Harley-Davidson, Inc. — 2020 Q2 Form 10-Q Summary
Business context and reporting period
Harley-Davidson operates through Motorcycles and Related Products and Financial Services. This unaudited Form 10-Q covers the three and six months ended June 28, 2020, compared primarily with June 30, 2019. Results were materially affected by the COVID-19 pandemic, including temporary manufacturing suspensions, dealer closures, supply-chain disruption and reduced demand.
Key financial metrics
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Total revenue | $865.2 million | $1,632.6 million | $2,163.5 million | $3,017.0 million |
| Operating income (loss) | $(116.1) million | $256.3 million | $(8.6) million | $423.4 million |
| Net income (loss) | $(92.2) million | $195.6 million | $(22.5) million | $323.6 million |
| Diluted EPS | $(0.60) | $1.23 | $(0.15) | $2.03 |
| Operating cash flow | Not separately provided for the quarter | Not separately provided for the quarter | $610.2 million | $496.2 million |
- Motorcycles revenue: $669.3 million in Q2, down 53.3%; six-month revenue was $1.77 billion, down 32.7%.
- Motorcycles operating margin: negative 18.1% in Q2 versus 12.6% in the prior-year quarter; negative 2.1% for the first half versus 11.0%.
- Financial Services operating income: $4.9 million in Q2, down 93.5%; $27.9 million for the first half, down 79.2%.
- Financial Services provision for credit losses: $91.2 million in Q2 versus $26.4 million; $170.6 million for the first half versus $60.9 million.
- Finance receivables: $7.0 billion net at June 28, 2020, with an allowance for credit losses of $411.0 million, compared with $7.6 billion net and a $195.0 million allowance at June 30, 2019.
- Liquidity: Cash and cash equivalents were $3.86 billion. Cash, cash equivalents and availability under credit and conduit facilities totaled $4.69 billion.
- Debt: Total outstanding debt was $10.22 billion at June 28, 2020, versus $7.45 billion at June 30, 2019. Current and long-term debt on the balance sheet totaled approximately $10.22 billion, excluding lease liabilities.
- Balance sheet: Total assets were $13.16 billion and shareholders’ equity was $1.62 billion at June 28, 2020.
- Dividends and repurchases: The company paid $61.9 million of dividends in the first half, including $0.02 per share in Q2. Discretionary repurchases were suspended; first-half repurchases of $7.2 million primarily reflected employee tax withholding.
Material changes versus the prior comparable period
- Worldwide retail motorcycle sales declined 26.6% in Q2 and 23.0% in the first half. Wholesale motorcycle shipments declined 58.7% in Q2 and 36.3% in the first half.
- At the end of April, nearly 60% of independent dealers were closed; by the end of Q2, 93% had resumed normal operations.
- Manufacturing facilities were temporarily suspended, with the Thailand facility closed through April and U.S. facilities closed through May. Manufacturing had resumed by the reporting date.
- Motorcycles gross profit fell to $107.6 million in Q2 from $454.7 million. Lower volume, unfavorable foreign exchange and mix, and lower fixed-cost absorption were partly offset by lower spending and reduced tariff costs.
- Financial Services revenue was broadly stable in Q2 at $196.0 million, but higher funding costs and substantially higher expected credit losses reduced operating income to $4.9 million.
- The company adopted the current expected credit loss standard, ASU 2016-13, on January 1, 2020. The adoption increased the allowance by $100.6 million and reduced retained earnings by $78.2 million after tax. Prior periods were not restated and are not fully comparable.
- Cash increased by $3.16 billion during the first half, primarily from $2.70 billion of financing inflows, including increased commercial paper, securitization and other debt financing.
Guidance, outlook, management commentary, risks and unusual items
- The company withdrew all forward-looking financial guidance on March 26, 2020 because the magnitude and duration of COVID-19 impacts remained uncertain.
- Cost-preservation actions are expected to preserve approximately $250 million of cash in 2020, excluding restructuring charges. The company also expects to continue suspending discretionary share repurchases.
- The company approved a third-quarter dividend of $0.02 per share, consistent with Q2.
- Under “The Rewire,” management plans to eliminate approximately 700 positions globally, including approximately 500 employee terminations, streamline motorcycle models by approximately 30%, reduce Parts & Accessories SKUs by at least 15% and General Merchandise SKUs by at least 25%, and focus on approximately 50 priority markets.
- The company expects to launch the Pan America 1250 Adventure Touring motorcycle in 2021 and intends to present its 2021–2025 strategic plan, “The Hardwire,” in the fourth quarter of 2020.
- Restructuring expenses are expected to total approximately $94 million in 2020, with approximately $115 million of annual savings expected to begin in 2021. Additional actions approved through August 5, 2020 were expected to generate approximately $44 million of additional restructuring expense, approximately half in cash expenditures.
- COVID-19 remains the principal uncertainty, affecting demand, manufacturing, dealers, supply chains, credit losses, capital-market access and liquidity. Management expects recessionary conditions and a slow economic recovery could continue.
- At June 28, 2020, the company remained in compliance with debt covenants. HDFS’s relevant debt-to-capital ratio was 5.1 to 1.0 against a maximum of 10.0 to 1.0.
- Key contingencies include the pending EPA consent-decree matter, the York, Pennsylvania environmental cleanup, product-liability claims, warranty and recall obligations, and risks related to tariffs, foreign exchange, interest rates and dealer financial health.
Most important facts for an investor to verify
- Whether motorcycle demand, dealer operations and production volumes recover as assumed and whether the company’s reduced supply strategy supports pricing and market share.
- Whether the $411.0 million credit-loss allowance adequately reflects future consumer and dealer defaults, particularly after payment extensions expire.
- The timing and cost of the Rewire restructuring, including the additional $44 million approved after quarter-end and the achievability of projected annual savings.
- Debt maturities, refinancing access and the renewal of facilities expiring within the next 12 months, including the U.S. conduit facilities scheduled to expire November 25, 2020.
- The sustainability of the company’s $4.69 billion liquidity position and the effect of investment-grade rating changes on commercial-paper funding.
- The status and potential financial exposure of EPA, environmental, product-liability, warranty and recall matters.
- The impact of adopting ASU 2016-13 and changing economic forecasts on future earnings, equity and Financial Services profitability.