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HARLEY DAVIDSON INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

May 8, 2014

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 $265.9 million, or $1.21 per diluted share, for the first quarter of 2014 compared to $224.1 million, or $0.99 per diluted share, in the first quarter of 2013. Operating income from Motorcycles increased $70.9 million or 25.6% compared to last year's first quarter driven by an 11.1% increase in revenue behind a 7.3% increase in wholesale shipments of Harley-Davidson motorcycles. Motorcycles segment operating income also benefited from a higher gross margin percent, partially offset by higher year-over-year selling, general and administrative and engineering expenses. Operating income from Financial Services in the first quarter of 2014 was $63.2 million, down 11.7% compared to $71.5 million in the year-ago quarter. The decrease in 2014 operating income was primarily driven by a higher provision for credit losses. During the first quarter of 2014, worldwide independent dealer retail sales of new Harley-Davidson motorcycles increased 5.8% compared to the same period in 2013 driven by increases in both the U.S. and International markets. First quarter worldwide retail sales were below the Company's expectations, driven by very difficult weather conditions in portions of the U.S., which the Company believes will result primarily in a shift of retail sales from the first quarter to the second quarter of 2014(1). (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 (May 8, 2014), and the Company disclaims any obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances.

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Table of Contents

Outlook(1)

On April 22, 2014, the Company provided the following information concerning its expectations for the remainder of 2014. The Company reaffirmed its expectation to ship 279,000 to 284,000 Harley-Davidson motorcycles to dealers and distributors worldwide in 2014, an increase of 7.1% to 9.0% over 2013. In addition, the Company announced that its full-year shipment estimate includes expected shipments of 92,000 to 97,000 motorcycles in the second quarter of 2014, an increase of 8.7% to 14.6% over the second quarter of 2013. The Company believes the underlying demand fundamentals for Harley-Davidson motorcycles are strong and expects that motorcycle growth in 2014 will be driven by: • The strong appeal of the Harley-Davidson brand



• Its model-year 2014 and 2015 motorcycles

• The introduction of the new Street motorcycles, which represent 7,000 to 10,000 units of the 2014 unit shipment estimate



• Continuing outreach momentum in the United States

• International expansion

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 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 expenditure 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.


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Source: Edgar Glimpses


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