Harley-Davidson, Inc. 2020 Form 10-K Summary
Business Context and Reporting Period
Harley-Davidson reported for the fiscal year ended December 31, 2020. The company operates through Motorcycles and Related Products and Financial Services segments. The filing reflects significant COVID-19 disruption, including temporary manufacturing and dealer closures, and the execution of the restructuring program known as The Rewire.
Financial Performance and Key Metrics
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Total revenue | $4.054 billion | $5.362 billion | Down 24.4% |
| Operating income | $9.7 million | $555.6 million | Down 98.3% |
| Net income | $1.3 million | $423.6 million | Down 99.7% |
| Diluted EPS | $0.01 | $2.68 | Down $2.67 |
| Operating cash flow | $1.178 billion | $868.3 million | Up $309.6 million |
| Capital expenditures | $131.1 million | $181.4 million | Down 27.8% |
- Motorcycles segment revenue fell 28.6% to $3.264 billion. The segment posted a $186.1 million operating loss versus $289.6 million of operating income in 2019; operating margin declined to negative 5.7% from 6.3%.
- Financial Services revenue was broadly stable at $790.3 million, while operating income declined 26.4% to $195.8 million. Higher interest expense, restructuring costs and the provision for credit losses reduced profitability.
- Worldwide retail sales of new Harley-Davidson motorcycles declined 17.4% to 180,248 units. Wholesale motorcycle shipments declined 32.1% to 145,246 units.
- U.S. market share for new 601+cc motorcycles declined to 42.1% from 49.1%; European market share declined to 7.7% from 9.1%.
- Cash and cash equivalents were $3.257 billion at year-end. Total available liquidity, including credit and conduit facilities, was approximately $4.664 billion.
- Total outstanding debt was $8.987 billion, compared with $7.445 billion at December 31, 2019. Deposits totaled $80.0 million.
- Finance receivables, net, were $6.443 billion, compared with $7.374 billion in 2019. The allowance for credit losses increased to $390.9 million from $198.6 million.
- The 30-day retail loan delinquency rate improved to 3.18% from 4.39%, and annual retail loan losses declined to 1.38% from 2.00%; however, these trends benefited from pandemic-related payment extensions and improved used-motorcycle values.
- The company paid $0.44 per share in dividends during 2020, compared with $1.50 in 2019, and suspended discretionary share repurchases.
Material Changes Versus the Prior Comparable Period
- COVID-19 caused manufacturing suspensions from mid-March through May 2020, widespread dealer closures and supply-chain disruption. Dealer inventory of new motorcycles was down approximately 64% in the U.S. and 59% worldwide at year-end.
- The Rewire eliminated approximately 700 positions globally, including approximately 500 employee terminations, and involved product cancellations, facility changes, dealer-network optimization, international-market exits and the discontinuation of sales and manufacturing operations in India.
- Restructuring expense was $130.0 million in 2020, with approximately $20 million of additional expense expected in 2021. Total restructuring expense is estimated at approximately $150 million, with expected ongoing gross savings of approximately $115 million.
- The company adopted ASU 2016-13, requiring lifetime expected credit-loss recognition. The adoption increased the allowance by $100.6 million and reduced retained earnings by $78.2 million, net of tax. Prior periods were not restated and are not fully comparable for credit-loss measures.
- The company changed the annual new-model launch timing from the third quarter to the first quarter and implemented a more restrictive supply and inventory-management approach, which adversely affected 2020 shipments and retail comparisons.
- Incremental tariff costs declined to $24.5 million from $97.9 million, partly because motorcycles sourced from Thailand began being wholesaled into the European Union during 2020.
Guidance, Outlook, Commentary and Risks
- The Hardwire, the 2021–2025 strategic plan, targets focused growth in Touring, large Cruiser and Trike motorcycles; selective expansion into Adventure Touring and middleweight Cruiser; electric motorcycles; growth in Parts and Accessories, General Merchandise and Financial Services; and a more focused presence in approximately 50 global markets.
- Long-term targets include mid-single-digit Motorcycles revenue growth from 2021 through 2025, steady improvement in Motorcycles operating margin versus 2019, double-digit Financial Services operating-income growth, low-double-digit diluted EPS growth and annual capital investment of $190 million to $250 million.
- For 2021, management guided to Motorcycles revenue growth of 20% to 25%, a Motorcycles operating margin of 5% to 7%, approximately $20 million of restructuring expense, Financial Services operating-income growth of 10% to 15% and capital expenditures of $190 million to $220 million.
- Management reduced planned 2020 spending by approximately $250 million to preserve cash. The 2021 first-quarter dividend was approved at $0.15 per share, while significant discretionary repurchases were not planned.
- Key risks include the duration and recurrence of COVID-19 effects, weaker discretionary demand, dealer and distributor financial health, supply-chain interruptions, tariffs, foreign-exchange and interest-rate exposure, credit losses at HDFS, access to capital markets, product acceptance, electric-motorcycle execution, regulatory and emissions requirements, cybersecurity, recalls and product liability.
- Debt maturities total approximately $3.063 billion in 2021, including $1.014 billion of commercial paper and $2.040 billion of current long-term debt. The company was in compliance with applicable financial covenants at December 31, 2020.
- In February 2021, HDFS issued $600 million of secured notes through an on-balance-sheet asset-backed securitization at a weighted-average interest rate of 0.30%.
- The company disclosed an environmental remediation matter involving its York, Pennsylvania facility and product-liability claims; management stated that recorded accruals and insurance coverage were adequate.
Most Important Facts for Investors to Verify
- Whether 2021 revenue and margin guidance is achieved despite COVID-19, supply-chain, tariff and demand uncertainty.
- Whether the planned $115 million of restructuring savings materialize and whether remaining restructuring costs stay near the estimated $20 million for 2021.
- HDFS credit performance after pandemic payment extensions expire, including delinquency rates, charge-offs and allowance adequacy under ASU 2016-13.
- The refinancing and liquidity plan for approximately $3.063 billion of debt maturities due in 2021 and the continued availability of credit and conduit facilities.
- Progress and financial returns from The Hardwire initiatives, including Pan America, electric motorcycles, international-market prioritization and growth in Parts and Accessories and General Merchandise.
- Whether declining U.S. and European market share stabilizes or continues to pressure motorcycle volume, pricing and margins.
- Potential effects of EU and other tariffs, foreign-exchange movements, interest rates, recalls, environmental remediation and pending legal matters.