HARLEY-DAVIDSON, INC. quarterly report, Q3 FY2021

Harley-Davidson, Inc. 2021 Q3 Form 10-Q Summary

Business context and reporting period

Harley-Davidson operates through two segments: Motorcycles and Related Products, which designs and sells motorcycles, parts, accessories and merchandise, and Financial Services, which provides retail and wholesale financing. This unaudited Form 10-Q covers the three and nine months ended September 26, 2021, compared with the periods ended September 27, 2020.

Financial performance and key metrics

Metric	Q3 2021	Q3 2020	9M 2021	9M 2020
Total revenue	$1.365 billion	$1.166 billion	$4.320 billion	$3.329 billion
Operating income	$204.2 million	$137.9 million	$830.7 million	$129.3 million
Net income	$163.0 million	$120.2 million	$628.5 million	$97.7 million
Diluted EPS	$1.05	$0.78	$4.06	$0.64
Operating cash flow	Not separately reported	Not separately reported	$925.6 million	$1.135 billion

Motorcycles segment revenue increased 20.4% to $1.161 billion in Q3 and 36.3% to $3.724 billion for the first nine months. Segment operating income was $97.7 million in Q3 and $511.0 million year to date, with operating margins of 8.4% and 13.7%, respectively.
Financial Services revenue was $204.7 million in Q3 and $595.7 million year to date. Segment operating income increased 16.9% to $106.5 million in Q3 and 168.6% to $319.7 million year to date.
Q3 consolidated income before taxes was $197.5 million and the effective tax rate was 17.5%. The nine-month effective tax rate was 22.8%, compared with 10.8% in 2020, when discrete tax items affected the rate.
Retail finance receivables, net, totaled $6.863 billion at September 26, 2021, including a $355.8 million allowance for credit losses. Annualized retail loan credit losses were 0.84% for the first nine months, compared with 1.40% in 2020.
Cash and cash equivalents were $2.061 billion; cash, cash equivalents and restricted cash totaled $2.237 billion. Management reported total available liquidity of $3.384 billion, including cash and availability under credit and conduit facilities.
Total outstanding debt was $7.232 billion, and net brokered deposits were $290.3 million. Total debt and deposits declined from $9.539 billion at September 27, 2020.
Nine-month capital expenditures were $61.5 million. The company expected 2021 capital expenditures of $135 million to $150 million.
The company paid $69.3 million of dividends during the first nine months, or $0.45 per share. No discretionary share repurchases occurred; employee tax-withholding share repurchases totaled $11.5 million.

Material changes versus the prior comparable period

Q3 net income increased 35.6%, while nine-month net income increased more than sixfold, primarily because of higher motorcycle volume and mix, lower restructuring expense, lower Financial Services interest expense and substantially lower credit-loss provisions.
Worldwide wholesale motorcycle shipments increased 11.5% in Q3 to 47,941 units and 28.2% year to date to 159,419 units. Grand American Touring, Cruiser and new Pan America models contributed to the improved mix.
Worldwide retail sales declined 5.6% in Q3, with North American growth of 1.9% more than offset by declines in EMEA, Asia Pacific and Latin America. For the first nine months, worldwide retail sales increased 9.1%, led by North America.
Motorcycle operating results were pressured by raw-material, logistics, manufacturing and tariff costs. Q3 additional EU tariff costs were $25.6 million, compared with $1.8 million in the prior-year quarter; nine-month costs were $44.3 million versus $17.7 million.
Restructuring expense declined to $0.6 million in Q3 and $1.2 million year to date, compared with $43.9 million and $85.9 million, respectively, in the prior-year periods. Cumulative restructuring expense since inception was $131.2 million, with total expected expense of approximately $135 million.
Operating cash flow declined by $209.5 million year to date, primarily because 2020 benefited from a significant reduction in wholesale finance receivables, while 2021 reflected higher finance-receivable originations and relatively stable wholesale receivable balances.

Guidance, outlook, risks and unusual items

Management maintained 2021 Motorcycles segment revenue growth guidance of 30% to 35% over 2020 and operating margin guidance of 6% to 8%, assuming approximately $61 million of additional EU tariff costs.
Fourth-quarter wholesale motorcycle shipments were expected to be approximately 22,000 to 29,000 units. The model-year changeover was expected to constrain shipments and increase operating expense and capital expenditures.
Financial Services segment operating income growth guidance was increased to 95% to 105% over 2020, from the previous 75% to 85% range.
An October 30, 2021 U.S.-EU tariff agreement is expected to reduce the EU tariff rate on Harley-Davidson motorcycles from 31% to 6% beginning January 1, 2022. Management reduced its estimated 2021 tariff impact to approximately $61 million and expects no additional EU tariff impact in 2022, subject to the agreement and ongoing BOI appeals.
Supply-chain disruption, supplier volatility, longer shipping times and higher logistics, raw-material and purchased-component costs continued. Management expected fourth-quarter cost pressure at Q3 levels and supply-chain challenges to continue well into 2022.
Management cautioned that unusually favorable credit performance benefited from stimulus payments, payment extensions and elevated used-motorcycle auction values. Credit losses and delinquencies may normalize or increase as these effects fade.
Key risks include COVID-19 developments, supply-chain and production interruptions, tariffs and trade policy, consumer demand, dealer financial health, access to capital markets, foreign exchange and interest-rate volatility, product quality and recalls, cybersecurity, litigation, and execution of The Hardwire strategy and electric-vehicle initiatives.
The company remained in compliance with applicable financial covenants. The U.S. asset-backed commercial paper conduit facility had an expiration date of November 19, 2021, which the company expected to renew. The Canadian conduit facility expires June 27, 2022 unless renewed or extended.
Product liability and environmental matters remained outstanding, including the York, Pennsylvania remediation matter. Management stated that recorded accruals and insurance were adequate and that these matters were not expected to have a material adverse effect.

Important facts for investors to verify

Whether the announced U.S.-EU tariff agreement remains effective and whether the company achieves the expected 2022 tariff savings.
Fourth-quarter wholesale shipments, model-year transition effects and progress toward the 2021 motorcycle revenue and margin guidance.
Trends in retail demand, international sales, dealer inventory and market share, particularly the decline in Europe and other non-North American markets.
Normalization of HDFS delinquencies and credit losses as stimulus benefits and pandemic-related payment extensions recede.
Renewal and availability of the U.S. conduit facility and continued access to commercial paper and other funding markets.
Execution of supply-chain mitigation, pricing surcharges, The Hardwire initiatives and electric-motorcycle investments.