HARLEY-DAVIDSON, INC. quarterly report, Q3 FY2013

Harley-Davidson, Inc. Form 10-Q Summary

Reporting period: Quarter and nine months ended September 29, 2013, compared primarily with the periods ended September 30, 2012. The filing is unaudited and covers the Motorcycles & Related Products and Financial Services segments.

Business Context and Reporting Period

Harley-Davidson produces heavyweight cruiser and touring motorcycles and related products. Harley-Davidson Financial Services provides retail and wholesale financing to customers and independent dealers. Third-quarter results benefited from the launch of 2014 model-year motorcycles, including Project Rushmore, improved motorcycle availability, stronger retail demand and a favorable motorcycle product mix.

Key Financial Metrics

Metric	Q3 2013	Q3 2012	9M 2013	9M 2012
Total revenue	$1.344 billion	$1.250 billion	$4.709 billion	$4.410 billion
Operating income	$251.5 million	$217.1 million	$1.032 billion	$884.1 million
Net income	$162.7 million	$134.0 million	$658.6 million	$553.3 million
Diluted EPS	$0.73	$0.59	$2.93	$2.40
Cash dividends per share	$0.210	$0.155	$0.630	$0.465

Growth: Q3 revenue increased 7.5%, operating income 15.9%, net income 21.4% and diluted EPS 23.7%. For the first nine months, revenue increased 6.8%, operating income 16.7%, net income 19.0% and diluted EPS 22.1%.
Margins: Consolidated operating margin was approximately 18.7% in Q3 versus 17.4% in the prior-year quarter, and approximately 21.9% for the first nine months versus 20.0%. Motorcycles gross margin was approximately 35.3% in Q3 versus 34.7%, and 36.4% for nine months versus 35.6%.
Motorcycles segment: Q3 revenue was $1.180 billion and operating income was $175.5 million, up 21.2%. Nine-month revenue was $4.226 billion and operating income was $809.9 million, up 22.3%. Motorcycle shipments increased 2.3% in Q3 and 6.6% for the first nine months.
Financial Services: Q3 revenue was $163.4 million and operating income was $76.1 million, up 5.1%. Nine-month operating income was $221.8 million, essentially unchanged year over year. Lower funding costs were offset by higher credit-loss provisions.
Cash flow: Nine-month operating cash flow was $825.1 million, compared with $712.5 million. Investing cash outflow was $539.0 million, including $111.7 million of capital expenditures and $446.2 million net cash invested in finance receivables. Financing cash outflow was $312.5 million.
Liquidity: Cash and cash equivalents were $1.030 billion, marketable securities were $122.2 million and total stated availability under credit facilities was $1.569 billion, for total cash, securities and availability of $2.721 billion.
Debt: Total debt was $5.184 billion at September 29, 2013, down from $5.874 billion at September 30, 2012. The company remained in compliance with applicable financial covenants.
Finance receivables: Net finance receivables totaled $6.185 billion, including $5.406 billion of retail and $891.1 million of wholesale receivables. The allowance for credit losses was $111.9 million. Annualized retail loan losses were 0.88%, compared with 0.65% in the prior-year period.
Shareholder returns: The company paid $140.8 million of dividends and repurchased $302.2 million of common stock during the first nine months. Diluted weighted-average shares declined to 224.7 million from 230.1 million.

Material Changes Versus the Prior Comparable Period

Motorcycles operating income improved primarily from higher shipments, model-year price increases, stronger touring mix, restructuring savings and lower temporary manufacturing inefficiencies.
Worldwide independent-dealer retail sales increased 15.5% in Q3, including 20.1% in the United States and 6.5% internationally. Nine-month worldwide retail sales increased 4.1%.
Financial Services interest expense decreased 13.8% in Q3 and 13.8% for the first nine months because of a more favorable cost of funds. The benefit was partly offset by higher credit-loss provisions.
Nine-month credit-loss provision increased to $39.0 million from $12.8 million. The prior year included approximately $14.5 million of credit-loss allowance releases, compared with approximately $1.9 million in releases in 2013.
Restructuring expense changed from $26.8 million in the first nine months of 2012 to a $1.7 million benefit in 2013. The company modified its New Castalloy plan to retain limited operations and reduced the workforce by approximately 100 employees.
Cash declined by $38.2 million during the first nine months, compared with a $268.2 million increase in the prior-year period, primarily because of increased finance-receivable originations, higher share repurchases and dividends.
The effective tax rate declined to 32.6% in Q3 and 34.3% for the first nine months, compared with 35.3% in both prior-year periods, aided by the reinstated federal research and development tax credit and a deferred-tax valuation allowance adjustment.

Guidance, Outlook, Risks and Unusual Items

2013 motorcycle shipments: Management reaffirmed worldwide shipment guidance of 259,000 to 264,000 motorcycles, representing approximately 4.5% to 6.5% growth over 2012. Fourth-quarter shipments were expected at 45,000 to 50,000 units.
Gross margin: Full-year 2013 gross margin guidance remained 35.25% to 36.25%. Fourth-quarter margin was expected to face pressure from lower production, unfavorable product mix, foreign-exchange effects and the content costs of 2014 models.
Financial Services: Management expected 2013 operating income to be modestly below 2012 because of prior-year allowance releases, increased competition and higher credit losses. Rising interest rates were expected to compress margins over time.
Other guidance: The company estimated a 2013 effective tax rate of approximately 34.7% and capital expenditures of $200 million to $220 million.
New products: The Street 750 and Street 500 motorcycles were planned for launch beginning in the second quarter of 2014, with expected 2014 shipments of 7,000 to 10,000 units. Management expected incremental gross-margin dollars but approximately 0.5 percentage-point dilution to gross margin percentage.
Unusual items: The filing reflects a $4.9 million loss on extinguishment of debt, restructuring benefits, pension contributions of $175 million, and an expected $4.9 million fourth-quarter recall expense related to a voluntary recall announced in October 2013.
Contingencies: The EPA continued to investigate emissions certifications, aftermarket parts and emissions-related warranty claims; potential remedies could not be reasonably estimated. The company had a $3.4 million reserve for its estimated share of York, Pennsylvania environmental response costs, while additional costs remained uncertain.
Key risks: Risks include weaker consumer demand, adverse weather, economic weakness in the United States and Europe, foreign-exchange volatility, rising funding costs, higher HDFS credit losses, dealer financial difficulties, supply-chain disruptions, product recalls, regulatory actions, labor and manufacturing execution, and continued access to capital markets.

Most Important Facts for Investors to Verify

Whether 2014 model-year launches and the planned Street models produce the expected volume and sustainable margin benefits.
Whether HDFS credit losses continue to rise, particularly as sub-prime originations and approval rates increase.
Whether fourth-quarter production reductions, product mix, currency movements and model-content costs cause gross margin to fall within or below guidance.
Whether the company renews the $600 million U.S. conduit and Canadian conduit facilities before their 2014 expiration dates.
The timing and funding of approximately $489.4 million of 2013 debt principal payments and $2.168 billion due in 2014–2015.
The ultimate cost and resolution of the EPA investigation, York environmental remediation and product-liability or recall matters.
Whether restructuring savings and projected annual savings of approximately $320 million are realized without additional execution costs.