Harley-Davidson, Inc. — Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2021; filed February 25, 2022. The filing is an annual report, not a standalone fourth-quarter filing. Harley-Davidson operates through Motorcycles and Related Products and Financial Services.
Business Context
The company began its five-year strategic plan, The Hardwire, in 2021, emphasizing profitable growth in Grand American Touring, large Cruiser and Trike motorcycles; selective expansion into Adventure Touring and middleweight Cruiser; electric motorcycles through LiveWire; complementary businesses; customer experience; and stakeholder management.
Operations remained affected by COVID-19, supply-chain disruptions, semiconductor shortages, higher logistics and raw-material costs, and European Union tariffs. The company had approximately 5,800 employees and 1,348 dealership points at year-end.
Key Financial Metrics
| Metric | 2021 | 2020 | Change |
|---|---|---|---|
| Total revenue | $5.336 billion | $4.054 billion | +$1.282 billion |
| Motorcycles segment revenue | $4.540 billion | $3.264 billion | +39.1% |
| Financial Services revenue | $796.1 million | $790.3 million | +0.7% |
| Operating income | $823.4 million | $9.7 million | +$813.8 million |
| Motorcycles operating income | $408.6 million | $(186.1) million | Improved by $594.7 million |
| Financial Services operating income | $414.8 million | $195.8 million | +111.9% |
| Net income | $650.0 million | $1.3 million | +$648.7 million |
| Diluted EPS | $4.19 | $0.01 | +$4.18 |
| Operating cash flow | $975.7 million | $1.178 billion | $(202.2) million |
| Capital expenditures | $120.2 million | $131.1 million | $(10.9) million |
Consolidated operating margin was approximately 15.4% in 2021, compared with approximately 0.2% in 2020. The Motorcycles segment operating margin was 9.0%, versus negative 5.7% in 2020. The effective tax rate was 20.7%, compared with a 108.3% tax benefit rate in 2020.
Sales, Credit and Liquidity
- Worldwide retail sales of new motorcycles increased 7.8% to 194,256 units. North American retail sales increased 22.1%, while EMEA declined 15.7%, Asia Pacific declined 7.8% and Latin America declined 39.1%.
- Wholesale motorcycle shipments increased 29.8% to 188,494 units, led by Grand American Touring, Cruiser and the new Pan America Adventure Touring models.
- U.S. 601+cc market share increased to 44.5% from 42.1%; European market share declined to 5.9% from 7.7%.
- Financial Services’ provision for credit losses decreased 86.2% to $25.0 million. Retail motorcycle loan losses were 1.19%, compared with 1.38% in 2020, while the 30-day delinquency rate increased to 3.33% from 3.18%.
- Cash and cash equivalents were $1.875 billion at year-end. Cash, cash equivalents and available credit and conduit facilities totaled approximately $3.179 billion.
- Total outstanding debt was $6.889 billion, down from $8.987 billion, and brokered certificates of deposit were $290.3 million, up from $80.0 million.
- Cash decreased by $1.384 billion during 2021, primarily because of debt repayments and increased finance-receivable activity. The company paid $92.4 million in dividends, or $0.60 per share, and made no discretionary share repurchases.
Material Changes Versus 2020
- Profitability recovered sharply from the pandemic-affected 2020 period. The improvement reflected higher motorcycle shipments, favorable product mix, pricing, lower restructuring expense and stronger Financial Services results.
- Motorcycles revenue benefited from higher volume, pricing surcharges, lower incentives, favorable currency effects and a greater mix of Grand American Touring and Cruiser models. These benefits were partly offset by raw-material, manufacturing, logistics and tariff costs.
- Financial Services results benefited from lower funding costs and substantially lower credit-loss provisions. Management cautioned that 2021 credit performance benefited from elevated used-motorcycle values, government stimulus and pandemic-related payment extensions that may not recur.
- Restructuring expense fell to $3.4 million from $130.0 million. The 2020 restructuring program is expected to generate approximately $115 million of annual gross savings.
