Harley-Davidson announces Q3 earnings

Harley-Davidson, Inc. on Tuesday announced further progress implementing The Rewire, a critical overhaul of its business, setting a strong foundation for the company including a new operating model that realigns the organization for performance, reduces costs and sharpens focus on profitable products and markets.

The end of The Rewire will be the foundation for The Hardwire, the company's forthcoming 5-year strategic plan (2021-2025), to deliver profitable growth and shareholder value based on expanding the desirability of Harley-Davidson. Harley-Davidson also reported third quarter 2020 financial results, including the strongest third quarter net income since 2015, reflecting initial positive impacts of The Rewire efforts.

"We have driven significant progress across each key element of The Rewire playbook, and we believe the positive changes we have executed are setting our course for a winning future," said Jochen Zeitz, chairman, president and CEO, Harley-Davidson. "We have started on our journey to become a high-performance company where business structure, leadership principles and our culture are all aligned. The platform we are creating will support the work ahead as we continue to develop and execute our new 5-year strategic plan, The Hardwire."

Driving A High-Performance Culture
Harley-Davidson is evolving its culture to drive a high-performing, winning organization. The company is ramping up the competitive spirit of its employees and dealers to promote the heritage and value of the Harley-Davidson brand. Earlier this year, the company revealed a new vision and mission that are guiding and defining the company's roadmap.

Vision: Building our legend and leading our industry through innovation, evolution and emotion.

Mission: More than building machines, we stand for the timeless pursuit of adventure. Freedom for the soul.

The Rewire
The Rewire efforts to date have strengthened the company's focus on customers and dealers and reinforced desirability for the company's brand and products, setting the foundation for its 2021-2025 strategic plan.

Highlights as of the end of the Third Quarter:

  • $250 million cash savings including SG&A and capital reductions expected in 2020
  • $115 million annual savings from restructuring actions taken expected starting in 2021
  • $3.6 billion cash and cash equivalents compared to $862 million in 2019
  • $1.1 billion of cash generated from operating activities compared to $849 million in 2019
  • Global dealer inventory down over 30 percent compared to third quarter 2019
  • 2020 motorcycles selling at full MSRP (avg. U.S. during the third quarter)
  • Used Harley-Davidson prices up significantly (U.S.)

Progress made across all five key elements of The Rewire include:

New Operating Model: Reduced Complexity and Increased Speed
The company's new operating model eliminated duplication and complexity across global operations, resulting in significant expected ongoing SG&A savings and vast improvements in agility and efficiency.

The company also refreshed the leadership structure and team with most of the leaders being new to their roles and many bringing new perspectives and capabilities from outside the company.

Reset Global Business and Focus on High-Potential Markets
Harley-Davidson plans to concentrate on approximately 50 markets, primarily in North America, Europe and parts of Asia Pacific, that represent a high percentage of the company's expected volume and growth potential. The company's international business has been significantly reset and refocused with investment and resources aligned with projected market potential. Under the new participation model, approximately:

  • 36 highest potential markets will remain, with the resources and autonomy within a clearly defined framework, to best drive growth and profitability.
  • 17 markets will transition to more cost-effective distributor models. This includes India, where Hero MotoCorp will be the exclusive Harley-Davidson distributor and licensed to develop and sell a range of Harley-Davidson motorcycles.
  • 39 markets will be exited due to volume, profitability or potential that does not support continued investment.

Refined Motorcycle Line-Up and High-Impact Product Launches
The company has streamlined its planned product portfolio by 30 percent and overhauled launch timing and go-to-market practices for maximum impact and success.

Highlights of the new approach include:

  • Further streamlining - Eliminating optional offerings in the product portfolio with low customer uptake
  • Sharper focus - Reducing complexity and directing resources toward the highest priority and core stronghold products
    • Priority -Deliver Harley-Davidson's first Adventure Touring motorcycle in 2021
    • Outsource - New venture created for eBicycles with minority equity participation for Harley-Davidson; marketed as Serial 1, Powered by Harley-Davidson
  • Seasonal alignment - Plans underway for a virtual, new model year launch for dealers and consumers in first quarter (shifted from August to be closer to the start of the riding season)
  • Marketing that drives desirability - The company executed new marketing campaigns featuring Jason Momoa and Ewan McGregor and Charley Boorman, stars of The Long Way Up, generating significant leads and growing awareness, excitement and desirability for the Harley-Davidson brand and products.
    • 500 million+ views of 'United We Will Ride' video by Jason Momoa
    • 56 million+ views of The Long Way Up trailer
    • 92,000 visits to The Long Way Up page on H-D.com
    • 105 million+ positive media impressions of Long Way Up

Growth through Parts & Accessories (P&A) and General Merchandise (GM)
To drive growth, Harley-Davidson established new business units for P&A and GM that enable each to invest resources to establish new channel strategies and better product assortments.

