HOG - 06.29.2014 - 10Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
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Q | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 29, 2014
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£ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 1-9183
Harley-Davidson, Inc.
(Exact name of registrant as specified in its charter)
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Wisconsin | | 39-1382325 |
(State of organization) | | (I.R.S. Employer Identification No.) |
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3700 West Juneau Avenue Milwaukee, Wisconsin | | 53208 |
(Address of principal executive offices) | | (Zip code) |
Registrants telephone number: (414) 342-4680
None
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such requirements for the past 90 days. Yes Q No £
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes Q No £
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer | | Q | Accelerated filer | | £ |
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Non-accelerated filer | | £ | Smaller reporting company | | £ |
Indicate by check mark whether the registrant is a shell company as defined in Rule 12b-2 of the Exchange Act. Yes £ No Q
Number of shares of the registrant’s common stock outstanding at July 31, 2014: 217,464,154 shares
Harley-Davidson, Inc.
Form 10-Q
For The Quarter Ended June 29, 2014
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Part I | | |
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Item 1. | | |
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Item 2. | | |
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Item 3. | | |
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Item 4. | | |
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Part II | | |
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Item 1. | | |
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Item 2. | | |
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Item 6. | | |
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PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
HARLEY-DAVIDSON, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
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| | | | | | | | | | | | | | | |
| Three months ended | | Six months ended |
| June 29, 2014 | | June 30, 2013 | | June 29, 2014 | | June 30, 2013 |
Revenue: | | | | | | | |
Motorcycles and Related Products | $ | 1,834,285 |
| | $ | 1,631,466 |
| | $ | 3,405,973 |
| | $ | 3,045,714 |
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Financial Services | 166,414 |
| | 162,841 |
| | 320,774 |
| | 319,806 |
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Total revenue | 2,000,699 |
| | 1,794,307 |
| | 3,726,747 |
| | 3,365,520 |
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Costs and expenses: | | | | | | | |
Motorcycles and Related Products cost of goods sold | 1,110,146 |
| | 1,029,596 |
| | 2,089,703 |
| | 1,924,402 |
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Financial Services interest expense | 40,741 |
| | 45,506 |
| | 79,598 |
| | 86,060 |
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Financial Services provision for credit losses | 15,961 |
| | 11,297 |
| | 36,292 |
| | 24,407 |
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Selling, administrative and engineering expense | 286,156 |
| | 281,384 |
| | 562,577 |
| | 552,883 |
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Restructuring benefit | — |
| | (5,297 | ) | | — |
| | (2,359 | ) |
Total costs and expenses | 1,453,004 |
| | 1,362,486 |
| | 2,768,170 |
| | 2,585,393 |
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Operating income | 547,695 |
| | 431,821 |
| | 958,577 |
| | 780,127 |
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Investment income | 1,772 |
| | 1,770 |
| | 3,431 |
| | 3,385 |
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Interest expense | 393 |
| | 11,238 |
| | 4,070 |
| | 22,629 |
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Income before provision for income taxes | 549,074 |
| | 422,353 |
| | 957,938 |
| | 760,883 |
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Provision for income taxes | 194,921 |
| | 150,614 |
| | 337,868 |
| | 265,015 |
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Net income | $ | 354,153 |
| | $ | 271,739 |
| | $ | 620,070 |
| | $ | 495,868 |
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Earnings per common share: | | | | | | | |
Basic | $ | 1.63 |
| | $ | 1.22 |
| | $ | 2.84 |
| | $ | 2.22 |
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Diluted | $ | 1.62 |
| | $ | 1.21 |
| | $ | 2.82 |
| | $ | 2.20 |
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Cash dividends per common share | $ | 0.275 |
| | $ | 0.210 |
| | $ | 0.550 |
| | $ | 0.420 |
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The accompanying notes are an integral part of the consolidated financial statements.
HARLEY-DAVIDSON, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
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| | | | | | | | | | | | | | | |
| Three months ended | | Six months ended |
| June 29, 2014 | | June 30, 2013 | | June 29, 2014 | | June 30, 2013 |
Net Income | $ | 354,153 |
| | $ | 271,739 |
| | $ | 620,070 |
| | $ | 495,868 |
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Other comprehensive income (loss), net of tax | | | | | | | |
Foreign currency translation adjustments | 5,733 |
| | (11,304 | ) | | 8,681 |
| | (21,874 | ) |
Derivative financial instruments | 3,150 |
| | (90 | ) | | 2,923 |
| | 10,511 |
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Marketable securities | (74 | ) | | (383 | ) | | (116 | ) | | (627 | ) |
Pension and postretirement benefit plans | 6,069 |
| | 10,239 |
| | 12,137 |
| | 20,478 |
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Total other comprehensive income (loss), net of tax | $ | 14,878 |
| | $ | (1,538 | ) | | $ | 23,625 |
| | $ | 8,488 |
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Comprehensive income | $ | 369,031 |
| | $ | 270,201 |
| | $ | 643,695 |
| | $ | 504,356 |
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The accompanying notes are an integral part of the consolidated financial statements.
HARLEY-DAVIDSON, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
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| (Unaudited) | | | | (Unaudited) |
| June 29, 2014 | | December 31, 2013 | | June 30, 2013 |
ASSETS | | | | | |
Current assets: | | | | | |
Cash and cash equivalents | $ | 999,346 |
| | $ | 1,066,612 |
| | $ | 1,300,690 |
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Marketable securities | 57,814 |
| | 99,009 |
| | 133,631 |
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Accounts receivable, net | 289,940 |
| | 261,065 |
| | 253,819 |
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Finance receivables, net | 2,281,512 |
| | 1,773,686 |
| | 2,010,974 |
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Inventories | 371,597 |
| | 424,507 |
| | 307,717 |
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Restricted cash | 154,681 |
| | 144,807 |
| | 212,004 |
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Deferred income taxes | 90,348 |
| | 103,625 |
| | 108,806 |
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Other current assets | 128,460 |
| | 115,492 |
| | 126,830 |
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Total current assets | 4,373,698 |
| | 3,988,803 |
| | 4,454,471 |
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Finance receivables, net | 4,537,405 |
| | 4,225,877 |
| | 4,214,612 |
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Property, plant and equipment, net | 826,467 |
| | 842,477 |
| | 790,563 |
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Prepaid pension costs | 256,279 |
| | 244,871 |
| | — |
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Goodwill | 30,252 |
| | 30,452 |
| | 29,183 |
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Deferred income taxes | 2,915 |
| | 3,339 |
| | 149,880 |
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Other long-term assets | 49,280 |
| | 69,221 |
| | 68,489 |
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| $ | 10,076,296 |
| | $ | 9,405,040 |
| | $ | 9,707,198 |
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LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | |
Current liabilities: | | | | | |
Accounts payable | $ | 388,342 |
| | $ | 239,794 |
| | $ | 344,423 |
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Accrued liabilities | 500,769 |
| | 427,335 |
| | 450,247 |
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Short-term debt | 619,622 |
| | 666,317 |
| | 525,745 |
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Current portion of long-term debt | 944,915 |
| | 1,176,140 |
| | 776,274 |
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Total current liabilities | 2,453,648 |
| | 2,509,586 |
| | 2,096,689 |
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Long-term debt | 3,794,396 |
| | 3,416,713 |
| | 4,234,352 |
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Pension liability | 38,174 |
| | 36,371 |
| | 148,974 |
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Postretirement healthcare liability | 209,312 |
| | 216,165 |
| | 271,122 |
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Deferred income taxes | 38,919 |
| | 49,499 |
| | — |
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Other long-term liabilities | 175,587 |
| | 167,220 |
| | 134,822 |
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Commitments and contingencies (Note 16) |
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Shareholders’ equity: | | | | | |
Preferred stock, none issued | — |
| | — |
| | — |
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Common stock | 3,439 |
| | 3,432 |
| | 3,414 |
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Additional paid-in-capital | 1,231,913 |
| | 1,175,052 |
| | 1,128,079 |
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Retained earnings | 8,352,168 |
| | 7,852,729 |
| | 7,708,238 |
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Accumulated other comprehensive loss | (309,051 | ) | | (332,676 | ) | | (599,190 | ) |
Treasury stock, at cost | (5,912,209 | ) | | (5,689,051 | ) | | (5,419,302 | ) |
Total shareholders' equity | 3,366,260 |
| | 3,009,486 |
| | 2,821,239 |
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| $ | 10,076,296 |
| | $ | 9,405,040 |
| | $ | 9,707,198 |
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HARLEY-DAVIDSON, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (continued)
(In thousands)
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| (Unaudited) | | | | (Unaudited) |
| June 29, 2014 | | December 31, 2013 | | June 30, 2013 |
Balances held by consolidated variable interest entities (Note 6) | | | | | |
Current finance receivables, net | $ | 359,085 |
| | $ | 352,899 |
| | $ | 461,978 |
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Other assets | $ | 2,521 |
| | $ | 4,149 |
| | $ | 4,256 |
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Non-current finance receivables, net | $ | 1,495,171 |
| | $ | 1,184,441 |
| | $ | 1,717,462 |
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Restricted cash | $ | 141,146 |
| | $ | 133,053 |
| | $ | 198,893 |
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Current portion of long-term debt | $ | 403,891 |
| | $ | 334,630 |
| | $ | 433,524 |
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Long-term debt | $ | 1,308,964 |
| | $ | 922,002 |
| | $ | 1,240,235 |
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The accompanying notes are an integral part of the consolidated financial statements.
HARLEY-DAVIDSON, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
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| Six months ended |
| June 29, 2014 | | June 30, 2013 |
Net cash provided by operating activities (Note 3) | $ | 570,592 |
| | $ | 389,677 |
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Cash flows from investing activities: | | | |
Capital expenditures | (74,523 | ) | | (66,589 | ) |
Origination of finance receivables | (1,904,577 | ) | | (1,653,232 | ) |
Collections on finance receivables | 1,518,186 |
| | 1,422,688 |
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Purchases of marketable securities | — |
| | (4,998 | ) |
Sales and redemptions of marketable securities | 41,010 |
| | 6,003 |
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Other | 145 |
| | 6,667 |
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Net cash used by investing activities | (419,759 | ) | | (289,461 | ) |
Cash flows from financing activities: | | | |
Repayments of senior unsecured notes | (303,000 | ) | | — |
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Repayments of medium-term notes | (7,220 | ) | | (27,858 | ) |
Proceeds from securitization debt | 847,126 |
| | 647,516 |
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Repayments of securitization debt | (393,655 | ) | | (423,455 | ) |
Net (decrease) increase in credit facilities and unsecured commercial paper | (48,134 | ) | | 230,761 |
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Borrowings of asset-backed commercial paper | 36,800 |
| | 47,061 |
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Repayments of asset-backed commercial paper | (37,317 | ) | | (37,642 | ) |
Net change in restricted cash | (9,874 | ) | | (23,996 | ) |
Dividends paid | (120,631 | ) | | (94,213 | ) |
Purchase of common stock for treasury | (223,736 | ) | | (208,699 | ) |
Excess tax benefits from share-based payments | 8,652 |
| | 16,338 |
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Issuance of common stock under employee stock option plans | 27,907 |
| | 24,677 |
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Net cash (used by) provided by financing activities | (223,082 | ) | | 150,490 |
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Effect of exchange rate changes on cash and cash equivalents | 4,983 |
| | (18,154 | ) |
Net (decrease) increase in cash and cash equivalents | $ | (67,266 | ) | | $ | 232,552 |
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Cash and cash equivalents: | | | |
Cash and cash equivalents—beginning of period | $ | 1,066,612 |
| | $ | 1,068,138 |
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Net (decrease) increase in cash and cash equivalents | (67,266 | ) | | 232,552 |
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Cash and cash equivalents—end of period | $ | 999,346 |
| | $ | 1,300,690 |
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The accompanying notes are an integral part of the consolidated financial statements.
HARLEY-DAVIDSON, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation and Use of Estimates
The condensed consolidated financial statements include the accounts of Harley-Davidson, Inc. and its wholly-owned subsidiaries (the Company), including the accounts of the group of companies doing business as Harley-Davidson Motor Company (HDMC) and Harley-Davidson Financial Services (HDFS). In addition, certain variable interest entities (VIEs) related to secured financing are consolidated as the Company is the primary beneficiary. All intercompany accounts and material intercompany transactions are eliminated.
In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the condensed consolidated balance sheets as of June 29, 2014 and June 30, 2013, the condensed consolidated statements of operations for the three and six month periods then ended, the condensed consolidated statements of comprehensive income for the three and six month periods then ended and the condensed consolidated statements of cash flows for the six month periods then ended.
Certain information and footnote disclosures normally included in complete financial statements have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) and U.S. generally accepted accounting principles (U.S. GAAP) for interim financial reporting. These condensed consolidated financial statements should be read in conjunction with the audited financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.
The Company operates in two business segments: Motorcycles & Related Products (Motorcycles) and Financial Services (Financial Services).
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. Actual results could differ from those estimates.
2. New Accounting Standards
Accounting Standards Not Yet Adopted
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09 Revenue from Contracts with Customers (ASU No. 2014-09). ASU No. 2014-09 is a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The Company is required to adopt ASU No. 2014-09 for fiscal years beginning after December 15, 2016 and for interim periods therein. The Company is currently evaluating the impact of adoption.
Accounting Standards Recently Adopted
In July 2013, the FASB issued ASU No. 2013-11 Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (ASU No. 2013-11). ASU No. 2013-11 amends the guidance within Accounting Standards Codification (ASC) Topic 740, "Income Taxes", to require entities to present an unrecognized tax benefit, or a portion of an unrecognized tax benefit, in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. The Company adopted ASU No. 2013-11 on January 1, 2014. There were no material presentation changes resulting from the adoption of ASU No. 2013-11.
3. Additional Balance Sheet and Cash Flow Information
Marketable Securities
The Company’s marketable securities consisted of the following (in thousands):
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| June 29, 2014 | | December 31, 2013 | | June 30, 2013 |
Available-for-sale: Corporate bonds | $ | 57,814 |
| | $ | 99,009 |
| | $ | 133,631 |
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Trading securities: Mutual funds | 33,567 |
| | 30,172 |
| | 22,193 |
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| $ | 91,381 |
| | $ | 129,181 |
| | $ | 155,824 |
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The Company’s available-for-sale securities are carried at fair value with any unrealized gains or losses reported in other comprehensive income. During the first half of 2014 and 2013, the Company recognized gross unrealized losses of approximately $184,000 and $996,000, respectively, or $116,000 and $627,000 net of taxes, respectively, to adjust amortized cost to fair value. The marketable securities have contractual maturities that generally come due over the next 9 to 23 months.
The Company's trading securities relate to investments held by the Company to fund certain deferred compensation obligations. The trading securities are carried at fair value with gains and losses recorded in net income and investments are included in other long-term assets on the consolidated balance sheets.
Inventories
Inventories are valued at the lower of cost or market. Substantially all inventories located in the United States are valued using the last-in, first-out (LIFO) method. Other inventories are valued at the lower of cost or market using the first-in, first-out (FIFO) method. Inventories consist of the following (in thousands):
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| June 29, 2014 | | December 31, 2013 | | June 30, 2013 |
Components at the lower of FIFO cost or market | | | | | |
Raw materials and work in process | $ | 118,720 |
| | $ | 140,302 |
| | $ | 116,334 |
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Motorcycle finished goods | 179,314 |
| | 205,416 |
| | 111,188 |
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Parts and accessories and general merchandise | 122,289 |
| | 127,515 |
| | 126,084 |
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Inventory at lower of FIFO cost or market | 420,323 |
| | 473,233 |
| | 353,606 |
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Excess of FIFO over LIFO cost | (48,726 | ) | | (48,726 | ) | | (45,889 | ) |
| $ | 371,597 |
| | $ | 424,507 |
| | $ | 307,717 |
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Operating Cash Flow
The reconciliation of net income to net cash provided by operating activities is as follows (in thousands):
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| Six months ended |
| June 29, 2014 | | June 30, 2013 |
Cash flows from operating activities: | | | |
Net income | $ | 620,070 |
| | $ | 495,868 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | | | |
Depreciation | 87,123 |
| | 83,406 |
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Amortization of deferred loan origination costs | 45,713 |
| | 40,947 |
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Amortization of financing origination fees | 4,284 |
| | 4,635 |
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Provision for employee long-term benefits | 16,854 |
| | 33,382 |
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Contributions to pension and postretirement plans | (14,035 | ) | | (189,116 | ) |
Stock compensation expense | 20,768 |
| | 21,061 |
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Net change in wholesale finance receivables related to sales | (510,200 | ) | | (293,293 | ) |
Provision for credit losses | 36,292 |
| | 24,407 |
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Loss on debt extinguishment | 1,145 |
| | 4,947 |
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Deferred income taxes | (5,084 | ) | | — |
|
Foreign currency adjustments | (3,894 | ) | | 18,529 |
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Other, net | 9,332 |
| | (442 | ) |
Changes in current assets and liabilities: | | | |
Accounts receivable, net | (25,643 | ) | | (34,787 | ) |
Finance receivables—accrued interest and other | (993 | ) | | 699 |
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Inventories | 58,741 |
| | 69,475 |
|
Accounts payable and accrued liabilities | 226,233 |
| | 70,721 |
|
Restructuring reserves | — |
| | (22,790 | ) |
Derivative instruments | 968 |
| | (1,557 | ) |
Other | 2,918 |
| | 63,585 |
|
Total adjustments | (49,478 | ) | | (106,191 | ) |
Net cash provided by operating activities | $ | 570,592 |
| | $ | 389,677 |
|
4. Restructuring Expense
In 2013, the Company completed the activities related to its 2009, 2010, and 2011 Restructuring Plans.
2011 Restructuring Plans
In December 2011, the Company made a decision to cease operations at New Castalloy, its Australian subsidiary and producer of cast motorcycle wheels and wheel hubs, and source those components through other existing suppliers by the end of 2013 (2011 New Castalloy Restructuring Plan). Under this plan, the Company successfully transitioned a significant amount of wheel production to other existing suppliers. However, during the second quarter of 2013, the Company made a decision to retain limited operations at New Castalloy focused on the production of certain complex, high-finish wheels in a cost-effective and competitive manner. At that time, the Company also entered into a new agreement with the unionized labor force at New Castalloy.
In connection with the modified 2011 New Castalloy Restructuring Plan, the New Castalloy workforce was reduced by approximately 100 employees, leaving approximately 100 remaining employees to support the ongoing operations. The original plan would have resulted in a workforce reduction of approximately 200 employees.
Under the modified 2011 New Castalloy Restructuring Plan, restructuring expenses consisted of employee severance and termination costs, accelerated depreciation and other related costs. On a cumulative basis, the Company incurred $22.1 million of restructuring expense under the modified 2011 New Castalloy Restructuring Plan, of which approximately 35% was non-cash. This includes a benefit related to restructuring reserves released in the second quarter of 2013 in connection with the decision to retain a limited operation at the New Castalloy facility, as described above.
In February 2011, the Company’s unionized employees at its facility in Kansas City, Missouri ratified a new seven-year labor agreement. The new agreement took effect on August 1, 2011. The new contract is similar to the labor agreements ratified at the Company’s Wisconsin facilities in September 2010 and its York, Pennsylvania production facility in December 2009 and allows for similar flexibility, increased production efficiency and the addition of a flexible workforce component.
The actions to implement the new ratified labor agreement (2011 Kansas City Restructuring Plan) resulted in approximately 145 fewer full-time hourly unionized employees in its Kansas City facility than would have been required under the previous contract.
Under the 2011 Kansas City Restructuring Plan, restructuring expenses consisted of employee severance and termination costs and other related costs. On a cumulative basis, the Company incurred $6.0 million of restructuring expense under the 2011 Kansas City Restructuring Plan, of which approximately 10% was non-cash.
The following table summarizes the Motorcycles segment’s 2011 Kansas City Restructuring Plan and modified 2011 New Castalloy Restructuring Plan reserve activity and balances as recorded in accrued liabilities as of June 30, 2013 (in thousands): |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Six months ended June 30, 2013 |
| Kansas City | | New Castalloy | | Consolidated |
| Employee Severance and Termination Costs | | Other | | Total | | Employee Severance and Termination Costs | | Accelerated Depreciation | | Other | | Total | | Total |
Balance, beginning of period | $ | 2,259 |
| | $ | — |
| | $ | 2,259 |
| | $ | 9,306 |
| | $ | — |
| | $ | 145 |
| | $ | 9,451 |
| | $ | 11,710 |
|
Restructuring expense | — |
| | — |
| | — |
| | 860 |
| | 2,093 |
| | 577 |
| | 3,530 |
| | 3,530 |
|
Utilized—cash | (1,283 | ) | | — |
| | (1,283 | ) | | (4,019 | ) | | — |
| | (589 | ) | | (4,608 | ) | | (5,891 | ) |
Utilized—non-cash | — |
| | — |
| | — |
| | — |
| | (2,093 | ) | | — |
| | (2,093 | ) | | (2,093 | ) |
Non-cash reserve release | (376 | ) | | — |
| | (376 | ) | | (5,250 | ) | | — |
| | — |
| | (5,250 | ) | | (5,626 | ) |
Balance, end of period | $ | 600 |
| | $ | — |
| | $ | 600 |
| | $ | 897 |
| | $ | — |
| | $ | 133 |
| | $ | 1,030 |
| | $ | 1,630 |
|
2010 Restructuring Plan
In September 2010, the Company’s unionized employees in Wisconsin ratified three separate new seven-year labor agreements which took effect in April 2012 when the prior contracts expired. The new contracts are similar to the labor agreement ratified at the Company's York, Pennsylvania production facility in December 2009 and allow for similar flexibility, increased production efficiency and the addition of a flexible workforce component.
The actions to implement the new ratified labor agreements (2010 Restructuring Plan) resulted in approximately 250 fewer full-time hourly unionized employees in its Milwaukee-area facilities than would have been required under the previous contracts and approximately 75 fewer full-time hourly unionized employees in its Tomahawk, Wisconsin facility than would have been required under the previous contract.
Under the 2010 Restructuring Plan, restructuring expenses consisted of employee severance and termination costs and other related costs. On a cumulative basis, the Company incurred $59.2 million of restructuring expense under the 2010 Restructuring Plan, of which approximately 45% was non-cash.
The following table summarizes the Motorcycles segment’s 2010 Restructuring Plan reserve activity and balances as recorded in accrued liabilities as of June 30, 2013 (in thousands):
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| | | |
| Six months ended |
| June 30, 2013 |
| Employee Severance and Termination Costs |
Balance, beginning of period | $ | 10,156 |
|
Restructuring expense | — |
|
Utilized—cash | (9,710 | ) |
Non-cash reserve release | (336 | ) |
Balance, end of period | $ | 110 |
|
2009 Restructuring Plan
During 2009, in response to the U.S. economic recession and worldwide slowdown in consumer demand, the Company committed to a volume reduction and a combination of restructuring actions (2009 Restructuring Plan) expected to be completed at various dates between 2009 and 2013. The actions were designed to reduce administrative costs, eliminate excess capacity and exit non-core business operations. The Company’s announced actions include the restructuring and transformation of its York, Pennsylvania production facility including the implementation of a new more flexible unionized labor agreement which allows for the addition of a flexible workforce component; consolidation of facilities related to engine and transmission production; outsourcing of certain distribution and transportation activities and exiting the Buell product line. In addition, the Company implemented projects under this plan involving the outsourcing of select information technology activities and the consolidation of an administrative office in Michigan into its corporate headquarters in Milwaukee, Wisconsin.
