HARLEY-DAVIDSON, INC. quarterly report, Q1 FY2022

Harley-Davidson, Inc. Form 10-Q Summary

Reporting period: Three months ended March 27, 2022, compared with the three months ended March 28, 2021. The unaudited filing covers Harley-Davidson Motor Company and Harley-Davidson Financial Services, reported in two segments: Motorcycles and Related Products and Financial Services.

Key Financial Metrics

Metric	Q1 2022	Q1 2021	Change
Total revenue	$1.495 billion	$1.423 billion	Up 5.1%
Operating income	$289.2 million	$346.2 million	Down 16.4%
Net income	$222.5 million	$259.1 million	Down 14.1%
Diluted EPS	$1.45	$1.68	Down 13.7%
Operating cash flow	$139.3 million	$162.8 million	Down $23.5 million
Capital expenditures	$28.0 million	$18.8 million	Up $9.2 million
Cash, cash equivalents and restricted cash	$1.558 billion	$2.527 billion	Down $969.2 million

Revenue and Profitability

Motorcycles and Related Products revenue increased 5.8% to $1.303 billion, including motorcycle revenue of $1.059 billion, parts and accessories revenue of $165.5 million, and apparel revenue of $51.4 million.
Financial Services revenue increased 0.8% to $192.0 million, supported by higher average finance receivables but partly offset by a lower average yield.
Consolidated operating margin was approximately 19.3%, compared with approximately 24.3% in the prior-year quarter.
Motorcycles segment operating income declined 10.8% to $202.9 million; segment operating margin fell to 15.6% from 18.5%.
Financial Services operating income declined 27.2% to $86.4 million, primarily because the prior-year period benefited from a $22.5 million credit-loss provision benefit, whereas Q1 2022 included a $28.8 million provision.
The effective tax rate was 23.4%, compared with 23.8% in Q1 2021.

Cash Flow, Balance Sheet and Liquidity

Operating cash flow was $139.3 million. Investing cash outflow was $121.1 million, including $1.058 billion of finance receivable originations and $965.2 million of collections. Financing cash outflow was $483.5 million.
Cash, cash equivalents and restricted cash decreased by $467.1 million during the quarter to $1.558 billion, including $1.394 billion of cash and cash equivalents.
Total finance receivables, net, were $6.822 billion, compared with $6.572 billion at December 31, 2021 and $6.757 billion at March 28, 2021. The allowance for credit losses was $340.5 million.
Total debt, net, was $6.613 billion at March 27, 2022, compared with $7.866 billion at March 28, 2021. Brokered certificates of deposit totaled $348.1 million, versus $152.7 million a year earlier.
Liquidity totaled $2.628 billion, consisting of cash and cash equivalents of $1.394 billion and reported availability under credit and conduit facilities of $1.234 billion. The company targets at least twelve months of projected liquidity needs.
Shareholders’ equity was $2.509 billion. The company repurchased $261.7 million of common stock, including 6.2 million discretionary shares, and paid $24.1 million of dividends.

Material Changes Versus the Prior Comparable Period

Worldwide retail sales of new motorcycles increased 2.1% to 45,152 units, but U.S. retail sales declined 5.1%. International sales increased, particularly in EMEA and Asia Pacific.
Worldwide motorcycle shipments were essentially flat at 54,843 units. U.S. shipments declined 10.6%, reflecting production shortfalls tied to component availability.
Motorcycles gross profit declined 3.1% despite higher revenue. Supply-chain-related manufacturing and other costs increased $67.7 million, raw-material costs increased $14.9 million, and shipment mix reduced gross profit by $22.1 million. Pricing actions increased gross profit by $81.4 million.
Worldwide retail inventory of new motorcycles was approximately 24% below the prior-year level, primarily because of production constraints.
Financial Services credit-loss performance normalized: annualized retail credit losses increased to 1.77% from 1.46%, and the 30-day delinquency rate increased to 2.87% from 2.14%.
Debt declined year over year, although the company issued $500 million of 3.05% medium-term notes due 2027 and repaid $550 million of maturing medium-term notes during the quarter.
The company repurchased substantially more stock than in Q1 2021, when repurchases totaled $5.6 million.

Guidance, Outlook and Management Commentary

For 2022, management continued to project Motorcycles segment revenue growth of 5% to 10% and an operating margin of 11% to 12%.
Management expected Motorcycles revenue growth to be in the mid-single digits in the first half of 2022 and high-single digits in the second half. Expected operating margin was mid-teens in the first half and mid-to-high single digits in the second half.
Financial Services operating income was expected to decline 20% to 25% in 2022, largely because favorable 2021 credit-loss allowance reductions and unusually low actual losses were not expected to recur.
2022 capital investments were expected to be $190 million to $220 million. The company planned to continue funding The Hardwire initiatives, dividends and discretionary share repurchases.
Management expected logistics and manufacturing cost inflation to improve in the second half of 2022, but expected raw-material and component cost inflation to continue for the remainder of the year at rates similar to Q1 levels. Semiconductor supply was expected to stabilize in the second half.
The LiveWire transaction with AEA-Bridges Impact Corp. was expected to close in mid-2022, subject to shareholder approval and other conditions. Harley-Davidson expected to retain approximately 74% of the resulting public company and continue consolidating LiveWire.

Risks, Contingencies and Unusual Items

Key risks include global supply-chain disruption, semiconductor shortages, inflation, higher logistics and manufacturing costs, raw-material availability, and production interruptions.
The company suspended business in Russia following the invasion of Ukraine. Management identified potential risks from sanctions, commodity and energy-price volatility, supply interruptions, financial-market disruption, cyberattacks and changing consumer demand.
The temporary suspension of additional European Union tariffs reduced the applicable motorcycle tariff rate from 31% to 6% effective January 1, 2022; the arrangement is scheduled to remain effective through December 31, 2023, subject to ongoing negotiations.
Financial Services remains exposed to increasing delinquencies, credit losses, funding costs and capital-market access. The allowance for credit losses reflects uncertain economic conditions, including inflation, muted consumer confidence, supply-chain disruption and the Ukraine conflict.
The company had $1.717 billion of scheduled debt principal payments in 2022 and $1.592 billion in 2023. The Canadian conduit facility had an expiration date of June 27, 2022, and the U.S. conduit facility had an expiration date of November 18, 2022; management expected to renew facilities expiring within twelve months.
In April 2022, after quarter-end, the company issued $550 million of secured notes through an asset-backed securitization at a weighted-average interest rate of 2.40%.
Warranty and recall liabilities totaled $65.1 million, including $16.7 million for recall campaigns. Management stated that litigation accruals and insurance coverage were adequate and that it was not aware of material exposure beyond amounts accrued and insured.

Investor Verification Checklist

Verify whether supply-chain constraints, semiconductor availability and raw-material inflation improve as projected in the second half of 2022.
Monitor U.S. retail sales, dealer inventory levels, motorcycle shipment mix and the company’s ability to convert pricing actions into sustained margin improvement.
Assess whether Financial Services delinquencies and credit losses continue normalizing and whether the $340.5 million allowance remains adequate.
Review debt maturities, conduit-facility renewals, commercial-paper access and the effect of rising interest rates on funding costs.
Confirm the timing, financing, ownership and accounting effects of the LiveWire transaction, including any required additional company investment if SPAC shareholders redeem shares.
Track the continuation of the 6% EU tariff treatment after December 31, 2023 and the outcome of the company’s appeals concerning its tariff-related rulings.
Reconcile reported liquidity with the company’s stated twelve-month minimum liquidity objective and assess the sustainability of dividends and share repurchases.