Harley-Davidson, Inc. 2020 Q3 Form 10-Q Summary
Reporting period: Quarter and nine months ended September 27, 2020, compared with September 29, 2019. Harley-Davidson operates through Motorcycles and Related Products and Financial Services. The filing is unaudited.
Financial performance and metrics
| Metric | Q3 2020 | Q3 2019 | 9M 2020 | 9M 2019 |
|---|---|---|---|---|
| Revenue | $1.166 billion | $1.273 billion | $3.329 billion | $4.290 billion |
| Operating income | $137.9 million | $119.8 million | $129.3 million | $543.2 million |
| Net income | $120.2 million | $86.6 million | $97.7 million | $410.1 million |
| Diluted EPS | $0.78 | $0.55 | $0.64 | $2.58 |
| Cash dividends per share | $0.020 | $0.375 | $0.420 | $1.125 |
Margins: Consolidated net margin was approximately 10.3% in Q3 2020 versus 6.8% in Q3 2019, but approximately 2.9% for the first nine months versus 9.6% in the prior-year period. Motorcycles segment operating margin was 4.8% in Q3 versus 4.4%, and 0.4% for nine months versus 9.1%.
- Q3 revenue declined 8.4%; nine-month revenue declined 22.4%. Motorcycles and Related Products revenue declined 9.8% in Q3 and 26.1% year to date.
- Q3 Financial Services operating income increased 25.1% to $91.1 million, primarily from lower credit-loss provision and operating expenses. Nine-month Financial Services operating income declined 42.5% to $119.0 million because of higher credit-loss provisions.
- Q3 provision for credit losses was $7.8 million versus $33.7 million. For nine months, it was $178.4 million versus $94.6 million.
- Q3 worldwide retail motorcycle sales declined 8.1%, including a 10.3% U.S. decline. Nine-month worldwide retail sales declined 18.1%. Q3 wholesale shipments declined 6.2%; nine-month shipments declined 28.3%.
Cash flow, liquidity, debt and balance sheet
- Net cash provided by operating activities was $1.135 billion for the first nine months, up from $848.6 million, driven primarily by lower inventories and favorable wholesale-financing cash flows despite lower net income.
- Capital expenditures were $92.3 million versus $121.2 million. Net cash used in investing activities was $235.1 million versus $551.5 million.
- Financing activities provided $1.931 billion, compared with $603.7 million of financing cash outflows in the prior-year period, largely because of new debt and securitization financing.
- Cash, cash equivalents and restricted cash increased to $3.742 billion at September 27, 2020 from $905.4 million at December 31, 2019. Cash and cash equivalents were $3.561 billion.
- Total debt was $9.509 billion, up from $7.400 billion at September 29, 2019. Debt included $1.078 billion of unsecured commercial paper, $150.0 million of 364-day credit-facility borrowings, $2.096 billion of asset-backed securitization debt, $4.846 billion of medium-term notes and $743.8 million of senior notes.
- Management reported $4.735 billion of available liquidity, consisting of cash and availability under credit and conduit facilities. Credit ratings remained investment grade, although Standard & Poor’s and Fitch had negative outlooks.
- Finance receivables, net, were $6.843 billion, with an allowance for credit losses of $408.7 million. The allowance increased substantially following adoption of the lifetime expected-credit-loss standard and COVID-19-related economic assumptions.
Material changes versus the prior comparable period
- COVID-19 temporarily suspended global manufacturing, disrupted dealers and demand, and materially reduced motorcycle shipments and first-half retail sales.
- Harley-Davidson adopted ASU 2016-13 on January 1, 2020. The adoption increased the allowance for credit losses by $100.6 million and reduced retained earnings by $78.2 million after tax. Prior periods were not restated and are not fully comparable.
- The company initiated “The Rewire,” including approximately 700 fewer global positions, product and facility changes, dealer-network optimization, international-market exits and discontinuation of sales and manufacturing operations in India.
- Restructuring expense was $43.9 million in Q3 and $85.9 million year to date, versus $7.6 million and $31.7 million, respectively. Total 2020 restructuring expense is expected to be approximately $169 million, with annual savings of approximately $115 million beginning in 2021.
- Inventory management reduced global dealer inventory by more than 30% year over year, while U.S. dealer inventory declined approximately 39%. The company reported reduced discounting and stronger used-motorcycle values, but these actions also constrained retail sales.
- Discretionary share repurchases were suspended. Year-to-date repurchases of $7.9 million primarily reflected shares surrendered for employee tax withholding, compared with $217.5 million in the prior-year period.
Guidance, outlook, risks and unusual items
- The company withdrew all forward-looking guidance on March 26, 2020 because of COVID-19 uncertainty. It expected global retail sales to continue declining in Q4 2020 and market share to remain volatile due to model-year timing and inventory-management changes.
- The annual new-model-year launch was shifted from August to the first quarter, which management expected to adversely affect near-term comparisons but improve seasonal selling and reduce aged inventory.
- Management expected approximately $250 million of 2020 cash preservation from planned spending reductions and approved a fourth-quarter dividend of $0.02 per share.
- Key risks include the duration and severity of COVID-19, supply-chain and manufacturing disruptions, dealer financial health, retail-credit losses, capital-market access and funding costs, tariffs and foreign exchange, execution of The Rewire and The Hardwire plans, product recalls, litigation, cybersecurity and demand for electric motorcycles.
- The EPA consent decree was approved by the U.S. District Court on September 14, 2020; the company stated that the settlement payment would not materially affect financial condition or results.
- The company repurchased a previously off-balance-sheet securitization vehicle for $27.4 million in April 2020. Its U.S. conduit facilities had an expiration date of November 25, 2020, and the company expected renewal.
- The company remained in compliance with debt covenants. HDFS’s applicable leverage ratio was 4.6 to 1.0 versus a 10.0-to-1.0 limit.
Important facts for investors to verify
- Whether COVID-19-related retail demand, dealer inventory reductions and the first-quarter model-year launch improve or further pressure 2021 sales and market share.
- Actual restructuring costs, workforce reductions, market exits and realized annual savings relative to the $169 million cost and $115 million savings expectations.
- Future credit losses and allowance adequacy under the lifetime expected-loss model, including the effect of payment extensions and unemployment.
- Debt maturities, refinancing costs, conduit-facility renewals and continued access to commercial-paper and securitization markets.
- The sustainability of Q3 Financial Services earnings, given lower credit-loss provisions and temporary pandemic-related payment extensions.
- Execution of The Hardwire strategy, dealer-network changes, international-market exits and the company’s ability to restore profitable motorcycle growth.