Harley-Davidson, Inc. 10-Q Summary
Business Context and Reporting Period
This report covers the quarterly period ended July 1, 2007, and the six-month period ended on the same date. Harley-Davidson, Inc. operates two primary segments: Motorcycles & Related Products (manufacturing heavyweight motorcycles, parts, and accessories) and Financial Services (providing wholesale and retail financing). The company is a large accelerated filer with 257.5 million shares of common stock outstanding as of July 30, 2007.
Key Financial Metrics
Revenue and Profit (Six Months Ended July 1, 2007):
- Net Revenue: $2.80 billion (up 5.1% year-over-year).
- Net Income: $482.8 million (up 1.0% year-over-year).
- Diluted Earnings Per Share (EPS): $1.89 (up 6.8% year-over-year).
- Motorcycle Gross Margin: 36.7% (down from 37.9% in the prior year period).
- Operating Income: $734.4 million (up 0.1% year-over-year).
Cash Flow and Liquidity:
- Cash and Cash Equivalents: $416.1 million (up from $238.4 million at year-end 2006).
- Net Cash Provided by Operating Activities: $1.06 billion (up from $825.6 million in the prior year period).
- Capital Expenditures: $86.0 million for the six-month period.
- Share Repurchases: $491.1 million used to repurchase 7.6 million shares.
- Dividends Paid: $116.7 million ($0.46 per share).
Debt and Financing:
- Total Finance Debt: $1.18 billion (comprising commercial paper, credit facilities, medium-term notes, and senior subordinated debt).
- Current Ratio: Approximately 2.8x (Current Assets $3.05B / Current Liabilities $1.08B).
Material Changes vs. Prior Period
Revenue Growth Drivers: Second-quarter net revenue increased 17.7% to $1.62 billion, driven by a 19.2% increase in Harley-Davidson motorcycle shipments (95,117 units). International shipments grew 24.9%, while domestic shipments grew 17.1%. Revenue was also supported by wholesale price increases and favorable foreign currency exchange rates.
Margin Compression: Despite revenue growth, gross margins declined slightly. The first-half gross margin of 36.7% was negatively impacted by a three-week strike at the York, Pennsylvania assembly plant, higher raw material surcharges, and increased sales incentive costs. These factors offset benefits from price increases and currency fluctuations.
Financial Services Performance: Operating income from Financial Services rose 15.1% to $124.1 million for the six-month period. This was driven by higher interest income due to increased receivables and lending rates. However, the segment recorded a $3.5 million impairment charge on retained securitization interests due to higher anticipated credit losses.
Guidance, Outlook, and Risks
Outlook and Guidance:
- 2007 EPS Growth: Management expects annual earnings-per-share growth for 2007 to be in the range of 4% to 6%, lower than previous expectations due to U.S. retail sales underperformance and strike-related costs.
- 2008-2009 EPS Growth: Expected to return to a range of 11% to 17%.
- Shipments: Third-quarter 2007 shipments are anticipated to be between 91,000 and 95,000 units. The company expects worldwide retail sales growth for the full year 2007, with international growth outpacing the U.S. market.
- Capital Expenditures: Estimated at $300 million to $325 million for the full year 2007, funded by internally generated cash.
Risks and Contingencies:
- Legal Proceedings: The company faces consolidated shareholder class action lawsuits regarding 2005 production announcements and an ERISA class action. The SEC investigation into these matters was terminated in June 2007 with no enforcement action recommended. A security breach lawsuit regarding a lost laptop containing customer data is pending.
- Environmental: Ongoing remediation at the York, PA facility is estimated to cost the company $7.7 million, for which reserves have been established.
- Market Risks: Exposure to fluctuations in foreign currency exchange rates, interest rates, and commodity prices. Credit quality risks in the financial services portfolio, with annualized losses on managed retail loans rising to 1.63% in the first half of 2007.
Investor Verification Checklist
- Verify the impact of the York, PA strike on full-year operating margins and production schedules.
- Monitor U.S. retail sales trends, which declined 5.7% in the first half of 2007, against the company's expectation of second-half recovery.
- Review the status of the shareholder class action and ERISA lawsuits, specifically the outcome of motions to dismiss.
- Assess the credit quality of the Financial Services portfolio, noting the increase in annualized losses and the $3.5 million impairment charge.
- Confirm the execution of the share repurchase program and the remaining authorization under the October 2006 plan (15.2 million shares remaining).