UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
ý | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended: December 31, 2012
¨ | 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)
Wisconsin | 39-1382325 | |
(State of organization) | (I.R.S. Employer Identification No.) | |
3700 West Juneau Avenue Milwaukee, Wisconsin | 53208 | |
(Address of principal executive offices) | (Zip code) | |
Registrants telephone number: (414) 342-4680
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Name of each exchange on which registered | |
COMMON STOCK, $.01 PAR VALUE PER SHARE | NEW YORK STOCK EXCHANGE | |
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ý No ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No ý
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 and (2) has been subject to such requirements for the past 90 days. Yes ý No ¨
Indicate by checkmark 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 ý No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company as defined in Rule 12b-2 of the Exchange Act (check one).
Large accelerated filer | ý | Accelerated filer | ¨ | |||
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 ý
Aggregate market value of the voting stock held by non-affiliates of the registrant at July 1, 2012: $10,329,347,573
Number of shares of the registrant’s common stock outstanding at January 31, 2013: 226,249,774 shares
Documents Incorporated by Reference
Part III of this report incorporates information by reference from registrant’s Proxy Statement for the annual meeting of its shareholders to be held on April 27, 2013.
Harley-Davidson, Inc.
Form 10-K
For The Year Ended December 31, 2012
Page | ||
Part I | ||
Item 1. | ||
Item 1A. | ||
Item 1B. | ||
Item 2. | ||
Item 3. | ||
Item 4. | ||
Part II | ||
Item 5. | ||
Item 6. | ||
Item 7. | ||
Item 7A. | ||
Item 8. | ||
Item 9. | ||
Item 9A. | ||
Part III | ||
Item 10. | ||
Item 11. | ||
Item 12. | ||
Item 13. | ||
Item 14. | ||
Part IV | ||
Item 15. | ||
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PART I
Note regarding forward-looking statements
The Company intends that certain matters discussed by the Company 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 note 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 “Risk Factors” in Item 1A of this report and under “Cautionary Statements” in Item 7 of this report. 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 made as of the date indicated or, if a date is not indicated, as of the date of the filing of this report (February 22, 2013) and the Company disclaims any obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances.
Item 1. Business
Harley-Davidson, Inc. was incorporated in 1981, at which time it purchased the Harley-Davidson® motorcycle business from AMF Incorporated in a management buyout. In 1986, Harley-Davidson, Inc. became publicly held. Unless the context otherwise requires, all references to the “Company” include Harley-Davidson, Inc. and all of its subsidiaries. The Company operates in two segments: the Motorcycles & Related Products (Motorcycles) segment and the Financial Services (Financial Services) segment. 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 Motorcycles segment designs, manufactures and sells at wholesale heavyweight (street legal with engine displacement of 651+cc) 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 North America, Europe/Middle East/Africa (EMEA), Asia-Pacific and Latin America.
In 2009, the Company decided to exit its former Buell product line and ceased production of Buell motorcycles. The sale of remaining Buell motorcycle inventory to independent dealers and/or distributors was substantially completed during 2010. The majority of independent dealers continue to provide ongoing service and replacement parts to owners of Buell products that the Company sold.
In 2010, the Company completed the sale of MV Agusta (MV). The results of MV have been presented as a discontinued operation for all periods.
The Motorcycles segment discussion that follows is specific to the Harley-Davidson brand unless otherwise specifically noted.
The Financial Services segment consists of Harley-Davidson Financial Services (HDFS). HDFS provides wholesale and retail financing and provides insurance and insurance-related programs primarily to Harley-Davidson dealers and their retail customers. HDFS conducts business principally in the United States and Canada.
See Note 20 of Notes to Consolidated Financial Statements for financial information related to the Company’s business segments.
Motorcycles and Related Products
Motorcycles – The primary business of the Motorcycles segment is to design and manufacture premium motorcycles for the heavyweight market and sell them at wholesale. The Company’s worldwide motorcycle sales generated approximately 76%, 76% and 76% of the total net revenue in the Motorcycles segment during 2012, 2011 and 2010, respectively.
Harley-Davidson branded motorcycle products feature classic styling, innovative design, durability and quality. The Company manufactures five families of motorcycles: Touring, Dyna®, Softail®, Sportster® and V-Rod®. The first four of these motorcycle families are powered by an air-cooled, twin-cylinder engine with a 45-degree “V” configuration. The V-Rod® family is powered by a liquid-cooled, twin-cylinder engine with a 60-degree “V” configuration. The Company also offers
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limited-edition, factory-custom motorcycles through its Custom Vehicle Operation (CVOTM) program. The Company’s Harley-Davidson engines range in displacement size from 883cc to 1802cc.
The total heavyweight motorcycle market is comprised of the following categories:
• | Traditional (a basic motorcycle which usually features upright seating for one or two passengers); |
• | Sportbike (incorporates racing technology, aerodynamic styling, low handlebars with a “sport” riding position and high performance tires); |
• | Cruiser (emphasizes styling and owner customization); |
• | Touring (incorporates features such as saddlebags, fairings, or large luggage compartments and emphasizes rider comfort and load capacity); and |
• | Dual (designed with the capability for use on public roads as well as for off-highway recreational use). |
The Company competes in the touring and cruiser categories of the heavyweight motorcycle market. The touring category of the heavyweight market was pioneered by the Company and includes the Harley-Davidson Touring family of motorcycles, including three-wheeled motorcycles, which are generally equipped with fairings, windshields, saddlebags and/or Tour Pak® luggage carriers. The cruiser category of the market includes motorcycles featuring the distinctive styling associated with classic Harley-Davidson motorcycles and includes the Company’s Dyna, Softail, V-Rod® and Sportster motorcycle families.
Competition in the heavyweight motorcycle market is based upon a number of factors, including price, quality, reliability, styling, product features, customer preference, warranties and availability of financing. The Company’s motorcycle products continue to generally command a premium price at retail relative to competitors’ comparable motorcycles. The Company emphasizes quality, reliability, customization and styling in its products and generally offers a two-year warranty for its motorcycles. The Company promotes a comprehensive motorcycling experience across a wide demographic range through events, rides, rallies including those sponsored by Harley Owners Group® (H.O.G.®). The Company considers the availability of a line of motorcycle parts and accessories and general merchandise and the availability of financing through HDFS as competitive advantages.
In 2012, the U.S. and European regions accounted for approximately 80% of the total annual independent dealer retail sales of new Harley-Davidson motorcycles. The Company also competes in other markets around the world. The most significant other markets, based on the Company's retail sales data, are Canada, Japan, Australia and Brazil.
Harley-Davidson has been the historical market share leader in the U.S. heavyweight motorcycle market. Competitors in the U.S. market offer heavyweight motorcycles in all categories of the market including products that compete directly with the Company's offerings in the touring and cruiser categories.
According to the Motorcycle Industry Council, the touring and cruiser categories accounted for approximately 81%, 84% and 85% of total heavyweight retail unit registrations in the U.S. during 2012, 2011 and 2010, respectively. During 2012, the heavyweight portion of the market represented approximately 62% of the total U.S. motorcycle market (street legal models including both on-highway and dual purpose models and three-wheeled vehicles) in terms of new units registered.
The following chart includes U.S. retail registration data for Harley-Davidson motorcycles for the years 2010 through 2012:
U.S. Heavyweight Motorcycle Registration Data(a)(b)
(Units in thousands)
2012 | 2011 | 2010 | |||||||
Total new heavyweight motorcycle registrations | 282.0 | 271.0 | 259.7 | ||||||
Harley-Davidson new registrations | 161.3 | 150.9 | 142.7 | ||||||
57.2 | % | 55.7 | % | 54.9 | % | ||||
(a) | Heavyweight data includes street legal 651+cc models. Street legal 651+cc models include on-highway and dual purpose models and three-wheeled vehicles. |
(b) | U.S. industry data is derived from information provided by Motorcycle Industry Council (MIC). This third party data is subject to revision and update. The retail registration data for Harley-Davidson motorcycles presented in this table may differ slightly from the Harley-Davidson retail sales data presented in Item 7 of this report. The Company’s source for retail sales data in Item 7 of this report is sales and warranty registrations provided by Harley-Davidson dealers as compiled by the Company. The differences are not significant and generally relate to the timing of data submissions to the independent sources. |
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The European heavyweight motorcycle market (as defined below) is slightly smaller than the U.S. market; and customer preferences differ from those of U.S. customers. For example, in Europe, the sportbike category represented nearly 36% of the total heavyweight market in 2012 while the touring category represented 39% of the European heavyweight motorcycle market.
The following chart includes European retail registration data for Harley-Davidson for the years 2010 through 2012:
European Heavyweight Motorcycle Registration Data(a)(b)
(Units in thousands)
2012 | 2011 | 2010 | |||||||
Total new heavyweight motorcycle registrations | 268.3 | 292.5 | 301.3 | ||||||
Harley-Davidson new registrations | 35.6 | 40.0 | 38.0 | ||||||
13.3 | % | 13.7 | % | 12.7 | % | ||||
(a) | Heavyweight data includes street legal 651+cc models. Street legal 651+cc models include on-highway and dual purpose models and three-wheeled vehicles. |
(b) | Europe data includes retail sales in Austria, Belgium, Denmark, Finland, France, Germany, Greece, Italy, Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, and the United Kingdom. Industry retail motorcycle registration data is 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. The retail registration data for Harley-Davidson motorcycles presented in this table may differ slightly from the Harley-Davidson retail sales data presented in Item 7 of this report. The Company’s source for retail sales data in Item 7 of this report is sales and warranty registrations provided by Harley-Davidson dealers as compiled by the Company. The differences are not significant and generally relate to the timing of data submissions to the independent sources. |
Parts & Accessories – Parts and Accessories (P&A) products are comprised of replacement parts (Genuine Motor Parts) and mechanical and cosmetic accessories (Genuine Motor Accessories). Worldwide P&A net revenue comprised 17.4%, 17.5% and 17.9% of net revenue in the Motorcycles segment in 2012, 2011 and 2010, respectively.
General Merchandise – Worldwide General Merchandise net revenue, which includes revenue from MotorClothes® apparel and riding gear, comprised 6.1%, 5.9% and 6.2% of net revenue in the Motorcycles segment in 2012, 2011 and 2010, respectively.
Licensing – The Company creates an awareness of the Harley-Davidson brand among its customers and the non-riding public through a wide range of products for enthusiasts by licensing the name “Harley-Davidson” and other trademarks owned by the Company. The Company’s licensed products include t-shirts, vehicle accessories, jewelry, small leather goods, toys, footwear and numerous other products. The majority of licensing activity currently occurs in the U.S. Royalty revenues from licensing, included in Motorcycles segment net revenue, were $49.1 million, $43.2 million and $39.8 million in 2012, 2011 and 2010, respectively.
Harley-Davidson Museum – In 2008, the Company opened the Harley-Davidson Museum in Milwaukee, Wisconsin. The Museum is a unique experience that the Company believes builds and strengthens bonds between riders and the Company and enhances the brand among the public at large. The 130,000 square foot museum campus houses the Harley-Davidson Museum and Archives, a restaurant, café, retail store and special event space. The Museum gives the Company a unique way to create memories for customers – through visiting, planning rides and hosting special events at the Museum.
Other Services – The Company also provides a variety of services to its independent dealers including motorcycle service and business management training programs and customized dealer software packages. Motorcycle rentals are available through many of the Company’s independent dealers under the Company’s Authorized Rentals Program.
International Sales – The Company’s revenue from the sale of motorcycles and related products to independent dealers and distributors located outside of the United States was approximately $1.58 billion, $1.51 billion and $1.36 billion, or approximately 32%, 32% and 33% of net revenue of the Motorcycles segment, during 2012, 2011 and 2010, respectively.
Patents and Trademarks – The Company strategically manages its portfolio of patents, trade secrets, copyrights, trademarks and other intellectual property.
The Company and its subsidiaries own, and continue to obtain, patent rights that relate to its motorcycles and related products and processes for their production. Certain technology-related intellectual property is also protected, where appropriate, by license agreements, confidentiality agreements or other agreements with suppliers, employees and other third parties. The Company diligently protects its intellectual property, including patents and trade secrets, and its rights to innovative and proprietary technology. This protection, including enforcement, is important as the Company moves forward
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with investments in new products, designs and technologies. While the Company believes patents are important to its business operations and in the aggregate constitute a valuable asset, the success of the business is not dependent on any one patent or group of patents. The Company’s active patent portfolio has an average age for patents of approximately nine years. A patent review committee, which is comprised of a number of key executives, manages the patent strategy and portfolio of the Company.
Trademarks are important to the Company’s motorcycle business and licensing activities. The Company has a vigorous worldwide program of trademark registration and enforcement to maintain and strengthen the value of the trademarks and prevent the unauthorized use of those trademarks. The HARLEY-DAVIDSON trademark and the Bar and Shield trademark are each highly recognizable to the public and are very valuable assets. Additionally, the Company uses numerous other trademarks, trade names and logos which are registered worldwide. The following are among the Company’s trademarks: HARLEY-DAVIDSON, H-D, HARLEY, the Bar & Shield Logo, MOTORCLOTHES, the MotorClothes Logo, RIDER’S EDGE, HARLEY OWNERS GROUP, H.O.G., the H.O.G. Logo, SOFTAIL, SPORTSTER and V-ROD. The HARLEY-DAVIDSON trademark has been used since 1903 and the Bar and Shield trademark since at least 1910. Substantially all of the Company’s trademarks are owned by H-D U.S.A., LLC, a subsidiary of the Company, which also manages the Company’s trademark strategy and portfolio.
Marketing – The Company is executing a multi-generational and multi-cultural marketing strategy; the Company measures the success of this strategy by monitoring market shares (where available) across its various customer definitions, as well as monitoring brand health in various markets.