- Worldwide retail inventory declined approximately 23% from year-end 2020, reflecting strong demand and tighter inventory management, although company inventory increased because of model-year timing and supply-chain disruptions.
- The company’s pension and postretirement funded position improved substantially, and accumulated other comprehensive loss decreased to $240.9 million from $483.4 million.
Guidance, Outlook and Unusual Items
- For 2022, management expects Motorcycles segment revenue growth of 5% to 10% and a Motorcycles operating margin of 11% to 12%.
- Management expects Financial Services operating income to decline 20% to 25% because the favorable 2021 credit-loss allowance reductions and unusually low losses are not expected to repeat.
- Planned 2022 capital investments are $190 million to $220 million. The company plans to fund growth, pay dividends and resume discretionary share repurchases.
- Supply-chain pressures and semiconductor constraints were expected to persist in the first half of 2022, with moderate improvement in logistics and raw-material conditions and some semiconductor improvement expected in the second half.
- EU motorcycle tariffs declined from 31% in 2021 to 6% beginning January 1, 2022 under a U.S.-EU agreement currently scheduled to remain effective through December 31, 2023. The outcome after that date is uncertain.
- On December 13, 2021, Harley-Davidson announced a proposed transaction to combine LiveWire with AEA-Bridges Impact Corp. The transaction was expected to close in the first half of 2022, subject to shareholder approval and other conditions. Harley-Davidson expected to retain approximately 74% ownership and continue consolidating LiveWire.
- The company expects to update its longer-term Hardwire financial targets in the second quarter of 2022.
- In February 2022, Harley-Davidson Financial Services issued $500 million of 3.05% medium-term notes due in February 2027.
Principal Risks and Contingencies
- COVID-19 variants, supply-chain interruptions, semiconductor shortages, labor availability and higher freight, commodity and manufacturing costs could affect production, sales and margins.
- Motorcycle demand is discretionary and sensitive to economic conditions, interest rates, weather, used-motorcycle prices, consumer credit availability and dealer financial health.
- Financial Services is exposed to retail and dealer credit losses, changing delinquency trends, funding costs, capital-market access and credit-rating actions.
- LiveWire is an early-stage business expected to incur continuing losses and faces execution, funding, competition, technology, brand and dealer-network risks. Completion of the transaction is not assured.
- International operations face tariff, foreign-exchange, regulatory, geopolitical and trade-policy risks. The company continues to appeal the revocation of certain EU tariff rulings, with no assurance of success.
- Product recalls, warranty claims, product liability, cybersecurity incidents, data privacy requirements, environmental regulations and changing emissions standards could increase costs or damage the brand.
- Collective bargaining agreements cover approximately 2,400 U.S. hourly employees. The York agreement expires October 15, 2022; Milwaukee and Tomahawk agreements expire March 31, 2024.
- The company disclosed lawsuits and other claims involving product, commercial, employee, environmental and other matters, but stated that no material loss exposure exists beyond amounts accrued and insured.
Investor Verification Checklist
- Verify the reported 2022 Motorcycles revenue and margin guidance against actual results, particularly after supply-chain and semiconductor effects.
- Track Financial Services delinquencies, charge-offs, used-motorcycle recovery values and allowance assumptions as pandemic support effects fade.
- Confirm completion, funding, ownership and accounting treatment of the LiveWire transaction, including any additional Harley-Davidson investment for SPAC redemptions.
- Review debt maturities, refinancing activity, credit ratings and renewal of asset-backed conduit facilities, including the 2022 maturities.
- Assess whether the temporary 6% EU tariff remains available after December 31, 2023 and the potential effect of renewed tariffs.
- Evaluate the sustainability of 2021 pricing, product mix, market-share gains and restructuring savings after cost inflation and increased investment in The Hardwire.
- Review the company’s audited financial statements, critical audit matter concerning the $326.3 million retail finance-receivable allowance, and related economic forecast assumptions.