Harley-Davidson, Inc. Form 10-Q Summary
Reporting period: Quarter and six months ended June 26, 2022, compared with periods ended June 27, 2021. The filing covers Motorcycles and Related Products and Financial Services. Financial statements are unaudited.
Financial Performance and Position
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $1.469 billion | $1.532 billion | $2.964 billion | $2.955 billion |
| Operating income | $277.6 million | $280.4 million | $566.8 million | $626.5 million |
| Net income | $215.8 million | $206.3 million | $438.4 million | $465.5 million |
| Diluted EPS | $1.46 | $1.33 | $2.91 | $3.01 |
| Operating margin | 18.9% | 18.3% | 19.1% | 21.2% |
Q2 net income increased 4.6% and diluted EPS increased 9.8%, helped by favorable discrete tax benefits and lower diluted shares outstanding. The six-month effective tax rate was 22.7%, versus 24.5% in 2021; Q2 rates were 21.9% and 25.3%, respectively.
- Motorcycles: Q2 revenue declined 4.9% to $1.266 billion, while operating income increased 3.2% to $191.7 million and operating margin improved to 15.1% from 14.0%. Price increases and lower operating expenses offset lower shipment volumes, supply-chain costs and unfavorable foreign exchange.
- Financial Services: Q2 revenue increased 1.0% to $202.6 million, but operating income declined 9.1% to $85.9 million, primarily because the provision for credit losses increased 79.8% to $29.1 million. Six-month operating income declined 19.2% to $172.3 million.
- Retail demand and shipments: Worldwide Q2 retail sales declined 22.7%, including a 28.9% decline in the United States. Worldwide motorcycle shipments declined 15.0% to 48,168 units. Low dealer inventories and a roughly two-week production and shipment suspension affected results.
- Cash flow: Six-month operating cash flow was $244.2 million, down from $644.3 million. Investing cash flow was an outflow of $493.5 million, including $55.0 million of capital expenditures and a net $439.2 million cash outflow related to finance receivables. Financing activities provided $684.9 million.
- Liquidity: Cash and cash equivalents were $2.194 billion at June 26, 2022. Cash, together with availability under credit and conduit facilities, totaled approximately $3.532 billion. Management targets liquidity covering at least 12 months of projected needs.
- Debt: Total outstanding debt was $7.793 billion, compared with $7.076 billion a year earlier; brokered certificates of deposit were $345.8 million. Debt increased primarily because of asset-backed securitization and conduit borrowings. The Company remained in compliance with applicable financial covenants.
- Capital allocation: Six-month dividends were $47.1 million and share repurchases were $325.8 million, including $312.1 million for discretionary repurchases. Approximately 10.3 million shares remained authorized for repurchase at June 26, 2022.
Material Changes Versus the Prior Comparable Period
- Six-month revenue was broadly stable, but operating income declined 9.5% and net income declined 5.8% because of lower Motorcycle profitability and substantially higher Financial Services credit-loss provisions.
- Financial Services recorded a $58.0 million credit-loss provision in the first half of 2022, compared with a $6.3 million benefit in the prior-year period. Retail annualized credit losses were 1.40% in Q2 2022 versus 0.84% in Q2 2021, and 30-day delinquencies increased to 2.95% from 2.21%.
- Motorcycle operating performance benefited from pricing and cost discipline but was pressured by lower volume, supply-chain inflation, foreign exchange and product mix. Six-month Motorcycle operating margin declined to 15.4% from 16.1%.
- Inventory increased to $726.6 million from $457.6 million a year earlier, reflecting supply-chain conditions and motorcycles awaiting components.
- The Company issued $500.0 million of 3.05% medium-term notes due 2027, completed $1.827 billion of asset-backed securitization borrowings and repaid $950.0 million of medium-term notes during the first half.
Guidance, Outlook, Risks and Unusual Items
- For 2022, management continued to forecast Motorcycle segment revenue growth of 5% to 10%, an operating margin of 11% to 12%, Financial Services operating-income decline of 20% to 25%, and capital investments of $190 million to $220 million.
- Management expects second-half Motorcycle revenue growth in the low- to mid-double digits and operating margin in the mid- to high-single digits, assuming lost production and wholesale shipments are recovered.
- Supply-chain inflation is expected to remain a headwind in the second half, although management expects logistics and raw-material inflation to improve from peak 2021 levels. The Company expects pricing and the suspension of additional EU tariffs to support margins.
- A supplier regulatory-compliance matter caused an approximately two-week suspension of vehicle assembly and shipments, excluding LiveWire. The Company did not expect material additional costs or recall expenses but stated that potential costs could not yet be reasonably estimated.
- The proposed LiveWire transaction with AEA-Bridges Impact Corp. was expected to close at the beginning of the fourth fiscal quarter, subject to shareholder approval and other conditions. Harley-Davidson expected to retain control and continue consolidating LiveWire.
- Key risks include supply-chain and semiconductor shortages, inflation, recession and consumer demand, rising credit losses, funding costs and capital-market access, foreign exchange and interest rates, tariffs after December 31, 2023, the conflict in Ukraine, COVID-19 disruptions, product liability or recalls, dealer financial condition and execution of the LiveWire strategy.
- The Company suspended its business in Russia. It reported no material disruption from the Ukraine conflict at the filing date but warned that future effects could be significant and unpredictable.
Investor Verification Checklist
- Verify whether the Company recovered the production and wholesale shipments lost during the Q2 suspension and achieved the 2022 Motorcycle revenue and margin guidance.
- Monitor retail motorcycle inventories, U.S. market share, shipment volumes and the effect of pricing on demand and margins.
- Track Financial Services delinquencies, charge-offs, annualized credit losses and allowance adequacy as economic conditions normalize.
- Review refinancing and renewal of the $900 million U.S. conduit facility, which had an expiration date of November 18, 2022, and other near-term debt maturities.
- Assess liquidity, funding costs, credit ratings and compliance with financial covenants as Financial Services debt and receivables grow.
- Confirm the timing, financing, shareholder approvals and continuing-control accounting for the LiveWire transaction.
- Follow developments concerning the supplier compliance matter, potential recalls, EU tariff negotiations and related contingencies.