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HARLEY-DAVIDSON, INC. Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

11/04/2021 | 02:34pm 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
The "% Change" figures included in the Results of Operations sections were
calculated using unrounded dollar amounts and may differ from calculations using
the rounded dollar amounts presented.
(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," "forecasts," "sees," 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 (November 4, 2021), and the Company disclaims any obligation to publicly
update such forward-looking statements to reflect subsequent events or
The Company's net income was $163.0 million, or $1.05 per diluted share, in the
third quarter of 2021, compared to $120.2 million, or $0.78 per diluted share,
in the third quarter of 2020. In the third quarter of 2021, Motorcycles segment
operating income was $97.7 million, up $50.9 million over the third quarter of
2020. The increase in operating income from the Motorcycles segment for the
third quarter of 2021 was driven by an 11.5% increase in wholesale motorcycle
shipments, improved product mix and lower restructuring expenses compared to the
same quarter last year. Operating income from the Financial Services segment in
the third quarter of 2021 was $106.5 million, up $15.4 million compared to the
year-ago quarter due primarily to lower interest expense.
Retail sales of new Harley-Davidson motorcycles in the third quarter of 2021
were down 5.6% compared to the third quarter of 2020. Retail sales in the third
quarter of 2021 increased 1.9% in North America compared to the year ago
quarter, which was more than 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.
Additional European Union Tariffs(1)
Beginning in 2019, the Company operated under Binding Origin Information (BOI)
rulings that allowed it to supply its European Union (EU) markets with certain
motorcycles produced at its Thailand manufacturing facility at tariff rates of
6%. 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 the BOI rulings, effective April 19, 2021. As a result of
the revocation, all non-electric motorcycles that Harley-Davidson imported into
the EU, regardless of origin, were subject to a total tariff rate of 31% on
April 19, 2021 that was scheduled to increase to 56% effective June 1, 2021.
However, in May 2021, the EU made a decision to delay the increase initially
scheduled for June 2021 to December 2021, while tariff negotiations took place
between the U.S. and the EU. On October 30, 2021, the U.S. and EU announced an
agreement related to the Section 232 tariffs on steel and aluminum that were
implemented in 2018 by the U.S. and the subsequent rebalancing tariff measures
taken by the EU. This agreement will remove the additional tariffs imposed by
the EU on the Company's motorcycles beginning in 2018, reducing the total EU
tariff rate on the Company's motorcycles from 31% to 6%, effective January 1,
2022. The EU tariff rate will remain at 31% through the end of 2021 rather than
increasing to 56% on December 1, 2021 as
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previously scheduled. The lower 6% tariff rate will apply to all motorcycles
imported by the Company into the EU, regardless of origin, beginning in 2022.
Based on the agreement, the Company now estimates the impact of the additional
EU tariffs in 2021 to be approximately $61 million, including approximately $44
million recognized in the first nine months of 2021. The current estimate is
lower than the previous estimate of $80 million reflecting a tariff rate of 31%
for the remainder of 2021 as well as the Company's most recent EU volume
estimates. In addition, as a result of this agreement, the Company now expects
that there will be no impact from additional EU tariffs in 2022. The Company had
previously estimated the impact of additional EU tariffs to be approximately
$200 million to $225 million on annual basis after 2021 assuming a total EU
tariff rate of 56%.
To date, the Company continues to pursue its appeals of the revocation of the
BOIs and the denial of its application for temporary extended reliance on the 6%
tariff rate (for motorcycles produced in Thailand and ordered prior to April 19,
2021), although there is no assurance that these appeals will continue or be
COVID-19 Pandemic & Supply Chain
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, the consequences of vaccine requirements, 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 and Distribution - The global supply chain challenges, which the
Company believes are primarily linked to the COVID-19 pandemic, continue to
impact the Company and the industry. During the first nine months of 2021, the
Company experienced disruption and increased costs related to global supply
chain challenges. As a result of these challenges, the Company has experienced
cost increases for logistics, raw materials and purchased components, as well as
increased manufacturing conversion costs. In the third quarter of 2021, the
Company's supply chain cost impact was consistent with what it experienced in
the second quarter of 2021; however, it did experience increased supplier
volatility which impacted production levels for the third quarter. In addition,
the Company continued to experience longer shipping times into its international
markets during the third quarter. The Company expects continued cost pressure in
the fourth quarter of 2021 at the same levels experienced in the third
quarter.(1) In response to the supply chain challenges, the Company has imposed
pricing surcharges in the U.S., worked to optimize production schedules to
prioritize more profitable models and markets and enacted tighter operating
expense cost controls. The Company expects the supply chain challenges to
continue well into 2022 and will continue to work to mitigate the impact to its
Liquidity - At the end of the third quarter of 2021, the Company had $3.4
billion of available liquidity through cash, cash equivalents and availability
under its credit and conduit facilities. The Company continues to closely
monitor its liquidity in light of the COVID-19 pandemic; however, during 2021
the Company has gradually reduced its cash and cash equivalents from the
elevated December 2020 levels. 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
returning to pre-COVID-19 pandemic levels by the end of the second quarter of
2021. The Company discontinued extensions specific to the COVID-19 pandemic at
the beginning of the third quarter of 2021; however, it continues to grant
standard payment extensions to customers in accordance with its policies.
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.
The Company provided the following expectations for the remainder of 2021.
The Company continues to expect 2021 Motorcycles segment revenue growth of 30%
to 35% over 2020.
The Company continues to expect 2021 Motorcycles segment operating margin of 6%
to 8%. This guidance assumes $61 million of cost related to the additional EU
tariffs discussed above under "Additional European Union Tariffs."
  Table of     Contents
The Company expects to ship approximately 22,000 to 29,000 motorcycles at
wholesale in the fourth quarter of 2021. Consistent with the prior year, during
the fourth quarter of 2021, the Company will shift motorcycle production to
begin producing next year's model year product. The model year changeover will
limit the amount of wholesale shipments during the fourth quarter as model year
2022 motorcycles produced will remain in company-owned inventory ahead of the
new model year launch in early 2022. The Company expects the financial impact of
the model year changeover in the fourth quarter of 2021 to be very similar to
the impact of the changeover experienced in the fourth quarter of 2020. This
includes an increase in operating expense and capital expenditures in the fourth
quarter as compared to the first three quarters of the year to support the
product launch. Finally, the Company expects lower restructuring expense in the
fourth quarter of 2021 as compared to the fourth quarter of 2020.
The Company expects Financial Services segment operating income growth in 2021
over 2020 of 95% to 105%, up from the previous range of 75% to 85%. The improved
outlook takes into account the favorable credit loss experience through the
first nine months of 2021, as well as the outlook for the remainder of the year.
The Company now expects capital expenditures of $135 million to $150 million in
2021, down from its previous estimate of $190 to $220 million. The decrease is
driven by stronger capital management across projects, as well as changes in the
timing of expenditures for key initiatives.
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 $135 million, including approximately $5 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 September 26, 2021
             Compared to the Three Months Ended September 27, 2020

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