Harley-Davidson, Inc. Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2013; filed August 8, 2013. Financial statements are unaudited. The company operates through Motorcycles & Related Products and Financial Services, principally HDFS.
Financial performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Total revenue | $1.794 billion | $1.730 billion | $3.366 billion | $3.159 billion |
| Operating income | $431.8 million | $391.5 million | $780.1 million | $667.0 million |
| Net income | $271.7 million | $247.3 million | $495.9 million | $419.3 million |
| Diluted EPS | $1.21 | $1.07 | $2.20 | $1.81 |
| Operating margin | 24.1% | 22.6% | 23.2% | 21.1% |
| Net margin | 15.1% | 14.3% | 14.7% | 13.3% |
- Motorcycles revenue increased 4.0% in Q2 and 7.2% year to date. Motorcycle operating income rose 15.5% in Q2 and 22.6% year to date, supported by higher shipments, pricing, product mix, manufacturing efficiencies and lower restructuring costs.
- Financial Services revenue increased 1.4% in Q2 and 0.9% year to date, but operating income declined 9.5% and 2.4%, respectively. Lower funding costs were more than offset by higher credit-loss provisions and the absence of prior-year allowance releases.
- Worldwide dealer retail sales increased 5.2% in Q2 but declined 0.6% for the first half. Six-month U.S. retail sales fell 2.7%, while international sales increased 3.3%. Wholesale motorcycle shipments rose 1.3% in Q2 and 8.2% year to date.
- Six-month cash flow from operating activities was $389.7 million, compared with $288.2 million in the prior-year period. Investing cash use was $289.5 million, including $66.6 million of capital expenditures and net finance-receivable investment. Financing activities provided $150.5 million.
Balance sheet, debt and liquidity
- Cash and cash equivalents were $1.301 billion and marketable securities were $133.6 million at June 30, 2013, for total immediately available investments of $1.434 billion. Total liquidity, including credit-facility availability, was reported at $2.873 billion.
- Total debt was $5.536 billion, compared with $5.330 billion at July 1, 2012. Debt included $525.7 million of unsecured commercial paper, $2.859 billion of medium-term notes, $303.0 million of senior unsecured notes, $175.2 million under the Canadian conduit and $1.674 billion of term asset-backed securitization debt.
- Finance receivables, net, totaled $6.226 billion, including $5.248 billion of retail and $1.089 billion of wholesale receivables. The allowance for credit losses was $111.3 million.
- The company repurchased $208.7 million of common stock and paid $94.2 million of dividends during the first six months. The quarterly dividend was $0.210 per share, up from $0.155 in the prior-year quarter.
- HDFS and the company were in compliance with applicable debt covenants at June 30, 2013. The company maintained $824.3 million of global credit-facility availability, a $600 million U.S. asset-backed conduit commitment and $14.9 million of Canadian conduit availability.
Material changes versus the prior comparable periods
- Q2 net income increased 9.9%, while diluted EPS increased 13.1%, benefiting from higher earnings and a reduction in diluted weighted-average shares from 230.9 million to 224.5 million.
- First-half net income increased 18.3% and operating income increased 17.0%. The effective tax rate declined to 34.8% from 35.3%, partly because the U.S. federal research and development tax credit was reinstated.
- Financial Services credit-loss provision increased to $24.4 million year to date from $3.8 million. Annualized retail-loan losses increased to 0.80% from 0.58%, and the 30-day delinquency rate increased to 2.75% from 2.68%.
- The company issued $650 million of secured notes through a term asset-backed securitization in Q2 and repurchased $23 million of 6.8% medium-term notes, recognizing a $4.9 million debt-extinguishment loss.
- Restructuring expense was a $2.4 million benefit in the first half of 2013 versus $17.7 million of expense in the prior-year period. The New Castalloy plan was modified to retain limited operations; approximately 100 employees will remain and approximately 100 will be reduced.
Guidance, outlook and risks
- Management reaffirmed 2013 worldwide motorcycle shipment guidance of 259,000 to 264,000 units, including expected Q3 shipments of 51,000 to 56,000 units.
- Management reaffirmed a 2013 gross-margin outlook of 35.25% to 36.25%, an effective tax rate of approximately 34.8% and capital expenditures of $200 million to $220 million.
- Financial Services operating income is expected to be modestly below 2012 because prior-year credit-loss allowance releases are not expected to recur, competition is increasing and credit losses may rise. Higher benchmark interest rates may compress HDFS margins over time.
- Management cited improved product availability, the model-year 2014 launch and favorable prior-year comparisons as second-half benefits, but noted that weather-related Q2 sales weakness may not be fully recovered and could pressure the high end of shipment guidance.
- Key risks include weak U.S. and European economic conditions, foreign-currency volatility, rising interest rates, consumer and dealer credit quality, funding-market access, competition, product recalls and warranty costs, labor and restructuring execution, supply-chain disruption and regulatory or environmental matters.
- The SEC is investigating emissions-related matters, including certificates of conformity, aftermarket parts and emissions-related warranty claims. Potential remedies cannot currently be estimated.
- The company has a $3.4 million reserve for its estimated share of York, Pennsylvania environmental response costs, but additional costs remain uncertain. Product-liability claims are also ongoing; management believes accruals and insurance are adequate.
Most important facts to verify
- Whether retail demand and motorcycle shipments support the 259,000-to-264,000-unit 2013 guidance, particularly after weather-related Q2 weakness.
- Whether HDFS credit losses, delinquencies and near-prime/sub-prime exposure continue to increase.
- Renewal of the $600 million U.S. conduit facility, which was scheduled to expire September 13, 2013, and the Canadian conduit scheduled to expire June 30, 2014.
- Execution and final cost of the restructuring plans, including the revised approximately $485 million cumulative estimate and expected completion by year-end 2013.
- Potential financial or operational effects from the EPA emissions inquiry, York environmental remediation and product-liability matters.
- Impact of currency devaluation, rising interest rates and funding-market conditions on motorcycle margins and HDFS profitability.