The 2009 Restructuring Plan resulted in a reduction of approximately 2,900 hourly production positions and approximately 800 non-production, primarily salaried positions within the Motorcycles segment and approximately 100 salaried positions in the Financial Services segment.
Under the 2009 Restructuring Plan, restructuring expenses consisted of employee severance and termination costs, accelerated depreciation on the long-lived assets that were exited as part of the 2009 Restructuring Plan and other related costs. On a cumulative basis, the Company incurred $393.8 million of restructuring and impairment expense under the 2009 Restructuring Plan, of which approximately 30% was non-cash.
The following table summarizes the Company’s 2009 Restructuring Plan reserve activity and balances recorded in accrued liabilities as of June 30, 2013 (in thousands):
|
| | | | | | | | | | | | | | | |
| Six months ended June 30, 2013 |
| Motorcycles & Related Products |
| Employee Severance and Termination Costs | | Accelerated Depreciation | | Other | | Total |
Balance, beginning of period | $ | 5,196 |
| | $ | — |
| | $ | 161 |
| | $ | 5,357 |
|
Restructuring expense | — |
| | — |
| | 1,606 |
| | 1,606 |
|
Utilized—cash | (1,613 | ) | | — |
| | (1,591 | ) | | (3,204 | ) |
Non-cash reserve release | (1,533 | ) | | — |
| | — |
| | (1,533 | ) |
Balance, end of period | $ | 2,050 |
| | $ | — |
|
| $ | 176 |
| | $ | 2,226 |
|
Other restructuring costs include items such as the exit costs for terminating supply contracts, lease termination costs and moving costs.
5. Finance Receivables
HDFS provides retail financial services to customers of the Company’s independent dealers in the United States and Canada. The origination of retail loans is a separate and distinct transaction between HDFS and the retail customer, unrelated to the Company’s sale of product to its dealers. Retail finance receivables consist of secured promissory notes and secured installment sales contracts. HDFS holds either titles or liens on titles to vehicles financed by promissory notes and installment sales contracts.
HDFS offers wholesale financing to the Company’s independent dealers. Wholesale loans to dealers are generally secured by financed inventory or property and are originated in the U.S. and Canada.
Finance receivables, net, consisted of the following (in thousands):
|
| | | | | | | | | | | |
| June 29, 2014 | | December 31, 2013 | | June 30, 2013 |
Retail | $ | 5,603,187 |
| | $ | 5,265,044 |
| | $ | 5,248,289 |
|
Wholesale | 1,338,085 |
| | 845,212 |
| | 1,088,621 |
|
| 6,941,272 |
| | 6,110,256 |
| | 6,336,910 |
|
Allowance for credit losses | (122,355 | ) | | (110,693 | ) | | (111,324 | ) |
| $ | 6,818,917 |
| | $ | 5,999,563 |
| | $ | 6,225,586 |
|
A provision for credit losses on finance receivables is charged or credited to earnings in amounts that the Company believes are sufficient to maintain the allowance for credit losses at a level that is adequate to cover losses of principal inherent in the existing portfolio. The allowance for credit losses represents management’s estimate of probable losses inherent in the finance receivable portfolio as of the balance sheet date. However, due to the use of projections and assumptions in estimating the losses, the amount of losses actually incurred by the Company could differ from the amounts estimated.
Changes in the allowance for credit losses on finance receivables by portfolio were as follows (in thousands):
|
| | | | | | | | | | | |
| Three months ended June 29, 2014 |
| Retail | | Wholesale | | Total |
Balance, beginning of period | $ | 106,776 |
| | $ | 7,753 |
| | $ | 114,529 |
|
Provision for credit losses | 16,258 |
| | (297 | ) | | 15,961 |
|
Charge-offs | (19,018 | ) | | — |
| | (19,018 | ) |
Recoveries | 10,883 |
| | — |
| | 10,883 |
|
Balance, end of period | $ | 114,899 |
| | $ | 7,456 |
| | $ | 122,355 |
|
| Three months ended June 30, 2013 |
| Retail | | Wholesale | | Total |
Balance, beginning of period | $ | 98,542 |
| | $ | 8,250 |
| | $ | 106,792 |
|
Provision for credit losses | 11,993 |
| | (696 | ) | | 11,297 |
|
Charge-offs | (18,166 | ) | | — |
| | (18,166 | ) |
Recoveries | 11,401 |
| | — |
| | 11,401 |
|
Balance, end of period | $ | 103,770 |
| | $ | 7,554 |
| | $ | 111,324 |
|
| Six months ended June 29, 2014 |
| Retail | | Wholesale | | Total |
Balance, beginning of period | $ | 106,063 |
| | $ | 4,630 |
| | $ | 110,693 |
|
Provision for credit losses | 33,466 |
| | 2,826 |
| | 36,292 |
|
Charge-offs | (46,361 | ) | | — |
| | (46,361 | ) |
Recoveries | 21,731 |
| | — |
| | 21,731 |
|
Balance, end of period | $ | 114,899 |
| | $ | 7,456 |
| | $ | 122,355 |
|
| Six months ended June 30, 2013 |
| Retail | | Wholesale | | Total |
Balance, beginning of period | $ | 101,442 |
| | $ | 6,225 |
| | $ | 107,667 |
|
Provision for credit losses | 23,078 |
| | 1,329 |
| | 24,407 |
|
Charge-offs | (43,409 | ) | | — |
| | (43,409 | ) |
Recoveries | 22,659 |
| | — |
| | 22,659 |
|
Balance, end of period | $ | 103,770 |
| | $ | 7,554 |
| | $ | 111,324 |
|
Finance receivables are considered impaired when management determines it is probable that the Company will be unable to collect all amounts due according to the terms of the loan agreement. Portions of the allowance for credit losses are established to cover estimated losses on finance receivables specifically identified for impairment. The unspecified portion of the allowance for credit losses covers estimated losses on finance receivables which are collectively reviewed for impairment.
The retail portfolio primarily consists of a large number of small balance, homogeneous finance receivables. HDFS performs a periodic and systematic collective evaluation of the adequacy of the retail allowance for credit losses. HDFS utilizes loss forecast models which consider a variety of factors including, but not limited to, historical loss trends, origination or vintage analysis, known and inherent risks in the portfolio, the value of the underlying collateral, recovery rates, and current economic conditions including items such as unemployment rates. Retail finance receivables are not evaluated individually for impairment prior to charge-off and therefore are not reported as impaired loans.
The wholesale portfolio is primarily composed of large balance, non-homogeneous loans. The Company’s evaluation for the wholesale allowance for credit losses is first based on a loan-by-loan review. A specific allowance for credit losses is established for wholesale finance receivables determined to be individually impaired when management concludes that the borrower will not be able to make full payment of the contractual amounts due based on the original terms of the loan agreement. The impairment is determined based on the cash that the Company expects to receive discounted at the loan’s original interest rate or the fair value of the collateral, if the loan is collateral-dependent. Finance receivables in the wholesale portfolio that are not considered impaired on an individual basis are segregated, based on similar risk characteristics, according to the Company’s internal risk rating system and collectively evaluated for impairment. The related allowance for credit losses is based on factors such as the specific borrower’s financial performance and ability to repay, the Company’s past loan loss experience, current economic conditions, and the value of the underlying collateral.
Generally, it is the Company’s policy not to change the terms and conditions of finance receivables. However, to minimize the economic loss, the Company may modify certain finance receivables in troubled debt restructurings. Total restructured finance receivables are not significant.
The allowance for credit losses and finance receivables by portfolio, segregated by those amounts that are individually evaluated for impairment and those that are collectively evaluated for impairment, was as follows (in thousands):
|
| | | | | | | | | | | |
| June 29, 2014 |
| Retail | | Wholesale | | Total |
Allowance for credit losses, ending balance: | | | | | |
Individually evaluated for impairment | $ | — |
| | $ | — |
| | $ | — |
|
Collectively evaluated for impairment | 114,899 |
| | 7,456 |
| | 122,355 |
|
Total allowance for credit losses | $ | 114,899 |
| | $ | 7,456 |
| | $ | 122,355 |
|
Finance receivables, ending balance: | | | | | |
Individually evaluated for impairment | $ | — |
| | $ | — |
| | $ | — |
|
Collectively evaluated for impairment | 5,603,187 |
| | 1,338,085 |
| | 6,941,272 |
|
Total finance receivables | $ | 5,603,187 |
| | $ | 1,338,085 |
| | $ | 6,941,272 |
|
| December 31, 2013 |
| Retail | | Wholesale | | Total |
Allowance for credit losses, ending balance: | | | | | |
Individually evaluated for impairment | $ | — |
| | $ | — |
| | $ | — |
|
Collectively evaluated for impairment | 106,063 |
| | 4,630 |
| | 110,693 |
|
Total allowance for credit losses | $ | 106,063 |
| | $ | 4,630 |
| | $ | 110,693 |
|
Finance receivables, ending balance: | | | | | |
Individually evaluated for impairment | $ | — |
| | $ | — |
| | $ | — |
|
Collectively evaluated for impairment | 5,265,044 |
| | 845,212 |
| | 6,110,256 |
|
Total finance receivables | $ | 5,265,044 |
| | $ | 845,212 |
| | $ | 6,110,256 |
|
| June 30, 2013 |
| Retail | | Wholesale | | Total |
Allowance for credit losses, ending balance: | | | | | |
Individually evaluated for impairment | $ | — |
| | $ | — |
| | $ | — |
|
Collectively evaluated for impairment | 103,770 |
| | 7,554 |
| | 111,324 |
|
Total allowance for credit losses | $ | 103,770 |
| | $ | 7,554 |
| | $ | 111,324 |
|
Finance receivables, ending balance: | | | | | |
Individually evaluated for impairment | $ | — |
| | $ | — |
| | $ | — |
|
Collectively evaluated for impairment | 5,248,289 |
| | 1,088,621 |
| | 6,336,910 |
|
Total finance receivables | $ | 5,248,289 |
| | $ | 1,088,621 |
| | $ | 6,336,910 |
|
There were no wholesale finance receivables at June 29, 2014, December 31, 2013, or June 30, 2013 that were individually deemed to be impaired under ASC Topic 310, “Receivables.”
Retail finance receivables are contractually delinquent if the minimum payment is not received by the specified due date. Retail finance receivables are generally charged-off when the receivable is 120 days or more delinquent, the related asset is repossessed or the receivable is otherwise deemed uncollectible. All retail finance receivables accrue interest until either collected or charged-off. Accordingly, as of June 29, 2014, December 31, 2013 and June 30, 2013, all retail finance receivables were accounted for as interest-earning receivables, of which $14.7 million, $24.6 million and $13.9 million, respectively, were 90 days or more past due.
Wholesale finance receivables are delinquent if the minimum payment is not received by the contractual due date. Interest continues to accrue on past due finance receivables until the date the finance receivable becomes uncollectible and the finance receivable is placed on non-accrual status. HDFS will resume accruing interest on these accounts when payments are current according to the terms of the loans and future payments are reasonably assured. While on non-accrual status, all cash received is applied to principal or interest as appropriate. Wholesale finance receivables are written down once management determines that the specific borrower does not have the ability to repay the loan in full. There were no wholesale receivables on non-accrual status at June 29, 2014, December 31, 2013 or June 30, 2013. At June 29, 2014, December 31, 2013 and June 30, 2013, $0.03 million, $0.2 million, and $0.2 million of wholesale finance receivables were 90 days or more past due and accruing interest, respectively.
An analysis of the aging of past due finance receivables was as follows (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| June 29, 2014 |
| Current | | 31-60 Days Past Due | | 61-90 Days Past Due | | Greater than 90 Days Past Due | | Total Past Due | | Total Finance Receivables |
Retail | $ | 5,469,796 |
| | $ | 90,617 |
| | $ | 28,088 |
| | $ | 14,686 |
| | $ | 133,391 |
| | $ | 5,603,187 |
|
Wholesale | 1,337,437 |
| | 501 |
| | 113 |
| | 34 |
| | 648 |
| | 1,338,085 |
|
Total | $ | 6,807,233 |
| | $ | 91,118 |
| | $ | 28,201 |
| | $ | 14,720 |
| | $ | 134,039 |
| | $ | 6,941,272 |
|
| December 31, 2013 |
| Current | | 31-60 Days Past Due | | 61-90 Days Past Due | | Greater than 90 Days Past Due | | Total Past Due | | Total Finance Receivables |
Retail | $ | 5,094,615 |
| | $ | 109,806 |
| | $ | 36,029 |
| | $ | 24,594 |
| | $ | 170,429 |
| | $ | 5,265,044 |
|
Wholesale | 844,033 |
| | 791 |
| | 181 |
| | 207 |
| | 1,179 |
| | 845,212 |
|
Total | $ | 5,938,648 |
| | $ | 110,597 |
| | $ | 36,210 |
| | $ | 24,801 |
| | $ | 171,608 |
| | $ | 6,110,256 |
|
| June 30, 2013 |
| Current | | 31-60 Days Past Due | | 61-90 Days Past Due | | Greater than 90 Days Past Due | | Total Past Due | | Total Finance Receivables |
Retail | $ | 5,119,572 |
| | $ | 90,790 |
| | $ | 24,023 |
| | $ | 13,904 |
| | $ | 128,717 |
| | $ | 5,248,289 |
|
Wholesale | 1,087,607 |
| | 507 |
| | 281 |
| | 226 |
| | 1,014 |
| | 1,088,621 |
|
Total | $ | 6,207,179 |
| | $ | 91,297 |
| | $ | 24,304 |
| | $ | 14,130 |
| | $ | 129,731 |
| | $ | 6,336,910 |
|
A significant part of managing HDFS’ finance receivable portfolios includes the assessment of credit risk associated with each borrower. As the credit risk varies between the retail and wholesale portfolios, HDFS utilizes different credit risk indicators for each portfolio.
HDFS manages retail credit risk through its credit approval policy and ongoing collection efforts. HDFS uses FICO scores, a standard credit rating measurement, to differentiate the expected default rates of retail credit applicants enabling the Company to better evaluate credit applicants for approval and to tailor pricing according to this assessment. Retail loans with a FICO score of 640 or above at origination are considered prime, and loans with a FICO score below 640 are considered sub-prime. These credit quality indicators are determined at the time of loan origination and are not updated subsequent to the loan origination date.
The recorded investment of retail finance receivables, by credit quality indicator, was as follows (in thousands):
|
| | | | | | | | | | | |
| June 29, 2014 | | December 31, 2013 | | June 30, 2013 |
Prime | $ | 4,407,364 |
| | $ | 4,141,559 |
| | $ | 4,128,450 |
|
Sub-prime | 1,195,823 |
| | 1,123,485 |
| | 1,119,839 |
|
Total | $ | 5,603,187 |
| | $ | 5,265,044 |
| | $ | 5,248,289 |
|
HDFS’ credit risk on the wholesale portfolio is different from that of the retail portfolio. Whereas the retail portfolio represents a relatively homogeneous pool of retail finance receivables that exhibit more consistent loss patterns, the wholesale portfolio exposures are less consistent. HDFS utilizes an internal credit risk rating system to manage credit risk exposure consistently across wholesale borrowers and individually evaluates credit risk factors for each borrower.
HDFS uses the following internal credit quality indicators, based on the Company’s internal risk rating system, listed from highest level of risk to lowest level of risk for the wholesale portfolio: Doubtful, Substandard, Special Mention, Medium Risk and Low Risk. Based upon management’s review, the dealers classified in the Doubtful category are the dealers with the greatest likelihood of being charged off, while the dealers classified as Low Risk are least likely to be charged off. The internal rating system considers factors such as the specific borrowers’ ability to repay and the estimated value of any collateral. Dealer risk rating classifications are reviewed and updated on a quarterly basis.
The recorded investment of wholesale finance receivables, by internal credit quality indicator, was as follows (in thousands):
|
| | | | | | | | | | | |
| June 29, 2014 | | December 31, 2013 | | June 30, 2013 |
Doubtful | $ | 4,916 |
| | $ | — |
| | $ | 3,958 |
|
Substandard | 4,192 |
| | 8,383 |
| | 14,187 |
|
Special Mention | — |
| | 2,076 |
| | 2,929 |
|
Medium Risk | 16,202 |
| | 5,205 |
| | 10,041 |
|
Low Risk | 1,312,775 |
| | 829,548 |
| | 1,057,506 |
|
Total | $ | 1,338,085 |
| | $ | 845,212 |
| | $ | 1,088,621 |
|
6. Asset-Backed Financing
HDFS participates in asset-backed financing through both term asset-backed securitization transactions and through asset-backed commercial paper conduit facilities. HDFS treats these transactions as secured borrowing because either they are transferred to consolidated variable interest entities (VIEs) or HDFS maintains effective control over the assets and does not meet the accounting sale requirements under ASC Topic 860, "Transfers and Servicing" (ASC Topic 860). In HDFS' asset-backed financing programs, HDFS transfers retail motorcycle finance receivables to special purpose entities (SPE), which are considered VIEs under U.S. GAAP. Each SPE then converts those assets into cash, through the issuance of debt.
HDFS is required to consolidate any VIE in which it is deemed to be the primary beneficiary through having power over the significant activities of the entity and having an obligation to absorb losses or the right to receive benefits from the VIE which are potentially significant to the VIE. HDFS is considered to have the power over the significant activities of its term asset-backed securitization and asset-backed U.S. commercial paper conduit facility VIEs due to its role as servicer. Servicing fees are typically not considered potentially significant variable interests in a VIE. However, HDFS retains a residual interest in the VIEs in the form of a debt security, which gives HDFS the right to receive benefits that could be potentially significant to the VIE. Therefore, the Company is the primary beneficiary and consolidates all of these VIEs within its consolidated financial statements.
HDFS is not the primary beneficiary of the asset-backed Canadian commercial paper conduit facility VIE; therefore, HDFS does not consolidate this VIE. However, HDFS treats the conduit facility as a secured borrowing as it maintains effective control over the assets transferred to the VIE and therefore does not meet the requirements for sale accounting under ASC Topic 860. As such, the Company retains the transferred assets and the related debt within its Consolidated Balance Sheet.
Servicing fees paid by VIEs to HDFS are eliminated in consolidation and therefore are not recorded on a consolidated basis. HDFS is not required, and does not currently intend, to provide any additional financial support to its VIEs. Investors and creditors only have recourse to the assets held by the VIEs.
The following table shows the assets and liabilities related to the asset-backed financings that were included in the financial statements (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| June 29, 2014 |
| Finance receivables | | Allowance for credit losses | | Restricted cash | | Other assets | | Total assets | | Asset-backed debt |
On-balance sheet assets and liabilities | | | | | | | | | | | |
Consolidated VIEs | | | | | | | | | | | |
Term asset-backed securitizations | $ | 1,893,585 |
| | $ | (39,329 | ) | | $ | 141,146 |
| | $ | 2,342 |
| | $ | 1,997,744 |
| | $ | 1,712,855 |
|
Asset-backed U.S. commercial paper conduit facility | — |
| | — |
| | — |
| | 179 |
| | 179 |
| | — |
|
Unconsolidated VIEs | | | | | | | | | | | |
Asset-backed Canadian commercial paper conduit facility | 203,800 |
| | (3,235 | ) | | 13,535 |
| | 240 |
| | 214,340 |
| | 173,224 |
|
Total on-balance sheet assets and liabilities | $ | 2,097,385 |
| | $ | (42,564 | ) | | $ | 154,681 |
| | $ | 2,761 |
| | $ | 2,212,263 |
| | $ | 1,886,079 |
|
| | | | | | | | | | | |
| December 31, 2013 |
| Finance receivables | | Allowance for credit losses | | Restricted cash | | Other assets | | Total assets | | Asset-backed debt |
On-balance sheet assets and liabilities | | | | | | | | | | | |
Consolidated VIEs | | | | | | | | | | | |
Term asset-backed securitizations | $ | 1,569,118 |
| | $ | (31,778 | ) | | $ | 133,053 |
| | $ | 3,720 |
| | $ | 1,674,113 |
| | $ | 1,256,632 |
|
Asset-backed U.S. commercial paper conduit facility | — |
| | — |
| | — |
| | 429 |
| | 429 |
| | — |
|
Unconsolidated VIEs | | | | | | | | | | | |
Asset-backed Canadian commercial paper conduit facility | 204,092 |
| | (3,361 | ) | | 11,754 |
| | 589 |
| | 213,074 |
| | 174,241 |
|
Total on-balance sheet assets and liabilities | $ | 1,773,210 |
| | $ | (35,139 | ) | | $ | 144,807 |
| | $ | 4,738 |
| | $ | 1,887,616 |
| | $ | 1,430,873 |
|
| | | | | | | | | | | |
| June 30, 2013 |
| Finance receivables | | Allowance for credit losses | | Restricted cash | | Other assets | | Total assets | | Asset-backed debt |
On-balance sheet assets and liabilities | | | | | | | | | | | |
Consolidated VIEs | | | | | | | | | | | |
Term asset-backed securitizations | $ | 2,223,167 |
| | $ | (43,727 | ) | | $ | 198,893 |
| | $ | 4,082 |
| | $ | 2,382,415 |
| | $ | 1,673,759 |
|
Asset-backed U.S. commercial paper conduit facility | — |
| | — |
| | — |
| | 174 |
| | 174 |
| | — |
|
Unconsolidated VIEs | | | | | | | | | | | |
Asset-backed Canadian commercial paper conduit facility | 202,894 |
| | (3,547 | ) | | 13,111 |
| | 109 |
| | 212,567 |
| | 175,229 |
|
Total on-balance sheet assets and liabilities | $ | 2,426,061 |
| | $ | (47,274 | ) | | $ | 212,004 |
| | $ | 4,365 |
| | $ | 2,595,156 |
| | $ | 1,848,988 |
|
Term Asset-Backed Securitization VIEs
The Company transfers U.S. retail motorcycle finance receivables to SPEs which in turn issue secured notes to investors, with various maturities and interest rates, secured by future collections of the purchased U.S. retail motorcycle finance receivables. Each term asset-backed securitization SPE is a separate legal entity and the U.S. retail motorcycle finance receivables included in the term asset-backed securitizations are only available for payment of the secured debt and other obligations arising from the term asset-backed securitization transaction and are not available to pay other obligations or claims of the Company’s creditors until the associated secured debt and other obligations are satisfied. Restricted cash balances held by the SPEs are used only to support the securitizations. There are no amortization schedules for the secured notes; however, the debt is reduced monthly as available collections on the related U.S. retail motorcycle finance receivables are applied to outstanding principal. The secured notes’ contractual lives have various maturities ranging from 2014 to 2021.
During 2012, the Company issued $89.5 million of secured notes through the sale of notes that had been previously retained as part of certain 2009 and 2011 term asset-backed securitization transactions. These notes were sold at a premium. The unaccreted premium associated with the issuance of these secured notes was $0.4 million and $0.7 million at June 29, 2014 and June 30, 2013, respectively.
During the second quarter of 2014, the Company issued $850.0 million of secured notes through one term asset-backed securitization transaction. During the second quarter of 2013, the Company issued $650.0 million of secured notes through one term asset-backed securitization transaction. There were no other term asset-backed securitization transactions during the six months ended June 29, 2014 or June 30, 2013.
Asset-Backed U.S. Commercial Paper Conduit Facility VIE
In September 2013, the Company amended and restated its facility (U.S. Conduit) with a third-party bank sponsored asset-backed commercial paper conduit, which provides for a total aggregate commitment of $600.0 million based on, among other things, the amount of eligible U.S. retail motorcycle loans held by a SPE as collateral. Under the facility, HDFS may transfer U.S. retail motorcycle finance receivables to a SPE, which in turn may issue debt to third-party bank-sponsored asset-backed commercial paper conduits.
