One month ago, I criticized Citigroup (NYSE: C) for its decision to upgrade Harley-Davidson (NYSE: HOG). Despite predicting that Harley would see its third-quarter sales drop 25%, Citi argued that Harley "turned a corner" in Q3, and that the business was now improving. But was the banker right?

Maybe yes
In a couple of respects, yes, the banker was right on the money. In one move to turn the proverbial corner, Harley promised to cease production of Buell motorcycles and sell off its MV Agusta subsidiary. Freed of these distractions, management will be "focusing on the Harley-Davidson brand" and trying to get it moving in the right direction.

In fact, it may be doing this already. Although Harley's Q3 sales declined, they did so by a smaller amount than even Citi believed possible. Unlike Ford (NYSE: F), Toyota (NYSE: TM), Honda (NYSE: HMC), and similar quadrupeds, Harley couldn't ride the U.S. government's "Cash for Clunkers" coattails in Q3. In that context, Harley's success in holding the line at a 21% sales decline was quite a feat.

Maybe no
Even so, this better-than-expected performance wasn't enough to save Harley from an 85% decline in profit (to $0.11 per share). And judging from the raft of writedowns and charges that will accompany the restructuring, profits could be hard to come by in quarters to come as well.

Maybe I don't know
But here's the really interesting thing about Harley: Profits may be down, but Harley's cash flowis way up. We now see Harley claiming positivecash flow of $511 million year to date -- a feat requiring $675 million in cash flow during Q3.

Harley hasn't accomplished anything like that in, well ... ever. To be sure, I went back and combed through the last 15 years of Harley's cash flow statements. No matter how strong the economy, Harley has never generated anything like $675 million in a single quarter.

Yet it did this in the middle of a recession? I've got just one question.

How?
We already know that Harley didn't sell more bikes. Remember: Sales declined 21% year over year. It didn't generate cash by collecting debts. Accounts receivable inched up 2%. And unlike rival Polaris (NYSE: PII), Harley didn't deliver on its promise to trim inventories, either. They grew 8%.

So how, pray tell, did Harley do it? Until Harley files its complete 10-Q, I cannot be sure, but I suspect the firm securitized some accounts receivable -- sold off the debts to a third party in return for a cash infusion. Harley mentions a transaction raising $700 million, but it happened after Q3 closed. One thing I am sure of: Q4 has commenced, and historically, Harley has burned cash in the year's final quarter. So however Harley produced its magic cash lastquarter, I don't expect to see much of it remaining when next we hear from Harley.

Foolish takeaway
Harley's in a better position to ride out the quarter now. But over the long road, the firm only has so much debt to sell ... sooner or later, it needs to remember how to sell bikes.

This article was originally published as Harley-Davidson's Wildest Quarter Everon Fool.com

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