P&A Strategy

  • Better leverage opportunity to inspire riders through customization
  • Synergize with motorcycle product strategy
  • Improve pricing and inventory strategy; reduce SKUs by 15 percent for 2021
  • Enhance training and field support to drive sales growth

GM Strategy

  • Realign product in critical categories; build category management plans
  • Reestablish design principles centered around authenticity, brand heritage and quality
  • Sharpen focus on most profitable SKUs; reduce SKUs by 25 percent for 2021

Protecting Value
The company is operating with a remodeled approach to supply and inventory management with a focus on a powerful dealer network to better preserve the value and desirability of Harley-Davidson motorcycles for customers. Some initial outcomes of this approach as of the end of the third quarter include:

  • Reduced price gap between new and used Harley-Davidson motorcycles in the U.S.
  • Global dealer inventory down over 30 percent
  • Essentially eliminated promotions and discounting with a focus on brand building

A strong network of profitable dealers is essential to delivering the most desirable Harley-Davidson experience. The company continues to optimize its network to strengthen priority markets and provide an improved and integrated customer experience.

COVID-19 Response and Recovery
The company continues to proactively manage its business through the pandemic and has maintained robust protocols to keep workers safe in its factories. Most non-production workers will continue to work from home at least until the end of the year.

Included in the company's broad cost and cash savings measures are SG&A reductions, curtailed capital spending, suspended discretionary share repurchases and a prudent approach to dividend payments. The company will pay a fourth quarter cash dividend of $0.02 per share, in line with its second and third quarter dividends. The dividend is payable December 18, 2020 to the shareholders of record of the company's common stock as of December 4, 2020.

The company has also maintained its strong liquidity position with $4.7 billion in liquidity at the end of the quarter.

Third Quarter 2020 Results
 Harley-Davidson, Inc. Consolidated Financial Results
$ in millions (except EPS)3rd quarter9 months
20202019Change20202019Change
Revenue$1,166$1,273(8)%$3,329$4,290(22)%
Net Income$120$8739%$98$410(76)%
GAAP Diluted EPS$0.78$0.5542%$0.64$2.58(75)%
Adjusted Diluted EPS$1.05$0.7050%$1.22$3.14(61)%

Net income in Q3 2020 was $120 million, up 39 percent over prior year and the highest Q3 result since 2015. Q3 results reflect the actions taken in the third quarter under the company's The Rewire effort. Q3 GAAP diluted EPS was $0.78 versus $0.55 in Q3 2019. Excluding restructuring plan costs and the impact of tariffs, adjusted Q3 diluted EPS was $1.05 versus $0.70 in Q3 2019.

 Retail Motorcycle Sales
Motorcycles (thousands)3rd quarter9 months
20202019Change20202019Change
U.S.31.334.9(10)%86.4105.8(18)%
Canada1.92.6(25)%5.77.8(27)%
North America33.237.5(11)%92.0113.5(19)%
EMEA11.210.57%29.936.9(19)%
Asia Pacific 7.68.1(6)%20.321.8(7)%
Latin America1.82.5(29)%4.87.3(34)%
Worldwide Total53.858.5(8)%147.0179.5(18)%

Global retail motorcycle sales in the third quarter of 2020 were down 8 percent compared to the prior year reflecting, among other things, the company's shift in timing of the launch of new model year motorcycles from August each year to early Q1 to better align with seasonality.

 Motorcycles and Related Products Segment Results
$ in millions3rd quarter9 months
20202019Change20202019Change
Motorcycle Shipments (thousands)43.045.8(6)%124.3173.5(28)%
Total Revenue$964$1,069(10)%$2,733$3,699(26)%
Motorcycles Revenue$684$779(12)%$2,030$2,872(29)%
Parts & Accessories Revenue$210$2033%$513$584(12)%
General Merchandise Revenue$49$60(18)%$136$180(24)%
Gross Margin29.8%29.9%(0.1) pts.26.1%30.3%(4.2) pts.
Operating Income$47$47(0)%$10$336(97)%
Operating Margin4.8%4.4%0.5 pts.0.4%9.1%(8.7) pts.