U.S. retail purchasers of new Harley-Davidson motorcycles include both core and outreach customers and are diverse in terms of age, gender and ethnicity. The Company defines its U.S. core customer base as Caucasian men over the age of 35 and its U.S. outreach customers as women, young adults, African-American adults, and Latino adults. In 2011, which is the most recent data available, the Company was the market share leader in U.S. new motorcycle registrations of heavyweight motorcycles within its core and outreach customers. In the U.S., the Company was also the market share leader in 2011 across all (street legal) motorcycle registrations, regardless of engine displacement, within its core and outreach customers. (Source: R. L. Polk & Co. 2011 motorcycle registrations)
In 2012, the average U.S. retail purchaser of a new Harley-Davidson motorcycle had a median household income of approximately $89,500. More than three-quarters of the U.S. retail sales of new Harley-Davidson motorcycles were to purchasers with at least one year of education beyond high school, and 34% of the buyers had college/graduate degrees. (Sources: 2012 Company Studies)
The Company is in the process of implementing its multi-generational and multi-cultural customer marketing strategy outside of the U.S. The Company's definition of core and outreach customers outside the U.S. varies depending on the profile of its customers in each market. In general, the Company defines its core customers outside the U.S. as men over the age of 35 and its outreach customers outside the U.S. as women and young adults.
The Company’s products are marketed to retail customers worldwide primarily through advertising and promotional activities via television, print, radio, direct mailings, as well as electronic advertising and social media. Additionally, local marketing efforts are accomplished through a cooperative program with the Company’s independent dealers.
Customer experiences have traditionally been at the center of much of the Company’s marketing. To attract customers and achieve its goals, the Company not only participates in motorcycle rallies around the world, but also in major motorcycle consumer shows, racing activities, music festivals, mixed martial arts activities and other special promotional events.
Since 1983, the Company has promoted its Harley-Davidson products and the related lifestyle through the Harley Owner’s Group (H.O.G.), which has approximately 1 million members worldwide and the Company believes is the industry’s largest company-sponsored motorcycle enthusiast organization. This group also sponsors many motorcycle events, including rallies and rides for Harley-Davidson motorcycle enthusiasts throughout the world.
In 2000, the Company initiated Rider’s Edge – the Harley-Davidson Academy of Motorcycling. Rider’s Edge offers a series of rider education experiences that provide both new and experienced riders with deeper engagement in the sport of motorcycling by teaching basic and advanced motorcycling skills and knowledge. Since its inception, Rider's Edge has trained more than 300,000 riders. The courses are conducted by a network of select Harley-Davidson dealerships throughout the U.S., enabling students to experience the Harley-Davidson lifestyle, environment, people, and products as they learn.
In 2011, the Company launched a new global Harley-Davidson Authorized Tours Program that offers Harley-Davidson riders the opportunity to experience riding opportunities worldwide. Riders can also rent Harley-Davidson motorcycles worldwide from participating dealers through the Company’s Authorized Rentals Program.
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The Company also uses its website (www.harley-davidson.com) to market its products and services.
Harley-Davidson Distribution – The Company’s products are retailed through an independent dealer network, of which the majority sells Harley-Davidson motorcycles exclusively. The Company’s independent dealerships stock and sell the Company’s motorcycles, P&A, general merchandise and licensed products, and perform service for the Company’s motorcycles. The Company’s independent dealers may also have secondary retail locations (SRLs) to meet additional retail and service needs of the Company’s riding customers. SRLs also provide P&A, general merchandise and licensed products and are authorized to sell and service new motorcycles. The Company’s independent dealers also sell P&A, general merchandise and licensed products through “non-traditional” retail outlets. The “non-traditional” outlets, which are extensions of the main dealership, consist of Alternate Retail Outlets (AROs) and Seasonal Retail Outlets (SROs). AROs are located primarily in high traffic locations such as malls, airports or popular vacation destinations and focus on selling the Company’s general merchandise and licensed products. SROs are located in similar high traffic areas, but operate on a seasonal basis out of temporary locations such as vendor kiosks. AROs and SROs are not authorized to sell new motorcycles.
The Company’s North American region consists of the United States and Canada. In the United States, the Company distributes its motorcycles and related products to a network of independently-owned full-service Harley-Davidson dealerships and the Overseas Military Sales Corporation, an entity that retails the Company’s products to members of the U.S. military. The Company distributes its motorcycles to its dealers in the U.S. based on dealer orders but subject to an allocation system that the Company designed to be forward-looking and market-driven to align the distribution of motorcycles with the demand in individual dealer markets. The allocation system can affect the number of units of particular models that dealers are able to order and the timing of shipments to dealers. In Canada, the Company sells its motorcycles and related products at wholesale to a single independent distributor, Deeley Harley-Davidson Canada/Fred Deeley Imports Ltd., which in turn sells to independent dealers in the Canadian market.
The Company’s operations in the EMEA region are managed out of its Oxford, England regional headquarters. In the EMEA region, the Company distributes all products sold to independent dealers through its subsidiaries located in Austria, Czech Republic, Dubai, France, Germany, Italy, Netherlands, Russia, South Africa, Spain, Switzerland and the United Kingdom and three independent distributors located in Greece, Sweden and Finland.
The Company’s operations in the Asia-Pacific region are managed out of its Singapore regional headquarters. In the Asia-Pacific region, the Company distributes all products sold to independent dealers in Australia, China, India and Japan through subsidiaries in those countries. The Company distributes all products sold to independent dealers for the remaining Asia-Pacific markets in which its motorcycles are sold from its U.S. operations.
The Company’s operations in the Latin America region are managed out of its Miami, Florida regional headquarters. The Company distributes all products sold to independent dealers in Mexico and Brazil through subsidiaries in those countries. The Company distributes all products sold to independent dealers for the remaining Latin American markets in which its motorcycles are sold from its U.S. operations.
The following table includes the number of worldwide Harley-Davidson independent dealerships by geographic region as of December 31, 2012:
North America Region | EMEA Region | Asia-Pacific Region | Latin America Region | Total | ||||||||||||||
United States | Canada | |||||||||||||||||
Full Service Dealerships and SRLs | 695 | 73 | 371 | 281 | 47 | 1,467 | ||||||||||||
Non-Traditional | 87 | 5 | 14 | 1 | 30 | 137 | ||||||||||||
Outside of the U.S., the Company’s strategy calls for the international dealer network to open 100 to 150 new dealerships from the end of 2009 through the end of 2014. Through December 31, 2012, the Company added 93 new international dealers. This excludes international dealers closed in the normal course of business.
Retail Customer and Dealer Financing – The Company believes that HDFS, as well as other financial services companies, provide adequate financing to Harley-Davidson independent distributors, dealers and their retail customers. HDFS provides financing to Harley-Davidson independent dealers and the retail customers of those dealers in the U.S. and Canada. HDFS also provides financing to the Company’s Canadian distributor. The Company’s independent distributors, dealers and their retail customers in the EMEA, Asia-Pacific and Latin America regions are not financed by HDFS, but have access to financing through other established financial services companies, some of which have licensing or branding agreements with the Company.
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Seasonality – The timing of retail sales made by the Company’s independent dealers tracks closely with regional riding seasons.
The Company has historically produced and shipped motorcycles at wholesale to its North America region dealers at approximately the same level throughout the year. Consequently, the Company’s independent dealers in the North America region typically built their inventory levels in the late fall and winter in anticipation of the spring and summer selling season. As a result of new manufacturing capabilities, discussed more fully below, beginning in the first half of 2013, the Company plans to more closely correlate the timing of motorcycle production and wholesale shipments to the riding season. In advance of the new manufacturing capabilities, wholesale motorcycle shipments in the fourth quarter of 2012 were down compared to the fourth quarter of 2011 and retail inventory of independent dealers in the U.S. was approximately 1,200 units lower than at the end of 2011.
In markets outside of the North America region , the Company typically distributes motorcycles through its local warehouses. This allows the dealers in those markets to carry fewer motorcycles in stock as compared to dealers in the North America region. Consequently, independent dealers and distributors in markets outside of the North America region typically do not build inventory levels in the non-riding season, and as a result, the Company’s wholesale shipments to these markets are generally lower in the non-riding season than in the riding season.
Motorcycle Manufacturing – The Company’s manufacturing strategy is designed to continuously improve product quality and productivity while reducing costs and increasing flexibility to respond to continuously changing customer expectations and preferences.
The Company believes that flexible manufacturing processes and flexible supply chains combined with cost-competitive and flexible labor agreements are critical to enabling the Company to respond to customers in a cost effective manner. The restructuring of the Company’s U.S. manufacturing plants, which commenced in 2009, supports the Company’s efforts to become more flexible and cost competitive allowing it to more effectively get the right product at the right time to the customer. Significant restructuring accomplishments include: consolidation of motorcycle production onto a single production line at the Company's motorcycle manufacturing facility in York, Pennsylvania; consolidation of the Wisconsin powertrain production facilities into the Menomonee Falls location; and the ratification of new more flexible labor agreements at all of the Company’s U.S. manufacturing locations. In the first half of 2013, the Company began implementing flexible production capabilities at the York facility by adding flexible workers thus enabling the Company to increase manufacturing production in the first half of 2013 to more closely match retail demand. The Company expects to implement flexible production capabilities at its motorcycle manufacturing facility in Kansas City, Missouri in 2014.
To support the Company’s international growth initiatives, the Company operates two CKD (Complete Knock Down) assembly plants. A CKD plant assembles motorcycles from component kits produced by the Company's U.S. plants and by the Company's suppliers. The Company's first CKD plant is in Brazil and has been in operation since 1999, and its second CKD plant is in India and has been in operation since 2011.
Raw Materials and Purchased Components – The Company continues to establish and reinforce long-term, mutually beneficial relationships with its suppliers. Through these collaborative relationships, the Company gains access to technical and commercial resources for application directly to product design, development and manufacturing initiatives. This strategy has generated improved product quality, technical integrity, application of new features and innovations and faster manufacturing ramp-up of new vehicle introductions. Through a continued focus on collaboration and strong supplier relationships, the Company believes it will be positioned to achieve strategic objectives and deliver cost and quality improvement over the long-term.
The Company purchases all of its raw materials, principally steel and aluminum castings, forgings, steel sheets and bars. The Company also purchases certain motorcycle components, including, but not limited to, electronic fuel injection systems, batteries, tires, seats, electrical components and instruments. In 2011, the Company announced that it will close New Castalloy, its Australian facility that currently manufactures the majority of the wheels for its motorcycles. The Company is in the process of sourcing these components through existing suppliers, and it anticipates this transition will be completed in 2013. The Company closely monitors the overall viability of its supply base. At this time, the Company does not anticipate difficulties in obtaining raw materials or components.
Research and Development – The Company is executing a strategy that it commenced in 2011 to transform product development with the objectives of reducing cost and time to market and ensuring the Company delivers relevant products for an increasingly diverse customer base. The objectives of the strategy include implementing a new product development methodology and organization structure that support greater innovation, flexibility, capacity and focus on consumer insight. The Company incurred research and development expenses of $137.3 million, $145.4 million and $136.2 million during 2012, 2011 and 2010, respectively.
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Regulation – International, federal, state and local authorities have various environmental control requirements relating to air, water and noise that affect the business and operations of the Company. The Company strives to ensure that its facilities and products comply with all applicable environmental regulations and standards.
The Company’s motorcycles that are sold in the United States are subject to certification by the U.S. Environmental Protection Agency (EPA) for compliance with applicable emissions and noise standards. Harley-Davidson motorcycle products have been designed to comply with EPA standards and the Company believes it will comply with future requirements when they go into effect. Additionally, the Company’s motorcycle products must comply with the motorcycle emissions, noise and safety standards of Canada, the European Union, Japan, Brazil and certain other foreign markets where they are sold, and the Company believes its products currently comply with those standards. Because the Company expects that environmental standards will become even more stringent over time, the Company will continue to incur some level of research, development and production costs in this area for the foreseeable future.
The Company, as a manufacturer of motorcycle products, is subject to the U.S. National Traffic and Motor Vehicle Safety Act, which is administered by the U.S. National Highway Traffic Safety Administration (NHTSA). The Company has certified to NHTSA that its motorcycle products comply fully with all applicable federal motor vehicle safety standards and related regulations. The Company has from time to time initiated certain voluntary recalls. During the last three years, the Company has initiated 12 voluntary recalls related to Harley-Davidson motorcycles at a total cost of $17.2 million. The Company reserves for all estimated costs associated with recalls in the period that the recalls are announced.
Employees – As of December 31, 2012, the Motorcycles segment had approximately 5,800 employees. Unionized employees at the manufacturing facilities in Menomonee Falls and Tomahawk, Wisconsin and Kansas City, Missouri are represented by the United Steelworkers of America (USW), as well as the International Association of Machinist and Aerospace Workers (IAM). Production workers at the motorcycle manufacturing facility in York, Pennsylvania are represented by the IAM. In September 2010, the Company’s unionized employees in Wisconsin ratified three separate new seven-year labor agreements which took effect April 1, 2012 and will expire on March 31, 2019. The collective bargaining agreement with the Kansas City USW and IAM unions took effect on August 1, 2011 and will expire on July 31, 2018, and the collective bargaining agreement with the Pennsylvania-IAM union took effect on February 2, 2010 and will expire on February 2, 2017. Please refer to the Overview section of Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for further discussion of the Company’s restructuring activities and the impact on the number of employees.
