Harley-Davidson, Inc. — Form 10-Q Summary
Business context and reporting period
Harley-Davidson reported results for the quarter and six months ended June 27, 2021, compared with the periods ended June 28, 2020. The company operates through Motorcycles and Related Products and Financial Services. Results for the prior-year period were materially affected by COVID-19-related manufacturing disruptions and weaker economic conditions.
Key financial metrics
| Metric | Three months ended June 27, 2021 | Three months ended June 28, 2020 | Six months ended June 27, 2021 | Six months ended June 28, 2020 |
|---|---|---|---|---|
| Revenue | $1.532 billion | $865.2 million | $2.955 billion | $2.163 billion |
| Operating income (loss) | $280.4 million | $(116.1) million | $626.5 million | $(8.6) million |
| Net income (loss) | $206.3 million | $(92.2) million | $465.5 million | $(22.5) million |
| Diluted EPS | $1.33 | $(0.60) | $3.01 | $(0.15) |
| Operating cash flow | Not separately provided | Not separately provided | $644.3 million | $610.2 million |
Second-quarter revenue increased 77.1%, while first-half revenue increased 36.6%. Second-quarter operating margin was approximately 18.3%, compared with a negative 13.4% in the prior-year quarter; first-half operating margin was approximately 21.2%, compared with negative 0.4%.
- Motorcycles revenue was $1.332 billion in the second quarter and $2.564 billion for the first half. Motorcycles segment operating income was $185.8 million and $413.4 million, respectively, with operating margins of 14.0% and 16.1%.
- Financial Services revenue was $200.6 million in the second quarter and $391.0 million for the first half. Segment operating income was $94.5 million and $213.2 million, respectively.
- Worldwide motorcycle wholesale shipments increased 99.8% to 56,668 units in the second quarter and 37.0% to 111,478 units for the first half.
- Worldwide retail sales increased 23.8% in the second quarter and 17.6% for the first half. U.S. second-quarter retail sales increased 42.8%, while EMEA, Asia Pacific and Latin America declined.
- Financial Services provision for credit losses was $16.2 million in the second quarter versus $91.2 million in the prior-year quarter, and was a $6.3 million benefit for the first half versus a $170.6 million provision in the prior-year period.
- Retail motorcycle loan annualized credit losses were 0.84% for the first half versus 1.87% in the prior-year period. The 30-day delinquency rate was 2.21% at June 27, 2021, versus 1.75% at June 28, 2020.
Liquidity, debt and capital allocation
- Cash and cash equivalents were $1.742 billion at June 27, 2021, down from $3.257 billion at December 31, 2020 and $3.857 billion at June 28, 2020.
- Total cash, cash equivalents and restricted cash were $1.915 billion at quarter-end. Management reported approximately $3.030 billion of available liquidity, including cash and availability under credit and conduit facilities.
- Total outstanding debt was $7.076 billion, compared with $10.222 billion a year earlier. Net deposits were $259.4 million versus $18.0 million a year earlier.
- Net cash used in financing activities was $1.746 billion in the first half, primarily reflecting debt repayments. Capital expenditures were $37.6 million; full-year capital expenditures were expected to be $190 million to $220 million.
- The company paid $46.2 million of dividends in the first half, or $0.30 per share. Share repurchases were limited to $10.9 million of employee tax-withholding-related share acquisitions; no discretionary repurchases occurred.
- The company remained in compliance with applicable financial covenants. Its U.S. asset-backed commercial paper conduit facility expires November 19, 2021, and the Canadian facility expires June 27, 2022; management expects the facilities to be renewed before expiration.
Material changes versus the prior comparable period
- Results improved sharply as manufacturing resumed and motorcycle shipments increased from COVID-19-depressed 2020 levels.
- Motorcycles profitability benefited from higher volume, favorable product mix, lower sales incentives, restructuring savings and lower fixed cost per unit. These benefits were partly offset by raw-material inflation, supply-chain costs and tariffs.
- Financial Services profitability improved primarily because of lower credit-loss provisions, lower funding costs and lower average debt.
- Finance receivables, net increased to $6.889 billion from $6.443 billion at December 31, 2020, while the allowance for credit losses declined to $358.8 million from $390.9 million.
- Restructuring expense declined to $0.6 million for the first half from $41.9 million. Cumulative restructuring expense since inception was $130.6 million; total expected expense remained approximately $150 million, with approximately $20 million expected in 2021 and estimated annual ongoing gross savings of approximately $115 million.
Guidance, outlook, risks and unusual items
- For 2021, management maintained Motorcycles segment revenue growth guidance of 30% to 35% over 2020 and updated Motorcycles operating-margin guidance to 6% to 8%, including the expected impact of EU tariffs.
- Financial Services segment operating income growth guidance was increased to 75% to 85% over 2020, from the prior 50% to 60% range.
- Management expects second-half Motorcycles revenue and margin to be lower than in the first half. The second-half Motorcycles operating margin was expected to be in the negative mid-single digits, assuming EU tariffs are not materially mitigated.
- Additional EU tariffs resulting from revocation of the company’s Binding Origin Information rulings were estimated to cost approximately $80 million in 2021 if unmitigated, including approximately $19 million recognized in the first half. The tariff rate was 31% and could increase to 56% in December 2021 if the U.S. and EU do not resolve the matter.
- The company’s application for temporary continued reliance on the 6% tariff rate was rejected on July 30, 2021. The company plans to appeal and continues to appeal the BOI revocation, but success is uncertain.
- COVID-19-related supply-chain and logistics disruptions, raw-material and freight inflation, international lockdowns, low dealer inventory, and potential changes in consumer demand remain significant risks. The company implemented an approximately 2% surcharge on select U.S. models beginning July 1, 2021.
- Management noted that unusually favorable credit performance benefited from stimulus programs, payment extensions and strong used-motorcycle values; credit losses and delinquencies may normalize or increase as those benefits fade.
- Other contingencies include environmental remediation at the York, Pennsylvania facility, product-liability matters, recall obligations and $52.3 million of unrecognized tax benefits plus $26.7 million of related interest and penalties.
Important facts for investors to verify
- Whether the EU tariff rate increases to 56% in December 2021 and whether the company’s appeals or mitigation actions succeed.
- Whether supply-chain, freight and raw-material inflation persists and offsets restructuring savings or pricing actions.
- Whether favorable HDFS credit performance continues after stimulus and pandemic-related payment extensions diminish.
- The renewal and availability terms of the U.S. and Canadian asset-backed commercial paper facilities.
- Whether second-half motorcycle shipments, dealer inventory and international retail demand support the company’s full-year guidance.
- The timing and cash impact of remaining restructuring costs, debt maturities and planned capital expenditures.