Revenue from the Motorcycles and Related Products segment was down in Q3 compared to the prior year due to, among other things, the shift in timing of its motorcycle model year change-over from August to early Q1 annually. Gross margin was flat to prior year and operating margin was up during the quarter compared to Q3 2019 primarily due to aggressive cost management in the face of the COVID-19 pandemic and actions taken under The Rewire.

 Financial Services Segment Results
$ in millions3rd Quarter9 months
20202019Change20202019Change
Revenue$202$204(1)%$596$5911%
Operating Income$91$7325%$119$207(43)%

Financial Services segment third quarter operating income was up 25 percent due primarily to a decrease in the provision for loan losses driven by lower actual losses at the end of Q3 versus the previous quarter.

Other Results
Cash - Cash and cash equivalents were $3.6 billion at the end of Q3 2020, compared to $862 million at the end of Q3 2019. Harley-Davidson generated $1.1 billion of cash from operating activities year-to-date 2020 compared to $849 million year-to-date 2019.

Tax Rate - Harley-Davidson's year-to-date effective tax rate was 10.8 percent in Q3 2020 compared to 24.6 percent in Q3 2019. The decline in the effective tax rate was primarily due to discrete income tax benefits which reduced the Company's income tax expense.

Dividend & Share Repurchase - The company paid a cash dividend of $0.02 per share for the third quarter of 2020. The company did not repurchase shares on a discretionary basis during the first three quarters of 2020. During the quarter, there were 154 million weighted-average diluted common shares outstanding and 18 million shares remained on board-approved share repurchase authorizations.

Outlook
Given the uncertainty that remains surrounding the impact and duration of the COVID-19 pandemic, the company is not providing 2020 financial guidance.

Harley-Davidson is developing its 2021-2025 strategic plan, The Hardwire. Building on the foundation and principles of The Rewire, the driver of the new plan will be Harley-Davidson as the most desirable motorcycle brand in the world for its customers, employees, community and investors.

Harley-Davidson, Inc.
Condensed Consolidated Statements of Operations
(In thousands, except per share amounts)
 
  (Unaudited) (Unaudited) (Unaudited) (Unaudited)
  Three months ended Nine months ended
  September 27, September 29, September 27, September 29,
  2020 2019 2020 2019
         
Motorcycles and Related Products revenue $ 964,029 $           1,068,942 $          2,733,091 $           3,698,583
Gross profit 287,233 320,064 713,781 1,122,241
Selling, administrative and engineering expense 196,912 265,464 618,912 754,479
Restructuring expense  43,581 7,629 84,586 31,682
  Operating income from Motorcycles and Related Products46,740 46,971 10,283 336,080
         
Financial Services revenue 201,655 203,577 596,064 590,935
Financial Services expense 110,177 130,704 475,771 383,802
Financial Services restructuring expense 334 - 1,278 -
  Operating income from Financial Services 91,144 72,873 119,015 207,133
         
Operating income 137,884 119,844 129,298 543,213
Other income, net 155 3,160 466 11,857
Investment income 2,672 2,041 3,082 11,970
Interest expense 7,783 7,789 23,307 23,304
Income before income taxes 132,928 117,256 109,539 543,736
Provision for income taxes 12,710 30,693 11,843 133,597
Net income $ 120,218 $              86,563 $             97,696 $             410,139
         
Earnings per share:        
  Basic $    0.78 $                0.55 $               0.64 $                2.59
  Diluted $    0.78 $                0.55 $               0.64 $                2.58
         
Weighted-average shares:        
  Basic 153,252 156,239 153,153 158,117
  Diluted 153,915 156,944 153,790 158,794
         
Cash dividends per share: $   0.020 $               0.375 $              0.420 $               1.125
Harley-Davidson, Inc.
Reconciliation of GAAP Amounts to Non-GAAP Amounts
(In thousands, except per share amounts) 
         
  (Unaudited) (Unaudited) (Unaudited) (Unaudited)
  Three months ended Nine months ended
  September 27, September 29, September 27, September 29,
  2020 2019 2020 2019
Net income excluding restructuring plan costs and the
impact of tariffs
        