Internet Access – The Company’s internet website address is www.harley-davidson.com. The Company makes available free of charge (other than an investor’s own internet access charges) through its internet website the Company’s Annual Report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and any amendments to those reports, as soon as reasonably practicable after it electronically files such material with, or furnishes such material to, the United States Securities and Exchange Commission (SEC). In addition, the Company makes available, through its website, the following corporate governance materials: (a) the Company’s Corporate Governance Policy; (b) Committee Charters approved by the Company’s Board of Directors for the Audit Committee, Human Resources Committee, Nominating and Corporate Governance Committee and Sustainability Committee; (c) the Company’s Financial Code of Ethics; (d) the Company’s Code of Business Conduct (the Code of Conduct) in nine languages including English; (e) the Conflict of Interest Process for Directors, Executive Officers and Other Employees (the Conflict Process); (f) a list of the Company’s Board of Directors; (g) the Company’s By-laws; (h) the Company’s Environmental Policy; (i) the Company’s Policy for Managing Disclosure of Material Information; (j) the Company’s Supplier Code of Conduct; (k) the Sustainability Strategy Report; (l) the list of compensation survey participants used as market reference points for various components of compensation as reported in the Company’s Notice of Annual Meeting and Proxy Statement filed with the SEC on March 26, 2012, which compensation relates to the Company’s named executive officers; and (m) the California Transparency in Supply Chain Act Disclosure. This information is also available from the Company upon request. The Company satisfies the disclosure requirements under the Code of Conduct, the Conflict Process and applicable New York Stock Exchange listing requirements regarding waivers of the Code of Conduct or the Conflict Process by disclosing the information in the Company’s proxy statement for its annual meeting of shareholders or on the Company’s website. The Company is not including the information contained on or available through its website as a part of, or incorporating such information by reference into, this Annual Report on Form 10-K.
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Financial Services
HDFS is engaged in the business of financing and servicing wholesale inventory receivables and retail consumer loans, primarily for the purchase of Harley-Davidson motorcycles. HDFS is an agent for certain unaffiliated insurance companies providing property/casualty insurance and also sells extended service contracts, gap coverage and debt protection products to motorcycle owners. HDFS conducts business principally in the United States and Canada, and primarily through certain subsidiaries such as Harley-Davidson Credit Corp., Eaglemark Savings Bank, Harley-Davidson Insurance Services, Inc., and Harley-Davidson Financial Services Canada, Inc.
Wholesale Financial Services – HDFS provides wholesale financial services to Harley-Davidson dealers and distributors, including floorplan and open account financing of motorcycles and motorcycle parts and accessories. HDFS offers wholesale financial services to Harley-Davidson dealers in the United States and Canada, and during 2012 approximately 97% of such dealers utilized those services. HDFS also offers financial services to the Harley-Davidson distributor in Canada. The wholesale finance operations of HDFS are located in Plano, Texas.
Retail Financial Services – HDFS provides retail financing to consumers, consisting primarily of installment lending for the purchase of new and used Harley-Davidson motorcycles. HDFS’ retail financial services are available through most Harley-Davidson dealers in the United States and Canada. HDFS’ retail finance operations are principally located in Carson City, Nevada and Plano, Texas.
Insurance Services – HDFS operates an insurance agency that offers point-of-sale protection products to Harley-Davidson dealers in both the U.S. and Canada, including motorcycle insurance, extended service contracts, credit protection and motorcycle maintenance protection. HDFS also direct-markets motorcycle insurance to owners of Harley-Davidson motorcycles. In addition, HDFS markets a comprehensive package of business insurance coverages and services to owners of Harley-Davidson dealerships. The HDFS insurance operations are located in Carson City, Nevada and Chicago, Illinois.
Funding – The Company believes a diversified and cost effective funding strategy is important to meet HDFS’ goal of providing credit while delivering appropriate returns and profitability. 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.
Competition – The Company regards its ability to offer a package of wholesale and retail financial services in the U.S. and Canada as a significant competitive advantage. Competitors in the financial services industry compete for business based largely on price and, to a lesser extent, service. HDFS competes on convenience, service, brand association, dealer relations, industry experience, terms and price.
In the United States, HDFS financed 50.9% of the new Harley-Davidson motorcycles retailed by independent dealers during 2012, as compared to 51.0% in 2011. In Canada, HDFS financed 28.6% of the new Harley-Davidson motorcycles retailed by independent dealers during 2012, as compared to 30.4% in 2011. Competitors for retail motorcycle finance business are primarily banks, credit unions and other financial institutions. In the motorcycle insurance business, competition primarily comes from national insurance companies and from insurance agencies serving local or regional markets. For insurance-related products such as extended service contracts, HDFS faces competition from certain regional and national industry participants as well as dealer in-house programs. Competition for the wholesale motorcycle finance business primarily consists of banks and other financial institutions providing wholesale financing to Harley-Davidson dealers in their local markets.
Trademarks – HDFS uses various trademarks and trade names for its financial services and products which are licensed from H-D U.S.A., LLC, including HARLEY-DAVIDSON, H-D and the Bar & Shield logo.
Seasonality – In the U.S. and Canada, motorcycles are primarily used during warmer months. Accordingly, HDFS experiences seasonal variations in wholesale and retail financing activities. In general, from mid-March through August, retail financing volume increases while wholesale financing volume decreases as dealer inventories decline. From September through mid-March, there is generally a decrease in retail financing volume while dealer inventories generally build and turn over more slowly, thereby increasing wholesale finance receivables. As discussed under Motorcycle and Related - Products Seasonality, the Company is implementing flexible production capabilities which may reduce the seasonality of dealer inventory levels.
Regulation – The operations of HDFS (both U.S. and foreign) are subject, in certain instances, to supervision and regulation by state and federal administrative agencies and various foreign governmental authorities. Many of the statutory and regulatory requirements imposed by such entities are in place to provide consumer protection as it pertains to the selling and ongoing servicing of financial products and services. Therefore, operations may be subject to various regulations, laws and judicial and/or administrative decisions imposing requirements and restrictions, which among other things: (a) regulate credit
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granting activities, including establishing licensing requirements, in applicable jurisdictions; (b) establish maximum interest rates, finance charges and other charges; (c) regulate customers’ insurance coverage; (d) require disclosure of credit and insurance terms to customers; (e) govern secured transactions; (f) set collection, foreclosure, repossession and claims handling procedures and other trade practices; (g) prohibit discrimination in the extension of credit and administration of loans; (h) regulate the use and reporting of information related to a borrower; (i) require certain periodic reporting; (j) govern the use and protection of non-public personal information; (k) regulate the use of information reported to the credit reporting agencies; (l) regulate the reporting of information to the credit reporting agencies; and/or (m) regulate insurance solicitation and sales practices.
Depending on the provisions of the applicable laws and regulations, the interpretation of laws and regulations and the specific facts and circumstances involved, violations of or non-compliance with these laws may limit the ability of HDFS to collect all or part of the principal or interest on applicable loans. In addition, these violations or non-compliance may entitle the borrower to rescind the loan or to obtain a refund of amounts previously paid, could subject HDFS to the payment of damages or penalties and administrative sanctions, including “cease and desist” orders, and could limit the number of loans eligible for HDFS securitization programs.
Such regulatory requirements and associated supervision could limit the discretion of HDFS in operating its business. Noncompliance with applicable statutes or regulations could result in the suspension or revocation of any charter, license or registration at issue, as well as the imposition of civil fines, criminal penalties and administrative sanctions. The Company cannot assure that the applicable laws or regulations will not be amended or construed differently, that new laws and regulations will not be adopted or that interest rates charged by HDFS will not rise to maximum levels permitted by law, the effect of any of which could be to adversely affect the business of HDFS or its results of operations.
A subsidiary of HDFS, Eaglemark Savings Bank (ESB), is a Nevada state thrift chartered as an Industrial Loan Company (ILC). As such, the activities of this subsidiary are governed by federal regulations and State of Nevada banking laws and are subject to examination by the Federal Deposit Insurance Corporation (FDIC) and Nevada state bank examiners. ESB originates retail loans and sells the loans to a non-banking subsidiary of HDFS. This process allows HDFS to offer retail products with many common characteristics across the United States and to similarly service loans to U.S. retail customers.
Employees – As of December 31, 2012, the Financial Services segment had approximately 600 employees.
Item 1A. Risk Factors
An investment in Harley-Davidson, Inc. involves risks, including those discussed below. These risk factors should be considered carefully before deciding whether to invest in the Company.
• | The Company may not be able to successfully execute its long-term business strategy. There is no assurance that the Company will be able to drive growth to the extent desired through its focus of efforts and resources on the Harley-Davidson brand or to enhance productivity and profitability to the extent desired through continuous improvement. |
• | Expanding international sales subjects the Company to risks that may have a material adverse effect on its business. Expanding international sales is a part of the Company’s long-term business strategy. To support that strategy, the Company must increase its presence outside the U.S., including additional employees and investment in business infrastructure and operations. International operations and sales are subject to various risks, including political and economic instability, local labor market conditions, the imposition of foreign tariffs and other trade barriers, the impact of foreign government regulations and the effects of income and withholding taxes, governmental expropriation and differences in business practices. The Company may incur increased costs and experience delays or disruptions in product deliveries and payments in connection with international operations and sales that could cause loss of revenues and earnings. Unfavorable changes in the political, regulatory and business climate could have a material adverse effect on the Company’s net sales, financial condition, profitability or cash flows. |
• | The Company sells its products at wholesale and must rely on a network of independent dealers and distributors to manage the retail distribution of its products. The Company depends on the capability of its independent dealers and distributors to develop and implement effective retail sales plans to create demand among retail purchasers for the motorcycles and related products and services that the dealers and distributors purchase from the Company. If the Company’s independent dealers and distributors are not successful in these endeavors, then the Company will be unable to maintain or grow its revenues and meet its financial expectations. Further, independent dealers and distributors may experience difficulty in funding their day-to-day cash flow needs and paying their |
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obligations resulting from adverse business conditions such as weakened retail sales and tightened credit. If dealers are unsuccessful, they may exit or be forced to exit the business or, in some cases, the Company may seek to terminate relationships with certain dealerships. As a result, the Company could face additional adverse consequences related to the termination of dealer relationships. Additionally, liquidating a former dealer’s inventory of new and used motorcycles can add downward pressure on new and used motorcycle prices. Further, the unplanned loss of any of the Company’s independent dealers may lead to inadequate market coverage for retail sales of new motorcycles and for servicing previously sold motorcycles, create negative impressions of the Company with its retail customers, and adversely impact the Company’s ability to collect wholesale receivables that are associated with that dealer.