The assets of the SPE are restricted as collateral for the payment of the debt or other obligations arising in the transaction and are not available to pay other obligations or claims of the Company’s creditors. The terms for this debt provide for interest on the outstanding principal generally based on prevailing commercial paper rates plus a program fee based on outstanding principal, or LIBOR plus a specified margin to the extent the advance is not funded by a conduit lender through the issuance of commercial paper. The U.S. Conduit also provides for an unused commitment fee based on the unused portion of the total aggregate commitment of $600.0 million. There is no amortization schedule; however, the debt is reduced monthly as available collections on the related finance receivables are applied to outstanding principal. Upon expiration of the U.S. Conduit, any outstanding principal will continue to be reduced monthly through available collections. Unless earlier terminated or extended by mutual agreement of HDFS and the lenders, the U.S. Conduit has an expiration date of September 12, 2014.
The SPE had no borrowings outstanding under the U.S. Conduit at June 29, 2014, December 31, 2013 or June 30, 2013; therefore, U.S. Conduit assets are restricted as collateral for the payment of fees associated with the unused portion of the total aggregate commitment.
Asset-Backed Canadian Commercial Paper Conduit Facility
In June 2013, HDFS amended its facility agreement (Canadian Conduit) with a Canadian bank-sponsored asset-backed commercial paper conduit. Under the agreement, the Canadian Conduit is contractually committed, at HDFS' option, to purchase from HDFS eligible Canadian retail motorcycle finance receivables for proceeds up to C$200.0 million. The terms for this debt provide for interest on the outstanding principal based on prevailing market interest rates plus a specified margin. The Canadian Conduit also provides for a program fee and an unused commitment fee based on the unused portion of the total aggregate commitment of C$200.0 million. There is no amortization schedule; however, the debt is reduced monthly as available collections on the related finance receivables are applied to outstanding principal. Upon expiration of the Canadian Conduit, any outstanding principal will continue to be reduced monthly through available collections. Unless earlier terminated or extended by mutual agreement of HDFS and the lenders, as of June 29, 2014, the Canadian Conduit had an expiration date of June 30, 2014. The Canadian Conduit was renewed on June 30, 2014 with similar terms and for the same amount with an expiration date of June 30, 2015. The contractual maturity of the debt is approximately 5 years.
As HDFS participates in and does not consolidate the Canadian bank-sponsored, multi-seller conduit VIE, the maximum exposure to loss associated with this VIE, which would only be incurred in the unlikely event that all the finance receivables and underlying collateral have no residual value, was $41.1 million at June 29, 2014. The maximum exposure is not an indication of the Company's expected loss exposure.
During the second quarter of 2014, HDFS transferred $26.4 million of Canadian retail motorcycle finance receivables to the Canadian Conduit for proceeds of $23.1 million. During the first quarter of 2014, HDFS transferred $15.7 million of Canadian retail motorcycle finance receivables to the Canadian Conduit for proceeds of $13.8 million. During the second quarter of 2013, HDFS transferred $53.8 million of Canadian retail motorcycle finance receivables to the Canadian Conduit for proceeds of $47.1 million. HDFS did not transfer any Canadian retail motorcycle finance receivables during the first quarter of 2013. The transferred assets are restricted as collateral for the payment of the debt.
7. Fair Value Measurements
Certain assets and liabilities are recorded at fair value in the financial statements; some of these are measured on a recurring basis while others are measured on a non-recurring basis. Assets and liabilities measured on a recurring basis are those that are adjusted to fair value each time a financial statement is prepared. Assets and liabilities measured on a non-recurring basis are those that are adjusted to fair value when a significant event occurs. In determining fair value of assets and liabilities, the Company uses various valuation techniques. The availability of inputs observable in the market varies from instrument to instrument and depends on a variety of factors including the type of instrument, whether the instrument is actively traded, and other characteristics particular to the transaction. For many financial instruments, pricing inputs are readily observable in the market, the valuation methodology used is widely accepted by market participants, and the valuation does not require significant management discretion. For other financial instruments, pricing inputs are less observable in the market and may require management judgment.
The Company assesses the inputs used to measure fair value using a three-tier hierarchy. The hierarchy indicates the extent to which inputs used in measuring fair value are observable in the market. Level 1 inputs include quoted prices for identical instruments and are the most observable.
Level 2 inputs include quoted prices for similar assets and observable inputs such as interest rates, foreign currency exchange rates, commodity rates and yield curves. The Company uses the market approach to derive the fair value for its level 2 fair value measurements. Foreign currency exchange contracts are valued using publicly quoted spot and forward prices; commodity contracts are valued using publicly quoted prices, where available, or dealer quotes; interest rate swaps are valued using publicized swap curves; and investments in marketable securities and cash equivalents are valued using publicly quoted prices.
Level 3 inputs are not observable in the market and include management’s judgments about the assumptions market participants would use in pricing the asset or liability. The use of observable and unobservable inputs is reflected in the hierarchy assessment disclosed in the following tables.
Recurring Fair Value Measurements
The following tables present information about the Company’s assets and liabilities measured at fair value on a recurring basis (in thousands):
|
| | | | | | | | | | | | | | | |
| June 29, 2014 |
| Balance | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
Assets: | | | | | | | |
Cash equivalents | $ | 660,520 |
| | $ | 482,780 |
| | $ | 177,740 |
| | $ | — |
|
Marketable securities | 91,381 |
| | 33,567 |
| | 57,814 |
| | — |
|
Derivatives | 3,159 |
| | — |
| | 3,159 |
| | — |
|
| $ | 755,060 |
| | $ | 516,347 |
| | $ | 238,713 |
| | $ | — |
|
Liabilities: | | | | | | | |
Derivatives | $ | 1,478 |
| | $ | — |
| | $ | 1,478 |
| | $ | — |
|
| December 31, 2013 |
| Balance | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
Assets: | | | | | | | |
Cash equivalents | $ | 836,387 |
| | $ | 516,173 |
| | $ | 320,214 |
| | $ | — |
|
Marketable securities | 129,181 |
| | 30,172 |
| | 99,009 |
| | — |
|
Derivatives | 1,932 |
| | — |
| | 1,932 |
| | — |
|
| $ | 967,500 |
| | $ | 546,345 |
| | $ | 421,155 |
| | $ | — |
|
Liabilities: | | | | | | | |
Derivatives | $ | 3,925 |
| | $ | — |
| | $ | 3,925 |
| | $ | — |
|
| June 30, 2013 |
| Balance | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
Assets: | | | | | | | |
Cash equivalents | $ | 1,070,329 |
| | $ | 620,947 |
| | $ | 449,382 |
| | $ | — |
|
Marketable securities | 155,824 |
| | 22,193 |
| | 133,631 |
| | — |
|
Derivatives | 11,214 |
| | — |
| | 11,214 |
| | — |
|
| $ | 1,237,367 |
| | $ | 643,140 |
| | $ | 594,227 |
| | $ | — |
|
Liabilities: | | | | | | | |
Derivatives | $ | 570 |
| | $ | — |
| | $ | 570 |
| | $ | — |
|
8. Fair Value of Financial Instruments
The Company’s financial instruments consist primarily of cash and cash equivalents, marketable securities, trade receivables, finance receivables, net, trade payables, debt, and foreign currency contracts (derivative instruments are discussed further in Note 9).
The following table summarizes the fair value and carrying value of the Company’s financial instruments (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| June 29, 2014 | | December 31, 2013 | | June 30, 2013 |
| Fair Value | | Carrying Value | | Fair Value | | Carrying Value | | Fair Value | | Carrying Value |
Assets: | | | | | | | | | | | |
Cash and cash equivalents | $ | 999,346 |
| | $ | 999,346 |
| | $ | 1,066,612 |
| | $ | 1,066,612 |
| | $ | 1,300,690 |
| | $ | 1,300,690 |
|
Marketable securities | $ | 91,381 |
| | $ | 91,381 |
| | $ | 129,181 |
| | $ | 129,181 |
| | $ | 155,824 |
| | $ | 155,824 |
|
Accounts receivable, net | $ | 289,940 |
| | $ | 289,940 |
| | $ | 261,065 |
| | $ | 261,065 |
| | $ | 253,819 |
| | $ | 253,819 |
|
Derivatives | $ | 3,159 |
| | $ | 3,159 |
| | $ | 1,932 |
| | $ | 1,932 |
| | $ | 11,214 |
| | $ | 11,214 |
|
Finance receivables, net | $ | 6,917,698 |
| | $ | 6,818,917 |
| | $ | 6,086,441 |
| | $ | 5,999,563 |
| | $ | 6,314,282 |
| | $ | 6,225,586 |
|
Restricted cash | $ | 154,681 |
| | $ | 154,681 |
| | $ | 144,807 |
| | $ | 144,807 |
| | $ | 212,004 |
| | $ | 212,004 |
|
Liabilities: | | | | | | | | | | | |
Accounts payable | $ | 388,342 |
| | $ | 388,342 |
| | $ | 239,794 |
| | $ | 239,794 |
| | $ | 344,423 |
| | $ | 344,423 |
|
Derivatives | $ | 1,478 |
| | $ | 1,478 |
| | $ | 3,925 |
| | $ | 3,925 |
| | $ | 570 |
| | $ | 570 |
|
Unsecured commercial paper | $ | 619,622 |
| | $ | 619,622 |
| | $ | 666,317 |
| | $ | 666,317 |
| | $ | 525,745 |
| | $ | 525,745 |
|
Asset-backed Canadian commercial paper conduit facility | $ | 173,224 |
| | $ | 173,224 |
| | $ | 174,241 |
| | $ | 174,241 |
| | $ | 175,229 |
| | $ | 175,229 |
|
Medium-term notes | $ | 3,049,735 |
| | $ | 2,853,232 |
| | $ | 3,087,852 |
| | $ | 2,858,980 |
| | $ | 3,100,162 |
| | $ | 2,858,638 |
|
Senior unsecured notes | $ | — |
| | $ | — |
| | $ | 305,958 |
| | $ | 303,000 |
| | $ | 325,705 |
| | $ | 303,000 |
|
Term asset-backed securitization debt | $ | 1,717,287 |
| | $ | 1,712,855 |
| | $ | 1,259,314 |
| | $ | 1,256,632 |
| | $ | 1,673,645 |
| | $ | 1,673,759 |
|
Cash and Cash Equivalents, Restricted Cash, Accounts Receivable, Net and Accounts Payable – With the exception of certain cash equivalents, the carrying value of these items in the financial statements is based on historical cost. The historical cost basis for these amounts is estimated to approximate their respective fair values due to the short maturity of these instruments. Fair value is based on Level 1 or Level 2 inputs.
Marketable Securities – The carrying value of marketable securities in the financial statements is based on fair value. The fair value of marketable securities is determined primarily based on quoted prices for identical instruments or on quoted market prices of similar financial assets. Fair value is based on Level 1 or Level 2 inputs.
Finance Receivables, Net – The carrying value of retail and wholesale finance receivables in the financial statements is amortized cost less an allowance for credit losses. The fair value of retail finance receivables is generally calculated by discounting future cash flows using an estimated discount rate that reflects current credit, interest rate and prepayment risks associated with similar types of instruments. Fair value is determined based on Level 3 inputs. The amortized cost basis of wholesale finance receivables approximates fair value because they either are short-term or have interest rates that adjust with changes in market interest rates.
Derivatives – Interest rate swaps, foreign currency exchange contracts and commodity contracts are derivative financial instruments and are carried at fair value on the balance sheet. The fair value of interest rate swaps is determined using pricing models that incorporate quoted prices for similar assets and observable inputs such as interest rates and yield curves. The fair value of foreign currency exchange and commodity contracts is determined using publicly quoted prices. Fair value is calculated using Level 2 inputs.
Debt – The carrying value of debt in the financial statements is generally amortized cost. The carrying value of unsecured commercial paper approximates fair value due to its short maturity. Fair value is calculated using Level 2 inputs.
The carrying value of debt provided under the Canadian Conduit approximates fair value since the interest rates charged under the facility are tied directly to market rates and fluctuate as market rates change. Fair value is calculated using Level 2 inputs.
The fair values of the medium-term notes are estimated based upon rates currently available for debt with similar terms and remaining maturities. Fair value is calculated using Level 2 inputs.
The fair value of the senior unsecured notes is estimated based upon rates currently available for debt with similar terms and remaining maturities. Fair value is calculated using Level 2 inputs.
The fair value of the debt related to term asset-backed securitization transactions is estimated based on pricing currently available for transactions with similar terms and maturities. Fair value is calculated using Level 2 inputs.
9. Derivative Instruments and Hedging Activities
The Company is exposed to certain risks such as foreign currency exchange rate risk, interest rate risk and commodity price risk. To reduce its exposure to such risks, the Company selectively uses derivative financial instruments. All derivative transactions are authorized and executed pursuant to regularly reviewed policies and procedures, which prohibit the use of financial instruments for speculative trading purposes.
All derivative instruments are recognized on the balance sheet at fair value (see Note 7). In accordance with ASC Topic 815, “Derivatives and Hedging,” the accounting for changes in the fair value of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and, further, on the type of hedging relationship. Changes in the fair value of derivatives that are designated as fair value hedges, along with the gain or loss on the hedged item, are recorded in current period earnings. For derivative instruments that are designated as cash flow hedges, the effective portion of gains and losses that result from changes in the fair value of derivative instruments is initially recorded in other comprehensive income (OCI) and subsequently reclassified into earnings when the hedged item affects income. The Company assesses, both at the inception of each hedge and on an on-going basis, whether the derivatives that are used in its hedging transactions are highly effective in offsetting changes in cash flows of the hedged items. Any ineffective portion is immediately recognized in earnings. No component of a hedging derivative instrument’s gain or loss is excluded from the assessment of hedge effectiveness. Derivative instruments that do not qualify for hedge accounting are recorded at fair value, and any changes in fair value are recorded in current period earnings.
The Company sells its products internationally and in most markets those sales are made in the foreign country’s local currency. As a result, the Company’s earnings can be affected by fluctuations in the value of the U.S. dollar relative to foreign currency. The Company’s most significant foreign currency risk relates to the Euro, the Australian dollar, the Japanese yen and the Brazilian real. The Company utilizes foreign currency contracts to mitigate the effects of certain currencies’ fluctuations on earnings. The foreign currency contracts are entered into with banks and allow the Company to exchange a specified amount of foreign currency for U.S. dollars at a future date, based on a fixed exchange rate.
The Company utilizes commodity contracts to hedge portions of the cost of certain commodities consumed in the Company’s motorcycle production and distribution operations.
The Company’s foreign currency contracts and commodity contracts generally have maturities of less than one year.
The Company’s earnings are affected by changes in interest rates. HDFS utilized interest rate swaps to reduce the impact of fluctuations in interest rates on its unsecured commercial paper by converting a portion from a floating rate basis to a fixed rate basis. The swaps expired during the second quarter of 2013, and as of June 29, 2014, HDFS had no interest rate swaps outstanding. The fair value of HDFS’s interest rate swaps at June 30, 2013 was determined using pricing models that incorporate quoted prices for similar assets and observable inputs such as interest rates and yield curves.
The following table summarizes the fair value of the Company’s derivative financial instruments (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| June 29, 2014 | | December 31, 2013 | | June 30, 2013 |
Derivatives Designated As Hedging Instruments Under ASC Topic 815 | Notional Value | | Asset Fair Value(a) | | Liability Fair Value(b) | | Notional Value | | Asset Fair Value(a) | | Liability Fair Value(b) | | Notional Value | | Asset Fair Value(a) | | Liability Fair Value(b) |
Foreign currency contracts(c) | $ | 398,338 |
| | $ | 3,091 |
| | $ | 1,461 |
| | $ | 299,550 |
| | $ | 1,672 |
| | $ | 3,842 |
| | $ | 333,407 |
| | $ | 11,214 |
| | $ | 29 |
|
Commodity contracts(c) | 1,411 |
| | — |
| | 17 |
| | 1,286 |
| | 76 |
| | — |
| | 1,226 |
| | — |
| | 99 |
|
Interest rate swaps(c) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Total | $ | 399,749 |
| | $ | 3,091 |
| | $ | 1,478 |
|
| $ | 300,836 |
| | $ | 1,748 |
| | $ | 3,842 |
|
| $ | 334,633 |
| | $ | 11,214 |
| | $ | 128 |
|
| June 29, 2014 | | December 31, 2013 | | June 30, 2013 |
Derivatives Not Designated As Hedging Instruments Under ASC Topic 815 | Notional Value | | Asset Fair Value(a) | | Liability Fair Value(b) | | Notional Value | | Asset Fair Value(a) | | Liability Fair Value(b) | | Notional Value | | Asset Fair Value(a) | | Liability Fair Value(b) |
Commodity contracts | $ | 7,754 |
| | $ | 68 |
| | $ | — |
| | $ | 9,855 |
| | $ | 184 |
| | $ | 83 |
| | $ | 11,958 |
| | $ | — |
| | $ | 442 |
|
| $ | 7,754 |
|
| $ | 68 |
| | $ | — |
| | $ | 9,855 |
| | $ | 184 |
| | $ | 83 |
| | $ | 11,958 |
| | $ | — |
| | $ | 442 |
|
| |
(a) | Included in other current assets |
| |
(b) | Included in accrued liabilities |
| |
(c) | Derivative designated as a cash flow hedge |
The following tables summarize the amount of gains and losses related to derivative financial instruments designated as cash flow hedges (in thousands):
|
| | | | | | | | | | | | | | | |
| Amount of Gain/(Loss) Recognized in OCI, before tax |
| Three months ended | | Six months ended |
Cash Flow Hedges | June 29, 2014 | | June 30, 2013 | | June 29, 2014 | | June 30, 2013 |
Foreign currency contracts | $ | 3,931 |
| | $ | 723 |
| | $ | 2,493 |
| | $ | 16,444 |
|
Commodity contracts | (24 | ) | | (231 | ) | | 191 |
| | (72 | ) |
Interest rate swaps | — |
| | — |
| | — |
| | (2 | ) |
Total | $ | 3,907 |
| | $ | 492 |
| | $ | 2,684 |
| | $ | 16,370 |
|
|
| | | | | | | | | | | | | | | | | | | |
| Amount of Gain/(Loss) Reclassified from AOCL into Income | | |
| Three months ended | | Six months ended | | Expected to be Reclassified |
Cash Flow Hedges | June 29, 2014 | | June 30, 2013 | | June 29, 2014 | | June 30, 2013 | | Over the Next Twelve Months |
Foreign currency contracts(a) | $ | (1,183 | ) | | $ | 753 |
| | $ | (2,241 | ) | | $ | 13 |
| | $ | 1,990 |
|
Commodity contracts(a) | 87 |
| | (34 | ) | | 283 |
| | 13 |
| | (17 | ) |
Interest rate swaps(b) | — |
| | (82 | ) | | — |
| | (345 | ) | | — |
|
Total | $ | (1,096 | ) | | $ | 637 |
| | $ | (1,958 | ) | | $ | (319 | ) | | $ | 1,973 |
|
| |
(a) | Gain/(loss) reclassified from accumulated other comprehensive loss (AOCL) to income is included in cost of goods sold. |
| |
(b) | Gain/(loss) reclassified from AOCL to income is included in financial services interest expense. |
The following tables summarize the amount of gains and losses related to derivative financial instruments not designated as hedging instruments (in thousands):
|
| | | | | | | | | | | | | | | |
| Amount of Gain/(Loss) Recognized in Income on Derivative |
| Three months ended | | Six months ended |
Derivatives Not Designated As Hedges | June 29, 2014 | | June 30, 2013 | | June 29, 2014 | | June 30, 2013 |
Commodity contracts(a) | $ | 184 |
| | $ | 21 |
| | $ | (144 | ) | | $ | (609 | ) |
Total | $ | 184 |
| | $ | 21 |
| | $ | (144 | ) | | $ | (609 | ) |
| |
(a) | Gain/(loss) recognized in income is included in cost of goods sold. |
For the three and six months ended June 29, 2014 and June 30, 2013, the cash flow hedges were highly effective and, as a result, the amount of hedge ineffectiveness was not material. No amounts were excluded from effectiveness testing.
The Company is exposed to credit loss risk in the event of non-performance by counterparties to these derivative financial instruments. Although no assurances can be given, the Company does not expect any of the counterparties to these derivative financial instruments to fail to meet its obligations. To manage credit loss risk, the Company evaluates counterparties based on credit ratings and, on a quarterly basis, evaluates each hedge’s net position relative to the counterparty’s ability to cover its position.
