Harley-Davidson, Inc. 2010 Form 10-K Summary
Business context and reporting period
Annual report for the fiscal year ended December 31, 2010, filed February 24, 2011. Harley-Davidson operated through two segments: Motorcycles & Related Products, which designs, manufactures and sells heavyweight motorcycles, parts, accessories and merchandise; and Financial Services, which provides dealer and retail financing, insurance and related products primarily in the United States and Canada.
The company exited the Buell product line and completed the sale of MV Agusta on August 6, 2010. MV Agusta is presented as a discontinued operation for all periods. The company adopted new consolidation guidance for previously off-balance-sheet securitization entities on January 1, 2010, significantly affecting balance-sheet presentation and comparability with 2009.
Key financial metrics
<>| Metric | 2010 | 2009 | Change |
|---|---|---|---|
| Total revenue | $4.859 billion | $4.782 billion | 1.6% increase |
| Motorcycles revenue | $4.177 billion | $4.287 billion | 2.6% decrease |
| Financial Services revenue | $682.7 million | $494.8 million | 38.0% increase |
| Operating income | $560.6 million | $196.1 million | 185.9% increase |
| Income from continuing operations | $259.7 million | $70.6 million | 267.6% increase |
| Net income (loss) | $146.5 million | $(55.1) million | Returned to profitability |
| Diluted EPS from continuing operations | $1.11 | $0.30 | Increase |
| Net loss from discontinued operations | $(113.1) million | $(125.8) million | Improved |
| Operating cash flow from continuing operations | $1.163 billion | $609.0 million | Increase |
| Capital expenditures | $170.8 million | $116.7 million | Increase |
| Total debt | $5.752 billion | $5.636 billion | Increase |
| Total equity | $2.207 billion | $2.108 billion | Increase |
Consolidated operating margin was approximately 11.5%, compared with 4.1% in 2009. Motorcycles gross profit was $1.427 billion, implying a segment gross margin of approximately 34.2%, up from approximately 32.3% in 2009. The effective tax rate on continuing operations was 33.5%, compared with 60.5% in 2009.
At December 31, 2010, cash and cash equivalents were $1.022 billion and marketable securities were $140.1 million. Total stated liquidity, including available credit facilities of $1.154 billion, was $2.316 billion. The company reported $480.5 million of short-term debt and $4.520 billion of long-term debt, including debt held by variable-interest entities.
Material changes versus the prior comparable period
- Motorcycles operating income increased $64.7 million to $378.8 million despite a 5.6% decline in Harley-Davidson wholesale shipments to 210,494 units. Improvement reflected product mix, lower restructuring expense and reduced operating costs.
- Worldwide dealer retail sales declined 8.5% to 222,110 motorcycles. U.S. retail sales declined 11.7%, while international retail sales declined 1.9%. U.S. heavyweight industry registrations fell 14.6%.
- Financial Services returned to profitability, with operating income of $181.9 million versus a $118.0 million loss in 2009. Drivers included favorable net interest income, lower funding costs, improved credit performance and the absence of significant 2009 impairment charges.
- Annual losses on managed retail motorcycle finance receivables improved to 2.11% from 2.86%, and the 30-day delinquency rate declined to 5.07% from 6.51%. The allowance for finance credit losses increased to $173.6 million, partly because of newly consolidated receivables.
- Adoption of ASC Topics 810 and 860 consolidated previously off-balance-sheet securitization entities. This added approximately $1.9 billion of debt at adoption and resulted in $2.755 billion of term asset-backed securitization debt at year-end, secured by restricted finance receivables.
- The company repurchased $297.0 million principal amount of its 15% senior unsecured notes for $380.8 million, recording an $85.2 million loss on debt extinguishment. The transaction is expected to reduce annual interest expense by approximately $45 million in 2011 through 2013.
- Restructuring expense and other impairments were $163.5 million in 2010, compared with $224.3 million in 2009. Cumulative restructuring-related costs were expected to reach $495 million to $510 million through 2012.
Guidance, outlook, commentary and risks
Management expected 2011 Harley-Davidson shipments of 221,000 to 228,000 units, including 51,000 to 56,000 units in the first quarter. Full-year 2011 gross margin guidance was 34.0% to 35.0%, and the effective tax rate for continuing operations was expected to be approximately 35%. Planned 2011 capital expenditures were $210 million to $230 million, including $60 million to $75 million for restructuring; management expected operating cash flow to fund these expenditures.
Management targeted ongoing annual restructuring savings of approximately $290 million to $310 million after completion of the announced actions. Additional dealer closures were expected in the United States, while international expansion remained a strategic priority, including a new CKD assembly operation in India expected to become operational in the first half of 2011.
Key risks include weak discretionary consumer demand, declining used-motorcycle values, dealer financial health, access to capital for HDFS, credit losses, refinancing and credit-rating risk, execution of restructuring and labor agreements, supplier and raw-material costs, foreign currency and interest-rate volatility, pension and healthcare obligations, regulatory changes including Dodd-Frank, environmental and emissions matters, product liability and recalls, and brand or cybersecurity risks.
The company disclosed an ongoing EPA information request concerning emissions certificates, aftermarket parts and emissions-related warranty claims. Potential remedies could include fines or other relief, but the company stated that the impact could not yet be reasonably estimated. The company estimated its share of future York, Pennsylvania environmental remediation costs at approximately $5.9 million and had reserved that amount.
Most important facts for an investor to verify
- Whether the 2011 shipment and gross-margin guidance was achieved and whether volume growth occurred without rebuilding excessive dealer inventory.
- The sustainability of the Financial Services turnaround after the favorable 2010 credit-loss and funding trends.
- The effect of securitization consolidation on leverage, restricted assets, liquidity and future cash flows; 2010 and 2009 are not fully comparable.
- Actual restructuring costs, workforce reductions, savings realization and the outcome of the Kansas City labor and operating review.
- Future HDFS funding availability, credit ratings, commercial-paper access and the April 2011 and September 2011 facility maturities.
- Potential financial exposure from the EPA investigation, environmental remediation, product liability and recall matters.
- Required pension and postretirement healthcare funding, including the $200 million pension contribution made in January 2011.