• | Changes in general economic conditions, tightening of credit, political events or other factors may adversely impact dealers’ retail sales. The motorcycle industry is impacted by general economic conditions over which motorcycle manufacturers have little control. These factors can weaken the retail environment and lead to weaker demand for discretionary purchases such as motorcycles. Tightening of credit can limit the availability of funds from financial institutions and other lenders and sources of capital which could adversely affect the ability of retail consumers to obtain loans for the purchase of motorcycles from lenders, including HDFS. Should general economic conditions or motorcycle industry demand decline, the Company’s results of operations and financial condition may be substantially adversely affected. The motorcycle industry can also be affected by political conditions and other factors over which motorcycle manufacturers have little control. |
• | Retail sales of the Company’s independent dealers may be adversely impacted by declining prices for used motorcycles and excess supplies of new motorcycles. The Company has observed that when prices for used Harley-Davidson motorcycles have declined, it has had the effect of reducing demand among retail purchasers for new Harley-Davidson motorcycles (at or near manufacturer’s suggested retail prices). Also, while the Company has taken steps designed to balance production volumes for its new motorcycles with demand, the Company’s competitors could choose to supply new motorcycles to the market in excess of demand at reduced prices which could also have the effect of reducing demand for new Harley-Davidson motorcycles (at or near manufacturer’s suggested retail prices). Ultimately, reduced demand among retail purchasers for new Harley-Davidson motorcycles leads to reduced shipments by the Company. |
• | The Company may not be able to successfully execute its manufacturing strategy. The Company’s manufacturing strategy is designed to continuously improve product quality and increase productivity, while reducing costs and increasing flexibility to respond to ongoing changes in the marketplace. The Company believes flexible manufacturing, including flexible supply chains and flexible labor agreements, is the key element to enable improvements in the Company’s ability to respond to customers in a cost effective manner. To implement this strategy, the Company must be successful in its continuous improvement efforts which are dependent on the involvement of management, production employees and suppliers. Any inability to achieve these objectives could adversely impact the profitability of the Company’s products and its ability to deliver the right product at the right time to the customer. |
• | The Company’s ability to remain competitive is dependent upon its capability to develop and successfully introduce new, innovative and compliant products. The motorcycle market continues to change in terms of styling preferences and advances in new technology and, at the same time, be subject to increasing regulations related to safety and emissions. The Company must continue to distinguish its products from its competitors’ products with unique styling and new technologies and to protect its intellectual property from imitators. In addition, these new products must comply with applicable regulations worldwide and satisfy the potential demand for products that produce lower emissions and achieve better fuel economy. The Company must make product advancements while maintaining the classic look, sound and feel associated with Harley-Davidson products. The Company must also be able to design and manufacture these products and deliver them to the marketplace in an efficient and timely manner. There can be no assurances that the Company will be successful in these endeavors or that existing and prospective customers will like or want the Company’s new products. |
• | The Company must invest in and successfully implement new information systems and technology. The Company is continually modifying and enhancing its systems and technology to increase productivity and efficiency. The Company has several strategic projects in process. As new systems and technologies (and related strategies) are implemented, the Company could experience unanticipated difficulties resulting in unexpected costs and adverse impacts to its manufacturing and other business processes. When implemented, the systems and technology may not provide the benefits anticipated and could add costs and complications to ongoing operations, which may have a material adverse effect on the Company’s business and results of operations. |
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• | The Company and its independent dealers must successfully adjust to a more seasonal retail motorcycle sales pattern. The Company records the wholesale sale of a motorcycle when it is shipped to the Company’s independent dealers and distributors. The Company began flexible production at its York, Pennsylvania facility in the first half of 2013, which the Company expects will shift some motorcycle production to the first half of 2013 that did not occur in the fourth quarter of 2012, to, among other things, address the seasonal retail sales cycle. Any difficulties in implementing flexible production could result in lost production or sales. The Company and its independent dealers and distributors must be able to successfully manage changes in production rates, inventory levels and other business processes associated with flexible production. Failure by the Company and its independent dealers to make such adjustments may have a material adverse effect on the Company’s business and results of operations. |
• | The Company relies on third party suppliers to obtain raw materials and provide component parts for use in the manufacture of its motorcycles. The Company may experience supply problems such as unfavorable pricing or untimely delivery of raw materials and components. In certain circumstances, the Company relies on a single supplier to provide the entire requirement of a specific part, and a change in this established supply relationship may cause disruption in the Company’s production schedule. In addition, the price and availability of raw materials and component parts from suppliers can be adversely affected by factors outside of the Company’s control such as the supply of a necessary raw material or natural disasters. Further, Company suppliers may experience difficulty in funding their day-to-day cash flow needs because of tightening credit caused by financial market disruption. In addition, adverse economic conditions and related pressure on select suppliers due to difficulties in the global manufacturing arena could adversely affect their ability to supply the Company. These supplier risks may have a material adverse effect on the Company’s business and results of operations. |
• | The Company relies on third party outsourcing companies to perform certain operating and administrative functions. The Company has outsourced a number of operations to third parties in an effort to focus on competencies that provide the Company a competitive advantage. Similar to suppliers of raw materials and components, the Company may experience problems with outsourced services, such as unfavorable pricing, untimely delivery of services, or poor quality. Also, outsourcing companies may experience adverse economic conditions due to difficulties in the global economy that could lead to difficulties supporting the Company's operations. These service provider risks may have a material adverse effect on the Company's business and results of operations. |
• | The Company’s financial services operations rely on external sources to finance a significant portion of its operations. Liquidity is essential to the Company’s financial services business. Disruptions in financial markets may cause lenders and institutional investors to reduce or cease to loan money to borrowers, including financial institutions. The Company’s financial services operations may be negatively affected by the difficulty in raising capital in the long-term and short-term capital markets. These negative consequences may 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 share value through the use of alternative sources of capital. |
• | The Company’s financial services operations are highly dependent on accessing capital markets to fund their operations at competitive interest rates, the Company’s access to capital and its cost of capital are highly dependent upon its credit ratings, and any negative credit rating actions will adversely affect its earnings and results of operations. The ability of the Company and its financial services operations to access unsecured capital markets is influenced by their short-term and long-term credit ratings. If the Company’s credit ratings are downgraded or its ratings outlook is negatively changed, the Company’s cost of borrowing will increase, resulting in reduced earnings and interest margins, or the Company’s access to capital may be disrupted or impaired. |
• | The Company’s financial services operations are exposed to credit risk on its retail and wholesale receivables. Credit risk is the risk of loss arising from a failure by a customer to meet the terms of any contract with the Company’s financial services operations. Credit losses are influenced by general business and economic conditions, including unemployment rates, bankruptcy filings and other factors that negatively affect household incomes, as well as contract terms, customer credit profiles and the new and used motorcycle market. Negative changes in general business, economic or market factors may have an additional adverse impact on the Company’s financial services credit losses and future earnings. While HDFS experienced historically low levels of retail credit losses during 2012, the Company believes 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 near-prime and sub-prime lending environment. Credit losses are also adversely impacted by increases in the frequency of loss and by decreases in the value of repossessed Harley-Davidson branded motorcycles. If there are adverse circumstances that involve a material decline in values of |
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Harley-Davidson branded motorcycles, those circumstances or any related decline in resale values for Harley-Davidson-branded motorcycles could contribute to increased delinquencies and credit losses.
• | The Company must effectively execute the Company’s restructuring plans within expected costs. During 2009, 2010 and 2011, the Company announced a combination of restructuring actions that are designed to reduce administrative costs, eliminate excess capacity and exit non-core business operations. Effectively executing these plans within expected costs and realizing expected benefits will depend upon a number of factors, including the time required to complete planned actions and effective collaboration with the unions representing the Company’s employees, the absence of material issues associated with workforce reductions, availability of and effective use of third party service providers to assist in implementing the actions, avoidance of unexpected disruptions in production, retention of key employees involved in implementing the restructuring plans and the ability of the Company to dispose of vacated facilities in a cost effective manner. |
• | The Company has a number of competitors, some of which have greater financial resources than the Company. Many of the Company’s competitors are more diversified than the Company, and they may compete in all segments of the motorcycle market, other powersports markets and/or the automotive market. Also, the Company’s manufacturer’s suggested retail price for its motorcycles is generally higher than its competitors, and if price becomes a more important competitive factor for consumers in the heavyweight motorcycle market, the Company may be at a competitive disadvantage. In addition, the Company’s financial services operations face competition from various banks, insurance companies and other financial institutions that may have access to additional sources of capital at more competitive rates and terms, particularly for borrowers in higher credit tiers. Failure to adequately address and respond to these competitive pressures worldwide and in the U.S. may have a material adverse effect on the Company’s business and results of operations. |
• | The Company’s marketing strategy of appealing to and growing sales to multi-generational and multi-cultural customers worldwide may not continue to be successful. The Company has been successful in marketing its products in large part by promoting the experience of motorcycling. To sustain and grow the business over the long-term, the Company must continue to be successful selling products and promoting the experience of motorcycling to both core customers and outreach customers such as women, young adults and ethnically diverse adults. The Company must also execute its multi-generational and multi-cultural strategy without adversely impacting the strength of the brand with core customers. |
• | The Company’s success depends upon the continued strength of the Harley-Davidson brand. The Company believes that the Harley-Davidson brand has significantly contributed to the success of its business and that maintaining and enhancing the brand is critical to expanding its customer base. Failure to protect the brand from infringers or to grow the value of the Harley-Davidson brand may have a material adverse effect on the Company’s business and results of operations. |
• | The Company is exposed to market risk from changes in foreign exchange rates, commodity prices and interest rates. The Company sells its products internationally and in most markets those sales are made in the foreign country’s local currency. Shifting foreign exchange rates can adversely affect the Company's revenue and margin, and cause volatility in results of operations. The Company is also subject to risks associated with changes in prices of commodities. Earnings from the Company’s financial services business are affected by changes in interest rates. Although the Company uses derivative financial instruments to attempt to manage foreign currency exchange rates, commodity price and interest rate risks, these instruments generally do not extend beyond one year and may expose the Company to credit risk in the event of counterparty default to the derivative financial instruments. There can be no assurance that in the future the Company will successfully manage these risks. |
• | The Company’s operations are dependent upon attracting and retaining skilled employees, including executive officers and other senior leaders. The Company’s future success depends on its continuing ability to identify, hire, develop, motivate, retain and promote skilled personnel for all areas of its organization. The Company’s current and future total compensation arrangements, which include benefits and incentive awards, may not be successful in attracting new employees and retaining and motivating the Company’s existing employees. In addition, the Company must cultivate and sustain a work environment where employees are engaged and energized in their jobs to maximize their performance. If the Company does not succeed in attracting new personnel, retaining existing personnel, implementing effective succession plans and motivating and engaging personnel, including executive officers, the Company may be unable to develop and distribute products and services and effectively execute its plans and strategies. |
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• | The Company incurs substantial costs with respect to employee pension and healthcare benefits. The Company’s cash funding requirements and its estimates of liabilities and expenses for pensions and healthcare benefits for both active and retired employees are based on several factors that are outside the Company’s control. These factors include funding requirements of the Pension Protection Act of 2006, the rate used to discount the future estimated liability, the rate of return on plan assets, current and projected healthcare costs, healthcare reform or legislation, retirement age and mortality. Changes in these factors can impact the expense, liabilities and cash requirements associated with these benefits which could have a material adverse effect on future results of operations, liquidity or shareholders’ equity. In addition, costs associated with these benefits put the Company under significant cost pressure as compared to its competitors that may not bear the costs of similar benefit plans. Furthermore, costs associated with complying with the Patient Protection and Affordable Care Act may produce additional cost pressure on the Company and its health care plans. |
• | The Company manufactures products that create exposure to product liability claims and litigation. To the extent plaintiffs are successful in showing that personal injury or property damage result from defects in the design or manufacture of the Company’s products, the Company may be subject to claims for damages that are not covered by insurance. The costs associated with defending product liability claims, including frivolous lawsuits, and payment of damages could be substantial. The Company’s reputation may also be adversely affected by such claims, whether or not successful. |
• | The Company must maintain stakeholder confidence in its operating ethics and corporate governance practices. The Company believes it has a history of good corporate governance. Prior to the enactment of the Sarbanes-Oxley Act of 2002, the Company had in place many of the corporate governance procedures and processes now mandated by the Sarbanes-Oxley Act and related rules and regulations, such as Board Committee Charters and a Corporate Governance Policy. In 1992, the Company established a Code of Business Conduct that defines how employees interact with various Company stakeholders and addresses issues such as confidentiality, conflict of interest and fair dealing. Failure to maintain its reputation for good corporate governance may have a material adverse effect on the Company’s business and results of operations. |
• | The Company is and may in the future become subject to legal proceedings and commercial or contractual disputes. These are typically claims that arise in the normal course of business. The uncertainty associated with substantial unresolved claims and lawsuits may harm the Company’s business, financial condition, reputation and brand. The defense of the lawsuits may result in the expenditures of significant financial resources and the diversion of management’s time and attention away from business operations. In addition, although the Company is unable to determine the amount, if any, that it may be required to pay in connection with the resolution of the lawsuits by settlement or otherwise, any such payment may have a material adverse effect on the Company’s business and results of operations. Refer to the Company’s disclosures concerning legal proceedings in the periodic reports that the Company files with the Securities and Exchange Commission for additional detail regarding lawsuits and other claims against the Company. |
• | The Company must comply with governmental laws and regulations that are subject to change and involve significant costs. The Company’s sales and operations in areas outside the U.S. may be subject to foreign laws, regulations and the legal systems of foreign courts or tribunals. These laws and policies governing operations of foreign-based companies may result in increased costs or restrictions on the ability of the Company to sell its products in certain countries. The Company’s international sales operations may also be adversely affected by U. S. laws affecting foreign trade and taxation. |
The Company is subject to income and non-income based taxes in the U.S. and in various foreign jurisdictions. Significant judgment is required in determining the Company's worldwide income tax liabilities and other tax liabilities. The Company believes that it complies with applicable tax law. If the governing tax authorities have a different interpretation of the applicable law or if there is a change in tax law, the Company's financial condition and/or results of operations may be adversely affected.
The Company’s domestic sales and operations are subject to governmental policies and regulatory actions of agencies of the United States Government, including the Environmental Protection Agency (“EPA”), SEC, National Highway Traffic Safety Administration, Department of Labor and Federal Trade Commission. In addition, the Company’s sales and operations are also subject to laws and actions of state legislatures and other local regulators, including dealer statutes and licensing laws. Changes in regulations or the imposition of additional regulations may have a material adverse effect on the Company’s business and results of operations.
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The Company’s motorcycle products use internal combustion engines. These motorcycle products are subject to statutory and regulatory requirements governing emissions and noise, including standards imposed by the EPA, state regulatory agencies, such as California Air Resources Board, and regulatory agencies in certain foreign countries where the Company’s motorcycle products are sold. The Company is also subject to statutory and regulatory requirements governing emissions and noise in the conduct of the Company’s manufacturing operations. Any significant change to the regulatory requirements governing emissions and noise may substantially increase the cost of manufacturing the Company’s products. If the Company fails to meet existing or new requirements, then the Company may be unable to sell certain products or may be subject to fines or penalties. Further, in response to concerns about global climate changes, the Company may face greater regulatory or customer pressure to develop products that generate less emissions. This may require the Company to spend additional funds on research, product development, and implementation costs and subject the Company to the risk that the Company’s competitors may respond to these pressures in a manner that gives them a competitive advantage.
The Company’s financial services operations are governed by various foreign, federal and state laws that more specifically affect general financial and lending institutions. The financial services operations originate the majority of its consumer loans through its subsidiary, Eaglemark Savings Bank, a Nevada state thrift chartered as an industrial loan company. Congress has previously considered and may in the future impose additional regulation and supervision over the financial services industry.
Depending on the provisions of the applicable laws and regulations, the interpretation of laws and regulations and the specific facts and circumstances involved, violations of or non-compliance with these laws may limit the ability of HDFS to collect all or part of the principal or interest on applicable loans, may entitle the borrower to rescind the loan or obtain a refund of amounts previously paid, could subject HDFS to payment of damages or penalties and administrative sanctions, including "cease and desist" orders, and could limit the number of loans eligible for HDFS securitizations programs. Such regulatory requirements and associated supervision could limit the discretion of HDFS in operating its business. Noncompliance with applicable statutes or regulations could result in the suspension or revocation of any charter, license or registration at issue, as well as the imposition of civil fines, criminal penalties and administrative sanctions. The Company cannot assure that the applicable laws or regulations will not be amended or construed differently, that new laws and regulations will not be adopted or that interest rates charged by HDFS will not rise to maximum levels permitted by law, the effect of any of which could be to adversely affect the business of HDFS or its results of operations.
