Harley-Davidson, Inc. 2019 Q3 Form 10-Q Summary
Reporting period: Quarter and nine months ended September 29, 2019, compared with September 30, 2018. The interim financial statements are unaudited. Harley-Davidson operates through Motorcycles and Related Products and Financial Services segments.
Financial performance and position
| Metric | Q3 2019 | Q3 2018 | Change |
|---|
| Revenue | $1,272.5 million | $1,315.7 million | Down 3.3% |
| Operating income | $119.8 million | $149.4 million | Down 19.8% |
| Net income | $86.6 million | $113.9 million | Down 24.0% |
| Diluted EPS | $0.55 | $0.68 | Down 19.1% |
| Operating margin | 9.4% | 11.4% | Down approximately 2.0 points |
| Net margin | 6.8% | 8.7% | Down approximately 1.9 points |
| Metric | Nine months 2019 | Nine months 2018 | Change |
|---|
| Revenue | $4,289.5 million | $4,571.0 million | Down 6.2% |
| Operating income | $543.2 million | $709.8 million | Down 23.5% |
| Net income | $410.1 million | $531.0 million | Down 22.8% |
| Diluted EPS | $2.58 | $3.17 | Down 18.6% |
| Operating margin | 12.7% | 15.5% | Down approximately 2.9 points |
| Net margin | 9.6% | 11.6% | Down approximately 2.0 points |
- Motorcycles segment: Q3 revenue declined 4.9% to $1,068.9 million and operating income declined 28.5% to $47.0 million. The operating margin fell to 4.4% from 5.8%. Nine-month revenue declined 7.8% to $3,698.6 million and operating income declined 30.3% to $336.1 million.
- Financial Services: Q3 revenue increased 6.2% to $203.6 million, but operating income declined 13.0% to $72.9 million. Higher funding costs, credit-loss provisions and operating expenses more than offset higher interest income. Nine-month operating income declined 9.1% to $207.1 million.
- Motorcycle demand: Worldwide retail sales declined 1.2% in Q3 and 4.9% for the first nine months. U.S. retail sales declined 3.6% in Q3 and 5.6% year to date, while international retail sales increased 2.7% in Q3 but declined 3.9% year to date.
- Shipments: Motorcycle shipments declined 5.8% in Q3 to 45,837 units and 6.3% for the first nine months to 173,485 units.
- Cash flow: Nine-month operating cash flow was $848.6 million, down from $1,122.6 million. Capital expenditures were $121.2 million. Net cash used in investing activities was $551.5 million and net cash used in financing activities was $603.7 million.
- Liquidity: September 29 cash and cash equivalents were $862.4 million; cash, cash equivalents and restricted cash totaled $949.1 million. Reported cash and availability under credit and conduit facilities totaled $2.227 billion, including $1.365 billion of facility availability.
- Debt: Total reported debt was approximately $7.400 billion, consisting of unsecured commercial paper, medium-term notes, senior unsecured notes and asset-backed financing. Contractual principal payments totaled $7.420 billion, with $1.101 billion due during the remainder of 2019.
- Finance receivables: Net finance receivables were $7.516 billion, supported by an allowance for credit losses of $198.6 million. The nine-month provision for credit losses rose to $94.6 million from $72.5 million. Retail annualized credit losses were 1.83%, versus 1.55% in the prior-year period, and 30-day delinquencies were 3.75%, versus 3.60%.
- Shareholder returns: The company paid $179.4 million of dividends and repurchased $217.5 million of common stock during the first nine months. The quarterly dividend was $0.375 per share, and 10.4 million shares remained available under the repurchase authorization at quarter-end.
Material changes versus the prior comparable period
- Results weakened primarily because of lower motorcycle volumes, unfavorable product mix, foreign-exchange effects and higher tariffs.
- Q3 Motorcycles gross profit declined 7.9%; tariff costs were $21.6 million in the quarter, $11.3 million higher than the prior-year quarter.
- Financial Services credit-loss provision increased 43.4% in Q3 and 30.6% year to date. Management attributed the increase partly to inefficiencies from implementing a new loan-management system and lower used-motorcycle recovery values.
- Restructuring expense declined to $7.6 million in Q3 and $31.7 million year to date, compared with $14.8 million and $74.0 million, respectively, in the prior-year periods.
- The company adopted the new lease standard on January 1, 2019, recognizing approximately $60 million of lease assets and liabilities without a material effect on ongoing net income or cash flow.
- StaCyc was acquired in March 2019 for total consideration of $14.9 million, supporting the company’s electric two-wheeler strategy.
Guidance, outlook, risks and unusual items
- Management expects 2019 dealer shipments of 212,000 to 217,000 motorcycles, down approximately 5% to 7% from 2018.
- 2019 Motorcycles segment operating margin is expected to be 6% to 7%; fourth-quarter operating margin is expected to be approximately negative 5.5%.
- 2019 tariff impact from recent European Union and China tariffs is estimated at approximately $105 million, excluding higher metals costs from U.S. steel and aluminum tariffs. The company estimates approximately $20 million of U.S. China-related tariff impact in 2020.
- Management expects Financial Services operating income to decline in 2019 because of higher credit losses and higher depreciation from the new loan-management system.
- 2019 capital expenditures are expected to be $205 million to $225 million, and the effective tax rate is expected to be approximately 24% to 25%. Management expects operating cash flow to fund capital expenditures.
- The Manufacturing Optimization Plan is estimated to cost $142 million to $152 million through 2019, with approximately 70% expected to be cash costs. Estimated annual cash savings are $25 million to $30 million in 2019 and $45 million to $50 million in 2020.
- Key risks include continued weakness in U.S. and developed international motorcycle markets, aggressive competition and promotions, tariffs and foreign-exchange movements, execution of global manufacturing and the More Roads strategy, product recalls and liability, dealer financial health, credit losses at HDFS, funding-market access, cybersecurity and regulatory matters.
- The U.S. asset-backed commercial paper conduit facilities had an expiration date of November 29, 2019, and the company expected to renew facilities expiring within the next twelve months. The Canadian conduit facility expires June 26, 2020.
- Pending matters include an EPA consent decree awaiting court approval, environmental remediation obligations at the York facility and product-liability claims. Management states that recorded accruals and insurance are adequate, but the filing does not provide a clear quantified maximum exposure for all matters.
Important facts for investors to verify
- Whether motorcycle shipments and retail demand stabilize against the company’s 2019 guidance and longer-term More Roads objectives.
- The realized effect of EU, China and other tariffs, including the timing and savings from shifting EU production to Thailand.
- Whether Financial Services credit losses, delinquencies and reserve requirements continue to rise as the new loan-management system is integrated.
- Renewal and pricing of the U.S. conduit facilities and the company’s ability to refinance or repay substantial debt maturities.
- Actual restructuring costs, cash expenditures and savings compared with the Manufacturing Optimization Plan estimates.
- The outcome of the EPA consent decree, York environmental matter, product-liability claims and recall obligations.
- The sustainability of dividends and share repurchases given lower earnings, reduced operating cash flow and total debt of approximately $7.4 billion.
