Harley-Davidson, Inc. — Q1 2021 Form 10-Q Summary
Reporting period: Three months ended March 28, 2021, compared with the three months ended March 29, 2020. Results are unaudited. Harley-Davidson operates through Motorcycles and Related Products and Financial Services.
Financial Performance and Position
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Revenue | $1.423 billion | $1.298 billion | +9.6% |
| Operating income | $346.2 million | $107.5 million | +222.0% |
| Net income | $259.1 million | $69.7 million | +271.8% |
| Diluted EPS | $1.68 | $0.45 | +$1.23 |
| Effective tax rate | 23.8% | 26.3% | Down 2.5 points |
| Operating margin | 24.3% | 8.3% | Up approximately 16.0 points |
| Net margin | 18.2% | 5.4% | Improved materially |
| Operating cash flow | $162.8 million | $(8.6) million | Improved by $171.4 million |
- Motorcycles segment: Revenue increased 12.0% to $1.232 billion. Operating income increased 169.1% to $227.5 million, and operating margin rose to 18.5% from 7.7%.
- Financial Services segment: Revenue declined 4.1% to $190.4 million, but operating income increased 417.0% to $118.6 million. The principal driver was a $101.9 million reduction in the provision for credit losses, which was a $22.5 million benefit in Q1 2021 versus a $79.4 million expense in Q1 2020.
- Worldwide retail sales of new motorcycles increased 9.4% to 44,235 units, led by a 30.6% increase in the United States. EMEA retail sales declined 36.1% and Latin America declined 59.2%.
- Worldwide wholesale motorcycle shipments increased 3.5% to 54,810 units. Touring shipments increased 26.5%, while Sportster/Street shipments declined 37.5%.
- Motorcycles gross profit increased 31.8% to $420.5 million, supported by product mix, lower sales incentives, foreign exchange, restructuring savings and lower tariff costs, partly offset by supply-chain costs.
- Cash, cash equivalents and restricted cash totaled $2.527 billion at March 28, 2021, including $2.321 billion of unrestricted cash and cash equivalents. Total assets were $11.339 billion and shareholders’ equity was $1.976 billion.
- Finance receivables, net, totaled $6.757 billion, compared with $7.292 billion a year earlier. The allowance for credit losses was $346.2 million.
- Total outstanding debt was $7.866 billion, compared with $8.140 billion at March 29, 2020. Net deposits were $152.7 million, versus none a year earlier. Debt principal payments scheduled for 2021 totaled approximately $1.671 billion.
- Liquidity available at quarter-end was approximately $3.992 billion, consisting of cash and cash equivalents plus availability under credit and conduit facilities.
Material Changes Versus Q1 2020
- Results benefited from recovery from the initial COVID-19 disruption, the shift of the model-year launch timing into the first quarter, stronger demand for Touring and Large Cruiser motorcycles, favorable product mix, lower incentives and cost reductions from The Rewire restructuring program.
- Financial Services credit performance improved: the retail 30-day delinquency rate declined to 2.14% from 3.37%, and annualized retail credit losses declined to 1.46% from 2.73%. Management cautioned that these historically favorable levels may not continue.
- Operating cash flow improved significantly, while cash declined by $881.8 million during the quarter because of debt repayments and other financing activity. The Company repaid $1.050 billion of medium-term notes and issued $597.4 million of net securitization debt.
- The quarterly dividend was reduced to $0.15 per share from $0.38 per share. No discretionary share repurchases occurred; $5.6 million of shares were acquired to satisfy employee tax-withholding obligations.
- Restructuring activities generated a $0.4 million benefit in Q1 2021. Cumulative restructuring expenses since inception were $129.6 million, with approximately $20 million of additional costs expected during 2021 and total costs expected to reach approximately $150 million.
Guidance, Outlook, Risks and Unusual Items
- Management increased full-year 2021 guidance to Motorcycles segment revenue growth of 30% to 35%, up from 20% to 25%.
- Motorcycles segment operating margin guidance was increased to 7% to 9%, up from 5% to 7%, assuming successful mitigation of additional EU tariffs. If the tariffs cannot be mitigated, management expects a 5% to 7% margin.
- Financial Services operating income growth guidance was increased to 50% to 60%, up from 10% to 15%, primarily because of expected favorable credit-loss provisions.
- Capital expenditure guidance remains $190 million to $220 million. Management expects approximately 60% of annual Motorcycles revenue in the first half of 2021, with mid-teens Motorcycles operating margins in the first half and approximately breakeven margins in the second half, assuming EU tariff mitigation.
- Following revocation of the Company’s EU Binding Origin Information rulings effective April 19, 2021, non-electric motorcycles imported into the EU face a 31% total tariff through May 31, 2021, expected to increase to 56% beginning June 1, 2021. The Company estimates an unmitigated 2021 impact of approximately $135 million and a future annual impact of $200 million to $225 million.
- The Company is appealing the BOI revocation and seeking temporary continued reliance on the 6% tariff rate for certain motorcycles ordered before April 19, 2021. There is no assurance that these efforts will succeed.
- COVID-19-related supply-chain disruption and higher costs are expected to continue through 2021. Management reported that disruptions had not materially impaired production or supply as of the filing date.
- HDFS continues to provide payment-date extensions to eligible borrowers affected by COVID-19, although volumes have declined from 2020 peaks and remain above pre-pandemic levels.
- Key risks include EU and other tariffs, supply-chain interruptions, demand and dealer performance, used-motorcycle values, future credit losses, funding-market access, foreign exchange and interest rates, product liability and recalls, cybersecurity, regulatory changes and execution of The Hardwire strategy.
- The Company remained in compliance with applicable debt covenants as of March 28, 2021. Its disclosure controls and procedures were effective, with no material changes to internal control over financial reporting.
Investor Verification Checklist
- Verify the outcome and financial effect of the EU BOI appeal, any temporary tariff relief and the actual tariff rates applied after June 1, 2021.
- Reconcile future Motorcycles segment revenue and margin performance with the 30% to 35% revenue-growth and 7% to 9% margin guidance.
- Monitor retail and wholesale volumes, U.S. and European market share, dealer inventory and the mix of Touring, Cruiser and Sportster/Street motorcycles.
- Assess whether the favorable HDFS delinquency and credit-loss trends persist as payment extensions and government stimulus effects fade.
- Review debt maturities, refinancing needs and the renewal or expiration of the Canadian Conduit facility in June 2021 and U.S. Conduit Facility in November 2021.
- Track restructuring costs and savings, supply-chain inflation, capital expenditures and cash generation against management’s expectations.
- Review disclosed environmental, product liability, warranty and recall matters, including the $72.4 million warranty and recall liability at quarter-end.