10. Accumulated Other Comprehensive Loss
The following tables set forth the changes in accumulated other comprehensive loss (AOCL) (in thousands):
|
| | | | | | | | | | | | | | | | | | | | |
| | Three months ended June 29, 2014 |
| | Foreign currency translation adjustments | | Marketable securities | | Derivative financial instruments | | Pension and postretirement benefit plans | | Total |
Beginning balance | | $ | 36,274 |
| | $ | (318 | ) | | $ | (1,907 | ) | | $ | (357,978 | ) | | $ | (323,929 | ) |
Other comprehensive (loss) income before reclassifications | | 6,945 |
| | (117 | ) | | 3,907 |
| | — |
| | 10,735 |
|
Income tax | | (1,212 | ) | | 43 |
| | (1,448 | ) | | — |
| | (2,617 | ) |
Net other comprehensive income before reclassifications | | 5,733 |
| | (74 | ) | | 2,459 |
| | — |
| | 8,118 |
|
Reclassifications: | | | | | | | | | | |
Realized (gains) losses - foreign currency contracts(a) | | — |
| | — |
| | 1,183 |
| | — |
| | 1,183 |
|
Realized (gains) losses - commodities contracts(a) | | — |
| | — |
| | (87 | ) | | — |
| | (87 | ) |
Prior service credits(c) | | — |
| | — |
| | — |
| | (684 | ) | | (684 | ) |
Actuarial losses(c) | | — |
| | — |
| | — |
| | 10,323 |
| | 10,323 |
|
Total before tax | | — |
| | — |
| | 1,096 |
| | 9,639 |
| | 10,735 |
|
Income tax expense | | — |
| | — |
| | (405 | ) | | (3,570 | ) | | (3,975 | ) |
Net reclassifications | | — |
| | — |
| | 691 |
| | 6,069 |
| | 6,760 |
|
Other comprehensive (loss) income | | 5,733 |
| | (74 | ) | | 3,150 |
| | 6,069 |
| | 14,878 |
|
Ending Balance | | $ | 42,007 |
| | $ | (392 | ) | | $ | 1,243 |
| | $ | (351,909 | ) | | $ | (309,051 | ) |
|
| | | | | | | | | | | | | | | | | | | | |
| | Three months ended June 30, 2013 |
| | Foreign currency translation adjustments | | Marketable securities | | Derivative financial instruments | | Pension and postretirement benefit plans | | Total |
Beginning balance | | $ | 40,765 |
| | $ | 433 |
| | $ | 6,764 |
| | $ | (645,614 | ) | | $ | (597,652 | ) |
Other comprehensive (loss) income before reclassifications | | (12,380 | ) | | (608 | ) | | 492 |
| | — |
| | (12,496 | ) |
Income tax | | 1,076 |
| | 225 |
| | (182 | ) | | — |
| | 1,119 |
|
Net other comprehensive (loss) income before reclassifications | | (11,304 | ) | | (383 | ) | | 310 |
| | — |
| | (11,377 | ) |
Reclassifications: | | | | | | | | | | |
Realized (gains) losses - foreign currency contracts(a) | | — |
| | — |
| | (753 | ) | | — |
| | (753 | ) |
Realized (gains) losses - commodities contracts(a) | | — |
| | — |
| | 34 |
| | — |
| | 34 |
|
Realized (gains) losses - interest rate swaps(b) | | — |
| | — |
| | 82 |
| | — |
| | 82 |
|
Prior service credits(c) | | — |
| | — |
| | — |
| | (526 | ) | | (526 | ) |
Actuarial losses(c) | | — |
| | — |
| | — |
| | 16,789 |
| | 16,789 |
|
Total before tax | | — |
| | — |
| | (637 | ) | | 16,263 |
| | 15,626 |
|
Income tax expense (benefit) | | — |
| | — |
| | 237 |
| | (6,024 | ) | | (5,787 | ) |
Net reclassifications | | — |
| | — |
| | (400 | ) | | 10,239 |
| | 9,839 |
|
Other comprehensive (loss) income | | (11,304 | ) | | (383 | ) | | (90 | ) | | 10,239 |
| | (1,538 | ) |
Ending Balance | | $ | 29,461 |
| | $ | 50 |
| | $ | 6,674 |
| | $ | (635,375 | ) | | $ | (599,190 | ) |
|
| | | | | | | | | | | | | | | | | | | | |
| | Six months ended June 29, 2014 |
| | Foreign currency translation adjustments | | Marketable securities | | Derivative financial instruments | | Pension and postretirement benefit plans | | Total |
Beginning balance | | $ | 33,326 |
| | $ | (276 | ) | | $ | (1,680 | ) | | $ | (364,046 | ) | | $ | (332,676 | ) |
Other comprehensive income (loss) before reclassifications | | 8,700 |
| | (184 | ) | | 2,684 |
| | — |
| | 11,200 |
|
Income tax | | (19 | ) | | 68 |
| | (994 | ) | | — |
| | (945 | ) |
Net other comprehensive income (loss) before reclassifications | | 8,681 |
| | (116 | ) | | 1,690 |
| | — |
| | 10,255 |
|
Reclassifications: | | | | | | | | | | |
Realized (gains) losses - foreign currency contracts(a) | | — |
| | — |
| | 2,241 |
| | — |
| | 2,241 |
|
Realized (gains) losses - commodities contracts(a) | | — |
| | — |
| | (283 | ) | | — |
| | (283 | ) |
Prior service credits(c) | | — |
| | — |
| | — |
| | (1,368 | ) | | (1,368 | ) |
Actuarial losses(c) | | — |
| | — |
| | — |
| | 20,645 |
| | 20,645 |
|
Total before tax | | — |
| | — |
| | 1,958 |
| | 19,277 |
| | 21,235 |
|
Income tax benefit | | — |
| | — |
| | (725 | ) | | (7,140 | ) | | (7,865 | ) |
Net reclassifications | | — |
| | — |
| | 1,233 |
| | 12,137 |
| | 13,370 |
|
Other comprehensive income (loss) | | 8,681 |
| | (116 | ) | | 2,923 |
| | 12,137 |
| | 23,625 |
|
Ending Balance | | $ | 42,007 |
| | $ | (392 | ) | | $ | 1,243 |
| | $ | (351,909 | ) | | $ | (309,051 | ) |
|
| | | | | | | | | | | | | | | | | | | | |
| | Six months ended June 30, 2013 |
| | Foreign currency translation adjustments | | Marketable securities | | Derivative financial instruments | | Pension and postretirement benefit plans | | Total |
Beginning balance | | $ | 51,335 |
| | $ | 677 |
| | $ | (3,837 | ) | | $ | (655,853 | ) | | $ | (607,678 | ) |
Other comprehensive (loss) income before reclassifications | | (23,852 | ) | | (996 | ) | | 16,370 |
| | — |
| | (8,478 | ) |
Income tax | | 1,978 |
| | 369 |
| | (6,063 | ) | | — |
| | (3,716 | ) |
Net other comprehensive (loss) income before reclassifications | | (21,874 | ) | | (627 | ) | | 10,307 |
| | — |
| | (12,194 | ) |
Reclassifications: | | | | | | | | | | |
Realized (gains) losses - foreign currency contracts(a) | | — |
| | — |
| | (13 | ) | | — |
| | (13 | ) |
Realized (gains) losses - commodities contracts(a) | | — |
| | — |
| | (13 | ) | | — |
| | (13 | ) |
Realized (gains) losses - interest rate swaps(b) | | — |
| | — |
| | 345 |
| | — |
| | 345 |
|
Prior service credits(c) | | — |
| | — |
| | — |
| | (1,052 | ) | | (1,052 | ) |
Actuarial losses(c) | | — |
| | — |
| | — |
| | 33,578 |
| | 33,578 |
|
Total before tax | | — |
| | — |
| | 319 |
| | 32,526 |
| | 32,845 |
|
Income tax benefit | | — |
| | — |
| | (115 | ) | | (12,048 | ) | | (12,163 | ) |
Net reclassifications | | — |
| | — |
| | 204 |
| | 20,478 |
| | 20,682 |
|
Other comprehensive (loss) income | | (21,874 | ) | | (627 | ) | | 10,511 |
| | 20,478 |
| | 8,488 |
|
Ending Balance | | $ | 29,461 |
| | $ | 50 |
| | $ | 6,674 |
| | $ | (635,375 | ) | | $ | (599,190 | ) |
| |
(a) | Amounts reclassified to net income are included in motorcycles and related products cost of goods sold. |
| |
(b) | Amounts reclassified to net income are presented in financial services interest expense. |
| |
(c) | Amounts reclassified are included in the computation of net periodic period cost. See note 14 for information related to pension and postretirement benefit plans. |
11. Income Taxes
The Company’s 2014 income tax rate for the six months ended June 29, 2014 was 35.3% compared to 34.8% for the same period last year. The higher effective tax rate in the first half of 2014 primarily reflects the absence of the U.S. Federal Research and Development tax credit that expired at the end of 2013. The effective tax rate for the first half of 2013 also included the full-impact of the 2012 U.S. Federal Research and Development tax credit due to the timing of the enactment of the American Taxpayer Relief Act.
12. Product Warranty and Safety Recall Campaigns
The Company currently provides a standard two-year limited warranty on all new motorcycles sold worldwide, except for Japan, where the Company currently provides a standard three-year limited warranty on all new motorcycles sold. In addition, the Company provides a one-year warranty for Parts & Accessories (P&A). The warranty coverage for the retail customer generally begins when the product is sold to a retail customer. The Company maintains reserves for future warranty claims using an estimated cost, which is based primarily on historical Company claim information. Additionally, the Company has from time to time initiated certain voluntary safety recall campaigns. The Company reserves for all estimated costs associated with safety recalls in the period that the safety recalls are announced.
Changes in the Company’s warranty and safety recall liability were as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| Three months ended | | Six months ended |
| June 29, 2014 | | June 30, 2013 | | June 29, 2014 | | June 30, 2013 |
Balance, beginning of period | $ | 69,336 |
| | $ | 67,709 |
| | $ | 64,120 |
| | $ | 60,263 |
|
Warranties issued during the period | 19,824 |
| | 19,401 |
| | 37,186 |
| | 34,521 |
|
Settlements made during the period | (16,921 | ) | | (16,702 | ) | | (28,494 | ) | | (28,340 | ) |
Recalls and changes to pre-existing warranty liabilities | 3,798 |
| | (2 | ) | | 3,225 |
| | 3,962 |
|
Balance, end of period | $ | 76,037 |
| | $ | 70,406 |
| | $ | 76,037 |
| | $ | 70,406 |
|
The liability for safety recall campaigns was $6.8 million, $4.0 million and $3.0 million as of June 29, 2014, December 31, 2013 and June 30, 2013, respectively.
13. Earnings Per Share
The following table sets forth the computation for basic and diluted earnings per share (in thousands, except per share amounts):
|
| | | | | | | | | | | | | | | |
| Three months ended | | Six months ended |
| June 29, 2014 | | June 30, 2013 | | June 29, 2014 | | June 30, 2013 |
Numerator: | | | | | | | |
Net income used in computing basic and diluted earnings per share | $ | 354,153 |
| | $ | 271,739 |
| | $ | 620,070 |
| | $ | 495,868 |
|
Denominator: | | | | | | | |
Denominator for basic earnings per share - weighted-average common shares | 217,762 |
| | 223,052 |
| | 218,367 |
| | 223,737 |
|
Effect of dilutive securities - employee stock compensation plan | 1,399 |
| | 1,418 |
| | 1,453 |
| | 1,569 |
|
Denominator for diluted earnings per share - adjusted weighted-average shares outstanding | 219,161 |
| | 224,470 |
| | 219,820 |
| | 225,306 |
|
Earnings per common share: | | | | | | | |
Basic | $ | 1.63 |
| | $ | 1.22 |
| | $ | 2.84 |
| | $ | 2.22 |
|
Diluted | $ | 1.62 |
| | $ | 1.21 |
| | $ | 2.82 |
| | $ | 2.20 |
|
Outstanding options to purchase 0.4 million and 1.2 million shares of common stock for the three months ended June 29, 2014 and June 30, 2013, respectively, and 0.5 million and 1.3 million shares of common stock for the six months ended June 29, 2014 and June 30, 2013 were not included in the Company’s computation of dilutive securities because the exercise price was greater than the market price and therefore the effect would have been anti-dilutive.
The Company has a share-based compensation plan under which employees may be granted share-based awards including shares of restricted stock and restricted stock units (RSUs). Non-forfeitable dividends are paid on unvested shares of restricted stock and non-forfeitable dividend equivalents are paid on unvested RSUs. As such, shares of restricted stock and RSUs are considered participating securities under the two-class method of calculating earnings per share as described in ASC Topic 260, “Earnings per Share.” The two-class method of calculating earnings per share did not have a material impact on the Company’s earnings per share calculation for the three and six month periods ending June 29, 2014 and June 30, 2013, respectively.
14. Employee Benefit Plans
The Company has a defined benefit pension plan and postretirement healthcare benefit plans that cover certain employees of the Motorcycles segment. The Company also has unfunded supplemental employee retirement plan agreements (SERPA) with certain employees which were instituted to replace benefits lost under the Tax Revenue Reconciliation Act of 1993. Net periodic benefit costs are allocated among selling, administrative and engineering expense, cost of goods sold and inventory. Amounts capitalized in inventory are not significant. Components of net periodic benefit costs were as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| Three months ended | | Six months ended |
| June 29, 2014 | | June 30, 2013 | | June 29, 2014 | | June 30, 2013 |
Pension and SERPA Benefits | | | | | | | |
Service cost | $ | 7,874 |
| | $ | 8,997 |
| | $ | 15,748 |
| | $ | 17,994 |
|
Interest cost | 21,731 |
| | 19,752 |
| | 43,462 |
| | 39,564 |
|
Expected return on plan assets | (34,184 | ) | | (31,832 | ) | | (68,368 | ) | | (63,664 | ) |
Amortization of unrecognized: | | | | | | | |
Prior service cost | 279 |
| | 437 |
| | 558 |
| | 874 |
|
Net loss | 9,141 |
| | 14,652 |
| | 18,281 |
| | 29,304 |
|
Net periodic benefit cost | $ | 4,841 |
| | $ | 12,006 |
| | $ | 9,681 |
| | $ | 24,072 |
|
Postretirement Healthcare Benefits | | | | | | | |
Service cost | $ | 1,754 |
| | $ | 1,965 |
| | $ | 3,508 |
| | $ | 3,930 |
|
Interest cost | 4,220 |
| | 3,900 |
| | 8,439 |
| | 7,800 |
|
Expected return on plan assets | (2,607 | ) | | (2,384 | ) | | (5,215 | ) | | (4,768 | ) |
Amortization of unrecognized: | | | | | | | |
Prior service credit | (963 | ) | | (963 | ) | | (1,927 | ) | | (1,926 | ) |
Net loss | 1,182 |
| | 2,137 |
| | 2,364 |
| | 4,274 |
|
Net periodic benefit cost | $ | 3,586 |
| | $ | 4,655 |
| | $ | 7,169 |
| | $ | 9,310 |
|
During the first six months of 2013, the Company voluntarily contributed $175 million in cash to further fund its pension plans. No pension contributions to qualified plans are required in 2014. The Company expects it will continue to make on-going contributions related to current benefit payments for SERPA and postretirement healthcare plans.
15. Business Segments
The Company operates in two business segments: Motorcycles & Related Products (Motorcycles) and Financial Services. The Company’s reportable segments are strategic business units that offer different products and services. They are managed separately based on the fundamental differences in their operations. Selected segment information is set forth below (in thousands):
|
| | | | | | | | | | | | | | | |
| Three months ended | | Six months ended |
| June 29, 2014 | | June 30, 2013 | | June 29, 2014 | | June 30, 2013 |
Motorcycles net revenue | $ | 1,834,285 |
| | $ | 1,631,466 |
| | $ | 3,405,973 |
| | $ | 3,045,714 |
|
Gross profit | 724,139 |
| | 601,870 |
| | 1,316,270 |
| | 1,121,312 |
|
Selling, administrative and engineering expense | 250,883 |
| | 249,502 |
| | 495,322 |
| | 489,245 |
|
Restructuring benefit | — |
| | (5,297 | ) | | — |
| | (2,359 | ) |
Operating income from Motorcycles | 473,256 |
| | 357,665 |
| | 820,948 |
| | 634,426 |
|
Financial Services revenue | 166,414 |
| | 162,841 |
| | 320,774 |
| | 319,806 |
|
Financial Services expense | 91,975 |
| | 88,685 |
| | 183,145 |
| | 174,105 |
|
Operating income from Financial Services | 74,439 |
| | 74,156 |
| | 137,629 |
| | 145,701 |
|
Operating income | $ | 547,695 |
| | $ | 431,821 |
| | $ | 958,577 |
| | $ | 780,127 |
|
16. Commitments and Contingencies
The Company is subject to lawsuits and other claims related to environmental, product and other matters. In determining required reserves related to these items, the Company carefully analyzes cases and considers the likelihood of adverse judgments or outcomes, as well as the potential range of possible loss. The required reserves are monitored on an ongoing basis and are updated based on new developments or new information in each matter.
Environmental Protection Agency Notice
In December 2009, the Company received formal, written requests for information from the United States Environmental Protection Agency (EPA) regarding: (i) certificates of conformity for motorcycle emissions and related designations and labels, (ii) aftermarket parts, and (iii) warranty claims on emissions related components. The Company promptly submitted written responses to the EPA’s inquiry and has engaged in discussions with the EPA. Since that time, the EPA has delivered various additional requests for information to which the Company has responded. It is possible that a result of the EPA’s investigation will be some form of enforcement action by the EPA that will seek a fine or other relief. However, at this time the Company does not know and cannot reasonably estimate the impact of any remedies the EPA might seek, if any.
York Environmental Matters:
The Company is involved with government agencies and groups of potentially responsible parties in various environmental matters, including a matter involving the cleanup of soil and groundwater contamination at its York, Pennsylvania facility. The York facility was formerly used by the U.S. Navy and AMF prior to the purchase of the York facility by the Company from AMF in 1981. Although the Company is not certain as to the full extent of the environmental contamination at the York facility, it has been working with the Pennsylvania Department of Environmental Protection (PADEP) since 1986 in undertaking environmental investigation and remediation activities, including an ongoing site-wide remedial investigation/feasibility study (RI/FS). In January 1995, the Company entered into a settlement agreement (the Agreement) with the Navy, and the parties amended the Agreement in 2013 to address ordnance and explosive waste. The Agreement calls for the Navy and the Company to contribute amounts into a trust equal to 53% and 47%, respectively, of future costs associated with environmental investigation and remediation activities at the York facility (Response Costs). The trust administers the payment of the Response Costs incurred at the York facility as covered by the Agreement.
The Company estimates that its share of the future Response Costs at the York facility will be approximately $3.2 million and has established a reserve for this amount which is included in accrued liabilities in the Condensed Consolidated Balance Sheets. As noted above, the RI/FS is still underway and given the uncertainty that exists concerning the nature and scope of additional environmental investigation and remediation that may ultimately be required under the RI/FS or otherwise at the York facility, the Company is unable to make a reasonable estimate of those additional costs, if any, that may result.
The estimate of the Company’s future Response Costs that will be incurred at the York facility is based on reports of independent environmental consultants retained by the Company, the actual costs incurred to date and the estimated costs to complete the necessary investigation and remediation activities. Response Costs are expected to be paid primarily over a period of several years ending in 2017 although certain Response Costs may continue for some time beyond 2017.
Product Liability Matters:
The Company is involved in product liability suits related to the operation of its business. The Company accrues for claim exposures that are probable of occurrence and can be reasonably estimated. The Company also maintains insurance coverage for product liability exposures. The Company believes that its accruals and insurance coverage are adequate and that product liability suits will not have a material adverse effect on the Company’s consolidated financial statements.
