Harley-Davidson, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Unaudited results for the quarter and six months ended June 26, 2016, compared primarily with the periods ended June 28, 2015. The company operates through Motorcycles & Related Products and Financial Services, including Harley-Davidson Financial Services financing for dealers and retail customers.
Key Financial Metrics
| Metric | Q2 2016 | Q2 2015 | Six Months 2016 | Six Months 2015 |
|---|---|---|---|---|
| Total revenue | $1.861 billion | $1.824 billion | $3.611 billion | $3.497 billion |
| Operating income | $412.3 million | $462.5 million | $801.2 million | $872.6 million |
| Net income | $280.4 million | $299.8 million | $530.9 million | $569.7 million |
| Diluted EPS | $1.55 | $1.44 | $2.91 | $2.71 |
| Operating margin | 22.2% | 25.4% | 22.2% | 25.0% |
| Net margin | 15.1% | 16.4% | 14.7% | 16.3% |
| Operating cash flow | Not provided quarterly | Not provided quarterly | $456.3 million | $613.9 million |
- Motorcycles revenue increased 1.2% in Q2 and 2.7% year to date, but Motorcycles operating income declined 15.2% in Q2 and 9.8% year to date.
- Financial Services revenue increased 10.0% in Q2 and 8.4% year to date. Financial Services operating income increased 9.4% in Q2 but declined 0.4% year to date.
- Q2 worldwide retail motorcycle sales declined 1.9%; U.S. retail sales declined 5.2%, while international sales increased 4.3%. U.S. market share for 601+cc motorcycles was 49.5%, up 2.0 percentage points.
- Six-month worldwide wholesale shipments increased 3.9% to 171,196 motorcycles, with a less favorable mix toward lower-margin Cruiser and Sportster/Street models and away from Touring models.
- Cash and cash equivalents were $864.7 million and current marketable securities were $5.1 million at June 26, 2016. Total reported liquidity, including available credit facilities, was approximately $1.937 billion.
- Total debt was $7.061 billion, compared with $6.211 billion at June 28, 2015. The company remained in compliance with applicable debt covenants.
- Finance receivables, net, totaled $7.282 billion, with an allowance for credit losses of $161.4 million. The 30-day delinquency rate for on-balance-sheet retail loans was 3.16%, versus 2.71% in the prior-year period.
- Dividends paid during the first six months totaled $127.8 million, or $0.70 per share. Share repurchases totaled $269.4 million, and 23.0 million shares remained authorized for repurchase at period end.
Material Changes Versus the Prior Comparable Period
- Operating income fell 10.9% in Q2 and 8.2% year to date, primarily because of lower Motorcycles profitability.
- Motorcycles gross profit declined $39.7 million year to date despite higher revenue. Drivers included unfavorable foreign exchange, product and shipment mix, higher manufacturing costs, plant re-tooling, ERP implementation costs, plant disruptions and lower fixed-cost absorption.
- Selling, administrative and engineering expense increased due to higher marketing and product-development investment and costs associated with the acquired Canadian operations.
- Financial Services credit-loss provision increased 54.6% in Q2 and 46.3% year to date, reflecting higher losses in oil-dependent areas, normalizing loan performance and lower used-motorcycle auction values.
- Financial Services benefited from a $9.3 million gain on the sale of finance receivables with a $301.8 million principal balance through an off-balance-sheet securitization. There was no comparable transaction in 2015.
- The effective tax rate declined to 30.9% in Q2 and 32.7% year to date, partly due to a $14.6 million discrete tax benefit from the closure of tax audits.
- Cash flow from operations declined $157.7 million year to date, reflecting lower earnings, working-capital changes, higher wholesale lending activity and a $25.0 million voluntary pension contribution.
- The company issued $1.193 billion of medium-term notes in the first quarter and repaid $450.0 million of maturing notes. Debt issuance also increased interest expense.
Guidance, Outlook, Risks and Unusual Items
- Management lowered 2016 motorcycle shipment guidance to 264,000–269,000 units, approximately flat to up 1% versus 2015, from the prior range of 269,000–274,000 units.
- Third-quarter 2016 shipment guidance was 48,500–53,500 motorcycles, compared with 53,472 in the third quarter of 2015. Some shipments were moved into Q2 ahead of the Kansas City ERP implementation.
- 2016 Motorcycles operating margin guidance was reduced to 15%–16%, from 16%–17%, versus 16.5% in 2015. Management cited lower production, unfavorable mix and higher manufacturing expense.
- Management expects adverse currency effects to reduce 2016 Motorcycles gross margin by approximately $45 million, or 0.8 percentage points, if recent exchange rates persist.
- Capital expenditures are expected to be $255 million–$275 million and funded from operating cash flow. The expected full-year effective tax rate is approximately 33%.
- Financial Services operating income is expected to decline modestly in 2016 because of higher credit-loss provisions and borrowing costs, partially offset by higher revenue.
- The U.S. asset-backed commercial paper conduit facility, with $600 million of capacity, expires December 14, 2016; management expects to renew it. The Canadian conduit was renewed through June 30, 2017.
- NHTSA announced an investigation into certain 2008–2011 ABS-equipped motorcycles following brake-failure complaints. No reserve was recorded because management does not believe a loss is probable; potential future costs cannot be reasonably estimated.
- The company maintains reserves for an EPA emissions-related investigation and environmental remediation at its York, Pennsylvania facility. Additional York costs cannot be reasonably estimated and may continue beyond 2017.
- Key continuing risks include weak U.S. motorcycle demand, competitive discounting, dealer financial health, foreign exchange, manufacturing and ERP execution, credit losses, used-motorcycle values, funding-market access, regulatory investigations, recalls, product liability and cybersecurity.
Important Facts for Investors to Verify
- Whether lower 2016 shipment guidance and the reduced Motorcycles margin outlook are consistent with subsequent retail demand and dealer inventory levels.
- Whether elevated Financial Services credit losses, delinquencies and allowance levels continue to rise.
- Future refinancing or renewal of the U.S. conduit facility and the cost and availability of Financial Services funding.
- The recurring versus nonrecurring nature of the $9.3 million securitization gain, $14.6 million tax benefit and ERP-related manufacturing costs.
- The eventual financial impact of the NHTSA investigation, EPA matter, York environmental remediation and other product-liability or recall contingencies.
- The effect of share repurchases and additional debt on per-share earnings, leverage and liquidity.