Harley-Davidson, Inc. 2017 Form 10-K Summary
Business context and reporting period
Harley-Davidson, Inc. reported for the fiscal year ended December 31, 2017. The company operates through two reportable segments: Motorcycles & Related Products, which designs, manufactures and wholesales motorcycles, parts, accessories and merchandise through independent dealers, and Financial Services, which provides wholesale and retail financing primarily in the United States and Canada.
The filing was dated February 21, 2018. The company operated through approximately 1,498 independent dealerships in about 100 countries. U.S. and European markets represented approximately 77% of worldwide independent-dealer retail sales of new Harley-Davidson motorcycles in 2017.
Financial performance and key metrics
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Total revenue | $5.647 billion | $5.996 billion | Down 5.8% |
| Motorcycles revenue | $4.915 billion | $5.271 billion | Down 6.8% |
| Financial Services revenue | $732.2 million | $725.1 million | Up 1.0% |
| Operating income | $891.3 million | $1.049 billion | Down 15.0% |
| Net income | $521.8 million | $692.2 million | Down 24.6% |
| Diluted EPS | $3.02 | $3.83 | Down 21.1% |
| Operating margin | 15.8% | 17.5% | Down approximately 1.7 percentage points |
| Net margin | 9.2% | 11.5% | Down approximately 2.3 percentage points |
- Motorcycles segment operating income was $616.0 million, down 20.4%; implied operating margin was approximately 12.5%, compared with 14.7% in 2016.
- Motorcycles gross profit was $1.653 billion, representing an implied gross margin of approximately 33.6%, versus approximately 35.1% in 2016. Lower volume, unfavorable shipment mix, higher raw-material costs and manufacturing costs more than offset pricing and foreign-currency benefits.
- Financial Services operating income was $275.3 million, essentially unchanged from 2016. Interest income and other income increased, but higher funding costs and lower securitization and servicing income offset those benefits.
- Worldwide dealer retail sales declined 6.7% to 242,788 motorcycles. U.S. retail sales declined 8.5% to 147,972 units, while international retail sales declined 3.9% to 94,816 units.
- Wholesale motorcycle shipments declined 7.9% to 241,498 units, including a 10.5% decline in U.S. shipments and a 3.8% decline internationally.
- U.S. 601+cc market share was 50.7%, down from 51.2% in 2016. European 601+cc registrations declined 0.3%, while U.S. industry registrations declined 7.3%.
- Research and development expense was $175.2 million, compared with $172.3 million in 2016.
Cash flow, balance sheet, debt and liquidity
| Metric | 2017 | 2016 |
|---|---|---|
| Cash flow from operating activities | $1.005 billion | $1.174 billion |
| Capital expenditures | $206.3 million | $256.3 million |
| Net cash used in investing activities | $562.5 million | $392.7 million |
| Net cash used in financing activities | $541.8 million | $734.4 million |
| Cash and cash equivalents | $687.5 million | $760.0 million |
| Total debt | $6.988 billion | $6.808 billion |
| Total equity | $1.844 billion | $1.920 billion |
- Total liquidity, including cash and availability under credit and conduit facilities, was approximately $1.600 billion at December 31, 2017, consisting of $687.5 million of cash and $912.6 million of facility availability.
- Debt maturities totaled $2.406 billion in 2018, including $1.273 billion of commercial paper and $1.127 billion of current long-term debt. Total scheduled principal payments were $7.008 billion, excluding certain unquantified obligations.
- The company paid $251.9 million of dividends and repurchased $465.3 million of common stock during 2017. It repurchased approximately 8.8 million shares at a weighted-average price of $53. The quarterly dividend increased to $0.365 per share, or $1.46 for the year.
- HDFS finance receivables, net, were $6.965 billion. The allowance for credit losses increased to $192.5 million from $173.3 million. Retail loan losses increased to 1.90% from 1.83%, while the 30-day delinquency rate improved slightly to 4.21% from 4.25%.
