Harley-Davidson, Inc. is the parent company of the group of companies referred
to as Harley-Davidson Motor Company (HDMC) and Harley-Davidson Financial
Services (HDFS). Unless the context otherwise requires, all references to the
"Company" include Harley-Davidson, Inc. and all of its subsidiaries. The Company
operates in two segments: Motorcycles and Related Products (Motorcycles) and
Financial Services.
The "% Change" figures included in the Results of Operations sections were
calculated using unrounded dollar amounts and may differ from calculations using
the rounded dollar amounts presented.
(1) Note Regarding Forward-Looking Statements
The Company intends that certain matters discussed in this report are
"forward-looking statements" intended to qualify for the safe harbor from
liability established by the Private Securities Litigation Reform Act of 1995.
These forward-looking statements can generally be identified as such by
reference to this footnote or because the context of the statement will include
words such as the Company "believes," "anticipates," "expects," "plans," "may,"
"will," "estimates" or words of similar meaning. Similarly, statements that
describe or refer to future expectations, future plans, strategies, objectives,
outlooks, targets, guidance, commitments or goals are also forward-looking
statements. Such forward-looking statements are subject to certain risks and
uncertainties that could cause actual results to differ materially, unfavorably
or favorably, from those anticipated as of the date of this report. Certain of
such risks and uncertainties are described in close proximity to such statements
or elsewhere in this report, including under the caption "Cautionary Statements"
in this Item 2 and in Item 1A. Risk Factors, as well as in Item 1A. Risk Factors
of the Company's Annual Report on Form 10-K for the year ended December 31,
2019. Shareholders, potential investors, and other readers are urged to consider
these factors in evaluating the forward-looking statements and are cautioned not
to place undue reliance on such forward-looking statements. The forward-looking
statements included in the "Overview" and "Outlook" sections in this Item 2 are
only made as of October 27, 2020 and the remaining forward-looking statements in
this report are made as of the date of the filing of this report (November 5,
2020), and the Company disclaims any obligation to publicly update such
forward-looking statements to reflect subsequent events or circumstances.
Overview(1)
The Company's net income was $120.2 million, or $0.78 per diluted share, in the
third quarter of 2020, compared to $86.6 million, or $0.55 per diluted share, in
the third quarter of 2019. The Motorcycles segment reported operating income of
$46.7 million for the third quarter of 2020 which was down slightly from $47.0
million for the third quarter of 2019. Current year operating income was
impacted by a 6.2% decline in wholesale motorcycle shipments, unfavorable
product mix and higher restructuring expenses which were mostly offset by lower
manufacturing costs and reduced selling, administrative and engineering
expenses.
Operating income from the Financial Services segment in the third quarter of
2020 was $91.1 million, up 25.1% compared to the year-ago quarter due primarily
to a lower provision for credit losses and lower operating expenses. The
provision for credit losses benefited from lower credit losses and a modest
improvement in the Company's outlook on economic conditions during the third
quarter of 2020. The current year provision also reflects a new accounting
standard that changed how companies recognize expected credit losses on
financial instruments. The new standard requires recognition of full lifetime
expected credit losses upon initial recognition of a financial instrument,
replacing the prior, incurred loss methodology. The Company adopted the new
accounting standard on January 1, 2020 using a modified retrospective approach.
As a result, prior period results were not restated.
Worldwide independent dealer retail sales of new Harley-Davidson motorcycles in
the third quarter of 2020 were down 8.1% compared to the third quarter of 2019,
due primarily to a 10.3% decline in the U.S. The Company believes U.S. retail
sales for the third quarter of 2020, compared to prior year, were adversely
impacted by a shift in new model year launch timing from the third quarter to
the first quarter. The Company believes its new approach to supply and inventory
management also adversely impacted retail sales in the U.S. during the third
quarter of 2020 compared to the third quarter of last year.
Outlook(1)
As a result of the uncertainty surrounding the COVID-19 pandemic, the Company
withdrew all of its forward-looking guidance on March 26, 2020. While the
impacts on demand, facility closures and other restrictions resulting from the
pandemic are expected to be temporary, the duration of the pandemic and its
financial impact to the Company are unknown at this time. To the extent these
impacts continue, they are likely to have an adverse effect on the Company's
results of operations, financial condition and liquidity.
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COVID-19 Pandemic Response and Recovery Actions(1)
Cash Preservation - The Company is executing its previously disclosed plans to
reduce planned capital and planned non-capital spending. In total, the Company
continues to expect that these efforts will preserve approximately $250 million
of cash in 2020 with approximately 15% related to capital spending. The planned
spending reductions exclude the impact of restructuring charges as discussed
further under "Restructuring Plan Costs and Savings." Also, discretionary share
repurchases continue to be suspended, and the Company's Board of Directors
approved a cash dividend of $0.02 per share for the fourth quarter of 2020,
which was down from last year's fourth quarter, but in line with the 2020 second
and third quarter dividends.
Liquidity - At the end of the third quarter of 2020, the Company had $4.7
billion of available liquidity through cash, cash equivalents and availability
under its credit and conduit facilities. Liquidity is discussed in more detail
under Liquidity and Capital Resources.
Supporting Dealers and Riders - The Company's response and recovery plans have
included supporting global dealers and customers. HDFS continues to work with
qualified retail borrowers who have been impacted by the COVID-19 pandemic by
offering short-term adjustments to payment due dates. These temporary extensions
do not affect the associated interest rate or loan term.
