Harley-Davidson, Inc. Form 10-Q Summary
Business context and reporting period
Harley-Davidson operates through Motorcycles & Related Products and Financial Services. The filing covers the quarter and nine months ended September 24, 2017, compared with September 25, 2016. Financial statements are unaudited.
Financial performance and key metrics
| Metric | Q3 2017 | Q3 2016 | 9M 2017 | 9M 2016 |
|---|---|---|---|---|
| Total revenue | $1.151 billion | $1.275 billion | $4.418 billion | $4.886 billion |
| Operating income | $96.7 million | $178.4 million | $789.8 million | $979.5 million |
| Net income | $68.2 million | $114.1 million | $513.4 million | $645.0 million |
| Diluted EPS | $0.40 | $0.64 | $2.95 | $3.55 |
| Operating margin | 8.4% | 14.0% | 17.9% | 20.1% |
| Net margin | 5.9% | 8.9% | 11.6% | 13.2% |
- Motorcycles revenue declined 11.9% in Q3 and 10.8% for the first nine months. Motorcycles segment operating income fell 82.0% in Q3 to $19.6 million and 24.3% for the first nine months to $578.1 million.
- Financial Services revenue increased 3.2% in Q3 and 0.5% year to date. Segment operating income increased 11.0% in Q3 to $77.1 million but declined 1.7% year to date to $211.6 million.
- Worldwide retail motorcycle sales declined 6.9% in Q3 and 6.1% year to date. Q3 U.S. retail sales fell 8.1%; international retail sales fell 4.6%.
- Wholesale motorcycle shipments decreased 14.3% in Q3 and 11.6% year to date. The company reduced U.S. shipments to lower dealer inventory and support the model year 2018 launch.
- Nine-month operating cash flow was $949.1 million, compared with $927.8 million in 2016. Capital expenditures were $114.0 million, compared with $162.7 million.
- Cash and cash equivalents were $683.1 million at September 24, 2017, versus $760.0 million at December 31, 2016. Cash declined by $76.9 million during the first nine months.
- Total debt was $7.0 billion, including $834.9 million of unsecured commercial paper. Shareholders’ equity was $1.857 billion.
- Finance receivables, net, totaled $7.101 billion. The allowance for credit losses was $195.6 million, compared with $173.3 million at December 31, 2016.
- The company reported $2.087 billion of cash plus availability under credit and conduit facilities, including $1.404 billion of facility availability.
Material changes versus the prior comparable period
- Q3 revenue decreased 9.7%, operating income decreased 45.8%, and net income decreased 40.2%. Nine-month revenue decreased 9.6%, operating income decreased 19.4%, and net income decreased 20.4%.
- Motorcycle gross profit declined 24.5% in Q3 and 15.0% year to date. Drivers included lower volume, unfavorable shipment mix, higher raw-material costs, lower fixed-cost absorption, and model-year startup costs.
- Financial Services benefited from a 19.9% Q3 decline in credit-loss provision, but nine-month provision expense increased 2.0%. Retail annualized credit losses rose to 1.73% from 1.59%, and the 30-day delinquency rate rose to 3.72% from 3.61%.
- Share repurchases totaled $465.2 million for the first nine months, representing 8.8 million shares. Diluted weighted-average shares declined to 174.3 million from 181.6 million.
- Financial Services year-to-date results did not include the $9.3 million gain from the off-balance-sheet securitization recorded in 2016.
- The company issued $893.7 million of medium-term notes and repaid $400.0 million of medium-term notes during the first nine months.
Guidance, outlook, risks, contingencies, and unusual items
- Management maintained its expectation to ship 241,000 to 246,000 motorcycles worldwide in 2017, approximately 6% to 8% below 2016, including 46,700 to 51,700 units in Q4.
- Full-year Motorcycles segment gross margin was expected to decline versus 2016, with the decline greater than previously expected. Segment operating income as a percentage of revenue was expected to decline approximately one percentage point.
- Motorcycles operating expenses were expected to decline in dollars and remain flat as a percentage of revenue. Financial Services operating income was expected to decline, primarily because the 2016 securitization gain would not recur.
- Capital expenditure guidance was $200 million to $220 million for 2017, expected to be funded by operating cash flow. Full-year effective tax-rate guidance was approximately 33.4%.
- Management cited weak U.S. industry demand, soft used-motorcycle prices, hurricanes, international weakness in Japan, Australia and Mexico, dealer inventory management, foreign exchange, commodity costs, and competitive conditions as key risks.
- The U.S. asset-backed commercial paper conduit facilities had an expiration date of December 13, 2017, and the Canadian conduit had an expiration date of June 30, 2018. The company expected to renew applicable facilities.
- The EPA settlement regarding emissions-related matters was not yet final and was subject to court approval. The company had accrued an amount it believed would prevent a material adverse effect if finalized.
- Additional costs related to the York, Pennsylvania environmental matter could not be reasonably estimated. NHTSA was investigating reported brake failures on certain ABS-equipped motorcycles; no reserve had been established because management did not believe a loss was probable.
- The company stated that it remained in compliance with applicable debt covenants and that disclosure controls were effective.
Facts investors should verify
- Whether motorcycle demand and retail sales stabilize, particularly in the United States and weaker international markets.
- Whether the model year 2018 launch improves shipment mix, dealer inventory, gross margin, and full-year profitability.
- Trends in HDFS retail credit losses, delinquencies, allowance adequacy, and sub-prime exposure.
- Renewal and availability of the U.S. and Canadian conduit facilities and the company’s ability to refinance upcoming debt maturities.
- The pace and valuation of share repurchases relative to operating cash generation and leverage.
- Final resolution of the EPA settlement, York environmental obligations, NHTSA investigation, product liability matters, and warranty or recall costs.
- Adoption effects from pending accounting standards, particularly the expected-credit-loss standard, which management anticipated would increase the annual provision for credit losses.