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HARLEY-DAVIDSON, INC.

(HOG)
  Report
Real-time Estimate Cboe BZX  -  01:51:13 2023-02-01 pm EST
45.48 USD   -1.19%
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HARLEY-DAVIDSON, INC. Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

11/03/2022 | 11:44am EST

Harley-Davidson, Inc. is the parent company of the groups of companies referred to as Harley-Davidson Motor Company and Harley-Davidson Financial Services. 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 sections 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," "is on-track," "forecasting," 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, as well as 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, 2021. 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 "Key Factors Impacting the Company" and the "Guidance" sections in this Item 2 are only made as of October 26, 2022 and the remaining forward-looking statements in this report are made as of the date of the filing of this report (November 3, 2022), and the Company disclaims any obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances.

Overview(1)

During the third quarter of 2022, the Company's shipments were up 19% compared to the same quarter last year as it recovered a majority of the volume lost as a result of a suspension of production and shipments for approximately two weeks during the second quarter of 2022. Year to date, through the end of the third quarter, shipments were up 0.4% compared to the same period last year. The Company plans to make up the remaining volume lost as a result of the second quarter suspension during the fourth quarter of 2022. The Company's net income was $261.2 million, or $1.78 per diluted share, in the third quarter of 2022, compared to $163.0 million, or $1.05 per diluted share, in the third quarter of 2021. On a year to date basis, the Company's net income was $699.5 million, or $4.68 per diluted share, for the first three of quarters 2022, compared to $628.5 million, or $4.06 per diluted share, for the first three quarters of 2021.

In the third quarter of 2022, Motorcycles segment operating income was $257.8 million, up $160.1 million from the third quarter of 2021. The increase in operating income from the Motorcycles segment for the third quarter of 2022 was driven primarily by higher motorcycle shipments, price increases, favorable product mix and lower tariff costs partially offset by the impact of higher supply chain costs, unfavorable foreign currency exchange rates and increased operating expenses compared to the same quarter last year. Operating income from the Financial Services segment in the third quarter of 2022 was $81.0 million, down $25.6 million compared to the prior year quarter due primarily to an increase in the provision for credit losses and higher interest expense.

Retail sales of new Harley-Davidson motorcycles in the third quarter of 2022 were down 2.3% compared to the third quarter of 2021, including a decline of 5.4% in the U.S., partially offset by an increase of 2.8% in international markets. The Company believes retail sales during the third quarter of 2022 were impacted by low dealer inventory levels following the Company's suspension of production and shipments during the second quarter of 2022. Refer to the Motorcycles Retail Sales and Registration Data section for further discussion of retail sales results.

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Key Factors Impacting the Company(1)

Supply Chain Challenges - During the third quarter of 2022, the Company continued to experience disruption and increased costs related to global supply chain challenges including the continued global semiconductor chip shortages. As a result of these challenges, the Company experienced higher costs in the third quarter of 2022, although the rate of year over year inflation moderated during the quarter relative to inflation rates experienced in the first two quarters of 2022. The moderation in inflation experienced during the third quarter resulted primarily from the normalization of logistics inflation which started to decline during the quarter and to a lesser extent raw materials inflation which slowed as metal markets improved. In addition, the Company continued to reduce its reliance on expedited shipping during the third quarter of 2022. The Company expects inflation rates for supply chain costs during the fourth quarter of 2022 to be similar to the third quarter of 2022 with continued improvement in logistics and material costs through the balance of the year.

Supply Matter - During the second quarter of 2022, the Company received information from a third-party supplier concerning a regulatory compliance matter relating to the supplier's component part. As a result, out of an abundance of caution, the Company suspended all vehicle assembly and shipments (excluding LiveWire models) for approximately two weeks during the second quarter of 2022. The Company continues to work through the regulatory compliance matter with its relevant suppliers and the regulatory agency. Given the uncertainties related to this matter, the Company is currently unable to reasonably estimate any potential additional costs or recall expenses it may incur. While at this time the Company does not expect that this matter will result in additional costs or recall expenses that are material, it is possible that the Company could incur additional costs or recall expenses that are material.