In 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act was passed into law. The Dodd-Frank Act is a sweeping piece of legislation, and the financial services industry is still assessing the impacts. Congress detailed some significant changes, but the Dodd-Frank Act leaves many details to be determined by regulation and further study. The full impact will not be fully known for months or even years, as regulations that are intended to implement the Dodd-Frank Act are adopted by the appropriate agencies, and the text of the Dodd-Frank Act is analyzed by impacted stakeholders and possibly the courts. The Dodd-Frank Act also created the Bureau of Consumer Financial Protection (“CFPB”), housed in the Federal Reserve. The CFPB has been granted significant enforcement and rule-making authority in the area of consumer financial products and services. The direction that the CFPB will take, the regulations it will adopt, and its interpretation of existing laws and regulations are all elements that are not yet known. Compliance with the law may be costly and could affect operating results as the implementation of new forms, processes, procedures and controls and infrastructure may be required to comply with the regulations. Compliance may create operational constraints and place limits on pricing. Failure to comply with these regulations, changes in these or other regulations, or the imposition of additional regulations, could affect HDFS’ earnings, limit its access to capital, limit the number of loans eligible for HDFS securitization programs and have a material adverse effect on HDFS’ business and results of operations.
In addition, the Company is also subject to policies and actions of the New York Stock Exchange (“NYSE”). Many major competitors of the Company are not subject to the requirements of the SEC or the NYSE rules. As a result, the Company may be required to disclose certain information that may put the Company at a competitive disadvantage to its principal competitors.
• | A cybersecurity breach involving digital consumer or employee personal data may adversely affect the Company’s reputation, revenue and earnings. The Company and certain of its third-party vendors receive and store digital personal information in connection with its human resources operations, financial services operations, the Harley Owners Group and other aspects of its business. Any system failure, accident or security breach could result in disruptions to the Company's operations. To the extent that any disruptions or security breach results in a loss or damage to the Company's data, or in inappropriate disclosure of confidential information, it could cause significant |
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damage to the Company's reputation, affect its relationships with customers, lead to claims against the Company and ultimately harm the Company's business. In addition, the Company may be required to incur significant costs to protect against damage caused by these disruptions or security breaches in the future.
• | The Company’s Motorcycles segment is dependent upon unionized labor. Substantially all of the hourly production employees working in the Motorcycles segment are represented by unions and covered by collective bargaining agreements. Harley-Davidson Motor Company is currently a party to five collective bargaining agreements with local affiliates of the International Association of Machinists and Aerospace Workers and the United Steelworkers of America. Current collective bargaining agreements with hourly employees in Pennsylvania, Missouri and Wisconsin will expire in 2017, 2018 and 2019, respectively. Collective bargaining agreements generally cover wages, healthcare benefits and retirement plans, seniority, job classes and work rules. There is no certainty that the Company will be successful in negotiating new agreements with these unions that extend beyond the current expiration dates or that these new agreements will be on terms that will allow the Company to be competitive. Failure to renew these agreements when they expire or to establish new collective bargaining agreements on terms acceptable to the Company and the unions could result in the relocation of production facilities, work stoppages or other labor disruptions which may have a material adverse effect on customer relationships and the Company’s business and results of operations. |
• | The Company’s operations may be affected by greenhouse emissions and climate change and related regulations. Climate change is receiving increasing attention worldwide. Many scientists, legislators and others attribute climate change to increased levels of greenhouse gases, including carbon dioxide, which has led to significant legislative and regulatory efforts to limit greenhouse gas emissions. Congress has previously considered and may in the future implement restrictions on greenhouse gas emissions. In addition, several states, including states where the Company has manufacturing plants, have previously considered and may in the future implement greenhouse gas registration and reduction programs. Energy security and availability and its related costs affect all aspects of the Company’s manufacturing operations in the United States, including the Company’s supply chain. The Company’s manufacturing plants use energy, including electricity and natural gas, and certain of the Company’s plants emit amounts of greenhouse gas that may be affected by these legislative and regulatory efforts. Greenhouse gas regulation could increase the price of the electricity the Company purchases, increase costs for use of natural gas, potentially restrict access to or the use of natural gas, require the Company to purchase allowances to offset the Company’s own emissions or result in an overall increase in costs of raw materials, any one of which could increase the Company’s costs, reduce competitiveness in a global economy or otherwise negatively affect the Company’s business, operations or financial results. Many of the Company’s suppliers face similar circumstances. Physical risks to the Company’s business operations as identified by the Intergovernmental Panel on Climate Change and other expert bodies include scenarios such as sea level rise, extreme weather conditions and resource shortages. Extreme weather may disrupt the production and supply of component parts or other items such as natural gas, a fuel necessary for the manufacture of motorcycles and their components. Supply disruptions would raise market rates and jeopardize the continuity of motorcycle production. |
• | New regulations related to conflict minerals may force the Company to incur additional expenses. The SEC recently adopted additional disclosure requirements related to certain minerals sourced from the Democratic Republic of Congo and surrounding countries, or "conflict minerals", that are necessary to the functionality of a product manufactured, or contracted to be manufactured, by an SEC reporting company. The minerals that the final rules cover are commonly referred to as "3TG" and include tin, tantalum, tungsten and gold. Implementation of the new disclosure requirements could affect the sourcing and availability of some of the minerals that the Company uses in the manufacture of its products. The Company's supply chain is complex, and if it is not able to conclusively verify the origins for all conflict minerals used in its products or that its products are "conflict free", then the Company may face reputational challenges with customers or investors. Additionally, as there may be only a limited number of suppliers offering "conflict free" minerals, the Company cannot be sure that it will be able to obtain necessary metals from such suppliers in sufficient quantities or at competitive prices. Accordingly, the Company could incur significant costs related to the compliance process, including potential difficulty or added costs in satisfying the disclosure requirements. |
• | The Company must detect issues with the Company’s motorcycles or manufacturing processes to avoid recall campaigns, increased warranty costs or litigation, and delays in new model launches. The Company must also complete any recall campaigns within cost expectations. The Company must continually improve and adhere to product development and manufacturing processes to ensure high quality products are shipped to dealers. If product designs or manufacturing processes are defective, the Company could experience delays in new model launches, product recalls, conventional warranty claims, and product liability or unconventional warranty claims, which may |
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involve purported class actions. While the Company uses reasonable methods to estimate the cost of warranty, recall and product liability costs and appropriately reflect those in the financial statements, there is a risk the actual costs could exceed estimates. Further, shipping products with poor quality may also adversely affect the Company’s reputation.
The Company disclaims any obligation to update these Risk Factors or any other forward-looking statements. The Company assumes no obligation (and specifically disclaims any such obligation) to update these Risk Factors or any other forward-looking statements to reflect actual results, changes in assumptions or other factors affecting such forward-looking statements.
Item 1B. Unresolved Staff Comments
None.
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Item 2. Properties
The following is a summary of the principal operating properties of the Company as of December 31, 2012:
Motorcycles & Related Products Segment
Type of Facility | Location | Approximate Square Feet | Status | ||||
Corporate Office | Milwaukee, WI | 515,000 | Owned | ||||
Museum | Milwaukee, WI | 130,000 | Owned | ||||
Manufacturing(1) | Wauwatosa, WI | 430,000 | Owned | ||||
Product Development Center | Wauwatosa, WI | 409,000 | Owned | ||||
Distribution Center(2) | Franklin, WI | 255,000 | Owned | ||||
Manufacturing(3) | Menomonee Falls, WI | 881,600 | Owned | ||||
Manufacturing(4) | Tomahawk, WI | 226,000 | Owned | ||||
Airplane hangar | Milwaukee, WI | 14,600 | Owned | ||||
Office | Cleveland, OH | 23,000 | Lease expiring 2014 | ||||
Manufacturing and Materials Velocity Center(5) | Kansas City, MO | 450,000 | Owned | ||||
Warehouse | Kansas City, MO | 20,000 | Lease expiring 2013 | ||||
Manufacturing(6) | York, PA | 610,000 | Owned | ||||
Training Center | York, PA | 12,300 | Lease expiring 2015 | ||||
Motorcycle Testing | Naples, FL | 82,000 | Owned | ||||
Office | Miami, FL | 12,700 | Lease expiring 2017 | ||||
Motorcycle Testing | Yucca, AZ | 79,000 | Lease expiring 2019 | ||||
Office and Training Facility | Monterrey, Mexico | 8,300 | Lease expiring 2014 | ||||
Manufacturing and Office(7) | Manaus, Brazil | 100,000 | Lease expiring 2016 | ||||
Office | Sao Paulo, Brazil | 1,200 | Lease expiring 2015 | ||||
Office and Warehouse | Oxford, England | 39,000 | Lease expiring 2017 | ||||
Office | Rijswijk, The Netherlands | 6,000 | Lease expiring 2021 | ||||
Office | Creteil, France | 8,500 | Lease expiring 2016 | ||||
Office | Neu-Isenberg, Germany | 27,600 | Lease expiring 2032 | ||||
Office | Sant Cugat, Spain | 3,400 | Lease expiring 2017 | ||||
Office | Zurich, Switzerland | 2,000 | Lease expiring 2014 | ||||
Office and Warehouse | Arese, Italy | 17,000 | Lease expiring 2015 | ||||
Office | Prague, Czech Republic | 1,900 | Lease expiring 2019 | ||||
Office | Dubai, United Arab Emirates | 3,700 | Lease expiring 2015 | ||||
Office | Vienna, Austria | 2,700 | Lease expiring 2016 | ||||
Office | Gurgaon, India | 9,400 | Lease expiring 2016 | ||||
Manufacturing(8) | Bawal, India | 68,200 | Lease expiring 2016 | ||||
Office | Moscow, Russia | 2,500 | Lease expiring 2013 | ||||
Warehouse | Yokohama, Japan | 15,000 | Lease expiring 2013 | ||||
Office | Akishima, Japan | 13,000 | Lease expiring 2028 | ||||
Office | Shanghai, China | 9,900 | Lease expiring 2017 | ||||
Office | Singapore | 8,800 | Lease expiring 2015 | ||||
Office | Cape Town, South Africa | 3,500 | Lease expiring 2013 | ||||
Office | Sydney, Australia | 21,800 | Lease expiring 2017 | ||||
Manufacturing(9) | Adelaide, Australia | 485,000 | Lease expiring 2013 | ||||
(1) | Facility was idled during 2010 and production moved to Menomonee Falls, WI. |
(2) | The P&A warehousing and distribution activity at this facility was moved to an outsourced facility during 2011. |
(3) | Motorcycle powertrain production. |
(4) | Fiberglass/plastic parts production and painting. |
(5) | Motorcycle parts fabrication, painting and Dyna, Sportster® and V-Rod® assembly. |
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(6) | Motorcycle parts fabrication, painting and Softail® and touring model assembly. |
(7) | Assembly of select models for the Brazilian market. |
(8) | Assembly of select models for the Indian market. |
(9) | The Company anticipates that the motorcycle wheel production will be fully outsourced in 2013. |
Financial Services Segment
Type of Facility | Location | Approximate Square Feet | Status | ||||
Office | Chicago, IL | 26,000 | Lease expiring 2022 | ||||
Office | Plano, TX | 61,500 | Lease expiring 2014 | ||||
Office | Carson City, NV | 100,000 | Owned | ||||
The Financial Services segment has three office facilities: Chicago, Illinois (corporate headquarters); Plano, Texas (wholesale and retail operations); and Carson City, Nevada (retail and insurance operations).
Item 3. Legal Proceedings
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 engaged in discussions with the EPA. 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.
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. 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.
In February 2002, the Company was advised by the EPA that it considers some of the Company’s remediation activities at the York facility to be subject to the EPA’s corrective action program under the Resource Conservation and Recovery Act (RCRA) and offered the Company the option of addressing corrective action under a RCRA facility lead agreement. In July 2005, the York facility was designated as the first site in Pennsylvania to be addressed under the “One Cleanup Program.” The program provides a more streamlined and efficient oversight of voluntary remediation by both PADEP and EPA and will be carried out consistent with the Agreement with the Navy. As a result, the RCRA facility lead agreement has been superseded.
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, we are unable to make a reasonable estimate of those additional costs, if any, that may result.
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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 related to the remediation of soil are expected to be incurred primarily over a period of several years ending in 2015. Response Costs related to ground water remediation may continue for some time beyond 2015.
Product Liability Matters:
Additionally, 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 will not have a material adverse effect on the Company’s consolidated financial statements.
Item 4. Mine Safety Disclosures
Not Applicable
PART II
Item 5. | Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchase of Equity Securities |
Harley-Davidson, Inc. common stock is traded on the New York Stock Exchange, Inc. The high and low market prices for the common stock, reported as New York Stock Exchange, Inc. Composite Transactions, were as follows:
2012 | Low | High | 2011 | Low | High | |||||||||||||
First quarter | $ | 38.93 | $ | 50.96 | First quarter | $ | 34.56 | $ | 43.14 | |||||||||
Second quarter | $ | 43.79 | $ | 54.32 | Second quarter | $ | 34.70 | $ | 43.15 | |||||||||
Third quarter | $ | 37.84 | $ | 47.62 | Third quarter | $ | 31.50 | $ | 46.88 | |||||||||
Fourth quarter | $ | 40.59 | $ | 49.76 | Fourth quarter | $ | 31.93 | $ | 40.92 | |||||||||
The Company paid the following dividends per share:
2012 | 2011 | 2010 | ||||||||||
First quarter | $ | 0.155 | $ | 0.100 | $ | 0.10 | ||||||
Second quarter | 0.155 | 0.125 | 0.10 | |||||||||
Third quarter | 0.155 | 0.125 | 0.10 | |||||||||
Fourth quarter | 0.155 | 0.125 | 0.10 | |||||||||
$ | 0.620 | $ | 0.475 | $ | 0.400 | |||||||
As of January 31, 2013 there were 83,194 shareholders of record of Harley-Davidson, Inc. common stock.