Community Strength - The Company continues to proactively manage through the
COVID-19 pandemic and has implemented robust protocols to keep workers safe in
its factories. The Company expects most non-production workers will continue
working from home at least until the end of the year.
The Rewire
The Company is executing a set of actions, referred to as The Rewire. The Rewire
is a critical overhaul of the Company's business setting a strong foundation for
the Company. Key elements of The Rewire and highlights to date include the
following:
New operating model with reduced complexity and increased speed - The Company
has implemented a new operating model to eliminate duplication and complexity
across its global operations. The streamlined structure requires 700 fewer
positions across the Company's global operations and is expected to result in
significant annual ongoing savings as discussed further under "Restructuring
Plan Costs and Savings."
Reset global business and focus on high-potential markets - The Company 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 re-set and re-focused with investment and resources aligned with
projected market potential. The 36 highest potential markets will remain with
the resources and autonomy, within a clearly defined framework, to best drive
growth and profitability. Approximately 17 markets will remain as or transition
to a cost-effective dealer-direct or distributor model. This includes the India
market where the Company will wholesale it products through a third-party
distributor in the future. The Company will exit approximately 39 markets 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 approximately 30% and overhauled
launch timing and go-to-market practices for maximum impact and success.
Highlights of the new approach include:
•Further streamlining the product portfolio to reduce complexity
•Sharper focus - reducing complexity and directing resources toward highest
priority and core, stronghold products
•Seasonal alignment - plans underway for a virtual, new model year launch for
dealers and consumers in the first quarter (shifted annual model year launch
from August to the first quarter to be closer to the start of the riding season)
•Marketing that drives desirability - the Company has executed new marketing
campaigns featuring celebrities, generating significant leads and growing
awareness, excitement and desirability for the Harley-Davidson brand and
products
Growth through Parts & Accessories (P&A) and General Merchandise (GM) - The P&A
and GM businesses are now organized around dedicated leaders and business units
with strategies poised for new growth as the Company invests in new channel
strategies and better product assortments.
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Protecting value - The Company is operating with a remodeled approach to supply
and inventory management with a focus on a strong dealer network to better
preserve the value and desirability of Harley-Davidson motorcycles for
customers. Some initial outcomes of this approach include:
•A reduced gap between new and used Harley-Davidson motorcycles pricing in the
U.S. during the third quarter of 2020
•Global dealer inventory reduced over 30% at the end of September 2020 compared
to the same time last year
•Essentially eliminated promotions and discounting with a focus on brand
building in the third quarter of 2020
The Company is seeking to optimize its dealer network and believes an integrated
customer experience driven by a strong network of profitable dealers is
essential to delivering the most desirable Harley-Davidson experience. The
Company reduced its global dealer network during the first nine months of 2020
and continues to seek to optimize its network of independent dealers to
strengthen priority markets and provide and improve the customer experience.
The Hardwire
The Hardwire is the Company's forthcoming 5-year (2021-2025) strategic plan to
deliver profitable, growth and shareholder value based on building and expanding
the desirability of Harley-Davidson. The following is an initial look at the
framework for The Hardwire:
The Hardwire will be guided by Harley-Davidson's vision and mission.
•Vision: To build on its legend and lead its industry through innovation,
evolution and emotion
•Mission: More than building machines, we stand for the timeless pursuit of
adventure. Freedom for the soul.
Both statements will keep the Company grounded in its authentic brand delivering
adventure and freedom for the soul.
Harley-Davidson as the most desirable motorcycle brand in the world and the
Company that defines motorcycle culture globally is the basis of The Hardwire.
Desirability provides the framework for the Company's work and for its success
measures. The Hardwire framework will be organized around desirable:
•Growth strategy for motorcycles, P&A and GM in priority markets
•Customer focus inclusive of distinct products, brand and purchase experiences
•Operations that are high-performance, lean and efficient
•Impact with emphasis on inclusive stakeholder management and delivering
long-term value
•Workplace that is diverse, inclusive and built around top talent rooted in a
high-performance, winning culture
Desirability will also help define success measures. Through The Hardwire, the
Company will target growth that is focused and profitable across the businesses,
rooted in a clear understanding of sources of growth associated with value. The
Company intends to set achievable targets and it will not pursue growth merely
for growth sake.
The Company believes its brand is powerful and recognized globally - backed by
an incredible heritage and iconic products. The Rewire will set a strong
foundation to execute the Company's forthcoming 2021-2025 strategic plan to
achieve its ambition as the most desirable motorcycle brand in the world.
Restructuring Plan Costs and Savings(1)
During 2020, the Company initiated certain restructuring activities as part of
The Rewire including a workforce reduction, the termination of certain current
and future products, facility changes, optimizing its global independent dealer
network, exiting certain international markets, and discontinuing its sales and
manufacturing operations in India. These actions will result in restructuring
expenses including employee termination costs, contract termination costs and
non-current asset adjustments. The workforce reduction will result in the
elimination of approximately 700 positions globally, including the termination
of approximately 500 employees. In addition, the India action will result in the
termination of approximately 70 employees. Based on these actions, the Company
expects restructuring expenses of approximately $169 million, primarily in 2020,
and annual savings of approximately $115 million beginning in 2021.
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