Harley-Davidson, Inc. Form 10-Q Summary
Business Context and Reporting Period
Harley-Davidson reported unaudited results for the quarter and six months ended June 29, 2014, compared with the comparable periods ended June 30, 2013. The company operates through Motorcycles & Related Products and Financial Services, which provides retail and wholesale financing to dealers and customers.
Financial Results and Key Metrics
| Metric | Q2 2014 | Q2 2013 | Six Months 2014 | Six Months 2013 |
|---|---|---|---|---|
| Total revenue | $2.001 billion | $1.794 billion | $3.727 billion | $3.366 billion |
| Operating income | $547.7 million | $431.8 million | $958.6 million | $780.1 million |
| Net income | $354.2 million | $271.7 million | $620.1 million | $495.9 million |
| Diluted EPS | $1.62 | $1.21 | $2.82 | $2.20 |
| Operating margin | 27.4% | 24.1% | 25.7% | 23.2% |
- Motorcycles revenue increased 12.4% in Q2 and 11.8% for the first six months. Motorcycle operating income increased 32.3% in Q2 to $473.3 million and 29.4% year to date to $820.9 million.
- Financial Services operating income was essentially flat in Q2 at $74.4 million, but declined 5.5% year to date to $137.6 million. Higher credit-loss provisions and operating expenses offset lower funding costs.
- Motorcycles gross profit was $724.1 million in Q2 and $1.316 billion year to date. Implied gross margins were approximately 39.5% and 38.6%, respectively, compared with approximately 36.9% and 36.8% in the prior-year periods.
- Six-month operating cash flow was $570.6 million, compared with $389.7 million in 2013. Investing cash outflow was $419.8 million, including $74.5 million of capital expenditures and a $386.4 million net cash outflow from finance receivables. Financing cash outflow was $223.1 million.
- Cash and cash equivalents were $999.3 million at June 29, 2014, with current marketable securities of $57.8 million. Total cash, current marketable securities and available credit facilities were approximately $2.402 billion.
- Total debt was $5.359 billion, consisting primarily of commercial paper, medium-term notes, Canadian conduit debt and term asset-backed securitization debt. The company repaid $303.0 million of senior unsecured notes in February 2014.
- Finance receivables, net, totaled $6.819 billion, with an allowance for credit losses of $122.4 million. Retail loans represented $5.603 billion and wholesale loans $1.338 billion.
Material Changes Versus the Prior Comparable Period
- Net income increased 30.3% in Q2 and 25.0% for the first six months. Diluted EPS increased 33.9% and 28.2%, respectively, aided by lower share counts from repurchases.
- Motorcycle wholesale shipments increased 9.0% in Q2 to 92,217 units and 8.2% for the first six months to 172,899 units. Touring motorcycles represented a larger shipment mix, benefiting revenue and gross profit.
- Worldwide independent-dealer retail sales were flat in Q2 and increased 2.2% for the first six months. U.S. Q2 retail sales were flat; Canada declined 18.0%, while EMEA increased 7.0% and Asia Pacific increased 1.5%.
- Financial Services provision for credit losses increased 41.3% in Q2 and 48.7% year to date. Annualized retail loan losses rose to 0.97% from 0.80%, although the 30-day delinquency rate improved to 2.68% from 2.75%.
- The first half of 2014 had no restructuring benefit, compared with benefits of $2.4 million in the first half of 2013. Street motorcycle start-up costs were approximately $5.3 million in Q2 and $10 million year to date.
- The effective tax rate increased to 35.3% for the first six months from 34.8%, primarily because the U.S. Federal Research and Development tax credit expired at the end of 2013.
- The company repurchased $223.7 million of common stock and paid $120.6 million in dividends during the first six months. The quarterly dividend was increased to $0.275 per share from $0.210.
Guidance, Outlook, Risks and Unusual Items
- Full-year 2014 motorcycle shipment guidance was reduced to 270,000 to 275,000 units from 279,000 to 284,000. Third-quarter shipments were expected at 49,000 to 54,000 units.
- Management cited prolonged poor U.S. weather, the absence of Road Glide models, soft Sportster sales and Street motorcycle start-up delays as factors behind weaker-than-expected retail sales. U.S. dealer inventory was approximately 6,600 units higher year over year at quarter-end.
- Management expected third-quarter gross margin to decline approximately 2.5 percentage points from the prior-year 35.3%, due to unfavorable shipment mix, lower production and approximately $5 million of additional Street start-up costs.
- The company maintained its expectation for 2014 Motorcycles operating margin of 17.5% to 18.5%, Financial Services operating income modestly below 2013, capital expenditures of $215 million to $235 million, and an effective tax rate of approximately 35.5%.
- Liquidity risks include funding costs, access to capital markets, credit losses and competition affecting Financial Services net interest margins. The $600 million U.S. asset-backed commercial paper conduit facility was scheduled to expire September 12, 2014; management expected renewal. The Canadian conduit was renewed through June 30, 2015.
- The company remained in compliance with debt covenants. It had a support agreement for HDFS but had never provided support under that agreement.
- The EPA continued to investigate motorcycle emissions certifications, aftermarket parts and emissions-related warranty claims. Potential remedies could include fines or other relief, but the company could not estimate any impact.
- The company had a $3.2 million reserve for its estimated share of York, Pennsylvania environmental response costs, while additional remediation costs remained uncertain. Warranty and safety recall liabilities totaled $76.0 million at quarter-end, including $6.8 million for safety recalls.
Important Facts Investors Should Verify
- Whether Street motorcycle production and retail availability reached planned levels and whether the revised shipment guidance was achieved.
- Trends in U.S. dealer inventory, worldwide retail demand and the effect of the Road Glide relaunch and Project Rushmore products.
- Whether Financial Services credit losses, reserve rates and funding costs continue to pressure segment earnings.
- The renewal and utilization status of the U.S. conduit facility and the company’s ability to refinance scheduled debt maturities.
- Progress and potential financial exposure from the EPA investigation, York environmental remediation and product liability or recall matters.
- The sustainability of share repurchases, dividends and cash generation while finance receivables and total debt remain substantial.