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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)

05/06/2021 | 11:52am 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.
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," "intend" 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 the "Overview" and
"Guidance" sections in this Item 2 are only made as of April 19, 2021 and the
remaining forward-looking statements in this report are made as of the date of
the filing of this report (May 6, 2021), and the Company disclaims any
obligation to publicly update such forward-looking statements to reflect
subsequent events or circumstances.
Overview(1)
The Company's net income was $259.1 million, or $1.68 per diluted share, in the
first quarter of 2021, compared to $69.7 million, or $0.45 per diluted share, in
the first quarter of 2020. The Motorcycles segment reported operating income of
$227.5 million for the first quarter of 2021 which was up $143.0 million over
the first quarter of 2020. Operating income from the Motorcycles segment for the
first quarter of 2021 was favorably impacted by a 3.5% increase in wholesale
motorcycle shipments, favorable product mix, lower sales incentives and reduced
selling, administrative and engineering expenses. Operating income from the
Financial Services segment in the first quarter of 2021 was $118.6 million, up
417.0% compared to the year-ago quarter due primarily to a lower provision for
credit losses.
Worldwide independent dealer retail sales of new Harley-Davidson motorcycles in
the first quarter of 2021 were up 9.4% compared to the first quarter of 2020 led
by a 30.6% increase in the U.S., partially offset by declines in Europe/Middle
East/Africa (EMEA) and Latin America. Refer to the Motorcycles Retail Sales and
Registration Data section for further discussion of retail sales results.
The Company is pleased with the pace of recovery that it has experienced across
the business as compared to prior year when the Company's results were adversely
impacted by the onset of the COVID-19 pandemic. The Company continues to manage
through the impacts of the COVID-19 pandemic keeping safety and community
well-being at the forefront. The Company believes its actions during 2020 to
reshape the business through The Rewire and its initial execution of The
Hardwire 5-year strategic plan are having a positive impact on the Company's
results. 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.
                                       37

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Guidance(1)
Given the strong 2021 first quarter performance, the Company has increased its
guidance for the full year. The decision to increase guidance was based on
several key factors. First, the Company has better clarity on the cost impact of
supply chain challenges and its ability to adapt to those challenges. Also, the
economic outlook has improved with falling unemployment numbers, recent federal
stimulus in the U.S. and continued progress on the global COVID-19 vaccine
roll-out. The Company also has a better read on demand for its new model year
2021 motorcycles, which has been stronger than it had anticipated, particularly
in the most profitable segments of Touring and Large Cruiser motorcycles. As a
result, for the full-year 2021, the Company now expects:
•Motorcycles segment revenue growth of 30% to 35%, an increase from the previous
guidance of 20% to 25%.
•Motorcycles segment operating income margin of 7% to 9%, up from the previous
guidance of 5% to 7%, assuming the Company can successfully mitigate the impact
of the additional European Union (EU) tariffs discussed below. This increase
reflects an improved demand outlook and confidence in the Company's ability to
continue navigating through the global supply chain headwinds.
•If the Company is unable to mitigate the impact of the additional EU tariffs to
any extent in 2021, the Company expects Motorcycles segment operating income
margin of 5% to 7%, in line with the original guidance.
•Financial Services segment operating income growth of 50% to 60%, an increase
from the previous guidance of 10% to 15%, driven primarily by a favorable
provision for credit losses.
Additionally, for the full-year 2021, the Company continues to expect capital
expenditures of $190 million to $220 million.
Within 2021, the Company expects (a) approximately 60% of the total annual
Motorcycles segment revenue to occur in the first half of the year driven by
momentum from the model year 2021 launch through the riding season and (b)
assuming the Company can successfully mitigate the impact of the additional EU
tariffs discussed below, Motorcycles segment operating margin percent to be in
the mid-teens during the first half of 2021 and near break-even in the second
half of 2021.
In the second half of 2021, the Company expects retail inventory to decrease
from its expected peak level at the end of the second quarter. In the fourth
quarter the Company will prepare its manufacturing facilities to begin
production of model year 2022 motorcycles. The Company believes the pattern for
inventory and shipments in the second half of 2021 will be similar to what the
Company experienced in the second half of 2020. In addition, during 2020, the
Company benefited from cost reductions associated with COVID-19 pandemic cash
preservation efforts, which started in the second quarter of 2020, and The
Rewire restructuring savings, which started in the third quarter of 2020. Refer
to "Restructuring Plan Costs and Savings" for additional discussion.
Additional EU Tariffs(1)
In April 2021, the Company received notification from the Economic Ministry of
Belgium that, following a request from the 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 which 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, will be subject to a total tariff rate of 31% from April 19, 2021
through May 31, 2021. This rate is expected to increase to 56% effective June 1,
2021. This ruling will effectively prohibit the Company from functioning
competitively in the EU. The Company estimates the impact of the additional EU
tariffs in 2021, if unmitigated, to be approximately $135 million and expects
the impact to be approximately $200 million to $225 million on annual basis in
future years. The Company is appealing the revocation of the BOIs. It has also
sought temporary extended reliance on the 6% tariff rate for motorcycles
produced in Thailand, ordered prior to April 19, 2021. There is no assurance
that the appeal will be successful or that the Company will receive the extended
reliance.
COVID-19 Pandemic
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.
                                       38

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  Table of Contents
Supply Chain - During the first quarter of 2021, the Company experienced some
disruption and increased cost related to the adverse impacts of the COVID-19
pandemic on its global supply chain. To date, the Company has been successful in
mitigating these disruptions to avoid material adverse impacts on its ability to
produce and supply product. 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.
Liquidity - The Company continues to closely monitor its liquidity in light of
the COVID-19 pandemic. At the end the first quarter of 2021, the Company had
$4.0 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 Dealers and Riders - The Company's response and recovery plans have
included supporting global dealers and customers. HDFS continues to work with
qualified retail borrowers who have been impacted by the COVID-19 pandemic by
offering short-term adjustments to payment due dates. These temporary extensions
do not affect the associated interest rate or loan term. The volume of payment
extensions on eligible retail loans has declined from the levels experienced
during the second quarter and into the third quarter of 2020 but has not yet
returned to pre-COVID-19 pandemic levels.
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.
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.

Results of Operations for the Three Months Ended March 28, 2021

               Compared to the Three Months Ended March 29, 2020

© Edgar Online, source Glimpses

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