The following table contains detail related to the repurchase of common stock based on the date of trade during the quarter ended December 31, 2012:
2012 Fiscal Month | Total Number of Shares Purchased | 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 | |||||||||
October 1 to November 4 | 634,806 | $ | 43 | 634,806 | 14,703,317 | ||||||||
November 5 to December 2 | 283,000 | $ | 47 | 283,000 | 14,624,096 | ||||||||
December 3 to December 31 | 281,656 | $ | 47 | 281,656 | 14,525,205 | ||||||||
Total | 1,199,462 | $ | 45 | 1,199,462 | |||||||||
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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 repurchased 0.4 million shares during the fourth quarter ended December 31, 2012 under this authorization. As of December 31, 2012, there were no shares available 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 repurchased 0.8 million shares during the fourth quarter ended December 31, 2012 under this authorization. As of December 31, 2012, 14.5 million shares remained under this authorization.
From time to time, the Company may enter into a Rule 10b5-1 trading plan for the purpose of repurchasing shares under either the 1997 or 2007 authorization.
The Harley-Davidson, Inc. 2009 Incentive Stock Plan (exhibit 10.5) 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 fourth quarter of 2012, the Company acquired 5,750 shares of common stock that employees presented to the Company to satisfy withholding taxes in connection with the vesting of restricted stock awards.
Item 12 of this Annual Report on Form 10-K contains certain information relating to the Company’s equity compensation plans.
The following information in this Item 5 is not deemed to be “soliciting material” or to be “filed” with the SEC or subject to Regulation 14A or 14C under the Securities Exchange Act of 1934 or to the liabilities of Section 18 of the Securities Exchange Act of 1934, and will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent the Company specifically incorporates it by reference into such a filing: the SEC requires the Company to include a line graph presentation comparing cumulative five year Common Stock returns with a broad-based stock index and either a nationally recognized industry index or an index of peer companies selected by the Company. The Company has chosen to use the Standard & Poor’s 500 Index as the broad-based index and the Standard & Poor’s MidCap 400 Index as a more specific comparison. The Standard & Poor’s MidCap 400 Index was chosen because the Company does not believe that any other published industry or line-of-business index adequately represents the current operations of the Company. The graph assumes a beginning investment of $100 on December 31, 2007 and that all dividends are reinvested.
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2007 ($) | 2008 ($) | 2009 ($) | 2010 ($) | 2011 ($) | 2012 ($) | |||||||||||||
Harley-Davidson, Inc. | 100 | 38 | 58 | 81 | 92 | 117 | ||||||||||||
Standard & Poor’s MidCap 400 Index | 100 | 64 | 88 | 111 | 109 | 129 | ||||||||||||
Standard & Poor’s 500 Index | 100 | 63 | 80 | 92 | 94 | 109 | ||||||||||||
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Item 6. Selected Financial Data
(In thousands, except per share amounts) | 2012(1) | 2011(1) | 2010(1) | 2009(2) | 2008(2) | |||||||||||||||
Statement of operations data: | ||||||||||||||||||||
Revenue: | ||||||||||||||||||||
Motorcycles & Related Products | 4,942,582 | 4,662,264 | 4,176,627 | 4,287,130 | 5,578,414 | |||||||||||||||
Financial Services | 637,924 | 649,449 | 682,709 | 494,779 | 376,970 | |||||||||||||||
Total revenue | 5,580,506 | 5,311,713 | 4,859,336 | 4,781,909 | 5,955,384 | |||||||||||||||
Income from continuing operations | 623,925 | 548,078 | 259,669 | 70,641 | 684,235 | |||||||||||||||
Income (loss) from discontinued operations, net of tax | — | 51,036 | (113,124 | ) | (125,757 | ) | (29,517 | ) | ||||||||||||
Net income (loss) | 623,925 | 599,114 | 146,545 | (55,116 | ) | 654,718 | ||||||||||||||
Weighted-average common shares: | ||||||||||||||||||||
Basic | 227,119 | 232,889 | 233,312 | 232,577 | 234,225 | |||||||||||||||
Diluted | 229,229 | 234,918 | 234,787 | 233,573 | 234,477 | |||||||||||||||
Earnings per common share from continuing operations: | ||||||||||||||||||||
Basic | $ | 2.75 | $ | 2.35 | $ | 1.11 | $ | 0.30 | $ | 2.92 | ||||||||||
Diluted | $ | 2.72 | $ | 2.33 | $ | 1.11 | $ | 0.30 | $ | 2.92 | ||||||||||
Earnings (loss) per common share from discontinued operations: | ||||||||||||||||||||
Basic | $ | — | $ | 0.22 | $ | (0.48 | ) | $ | (0.54 | ) | $ | (0.13 | ) | |||||||
Diluted | $ | — | $ | 0.22 | $ | (0.48 | ) | $ | (0.54 | ) | $ | (0.13 | ) | |||||||
Earnings (loss) per common share: | ||||||||||||||||||||
Basic | $ | 2.75 | $ | 2.57 | $ | 0.63 | $ | (0.24 | ) | $ | 2.80 | |||||||||
Diluted | $ | 2.72 | $ | 2.55 | $ | 0.62 | $ | (0.24 | ) | $ | 2.79 | |||||||||
Dividends paid per common share | $ | 0.620 | $ | 0.475 | $ | 0.400 | $ | 0.400 | $ | 1.290 | ||||||||||
Balance sheet data: | ||||||||||||||||||||
Total assets | 9,170,773 | 9,674,164 | 9,430,740 | 9,155,518 | 7,828,625 | |||||||||||||||
Total debt | 5,102,649 | 5,722,619 | 5,752,356 | 5,636,129 | 3,914,887 | |||||||||||||||
Total equity | 2,557,624 | 2,420,256 | 2,206,866 | 2,108,118 | 2,115,603 | |||||||||||||||
(1) | The Company began consolidating formerly off-balance sheet qualifying special purpose entities as required by the new guidance within Accounting Standards Codification (ASC) Topic 810, “Consolidations” and ASC Topic 860, “Transfers and Servicing” in 2010. |
(2) | 2009 and 2008 total assets include assets of discontinued operations of $181.2 million and $238.7 million, respectively. |
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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Harley-Davidson, Inc. is the parent company for 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 manufactures five families of motorcycles: Touring, Dyna®, Softail®, Sportster® and V-Rod®. 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 income from continuing operations for 2012 was $623.9 million, or $2.72 per diluted share compared to $548.1 million, or $2.33 per diluted share, in 2011. The increase in 2012 income from continuing operations was driven by strong financial performance in both the Motorcycles and the Financial Services segments. Operating income from the Motorcycles segment was up $154.3 million over 2011 on a 6.2% increase in wholesale shipments of Harley-Davidson motorcycles, lower manufacturing costs and a decrease in restructuring expense. Operating income from the Financial Services segment was also up over the prior year, increasing $15.9 million, or 5.9%, driven primarily by a decrease in interest expense.
In 2012, worldwide independent dealer retail sales of new Harley-Davidson motorcycles grew 6.2% compared to 2011, including a 6.6% increase in the U.S. and a 5.6% increase in international markets. The Company believes the improvement in retail sales of new Harley-Davidson motorcycles reflects the strength of the Harley-Davidson brand and the appeal of model- year 2012 and 2013 products, worldwide dealer efforts and continued investment in growth opportunities around the world.
Please refer to the “Results of Operations 2012 Compared to 2011” for additional details concerning the results for 2012.
(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 “Risk Factors” in Item 1A and under “Cautionary Statements” in Item 7 of this report. 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 made only as of the date of the filing of this report (February 22, 2013), and the Company disclaims any obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances.
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Outlook(1)
On January 29, 2013 the Company announced the following expectations for 2013.
The Company expects to ship 259,000 to 264,000 Harley-Davidson motorcycles during 2013, with 71,000 to 76,000 Harley-Davidson motorcycles expected to ship in the first quarter of 2013. The 2013 shipment estimates take several factors into consideration, including new model-year 2013 and 2014 products, the continued success of outreach efforts in the U.S., the improved product availability in the U.S., continued expansion of the international distribution network and the strong appeal of the Harley-Davidson brand. At the same time, the Company remains cautious on the world economies, in particular in the U.S. and Europe.
Shipment expectations for the first quarter of 2013 reflect an increase of approximately 10% to 18% compared to the first quarter of 2012. This increase is expected to be supported by the new surge manufacturing capability launched at the York, Pennsylvania (York) facility at the start of 2013. The surge manufacturing capabilities at York will rely on a new seasonal workforce and will be supported by similar efforts at the Company's Wisconsin manufacturing facilities that supply York. The surge manufacturing capability is expected to enable the Company to increase manufacturing capacity in the first half of 2013 to more closely match retail demand. As a result, U.S. retail inventory is expected to increase by the end of the first quarter as dealers replenish inventory to prepare for the 2013 selling season.
The Company expects to implement surge manufacturing capabilities at its Kansas City, Missouri (Kansas City) facility in 2014. Consequently, the Company expects U.S. retail inventory to be slightly lower on a year over year basis at the end of 2013 as dealers more closely align inventory with the seasonal low point for retail sales in advance of the expected surge manufacturing capability at the Kansas City facility.
In addition, the Company expects full year 2013 gross margin to be between 35.25% and 36.25%. In 2013 gross margin is expected to be positively impacted by approximately $25 million in incremental restructuring savings, approximately $16 million less in temporary inefficiencies, a lower fixed cost per unit on higher production and higher pricing. To a lesser extent, gross margin is also expected to be favorably impacted by changes in product mix. However, these positive benefits are expected to be offset by unfavorable currency impacts due in part to less favorable hedge positions, higher pension expense and pressure on material costs.
The Company believes operating income from financial services in 2013 will be modestly lower than 2012 as the business benefited from $17 million in credit loss allowance releases which may not repeat in 2013. In addition, the Company expects changing consumer behavior, HDFS' funding of additional prudently structured loans in the near-prime and sub-prime segments and lower recoveries resulting from lower charge-offs in prior periods to result in modestly higher credit losses in 2013.
The Company’s capital expenditure estimates for 2013 are between $200 million and $220 million. The Company anticipates it will have the ability to fund all capital expenditures in 2013 with cash flows generated by operations.
The Company also announced on January 29, 2013 that it expects the full year 2013 effective income tax rate to be approximately 34.8% for continuing operations which includes the impact of the reinstatement of the Federal Research and Development tax credit with the enactment of the American Taxpayer Relief Act of 2012. 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.
Restructuring Activities(1)
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. The Company expects the transition of supply from New Castalloy to be complete in 2013. The decision to close New Castalloy comes as part of the Company’s overall long term strategy to develop world-class manufacturing capability throughout the Company by restructuring and consolidating operations for greater competitiveness, efficiency and flexibility. In connection with the 2011 New Castalloy restructuring plan, the Company will reduce its workforce by approximately 200 employees by the end of 2013.
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
26
at the Company’s Wisconsin facilities in September 2010 and its York facility in December 2009, and allows for similar flexibility, increased production efficiency and the addition of a flexible workforce component.
The 2011 Kansas City restructuring plan results in approximately 145 fewer full-time hourly unionized employees in its Kansas City facility than would be required under the previous contract.
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 York in December 2009 and allow for similar flexibility, increased production efficiency and the addition of a flexible workforce component.
The 2010 restructuring plan results in approximately 250 fewer full-time hourly unionized employees in its Milwaukee-area facilities than would be required under the previous contract and approximately 75 fewer full-time hourly unionized employees in its Tomahawk facility than would be required under the previous contract.
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 that were expected to be completed at various dates between 2009 and 2012. 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 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 results in a reduction of approximately 2,700 to 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.
Restructuring Costs and Savings
During 2012, the Company incurred $28.5 million in restructuring expense related to its combined restructuring plan activities. This is in addition to $455.8 million in restructuring and impairment expense incurred in prior years since its restructuring activities were initiated in 2009. On January 29, 2013, the Company provided an estimate for restructuring expenses related to its combined restructuring plan activities that it expects to incur from 2009 to 2013 of approximately $495 million which is within the range of expected cost of $490 million to $510 million that the Company previously provided. The Company continues to expect approximately 35% of the amounts to be non-cash. The estimated restructuring expense includes an estimate of $13 million in 2013, which was revised up from the previous estimate of $5 million to $10 million reflecting a shift in expected expense from 2012 to 2013.
The Company anticipates annual ongoing total savings from restructuring activities initiated since early 2009 of approximately $320 million upon completion of all announced restructuring activities. The Company has realized or estimates that it will realize cumulative savings from these restructuring activities, measured against 2008, as follows:
• | 2009 - $91 million (91% operating expense and 9% cost of sales) (actual); |
• | 2010 - $172 million (64% operating expense and 36% cost of sales) (actual); |
• | 2011 - $217 (51% operating expense and 49% cost of sales) (actual); |
• | 2012 - $280 million (42% operating expense and 58% cost of sales) (actual); |
• | 2013 - $305 million (approximately 40% operating expense and approximately 60% cost of sales) (estimated); |
• | Ongoing annually upon completion - $320 million (approximately 35% operating expense and approximately 65% cost of sales) (estimated). |
27
Results of Operations 2012 Compared to 2011
Consolidated Results
(in thousands, except earnings per share) | 2012 | 2011 | Increase (Decrease) | % Change | |||||||||||
Operating income from motorcycles & related products | $ | 715,489 | $ | 561,176 | $ | 154,313 | 27.5 | % | |||||||
Operating income from financial services | 284,687 | 268,791 | 15,896 | 5.9 | % | ||||||||||
Operating income | 1,000,176 | 829,967 | 170,209 | 20.5 | % | ||||||||||
Investment income | 7,369 | 7,963 | (594 | ) | (7.5 | )% | |||||||||
Interest expense | 46,033 | 45,266 | 767 | 1.7 | % | ||||||||||
Income before income taxes | 961,512 | 792,664 | 168,848 | 21.3 | % | ||||||||||
Provision for income taxes | 337,587 | 244,586 | 93,001 | 38.0 | % | ||||||||||
Income from continuing operations | 623,925 | 548,078 | 75,847 | 13.8 | % | ||||||||||
Income from discontinued operations, net of taxes | — | 51,036 | (51,036 | ) | NM | ||||||||||
Net income | $ | 623,925 | $ | 599,114 | $ | 24,811 | 4.1 | % | |||||||
Diluted earnings per share from continuing operations | $ | 2.72 | $ | 2.33 | $ | 0.39 | 16.7 | % | |||||||
Diluted earnings per share from discontinued operations | $ | — | $ | 0.22 | $ | (0.22 | ) | NM | |||||||
Diluted earnings per share | $ | 2.72 | $ | 2.55 | $ | 0.17 | 6.7 | % | |||||||
Operating income for the Motorcycles segment during 2012 improved by $154.3 million compared to 2011 driven by a 6.2% increase in motorcycle shipments, price increases, decreases in manufacturing costs and lower restructuring expenses compared to the prior year. Operating income for the Financial Services segment improved by $15.9 million during 2012 primarily due to lower interest expense. 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.
