Harley-Davidson(HOG) - 2019 Q1 - Quarterly Report

Part I Financial Information This section presents unaudited consolidated financial statements, management's discussion, market risk, and controls Item 1. Financial Statements This section presents unaudited consolidated financial statements and detailed notes for the reporting periods Consolidated Statements of Income This section presents unaudited consolidated statements of income, detailing revenue, operating income, and net income Consolidated Statements of Income (Q1 2019 vs Q1 2018) | Metric | March 31, 2019 (in thousands) | April 1, 2018 (in thousands) | YoY Change | | :--- | :--- | :--- | :--- | | Total Revenue | $1,384,380 | $1,542,121 | -10.2% | | Motorcycles and Related Products Revenue | $1,195,637 | $1,363,947 | -12.3% | | Financial Services Revenue | $188,743 | $178,174 | +5.9% | | Operating Income | $167,112 | $236,417 | -29.3% | | Net Income | $127,945 | $174,763 | -26.8% | | Diluted EPS | $0.80 | $1.03 | -22.3% | Consolidated Balance Sheets This section provides unaudited consolidated balance sheets, outlining assets, liabilities, and shareholders' equity Consolidated Balance Sheet Highlights | Metric | March 31, 2019 (in thousands) | December 31, 2018 (in thousands) | April 1, 2018 (in thousands) | | :--- | :--- | :--- | :--- | | Total Assets | $10,580,613 | $10,665,664 | $10,277,621 | | Cash and cash equivalents | $749,600 | $1,203,766 | $753,517 | | Finance receivables, net (Total) | $7,438,592 | $7,221,931 | $7,126,442 | | Inventories | $595,806 | $556,128 | $564,571 | | Total Liabilities | $8,783,002 | $8,891,715 | $8,281,672 | | Short-term debt | $1,192,925 | $1,135,810 | $1,036,976 | | Long-term debt, net | $4,744,694 | $4,887,667 | $4,108,511 | | Total Shareholders' Equity | $1,797,611 | $1,773,949 | $1,995,949 | Consolidated Statements of Cash Flows This section presents unaudited consolidated statements of cash flows, categorizing cash movements by activity Consolidated Cash Flow Summary (Q1 2019 vs Q1 2018) | Cash Flow Activity | Three months ended March 31, 2019 (in thousands) | Three months ended April 1, 2018 (in thousands) | | :--- | :--- | :--- | | Net cash provided by operating activities | $32,671 | $191,594 | | Net cash used by investing activities | ($77,200) | ($21,651) | | Net cash used by financing activities | ($415,679) | ($98,930) | | Net (decrease) increase in cash | ($460,617) | $73,047 | Notes to Consolidated Financial Statements This section details accounting policies, segment information, and financial instrument disclosures - The company operates in two reportable segments: Motorcycles and Related Products (Motorcycles) and Financial Services[21] - The company adopted new lease accounting standard ASU 2016-02 on January 1, 2019, resulting in the recognition of right-of-use assets and lease liabilities of approximately $60 million[22][24] Revenue by Source (Q1 2019 vs Q1 2018) | Revenue Source | Q1 2019 (in thousands) | Q1 2018 (in thousands) | | :--- | :--- | :--- | | Motorcycles & Related Products | $1,195,637 | $1,363,947 | | Motorcycles | $964,575 | $1,121,673 | | Parts & Accessories | $159,703 | $169,075 | | General Merchandise | $55,401 | $56,601 | | Financial Services | $188,743 | $178,174 | | Total Revenue | $1,384,380 | $1,542,121 | - The company initiated a multi-year Manufacturing Optimization Plan in January 2018, involving the consolidation of its Kansas City plant into its York, PA plant and the closure of its Adelaide, Australia wheel operations. Expected costs are $152 million to $162 million through 2019[34][35] - On March 4, 2019, the company acquired StaCyc, Inc., a producer of electric-powered two-wheelers for children, for a total consideration of $14.9 million. This acquisition supports the company's expansion into electric vehicles[45] Finance Receivables, Net by Type | Type | March 31, 2019 (in thousands) | April 1, 2018 (in thousands) | | :--- | :--- | :--- | | Retail | $6,290,036 | $6,064,192 | | Wholesale | $1,339,428 | $1,252,600 | | Total Finance Receivables | $7,629,464 | $7,316,792 | - The company utilizes derivative instruments, including foreign currency contracts, commodity contracts, and interest rate swaps, to mitigate risks from foreign exchange rates, commodity prices, and interest rates. These are not used for speculative purposes[69][70][71] - The company participates in asset-backed financing through both on-balance sheet and off-balance sheet special purpose entities (SPEs) to convert retail motorcycle finance receivables into cash[88][91] Operating Income by Segment (Q1 2019 vs Q1 2018) | Segment | Q1 2019 (in thousands) | Q1 2018 (in thousands) | YoY Change | | :--- | :--- | :--- | :--- | | Motorcycles | $108,381 | $172,838 | -37.3% | | Financial Services | $58,731 | $63,579 | -7.6% | | Total Operating Income | $167,112 | $236,417 | -29.3% | Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Management discusses Q1 2019 financial results, outlook, segment performance, liquidity, and risks Overview and Outlook This section provides an executive summary of financial performance, retail sales, and future guidance - Q1 2019 net income was $127.9 million ($0.80/share), down from $174.8 million ($1.03/share) in Q1 2018. The decline was driven by lower shipments, unfavorable mix, and incremental tariffs in the Motorcycles