Harley-Davidson, Inc. — Form 10-Q Summary
Business context and reporting period
Harley-Davidson operates through Harley-Davidson Motor Company (HDMC), LiveWire and Harley-Davidson Financial Services (HDFS). This unaudited quarterly filing covers the three and six months ended June 30, 2023, compared with periods ended June 26, 2022.
Key financial metrics
| Metric | Q2 2023 | Q2 2022 | Change |
|---|---|---|---|
| Revenue | $1.446 billion | $1.469 billion | Down 1.6% |
| Operating income | $221.3 million | $277.6 million | Down 20.3% |
| Net income attributable to Harley-Davidson | $178.0 million | $215.8 million | Down 17.5% |
| Diluted EPS | $1.22 | $1.46 | Down 16.4% |
| Operating margin | Approximately 15.3% | Approximately 18.9% | Down approximately 3.6 points |
| Cash dividends per share | $0.1650 | $0.1575 | Up 4.8% |
For the first six months, revenue was $3.234 billion, up 9.1%; operating income was $590.9 million, up 4.3%; net income attributable to Harley-Davidson was $482.1 million, up 10.0%; and diluted EPS was $3.27, up 12.4%.
- HDMC Q2 revenue declined 4.5% to $1.198 billion, while operating income declined 7.9% to $194.3 million. Gross profit increased 7.8% to $417.5 million, supported by pricing, product mix and lower manufacturing costs, but operating expenses increased 26.7%.
- Worldwide motorcycle shipments fell 10.4% to 42,934 units, primarily because of an approximately two-week production suspension at the York facility related to brake-hose compliance issues. Worldwide retail sales increased 2.6% in Q2, but first-half retail sales declined 4.5%.
- LiveWire Q2 revenue declined 43.8% to $7.0 million, motorcycle shipments fell to 33 from 225, and operating loss widened to $32.0 million from $19.4 million.
- HDFS revenue increased 18.6% to $240.4 million, but operating income declined 31.4% to $59.0 million. Higher interest expense and credit-loss provisions more than offset higher interest income.
- HDFS provision for credit losses was $57.3 million in Q2, compared with $29.1 million in the prior-year quarter. The allowance for credit losses increased to $381.8 million from $352.1 million at June 26, 2022.
- Annualized retail credit losses were 2.61% at June 30, 2023, compared with 1.40% a year earlier; 30-day delinquencies increased to 3.63% from 2.95%.
Cash flow, liquidity and debt
- First-half operating cash flow was $410.5 million, compared with $244.2 million in the prior-year period.
- Capital expenditures were $86.5 million, compared with $55.0 million. Net cash used in investing activities was $345.2 million.
- Net cash provided by financing activities was $24.8 million, compared with $684.9 million in the prior-year period, reflecting lower net debt financing and lower share repurchases.
- Cash, cash equivalents and restricted cash totaled $1.669 billion at June 30, 2023; cash and cash equivalents alone were $1.522 billion.
- Total outstanding debt was $7.065 billion, compared with $7.793 billion at June 26, 2022. Brokered certificates of deposit totaled $439.9 million.
- Management reported approximately $3.457 billion of cash and net credit and conduit facility availability, including $724.6 million of net credit facility availability and $1.2 billion of net U.S. commercial-paper conduit availability.
- The Company states that it targets at least 12 months of projected liquidity needs and believes current cash and facility availability are sufficient. The U.S. commercial-paper conduit facility expires November 17, 2023, and the Canadian conduit expires June 28, 2024; management expects renewal of facilities expiring within 12 months.
- During the first half, the Company paid $48.2 million of dividends and repurchased $169.6 million of common stock. At June 30, 2023, 5.8 million shares remained authorized for repurchase.
Material changes versus the prior comparable period
- Q2 profitability weakened despite improved HDMC gross profit because motorcycle shipments declined, operating expenses increased, LiveWire losses widened and HDFS incurred materially higher funding costs and credit-loss provisions.
- First-half results improved year over year because HDMC benefited from higher shipments, pricing and favorable product mix; these gains were partly offset by weaker LiveWire and HDFS performance.
- Finance receivables, net increased to $7.510 billion at June 30, 2023 from $7.104 billion at June 26, 2022, increasing HDFS exposure to consumer credit performance.
- Medium-term notes issued in March and April 2023 totaled approximately $1.462 billion at carrying value and carried interest rates of 6.50% and 6.36%, respectively, reflecting the higher-rate financing environment.
- The Company adopted ASU 2022-02 on January 1, 2023; adoption did not materially affect the financial statements.
Guidance, outlook, commentary and risks
- On July 27, 2023, management reduced 2023 HDMC revenue-growth guidance to 0%–3% from 4%–7%, reflecting the production suspension and expected wholesale shipment decline of 1%–3%.
- HDMC operating margin guidance was reduced to 13.9%–14.3% from 14.1%–14.6%. Expected 2023 productivity savings were reduced to approximately $100 million from $140 million.
- LiveWire reduced its 2023 unit-sales outlook to 600–1,000 motorcycles from 750–2,000, while maintaining expected operating loss guidance of $115–$125 million. LiveWire began production of the Del Mar electric motorcycle in July 2023.
- HDFS operating income is still expected to decline 20%–25% in 2023 versus 2022. Management expects the year-over-year decline to moderate in the second half.
- 2023 capital investment guidance remains $225–$250 million.
- PCA brake-hose compliance matters resulted in the York production suspension. Harley-Davidson has petitioned NHTSA for determinations that the issues are inconsequential to motor vehicle safety and has accrued no related costs. A field action or recall remains possible, with an estimated aggregate cost of approximately $100 million–$400 million.
- Key ongoing risks include higher interest rates, consumer affordability and credit deterioration, elevated delinquencies and repossession challenges, supply-chain and quality issues, foreign-exchange and tariff exposure, LiveWire execution and losses, capital-market access, and changing motorcycle demand.
- The temporary 6% European Union tariff rate is scheduled to remain in effect through December 31, 2023; future tariff treatment remains uncertain.
Most important facts for investors to verify
- Whether NHTSA grants the requested inconsequentiality determinations and whether a brake-hose recall or field action occurs within the estimated $100 million–$400 million range.
- Whether HDMC achieves the revised shipment, revenue-growth and operating-margin guidance after the production interruption.
- Whether HDFS retail credit losses, delinquencies, repossessions and allowance requirements continue to rise.
- Whether the U.S. conduit facility is renewed before its November 17, 2023 expiration and whether HDFS can maintain cost-effective funding access.
- Whether LiveWire’s Del Mar launch and 2023 unit-sales target can be achieved while containing its projected operating loss.
- The effect of higher interest rates, consumer affordability, foreign-exchange movements and post-December 2023 EU tariff developments on margins and demand.