The effective income tax rate for 2012 was 35.1% compared to 30.9% for 2011. The lower 2011 effective tax rate was mainly driven by a change in the 2011 Wisconsin income tax law associated with certain net operating losses, the favorable settlement of an IRS audit and the impact of the federal Research and Development Tax Credit.
In 2011, the Company recognized a $51.0 million benefit on income from discontinued operations, driven by the reversal of tax amounts reserved in prior years related to the divestiture of the Company’s MV Agusta subsidiaries. The amounts had been reserved pending an agreement that the Company and the IRS reached on the tax treatment of the transaction in December 2011.
Diluted earnings per share from continuing operations was $2.72 in 2012, up 16.7% over 2011. The increase in diluted earnings per share was driven primarily by the 13.8% increase in income from continuing operations, but also benefited from lower diluted weighted average shares outstanding. Diluted weighted average share outstanding decreased from 234.9 million in 2011 to 229.2 million in 2012 driven by the Company's repurchase of common stock over the last two years. Please refer to "Liquidity and Capital Resources" for additional information concerning the Company's share repurchase activity.
28
Motorcycles and Related Products Segment
Harley-Davidson Motorcycle Retail Sales
Worldwide independent dealer retail sales of Harley-Davidson motorcycles increased 6.2% during 2012 compared to 2011. Retail sales of Harley-Davidson motorcycles increased 6.6% in the United States and 5.6% internationally in 2012. International retail sales as a percent of total retail sales were down slightly compared to 2011 reflecting the tough market conditions in Europe. International retail sales represented 35.3% and 35.5% of total retail sales in 2012 and 2011, respectively. Given the fact that the Company's European business was down in 2012 and the economic concerns that remain in Europe for the near term, the Company no longer believes it will meet its goal of international retail sales exceeding 40% of total retail sales by 2014. However, the Company continues to believe international retail sales will grow at a faster rate than domestic sales through 2014(1).
The following table includes retail unit sales of Harley-Davidson motorcycles:
Harley-Davidson Motorcycle Retail Sales(a)
Heavyweight (651+cc)
2012 | 2011 | Increase (Decrease) | % Change | |||||||||
North America Region | ||||||||||||
United States | 161,678 | 151,683 | 9,995 | 6.6 | % | |||||||
Canada | 10,573 | 10,502 | 71 | 0.7 | ||||||||
Total North America Region | 172,251 | 162,185 | 10,066 | 6.2 | ||||||||
Europe, Middle East and Africa Region (EMEA) | ||||||||||||
Europe(b) | 37,027 | 39,334 | (2,307 | ) | (5.9 | ) | ||||||
Other | 6,000 | 5,006 | 994 | 19.9 | ||||||||
Total EMEA Region | 43,027 | 44,340 | (1,313 | ) | (3.0 | ) | ||||||
Asia Pacific Region | ||||||||||||
Japan | 10,642 | 10,401 | 241 | 2.3 | ||||||||
Other | 13,839 | 11,015 | 2,824 | 25.6 | ||||||||
Total Asia Pacific Region | 24,481 | 21,416 | 3,065 | 14.3 | ||||||||
Latin America Region | 10,090 | 7,247 | 2,843 | 39.2 | ||||||||
Total Worldwide Retail Sales | 249,849 | 235,188 | 14,661 | 6.2 | % | |||||||
(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) | Data for Europe include Austria, Belgium, Denmark, Finland, France, Germany, Greece, Italy, Netherlands, Norway, Portugal, Spain, Sweden, Switzerland and the United Kingdom. |
The following table includes industry retail motorcycle registration data:
Heavyweight Motorcycle Registration Data(a)
2012 | 2011 | Increase (Decrease) | % Change | |||||||||
United States(b) | 281,974 | 271,029 | 10,945 | 4.0 | % | |||||||
Europe(c) | 268,299 | 292,533 | (24,234 | ) | (8.3 | )% | ||||||
(a) | Heavyweight data includes street legal 651+cc models. Street legal 651+cc models include on-highway and dual purpose models and three-wheeled vehicles. |
(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. Prior periods have been adjusted to include all dual purpose models that were previously excluded. |
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(c) | Europe data includes Austria, Belgium, Denmark, Finland, France, Germany, Greece, Italy, Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, and the United Kingdom. Industry retail motorcycle registration data includes 651+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. |
Motorcycle Unit Shipments
The following table includes wholesale motorcycle unit shipments for the Motorcycles segment:
2012 | 2011 | Increase | % Change | |||||||||||||||
United States | 160,477 | 64.8 | % | 152,180 | 65.3 | % | 8,297 | 5.5 | % | |||||||||
International | 87,148 | 35.2 | % | 80,937 | 34.7 | % | 6,211 | 7.7 | ||||||||||
Harley-Davidson motorcycle units | 247,625 | 100.0 | % | 233,117 | 100.0 | % | 14,508 | 6.2 | % | |||||||||
Touring motorcycle units | 99,496 | 40.2 | % | 92,002 | 39.5 | % | 7,494 | 8.1 | % | |||||||||
Custom motorcycle units* | 96,425 | 38.9 | % | 91,459 | 39.2 | % | 4,966 | 5.4 | ||||||||||
Sportster motorcycle units | 51,704 | 20.9 | % | 49,656 | 21.3 | % | 2,048 | 4.1 | ||||||||||
Harley-Davidson motorcycle units | 247,625 | 100.0 | % | 233,117 | 100.0 | % | 14,508 | 6.2 | % | |||||||||
* | Custom motorcycle units, as used in this table, include Dyna, Softail, V-Rod and CVO models. |
During 2012, wholesale shipments of Harley-Davidson motorcycles were up 6.2% compared to the prior year and within the Company’s most recent expected shipment range of 245,000 to 250,000 motorcycles. As expected, wholesale motorcycle shipments in the fourth quarter of 2012 were down compared to the fourth quarter of 2011 in advance of the launch of seasonal surge manufacturing at the Company's York facility in early 2013. Consequently, retail inventory in the U.S. was approximately 1,200 units lower than at the end of 2011.
Segment Results
The following table includes the condensed statement of operations for the Motorcycles segment (in thousands):
2012 | 2011 | (Decrease) Increase | % Change | ||||||||||||
Revenue: | |||||||||||||||
Motorcycles | $ | 3,764,794 | $ | 3,554,547 | $ | 210,247 | 5.9 | % | |||||||
Parts & Accessories | 859,945 | 816,569 | 43,376 | 5.3 | |||||||||||
General Merchandise | 299,403 | 274,124 | 25,279 | 9.2 | |||||||||||
Other | 18,440 | 17,024 | 1,416 | 8.3 | |||||||||||
Total revenue | 4,942,582 | 4,662,264 | 280,318 | 6.0 | |||||||||||
Cost of goods sold | 3,222,394 | 3,106,288 | 116,106 | 3.7 | |||||||||||
Gross profit | 1,720,188 | 1,555,976 | 164,212 | 10.6 | |||||||||||
Selling & administrative expense | 846,894 | 788,565 | 58,329 | 7.4 | |||||||||||
Engineering expense | 129,330 | 138,243 | (8,913 | ) | (6.4 | ) | |||||||||
Restructuring expense | 28,475 | 67,992 | (39,517 | ) | (58.1 | ) | |||||||||
Operating expense | 1,004,699 | 994,800 | 9,899 | 1.0 | |||||||||||
Operating income from motorcycles | $ | 715,489 | $ | 561,176 | $ | 154,313 | 27.5 | % | |||||||
30
The following table includes the estimated impact of the significant factors affecting the comparability of net revenue, cost of goods sold and gross profit from 2011 to 2012 (in millions):
Net Revenue | Cost of Goods Sold | Gross Profit | ||||||||||
2011 | $ | 4,662 | $ | 3,106 | $ | 1,556 | ||||||
Volume | 293 | 197 | 96 | |||||||||
Price | 30 | — | 30 | |||||||||
Foreign currency exchange rates and hedging | (76 | ) | (59 | ) | (17 | ) | ||||||
Shipment mix | 34 | 29 | 5 | |||||||||
Raw material prices | — | (7 | ) | 7 | ||||||||
Manufacturing costs | — | (43 | ) | 43 | ||||||||
Total | 281 | 117 | 164 | |||||||||
2012 | $ | 4,943 | $ | 3,223 | $ | 1,720 | ||||||
The following factors affected the comparability of net revenue, cost of goods sold and gross profit from 2011 to 2012:
• | Volume increases were driven by the increase in wholesale shipments of motorcycle units as well as higher sales volumes for Parts & Accessories and General Merchandise. |
• | On average, wholesale prices on the Company’s 2012 and 2013 model year motorcycles are higher than the preceding model years resulting in the favorable impact on revenue and gross profit during the period. |
• | Foreign currency exchange rates during 2012 resulted in a negative impact on net revenue, which was partially offset by the favorable impact of gains associated with foreign currency hedging included in cost of goods sold. |
• | Shipment mix changes resulted primarily from favorable product mix changes between motorcycle families. |
• | Raw material prices were lower in 2012 relative to 2011 primarily due to lower metal costs. |
• | Manufacturing costs were favorably impacted by savings related to restructuring initiatives. Temporary inefficiencies associated with the Company’s restructuring and transformation at its York facility were $33 million in 2012 compared to $32 million in 2011. |
The net increase in operating expense was primarily due to incremental investments to support the Company’s growth initiatives and increases in employee costs including pension. These cost increases were partially offset by lower restructuring expense related to the Company’s previously announced restructuring activities as well as lower engineering expense. For further information regarding the Company’s previously announced 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):
2012 | 2011 | Increase (Decrease) | % Change | ||||||||||||
Interest income | $ | 583,700 | $ | 598,675 | $ | (14,975 | ) | (2.5 | )% | ||||||
Other income | 54,224 | 50,774 | 3,450 | 6.8 | |||||||||||
Financial services revenue | 637,924 | 649,449 | (11,525 | ) | (1.8 | ) | |||||||||
Interest expense | 195,990 | 229,492 | (33,502 | ) | (14.6 | ) | |||||||||
Provision for credit losses | 22,239 | 17,031 | 5,208 | 30.6 | |||||||||||
Operating expenses | 135,008 | 134,135 | 873 | 0.7 | |||||||||||
Financial services expense | 353,237 | 380,658 | (27,421 | ) | (7.2 | ) | |||||||||
Operating income from financial services | $ | 284,687 | $ | 268,791 | $ | 15,896 | 5.9 | % | |||||||
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Interest income decreased during 2012 primarily due to lower average retail finance receivables outstanding. Interest expense benefited from lower debt levels related to lower average retail finance receivables outstanding, a more favorable cost of funds, and a $5.3 million lower loss on the extinguishment of medium-term notes as compared to 2011.
The provision for credit losses was unfavorable by $5.2 million in 2012 as compared to 2011. The retail motorcycle provision increased by $6.6 million on smaller allowance releases during 2012 as compared to 2011, although both years experienced favorable credit performance. The provision for credit losses related to wholesale motorcycle finance receivables increased by $3.0 million in 2012 primarily due to larger dealer performance-related allowance releases in 2011 as compared to 2012. The wholesale and retail motorcycle provision increases were offset by decreases in the provision for credit losses related to other retail receivables.
Annual losses on HDFS’ retail motorcycle loans were 0.79% during 2012 compared to 1.20% in 2011. The decrease in credit losses from 2011 resulted from changes in underwriting and collections, as well as a lower frequency of loss. The 30-day delinquency rate for retail motorcycle loans at December 31, 2012 increased to 3.94% from 3.85% at December 31, 2011. HDFS has not experienced a year-end 30-day delinquency rate below 4.50% in over ten years and believes the credit quality of its retail portfolio will remain strong in 2013(1).
Changes in the allowance for credit losses on finance receivables were as follows (in thousands):
2012 | 2011 | |||||||
Balance, beginning of period | $ | 125,449 | $ | 173,589 | ||||
Provision for credit losses | 22,239 | 17,031 | ||||||
Charge-offs, net of recoveries | (40,021 | ) | (65,171 | ) | ||||
Balance, end of period | $ | 107,667 | $ | 125,449 | ||||
At December 31, 2012, the allowance for credit losses on finance receivables was $101.4 million for retail receivables and $6.2 million for wholesale receivables. At December 31, 2011, the allowance for credit losses on finance receivables was $116.1 million for retail receivables and $9.3 million for wholesale receivables.
HDFS’ periodic evaluation of the adequacy of the allowance for credit losses on finance receivables is generally based on HDFS’ past loan loss experience, known and inherent risks in the portfolio, current economic conditions and the estimated value of any underlying collateral. Please refer to Note 6 of Notes to Consolidated Financial Statements for further discussion regarding the Company’s allowance for credit losses on finance receivables.