Net income (GAAP) $ 120,218 $              86,563 $             97,696 $             410,139
Restructuring plan costs 43,915 10,091 85,864 41,715
Impact of incremental tariffs 2,690 21,594 22,397 76,971
Tax effect of adjustments(a) (5,477) (8,063) (19,486) (29,160)
Adjustments, net of tax 41,128 23,622 88,775 89,526
Adjusted net income (non-GAAP) $ 161,346 $             110,185 $            186,471 $             499,665
         
Diluted EPS excluding restructuring plan costs and the
impact of tariffs
        
Diluted EPS (GAAP) $    0.78 $                0.55 $               0.64 $                2.58
Adjustments net of tax, per share 0.27 0.15 0.58 0.56
Adjusted diluted EPS (non-GAAP) $    1.05 $                0.70 $               1.22 $                3.14
         
(a) The income tax effect of adjustments has been computed using the company's effective income tax rate
Harley-Davidson, Inc.
Condensed Consolidated Balance Sheets
(In thousands)
       
  (Unaudited)   (Unaudited)
  September 27, December 31, September 29,
  2020 2019 2019
ASSETS      
Current assets:      
    Cash and cash equivalents $           3,560,950 $            833,868 $             862,381
    Accounts receivable, net 232,845 259,334 307,616
    Finance receivables, net 1,701,478 2,272,522 2,210,001
    Inventories, net 322,375 603,571 489,098
    Restricted cash 160,155 64,554 79,115
    Other current assets 178,931 168,974 140,786
  6,156,734 4,202,823 4,088,997
       
Finance receivables, net 5,142,014 5,101,844 5,305,579
Other long-term assets 1,233,527 1,223,492 1,181,654
  $          12,532,275 $         10,528,159 $          10,576,230
       
LIABILITIES AND SHAREHOLDERS' EQUITY      
Current liabilities:      
    Accounts payable and accrued liabilities $             880,384 $            876,668 $             905,941
    Short-term debt 1,227,763 571,995 1,013,137
    Current portion of long-term debt, net 2,109,284 1,748,109 1,779,673
  4,217,431 3,196,772 3,698,751
       
Long-term debt, net 6,171,676 5,124,826 4,607,041
Pension and postretirement healthcare liabilities 126,232 128,651 171,593
Other long-term liabilities 247,038 273,911 262,626
       
Shareholders' equity 1,769,898 1,803,999 1,836,219
  $          12,532,275 $         10,528,159 $          10,576,230
Harley-Davidson, Inc.
Condensed Consolidated Statements of Cash Flows
 (In thousands)
 
  (Unaudited) (Unaudited)
  Nine months ended
  September 27, September 29,
  2020 2019
     
Net cash provided by operating activities $          1,135,068 $             848,649
     
Cash flows from investing activities:    
  Capital expenditures (92,295) (121,161)
  Finance receivables, net (143,093) (445,708)
  Acquisition of business - (7,000)
  Other investing activities 334 22,395
Net cash used by investing activities (235,054) (551,474)
     
Cash flows from financing activities:    
  Proceeds from issuance of medium-term notes 1,396,602 546,655
  Repayments of medium-term notes (1,400,000) (1,350,000)
  Proceeds from securitization debt 2,064,450 1,021,353
  Repayments of securitization debt (735,885) (244,250)
  Net increase (decrease) in unsecured commercial paper 509,978 (120,707)
  Net increase in credit facilities 150,000 -
  Borrowings of asset-backed commercial paper 225,187 177,950
  Repayments of asset-backed commercial paper (236,846) (240,008)
  Deposits 29,992 -
  Dividends paid (65,002) (179,409)
  Repurchase of common stock (7,895) (217,454)
  Issuance of common stock under employee stock option plans 96 2,180
Net cash provided (used) by financing activities 1,930,677 (603,690)
     
Effect of exchange rate changes on cash, cash equivalents and restricted cash 6,071 (4,110)
     
Net increase (decrease) in cash, cash equivalents and restricted cash $          2,836,762 $            (310,625)
     
Cash, cash equivalents and restricted cash:    
Cash, cash equivalents and restricted cash, beginning of period $            905,366 $           1,259,748
Net increase (decrease) in cash, cash equivalents and restricted cash 2,836,762 (310,625)
Cash, cash equivalents and restricted cash, end of period $          3,742,128 $             949,123
     
