Tariffs sucker-punch high-debt companies like Harley-Davidson
- S&P Global Ratings has placed Harley-Davidson on CreditWatch with negative implications after the company announced it would shift production overseas due to retaliatory tariffs from the European Union on its products.
- The motorcycle company said it will absorb the costs rather than raises prices on its motorcycles, resulting in up to $40 million in additional costs for Harley this year. After 2018, those additional costs could be up to $100 million annually.
- Moody's listed Harley-Davidson's production shift as a credit negative because of the "increasing burden that rising trade tensions between the US and its trading partners is placing on Harley-Davidson," the investors service wrote.
Harley-Davidson's move to shift some production overseas has devolved into a political spectacle, but the consequences of tariffs are creating a dire need for the motorcycle company to adjust its manufacturing and operations.
The EU's retaliatory tariffs on Harley's products are the latest in a string of trade headwinds the company is facing. U.S. duties on imports of steel and aluminum have increased production costs in the U.S., according to Moody's.
"Since [the steel and aluminum tariff] announcement in middle of February, we have seen aluminum and steel prices rise even further," John Olin, senior vice president and CFO of Harley-Davidson, said in the company's most recent earnings call, which took place before the EU announced retaliatory tariffs. "So looking at the impact of tariffs every information that we have now shows a highly volatile situation."
In addition, the U.S. withdrawal from the Trans-Pacific Partnership "exposed its bikes to increased import tariffs in the strategically important Asian markets," Moody's said.
The series of tariffs "don’t come at a good time for the company, which we understand had already been seeing a trend toward somewhat weaker sales," Bill Danner, president of CreditRiskMonitor, a financial risk analysis and news service, told Supply Chain Dive.
Despite regulatory challenges and a declining consumer interest in motorcycles, Harley has "good financial strength, today, as is evidenced by our FRISK score of '9,'" Danner said. The FRISK score weighs probability of bankruptcy on a scale of one to 10, and a score of nine indicates a .12% to .27% chance of bankruptcy within the next 12 months. In other words, it's very unlikely Harley-Davidson will face bankruptcy risk anytime soon.
The company does, however, have a considerable amount of debt, Danner said. As noted in its first quarter earnings results, Harley's accounts payable, the money it owes to vendors, increased by $91.44 million.
"If the trade war escalates enough to tip the world into recession, things could get very bad for a high-debt company like Harley-Davidson," Danner said. "Hold onto your hat, because Harley-Davidson would not be alone. There are a lot of high-debt companies, these days."
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