17. Supplemental Consolidating Data
The supplemental consolidating data for the periods noted is presented for informational purposes. The supplemental consolidating data may be different than segment information presented elsewhere due to the allocation of intercompany eliminations to reporting segments. All supplemental data is presented in thousands. |
| | | | | | | | | | | | | | | |
| Three months ended June 29, 2014 |
| Motorcycles & Related Products Operations | | Financial Services Operations | | Eliminations | | Consolidated |
Revenue: | | | | | | | |
Motorcycles and Related Products | $ | 1,836,974 |
| | $ | — |
| | $ | (2,689 | ) | | $ | 1,834,285 |
|
Financial Services | — |
| | 166,963 |
| | (549 | ) | | 166,414 |
|
Total revenue | 1,836,974 |
| | 166,963 |
| | (3,238 | ) | | 2,000,699 |
|
Costs and expenses: | | | | | | | |
Motorcycles and Related Products cost of goods sold | 1,110,146 |
| | — |
| | — |
| | 1,110,146 |
|
Financial Services interest expense | — |
| | 40,741 |
| | — |
| | 40,741 |
|
Financial Services provision for credit losses | — |
| | 15,961 |
| | — |
| | 15,961 |
|
Selling, administrative and engineering expense | 251,432 |
| | 37,962 |
| | (3,238 | ) | | 286,156 |
|
Total costs and expenses | 1,361,578 |
| | 94,664 |
| | (3,238 | ) | | 1,453,004 |
|
Operating income | 475,396 |
| | 72,299 |
| | — |
| | 547,695 |
|
Investment income | 1,772 |
| | — |
| | — |
| | 1,772 |
|
Interest expense | 393 |
| | — |
| | — |
| | 393 |
|
Income before provision for income taxes | 476,775 |
| | 72,299 |
| | — |
| | 549,074 |
|
Provision for income taxes | 168,303 |
| | 26,618 |
| | — |
| | 194,921 |
|
Net income | $ | 308,472 |
| | $ | 45,681 |
| | $ | — |
| | $ | 354,153 |
|
| Six months ended June 29, 2014 |
| Motorcycles & Related Products Operations | | Financial Services Operations | | Eliminations | | Consolidated |
Revenue: | | | | | | | |
Motorcycles and Related Products | $ | 3,410,941 |
| | $ | — |
| | $ | (4,968 | ) | | $ | 3,405,973 |
|
Financial Services | — |
| | 321,649 |
| | (875 | ) | | 320,774 |
|
Total revenue | 3,410,941 |
| | 321,649 |
| | (5,843 | ) | | 3,726,747 |
|
Costs and expenses: | | | | | | | |
Motorcycles and Related Products cost of goods sold | 2,089,703 |
| | — |
| | — |
| | 2,089,703 |
|
Financial Services interest expense | — |
| | 79,598 |
| | — |
| | 79,598 |
|
Financial Services provision for credit losses | — |
| | 36,292 |
| | — |
| | 36,292 |
|
Selling, administrative and engineering expense | 496,197 |
| | 72,223 |
| | (5,843 | ) | | 562,577 |
|
Total costs and expenses | 2,585,900 |
| | 188,113 |
| | (5,843 | ) | | 2,768,170 |
|
Operating income | 825,041 |
| | 133,536 |
| | — |
| | 958,577 |
|
Investment income | 123,431 |
| | — |
| | (120,000 | ) | | 3,431 |
|
Interest expense | 4,070 |
| | — |
| | — |
| | 4,070 |
|
Income before provision for income taxes | 944,402 |
| | 133,536 |
| | (120,000 | ) | | 957,938 |
|
Provision for income taxes | 288,876 |
| | 48,992 |
| | — |
| | 337,868 |
|
Net income | $ | 655,526 |
| | $ | 84,544 |
| | $ | (120,000 | ) | | $ | 620,070 |
|
|
| | | | | | | | | | | | | | | |
| Three months ended June 30, 2013 |
| Motorcycles & Related Products Operations | | Financial Services Operations | | Eliminations | | Consolidated |
Revenue: | | | | | | | |
Motorcycles and Related Products | $ | 1,634,165 |
| | $ | — |
| | $ | (2,699 | ) | | $ | 1,631,466 |
|
Financial Services | — |
| | 163,335 |
| | (494 | ) | | 162,841 |
|
Total revenue | 1,634,165 |
| | 163,335 |
| | (3,193 | ) | | 1,794,307 |
|
Costs and expenses: | | | | | | | |
Motorcycles and Related Products cost of goods sold | 1,029,596 |
| | — |
| | — |
| | 1,029,596 |
|
Financial Services interest expense | — |
| | 45,506 |
| | — |
| | 45,506 |
|
Financial Services provision for credit losses | — |
| | 11,297 |
| | — |
| | 11,297 |
|
Selling, administrative and engineering expense | 249,996 |
| | 34,581 |
| | (3,193 | ) | | 281,384 |
|
Restructuring benefit | (5,297 | ) | | — |
| | — |
| | (5,297 | ) |
Total costs and expenses | 1,274,295 |
| | 91,384 |
| | (3,193 | ) | | 1,362,486 |
|
Operating income | 359,870 |
| | 71,951 |
| | — |
| | 431,821 |
|
Investment income | 1,770 |
| | — |
| | — |
| | 1,770 |
|
Interest expense | 11,238 |
| | — |
| | — |
| | 11,238 |
|
Income before provision for income taxes | 350,402 |
| | 71,951 |
| | — |
| | 422,353 |
|
Provision for income taxes | 124,271 |
| | 26,343 |
| | — |
| | 150,614 |
|
Net income | $ | 226,131 |
| | $ | 45,608 |
| | $ | — |
| | $ | 271,739 |
|
| Six months ended June 30, 2013 |
| Motorcycles & Related Products Operations | | Financial Services Operations | | Eliminations | | Consolidated |
Revenue: | | | | | | | |
Motorcycles and Related Products | $ | 3,050,974 |
| | $ | — |
| | $ | (5,260 | ) | | $ | 3,045,714 |
|
Financial Services | — |
| | 320,632 |
| | (826 | ) | | 319,806 |
|
Total revenue | 3,050,974 |
| | 320,632 |
| | (6,086 | ) | | 3,365,520 |
|
Costs and expenses: | | | | | | | |
Motorcycles and Related Products cost of goods sold | 1,924,402 |
| | — |
| | — |
| | 1,924,402 |
|
Financial Services interest expense | — |
| | 86,060 |
| | — |
| | 86,060 |
|
Financial Services provision for credit losses | — |
| | 24,407 |
| | — |
| | 24,407 |
|
Selling, administrative and engineering expense | 490,071 |
| | 68,898 |
| | (6,086 | ) | | 552,883 |
|
Restructuring benefit | (2,359 | ) | | — |
| | — |
| | (2,359 | ) |
Total costs and expenses | 2,412,114 |
| | 179,365 |
| | (6,086 | ) | | 2,585,393 |
|
Operating income | 638,860 |
| | 141,267 |
| | — |
| | 780,127 |
|
Investment income | 188,385 |
| | — |
| | (185,000 | ) | | 3,385 |
|
Interest expense | 22,629 |
| | — |
| | — |
| | 22,629 |
|
Income before provision for income taxes | 804,616 |
| | 141,267 |
| | (185,000 | ) | | 760,883 |
|
Provision for income taxes | 213,557 |
| | 51,458 |
| | — |
| | 265,015 |
|
Net income | $ | 591,059 |
| | $ | 89,809 |
| | $ | (185,000 | ) | | $ | 495,868 |
|
|
| | | | | | | | | | | | | | | |
| June 29, 2014 |
| Motorcycles & Related Products Operations | | Financial Services Operations | | Eliminations | | Consolidated |
ASSETS | | | | | | | |
Current assets: | | | | | | | |
Cash and cash equivalents | $ | 635,705 |
| | $ | 363,641 |
| | $ | — |
| | $ | 999,346 |
|
Marketable securities | 57,814 |
| | — |
| | — |
| | 57,814 |
|
Accounts receivable, net | 1,317,297 |
| | — |
| | (1,027,357 | ) | | 289,940 |
|
Finance receivables, net | — |
| | 2,281,512 |
| | — |
| | 2,281,512 |
|
Inventories | 371,597 |
| | — |
| | — |
| | 371,597 |
|
Restricted cash | — |
| | 154,681 |
| | — |
| | 154,681 |
|
Deferred income taxes | 52,348 |
| | 38,000 |
| | — |
| | 90,348 |
|
Other current assets | 95,429 |
| | 33,031 |
| | — |
| | 128,460 |
|
Total current assets | 2,530,190 |
| | 2,870,865 |
| | (1,027,357 | ) | | 4,373,698 |
|
Finance receivables, net | — |
| | 4,537,405 |
| | — |
| | 4,537,405 |
|
Property, plant and equipment, net | 792,642 |
| | 33,825 |
| | — |
| | 826,467 |
|
Prepaid pension costs | 256,279 |
| | — |
| | — |
| | 256,279 |
|
Goodwill | 30,252 |
| | — |
| | — |
| | 30,252 |
|
Deferred income taxes | 2,915 |
| | — |
| | — |
| | 2,915 |
|
Other long-term assets | 111,229 |
| | 14,506 |
| | (76,455 | ) | | 49,280 |
|
| $ | 3,723,507 |
| | $ | 7,456,601 |
| | $ | (1,103,812 | ) | | $ | 10,076,296 |
|
LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | | | |
Current liabilities: | | | | | | | |
Accounts payable | $ | 316,707 |
| | $ | 1,098,992 |
| | $ | (1,027,357 | ) | | $ | 388,342 |
|
Accrued liabilities | 423,312 |
| | 79,205 |
| | (1,748 | ) | | 500,769 |
|
Short-term debt | — |
| | 619,622 |
| | — |
| | 619,622 |
|
Current portion of long-term debt | — |
| | 944,915 |
| | — |
| | 944,915 |
|
Total current liabilities | 740,019 |
| | 2,742,734 |
| | (1,029,105 | ) | | 2,453,648 |
|
Long-term debt | — |
| | 3,794,396 |
| | — |
| | 3,794,396 |
|
Pension liability | 38,174 |
| | — |
| | — |
| | 38,174 |
|
Postretirement healthcare benefits | 209,312 |
| | — |
| | — |
| | 209,312 |
|
Deferred income taxes | 35,597 |
| | 1,574 |
| | 1,748 |
| | 38,919 |
|
Other long-term liabilities | 152,862 |
| | 22,725 |
| | — |
| | 175,587 |
|
Shareholders’ equity | 2,547,543 |
| | 895,172 |
| | (76,455 | ) | | 3,366,260 |
|
| $ | 3,723,507 |
| | $ | 7,456,601 |
| | $ | (1,103,812 | ) | | $ | 10,076,296 |
|
|
| | | | | | | | | | | | | | | |
| December 31, 2013 |
| Motorcycles & Related Products Operations | | Financial Services Operations | | Eliminations | | Consolidated |
ASSETS | | | | | | | |
Current assets: | | | | | | | |
Cash and cash equivalents | $ | 718,912 |
| | $ | 347,700 |
| | $ | — |
| | $ | 1,066,612 |
|
Marketable securities | 99,009 |
| | — |
| | — |
| | 99,009 |
|
Accounts receivable, net | 850,248 |
| | — |
| | (589,183 | ) | | 261,065 |
|
Finance receivables, net | — |
| | 1,773,686 |
| | — |
| | 1,773,686 |
|
Inventories | 424,507 |
| | — |
| | — |
| | 424,507 |
|
Restricted cash | — |
| | 144,807 |
| | — |
| | 144,807 |
|
Deferred income taxes | 70,557 |
| | 33,068 |
| | — |
| | 103,625 |
|
Other current assets | 82,717 |
| | 34,573 |
| | (1,798 | ) | | 115,492 |
|
Total current assets | 2,245,950 |
| | 2,333,834 |
| | (590,981 | ) | | 3,988,803 |
|
Finance receivables, net | — |
| | 4,225,877 |
| | — |
| | 4,225,877 |
|
Property, plant and equipment, net | 808,005 |
| | 34,472 |
| | — |
| | 842,477 |
|
Prepaid pension costs | 244,871 |
| | — |
| | — |
| | 244,871 |
|
Goodwill | 30,452 |
| | — |
| | — |
| | 30,452 |
|
Deferred income taxes | 3,339 |
| | — |
| | — |
| | 3,339 |
|
Other long-term assets | 126,940 |
| | 17,360 |
| | (75,079 | ) | | 69,221 |
|
| $ | 3,459,557 |
| | $ | 6,611,543 |
| | $ | (666,060 | ) | | $ | 9,405,040 |
|
LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | | | |
Current liabilities: | | | | | | | |
Accounts payable | $ | 203,786 |
| | $ | 625,191 |
| | $ | (589,183 | ) | | $ | 239,794 |
|
Accrued liabilities | 353,618 |
| | 77,774 |
| | (4,057 | ) | | 427,335 |
|
Short-term debt | — |
| | 666,317 |
| | — |
| | 666,317 |
|
Current portion of long-term debt | 303,000 |
| | 873,140 |
| | — |
| | 1,176,140 |
|
Total current liabilities | 860,404 |
| | 2,242,422 |
| | (593,240 | ) | | 2,509,586 |
|
Long-term debt | — |
| | 3,416,713 |
| | — |
| | 3,416,713 |
|
Pension liability | 36,371 |
| | — |
| | — |
| | 36,371 |
|
Postretirement healthcare benefits | 216,165 |
| | — |
| | — |
| | 216,165 |
|
Deferred income taxes | 44,584 |
| | 2,656 |
| | 2,259 |
| | 49,499 |
|
Other long-term liabilities | 146,686 |
| | 20,534 |
| | — |
| | 167,220 |
|
Shareholders’ equity | 2,155,347 |
| | 929,218 |
| | (75,079 | ) | | 3,009,486 |
|
| $ | 3,459,557 |
| | $ | 6,611,543 |
| | $ | (666,060 | ) | | $ | 9,405,040 |
|
|
| | | | | | | | | | | | | | | |
| June 30, 2013 |
| Motorcycles & Related Products Operations | | Financial Services Operations | | Eliminations | | Consolidated |
ASSETS | | | | | | | |
Current assets: | | | | | | | |
Cash and cash equivalents | $ | 935,095 |
| | $ | 365,595 |
| | $ | — |
| | $ | 1,300,690 |
|
Marketable securities | 133,631 |
| | — |
| | — |
| | 133,631 |
|
Accounts receivable, net | 956,619 |
| | — |
| | (702,800 | ) | | 253,819 |
|
Finance receivables, net | — |
| | 2,010,974 |
| | — |
| | 2,010,974 |
|
Inventories | 307,717 |
| | — |
| | — |
| | 307,717 |
|
Restricted cash | — |
| | 212,004 |
| | — |
| | 212,004 |
|
Other current assets | 175,231 |
| | 60,405 |
| | — |
| | 235,636 |
|
Total current assets | 2,508,293 |
| | 2,648,978 |
| | (702,800 | ) | | 4,454,471 |
|
Finance receivables, net | — |
| | 4,214,612 |
| | — |
| | 4,214,612 |
|
Property, plant and equipment, net | 758,674 |
| | 31,889 |
| | — |
| | 790,563 |
|
Goodwill | 29,183 |
| | — |
| | — |
| | 29,183 |
|
Other long-term assets | 277,409 |
| | 18,011 |
| | (77,051 | ) | | 218,369 |
|
| $ | 3,573,559 |
| | $ | 6,913,490 |
| | $ | (779,851 | ) | | $ | 9,707,198 |
|
LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | | | |
Current liabilities: | | | | | | | |
Accounts payable | $ | 290,363 |
| | $ | 756,860 |
| | $ | (702,800 | ) | | $ | 344,423 |
|
Accrued liabilities | 392,613 |
| | 61,015 |
| | (3,381 | ) | | 450,247 |
|
Short-term debt | — |
| | 525,745 |
| | — |
| | 525,745 |
|
Current portion of long-term debt | 303,000 |
| | 473,274 |
| | — |
| | 776,274 |
|
Total current liabilities | 985,976 |
| | 1,816,894 |
| | (706,181 | ) | | 2,096,689 |
|
Long-term debt | — |
| | 4,234,352 |
| | — |
| | 4,234,352 |
|
Pension liability | 148,974 |
| | — |
| | — |
| | 148,974 |
|
Postretirement healthcare liability | 271,122 |
| | — |
| | — |
| | 271,122 |
|
Other long-term liabilities | 116,645 |
| | 18,177 |
| | — |
| | 134,822 |
|
Shareholders’ equity | 2,050,842 |
| | 844,067 |
| | (73,670 | ) | | 2,821,239 |
|
| $ | 3,573,559 |
| | $ | 6,913,490 |
| | $ | (779,851 | ) | | $ | 9,707,198 |
|
|
| | | | | | | | | | | | | | | |
| Six months ended June 29, 2014 |
| Motorcycles & Related Products Operations | | Financial Services Operations | | Eliminations & Adjustments | | Consolidated |
Cash flows from operating activities: | | | | | | | |
Net income | $ | 655,526 |
| | $ | 84,544 |
| | $ | (120,000 | ) | | $ | 620,070 |
|
Adjustments to reconcile net income to cash provided by operating activities: | | | | | | | |
Depreciation | 83,348 |
| | 3,775 |
| | — |
| | 87,123 |
|
Amortization of deferred loan origination costs | — |
| | 45,713 |
| |
|
| | 45,713 |
|
Amortization of financing origination fees | 59 |
| | 4,225 |
| | — |
| | 4,284 |
|
Provision for employee long-term benefits | 16,854 |
| | — |
| | — |
| | 16,854 |
|
Contributions to pension and postretirement plans | (14,035 | ) | | — |
| | — |
| | (14,035 | ) |
Stock compensation expense | 19,393 |
| | 1,375 |
| | — |
| | 20,768 |
|
Net change in wholesale finance receivables related to sales | — |
| | — |
| | (510,200 | ) | | (510,200 | ) |
Provision for credit losses | — |
| | 36,292 |
| | — |
| | 36,292 |
|
Loss on debt extinguishment | — |
| | 1,145 |
| | — |
| | 1,145 |
|
Deferred income taxes | 939 |
| | (6,023 | ) | | — |
| | (5,084 | ) |
Foreign currency adjustments | (3,894 | ) | | — |
| | — |
| | (3,894 | ) |
Other, net | 4,712 |
| | 4,620 |
| | — |
| | 9,332 |
|
Change in current assets and current liabilities: | | | | | | | |
Accounts receivable | (363,817 | ) | | — |
| | 338,174 |
| | (25,643 | ) |
Finance receivables—accrued interest and other | — |
| | (993 | ) | | — |
| | (993 | ) |
Inventories | 58,741 |
| | — |
| | — |
| | 58,741 |
|
Accounts payable and accrued liabilities | 189,117 |
| | 375,290 |
| | (338,174 | ) | | 226,233 |
|
Derivative instruments | 968 |
| | — |
| | — |
| | 968 |
|
Other | 4,962 |
| | (2,044 | ) | | — |
| | 2,918 |
|
Total adjustments | (2,653 | ) | | 463,375 |
| | (510,200 | ) | | (49,478 | ) |
Net cash provided by operating activities | 652,873 |
| | 547,919 |
| | (630,200 | ) | | 570,592 |
|
|
| | | | | | | | | | | | | | | |
| Six months ended June 29, 2014 |
| Motorcycles & Related Products Operations | | Financial Services Operations | | Eliminations & Adjustments | | Consolidated |
Cash flows from investing activities: | | | | | | | |
Capital expenditures | (71,395 | ) | | (3,128 | ) | | — |
| | (74,523 | ) |
Origination of finance receivables | — |
| | (4,580,910 | ) | | 2,676,333 |
| | (1,904,577 | ) |
Collections of finance receivables | — |
| | 3,684,319 |
| | (2,166,133 | ) | | 1,518,186 |
|
Sales and redemptions of marketable securities | 41,010 |
| | — |
| | — |
| | 41,010 |
|
Other | 145 |
| | — |
| | — |
| | 145 |
|
Net cash used by investing activities | (30,240 | ) | | (899,719 | ) | | 510,200 |
| | (419,759 | ) |
Cash flows from financing activities: | | | | | | | |
Repayments of senior unsecured notes | (303,000 | ) | | — |
| | — |
| | (303,000 | ) |
Repayments of medium-term notes | — |
| | (7,220 | ) | | — |
| | (7,220 | ) |
Intercompany borrowing activity | (100,000 | ) | | 100,000 |
| | — |
| | — |
|
Proceeds from securitization debt | — |
| | 847,126 |
| | — |
| | 847,126 |
|
Repayments of securitization debt | — |
| | (393,655 | ) | | — |
| | (393,655 | ) |
Net increase in credit facilities and unsecured commercial paper | — |
| | (48,134 | ) | | — |
| | (48,134 | ) |
Borrowings of asset-backed commercial paper | — |
| | 36,800 |
| | — |
| | 36,800 |
|
Repayments of asset-backed commercial paper | — |
| | (37,317 | ) | | — |
| | (37,317 | ) |
Net change in restricted cash | — |
| | (9,874 | ) | | — |
| | (9,874 | ) |
Dividends paid | (120,631 | ) | | (120,000 | ) | | 120,000 |
| | (120,631 | ) |
Purchase of common stock for treasury | (223,736 | ) | | — |
| | — |
| | (223,736 | ) |
Excess tax benefits from share-based payments | 8,652 |
| | — |
| | — |
| | 8,652 |
|
Issuance of common stock under employee stock option plans | 27,907 |
| | — |
| | — |
| | 27,907 |
|
Net cash (used by) provided by financing activities | (710,808 | ) | | 367,726 |
| | 120,000 |
| | (223,082 | ) |
Effect of exchange rate changes on cash and cash equivalents | 4,968 |
| | 15 |
| | — |
| | 4,983 |
|
Net (decrease) increase in cash and cash equivalents | $ | (83,207 | ) | | $ | 15,941 |
| | $ | — |
| | $ | (67,266 | ) |
Cash and cash equivalents: | | | | | | | |
Cash and cash equivalents—beginning of period | $ | 718,912 |
| | $ | 347,700 |
| | $ | — |
| | $ | 1,066,612 |
|
Net (decrease) increase in cash and cash equivalents | (83,207 | ) | | 15,941 |
| | — |
| | (67,266 | ) |
Cash and cash equivalents—end of period | $ | 635,705 |
| | $ | 363,641 |
| | $ | — |
| | $ | 999,346 |
|
|
| | | | | | | | | | | | | | | |
| Six months ended June 30, 2013 |
| Motorcycles & Related Products Operations | | Financial Services Operations | | Eliminations & Adjustments | | Consolidated |
Cash flows from operating activities: | | | | | | | |
Net income | $ | 591,059 |
| | $ | 89,809 |
| | $ | (185,000 | ) | | $ | 495,868 |
|
Adjustments to reconcile net income to cash provided by operating activities: | | | | | | | |
Depreciation | 80,592 |
| | 2,814 |
| | — |
| | 83,406 |
|
Amortization of deferred loan origination costs | — |
| | 40,947 |
| | — |
| | 40,947 |
|
Amortization of financing origination fees | 237 |
| | 4,398 |
| | — |
| | 4,635 |
|
Provision for employee long-term benefits | 33,382 |
| | — |
| | — |
| | 33,382 |
|
Contributions to pension and postretirement plans | (189,116 | ) | | — |
| | — |
| | (189,116 | ) |
Stock compensation expense | 19,592 |
| | 1,469 |
| | — |
| | 21,061 |
|
Net change in wholesale finance receivables related to sales | — |
| | — |
| | (293,293 | ) | | (293,293 | ) |
Provision for credit losses | — |
| | 24,407 |
| | — |
| | 24,407 |
|
Loss on extinguishment of debt | — |
| | 4,947 |
| | — |
| | 4,947 |
|
Foreign currency adjustments | 18,529 |
| | — |
| | — |
| | 18,529 |
|
Other, net | (647 | ) | | 205 |
| | — |
| | (442 | ) |
Change in current assets and current liabilities: | | | | | | | |
Accounts receivable | (286,024 | ) | | — |
| | 251,237 |
| | (34,787 | ) |
Finance receivables—accrued interest and other | — |
| | 699 |
| | — |
| | 699 |
|
Inventories | 69,475 |
| | — |
| | — |
| | 69,475 |
|
Accounts payable and accrued liabilities | 63,605 |
| | 258,353 |
| | (251,237 | ) | | 70,721 |
|
Restructuring reserves | (22,790 | ) | | — |
| | — |
| | (22,790 | ) |
Derivative instruments | (1,529 | ) | | (28 | ) | | — |
| | (1,557 | ) |
Other | 65,613 |
| | (2,028 | ) | | — |
| | 63,585 |
|
Total adjustments | (149,081 | ) | | 336,183 |
| | (293,293 | ) | | (106,191 | ) |
Net cash provided by operating activities | 441,978 |
| | 425,992 |
| | (478,293 | ) | | 389,677 |
|
|
| | | | | | | | | | | | | | | |
| Six months ended June 30, 2013 |
| Motorcycles & Related Products Operations | | Financial Services Operations | | Eliminations & Adjustments | | Consolidated |
Cash flows from investing activities: | | | | | | | |
Capital expenditures | (64,282 | ) | | (2,307 | ) | | — |
| | (66,589 | ) |
Origination of finance receivables | — |
| | (4,019,925 | ) | | 2,366,693 |
| | (1,653,232 | ) |
Collections of finance receivables | — |
| | 3,496,088 |
| | (2,073,400 | ) | | 1,422,688 |
|
Purchases of marketable securities | (4,998 | ) | | — |
| | — |
| | (4,998 | ) |
Sales and redemptions of marketable securities | 6,003 |
| | — |
| | — |
| | 6,003 |
|
Other | 6,667 |
| | — |
| | — |
| | 6,667 |
|
Net cash used by investing activities | (56,610 | ) | | (526,144 | ) | | 293,293 |
| | (289,461 | ) |
Cash flows from financing activities: | | | | | | | |
Repayments of medium-term notes | — |
| | (27,858 | ) | | — |
| | (27,858 | ) |
Intercompany borrowing activity | 100,000 |
| | (100,000 | ) | | — |
| | — |
|
Proceeds from securitization debt | — |
| | 647,516 |
| | — |
| | 647,516 |
|
Repayments of securitization debt | — |
| | (423,455 | ) | | — |
| | (423,455 | ) |
Borrowings of asset-backed commercial paper | — |
| | 47,061 |
| | — |
| | 47,061 |
|
Repayments of asset-backed commercial paper | — |
| | (37,642 | ) | | — |
| | (37,642 | ) |
Net increase in credit facilities and unsecured commercial paper | — |
| | 230,761 |
| | — |
| | 230,761 |
|
Net change in restricted cash | — |
| | (23,996 | ) | | — |
| | (23,996 | ) |
Dividends paid | (94,213 | ) | | (185,000 | ) | | 185,000 |
| | (94,213 | ) |
Purchase of common stock for treasury | (208,699 | ) | | — |
| | — |
| | (208,699 | ) |
Excess tax benefits from share-based payments | 16,338 |
| | — |
| | — |
| | 16,338 |
|
Issuance of common stock under employee stock option plans | 24,677 |
| | — |
| | — |
| | 24,677 |
|
Net cash (used by) provided by financing activities | (161,897 | ) | | 127,387 |
| | 185,000 |
| | 150,490 |
|
Effect of exchange rate changes on cash and cash equivalents | (16,092 | ) | | (2,062 | ) | | — |
| | (18,154 | ) |
Net increase in cash and cash equivalents | $ | 207,379 |
| | $ | 25,173 |
| | $ | — |
| | $ | 232,552 |
|
Cash and cash equivalents: | | | | | | | |
Cash and cash equivalents—beginning of period | $ | 727,716 |
| | $ | 340,422 |
| | $ | — |
| | $ | 1,068,138 |
|
Net increase in cash and cash equivalents | 207,379 |
| | 25,173 |
| | — |
| | 232,552 |
|
Cash and cash equivalents—end of period | $ | 935,095 |
| | $ | 365,595 |
| | $ | — |
| | $ | 1,300,690 |
|
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Harley-Davidson, Inc. is the parent company of the groups of companies doing business as Harley-Davidson Motor Company (HDMC) and Harley-Davidson Financial Services (HDFS). HDMC produces heavyweight cruiser and touring motorcycles. HDMC currently manufactures six platforms of motorcycles: Touring, Dyna®, Softail®, Sportster®, V-Rod®, and Street. HDFS provides wholesale and retail financing and insurance programs primarily to Harley-Davidson dealers and customers.
The Company operates in two business segments: Motorcycles & Related Products (Motorcycles) and Financial Services (Financial Services). The Company’s reportable segments are strategic business units that offer different products and services. They are managed separately based on the fundamental differences in their operations.
The “% Change” figures included in the “Results of Operations” section were calculated using unrounded dollar amounts and may differ from calculations using the rounded dollar amounts presented.
Overview
The Company’s net income was $354.2 million, or $1.62 per diluted share, for the second quarter of 2014 compared to $271.7 million, or $1.21 per diluted share, in the second quarter of 2013. Operating income from Motorcycles increased $115.6 million or 32.3% compared to last year’s second quarter driven by a 12.4% increase in revenue behind a 9.0% increase in wholesale shipments of Harley-Davidson motorcycles. Motorcycles segment operating income also benefited from a higher gross margin percentage, partially offset by higher year-over-year selling, general and administrative and engineering expenses. Operating income from Financial Services in the second quarter of 2014 was $74.4 million, up 0.4% compared to $74.2 million in the year-ago quarter. The Company's net income also benefited from lower year-over-year interest expense due to the retirement of its high interest debt in the first quarter of 2014.
