Harley-Davidson, Inc. 2019 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2019; the filing also provides unaudited fourth-quarter data. Harley-Davidson operates through Motorcycles and Related Products and Financial Services, principally HDFS.
Business Context
The company is executing its “More Roads to Harley-Davidson” plan, focused on new products, broader customer access, stronger dealers and brand development. Strategic initiatives include electric motorcycles, middleweight and small-displacement models, international expansion and a 2027 objective of reaching 4 million U.S. Harley-Davidson riders.
Key Financial Metrics
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Total revenue | $5.362 billion | $5.717 billion | Down 6.2% |
| Motorcycles revenue | $4.573 billion | $4.969 billion | Down 8.0% |
| Financial Services revenue | $789.1 million | $748.2 million | Up 5.5% |
| Operating income | $555.6 million | $713.5 million | Down 22.1% |
| Net income | $423.6 million | $531.5 million | Down 20.3% |
| Diluted EPS | $2.68 | $3.19 | Down 16.0% |
| Operating margin | 10.4% | 12.5% | Down 2.1 points |
| Motorcycles operating margin | 6.3% | 8.5% | Down 2.2 points |
| Operating cash flow | $868.3 million | $1.206 billion | Down 28.0% |
| Capital expenditures | $181.4 million | $213.5 million | Down 15.0% |
Motorcycle wholesale shipments declined 6.4% to 213,939 units. Worldwide dealer retail sales declined 4.3% to 218,273 units, including a 5.2% U.S. decline and a 3.0% international decline. U.S. 601+cc market share was 49.1%, versus 49.7% in 2018; European share was 8.9%, versus 10.3%.
Financial Services operating income declined 8.6% to $266.0 million. The provision for credit losses increased 25.9% to $134.5 million. Retail loan losses were 2.00%, versus 1.76% in 2018, and the 30-day delinquency rate rose to 4.39% from 4.12%.
Liquidity, Debt and Capital Allocation
- Cash and cash equivalents were $833.9 million; total cash, cash equivalents and restricted cash were $905.4 million.
- Total debt was $7.445 billion, including $572.0 million of unsecured commercial paper, $1.370 billion of asset-backed debt, $4.760 billion of medium-term notes and $743.3 million of senior notes.
- Liquidity, including cash and available credit and conduit facilities, totaled approximately $2.656 billion at year-end. Management targets liquidity covering at least 12 months of projected needs.
- Operating cash flow funded capital expenditures, dividends and a portion of share repurchases, but cash, cash equivalents and restricted cash declined by $354.4 million during 2019.
- Dividends totaled $237.2 million, or $1.50 per share. Share repurchases totaled $296.5 million, including $286.7 million for 8.2 million discretionary shares; 8.2 million shares remained authorized for repurchase at year-end.
- Shareholders’ equity was $1.804 billion and total assets were $10.528 billion.
Material Changes Versus 2018
- Motorcycles operating income fell $132.7 million, primarily because of lower shipments, unfavorable product mix and higher tariff costs.
- Recent European Union and China tariffs reduced 2019 Motorcycles gross profit by approximately $97.9 million, or $74.2 million more than in 2018.
- Motorcycles gross profit decreased 16.9% to $1.343 billion; lower volume, unfavorable shipment mix and manufacturing costs more than offset pricing benefits.
- Lower restructuring expense and favorable warranty and recall developments partially offset the decline. The company recorded approximately $28.0 million of supplier recoveries in 2019 and about $34 million of recall-related benefits.
- Restructuring expense declined to $32.4 million from $93.4 million. The company expects no additional restructuring expense in 2020.
- Financial Services revenue increased, but higher funding costs, operating expenses and credit-loss provisions reduced segment operating income.
- The company adopted the new lease accounting standard in 2019, recognizing approximately $60 million of lease assets and liabilities without a material expected effect on ongoing net income or cash flow.
Guidance and Outlook
- For 2020, Motorcycles revenue was expected to range from approximately $4.53 billion to $4.66 billion, or down 1% to up 2% from 2019.
- 2020 Motorcycles operating margin was expected to be 7% to 8%, compared with 6.3% in 2019.
- Worldwide motorcycle shipments were expected to range from modestly down to slightly up, while U.S. retail sales were expected to decline again.
- Expected 2020 tariff impact was approximately $35 million, versus $97.9 million in 2019. The company also expected approximately $23 million of incremental Manufacturing Optimization Plan savings.
- 2020 Financial Services operating income was expected to be approximately flat, with higher interest income largely offset by credit losses and funding costs.
- Capital expenditures were expected to be $215 million to $235 million, funded by operating cash flow; the effective tax rate was expected to be approximately 24% to 25%.
- The company planned launches or expansions involving middleweight motorcycles, electric bicycles, a small-displacement motorcycle in China, Pan America and Bronx models, and additional electric two-wheelers.
- Effective January 1, 2020, the company adopted the expected-credit-loss standard. Initial allowance increases were expected to be $70 million to $110 million, with a corresponding after-tax reduction to retained earnings.
Risks, Contingencies and Unusual Items
- Key risks include declining U.S. and developed-market motorcycle demand, shifting consumer preferences, competition, dealer financial health, used-motorcycle pricing and weather-related sales volatility.
- Execution of the More Roads plan depends on successful product launches, electric-vehicle demand and infrastructure, international expansion, manufacturing changes and dealer capability.
- Tariffs, foreign exchange, commodity prices, interest rates and access to capital markets could materially affect margins, funding costs and cash flows.
- HDFS is exposed to rising retail and wholesale credit losses, including risks from subprime lending, used-motorcycle collateral values and loan-servicing systems.
- The company had a $36.4 million product recall liability at December 31, 2019. It accrued $83.4 million for 13 voluntary motorcycle recalls during the three years ended 2019.
- An EPA consent decree remained subject to court approval. The company had an accrual and stated that finalization would not materially affect its financial condition or results; potential remedies beyond the reserve could not be estimated if approval were denied.
- The company is responsible for 47% of certain environmental response costs at its York, Pennsylvania facility; remaining cleanup activities were scheduled to begin in mid-2020.
- Contractual debt principal payments totaled $7.467 billion, including $2.327 billion due in 2020. The company remained in compliance with applicable debt covenants.
- Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting. Critical audit matters included retail finance-receivable credit-loss allowances and product recall liabilities.
Investor Verification Checklist
- Verify whether 2020 and subsequent product launches generated the expected unit, revenue and margin improvement.
- Track U.S. and European motorcycle demand, market share, dealer inventory and promotional intensity.
- Reconcile actual tariff costs and savings with management’s 2020 estimates.
- Monitor HDFS delinquencies, charge-offs, reserve rates and the effect of the expected-credit-loss standard.
- Review refinancing needs for debt maturing in 2020 and the continued availability and cost of commercial paper and asset-backed funding.
- Assess cash generation after dividends, repurchases, capital expenditures and required debt repayments.
- Follow the EPA matter, York environmental remediation, recall claims, pension assumptions and other litigation contingencies.