Harley-Davidson, Inc. 2013 Form 10-K Summary
Business context and reporting period
Harley-Davidson operates through two segments: Motorcycles & Related Products, which designs, manufactures and wholesales motorcycles, parts, accessories and merchandise, and Financial Services, which provides dealer and retail financing and insurance-related products. The filing covers the fiscal year ended December 31, 2013, with quarterly data included for the fourth quarter. The filing was dated February 20, 2014.
- Worldwide motorcycle retail sales increased 4.4% to 260,839 units; wholesale shipments increased 5.2% to 260,471 units.
- U.S. 601+cc market share increased to 54.9% from 53.9% in 2012; European market share increased to 12.8% from 12.1%.
- 2013 included the launch of Project RUSHMORE touring motorcycles, completion of the multi-year restructuring program and implementation of surge manufacturing capabilities at York, Pennsylvania.
Financial performance and key metrics
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Total revenue | $5.900 billion | $5.581 billion | +5.7% |
| Motorcycles segment revenue | $5.258 billion | $4.943 billion | +6.4% |
| Financial Services revenue | $641.6 million | $637.9 million | +0.6% |
| Operating income | $1.154 billion | $1.000 billion | +15.3% |
| Net income | $734.0 million | $623.9 million | +17.6% |
| Diluted EPS | $3.28 | $2.72 | +20.6% |
| Operating cash flow | $977.1 million | $801.5 million | +21.9% |
| Total debt | $5.259 billion | $5.103 billion | +3.1% |
| Total equity | $3.009 billion | $2.558 billion | +17.7% |
- Motorcycles segment operating income was $870.6 million, up 21.7%; operating margin was approximately 16.6%, compared with approximately 14.5% in 2012.
- Motorcycles segment gross margin was 35.4%, compared with 34.8% in 2012 and 32.3% in 2009.
- Financial Services operating income declined 0.6% to $283.1 million. Higher credit-loss provisions largely offset lower interest expense and higher fee, licensing and insurance income.
- The consolidated effective tax rate declined to 34.1% from 35.1%, benefiting from reinstatement of the U.S. Federal Research and Development tax credit.
- Cash and cash equivalents were $1.067 billion, and current marketable securities were $99.0 million. Total liquidity, including available credit facilities, was $2.463 billion.
- Finance receivables totaled $6.110 billion gross, including $5.265 billion of retail receivables and $845.2 million of wholesale receivables. The allowance for credit losses was $110.7 million.
- Retail motorcycle loan losses increased to 1.09% from 0.79%; the 30-day delinquency rate improved to 3.71% from 3.94%.
- Capital expenditures were $208.3 million. The Company paid $187.7 million of dividends and repurchased $479.2 million of common stock, or approximately 8.2 million shares.
Material changes versus the prior comparable period
- Motorcycles segment profitability improved primarily because of higher shipment volume, model-year price increases, favorable product mix, lower manufacturing costs and sharply lower restructuring costs.
- These benefits were partly offset by adverse foreign-exchange movements, higher engineering expense and increased selling, administrative and information-system investment.
- Financial Services credit-loss provision increased to $60.0 million from $22.2 million, reflecting higher retail loss frequency, lower recoveries and the absence of approximately $17 million of allowance releases recorded in 2012.
- Restructuring activity was substantially completed. The Company recorded a $2.1 million restructuring benefit in 2013 versus $28.5 million of expense in 2012; cumulative restructuring and impairment expense since 2009 was $482.2 million.
- Shareholders’ equity increased substantially, aided by net income and a $275.0 million after-tax improvement in other comprehensive income, primarily from pension and postretirement benefit plans.
- Debt increased modestly, but the composition shifted toward higher commercial paper balances and lower term asset-backed securitization debt. Current maturities increased materially to $1.176 billion from $437.2 million.
Guidance, outlook, commentary and risks
- Management expected 2014 motorcycle shipments of 279,000 to 284,000 units, representing approximately 7% to 9% growth over 2013; first-quarter shipments were expected at 76,500 to 81,500 units.
- Management projected 2014 Motorcycles segment operating margin of 17.5% to 18.5%, versus 16.6% in 2013, with modest gross-margin improvement and operating leverage.
- The new Street motorcycles were expected to contribute 7,000 to 10,000 units to 2014 shipments, with availability beginning in the second quarter of 2014.
- Financial Services operating income was expected to decline modestly because of higher credit losses, tighter net interest margins and higher borrowing costs.
- 2014 capital expenditures were estimated at $215 million to $235 million and were expected to be funded by operating cash flow. The expected 2014 effective tax rate was approximately 35.5%.
- Key risks include discretionary consumer demand, weather and seasonality, dependence on independent dealers, international economic and foreign-exchange exposure, product development and regulatory compliance, union negotiations, supplier disruptions, cybersecurity, pension and healthcare costs, and access to capital markets for HDFS.
- HDFS depended on renewal of its $600 million U.S. commercial-paper conduit facility, expiring September 12, 2014, and its Canadian conduit facility, expiring June 30, 2014. Management expected to renew both facilities.
- The Company disclosed an ongoing EPA investigation involving motorcycle emissions certifications, aftermarket parts and emissions-related warranty claims. Potential remedies could not be reasonably estimated.
- The Company reserved approximately $3.9 million for its estimated share of York, Pennsylvania environmental remediation costs, but could not estimate potential additional costs while the remedial investigation remained underway.
- Unrecognized tax benefits were $63.1 million, with accrued interest and penalties of $24.4 million. The timing of potential cash settlement was not reliably estimable.
- Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting. Management concluded that internal controls were effective as of December 31, 2013.
Investor verification checklist
- Verify whether 2014 shipment growth and the projected 17.5% to 18.5% Motorcycles operating margin were achieved.
- Assess the trajectory of HDFS retail credit losses, delinquencies, allowance coverage and net interest margins.
- Review refinancing and renewal outcomes for the 2014 conduit maturities and the February 2014 senior unsecured notes maturity.
- Monitor foreign-exchange effects, particularly the euro, Australian dollar, Japanese yen and Brazilian real, and the effectiveness of hedging.
- Evaluate dealer inventory levels, retail demand, used-motorcycle pricing and the adoption of Street and Project RUSHMORE models.
- Follow developments in the EPA emissions inquiry, York environmental remediation and product-liability matters.
- Confirm the cash-flow impact of dividends, share repurchases, pension and healthcare obligations, and planned capital expenditures.