During the second quarter of 2014, worldwide independent dealer retail sales of new Harley-Davidson motorcycles were flat compared to the same period in 2013 in both the U.S. and International markets. Retail sales in the second quarter of 2014 were lower than the Company had expected due in part to prolonged poor weather conditions across parts of the U.S. and soft Sportster® sales related to anticipated shipments of the Company's new Street motorcycles, coupled with start-up issues impacting the timing of Street availability. As a result of the lower than expected second quarter retail sales, the Company made a decision to adjust its wholesale motorcycle shipment guidance downward by 9,000 motorcycles for 2014. Also, as anticipated, the absence of the popular Road Glide models from the 2014 model year continued to adversely impact U.S. retail sales as compared to the prior year. Although second quarter worldwide retail sales were below the Company's expectations, the Company believes the core demand fundamentals for the business remain intact and underlying growth trends are strong when adjusting for the absence of Road Glide.
| |
(1) | Note Regarding Forward-Looking Statements |
The Company intends that certain matters discussed in this report are “forward-looking statements” intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. These forward-looking statements can generally be identified as such by reference to this footnote or because the context of the statement will include words such as the Company “believes,” “anticipates,” “expects,” “plans,” or “estimates” or words of similar meaning. Similarly, statements that describe future plans, objectives, outlooks, targets, guidance or goals are also forward-looking statements. Such forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those anticipated as of the date of this report. Certain of such risks and uncertainties are described in close proximity to such statements or elsewhere in this report, including under the caption “Cautionary Statements” and in Item 1A “Risk Factors” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2013. Shareholders, potential investors, and other readers are urged to consider these factors in evaluating the forward-looking statements and cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements included in this report are only made as of the date of the filing of this report (August 7, 2014), and the Company disclaims any obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances.
Outlook(1)
On July 22, 2014, the Company provided the following information concerning its expectations for the remainder of 2014.
The Company stated its expectation to ship 270,000 to 275,000 Harley-Davidson motorcycles to dealers and distributors worldwide in 2014, an increase of 3.7% to 5.6% over 2013. The Company's previous guidance was 279,000 to 284,000 motorcycles. In addition, the Company announced that its full-year shipment estimate includes expected shipments of 49,000 to 54,000 motorcycles in the third quarter of 2014, down from 54,025 in the third quarter of 2013. The Company believes it is critical for it to support a healthy retail channel and protect its premium brand by aggressively managing supply in line with demand, as it has consistently done over the past several years. The Company expects retail sales will benefit from the following for the remainder of 2014:
| |
• | Project Rushmore motorcycles |
| |
• | Increased product availability of Street motorcycles, which represent 7,000 to 10,000 units of the 2014 unit shipment estimate. The Company now believes these shipments will be more heavily weighted towards the end of the year than originally planned |
| |
• | The 2015 model year motorcycle line-up which will include the new Road Glide |
The Company expects gross margin in the third quarter of 2014 to be lower by approximately 2.5 percentage points compared to 35.3% in the third quarter of 2013. The Company expects the lower gross margin to be driven by the following:
| |
• | The shipment mix of wholesale motorcycles is expected to be unfavorable. Project Rushmore models, which delivered strong mix gains since its introduction, will be included in both the current year and prior year results as the initial launch was in the third quarter of 2013, while Street, at a lower gross margin, is expected to be an increasing portion of the shipment mix in the third quarter of 2014 |
| |
• | The Company expects lower year-over-year production due to its revised shipment expectations |
| |
• | The Company expects additional Street start-up costs of approximately $5 million |
The Company continues to expect 2014 operating margin percent for the Motorcycles segment to be between 17.5% and 18.5% compared to 16.6% in 2013. The Company believes operating margin percent improvement will be driven by a modest increase in gross margin, as well as lower selling, administrative and engineering expenses as a percent of revenue. The Company expects selling, administrative and engineering expenses to grow in 2014 as it continues to invest in future growth opportunities but that they will decrease as a percent of revenue as the Company leverages its current spending.
The Company continues to expect operating income for the Financial Services segment to be down modestly in 2014 as compared to 2013. Going forward, the Company continues to expect pressure on Financial Services operating income as a result of modestly higher credit losses and tightening net interest margins due to increasing competition and higher year-over-year borrowing costs.
The Company continues to estimate capital expenditures for 2014 to be between $215 million and $235 million. The Company anticipates it will have the ability to fund all capital expenditures in 2014 with cash flows generated by operations.
The Company continues to expect the full year 2014 effective income tax rate to be approximately 35.5%. This guidance excludes the effect of any potential future adjustments such as changes in tax legislation or audit settlements which are recorded as discrete items in the period in which they are settled.
Results of Operations for the Three Months Ended June 29, 2014
Compared to the Three Months Ended June 30, 2013
Consolidated Results
|
| | | | | | | | | | | | | | |
| Three months ended | | | | |
(in thousands, except earnings per share) | June 29, 2014 | | June 30, 2013 | | Increase (Decrease) | | % Change |
Operating income from Motorcycles & Related Products | $ | 473,256 |
| | $ | 357,665 |
| | $ | 115,591 |
| | 32.3 | % |
Operating income from Financial Services | 74,439 |
| | 74,156 |
| | 283 |
| | 0.4 |
|
Operating income | 547,695 |
| | 431,821 |
| | 115,874 |
| | 26.8 |
|
Investment income | 1,772 |
| | 1,770 |
| | 2 |
| | 0.1 |
|
Interest expense | 393 |
| | 11,238 |
| | (10,845 | ) | | (96.5 | ) |
Income before income taxes | 549,074 |
| | 422,353 |
| | 126,721 |
| | 30.0 |
|
Provision for income taxes | 194,921 |
| | 150,614 |
| | 44,307 |
| | 29.4 |
|
Net income | $ | 354,153 |
| | $ | 271,739 |
| | $ | 82,414 |
| | 30.3 | % |
Diluted earnings per share | $ | 1.62 |
| | $ | 1.21 |
| | $ | 0.41 |
| | 33.9 | % |
Consolidated operating income was up 26.8% in the second quarter of 2014 led by an increase in operating income from the Motorcycles & Related Products segment which improved by $115.6 million, or 32.3%, compared to the second quarter of 2013. Operating income from the Financial Services segment was slightly higher during the second quarter of 2014 compared to the second quarter of 2013, increasing $0.3 million or 0.4%. Please refer to the “Motorcycles and Related Products Segment” and “Financial Services Segment” discussions following for a more detailed discussion of the factors affecting operating income.
Interest expense was lower in the second quarter of 2014 compared to the second quarter of 2013 due to the retirement of $303 million of senior unsecured long-term debt in February 2014.
The effective income tax rate for the second quarter of 2014 was 35.5% compared to 35.7% for the second quarter of 2013.
Diluted earnings per share was $1.62 in the second quarter of 2014, up 33.9% over the same period in the prior year. The increase in diluted earnings per share was driven primarily by the 30.3% increase in net income, but also benefited from lower diluted weighted average shares outstanding. Diluted weighted average shares outstanding decreased from 224.5 million in the second quarter of 2013 to 219.2 million in the second quarter of 2014, driven by the Company's repurchase of common stock. Please refer to "Liquidity and Capital Resources" for additional information concerning the Company's share repurchase activity.
Harley-Davidson Motorcycle Worldwide Retail Sales(a)
Worldwide independent dealer retail sales of Harley-Davidson motorcycles during the second quarter of 2014 were flat compared to the second quarter of 2013. Retail sales of Harley-Davidson motorcycles were flat in the United States and increased 0.1% internationally in the second quarter of 2014.
As anticipated, the Company believes the absence of its popular Road Glide models from the 2014 model year continued to adversely impact year-over-year U.S. retail sales results. Retail sales of Road Glide models represented approximately 10% of the U.S. retail sales in the second quarter of 2013. The Company also believes that prolonged poor weather conditions across parts of the U.S., including the Northeast, Southeast and Central states, likely resulted in lost sales that the Company believes will not be fully recovered in 2014.(1)
U.S. dealers also experienced a decline in Sportster® motorcycles sales in the second quarter of 2014 compared to the prior year, which the Company believes may be the result of the better-than-expected enthusiasm it is experiencing for the new Street motorcycles. The Company believes some customers are waiting to compare the two product offerings first-hand; however, start-up delays have resulted in slower-than-expected shipments of Street motorcycles to dealers for sales to retail customers and very low product availability to-date. Wholesale shipments of Street motorcycles for U.S. retail customers began late in the second quarter in very limited quantities. The Company plans to ship two Street motorcycles to each U.S. dealer for retail by the end of August 2014.(1)
Although the availability of Street motorcycles for retail sales is not at the level the Company had anticipated, approximately 1,600 Street 500 motorcycles were sold to U.S. dealers in the second quarter of 2014 for use in the Company's Riding Academy. The Street motorcycles have received a positive reception from the Company's worldwide dealer network, the motorcycle press and customers. Early feedback from graduates of the Company's Riding Academy suggests they are excited about the opportunity to purchase a Street as their first Harley-Davidson motorcycle. In addition, early retail Street motorcycle sales in India and Southern Europe are very encouraging.
Retail sales in Canada were 18.0% lower in the second quarter of 2014 compared to the second quarter of 2013 which the Company believes is due to poor weather conditions and an adverse response to recent price increases by the Company's Canadian distributor initiated to recover unfavorable currency exchange impacts.
In the EMEA region, retail sales of Harley-Davidson motorcycles in the second quarter of 2014 increased 7.0% compared to the prior year driven by growth in southern European countries and emerging markets.
Second quarter 2014 retail sales in the Asia Pacific were up 1.5% compared to the second quarter of 2013. Strong retail sales in emerging markets were partially offset by a 20.9% decline in Japan. The Company believes that an increase in a Japan consumption tax that went into effect on April 1, 2014 pulled significant sales forward into the first quarter of 2014. The strong emerging market growth was driven by India where retail growth more than doubled in the second quarter of 2014 compared to the second quarter of 2013 as a result of strong demand for Street motorcycles.
The Latin American region retail sales were down 10.4% in the second quarter of 2014 compared to the prior year which presented a difficult year-over-year comparison as it reflected retail sales growth of 39.2%. Retail sales in Brazil have also been negatively impacted by a slowing economy, consumer uncertainty and very aggressive price competition.
The following table includes retail unit sales of Harley-Davidson motorcycles:
|
| | | | | | | | | | | |
| Three months ended | | | | |
| June 30, 2014 | | June 30, 2013 | | Increase (Decrease) | | % Change |
North America Region | | | | | | | |
United States | 58,225 |
| | 58,241 |
| | (16 | ) | | — | % |
Canada | 4,146 |
| | 5,058 |
| | (912 | ) | | (18.0 | )% |
Total North America Region | 62,371 |
| | 63,299 |
| | (928 | ) | | (1.5 | )% |
Europe, Middle East and Africa Region (EMEA) | | | | | | | |
Europe(b) | 15,542 |
| | 14,669 |
| | 873 |
| | 6.0 | % |
Other | 2,222 |
| | 1,929 |
| | 293 |
| | 15.2 | % |
Total EMEA Region | 17,764 |
| | 16,598 |
| | 1,166 |
| | 7.0 | % |
Asia Pacific Region | | | | | | | |
Japan | 2,510 |
| | 3,174 |
| | (664 | ) | | (20.9 | )% |
Other | 4,792 |
| | 4,019 |
| | 773 |
| | 19.2 | % |
Total Asia Pacific Region | 7,302 |
| | 7,193 |
| | 109 |
| | 1.5 | % |
Latin America Region | 2,781 |
| | 3,103 |
| | (322 | ) | | (10.4 | )% |
Total Worldwide Retail Sales | 90,218 |
| | 90,193 |
| | 25 |
| | — | % |
Total International Retail Sales | 31,993 |
| | 31,952 |
| | 41 |
| | 0.1 | % |
| |
(a) | Data source for retail sales figures shown above is new sales warranty and registration information provided by Harley-Davidson dealers and compiled by the Company. The Company must rely on information that its dealers supply concerning retail sales and this information is subject to revision. |
| |
(b) | Includes Austria, Belgium, Denmark, Finland, France, Germany, Greece, Italy, Luxembourg, Netherlands, Norway, Portugal, Spain, Sweden, Switzerland and the United Kingdom. |
Motorcycles & Related Products Segment
Motorcycle Unit Shipments
The following table includes wholesale motorcycle unit shipments for the Motorcycles segment:
|
| | | | | | | | | | | | | | | | | |
| Three months ended | | | | |
| June 29, 2014 | | June 30, 2013 | | Unit | | Unit |
| Units | | Mix % | | Units | | Mix % | | Increase (Decrease) | | % Change |
United States | 63,043 |
| | 68.4 | % | | 57,070 |
| | 67.5 | % | | 5,973 |
| | 10.5 | % |
International | 29,174 |
| | 31.6 | % | | 27,536 |
| | 32.5 | % | | 1,638 |
| | 5.9 |
|
Harley-Davidson motorcycle units | 92,217 |
| | 100.0 | % | | 84,606 |
| | 100.0 | % | | 7,611 |
| | 9.0 | % |
Touring motorcycle units | 41,095 |
| | 44.6 | % | | 32,384 |
| | 38.3 | % | | 8,711 |
| | 26.9 | % |
Custom motorcycle units(a) | 32,231 |
| | 34.9 | % | | 35,315 |
| | 41.7 | % | | (3,084 | ) | | (8.7 | ) |
Sportster® / Street motorcycle units(b) | 18,891 |
| | 20.5 | % | | 16,907 |
| | 20.0 | % | | 1,984 |
| | 11.7 |
|
Harley-Davidson motorcycle units | 92,217 |
| | 100.0 | % | | 84,606 |
| | 100.0 | % | | 7,611 |
| | 9.0 | % |
| |
(a) | Custom motorcycle units, as used in this table, include Dyna®, Softail®, V-Rod® and CVO models. |
| |
(b) | Initial shipments of Street motorcycle units began during the first quarter of 2014. |
The Company shipped 92,217 Harley-Davidson motorcycles worldwide during the second quarter of 2014, which was 9.0% higher than the second quarter of 2013 and in line with Company expectations. Shipments of touring and Sportster® / Street motorcycles as a percentage of total shipments increased in the second quarter of 2014 compared to the prior year while shipments of custom motorcycles as a percentage of total shipments decreased. The increase in touring motorcycle shipments as a percentage of total shipments was driven by the shipments of model year 2014 Rushmore motorcycles that continued to create demand in the market. Although the shipment mix of Sportster® / Street motorcycles was up, it did not increase as much as the Company had anticipated due to Street start-up issues. The Company plans to continue to increase Street motorcycle production through the third quarter of 2014 and it expects production to be at planned levels during the fourth quarter of 2014.(1)
U.S. dealer retail inventory of Harley-Davidson motorcycles was approximately 6,600 units higher at the end of the second quarter of 2014 compared to the same time last year. The Company believes the overall U.S. retail inventory of Harley-Davidson motorcycles at the end of the second quarter of 2014 was higher than it desired due to lower retail sales in the second quarter of 2014. The Company remains committed to aggressively managing supply with demand as it has lowered its 2014 full-year shipment guidance.(1) The Company continues to expect 2014 year-end retail inventory to be moderately higher from year-end 2013 levels driven primarily by the addition of the new Street models.(1)
Segment Results
The following table includes the condensed statements of operations for the Motorcycles segment (in thousands):
|
| | | | | | | | | | | | | | |
| Three months ended | | | | |
| June 29, 2014 | | June 30, 2013 | | Increase (Decrease) | | % Change |
Revenue: | | | | | | | |
Motorcycles | $ | 1,480,914 |
| | $ | 1,274,882 |
| | $ | 206,032 |
| | 16.2 | % |
Parts & Accessories | 271,572 |
| | 269,588 |
| | 1,984 |
| | 0.7 |
|
General Merchandise | 76,386 |
| | 81,700 |
| | (5,314 | ) | | (6.5 | ) |
Other | 5,413 |
| | 5,296 |
| | 117 |
| | 2.2 |
|
Total revenue | 1,834,285 |
| | 1,631,466 |
| | 202,819 |
| | 12.4 |
|
Cost of goods sold | 1,110,146 |
| | 1,029,596 |
| | 80,550 |
| | 7.8 |
|
Gross profit | 724,139 |
| | 601,870 |
| | 122,269 |
| | 20.3 |
|
Selling & administrative expense | 218,410 |
| | 212,325 |
| | 6,085 |
| | 2.9 |
|
Engineering expense | 32,473 |
| | 37,177 |
| | (4,704 | ) | | (12.7 | ) |
Restructuring benefit | — |
| | (5,297 | ) | | 5,297 |
| | (100.0 | ) |
Operating expense | 250,883 |
| | 244,205 |
| | 6,678 |
| | 2.7 |
|
Operating income from Motorcycles | $ | 473,256 |
| | $ | 357,665 |
| | $ | 115,591 |
| | 32.3 | % |
The following table includes the estimated impact of significant factors affecting the comparability of net revenue, cost of goods sold and gross profit from the second quarter of 2013 to the second quarter of 2014 (in millions):
|
| | | | | | | | | | | |
| Net Revenue | | Cost of Goods Sold | | Gross Profit |
June 30, 2013 | $ | 1,631.5 |
| | $ | 1,029.6 |
| | $ | 601.9 |
|
Volume | 94.8 |
| | 65.0 |
| | 29.8 |
|
Motorcycle price, net of related cost | 73.5 |
| | 55.0 |
| | 18.5 |
|
Foreign currency exchange rates and hedging | 7.6 |
| | (9.6 | ) | | 17.2 |
|
Shipment mix | 26.9 |
| | (4.0 | ) | | 30.9 |
|
Raw material prices | — |
| | (0.4 | ) | | 0.4 |
|
Manufacturing and other costs | — |
| | (25.4 | ) | | 25.4 |
|
Total | 202.8 |
| | 80.6 |
| | 122.2 |
|
June 29, 2014 | $ | 1,834.3 |
| | $ | 1,110.2 |
| | $ | 724.1 |
|
The following factors affected the comparability of net revenue, cost of goods sold and gross profit from the second quarter of 2013 to the second quarter of 2014:
| |
• | Volume increases were driven by the increase in wholesale motorcycle shipments and parts and accessories sales, partially offset by lower sales volumes for general merchandise. As the Company transforms the Harley-Davidson customer experience, it has initiated an aggressive SKU reduction plan across its General Merchandise product offering. The Company believes the reduction will better focus dealers on fast-moving products and improve the customer experience with a more targeted assortment of popular styles. The Company anticipates that revenue from General Merchandise sales will be largely flat for the next two quarters as dealers sell through the discontinued items.(1) |
| |
• | On average, wholesale prices for the Company’s 2014 model-year motorcycles are higher than the prior model-year resulting in the favorable impact on revenue during the period. The impact of revenue favorability resulting from model year price increases on gross profit was partially offset by an increase in cost related to the significant additional content added to the 2014 model year motorcycles. |
| |
• | Gross profit benefited from changes in foreign currency exchange rates during the second quarter of 2014 compared to the second quarter of 2013. The favorability was driven by improved revenues as a result of the strengthening Euro and a favorable impact to cost of goods sold primarily due to foreign exchange losses recorded in the prior year. |
| |
• | Shipment mix changes positively impacted net revenue and gross profit in the second quarter of 2014 primarily as a result of a significantly higher mix of Touring motorcycles compared to the second quarter of 2013. The Company expects shipment mix to become significantly unfavorable in the second half of 2014 as Street motorcycle production and shipments increase and as mix favorability that resulted from the introduction of Project Rushmore motorcycles in the third quarter of 2013 moderates.(1) |
| |
• | Raw material prices were slightly lower in the second quarter of 2014 relative to the second quarter of 2013. |
| |
• | Manufacturing costs in the second quarter of 2014 benefited from increased year-over-year production, restructuring savings, lower temporary inefficiencies and lower pension costs compared to the second quarter of 2013. The manufacturing cost benefits were partially offset by start-up costs of approximately $5.3 million associated with the launch of the Company's new Street platform of motorcycles which are being produced at the Company's Kansas City, Missouri and India manufacturing facilities. |
The net increase in operating expenses was primarily due to a restructuring benefit in the second quarter of 2013. In addition, slightly higher selling and administrative expenses in the second quarter of 2014 were partially offset by lower engineering expense compared to the second quarter of 2013.
Financial Services Segment
Segment Results
The following table includes the condensed statements of operations for the Financial Services segment (in thousands):
|
| | | | | | | | | | | | | | |
| Three months ended | | | | |
| June 29, 2014 | | June 30, 2013 | | (Decrease) Increase | | % Change |
Interest income | $ | 148,509 |
| | $ | 144,784 |
| | $ | 3,725 |
| | 2.6 | % |
Other income | 17,905 |
| | 18,057 |
| | (152 | ) | | (0.8 | ) |
Financial Services revenue | 166,414 |
| | 162,841 |
| | 3,573 |
| | 2.2 |
|
Interest expense | 40,741 |
| | 45,506 |
| | (4,765 | ) | | (10.5 | ) |
Provision for credit losses | 15,961 |
| | 11,297 |
| | 4,664 |
| | 41.3 |
|
Operating expenses | 35,273 |
| | 31,882 |
| | 3,391 |
| | 10.6 |
|
Financial Services expense | 91,975 |
| | 88,685 |
| | 3,290 |
| | 3.7 |
|
Operating income from Financial Services | $ | 74,439 |
| | $ | 74,156 |
| | $ | 283 |
| | 0.4 | % |
Interest income for the second quarter of 2014 increased primarily due to higher average receivables in the wholesale and retail portfolios, partially offset by lower yields primarily on retail finance receivables due to increased competition. Interest expense for the second quarter of 2014 decreased primarily due to a $1.1 million loss on the extinguishment of medium-term notes compared to a $4.9 million loss on the extinguishment of medium-term notes in the second quarter of 2013, and a lower cost of funds.
The provision for credit losses increased $4.7 million in second quarter of 2014 as compared to the second quarter of 2013. The retail motorcycle provision increased $5.0 million in the second quarter of 2014 as a result of higher credit losses, portfolio growth, and an increase in retail motorcycle reserve rate. Credit losses were impacted by lower recovery values of repossessed motorcycles, changing consumer behavior, and lower recoveries as a result of fewer charge-offs in prior periods. The wholesale provision increased by $0.4 million due primarily to an increase in receivables.
Operating expenses for the second quarter of 2014 were higher as compared to the second quarter of 2013 due to higher administrative and employee-related expenses.
Changes in the allowance for credit losses on finance receivables were as follows (in thousands):
|
| | | |
| Three months ended |
| June 29, 2014 | | June 30, 2013 |
Balance, beginning of period | $114,529 | | $106,792 |
Provision for finance credit losses | 15,961 | | 11,297 |
Charge-offs | (19,018) | | (18,166) |
Recoveries | 10,883 | | 11,401 |
Balance, end of period | $122,355 | | $111,324 |
Results of Operations for the Six Months Ended June 29, 2014
Compared to the Six Months Ended June 30, 2013
Consolidated Results
|
| | | | | | | | | | | | | | |
| Six months ended | | | | |
(in thousands, except earnings per share) | June 29, 2014 | | June 30, 2013 | | Increase (Decrease) | | % Change |
Operating income from Motorcycles & Related Products | $ | 820,948 |
| | $ | 634,426 |
| | $ | 186,522 |
| | 29.4 | % |
Operating income from Financial Services | 137,629 |
| | 145,701 |
| | (8,072 | ) | | (5.5 | ) |
Operating income | 958,577 |
| | 780,127 |
| | 178,450 |
| | 22.9 |
|
Investment income | 3,431 |
| | 3,385 |
| | 46 |
| | 1.4 |
|
Interest expense | 4,070 |
| | 22,629 |
| | (18,559 | ) | | (82.0 | ) |
Income before income taxes | 957,938 |
| | 760,883 |
| | 197,055 |
| | 25.9 |
|
Provision for income taxes | 337,868 |
| | 265,015 |
| | 72,853 |
| | 27.5 |
|
Net income | $ | 620,070 |
| | $ | 495,868 |
| | $ | 124,202 |
| | 25.0 | % |
Diluted earnings per share | $ | 2.82 |
| | $ | 2.20 |
| | $ | 0.62 |
| | 28.2 | % |
Consolidated operating income was up 22.9% in the first six months of 2014 led by an increase in operating income from the Motorcycles segment which improved by $186.5 million, or 29.4%, compared to the first six months of 2013. Operating income for the Financial Services segment declined in the first six months of 2014 compared to the first six months of 2013. Please refer to the “Motorcycles and Related Products Segment” and “Financial Services Segment” discussions following for a more detailed discussion of the factors affecting operating income.
