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4-Traders Homepage  >  Equities  >  Nyse  >  Harley-Davidson Inc    HOG

Delayed Quote. Delayed  - 05/23 10:02:02 pm
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HARLEY DAVIDSON : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

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05/05/2016 | 05:30pm CEST
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). Unless the context otherwise requires, all references to the
"Company" include Harley-Davidson, Inc. and all its subsidiaries. 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 and are managed separately
based on the fundamental differences in their operations.
The Motorcycles segment consists of HDMC which designs, manufactures and sells
at wholesale on-road Harley-Davidson motorcycles as well as a line of motorcycle
parts, accessories, general merchandise and related services. The Company's
products are sold to retail customers through a network of independent dealers.
The Company conducts business on a global basis, with sales in the following
regions: Americas, Europe/Middle East/Africa (EMEA) and Asia-Pacific.
The Financial Services segment consists of HDFS which primarily provides
wholesale and retail financing and insurance-related programs to Harley-Davidson
dealers and their retail customers. HDFS conducts business principally in the
United States and Canada.
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.
The Company's net income was $250.5 million, or $1.36 per diluted share, for the
first quarter of 2016 compared to $269.9, or $1.27 per diluted share, in the
first quarter of 2015. Operating income from Motorcycles decreased $13.0 million
or 3.8% compared to last year's first quarter. The favorable impacts of higher
motorcycle shipments in the first quarter of 2016 were offset by unfavorable
product mix, foreign currency exchange rates, higher year-over-year
manufacturing costs, including start-up costs associated with the implementation
of its Enterprise Resource Planning (ERP) system, along with higher selling,
administrative and engineering expenses. Operating income from Financial
Services in the first quarter of 2016 was $56.4 million, down 12.8% compared to
$64.7 million in the year-ago quarter driven by higher provision for credit
losses partially offset by higher net interest income.
During the first quarter of 2016, worldwide independent dealer retail sales of
new Harley-Davidson motorcycles increased 1.4% compared to the first quarter of
2015, an improvement from being down 0.6% year-over-year in the fourth quarter
of 2015. The Company believes worldwide retail sales benefited from its
demand-driving marketing investments and a strong reception to its new 2016
model-year motorcycles as discussed in the Outlook section below.
While retail sales were up on worldwide basis, the Company continues to
experience headwinds from an intense competitive environment and challenging
macro-economic conditions around the world. The Company is confident in its
strong brand and its ability to grow in this highly competitive environment,
without engaging in brand-damaging discounting.
(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, 2015. 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 the Overview and Outlook section are only made as of April 19, 2016 and the remaining forward looking statements in this report are only made as of the date of the filing of this report (May 5, 2016) and the Company disclaims any obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances. Outlook(1) As previously disclosed, the Company plans to significantly increase its investments to drive demand. The Company plans to offset this increase in expenses by reducing costs in other areas, following reorganization actions taken in the fourth



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quarter of 2015. Starting in the first quarter and throughout 2016, the Company expects to increase its investments in customer-facing marketing by approximately 65% from 2015 levels and it expects to increase its investments in new product development by approximately 35% from 2015 levels. These investments, which consist primarily of selling, administrative and engineering expenses, would represent an approximate $70 million increase in the Company's investments to drive demand compared to 2015. The Company's increased investments will be focused in four key areas: • Increase product and brand awareness.

• Grow new ridership in the U.S.

• Increase and enhance brand access.

• Accelerate the cadence and impact of new products.

On April 19, 2016, the Company provided the following information concerning its
expectations for the remainder of 2016:
The Company continues to expect to ship 269,000 to 274,000 Harley-Davidson
motorcycles to dealers in 2016, up approximately 1% to 3% compared to 2015. In
addition, the Company announced that its full-year shipment estimate included
expected shipments of 82,500 to 87,500 motorcycles in the second quarter of 2016
compared to 85,172 motorcycles shipped in the second quarter of 2015 which is
approximately down 3% to up 3%.
The Company continues to expect 2016 full year operating margin percent for the
Motorcycles segment to be between 16% and 17% compared to 16.5% in 2015.
The Company continues to expect gross margin to be down in 2016 compared to
2015. The Company expects gross margin to be negatively impacted by unfavorable
foreign currency exchange, unfavorable mix and higher manufacturing costs,
including start-up costs associated with the implementation of its ERP system at
its Kansas City manufacturing facility.
If foreign currency exchange rates experienced at the end of the first quarter
of 2016 remained constant throughout the remainder of 2016, which is a
hypothetical expectation in what is a very volatile foreign currency exchange
environment, the Company estimates the adverse impact to its expected
Motorcycles segment full-year revenue from currency exchange rates would be
slightly unfavorable on a year-over-year basis. Under this scenario, the Company
would also expect an unfavorable year-over-year impact to gross margin of
approximately $50 million, or approximately 1 percentage point.
The Company also expects gross margin as a percent of revenue to be down in the
second quarter of 2016 compared to the second quarter of 2015 driven by
unfavorable foreign currency exchange rates, unfavorable shipment mix and higher
manufacturing costs. The Company expects currency exchange rates to negatively
impact gross margin by $25 million to $30 million, or approximately 1.5
percentage points compared to 2015, primarily due to $20 million of foreign
currency hedge gains in 2015. The Company believes shipment mix will be
unfavorable as a result of higher cruiser and Sportster® shipments supporting
the strong demand it has seen in these categories and its recently announced new
product introductions. The Company expects manufacturing costs to be unfavorable
as a result of higher year-over-year start-up costs, including ERP system
implementation costs.
The Company continues to expect its full-year selling, administrative and
engineering expenses to be flat to up modestly from 2015, but lower as a percent
of revenue. Selling, administrative and engineering expenses are expected to be
higher than the prior year in the second and third quarters of 2016, due
primarily to the timing of expenses which corresponds with the motorcycle
selling season in its largest markets.
The Company continues to expect operating income for the Financial Services
segment to be down modestly in 2016 as compared to 2015 as a result of increased
borrowing costs and higher credit losses, partially offset by higher revenues.
The Company continues to estimate capital expenditures for 2016 to be between
$255 million and $275 million. The Company anticipates it will have the ability
to fund all capital expenditures in 2016 with cash flows generated by
The Company continues to expect its full-year 2016 effective income tax rate
will be approximately 34.5%. The 2015 effective tax rate was 34.6%.



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