Harley-Davidson, Inc. 2020 Q1 Form 10-Q Summary
Business context and reporting period
Harley-Davidson, Inc. operates through Motorcycles and Related Products and Financial Services. The unaudited quarter ended March 29, 2020 is compared with the quarter ended March 31, 2019. Results were materially affected by the COVID-19 pandemic, including dealer closures, lower consumer demand, supply-chain disruption and temporary suspension of global manufacturing in March 2020.
Key financial metrics
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Revenue | $1.298 billion | $1.384 billion | Down 6.2% |
| Operating income | $107.5 million | $167.1 million | Down 35.7% |
| Net income | $69.7 million | $127.9 million | Down 45.5% |
| Diluted EPS | $0.45 | $0.80 | Down $0.35 |
| Operating margin | Approximately 8.3% | Approximately 12.1% | Down approximately 3.8 points |
| Net margin | Approximately 5.4% | Approximately 9.2% | Lower year over year |
| Operating cash flow | $(8.6) million | $32.7 million | Down $41.3 million |
| Capital expenditures | $32.9 million | $35.3 million | Down $2.3 million |
- Motorcycles revenue was $1.100 billion, down 8.0%. Motorcycle shipments declined 10.0% to 52,973 units, while worldwide independent-dealer retail sales declined 17.7% to 40,439 units.
- Motorcycles operating income declined 22.0% to $84.6 million; the operating margin fell to 7.7% from 9.1%. Lower volume, unfavorable foreign exchange and product mix more than offset manufacturing-cost benefits and the absence of restructuring expense.
- Financial Services revenue increased 5.1% to $198.5 million, but operating income fell 60.9% to $22.9 million. The provision for credit losses rose 130.3% to $79.4 million, reflecting COVID-19 impacts, economic deterioration and adoption of the current expected credit loss standard.
- Finance receivables, net, were $7.292 billion at March 29, 2020, compared with $7.374 billion at December 31, 2019 and $7.439 billion at March 31, 2019. The allowance for credit losses was $335.5 million, up from $190.9 million a year earlier.
- Cash and cash equivalents were $1.465 billion; cash, cash equivalents and restricted cash totaled $1.575 billion. The company reported $2.469 billion of cash plus availability under credit and conduit facilities at quarter end.
- Total debt was $8.140 billion, compared with $7.310 billion at March 31, 2019. Current debt consisted of $1.336 billion of commercial paper and $2.326 billion of current maturities of long-term debt; long-term debt, net, was $4.478 billion.
- Shareholders’ equity was $1.692 billion at quarter end. The company paid a $0.38 per-share dividend and repurchased $7.1 million of stock, primarily shares surrendered for employee tax withholding.
Material changes versus the prior comparable period
- COVID-19 drove lower motorcycle sales, shipments and revenue. Approximately 59% of the independent dealer network was closed for motorcycle sales in April 2020, and late-April month-to-date retail sales were down in line with dealer closures.
- Financial Services profitability deteriorated sharply as credit-loss provisions increased. Annualized retail motorcycle loan credit losses rose to 2.73% from 2.22%, while 30-day delinquencies improved to 3.37% from 3.73%.
- 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, net of tax. Prior periods were not restated and are not fully comparable.
- Restructuring expense fell to zero from $13.6 million because the manufacturing optimization and workforce reorganization plans were completed in 2019. The prior-year period also benefited from a $28.0 million supplier recovery related to recalls.
- Operating cash flow turned negative, while financing activities generated $655.5 million, primarily through increased commercial paper, asset-backed financing and a $522.7 million net securitization issuance.
Guidance, outlook, commentary and risks
- The company withdrew all forward-looking guidance on March 26, 2020 because the magnitude and duration of COVID-19 impacts were uncertain.
- Management expects cost-reduction actions, including hiring and compensation controls, spending reductions and a delayed model-year changeover, to preserve approximately $250 million of cash in 2020. Discretionary share repurchases were suspended.
- The board approved a second-quarter 2020 dividend of $0.02 per share, down from $0.38 per share in the first quarter.
- Management stated that cash and available credit were sufficient to fund operations for at least the next twelve months from the filing date, while also pursuing additional liquidity, including a potential $1.0 billion bank facility and further capital-markets access.
- Subsequent to quarter end, the company amended its credit facilities, extended a $195 million 364-day facility to August 2020, and issued $300 million of secured notes through an asset-backed securitization.
- The company launched “The Rewire,” a planned reset of its operating model and five-year strategy focused on core products, priority markets, dealer capabilities, cost reduction, product-launch timing, parts and accessories, general merchandise, Adventure Touring, Streetfighter and electric motorcycles.
- Principal risks include the duration and severity of COVID-19, dealer and supply-chain disruption, weaker consumer demand, increased loan losses, capital-market access and funding costs, tariffs, foreign exchange, product recalls and warranty costs, competition, cybersecurity, regulatory matters and environmental remediation.
- Material contingencies include an unresolved EPA consent-decree matter, for which the company has an accrual, and environmental remediation obligations at the York, Pennsylvania facility. The company states that product-liability accruals and insurance coverage are adequate.
Important facts for investors to verify
- Actual post-quarter COVID-19 retail sales, dealer reopening rates, manufacturing output and supply-chain recovery.
- Changes in HDFS delinquencies, charge-offs, repossessions, recovery values and the adequacy of the $335.5 million credit-loss allowance under worsening economic conditions.
- Liquidity availability, commercial-paper refinancing, conduit-facility renewals and compliance with debt covenants, particularly facilities expiring in 2020.
- Whether the planned $250 million of 2020 cash preservation is achieved without impairing product development, dealer support or long-term demand.
- The sustainability of the reduced $0.02 quarterly dividend and the timing of any resumption of discretionary share repurchases.
- Progress and estimated costs of “The Rewire,” including effects on product launches, market focus, restructuring and future margins.
- Final resolution of the EPA settlement and the cost and timing of York environmental remediation.