Material changes versus the prior comparable period
- Motorcycle demand weakened materially, particularly in the United States, resulting in lower retail sales, wholesale shipments, revenue and operating income.
- Motorcycles gross profit declined $198.3 million. Volume reduced gross profit by approximately $171 million; higher pricing and related costs contributed approximately $61 million, while manufacturing and other costs reduced gross profit by approximately $51 million.
- Financial Services operating income was stable despite higher interest expense and lower securitization income. The prior year included a $9.3 million gain from an off-balance-sheet asset-backed securitization; there was no comparable transaction in 2017.
- Corporate effective tax rate increased to 39.6% from 32.4%, primarily because of a $53.1 million non-cash provisional tax charge related to the Tax Cuts and Jobs Act.
- Weighted-average diluted shares declined to 172.9 million from 180.5 million because of share repurchases, partially offsetting the earnings decline on a per-share basis.
- Total debt increased by approximately $180 million, while cash declined by approximately $72 million.
Guidance, outlook, risks and unusual items
- For 2018, management expected motorcycle shipments of 231,000 to 236,000 units, down approximately 2% to 4% from 2017. U.S. retail sales were expected to remain challenging, while international retail sales were expected to grow.
- 2018 Motorcycles operating margin was expected at approximately 9.5% to 10.5%, down approximately 2 to 3 percentage points from 2017. The outlook included $120 million to $140 million of manufacturing-optimization plan costs.
- The manufacturing-optimization plan consolidates final assembly from Kansas City, Missouri, into York, Pennsylvania, and closes wheel operations in Australia. Total restructuring and consolidation costs were estimated at $170 million to $200 million through 2019, with approximately 70% expected to be cash costs. Ongoing annual cash savings were projected at $65 million to $75 million after implementation.
- The plan was expected to eliminate approximately 800 Kansas City jobs and add approximately 450 York jobs by 2019. Execution depends on union negotiations, workforce reductions, supplier capacity, production continuity and facility dispositions.
- Management expected 2018 capital expenditures of $250 million to $270 million, including approximately $50 million for the optimization plan, funded by operating cash flow. Additional annual investment in electric motorcycle technology, products and infrastructure was expected to be $25 million to $50 million for several years.
- Management expected a 2018 effective tax rate of approximately 23.5% to 25%, but stated that the 2017 Tax Act estimates were provisional and could be revised as guidance and tax interpretations develop.
- The company recorded a $29.4 million accrual in 2017 related to an NHTSA investigation of ABS-equipped motorcycles and announced a voluntary brake-fluid-flush recall in January 2018. The company believes the accrual is adequate.
- An EPA consent decree concerning motorcycle emissions, aftermarket tuning products and related matters remained subject to court approval. The company had accrued an amount it believed would prevent a material impact if finalized, but could not estimate potential additional remedies if the settlement were rejected.
- Material risks include continued U.S. motorcycle-market weakness, competition and price pressure, used-motorcycle values, dealer health, credit losses and funding access at HDFS, interest-rate and foreign-exchange exposure, commodity costs, labor negotiations, recalls and product liability, environmental regulation, cybersecurity and tax-law changes.
- The independent auditor issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2017.
Important facts for investors to verify
- Whether international retail growth and new product launches can offset continued U.S. market and used-motorcycle pressure.
- Actual 2018 shipment volumes, Motorcycles operating margin and the timing and total cost of the manufacturing-optimization plan.
- Progress on the Kansas City-to-York consolidation, labor agreements, workforce reductions and expected annual savings.
- HDFS retail credit losses, delinquencies, allowance coverage and access to competitively priced funding.
- 2018 cash generation relative to substantial debt maturities, dividends, repurchases and planned capital expenditures.
- Final resolution of the provisional $53.1 million Tax Cuts and Jobs Act charge and the resulting effective tax rate.
- Court approval and financial consequences of the EPA settlement, as well as the cost and scope of the NHTSA-related recall.
- Impact of tariffs, foreign exchange, steel and aluminum prices, emissions requirements and investments in electric motorcycles.