Reconciliation of cash, cash equivalents and restricted cash on the
Consolidated balance sheets to the Consolidated statements of cash flows: 
    
  Cash and cash equivalents $          3,560,950 $             862,381
  Restricted cash 160,155 79,115
  Restricted cash included in Other long-term assets 21,023 7,627
  Cash, cash equivalents and restricted cash per the Consolidated statements of cash flows $          3,742,128 $             949,123
Motorcycles and Related Products Revenue
 and Motorcycle Shipment Data
(Revenue in thousands) 
  (Unaudited) (Unaudited) (Unaudited) (Unaudited)
  Three months ended Nine months ended
  September 27, September 29, September 27, September 29,
  2020 2019 2020 2019
MOTORCYCLES AND RELATED PRODUCTS REVENUE        
  Motorcycles $ 684,344 $             779,344 $          2,030,447 $           2,871,982
  Parts & accessories 209,808 203,173 513,201 584,134
  General merchandise 49,356 60,334 136,321 180,379
  Licensing 8,894 8,611 21,826 27,099
  Other 11,627 17,480 31,296 34,989
  $ 964,029 $           1,068,942 $          2,733,091 $           3,698,583
         
U.S. MOTORCYCLE SHIPMENTS 25,284 25,572 69,359 101,481
         
WORLDWIDE MOTORCYCLE SHIPMENTS        
    Touring 16,505 19,905 47,811 75,871
    Cruiser(a) 15,500 16,225 47,505 59,367
    Sportster®/ Street 10,978 9,707 29,009 38,247
  42,983 45,837 124,325 173,485
         
(a) Includes Softail®, CVOTM, and LiveWireTM
Worldwide Retail Sales of Harley-Davidson Motorcycles(a)
         
  Three months ended Nine months ended
  September 30, September 30, September 30, September 30,
  2020 2019 2020 2019
         
United States 31,304 34,903 86,376 105,756
Canada 1,915 2,560 5,668 7,787
Total North America 33,219 37,463 92,044 113,543
         
Europe(b) 9,742 9,018 26,014 31,997
EMEA - Other 1,442 1,465 3,864 4,902
Total EMEA 11,184 10,483 29,878 36,899
         
Asia Pacific(c) 4,444 4,889 12,517 13,219
Asia Pacific - Other 3,187 3,189 7,754 8,603
Total Asia Pacific 7,631 8,078 20,271 21,822
         
Latin America 1,768 2,498 4,760 7,255
      Total worldwide retail sales 53,802 58,522 146,953 179,519
 
(a) Data source for retail sales figures shown above is new sales warranty and registration information provided by Harley-Davidson dealers and compiled by the Company. The Company must rely on information that its dealers supply concerning new retail sales, and the company does not regularly verify the information that its dealers supply. This information is subject to revision.
 
(b)  Includes Austria, Belgium, Denmark, Finland, France, Germany, Italy, Luxembourg, Netherlands, Norway, Spain, Sweden, Switzerland and the United Kingdom. Retail sales for Greece and Portugal were reclassified from Europe to EMEA - Other for 2019 to be consistent with the 2020 presentation.
  
(c) Includes Japan, Australia, New Zealand and South Korea
Motorcycle Registration Data (a)
     
  Nine months ended
  September 30, September 30,
  2020 2019
United States(b)  201,822 213,876
Europe(c) 349,993 360,320
 
(a) Data includes on-road models with internal combustion engines with displacements greater than 600cc's and electric motorcycles with kilowatt peak power equivalents greater than 600cc's (601+cc). On-road 601+cc models include dual purpose models, three-wheeled motorcycles and autocycles. Registration data for Harley-Davidson Street® 500 motorcycles is not included in this table.
 
(b) United States industry data is derived from information provided by Motorcycle Industry Council. This third-party data is subject to revision and update.
 
(c) Europe data includes Austria, Belgium, Denmark, Finland, France, Germany, Italy, Luxembourg, Netherlands, Norway, Spain, Sweden, Switzerland, and the United Kingdom. Industry data is derived from information provided by Management Services Helwig Schmitt GmbH. Prior year registrations have been revised to exclude Greece and Portugal registrations. This third party data is subject to revision and update.
Harley-Davidson Motor Company (PRNewsfoto/Harley-Davidson, Inc.)

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