Suspension of Additional European Union Tariffs - 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 revocation of the Binding Origin Information (BOI) rulings that allowed it to supply its EU markets with certain motorcycles produced at its Thailand manufacturing facility at tariff rates of 6%. 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% from April 19, 2021 through the end of 2021. 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 suspended the additional tariffs initially imposed by the EU on the Company's motorcycles, reducing the total EU tariff rate on the Company's motorcycles from 31% to 6%, effective January 1, 2022. The lower 6% tariff rate applies to all motorcycles imported by the Company into the EU, regardless of origin. Under the agreement between the U.S. and the EU, the lower tariff rate will remain in effect until December 31, 2023. During such time, the U.S. and EU will monitor and review the operation of the agreement, seeking to conclude the negotiations on steel and aluminum tariffs by December 31, 2023. These negotiations are ongoing, and there are no assurances the U.S. and EU will reach a resolution that concludes the trade conflict on steel and aluminum tariffs beyond December 31, 2023.

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 successful.

COVID-19 Pandemic - The Company continues to manage through the impacts of the COVID-19 pandemic and its associated variants by keeping safety and community well-being a priority. The Company continues to proactively follow protocols to keep workers safe in its manufacturing facilities. 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 including associated variants, the success of vaccination programs, the consequences of vaccine requirements, and its impact on the Company's employees, customers, 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.

LiveWire Transaction - On September 26, 2022, the Company's electric motorcycle subsidiary (LiveWire) completed its planned merger with AEA-Bridges Impact Corp. (ABIC), a special purpose acquisition company, to create a new publicly traded company. As described below, the transaction was financed with ABIC's cash held in trust less redemptions, a cash investment from the Company and an investment from Kwang Yang Motor Co., Ltd. (KYMCO), an independent strategic investor.

At the LiveWire transaction close, LiveWire received net proceeds of approximately $294 million, including a $180 million investment from the Company, net of transaction expenses, a $100 million investment from KYMCO and a $14 million investment from ABIC, net of redemptions and transaction expenses. Following the close, the Company has an equity interest in LiveWire of approximately 89.4%, ABIC's shareholders and founders have an equity interest of approximately 5.7%, and KYMCO has an equity interest of approximately 4.9%. As the controlling shareholder, the Company will continue to consolidate LiveWire's results, with additional adjustments to recognize non-controlling shareholder interests.

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Guidance(1)

On October 26, 2022, the Company provided the following guidance for 2022, which reflects its current outlook for the supply chain challenges discussed above.

The Company continues to expect Motorcycles segment revenue growth in 2022, compared to 2021, between 5% and 10%. This forecast incorporates the expectation that the Company will make up the remaining production and wholesale shipments lost as a result of the temporary suspension of production and shipments during the second quarter. The Company continues to expect revenue in 2022 to be positively impacted by global pricing as the Company works to offset cost headwinds across its supply chain.

The Company continues to expect Motorcycles segment operating margin as a percent of revenue of 11% to 12%. The Company believes the anticipated positive impacts from pricing will more than offset the expected cost inflation across the supply chain. Also, the Company expects the suspension of the additional EU tariffs to contribute over a percentage point of margin growth.

Given the model year 2023 planned production cut-over in the fourth quarter, the Company expects 2022 fourth quarter Motorcycles segment operating margin to be impacted by lower wholesale shipments and higher operating expenses relative to the first three quarters of 2022. The Company expects operating and capital expense to be higher in the fourth quarter, as compared to the first three quarters of 2022, related to product development, marketing and other model year launch support activities.

The Company continues to expect Financial Services operating income to decline 20% to 25% in 2022 compared to 2021. This decline is largely a result of the favorable credit loss allowance reductions and lower actual credit losses in 2021.

The Company expects capital investments between $170 and $190 million in 2022, down from the previous estimate of between $190 and $220 million. The Company plans to continue to invest behind product development and capability enhancement in support of The Hardwire strategy.

The Company's capital allocation priorities remain to fund growth through The Hardwire initiatives, including funding of the LiveWire transaction, pay dividends and execute discretionary share repurchases.

© Edgar Online, source Glimpses

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