense and credit-loss provisions declined more rapidly, producing higher operating income.
- Operating cash flow decreased primarily because of a $200.0 million voluntary pension contribution, higher finance-receivable originations, increased inventory and working-capital needs.
- Inventory increased to $418.0 million from $326.4 million, partly because the company built approximately 7,000 incremental motorcycles before the planned York enterprise-resource-planning system implementation.
- The company repurchased 6.2 million shares during 2011 at a weighted-average price of approximately $36 per share. Share authorizations remaining at year-end totaled 18.6 million shares.
- Effective January 1, 2010, the company consolidated formerly off-balance-sheet securitization entities. Consequently, 2010 and 2011 financial statements are not fully comparable with periods before 2010, particularly for Financial Services assets, debt, revenue and cash-flow classification.
Guidance, outlook, commentary and unusual items
- Management expected 2012 Harley-Davidson motorcycle shipments of 240,000 to 245,000 units, including 58,000 to 63,000 units in the first quarter.
- 2012 gross-margin guidance was 34.75% to 35.75%; capital expenditures were expected to be $190 million to $210 million, including approximately $25 million for restructuring; and the effective tax rate for continuing operations was expected to be approximately 35.5%.
- Management expected 2012 Financial Services operating income to decline from 2011 but remain positive, primarily because approximately $40 million of 2011 allowance releases were not expected to recur and the retail loan portfolio was contracting.
- Restructuring costs from plans initiated since 2009 were revised to $500 million to $520 million through 2013, with expected ongoing annual savings of approximately $315 million to $335 million after completion.
- The company decided to close New Castalloy in Australia and outsource wheel and wheel-hub production by mid-2013, reducing the workforce by approximately 200 employees. The company expected approximately $30 million of related charges through 2012.
- Key execution items include new labor agreements in Wisconsin and Kansas City, completion of manufacturing restructuring, implementation of a new York ERP system and continued international dealer expansion.
- Unusual 2011 items included a $51.0 million discontinued-operation tax benefit related to the completed MV Agusta tax resolution and a $9.6 million Financial Services loss on debt extinguishment.
- The filing identifies material risks from discretionary consumer demand, economic and credit conditions, dealer financial health, HDFS funding and credit losses, restructuring execution, labor relations, supply-chain disruption, foreign exchange, commodity and interest-rate volatility, regulatory changes, recalls, product liability, cybersecurity and pension or healthcare obligations.
- The company had a $3.9 million reserve for its estimated share of York environmental remediation costs, but could not reasonably estimate potential additional costs. An EPA investigation could result in fines or other remedies, although the amount was not estimable at filing.
Most important facts for an investor to verify
- Whether 2012 motorcycle shipment guidance, gross-margin guidance and capital-spending plans were achieved.
- Whether restructuring savings materialized without additional production disruption, labor costs or charges.
- Whether Financial Services credit losses, delinquencies, allowance releases and portfolio contraction developed as management expected.
- The availability, maturity profile and refinancing requirements of the $5.723 billion debt balance, including asset-backed securitization debt and commercial paper.
- The effect of pension and postretirement obligations, including the additional $200 million pension contribution made in January 2012.
- The outcome and potential cost of the EPA emissions inquiry, York environmental remediation and product-liability matters.
- The comparability effects of consolidating securitization entities beginning in 2010 when assessing trends in Financial Services revenue, assets, debt and cash flow.
- The sustainability of 2011 earnings in light of the $51.0 million discontinued-operation tax benefit and approximately $40 million of Financial Services allowance releases.