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OFFON

HARLEY-DAVIDSON, INC.

(HOG)
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HARLEY DAVIDSON : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

08/05/2021 | 04:10pm EDT
Harley-Davidson, Inc. is the parent company of Harley-Davidson Motor Company
(HDMC) and Harley-Davidson Financial Services (HDFS). Unless the context
otherwise requires, all references to the "Company" include Harley-Davidson,
Inc. and all its subsidiaries. The Company operates in two segments:
Motorcycles and Related Products (Motorcycles) and Financial Services. During
2020, the Company executed a set of actions, referred to as The Rewire. The
Rewire was a critical overhaul of the Company's business to set the Company on a
new course and provide a solid foundation to execute its 2021-2025 strategic
plan, The Hardwire. Refer to the Company's Annual Report on Form 10-K for the
year ended December 31, 2020 for more information on The Rewire and The
Hardwire.
The "% Change" figures included in the Results of Operations section were
calculated using unrounded dollar amounts and may differ from calculations using
the rounded dollar amounts presented. Certain "% Change" deemed not meaningful
(NM) have been excluded.
(1) Note Regarding Forward-Looking Statements
The Company intends that certain matters discussed in this report are
"forward-looking statements" intended to qualify for the safe harbor from
liability established by the Private Securities Litigation Reform Act of 1995.
These forward-looking statements can generally be identified as such by
reference to this footnote or because the context of the statement will include
words such as the Company "believes," "anticipates," "expects," "plans," "may,"
"will," "estimates," "targets," "intends" or words of similar meaning.
Similarly, statements that describe or refer to future expectations, future
plans, strategies, objectives, outlooks, targets, guidance, commitments or goals
are also forward-looking statements. Such forward-looking statements are subject
to certain risks and uncertainties that could cause actual results to differ
materially, unfavorably or favorably, from those anticipated as of the date of
this report. Certain of such risks and uncertainties are described in close
proximity to such statements or elsewhere in this report, including under the
caption "Cautionary Statements" in this Item 2 and in Item 1A. Risk Factors, as
well as in Item 1A. Risk Factors of the Company's Annual Report on Form 10-K for
the year ended December 31, 2020. Shareholders, potential investors, and other
readers are urged to consider these factors in evaluating the forward-looking
statements and are cautioned not to place undue reliance on such forward-looking
statements. The forward-looking statements included in this report are made as
of the date of the filing of this report (August 5, 2021), and the Company
disclaims any obligation to publicly update such forward-looking statements to
reflect subsequent events or circumstances.
Overview
The Company's net income was $206.3 million, or $1.33 per diluted share, in the
second quarter of 2021, compared to a net loss of $92.2 million, or $0.60 per
diluted share, in the second quarter of 2020 when the Company's results were
adversely impacted by the onset of the COVID-19 pandemic. In the second quarter
of 2021, Motorcycles segment operating income was $185.8 million, up $306.8
million over the second quarter of 2020. The increase in operating income from
the Motorcycles segment for the second quarter of 2021 was driven by a 99.8%
increase in wholesale motorcycle shipments over the same quarter last year when
wholesale shipments were impacted by the suspension of the Company's global
manufacturing as a result of the COVID-19 pandemic. Operating income from the
Financial Services segment in the second quarter of 2021 was $94.5 million, up
$89.6 million compared to the year-ago quarter due primarily to a lower
provision for credit losses and lower interest expense. The provision for credit
losses in the second quarter of 2020 was significantly higher reflecting a
deterioration of the Company's economic outlook which incorporated the then
expected impact of the COVID-19 pandemic.
Given the impact of the COVID-19 pandemic on 2020 results, the Company has also
assessed its performance relative to 2019. The Company's revenue in the second
quarter of 2021 was down 6.2%, on approximately 12,000 fewer wholesale
shipments, compared to the second quarter of 2019. The lower revenue and
shipments reflect actions taken by the Company under The Rewire in 2020 to
streamline its product offering and to exit certain international markets where
volumes and profitability did not support continued investment. Despite lower
revenue and shipments, operating income in the second quarter of 2021 was up
9.4% compared to the second quarter of 2019 with growth in both the Motorcycles
and Financial Services segments. Motorcycles segment operating income in the
second quarter of 2021 was 2.8% higher than in the second quarter of 2019
benefiting from improved product mix, lower sales incentives, lower tariff and
restructuring costs and a reduced cost structure behind 2020 restructuring
actions. Operating income from Financial Services was up 25.2% compared to the
second quarter of 2019 due primarily to a lower provision for credit losses and
lower interest expense.