Interest expense was lower in the first six months of 2014 compared to the first six months of 2013 due to the retirement of $303 million of senior unsecured long-term debt in February 2014.
The effective income tax rate for the first half of 2014 was 35.3% compared to 34.8% for the first half of 2013. The higher effective tax rate in the first half of 2014 primarily reflects the absence of the U.S. Federal Research and Development tax credit that expired at the end of 2013. The effective tax rate for the first half of 2013 also included the full-impact of the 2012 U.S. Federal Research and Development tax credit due to the timing of the enactment of the American Taxpayer Relief Act.
Diluted earnings per share was $2.82 in the first six months of 2014, up 28.2% over the same period in the prior year. The increase in diluted earnings per share was driven primarily by the 25.0% increase in net income, but also benefited from lower diluted weighted average shares outstanding. Diluted weighted average shares outstanding decreased from 225.3 million in the first six months of 2013 to 219.8 million in the first six months of 2014, driven by the Company's repurchase of common stock. Please refer to "Liquidity and Capital Resources" for additional information concerning the Company's share repurchase activity.
Motorcycles Retail Sales and Registration Data
Worldwide independent dealer retail sales of Harley-Davidson motorcycles increased 2.2% during the first half of 2014 compared to the first half of 2013, lower than Company expectations. Retail sales of Harley-Davidson motorcycles increased 1.1% in the United States and increased 4.2% internationally in the first half of 2014.
As anticipated, the Company believes the absence of its popular Road Glide models from the 2014 model year continued to adversely impact year-over-year U.S. retail sales results. Retail sales of Road Glide models represented approximately 10% of the U.S. retail sales in the first half of 2013. The Company also believes that prolonged poor weather conditions across parts of the U.S., and soft Sportster® sales, which the Company believes may be the result of the better than expected enthusiasm it is experiencing for the new Street motorcycles, negatively impacted U.S. retail sales in the first six months of 2014. The Company believes some customers are waiting to compare the two product offerings first-hand; however, start-up delays have resulted in slower-than-expected shipments of Street motorcycles to dealers for sales to retail customers and very low product availability to-date. Wholesale shipments of Street motorcycles for U.S. retail customers began late in the second quarter in very limited quantities. Although the availability of Street motorcycles for retail sales is not at the level the Company had anticipated, approximately 2,200 Street 500 motorcycles were sold to U.S. dealers in the first six months of 2014 for use in the Company's Riding Academy. Retail sales in the first six months of 2014 in EMEA were up 7.5% compared to the first six months of 2013 driven by growth across most of the European countries. The increase was aided by favorable year-over-year weather comparisons across most of Europe. Emerging markets within the EMEA region continued to grow, reflecting the Company's investment in its distribution network.
In the Asia-Pacific region, retail sales increased 10.1% in the first six months of 2014 compared to the same period last year driven by strong growth in emerging markets.
Latin America region retail sales in the first six months of 2014 were down 2.1% compared to the first six months of 2013 in part as a result of a difficult year-over-year comparison. Latin America retail sales grew 22.8% in first six months of 2013. In addition, retail sales in Brazil in the first six months of 2014 were negatively impacted by difficult economic conditions, consumer uncertainty and aggressive price competition.
Retail sales in Canada were down 13.5% in the first six months of 2014 compared to the same period last year. The Company believes the decrease was primarily due to the poor weather conditions in the market and an adverse response to price increases by the Company's Canadian distributor that were initiated to recover unfavorable currency exchange rates.
On an industry-wide basis, retail sales of 601+cc street-legal motorcycles were up 1.9% in the United States and up 14.3% in Europe for the six months ended June 30, 2014 when compared to the same period in 2013.
Worldwide Harley-Davidson Motorcycle Retail Sales(a)
The following table includes retail unit sales of Harley-Davidson motorcycles:
|
| | | | | | | | | | | |
| Six months ended | | | | |
| June 30, 2014 | | June 30, 2013 | | Increase (Decrease) | | % Change |
North America Region | | | | | | | |
United States | 93,955 |
| | 92,947 |
| | 1,008 |
| | 1.1 | % |
Canada | 6,155 |
| | 7,117 |
| | (962 | ) | | (13.5 | ) |
Total North America Region | 100,110 |
| | 100,064 |
| | 46 |
| | — |
|
Europe, Middle East and Africa Region (EMEA) | | | | | | | |
Europe(b) | 23,916 |
| | 22,369 |
| | 1,547 |
| | 6.9 |
|
Other | 3,788 |
| | 3,412 |
| | 376 |
| | 11.0 |
|
Total EMEA Region | 27,704 |
| | 25,781 |
| | 1,923 |
| | 7.5 |
|
Asia Pacific Region | | | | | | | |
Japan | 5,403 |
| | 5,347 |
| | 56 |
| | 1.0 |
|
Other | 9,077 |
| | 7,804 |
| | 1,273 |
| | 16.3 |
|
Total Asia Pacific Region | 14,480 |
| | 13,151 |
| | 1,329 |
| | 10.1 |
|
Latin America Region | 5,339 |
| | 5,451 |
| | (112 | ) | | (2.1 | ) |
Total Worldwide Retail Sales | 147,633 |
| | 144,447 |
| | 3,186 |
| | 2.2 | % |
Total International Retail Sales | 53,678 |
| | 51,500 |
| | 2,178 |
| | 4.2 | % |
| |
(a) | Data source for retail sales figures shown above is new sales warranty and registration information provided by Harley-Davidson dealers and compiled by the Company. The Company must rely on information that its dealers supply concerning retail sales and this information is subject to revision. |
| |
(b) | Includes Austria, Belgium, Denmark, Finland, France, Germany, Greece, Italy, Luxembourg, Netherlands, Norway, Portugal, Spain, Sweden, Switzerland and the United Kingdom. |
Motorcycle Registration Data(a)
The following table includes industry retail motorcycle registration data:
|
| | | | | | | | | | | |
| Six months ended | | | | |
| June 30, 2014 | | June 30, 2013 | | Increase | | % Change |
United States(b) | 173,960 |
| | 170,733 |
| | 3,227 |
| | 1.9 | % |
Europe(c) | 209,218 |
| | 182,965 |
| | 26,253 |
| | 14.3 | % |
| |
(a) | Data includes on-road 601+cc models. On-road 601+cc models include on-highway, dual purpose models and three-wheeled vehicles. Registration data for Harley-Davidson Street 500TM motorcycles are not included in this table. |
| |
(b) | United States industry data is derived from information provided by Motorcycle Industry Council (MIC). This third party data is subject to revision and update. |
| |
(c) | Europe data includes Austria, Belgium, Denmark, Finland, France, Germany, Greece, Italy, Luxembourg, Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, and the United Kingdom. Industry retail motorcycle registration data includes 601+cc models derived from information provided by Association des Constructeurs Europeens de Motocycles (ACEM), an independent agency. This third-party data is subject to revision and update. |
Motorcycles & Related Products Segment
Motorcycle Unit Shipments
The following table includes wholesale motorcycle unit shipments for the Motorcycles segment:
|
| | | | | | | | | | | | | | | | | |
| Six months ended | | | | |
| June 29, 2014 | | June 30, 2013 | | Unit | | Unit |
| Units | | Mix % | | Units | | Mix % | | Increase (Decrease) | | % Change |
United States | 117,334 |
| | 67.9 | % | | 107,753 |
| | 67.4 | % | | 9,581 |
| | 8.9 | % |
International | 55,565 |
| | 32.1 | % | | 52,075 |
| | 32.6 | % | | 3,490 |
| | 6.7 |
|
Harley-Davidson motorcycle units | 172,899 |
| | 100.0 | % | | 159,828 |
| | 100.0 | % | | 13,071 |
| | 8.2 | % |
Touring motorcycle units | 77,273 |
| | 44.7 | % | | 63,716 |
| | 39.8 | % | | 13,557 |
| | 21.3 | % |
Custom motorcycle units(a) | 61,380 |
| | 35.5 | % | | 65,617 |
| | 41.1 | % | | (4,237 | ) | | (6.5 | ) |
Sportster® / Street motorcycle units(b) | 34,246 |
| | 19.8 | % | | 30,495 |
| | 19.1 | % | | 3,751 |
| | 12.3 |
|
Harley-Davidson motorcycle units | 172,899 |
| | 100.0 | % | | 159,828 |
| | 100.0 | % | | 13,071 |
| | 8.2 | % |
| |
(a) | Custom motorcycle units, as used in this table, include Dyna®, Softail®, V-Rod® and CVO models. |
| |
(b) | Initial shipments of Street motorcycle units began during the first quarter of 2014. |
The Company shipped 172,899 motorcycles worldwide during the first half of 2014, which was 8.2% higher than the first half of 2013. International shipments as a percent of total shipments declined from 32.6% in the first six months of 2013 to 32.1% for first six months of 2014. The shipment mix of touring motorcycles in the first six months of 2014 increased from the prior year as the Company's Project Rushmore touring motorcycles continued to create demand in the market. The shipment mix of Sportster® / Street motorcycles increased in the first six months of 2014 compared to the same period last year. The increase was in part driven by the initial shipments of the Company's new Street motorcycles. In the U.S., approximately 2,200 Street 500TM motorcycles were shipped in the first six months of 2014 for use in Harley-Davidson Riding Academy fleets at dealerships. Although the shipment mix of Sportster® / Street motorcycles increased, it did not increase as much as the Company had anticipated due to Street start-up issues. The Company plans to continue to increase Street motorcycle production through the third quarter of 2014 and it expects production to be at planned levels during the fourth quarter of 2014.(1)
Segment Results
The following table includes the condensed statements of operations for the Motorcycles segment (in thousands):
|
| | | | | | | | | | | | | | |
| Six months ended | | | | |
| June 29, 2014 | | June 30, 2013 | | Increase (Decrease) | | % Change |
Revenue: | | | | | | | |
Motorcycles | $ | 2,785,953 |
| | $ | 2,428,709 |
| | $ | 357,244 |
| | 14.7 | % |
Parts & Accessories | 469,707 |
| | 453,626 |
| | 16,081 |
| | 3.5 |
|
General Merchandise | 140,500 |
| | 153,844 |
| | (13,344 | ) | | (8.7 | ) |
Other | 9,813 |
| | 9,535 |
| | 278 |
| | 2.9 |
|
Total revenue | 3,405,973 |
| | 3,045,714 |
| | 360,259 |
| | 11.8 |
|
Cost of goods sold | 2,089,703 |
| | 1,924,402 |
| | 165,301 |
| | 8.6 |
|
Gross profit | 1,316,270 |
| | 1,121,312 |
| | 194,958 |
| | 17.4 |
|
Selling & administrative expense | 429,585 |
| | 414,895 |
| | 14,690 |
| | 3.5 |
|
Engineering expense | 65,737 |
| | 74,350 |
| | (8,613 | ) | | (11.6 | ) |
Restructuring benefit | — |
| | (2,359 | ) | | 2,359 |
| | (100.0 | ) |
Operating expense | 495,322 |
| | 486,886 |
| | 8,436 |
| | 1.7 |
|
Operating income from Motorcycles | $ | 820,948 |
| | $ | 634,426 |
| | $ | 186,522 |
| | 29.4 | % |
The following table includes the estimated impact of significant factors affecting the comparability of net revenue, cost of goods sold and gross profit from the first half of 2013 to the first half of 2014 (in millions):
|
| | | | | | | | | | | |
| Net Revenue | | Cost of Goods Sold | | Gross Profit |
June 30, 2013 | $ | 3,045.7 |
| | $ | 1,924.4 |
| | $ | 1,121.3 |
|
Volume | 185.2 |
| | 123.8 |
| | 61.4 |
|
Motorcycle price, net of related costs | 126.7 |
| | 94.2 |
| | 32.5 |
|
Foreign currency exchange rates and hedging | (3.0 | ) | | (25.4 | ) | | 22.4 |
|
Shipment mix | 51.4 |
| | 3.3 |
| | 48.1 |
|
Raw material prices | — |
| | (2.2 | ) | | 2.2 |
|
Manufacturing and other costs | — |
| | (28.4 | ) | | 28.4 |
|
Total | 360.3 |
| | 165.3 |
| | 195.0 |
|
June 29, 2014 | $ | 3,406.0 |
| | $ | 2,089.7 |
| | $ | 1,316.3 |
|
The following factors affected the comparability of net revenue, cost of goods sold and gross profit from the first half of 2013 to first half of 2014:
| |
• | Volume increases were driven by the increase in wholesale motorcycle shipments and parts and accessories sales, partially offset by lower sales volumes for general merchandise. As the Company transforms the Harley-Davidson customer experience, it has initiated an aggressive SKU reduction plan across its General Merchandise product offering. The Company believes the reduction will better focus dealers on fast-moving products and improve the customer experience with a more targeted assortment of popular styles. The Company anticipates that revenue from General Merchandise sales will be largely flat for the next two quarters as dealers sell through the discontinued items. |
| |
• | On average, wholesale prices for the Company’s 2014 model-year motorcycles are higher than the prior model year resulting in the favorable impact on revenue during the period. The impact of revenue favorability resulting from model year price increases on gross profit was partially offset by an increase in cost related to the significant additional content added to the 2014 model year motorcycles. |
| |
• | Gross profit benefited from changes in foreign currency exchange rates during the first six months of 2014 compared to the first six months of 2013. Revenue was negatively impacted by a devaluation in the Japanese yen, Brazilian real and Australian dollar that was partially offset by a strengthening of the Euro. The negative |
impact to revenue was more than offset by a positive impact to cost of goods sold primarily due to foreign exchange losses recorded in the prior year.
| |
• | Shipment mix changes positively impacted net revenue and gross profit as a result of a significantly higher mix of Touring motorcycles compared to the second quarter of 2013. The Company continues to expect shipment mix to become significantly unfavorable in the second half of 2014 as Street motorcycle production and shipments increase and as the mix favorability that resulted from the introduction of Project Rushmore motorcycles in the third quarter of 2013 moderates.(1) |
| |
• | Raw material prices were lower in the first half of 2014 relative to the first half of 2013. |
| |
• | Manufacturing costs in the first six months of 2014 benefited from increased year-over-year production, restructuring savings, lower temporary inefficiencies and lower pension costs compared to last year's first six months. The manufacturing cost benefits were partially offset by start-up costs of approximately $10 million associated with the launch of the Company's new Street platform of motorcycles which are being produced at the Company's Kansas City, Missouri and India manufacturing facilities. |
The net increase in operating expense was primarily due to higher selling and administrative expenses and the absence of the restructuring benefit recorded in the first half of 2013, partially offset by lower engineering expense. The higher selling and administrative expenses were primarily due to higher spending in support of the Company’s growth initiatives. For further information regarding the Company’s completed restructuring activities, refer to Note 4 of Notes to Condensed Consolidated Financial Statements.
Financial Services Segment
Segment Results
The following table includes the condensed statements of operations for the Financial Services segment (in thousands):
|
| | | | | | | | | | | | | | |
| Six months ended | | | | |
| June 29, 2014 | | June 30, 2013 | | (Decrease) Increase | | % Change |
Interest income | $ | 289,906 |
| | $ | 288,731 |
| | $ | 1,175 |
| | 0.4 | % |
Other income | 30,868 |
| | 31,075 |
| | (207 | ) | | (0.7 | ) |
Financial Services revenue | 320,774 |
| | 319,806 |
| | 968 |
| | 0.3 |
|
Interest expense | 79,598 |
| | 86,060 |
| | (6,462 | ) | | (7.5 | ) |
Provision for credit losses | 36,292 |
| | 24,407 |
| | 11,885 |
| | 48.7 |
|
Operating expenses | 67,255 |
| | 63,638 |
| | 3,617 |
| | 5.7 |
|
Financial Services expense | 183,145 |
| | 174,105 |
| | 9,040 |
| | 5.2 |
|
Operating income from Financial Services | $ | 137,629 |
| | $ | 145,701 |
| | $ | (8,072 | ) | | (5.5 | )% |
Interest income was slightly higher in the first six months of 2014 due to higher average receivables in the retail and wholesale portfolios compared to the first six months of 2013, partially offset by lower yields primarily on retail finance receivables due to increased competition. Interest expense for the first six months of 2014 decreased primarily due to a $1.1 million loss on the extinguishment of medium-term notes compared to a $4.9 million loss on the extinguishment of medium-term notes in the first six months of 2013 and a lower costs of funds.
The provision for credit losses increased $11.9 million in the first six months of 2014. The retail motorcycle provision increased $11.3 million in the first six months of 2014 primarily as a result of higher credit losses, portfolio growth, and an increase in the retail motorcycle reserve rate . Credit losses were impacted by lower recovery values of repossessed motorcycles, changing consumer behavior, and lower recoveries as a result of fewer charge-offs in prior periods. The wholesale provision was unfavorable by $1.5 million due primarily to portfolio growth in the first six months of 2014 as well as a reserve rate increase in the first six months of 2014.
Operating expenses for the first six months of 2014 were higher as compared to the first six months of 2013 due to higher administrative and employee-related expenses.
Annualized losses on HDFS' retail motorcycle loans were 0.97% through June 29, 2014 compared to 0.80% through June 30, 2013. The 30-day delinquency rate for retail motorcycle loans at June 29, 2014 decreased to 2.68% from 2.75% at June 30, 2013.
Changes in the allowance for credit losses on finance receivables were as follows (in thousands):
|
| | | | | | | |
| Six months ended |
| June 29, 2014 | | June 30, 2013 |
Balance, beginning of period | $ | 110,693 |
| | $ | 107,667 |
|
Provision for credit losses | 36,292 |
| | 24,407 |
|
Charge-offs | (46,361 | ) | | (43,409 | ) |
Recoveries | 21,731 |
| | 22,659 |
|
Balance, end of period | $ | 122,355 |
| | $ | 111,324 |
|
Other Matters
Contractual Obligations
The Company has updated the contractual obligations table under the caption “Contractual Obligations” in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations of the Company’s Annual Report on Form 10-K for the year ended December 31, 2013 as of June 29, 2014 to reflect the new projected principal and interest payments for the remainder of 2014 and beyond as follows (in thousands):
|
| | | | | | | | | | | | | | | | | | | |
| 2014 | | 2015 - 2016 | | 2017 - 2018 | | Thereafter | | Total |
Principal payments on debt | $ | 1,400,510 |
| | $ | 2,027,605 |
| | $ | 1,907,886 |
| | $ | 22,932 |
| | $ | 5,358,933 |
|
Interest payments on debt | 70,797 |
| | 197,539 |
| | 102,188 |
| | 496 |
| | 371,020 |
|
| $ | 1,471,307 |
| | $ | 2,225,144 |
| | $ | 2,010,074 |
| | $ | 23,428 |
| | $ | 5,729,953 |
|
Interest obligations for floating rate instruments, as calculated above, assume rates in effect at June 29, 2014 remain constant.
As of June 29, 2014, there have been no other material changes to the Company’s summary of expected payments for significant contractual obligations in the contractual obligations table.
Commitments and Contingencies
The Company is subject to lawsuits and other claims related to environmental, product and other matters. In determining required reserves related to these items, the Company carefully analyzes cases and considers the likelihood of adverse judgments or outcomes, as well as the potential range of possible loss. The required reserves are monitored on an ongoing basis and are updated based on new developments or new information in each matter.
Environmental Protection Agency Notice
In December 2009, the Company received formal, written requests for information from the United States Environmental Protection Agency (EPA) regarding: (i) certificates of conformity for motorcycle emissions and related designations and labels, (ii) aftermarket parts, and (iii) warranty claims on emissions related components. The Company promptly submitted written responses to the EPA’s inquiry and has engaged in discussions with the EPA. Since that time, the EPA has delivered various additional requests for information to which the Company has responded. It is possible that a result of the EPA’s investigation will be some form of enforcement action by the EPA that will seek a fine or other relief. However, at this time the Company does not know and cannot reasonably estimate the impact of any remedies the EPA might seek, if any.
York Environmental Matters:
The Company is involved with government agencies and groups of potentially responsible parties in various environmental matters, including a matter involving the cleanup of soil and groundwater contamination at its York, Pennsylvania facility. The York facility was formerly used by the U.S. Navy and AMF prior to the purchase of the York facility by the Company from AMF in 1981. Although the Company is not certain as to the full extent of the environmental contamination at the York facility, it has been working with the Pennsylvania Department of Environmental Protection (PADEP) since 1986 in undertaking environmental investigation and remediation activities, including an ongoing site-wide remedial investigation/feasibility study (RI/FS). In January 1995, the Company entered into a settlement agreement (the Agreement) with the Navy, and the parties amended the Agreement in 2013 to address ordnance and explosive waste.
The Agreement calls for the Navy and the Company to contribute amounts into a trust equal to 53% and 47%, respectively, of future costs associated with environmental investigation and remediation activities at the York facility (Response Costs). The trust administers the payment of the Response Costs incurred at the York facility as covered by the Agreement.
The Company estimates that its share of the future Response Costs at the York facility will be approximately $3.2 million and has established a reserve for this amount which is included in accrued liabilities in the Condensed Consolidated Balance Sheets.(1) As noted above, the RI/FS is still underway and given the uncertainty that exists concerning the nature and scope of additional environmental investigation and remediation that may ultimately be required under the RI/FS or otherwise at the York facility, the Company is unable to make a reasonable estimate of those additional costs, if any, that may result.
The estimate of the Company’s future Response Costs that will be incurred at the York facility is based on reports of independent environmental consultants retained by the Company, the actual costs incurred to date and the estimated costs to complete the necessary investigation and remediation activities. Response Costs are expected to be paid primarily over a period of several years ending in 2017 although certain Response Costs may continue for some time beyond 2017.
Product Liability Matters:
The Company is involved in product liability suits related to the operation of its business. The Company accrues for claim exposures that are probable of occurrence and can be reasonably estimated. The Company also maintains insurance coverage for product liability exposures. The Company believes that its accruals and insurance coverage are adequate and that product liability suits will not have a material adverse effect on the Company’s consolidated financial statements.(1)
Liquidity and Capital Resources as of June 29, 2014(1)
Over the long-term, the Company expects that its business model will continue to generate cash that will allow it to invest in the business, fund future growth opportunities and return value to shareholders. The Company believes the Motorcycles operations will continue to be primarily funded through cash flows generated by operations. The Financial Services operations have been funded with unsecured debt, unsecured commercial paper, asset-backed commercial paper conduit facilities, committed unsecured bank facilities, term asset-backed securitizations, and intercompany borrowings.