segment[160] - Worldwide dealer retail sales of new motorcycles fell 3.8% YoY in Q1 2019, with U.S. sales down 4.2% and international sales down 3.3%. Sales were adversely impacted by limited availability of Street motorcycles following a recall[161] - 2019 Outlook: The company expects to ship 217,000 to 222,000 motorcycles, down 3% to 5% from 2018. Motorcycles segment operating margin is expected to be between 8.0% and 9.0%. The impact of incremental tariffs is projected to be approximately $100 million to $120 million[165][169][171] - Q2 2019 Outlook: The company expects to ship 65,500 to 70,500 motorcycles, down 3% to 10% YoY. Motorcycles segment operating margin is expected to be down approximately 4 percentage points compared to Q2 2018[172] Results of Operations This section analyzes operational performance, including retail sales, wholesale shipments, and segment results Worldwide Retail Sales of Harley-Davidson Motorcycles (Q1 2019 vs Q1 2018) | Region | Q1 2019 Units | Q1 2018 Units | YoY Change | | :--- | :--- | :--- | :--- | | United States | 28,091 | 29,309 | -4.2% | | International | 21,060 | 21,777 | -3.3% | | Total Worldwide | 49,151 | 51,086 | -3.8% | - In the U.S., the company's market share for new 601+cc motorcycles increased by 0.6 percentage points to 51.1% in Q1 2019, despite a 4.7% decline in the overall U.S. industry[190][192] Wholesale Motorcycle Unit Shipments (Q1 2019 vs Q1 2018) | Category | Q1 2019 Units | Q1 2018 Units | YoY Change | | :--- | :--- | :--- | :--- | | Touring | 25,043 | 30,857 | -18.8% | | Cruiser | 20,451 | 21,554 | -5.1% | | Sportster® / Street | 13,397 | 11,533 | +16.2% | | Total Units | 58,891 | 63,944 | -7.9% | - Motorcycles segment gross profit decreased by $126.3 million (26.7%) YoY, driven by lower shipment volume, unfavorable shipment mix, negative currency effects, and $21.0 million in incremental tariff costs[199][200][201] - Financial Services segment operating income decreased 7.6% to $58.7 million, primarily due to a higher provision for credit losses, higher interest expense from increased debt, and higher operating expenses related to a new loan management system[203][204][206] Liquidity and Capital Resources This section discusses cash flow, debt levels, share repurchases, and overall financial flexibility - Net cash provided by operating activities decreased significantly to $32.7 million in Q1 2019 from $191.6 million in Q1 2018, primarily due to lower sales and unfavorable changes in working capital[225][226] - The company repurchased 1.7 million shares for $61.7 million during Q1 2019. As of March 31, 2019, 14.9 million shares remained on a board-approved share repurchase authorization[228][262] - Total debt increased to $7.31 billion as of March 31, 2019, from $7.02 billion as of April 1, 2018[229] - The company maintains a support agreement with its financial services arm, HDFS, to ensure HDFS maintains a fixed-charge coverage of at least 1.25 and a minimum net worth of $40.0 million[245] Quantitative and Qualitative Disclosures About Market Risk The company is exposed to market risks from foreign exchange, commodities, and interest rates, mitigated by derivatives - The company's primary market risks are foreign currency fluctuations (especially Euro, AUD, JPY, BRL, CAD, MXN), commodity price changes, and interest rate changes affecting HDFS[254][255][256] - Derivative financial instruments are used selectively to hedge these risks under strict policies that prohibit speculative trading[254] Controls and Procedures Management concluded disclosure controls were effective, with no material changes to internal financial reporting controls - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of the end of the quarter[258] - There were no changes in internal control over financial reporting during the quarter that materially affected, or are reasonably likely to materially affect, the company's internal controls[259] Part II Other Information This section details legal proceedings, equity security transactions, and a list of exhibits filed with the report Legal Proceedings The company is involved in various legal proceedings, including EPA matters, with accruals for potential costs - The company is awaiting a court decision on a 2017 settlement with the EPA regarding emissions and aftermarket parts. An accrual has been made for this matter[133][211] - The company is involved in ongoing environmental remediation at its York, PA facility, sharing costs with the U.S. Navy. An accrual for its share of future costs has been recorded[134][135][136] Unregistered Sales of Equity Securities and Use of Proceeds The company repurchased 1.71 million shares in Q1 2019, with 14.9 million shares remaining for repurchase Share Repurchases in Q1 2019 | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | Jan 1 - Feb 3 | 457,779 | $34 | | Feb 4 - Mar 3 | 1,254,645 | $37 | | Mar 4 - Mar 31 | 1,588 | $37 | | Total | 1,714,012 | $36 | - As of March 31, 2019, 14.9 million shares remained available for repurchase under the February 2018 board authorization[262] Exhibits This section provides an index of exhibits filed with the Form 10-Q, including certifications and XBRL data - Exhibits filed include officer's certificates for Medium-Term Notes, CEO and CFO certifications pursuant to Rule 13a-14(a), and XBRL instance documents[267]