Worldwide independent dealer retail sales of new Harley-Davidson motorcycles in
the second quarter of 2021 were up 23.8% compared to the second quarter of 2020
led by a 42.8% increase in the U.S., partially offset by declines in the
Company's markets outside of North America. Refer to the Motorcycles Retail
Sales and Registration Data section for further discussion of retail sales
results.
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Additional European Union Tariffs(1)
In April 2021, the Company received notification from the Economic Ministry of
Belgium that, following a request from the European Union (EU), the Company
would be subject to the revocation of Binding Origin Information (BOI) rulings,
effective April 19, 2021. Beginning in 2019, the Company has operated under BOIs
that allowed it to supply its EU markets with certain motorcycles produced at
its Thailand manufacturing facility at tariff rates of 6%. Following the
revocation, all non-electric motorcycles that Harley-Davidson imports into the
EU, regardless of origin, became subject to a total tariff rate of 31% on April
19, 2021. At that time it was expected to increase to 56% effective June 1,
2021. However, in May 2021, the EU made a decision to suspend the previously
scheduled increase in the tariff rate to 56% while negotiations take place
between the U.S. and the EU. If the U.S. and the EU do not reach a resolution,
as it stands, the tariffs would increase again to 56% in December 2021. The
additional EU tariff, whether at a rate of 31% or a rate of 56%, will
significantly disadvantage the Company from competing effectively in the EU.
Based on the EU's decision to suspend the previously scheduled increase from
June 2021 to December 2021, the Company now estimates the impact of the
additional EU tariffs in 2021, if unmitigated, to be approximately $80 million,
including approximately $19 million recognized in the first six months of 2021.
In May 2021, the Company applied for temporary extended reliance on the 6%
tariff rate for motorcycles produced in Thailand and ordered prior to April 19,
2021; however, that application was rejected on July 30, 2021. The Company
estimates it could have avoided approximately $50 million of additional EU
tariffs in 2021 if the application for extended reliance had been granted. The
Company continues its appeals of the revocation of the BOIs and plans to appeal
the denial of temporary extended reliance although there is no assurance that
these appeals will be successful. The impact of the EU tariffs in 2021 are
included in the Company's full-year guidance discussed below.
COVID-19 Pandemic
The Company continues to manage through the impacts of the COVID-19 pandemic
keeping safety and community well-being a priority. The full impact of the
COVID-19 pandemic on future results depends on future developments, such as the
ultimate duration and scope of the pandemic, the success of vaccination
programs, and its impact on the Company's customers, independent dealers,
distributors, and suppliers. Future impacts and disruptions could have an
adverse effect on production, supply chains, distribution, and demand for the
Company's products.
Supply Chain & Distribution - The global supply chain and logistics challenges
linked to the COVID-19 pandemic continue to impact the Company and the industry.
During the first half of 2021, the Company experienced disruption and increased
costs related to the adverse impacts of the COVID-19 pandemic on its global
supply chain. However, the Company has been successful in mitigating these
disruptions to avoid material adverse impacts on its ability to produce and
supply product. The Company has experienced cost inflation across all of its
modes of freight, as well as within raw materials. To help offset these cost
impacts, the Company has implemented an average 2% pricing surcharge on select
models in the U.S. effective for models shipped on or after July 1, 2021 for the
remainder of model year 2021. The Company expects the global supply chain
disruptions to continue through the remainder of 2021, and the Company will
continue to actively work to mitigate these impacts on its business. In
addition, retail sales of new Harley-Davidson motorcycles have been negatively
impacted by continued COVID-19 pandemic lockdowns in key international markets
as well as logistics challenges that resulted in longer shipping times.
Liquidity - The Company continues to closely monitor its liquidity in light of
the COVID-19 pandemic. Starting in 2021, the Company began to gradually reduce
its cash and cash equivalents from elevated December 2020 levels. At the end of
the second quarter of 2021, the Company had $3.0 billion of available liquidity
through cash, cash equivalents and availability under its credit and conduit
facilities. Liquidity is discussed in more detail under Liquidity and Capital
Resources.
Supporting Customers - Starting in the second quarter of 2020, the Company
granted an increased amount of short-term payment due date extensions on
eligible retail loans to help retail customers get through financial
difficulties associated with the COVID-19 pandemic. During the first half of
2021, the volume of extensions declined from the levels experienced during 2020
as a result of the COVID-19 pandemic, but extensions did not return to
pre-COVID-19 pandemic levels until the end of the second quarter of 2021.