The Company’s strategy is to maintain a minimum of twelve months of its projected liquidity needs through a combination of cash and marketable securities and availability under credit facilities. The following table summarizes the Company’s cash and marketable securities and availability under credit facilities (in thousands):
|
| | | |
| June 29, 2014 |
Cash and cash equivalents | $ | 999,346 |
|
Current marketable securities | 57,814 |
|
Total cash and cash equivalents and marketable securities | 1,057,160 |
|
| |
Global credit facilities | 730,378 |
|
Asset-backed U.S. commercial paper conduit facility(a) | 600,000 |
|
Asset-backed Canadian commercial paper conduit facility(b) | 14,156 |
|
Total availability under credit facilities | 1,344,534 |
|
Total | $ | 2,401,694 |
|
| |
(a) | The U.S. commercial paper conduit facility expires on September 12, 2014. The Company anticipates that it will renew this facility prior to expiration(1). |
| |
(b) | The Canadian commercial paper conduit facility expired on June 30, 2014 and is limited to Canadian denominated borrowings. The Company renewed this facility and the new facility expires June 30, 2015(1). |
The Company continues to monitor and adjust to changes in the lending environment for its Financial Services operations. The Company intends to continue with a diversified funding profile through a combination of short-term and long-term funding vehicles and to pursue a variety of sources to obtain cost-effective funding. The Financial Services operations could be negatively affected by higher costs of funding and increased difficulty of raising or potential unsuccessful efforts to raise, funding in the short-term and long-term capital markets. These negative consequences could in turn adversely affect the Company’s business and results of operations in various ways, including through higher costs of capital, reduced funds
available through its Financial Services operations to provide loans to independent dealers and their retail customers, and dilution to existing shareholders through the use of alternative sources of capital.
Cash Flow Activity
The following table summarizes the cash flow activity for the periods indicated (in thousands):
|
| | | | | | | |
| Six months ended |
| June 29, 2014 | | June 30, 2013 |
Net cash provided by operating activities | $ | 570,592 |
| | $ | 389,677 |
|
Net cash used by investing activities | (419,759 | ) | | (289,461 | ) |
Net cash provided by financing activities | (223,082 | ) | | 150,490 |
|
Effect of exchange rate changes on cash and cash equivalents | 4,983 |
| | (18,154 | ) |
Net (decrease) increase in cash and cash equivalents | $ | (67,266 | ) | | $ | 232,552 |
|
Operating Activities
The increase in cash provided by operating activities for the first six months of 2014 compared to the first six months of 2013 was due in part to increased earnings and favorable changes in working capital, partially offset by higher wholesale finance originations. In addition, operating cash flow in 2013 was adversely impacted by a $175.0 million voluntary contribution to the Company's qualified pension plans. No contributions to qualified pension plans are required or planned in 2014(1). The Company expects it will continue to make on-going contributions related to current benefit payments for SERPA and postretirement healthcare plans.
Investing Activities
The Company’s investing activities consist primarily of capital expenditures, net changes in finance receivables and short-term investment activity. Capital expenditures were $74.5 million in the first six months of 2014 compared to $66.6 million in the same period last year. Net cash outflows for finance receivables for the first six months of 2014 were $155.8 million higher than in the same period last year as a result of an increase in retail motorcycle loan originations during the first six months of 2014. A net decrease in marketable securities during the first six months of 2014 resulted in higher investing cash flows of approximately $40.0 million compared to the same period last year.
Financing Activities
The Company’s financing activities consist primarily of share repurchases, dividend payments and debt activity. Cash outflows for share repurchases were $223.7 million in the first six months of 2014 compared to $208.7 million for the same period last year. Share repurchases during the first six months of 2014 included 3.3 million shares of common stock related to discretionary share repurchases as well as shares of common stock that employees surrendered to satisfy withholding taxes in connection with the vesting of restricted stock awards. As of June 29, 2014, there were 26.6 million shares remaining on board-approved share repurchase authorizations.
The Company paid dividends of $0.550 and $0.420 per share totaling $120.6 million and $94.2 million during the first six months of 2014 and 2013, respectively.
Financing cash flows related to debt activity resulted in net cash inflows of $94.6 million in the first six months of 2014 compared to net cash inflows of $436.4 million in the first six months of 2013. The Company repaid $303.0 million of senior unsecured notes in the first half of 2014. The Company’s total outstanding debt consisted of the following (in thousands):
|
| | | | | | | |
| June 29, 2014 | | June 30, 2013 |
Unsecured commercial paper | $ | 619,622 |
| | $ | 525,745 |
|
Asset-backed Canadian commercial paper conduit facility | 173,224 |
| | 175,229 |
|
Medium-term notes | 2,853,232 |
| | 2,858,638 |
|
Senior unsecured notes | — |
| | 303,000 |
|
Term asset-backed securitization debt | 1,712,855 |
| | 1,673,759 |
|
Total debt | $ | 5,358,933 |
| | $ | 5,536,371 |
|
To access the debt capital markets, the Company relies on credit rating agencies to assign short-term and long-term credit ratings. Generally, lower credit ratings result in higher borrowing costs and reduced access to debt capital markets. A credit
rating agency may change or withdraw the Company’s ratings based on its assessment of the Company’s current and future ability to meet interest and principal repayment obligations. The Company’s short-term debt ratings affect its ability to issue unsecured commercial paper. The Company’s short- and long-term debt ratings as of June 29, 2014 were as follows:
|
| | | | | |
| Short-Term | | Long-Term | | Outlook |
Moody’s | P2 | | Baa1 | | Positive |
Standard & Poor’s | A2 | | A- | | Stable |
Fitch | F1 | | A | | Stable |
Global Credit Facilities – On April 7, 2014, the Company, along with HDFS, entered into a new $675.0 million five-year credit facility to refinance and replace a $675.0 million four-year credit facility that was due to mature in April 2015. The new five-year credit facility matures in April 2019 and its terms are generally similar to those of the four-year credit facility that it replaced. The Company and HDFS also have a $675.0 million five-year credit facility which matures in April 2017. The new five-year credit facility and the existing five-year credit facility (together, the Global Credit Facilities) bear interest at various variable interest rates, which may be adjusted upward or downward depending on certain criteria, such as credit ratings. The Global Credit Facilities also require the Company to pay a fee based on the average daily unused portion of the aggregate commitments under the Global Credit Facilities. The Global Credit Facilities are committed facilities and primarily used to support HDFS' unsecured commercial paper program.
Unsecured Commercial Paper – Subject to limitations, HDFS could issue unsecured commercial paper of up to $1.35 billion as of June 29, 2014 supported by the $675.0 million four-year credit facility which matures in April 2019 and the $675.0 million five-year credit facility which matures in April 2017, as discussed above. Outstanding unsecured commercial paper may not exceed the unused portion of the Global Credit Facilities. Maturities may range up to 365 days from the issuance date. HDFS intends to repay unsecured commercial paper as it matures with additional unsecured commercial paper or through other means, such as borrowing under the Global Credit Facilities, borrowing under its asset-backed U.S. commercial paper conduit facility or through the use of operating cash flow and cash on hand.(1)
Medium-Term Notes – The Company had the following medium-term notes (collectively, the Notes) issued and outstanding at June 29, 2014 (in thousands):
|
| | | | | | |
Principal Amount | | Rate | | Issue Date | | Maturity Date |
$500,000 | | 5.75% | | November 2009 | | December 2014 |
$600,000 | | 1.15% | | September 2012 | | September 2015 |
$450,000 | | 3.875% | | March 2011 | | March 2016 |
$400,000 | | 2.70% | | January 2012 | | March 2017 |
$904,417 | | 6.80% | | May 2008 | | June 2018 |
The Notes provide for semi-annual interest payments and principal due at maturity. Unamortized discounts on the Notes reduced the outstanding balance by $1.2 million and $1.9 million at June 29, 2014 and June 30, 2013, respectively.
During the second quarter of 2014, HDFS repurchased an aggregate of $6.1 million of its 6.80% medium-term notes which mature in June 2018. As a result, HDFS recognized in financial services interest expense $1.1 million in loss on the extinguishment of debt, which included unamortized discounts and fees. During the second quarter of 2013, HDFS repurchased an aggregate of $23.0 million of its 6.80% medium-term notes which mature in June 2018. As a result, HDFS recognized in financial services interest expense $4.9 million in loss on the extinguishment of debt, which included unamortized discounts and fees.
Senior Unsecured Notes – In February 2009, the Company issued $600.0 million of senior unsecured notes in an underwritten offering. The senior unsecured notes provided for semi-annual interest payments and principal due at maturity. During the fourth quarter of 2010, the Company repurchased $297.0 million of the $600.0 million senior unsecured notes at a price of $380.8 million. The senior unsecured notes matured in February 2014 and the Company repaid the remaining senior unsecured notes outstanding.
Asset-Backed Canadian Commercial Paper Conduit Facility –HDFS has a facility agreement (Canadian Conduit) with a Canadian bank-sponsored asset-backed commercial paper conduit. Under the agreement, the Canadian Conduit is contractually committed, at HDFS' option, to purchase from HDFS eligible Canadian retail motorcycle finance receivables for proceeds up to C$200 million. The terms for this facility provide for interest on the outstanding principal based on prevailing market interest rates plus a specified margin. The Canadian Conduit also provides for a program fee and an unused commitment fee based on the unused portion of the total aggregate commitment of C$200 million. There is no amortization schedule; however, the debt is
reduced monthly as available collections on the related finance receivables are applied to outstanding principal. Upon expiration of the Canadian Conduit, any outstanding principal will continue to be reduced monthly through available collections. Unless earlier terminated or extended by mutual agreement of HDFS and the lenders, the Canadian Conduit has an expiration date of June 30, 2015, as it was renewed on June 30, 2014 with similar terms and for the same amount. The contractual maturity of the debt is approximately 5 years.
During the second quarter of 2014, HDFS transferred $26.4 million of Canadian retail motorcycle finance receivables to the Canadian Conduit for proceeds of $23.1 million. During the first quarter of 2014, HDFS transferred $15.7 million of Canadian retail motorcycle finance receivables to the Canadian Conduit for proceeds of $13.8 million. During the second quarter of 2013, HDFS transferred $53.8 million of Canadian retail motorcycle finance receivables to the Canadian Conduit for proceeds of $47.1 million. The transferred assets are restricted as collateral for the payment of the debt.
Asset-Backed U.S. Commercial Paper Conduit Facility VIE – HDFS has a revolving facility (U.S. Conduit) with an asset-backed U.S. commercial paper conduit, which provides for a total aggregate commitment of $600.0 million. At June 29, 2014 and June 30, 2013, HDFS had no outstanding borrowings under the U.S. Conduit.
This debt provides for interest on outstanding principal based generally on prevailing commercial paper rates plus a program fee based on outstanding principal, or LIBOR plus a specified margin to the extent the advance is not funded by a conduit lender through the issuance of commercial paper. The U.S. Conduit also provides for an unused commitment fee based on the unused portion of the total aggregate commitment of $600.0 million. There is no amortization schedule; however, the debt is reduced monthly as available collections on the related finance receivable collateral are applied to outstanding principal. Upon expiration of the U.S. Conduit, any outstanding principal will continue to be reduced monthly through available collections. Unless earlier terminated or extended by mutual agreement of HDFS and the lenders, as of June 29, 2014, the U.S. Conduit expires September 12, 2014.
Term Asset-Backed Securitization VIEs – For all of the term asset-backed securitization transactions, HDFS transferred U.S. retail motorcycle finance receivables to separate VIEs, which in turn issued secured notes with various maturities and interest rates to investors. All of the notes held by the VIEs are secured by future collections of the purchased U.S. retail motorcycle finance receivables. The U.S. retail motorcycle finance receivables included in the term asset-backed securitization transactions are not available to pay other obligations or claims of HDFS’ creditors until the associated debt and other obligations are satisfied. Restricted cash balances held by the VIEs are used only to support the securitizations. There is no amortization schedule for the secured notes; however, the debt is reduced monthly as available collections on the related retail motorcycle finance receivables are applied to outstanding principal. The secured notes’ contractual lives have various maturities ranging from 2014 to 2021.
During 2012, the Company issued $89.5 million of secured notes through the sale of notes that had been previously retained as part of certain 2009 and 2011 term asset-backed securitization transactions. These notes were sold at a premium. The unaccreted premium associated with the issuance of these secured notes was $0.4 million and $0.7 million at June 29, 2014 and June 30, 2013, respectively.
During the second quarter of 2014, the Company issued $850.0 million of secured notes through one term asset-backed securitization transaction. During the second quarter of 2013, the Company issued $650.0 million of secured notes through one term asset-backed securitization transaction. There were no other term asset-backed securitization transactions during the six months ended June 29, 2014 or June 30, 2013.
Intercompany Borrowing – During the first six months ended June 29, 2014, HDFS and the Company had in effect the following term loan agreements under which HDFS borrowed from the Company (in thousands):
|
| | | | |
Principal Amount | | Issue Date | | Maturity Date |
$300,000 | | June 2013 | | April 2014 * |
$150,000 | | September 2013 | | April 2014 * |
$300,000 | | April 2014 | | April 2015 |
$250,000 | | June 2014 | | September 2014 |
* This loan was repaid in 2014 on or before the maturity date.
The term loans provide for monthly interest based on the prevailing commercial paper rates and principal due at maturity or upon demand by the Company. The term loan balances and related interest are eliminated in the Company’s consolidated financial statements.
Support Agreement - The Company has a support agreement with HDFS whereby, if required, the Company agrees to provide HDFS with financial support to maintain HDFS’ fixed-charge coverage at 1.25 and minimum net worth of $40.0 million. Support may be provided at the Company’s option as capital contributions or loans. Accordingly, certain debt covenants may restrict the Company’s ability to withdraw funds from HDFS outside the normal course of business. No amount has ever been provided to HDFS under the support agreement.
Operating and Financial Covenants – HDFS and the Company are subject to various operating and financial covenants related to the Global Credit Facilities and various operating covenants under the Notes and the U.S. and Canadian asset-backed commercial paper conduit facilities. The more significant covenants are described below.
The operational covenants limit the Company’s and HDFS’ ability to:
| |
• | assume or incur certain liens; |
| |
• | participate in certain mergers, consolidations, liquidations or dissolutions; and |
| |
• | purchase or hold margin stock. |
Under the current financial covenants of the Global Credit Facilities, the consolidated debt to equity ratio of HDFS cannot exceed 10.0 to 1.0 as of the end of any fiscal quarter. In addition, the ratio of the Company's consolidated debt to the Company's consolidated debt and equity, in each case excluding the debt of HDFS and its subsidiaries, cannot exceed 0.65 to 1.0 as of the end of any fiscal quarter.
No financial covenants are required under the Notes or the U.S. or Canadian asset-backed commercial paper conduit facilities.
At June 29, 2014, HDFS and the Company remained in compliance with all of the then existing covenants.
Cautionary Statements
The Company’s ability to meet the targets and expectations noted depends upon, among other factors, the Company's ability to:
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(i) | execute its business strategy, |
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(ii) | adjust to fluctuations in foreign currency exchange rates, interest rates and commodity prices, |
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(iii) | manage through inconsistent economic conditions, including changing capital, credit and retail markets, |
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(iv) | manage through the effects inconsistent and unpredictable weather patterns may have on retail sales of motorcycles, |
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(v) | manage supply chain issues, including any unexpected interruptions or price increases caused by raw material shortages or natural disasters, |
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(vi) | manage changes and prepare for requirements in legislative and regulatory environments for its products, services and operations, |
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(vii) | develop and implement sales and marketing plans that retain existing retail customers and attract new retail customers in an increasingly competitive marketplace, |
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(viii) | implement and manage enterprise-wide information technology solutions, including solutions at its manufacturing facilities, and secure data contained in those systems, |
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(ix) | anticipate the level of consumer confidence in the economy, |
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(x) | continue to realize production efficiencies at its production facilities and manage operating costs including materials, labor and overhead, |
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(xi) | manage production capacity and production changes, |
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(xii) | provide products, services and experiences that are successful in the marketplace, |
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(xiii) | manage risks that arise through expanding international manufacturing, operations and sales, |
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(xiv) | manage the credit quality, the loan servicing and collection activities, and the recovery rates of HDFS’ loan portfolio, |
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(xv) | continue to manage the relationships and agreements that it has with its labor unions to help drive long-term competitiveness, |
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(xvi) | adjust to healthcare inflation and reform, pension reform and tax changes, |
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(xvii) | retain and attract talented employees, |
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(xviii) | manage the risks that the Company's independent dealers may have difficulty obtaining capital and managing through changing economic conditions and consumer demand, |
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(xix) | continue to have access to reliable sources of capital funding and adjust to fluctuations in the cost of capital, |
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(xx) | continue to develop the capabilities of its distributor and dealer network, and |
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(xxi) | detect any issues with the Company's motorcycles or manufacturing processes to avoid delays in new model launches, recall campaigns, increased warranty costs or litigation. |
In addition, the Company could experience delays or disruptions in its operations as a result of work stoppages, strikes, natural causes, terrorism or other factors. Other factors are described in risk factors that the Company has disclosed in documents previously filed with the Securities and Exchange Commission. Many of these risk factors are impacted by the current changing capital, credit and retail markets and the Company’s ability to manage through inconsistent economic conditions.
The Company’s ability to sell its motorcycles and related products and services and to meet its financial expectations also depends on the ability of the Company’s independent dealers to sell its motorcycles and related products and services to retail customers. The Company depends on the capability and financial capacity of its independent dealers and distributors to develop and implement effective retail sales plans to create demand for the motorcycles and related products and services they purchase from the Company.
In addition, the Company’s independent dealers and distributors may experience difficulties in operating their businesses and selling Harley-Davidson motorcycles and related products and services as a result of weather, economic conditions or other factors.
In recent years, HDFS has experienced historically low levels of retail credit losses, but there is no assurance that this will continue. The Company believes that HDFS' retail credit losses may increase over time due to changing consumer credit behavior and HDFS' efforts to increase prudently structured loan approvals in the sub-prime lending environment.
Refer to “Risk Factors” under Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2013 for a discussion of additional risk factors and a more complete discussion of some of the cautionary statements noted above.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Refer to the Company's Annual Report on Form 10-K for the year ended December 31, 2013 for a complete discussion of the Company's market risk. There have been no material changes to the market risk information included in the Company's Annual Report on Form 10-K for the year ended December 31, 2013.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
In accordance with Rule 13a-15(b) of the Securities Exchange Act of 1934 (the Exchange Act), as of the end of the period covered by this Quarterly Report on Form 10-Q, the Company’s management evaluated, with the participation of the Company’s Chairman, President and Chief Executive Officer and the Senior Vice President and Chief Financial Officer, the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act). Based upon their evaluation of these disclosure controls and procedures, the Chairman, President and Chief Executive Officer and the Senior Vice President and Chief Financial Officer have concluded that the disclosure controls and procedures were effective as of the end of the period covered by this Quarterly Report on Form 10-Q to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time period specified in the Securities and Exchange Commission rules and forms, and to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its Chairman, President and Chief Executive Officer and Senior Vice President and Chief Financial Officer, as appropriate, to allow timely decisions regarding disclosure.
Changes in Internal Controls
There was no change in the Company’s internal control over financial reporting during the quarter ended June 29, 2014 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II – OTHER INFORMATION
Item 1 – Legal Proceedings
The information required under this Item 1 of Part II is contained in Item 1 of Part I of this Quarterly report on Form 10-Q in Note 16 of the Notes to Condensed Consolidated Financial Statements, and such information is incorporated herein by reference in this Item 1 of Part II.
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds
The following table contains detail related to the repurchase of common stock based on the date of trade during the quarter ended June 29, 2014:
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2014 Fiscal Month | Total Number of Shares Purchased (a) | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs |
March 31 to May 4 | 752,993 |
| | 68 |
| | 752,993 |
| | 27,600,024 |
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May 5 to June 1 | 565,810 |
| | 72 |
| | 565,810 |
| | 27,210,995 |
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June 2 to June 29 | 621,009 |
| | 71 |
| | 621,009 |
| | 26,605,882 |
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Total | 1,939,812 |
| | 70 |
| | 1,939,812 |
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(a) | Includes discretionary share repurchases and shares of common stock that employees surrendered to satisfy withholding taxes in connection with the vesting of restricted stock awards |
The Company has an authorization (originally adopted in December 1997) by its Board of Directors to repurchase shares of its outstanding common stock under which the cumulative number of shares repurchased, at the time of any repurchase, shall not exceed the sum of (1) the number of shares issued in connection with the exercise of stock options occurring on or after January 1, 2004 plus (2) one percent of the issued and outstanding common stock of the Company on January 1 of the current year, adjusted for any stock split. The Company made discretionary share repurchases of 1.8 million shares during the quarter ended June 29, 2014 under this authorization. As of June 29, 2014, no shares remained under this authorization.
In December 2007, the Company’s Board of Directors separately authorized the Company to buy back up to 20.0 million shares of its common stock with no dollar limit or expiration date. The Company made discretionary share repurchases of 0.2 million shares during the quarter ended June 29, 2014 under this authorization. As of June 29, 2014, 6.6 million shares remained under this authorization.
Additionally, in February 2014, the Company's Board of Directors authorized the Company to repurchase up to 20.0 million shares of its common stock with no dollar limit or expiration date. The Company made no discretionary share repurchases during the quarter ended June 29, 2014 under this authorization. As of June 29, 2014 20.0 million shares remained under this authorization.
Under the share repurchase authorizations, the Company’s common stock may be purchased through any one or more of a Rule 10b5-1 trading plan and discretionary purchases on the open market, block trades, accelerated share repurchases or privately negotiated transactions. The number of shares repurchased, if any, and the timing of repurchases will depend on a number of factors, including share price, trading volume and general market conditions, as well as on working capital requirements, general business conditions and other factors. The repurchase authority has no expiration date but may be suspended, modified or discontinued at any time.
The Harley-Davidson, Inc. 2009 Incentive Stock Plan and predecessor stock plans permit participants to satisfy all or a portion of the statutory federal, state and local withholding tax obligations arising in connection with plan awards by electing to (a) have the Company withhold shares otherwise issuable under the award, (b) tender back shares received in connection with such award or (c) deliver other previously owned shares, in each case having a value equal to the amount to be withheld. During the second quarter of 2014, the Company acquired 4,770 shares of common stock that employees presented to the Company to satisfy withholding taxes in connection with the vesting of restricted stock awards.
Item 6 – Exhibits
Refer to the Exhibit Index on page 61 of this report.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| HARLEY-DAVIDSON, INC. |
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Date: 8/7/2014 | /s/ John A. Olin |
| John A. Olin |
| Senior Vice President and |
| Chief Financial Officer |
| (Principal financial officer) |
|
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Date: 8/7/2014 | /s/ Mark R. Kornetzke |
| Mark R. Kornetzke |
| Chief Accounting Officer |
| (Principal accounting officer) |
Harley-Davidson, Inc.
Exhibit Index to Form 10-Q
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Exhibit No. | | Description |
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10.1 | | Harley-Davidson, Inc. 2014 Incentive Stock Plan (incorporated by reference to Appendix A to the Company’s definitive proxy statement on Schedule 14A for the Company’s Annual Meeting of Shareholders held on April 26, 2014 filed on March 17, 2014 (File No. 1-9183)) |
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31.1 | | Chief Executive Officer Certification pursuant to Rule 13a-14(a) |
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31.2 | | Chief Financial Officer Certification pursuant to Rule 13a-14(a) |
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32.1 | | Written Statement of the Chief Executive Officer and the Chief Financial Officer pursuant to 18 U.S.C. §1350 |
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101 | | Financial statements from the quarterly report on Form 10-Q of Harley-Davidson, Inc. for the quarter ended June 29, 2014, filed on August 7, 2014, formatted in XBRL: (i) the Condensed Consolidated Statements of Operations; (ii) the Condensed Consolidated Statements of Comprehensive Income; (iii) the Condensed Consolidated Balance Sheets; (iv) the Condensed Consolidated Statements of Cash Flows; and (v) the Notes to Condensed Consolidated Financial Statements. |