Harley-Davidson, Inc. Form 10-Q Summary
Business Context and Reporting Period
Harley-Davidson reported unaudited results for the quarter and nine months ended September 28, 2014, compared with September 29, 2013. The company operates through Motorcycles & Related Products and Financial Services, with HDFS providing retail and wholesale motorcycle financing.
Financial Performance and Key Metrics
| Metric | Q3 2014 | Q3 2013 | 9M 2014 | 9M 2013 |
|---|---|---|---|---|
| Total revenue | $1.302 billion | $1.344 billion | $5.028 billion | $4.709 billion |
| Operating income | $224.1 million | $251.5 million | $1.183 billion | $1.032 billion |
| Net income | $150.1 million | $162.7 million | $770.1 million | $658.6 million |
| Diluted EPS | $0.69 | $0.73 | $3.52 | $2.93 |
| Operating margin | 17.2% | 18.7% | 23.5% | 21.9% |
| Net margin | 11.5% | 12.1% | 15.3% | 14.0% |
- Q3 Motorcycle revenue declined 4.2% to $1.131 billion, while Financial Services revenue rose 4.7% to $171.0 million.
- Q3 Motorcycle operating income fell 16.6% to $146.3 million; Financial Services operating income increased 2.2% to $77.8 million.
- For the first nine months, Motorcycle revenue increased 7.3% and Motorcycle operating income increased 19.4% to $967.3 million. Financial Services operating income decreased 2.9% to $215.4 million.
- Nine-month operating cash flow was $966.9 million, up from $825.1 million. Investing cash outflow was $689.7 million and financing cash outflow was $349.4 million, resulting in an $86.7 million decrease in cash.
- Cash and cash equivalents were $979.9 million at September 28, 2014, with current marketable securities of $57.6 million.
- Total debt was $5.444 billion, compared with $5.184 billion at September 29, 2013. Debt included $3.451 billion of medium-term notes and $1.475 billion of term asset-backed securitization debt.
- Total liquidity, including cash, current marketable securities and available credit facilities, was approximately $2.649 billion. The company targets at least 12 months of projected liquidity needs.
- Finance receivables, net, totaled $6.666 billion, and the allowance for credit losses was $126.0 million. Annualized HDFS retail loan losses increased to 1.08% from 0.88% a year earlier.
Material Changes Versus the Prior Comparable Period
- Management reduced third-quarter motorcycle shipments by 6.2% to address elevated dealer inventory following softer second-quarter retail sales. Worldwide retail sales nonetheless increased 3.8% in Q3 and 2.7% for the first nine months.
- Motorcycle gross margin declined in Q3, primarily because of lower volume, foreign exchange pressure, higher manufacturing costs from lower production, and approximately $14 million of recall expense. These factors were partly offset by pricing and favorable product mix.
- New Street motorcycle production and launch activities supported future growth but generated approximately $12.8 million of start-up costs during the first nine months.
- Financial Services credit-loss provision increased 47.2% in Q3 and 48.1% for the first nine months, reflecting higher losses, portfolio growth, increased reserve rates, lower repossession recoveries and changing consumer behavior.
- Interest expense declined substantially after repayment of $303 million of senior unsecured notes in February 2014. HDFS issued $600 million of 2.40% medium-term notes due in 2019 during Q3.
- The company repurchased $393.5 million of common stock during the first nine months and paid $179.9 million of dividends. The quarterly dividend was $0.275 per share, compared with $0.210 in the prior-year quarter.
- The effective tax rate was 34.9% for the first nine months, compared with 34.3%, primarily because the U.S. federal R&D tax credit expired at the end of 2013.
Guidance, Outlook, Risks and Unusual Items
- Management maintained its 2014 shipment outlook of 270,000 to 275,000 motorcycles, including 46,500 to 51,500 motorcycles expected in Q4.
- 2014 Motorcycle operating margin guidance remained 17.5% to 18.5%, versus 16.6% in 2013. Financial Services operating income was expected to decline modestly because of higher credit losses and tighter net interest margins.
- Capital expenditure guidance was $215 million to $235 million, expected to be funded by operating cash flow. The full-year effective tax rate estimate was reduced to approximately 35.0%.
- Key operating risks include retail demand and dealer inventory, weather, economic and competitive conditions, foreign currency movements, supply-chain and launch execution, commodity costs, recalls, regulatory matters and dealer financial health.
- HDFS faces funding, interest-rate, credit-quality and recovery-value risks. The company noted that historically low retail credit losses may not continue.
- The EPA continues to investigate emissions certifications, aftermarket parts and related warranty claims; potential penalties or other remedies cannot currently be estimated.
- The company reserved approximately $2.9 million for its estimated share of future York, Pennsylvania environmental response costs, but additional costs remain uncertain. Warranty and safety recall liabilities totaled $80.3 million at quarter-end, including $15.7 million for safety recall campaigns.
- The company reported compliance with applicable debt covenants and stated that its disclosure controls were effective as of quarter-end.
Important Facts for Investors to Verify
- Whether the planned shipment reduction and higher year-end U.S. dealer inventory normalize without requiring additional production or pricing actions.
- Whether HDFS retail credit losses, reserve rates and repossession recoveries continue to deteriorate.
- Progress toward the 17.5% to 18.5% Motorcycle operating-margin target and the underlying contribution from pricing, mix, productivity and cost control.
- Execution and demand for Street, Road Glide and Project Rushmore models, particularly in international markets.
- Refinancing or renewal of the U.S. conduit facility expiring October 30, 2015, and the Canadian conduit facility expiring June 30, 2015.
- Potential financial exposure from EPA proceedings, environmental remediation, recalls, product liability and other contingencies.
- The sustainability of cash returns given share repurchases, dividends, capital expenditures and total debt of $5.444 billion.