Safety - The Company continues to proactively manage through the COVID-19
pandemic and has implemented robust protocols to keep workers safe in its
manufacturing facilities. Most non-production workers continue to work remotely
in light of the COVID-19 pandemic.
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Guidance(1)
The Company has the following expectations for the remainder of 2021. Subsequent
to July 21, 2021, when the Company last provided its expectations for 2021, the
Company has updated its expectations related to 2021 Motorcycles segment
operating income given new information received on July 30, 2021 concerning its
application for temporary extended reliance on the 6% tariff rate for
motorcycles imported into the EU.
The Company continues to expect 2021 Motorcycles segment revenue growth of 30%
to 35% over 2020.
The Company expects Motorcycles segment operating income to be adversely
impacted by the additional EU tariffs resulting from the revocation of BOIs
announced in April 2021, as described above under "Additional EU Tariffs". In
April 2021, the Company provided two guidance scenarios for Motorcycles segment
operating margin in 2021 given uncertainty about how the EU tariff situation
would evolve. The Company's primary scenario was Motorcycles segment operating
margin of 7% to 9% which assumed the impact of additional EU tariffs would be
fully mitigated. The second guidance scenario was Motorcycles segment operating
margin of 5% to 7% and included the full impact of additional EU tariffs. Based
on developments since April, the expected impact of additional EU tariffs in
2021 is now more certain, but now is expected to be less than originally
estimated.
In May 2021, the EU made a decision to suspend a previously scheduled second
increase in additional tariffs (from 31% to 56%) from June 2021 to December
2021. As a result, the Company now estimates the 2021 impact of the additional
EU tariffs, if unmitigated, will result in approximately $80 million of
additional cost, down from the previous estimate of $135 million. Based on this,
the Company's guidance for Motorcycles segment operating margin in 2021 is now
6% to 8% and includes the impact of the additional tariffs. As discussed above,
the Company has taken actions in an effort to mitigate the impact of the
tariffs; however, given that the Company's application for temporary extended
reliance on the 6% tariff rate was rejected in July 2021, the Company does not
expect to materially mitigate the current estimated 2021 impact of the
additional EU tariffs.
The Company expects Financial Services segment operating income growth in 2021
over 2020 of 75% to 85%, up from the previously communicated range of 50% to
60%. The improved outlook takes into account the favorable credit loss
experience through the first half of 2021, as well as the outlook for the
remainder of the year.
The Company continues to expect capital expenditures of $190 million to $220
million in 2021.
Within 2021, the Company expects second-half Motorcycles segment revenue and
operating income margin to be lower than it was in the first half of 2021.
Motorcycles segment revenue for the first half of 2021 is expected to represent
approximately 60% of total annual Motorcycles segment revenue. Assuming the
additional EU tariffs are not materially mitigated in 2021, which is the
Company's current assumption, Motorcycles segment operating income margin is
expected to be in the negative mid-single digits for the second half of 2021.
The second-half 2021 guidance also incorporates the impact of the shift in
model-year launch timing to the first quarter, logistics and raw material
inflation rates in line with what has been experienced during the second quarter
of 2021, the approximate 2% pricing surcharge in the U.S. and an increase in
operating expense as the Company invests in The Hardwire initiatives and
prepares for the launch of model-year 2022.
Restructuring Plan Costs and Savings(1)
During 2020, the Company initiated certain restructuring activities as part of
The Rewire including a workforce reduction, the termination of certain current
and future products, facility changes, optimizing its global independent dealer
network, exiting certain international markets, and discontinuing its sales and
manufacturing operations in India. These actions included restructuring expenses
related to employee termination costs, contract termination costs and
non-current asset adjustments. The workforce reduction resulted in the
elimination of approximately 700 positions globally, including the termination
of approximately 500 employees. In addition, the India action resulted in the
termination of approximately 70 employees. The Company incurred approximately
$130 million of restructuring expense in connection with these actions during
2020. The Company expects to incur total restructuring expenses for these
actions of approximately $150 million, including approximately $20 million in
2021. The Company continues to expect annual ongoing gross savings resulting
from these restructuring activities of approximately $115 million. Refer to Note
4 of the Notes to Consolidated financial statements for additional information
regarding the Company's restructuring activities.
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