Harley-Davidson, Inc. 2016 Form 10-K Summary
Business context and reporting period
Harley-Davidson reported for the fiscal year ended December 31, 2016. The Company operates through two segments: Motorcycles & Related Products, which designs and sells motorcycles, parts, accessories, general merchandise and related services, and Financial Services, which provides dealer and retail financing and insurance-related products primarily in the United States and Canada.
Motorcycle products are sold through 1,461 independent dealerships in 97 countries. The United States and Europe represented approximately 77% of worldwide independent-dealer retail sales of new Harley-Davidson motorcycles in 2016.
Key financial metrics
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Total revenue | $5.996 billion | $5.995 billion | Flat |
| Motorcycles revenue | $5.271 billion | $5.309 billion | Down 0.7% |
| Financial Services revenue | $725.1 million | $686.7 million | Up 5.6% |
| Operating income | $1.049 billion | $1.156 billion | Down 9.2% |
| Net income | $692.2 million | $752.2 million | Down 8.0% |
| Diluted EPS | $3.83 | $3.69 | Up 3.8% |
| Net cash from operations | $1.174 billion | $1.100 billion | Up 6.7% |
| Total debt | $6.808 billion | $6.872 billion | Down 0.9% |
| Total equity | $1.920 billion | $1.840 billion | Up 4.4% |
Consolidated operating margin was approximately 17.5%, compared with 19.3% in 2015. Motorcycles gross profit was $1.852 billion, implying a segment gross margin of approximately 35.1%, versus approximately 36.8% in 2015. Net margin was approximately 11.5%, compared with 12.6% in 2015. The lower net income but higher diluted EPS primarily reflected substantial share repurchases.
Cash and cash equivalents were $760.0 million, and current marketable securities were $5.5 million. Including $1.338 billion of available credit facilities, the Company reported total liquidity of approximately $2.104 billion. Capital expenditures were $256.3 million. Dividends paid totaled $252.3 million, or $1.40 per share, and share repurchases used $465.3 million of cash.
Material changes versus the prior comparable period
- Worldwide retail sales declined 1.6% to 260,289 motorcycles. U.S. retail sales fell 3.9%, while international retail sales increased 2.3%.
- Wholesale motorcycle shipments declined 1.6% to 262,221 units. U.S. shipments fell 5.2%, partly offset by a 4.9% increase in international shipments.
- U.S. 601+cc market share increased to 51.2% from 50.2%, despite a 5.2% decline in the overall U.S. 601+cc market.
- Motorcycles segment operating income declined $102.1 million, or 11.7%. Lower volume, unfavorable manufacturing costs, foreign exchange and shipment mix outweighed pricing benefits and lower raw-material costs.
- Financial Services operating income declined $4.7 million, or 1.7%. Revenue growth was more than offset by higher interest expense and a $35.3 million increase in the provision for credit losses.
- Retail motorcycle loan losses increased to 1.83% from 1.42%, and the 30-day delinquency rate rose to 4.25% from 3.78%. The allowance for credit losses increased to $173.3 million from $147.2 million.
- Weighted-average diluted shares fell to 180.5 million from 203.7 million as a result of repurchases, supporting the increase in diluted EPS despite lower net income.
- The Company completed a $301.8 million finance-receivable sale through an off-balance-sheet securitization, receiving $312.6 million of proceeds and recognizing a $9.3 million gain.
Guidance, outlook, risks and unusual items
For 2017, management expected motorcycle shipments to be flat to modestly down, with lower U.S. shipments offset by higher international shipments. First-quarter shipments were expected to be 66,000 to 71,000 motorcycles, down approximately 15% to 20% year over year as the Company managed supply and dealer inventory. Full-year gross margin percentage and Motorcycles operating margin percentage were expected to be approximately in line with 2016. Capital expenditures were expected to be $200 million to $220 million, funded by operating cash flow, and the effective tax rate was expected to be approximately 34.5%.
Management identified continuing pressure from weak U.S. industry demand, soft used-motorcycle prices, competitive discounting, new product competition, foreign exchange, raw-material costs and global economic and political uncertainty. The long-term strategy includes adding two million U.S. riders, launching 100 new motorcycles, increasing international volume to 50% of total annual volume, and returning excess cash through dividends and share repurchases.
- The Company entered into an EPA consent decree involving a fine, a three-year emissions mitigation project and restrictions on tuning products. A reserve was recorded; the settlement remained subject to court approval at filing.
- NHTSA was investigating certain 2008-2011 motorcycles equipped with ABS following brake-failure complaints. No reserve was recorded because management did not believe a loss was probable, and the potential cost could not be reasonably estimated.
- Environmental remediation at the York, Pennsylvania facility remains subject to uncertainty regarding the scope and cost of future work.
- The Company had $2.146 billion of scheduled debt principal payments in 2017 and total scheduled principal payments of $6.830 billion. Its Canadian conduit facility was scheduled to expire June 30, 2017, and U.S. commercial-paper conduit facilities were scheduled to expire December 13, 2017; management expected to renew them.
- Key risks include consumer discretionary demand, dealer financial condition, used-motorcycle values, HDFS credit losses, funding and interest rates, foreign exchange, cybersecurity, product recalls, emissions regulation, union negotiations, supply-chain disruption and pension and healthcare obligations.
- Adoption of the future expected-credit-loss standard was expected to increase the annual provision for credit losses and the related allowance, although the amount was not yet quantified.
Most important facts for investors to verify
- Whether U.S. motorcycle demand, competitive discounting and used-motorcycle prices improve or continue to pressure shipments and margins.
- Whether HDFS retail delinquencies, loan losses and allowance requirements continue rising, particularly in sub-prime and oil-dependent markets.
- Whether management achieves its 2017 shipment, margin, capital-expenditure and tax-rate outlook.
- Refinancing and renewal of near-term debt and conduit facilities, including the $2.146 billion of 2017 scheduled principal payments.
- The final court disposition and total cost of the EPA settlement, and the outcome of the NHTSA ABS investigation.
- The sustainability of cash returns given leverage, pension and healthcare obligations, capital investment and Financial Services funding needs.
- Execution of the international dealer expansion and long-term product and rider-growth strategy.