32
Results of Operations 2011 Compared to 2010
Consolidated Results
(in thousands, except earnings per share) | 2011 | 2010 | Increase (Decrease) | % Change | |||||||||||
Operating income from motorcycles & related products | $ | 561,176 | $ | 378,758 | $ | 182,418 | 48.2 | % | |||||||
Operating income from financial services | 268,791 | 181,873 | 86,918 | 47.8 | |||||||||||
Operating income | 829,967 | 560,631 | 269,336 | 48.0 | |||||||||||
Investment income | 7,963 | 5,442 | 2,521 | 46.3 | |||||||||||
Interest expense | 45,266 | 90,357 | (45,091 | ) | (49.9 | ) | |||||||||
Loss on debt extinguishment | — | 85,247 | (85,247 | ) | NM | ||||||||||
Income before income taxes | 792,664 | 390,469 | 402,195 | 103.0 | |||||||||||
Provision for income taxes | 244,586 | 130,800 | 113,786 | 87.0 | |||||||||||
Income from continuing operations | 548,078 | 259,669 | 288,409 | 111.1 | |||||||||||
Income (loss) from discontinued operations, net of taxes | 51,036 | (113,124 | ) | 164,160 | (145.1 | ) | |||||||||
Net income | $ | 599,114 | $ | 146,545 | $ | 452,569 | 308.8 | % | |||||||
Diluted earnings per share from continuing operations | $ | 2.33 | $ | 1.11 | $ | 1.22 | 109.9 | % | |||||||
Diluted earnings (loss) per share from discontinued operations | $ | 0.22 | $ | (0.48 | ) | $ | 0.70 | (145.8 | )% | ||||||
Diluted earnings per share | $ | 2.55 | $ | 0.62 | $ | 1.93 | 311.3 | % | |||||||
Operating income for the Motorcycles segment during 2011 improved by $182.4 million compared to 2010 primarily due to increased motorcycle shipments and lower spending on the Company’s ongoing restructuring activities. Operating income for the Financial Services segment improved by $86.9 million during 2011 primarily due to improved credit performance in the retail motorcycle finance receivable portfolio. 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 for 2011 related to the Company’s senior unsecured notes, was approximately $45 million lower than in 2010. The decrease in interest expense on the senior unsecured notes is due to the Company’s repurchase of $297.0 million of the $600.0 million senior unsecured notes during the fourth quarter of 2010.
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. As a result of the transaction, the Company incurred a loss on debt extinguishment of $85.2 million which also includes $1.4 million of capitalized debt issuance costs that were written-off. The Company used cash on hand for the repurchase and the repurchased notes were canceled.
The effective income tax rate for 2011 was 30.9% compared to 33.5% for 2010. The lower 2011 effective tax rate was mainly driven by a change in the 2011 Wisconsin income tax law associated with certain net operating losses and a one-time tax charge in 2010 associated with the federal healthcare legislation.
In 2011, the Company recognized a $51.0 million benefit on income from discontinued operations, driven by the reversal of tax amounts reserved in prior years related to the divestiture of the Company’s MV Agusta subsidiaries. The amounts had been reserved pending an agreement that was reached by the Company and the IRS on the tax treatment of the transaction in December 2011. This compares to a $113.1 million loss from discontinued operations in 2010 due primarily to impairment charges related to a decrease in the fair value of MV Agusta.
Motorcycles and Related Products Segment
Harley-Davidson Motorcycle Retail Sales
Worldwide independent dealer retail sales of Harley-Davidson motorcycles increased 5.9% during 2011 compared to 2010. Retail sales of Harley-Davidson motorcycles increased 5.8% in the United States and 6.1% internationally in 2011. The following table includes retail unit sales of Harley-Davidson motorcycles:
33
Harley-Davidson Motorcycle Retail Sales(a)
Heavyweight (651+cc)
2011 | 2010 | Increase (Decrease) | % Change | |||||||||
North America Region | ||||||||||||
United States | 151,683 | 143,391 | 8,292 | 5.8 | % | |||||||
Canada | 10,502 | 10,376 | 126 | 1.2 | ||||||||
Total North America Region | 162,185 | 153,767 | 8,418 | 5.5 | ||||||||
Europe, Middle East and Africa Region (EMEA) | ||||||||||||
Europe(b) | 39,334 | 37,378 | 1,956 | 5.2 | ||||||||
Other | 5,006 | 3,810 | 1,196 | 31.4 | ||||||||
Total EMEA Region | 44,340 | 41,188 | 3,152 | 7.7 | ||||||||
Asia Pacific Region | ||||||||||||
Japan | 10,401 | 11,405 | (1,004 | ) | (8.8 | ) | ||||||
Other | 11,015 | 9,582 | 1,433 | 15.0 | ||||||||
Total Asia Pacific Region | 21,416 | 20,987 | 429 | 2.0 | ||||||||
Latin America Region | 7,247 | 6,168 | 1,079 | 17.5 | ||||||||
Total Worldwide Retail Sales | 235,188 | 222,110 | 13,078 | 5.9 | % | |||||||
(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) | Data for Europe include Austria, Belgium, Denmark, Finland, France, Germany, Greece, Italy, Netherlands, Norway, Portugal, Spain, Sweden, Switzerland and the United Kingdom. |
The following table includes industry retail motorcycle registration data:
Heavyweight Motorcycle Registration Data(a)
2011 | 2010 | Increase (Decrease) | % Change | |||||||||
United States(b) | 271,029 | 259,733 | 11,296 | 4.3 | % | |||||||
Europe(c) | 292,533 | 301,321 | (8,788 | ) | (2.9 | )% | ||||||
(a) | Heavyweight data includes street legal 651+cc models. Street legal 651+cc models include on-highway and dual purpose models and three-wheeled vehicles. |
(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. Prior periods have been adjusted to include all dual purpose models that were previously excluded. |
(c) | Europe data includes Austria, Belgium, Denmark, Finland, France, Germany, Greece, Italy, Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, and the United Kingdom. Industry retail motorcycle registration data includes 651+cc models derived from information provided by Association des Constructeurs Europeens de Motocycles (ACEM), an independent agency. Europe market data is reported on a one-month lag. This third-party data is subject to revision and update. |
34
Motorcycle Unit Shipments
The following table includes wholesale motorcycle unit shipments for the Motorcycles segment:
2011 | 2010 | Increase(Decrease) | % Change | |||||||||||||||
United States | 152,180 | 65.3 | % | 131,636 | 62.5 | % | 20,544 | 15.6 | % | |||||||||
International | 80,937 | 34.7 | % | 78,858 | 37.5 | % | 2,079 | 2.6 | ||||||||||
Harley-Davidson motorcycle units | 233,117 | 100.0 | % | 210,494 | 100.0 | % | 22,623 | 10.7 | % | |||||||||
Touring motorcycle units | 92,002 | 39.5 | % | 81,927 | 38.9 | % | 10,075 | 12.3 | % | |||||||||
Custom motorcycle units* | 91,459 | 39.2 | % | 87,158 | 41.4 | % | 4,301 | 4.9 | ||||||||||
Sportster motorcycle units | 49,656 | 21.3 | % | 41,409 | 19.7 | % | 8,247 | 19.9 | ||||||||||
Harley-Davidson motorcycle units | 233,117 | 100.0 | % | 210,494 | 100.0 | % | 22,623 | 10.7 | % | |||||||||
Buell motorcycle units | 274 | 2,614 | (2,340 | ) | (89.5 | )% | ||||||||||||
* | Custom motorcycle units, as used in this table, include Dyna, Softail, V-Rod and CVO models. |
During 2011, wholesale shipments of Harley-Davidson motorcycles were up 10.7% compared to the prior year. Temporary production constraints resulting from restructuring efforts at the Company’s York facility that impacted its production for 2011 eased during the fourth quarter of 2011, allowing a slightly higher mix of Touring motorcycles compared to the prior year. Sportster shipment mix was also higher than in 2010 and near the high end of the historical range of 18% to 22% due to strong retail demand for Sportster models.
Segment Results
The following table includes the condensed statement of operations for the Motorcycles segment (in thousands):
2011 | 2010 | Increase (Decrease) | % Change | ||||||||||||
Revenue: | |||||||||||||||
Harley-Davidson motorcycles | $ | 3,553,291 | $ | 3,136,987 | $ | 416,304 | 13.3 | % | |||||||
Buell motorcycles | 1,256 | 16,280 | (15,024 | ) | (92.3 | ) | |||||||||
Parts & Accessories | 816,569 | 749,240 | 67,329 | 9.0 | |||||||||||
General Merchandise | 274,124 | 259,125 | 14,999 | 5.8 | |||||||||||
Other | 17,024 | 14,995 | 2,029 | 13.5 | |||||||||||
Total revenue | 4,662,264 | 4,176,627 | 485,637 | 11.6 | |||||||||||
Cost of goods sold | 3,106,288 | 2,749,224 | 357,064 | 13.0 | |||||||||||
Gross profit | 1,555,976 | 1,427,403 | 128,573 | 9.0 | |||||||||||
Selling & administrative expense | 788,565 | 756,177 | 32,388 | 4.3 | |||||||||||
Engineering expense | 138,243 | 128,960 | 9,283 | 7.2 | |||||||||||
Restructuring expense | 67,992 | 163,508 | (95,516 | ) | (58.4 | ) | |||||||||
Operating expense | 994,800 | 1,048,645 | (53,845 | ) | (5.1 | ) | |||||||||
Operating income from motorcycles | $ | 561,176 | $ | 378,758 | $ | 182,418 | 48.2 | % | |||||||
35
The following table includes the estimated impact of the significant factors affecting the comparability of net revenue, cost of goods sold and gross profit from 2010 to 2011 (in millions):
Net Revenue | Cost of Goods Sold | Gross Profit | ||||||||||
2010 | $ | 4,177 | $ | 2,749 | $ | 1,428 | ||||||
Volume | 365 | 250 | 115 | |||||||||
Price | 15 | — | 15 | |||||||||
Foreign currency exchange rates and hedging | 89 | 84 | 5 | |||||||||
Shipment mix | 16 | 15 | 1 | |||||||||
Raw material prices | — | 32 | (32 | ) | ||||||||
Manufacturing costs | — | (24 | ) | 24 | ||||||||
Total | 485 | 357 | 128 | |||||||||
2011 | $ | 4,662 | $ | 3,106 | $ | 1,556 | ||||||
The following factors affected the comparability of net revenue, cost of goods sold and gross profit from 2010 to 2011:
• | Volume increases were driven by the 10.7% increase in wholesale shipments of Harley-Davidson motorcycle units as well as higher sales volumes for Parts & Accessories and General Merchandise. |
• | On average, wholesale prices on the Company’s 2012 model year motorcycles are higher than the prior model year resulting in the favorable impact on revenue and gross profit during the period. |
• | Foreign currency exchange rates during 2011 relative to 2010 resulted in a positive impact on net revenue. Gains and losses associated with the revaluation of foreign-denominated assets and liabilities and foreign currency hedging (included in cost of goods sold) were unfavorable when compared to 2010 which offset the majority of the positive impact of currency included in net revenue. |
• | Shipment mix changes positively impacted net revenue and resulted primarily from product mix changes both between and within the Company’s motorcycle families. However, the impact of these mix changes on cost of goods sold mostly offset the benefits included in revenue. |
• | Raw material prices were higher in 2011 relative to 2010 due to increased metals and fuel costs. |
• | Manufacturing costs were favorably impacted by savings related to restructuring and continuous improvement initiatives, partially offset by temporary inefficiencies associated with the Company’s restructuring and transformation at its York facility. During 2011, the Company experienced $32 million in temporary inefficiencies compared to $9 million in 2010. |
The increase in selling, administrative and engineering expense was primarily due to increased spending on growth initiatives and higher recall expenses offset by savings realized from the Company’s restructuring efforts and continuous improvement initiatives. In addition, during 2010 the Company incurred approximately $15 million of non-recurring costs in connection with the Company’s efforts to expand its presence in Brazil. Restructuring expense was lower in 2011 than in 2010. For further information regarding the Company’s previously announced 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):
36
2011 | 2010 | Increase (Decrease) | % Change | ||||||||||||
Interest income | $ | 598,675 | $ | 635,207 | $ | (36,532 | ) | (5.8 | )% | ||||||
Other income | 50,774 | 47,502 | 3,272 | 6.9 | |||||||||||
Financial services revenue | 649,449 | 682,709 | (33,260 | ) | (4.9 | ) | |||||||||
Interest expense | 229,492 | 272,484 | (42,992 | ) | (15.8 | ) | |||||||||
Provision for credit losses | 17,031 | 93,118 | (76,087 | ) | (81.7 | ) | |||||||||
Operating expenses | 134,135 | 135,234 | (1,099 | ) | (0.8 | ) | |||||||||
Financial services expense | 380,658 | 500,836 | (120,178 | ) | (24.0 | ) | |||||||||
Operating income from financial services | $ | 268,791 | $ | 181,873 | $ | 86,918 | 47.8 | % | |||||||
Interest income decreased during 2011 due to lower average retail and wholesale finance receivables outstanding. Interest expense benefited from lower debt levels related to lower average retail and wholesale finance receivables outstanding and a more favorable cost of funds, partially offset by a $9.6 million loss on the extinguishment of debt.
The provision for credit losses related to retail motorcycle and wholesale receivables decreased by $70.1 million and $7.1 million, respectively, in 2011 compared to 2010. The decrease in the provision for retail motorcycle credit losses was primarily driven by favorable finance receivable credit loss performance. The decrease in provision for wholesale credit losses was primarily due to favorable finance receivable performance.
Annual losses on HDFS’ retail motorcycle loans were 1.20% during 2011 compared to 2.11% in 2010. The decrease in credit losses from 2010 was due to a lower frequency of loss and a modest improvement in the recovery values of repossessed motorcycles. The 30-day delinquency rate for retail motorcycle loans at December 31, 2011 decreased to 3.85% from 5.07 % at December 31, 2010.