Harley-Davidson's Production Stoppage Was Caused by Non-compliant Brake Lines
Production ramps up to meet year-end targets
Back in May, Harley-Davidson announced it would temporarily halt motorcycle production due to a “regulatory compliance matter” regarding an unspecified part from a third-party supplier. Harley-Davidson initially estimated the stoppage would last two weeks but it eventually lasted 19 days before production resumed on June 6.
The actual cause for the delay remained unclear some speculating the issue was related to the powertrains, as the stoppage only affected Harley-Davidson’s gas engine-powered motorcycles and not the electric LiveWires. We thought that was unlikely at the time, as our sense was the powertrain production was also halted just to prevent a backlog of engines sitting idle awaiting installation onto motorcycles.
Harley-Davidson finally cleared things up today during its second quarter 2022 report. Jochen Zeitz, Harley-Davidson chief executive officer and board chair, kicked off his portion of the investor conference call by explaining the production shut-down was caused by non-compliant brake lines.
“The decision we took to temporarily close our production facilities and suspend vehicle shipments was taken out of an abundance of caution and related to a regulatory compliance issue with the brake hoses provided by a Tier 2 to our Tier 1 suppliers,” says Zeitz.
The Tier 1 supplier would be the company providing the braking systems for a bulk of Harley-Davidson models, while the Tier 2 supplier would be a company that provided brake lines to the Tier 1 supplier. Zeitz did not identify either supplier, but we suspect the Tier 1 supplier was Brembo, as it provides braking systems for numerous Harley-Davidson models. Brembo also provides braking systems for LiveWire, but we can assume its hoses were not subject to the same problem.
Zeitz did not provide detail on what was actually wrong with the brake hoses, except to say the issue was regulatory in nature.
The production stoppage had a negative effect on Harley-Davidson’s Q2 numbers, as it fell short of production targets for the quarter, but the company says it has ramped up production to make up for the shortfall.
Gina Goetter, Harley-Davidson chief financial officer, says the company typically produced about 4,500 units per week before the stoppage. The 19-day delay translated to a loss of production of 10,000 to 12,000 motorcycles. Since production resumed, Goetter says the production rate has risen above 4,500 units per week, which should allow Harley-Davidson to meet its initial production targets for the year.
“In terms of how we feel confident in the back half, that 4,500 unit run rate, we are producing over that now,” says Goetter. “So, as we work to recoup and kind of get the shipments into this critical Q3 window, we are producing above that output rate. And so that is what gives us confidence in being able to confirm our guidance.”
Over the second quarter, Harley-Davidson reported $1.266 billion in revenue from its motorcycle segment (including related products), a decrease of 5% from the same quarter last year. Motorcycle shipments decreased 15% to 48,200 units in the second quarter compared to 56,700 units shipped in the same period of 2021. Retail sales were down 23%, including a 28% decrease in North American sales.
Still, despite the drop in overall revenue, Harley-Davidson’s motorcycles and related products business saw a 3% increase in operating income to $192 million (from $186 million).
Including figures from its financial services business, Harley-Davidson reported overall revenues of $1.469 billion, down 4% from last year, while operating income declined 1% to $278 million. The second quarter saw a total net income of $216 million, up 5% from $206 million, while earnings per share increased from $1.33 to $1.46.
Harley-Davidson also provided an update on LiveWire and its pending merger with AEA-Bridges Impact Corp and Kymco. Zeitz says LiveWire is expected to go public on Sept. 26 to coincide with the start of the fourth quarter. AEA-Bridges will hold its shareholder meeting to vote on the transaction in mid-September.
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