Harley-Davidson, Inc. — Q1 2011 Form 10-Q Summary
Business context and reporting period
Harley-Davidson operates through Motorcycles & Related Products and Financial Services. The filing covers the three months ended March 27, 2011, compared primarily with the three months ended March 28, 2010. Financial statements are unaudited. MV Agusta was sold in August 2010 and is presented as a discontinued operation.
Key financial metrics
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Total revenue | $1,224.9 million | $1,207.2 million | +1.5% |
| Motorcycles revenue | $1,063.0 million | $1,037.3 million | +2.5% |
| Financial Services revenue | $161.9 million | $169.8 million | -4.7% |
| Operating income | $193.0 million | $152.8 million | +26.3% |
| Operating margin | 15.8% | 12.7% | +3.1 pts |
| Income from continuing operations | $119.3 million | $68.7 million | +73.5% |
| Net income | $119.3 million | $33.3 million | +257.9% |
| Diluted EPS | $0.51 | $0.14 | +$0.37 |
| Cash flow from continuing operations | $(104.9) million | $200.8 million | $(305.8) million |
Motorcycle gross profit was $351.9 million, producing a 33.1% gross margin versus 36.6% in the prior-year quarter. Motorcycle operating income was $125.1 million, down 0.8%. Financial Services operating income increased 154.6% to $67.9 million, principally due to lower funding costs and improved retail credit performance.
Cash and cash equivalents were $932.5 million at March 27, 2011, and marketable securities were $115.2 million, for total cash and marketable securities of $1.05 billion. The company reported $1.24 billion of availability under credit facilities, or total liquidity of approximately $2.29 billion. Total debt was $5.68 billion, including $2.32 billion of term asset-backed securitization debt held by variable interest entities. The company remained in compliance with applicable debt covenants.
The company paid a quarterly dividend of $0.10 per share, or $23.6 million. Capital expenditures were $27.7 million. The quarter included a $200.0 million cash pension contribution, a major driver of negative operating cash flow; management stated that no additional pension contributions were required for 2011, although ongoing SERPA and postretirement healthcare contributions were expected.
Material changes versus the prior comparable period
- Worldwide retail sales increased 3.5% to 49,595 motorcycles, led by a 22.7% increase in the Europe region; U.S. retail sales declined 0.5%.
- Wholesale motorcycle shipments increased 0.3% to 53,827 units. Harley-Davidson motorcycle revenue increased 3.0%, while parts and accessories revenue increased 10.2%.
- Motorcycle gross profit declined $27.7 million because of unfavorable foreign currency and hedging effects, higher raw-material prices, and manufacturing inefficiencies associated with restructuring at York.
- Restructuring expense declined to $23.0 million from $48.2 million. The company expects $95 million to $105 million of restructuring expense in 2011 and total restructuring and impairment costs of $510 million to $525 million from 2009 through 2012.
- Financial Services interest expense fell 28.5% and provision for credit losses fell 82.4% to $5.6 million. The allowance for finance credit losses declined to $159.7 million from $192.1 million at March 28, 2010.
- Interest expense outside Financial Services declined 51.1%, primarily because the company repurchased $297.0 million of its $600.0 million senior unsecured notes in the fourth quarter of 2010.
- The prior-year quarter included a $35.4 million net loss from discontinued operations, including a $28.6 million after-tax MV Agusta impairment charge. This loss did not recur in Q1 2011.
- The effective income tax rate declined to 34.8% from 47.2%; the 2010 rate included a $13.3 million tax charge related to healthcare legislation.
Guidance, outlook, risks and unusual items
Following the March 11, 2011 earthquake and tsunami in Japan, management reduced and widened 2011 shipment guidance to 215,000 to 228,000 motorcycles from prior guidance of 221,000 to 228,000. Second-quarter shipments were expected to be 62,000 to 67,000 units. The company identified potential shortages of Japanese-sourced components, including an electronic radio component, but stated that it believed viable solutions were available.
Full-year 2011 gross margin guidance was reduced to 33.5% to 35.0% from 34.0% to 35.0%. Capital expenditures remained projected at $210 million to $230 million, including $60 million to $75 million for restructuring. Management expected operations to fund 2011 capital expenditures and reiterated an effective tax rate of approximately 35%.
Management expects annual ongoing restructuring savings of approximately $305 million to $325 million after completion. Near-term manufacturing costs may remain elevated as York and other facilities transition to more flexible operating systems; the York restructuring was expected to be largely complete in the first half of 2012.
Key risks include supply-chain disruption, consumer demand and confidence, competitive discounting and used-motorcycle pricing, dealer financial condition, access to funding, HDFS credit losses, interest and foreign-exchange rates, commodity costs, labor and restructuring execution, product recalls and warranty costs, regulatory matters, and environmental remediation. The EPA was investigating motorcycle emissions certifications, aftermarket parts and emissions-related warranty claims; potential remedies could not be estimated. The company had reserved approximately $5.4 million for its estimated share of York environmental response costs, but additional costs remained uncertain.
On April 28, 2011, after the balance-sheet date, the company and HDFS entered into a new four-year $675.0 million credit facility replacing a 364-day facility. The $600.0 million asset-backed commercial paper conduit facility was scheduled to expire in September 2011 and had no borrowings outstanding at quarter-end.
Important facts for investors to verify
- Whether Japanese supply-chain constraints affected motorcycle shipments, gross margin, production schedules or component costs after the filing date.
- Actual 2011 shipment volume and gross margin relative to the revised guidance.
- Progress, cash costs and realized savings from the York, Kansas City and Wisconsin restructuring programs.
- HDFS retail and wholesale delinquency, charge-off, allowance and finance-receivable trends.
- Renewal or replacement of the $600.0 million conduit facility before its September 2011 expiration and continued access to commercial paper and other funding.
- Potential financial exposure from the EPA investigation, York environmental remediation and product-liability matters.
- The sustainability of negative operating cash flow after the one-time $200.0 million pension contribution and the effect of increased finance-receivable originations on liquidity.