Harley-Davidson, Inc. — Q3 2023 Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2023, compared with the quarter and nine months ended September 25, 2022. The financial statements are unaudited. Harley-Davidson operates through Harley-Davidson Motor Company (HDMC), LiveWire, and Harley-Davidson Financial Services (HDFS).
Financial Performance and Position
| Metric | Q3 2023 | Q3 2022 | Change |
|---|
| Revenue | $1.549 billion | $1.649 billion | Down 6.0% |
| Operating income | $209.3 million | $338.7 million | Down 38.2% |
| Operating margin | 13.5% | 20.5% | Down approximately 7.0 points |
| Net income attributable to Harley-Davidson | $198.6 million | $261.2 million | Down 23.9% |
| Diluted EPS | $1.38 | $1.78 | Down 22.5% |
| Cash dividends per share | $0.1650 | $0.1575 | Increased |
| Metric | 9M 2023 | 9M 2022 | Change |
|---|
| Revenue | $4.783 billion | $4.613 billion | Up 3.7% |
| Operating income | $800.2 million | $905.6 million | Down 11.6% |
| Operating margin | 16.7% | 19.6% | Down approximately 2.9 points |
| Net income attributable to Harley-Davidson | $680.8 million | $699.5 million | Down 2.7% |
| Diluted EPS | $4.65 | $4.68 | Down 0.6% |
| Effective tax rate | 22.1% | 23.0% | Improved |
- HDMC: Q3 revenue declined 8.8% to $1.297 billion and operating income declined 37.2% to $175.3 million. The operating margin fell to 13.5% from 19.6%. Lower shipments, higher operating expenses, unfavorable foreign exchange, and production disruption more than offset pricing, product mix, and lower raw-material costs.
- LiveWire: Q3 revenue declined 44.6% to $8.1 million and the operating loss increased to $25.3 million from $21.3 million. Nine-month operating loss was $81.9 million.
- HDFS: Q3 revenue increased 15.3% to $243.9 million, but operating income declined 26.7% to $59.4 million. Higher interest expense, credit-loss provisions, repossession costs, and operating expenses exceeded higher interest income.
- Cash flow: Nine-month operating cash flow was $706.8 million, compared with $574.7 million in the prior-year period. Investing cash outflow was $511.1 million, including $138.9 million of capital expenditures. Financing cash inflow was $253.6 million. Cash, cash equivalents, and restricted cash increased by $440.8 million to $2.020 billion.
- Liquidity: Cash and cash equivalents were $1.878 billion at September 30, 2023. Reported cash plus available credit and conduit capacity was approximately $3.723 billion. Management stated that liquidity was sufficient for projected needs and targets at least twelve months of liquidity coverage.
- Debt and deposits: Outstanding debt was $7.310 billion, including $815.1 million of commercial paper and $2.139 billion of asset-backed securitization debt. Brokered certificates of deposit totaled $478.9 million. Future debt principal payments totaled $7.340 billion, with $1.029 billion due in 2023 and $1.264 billion due in 2024.
- Finance receivables: Net finance receivables were $7.655 billion, up from $7.342 billion at September 25, 2022. The allowance for credit losses increased to $392.7 million from $360.1 million. Annualized retail loan credit losses rose to 2.69% from 1.48%, and 30-day delinquencies rose to 4.23% from 3.66%.
Material Changes Versus the Prior Comparable Period
- Worldwide retail motorcycle sales declined 15.6% in Q3 and 8.3% for the first nine months. Q3 U.S. retail sales decreased 15.1%, while Asia Pacific declined 24.2%.
- Worldwide motorcycle shipments declined 20.4% in Q3 to 45,269 units and 5.7% for the first nine months to 150,440 units. Sport and Lightweight shipments declined substantially as the company discontinued legacy Sportster models and shifted toward more profitable products.
- The previously disclosed brake-hose supplier issue caused an approximately two-week production suspension at the York facility in late June and early July 2023, affecting motorcycle availability and shipments.
- HDFS credit-loss provisions increased 66.2% in Q3 and 80.3% for the first nine months, reflecting higher actual losses, delinquencies, repossession challenges, lower auction recovery values, and recession-weighted economic forecasts.
- Share repurchases totaled $239.4 million during the first nine months, including $225.7 million of discretionary repurchases. The company repurchased approximately 2.0 million shares in Q3 and had 13.7 million shares remaining under its authorization at September 30, 2023.
Guidance, Outlook, Risks, and Unusual Items
- 2023 guidance: HDMC revenue growth of 0% to 3%; HDMC operating margin of 13.9% to 14.3%; LiveWire sales of 600 to 1,000 motorcycles and an operating loss of $115 million to $125 million; HDFS operating income decline of 20% to 25%; and capital investment of $225 million to $250 million.
- Expected 2023 productivity savings were revised to approximately $70 million from $100 million because of the current production environment.
- NHTSA petitions concerning brake-hose compliance remained pending. No costs had been accrued for a potential recall, but management estimated a possible aggregate cost of approximately $100 million to $400 million if a field action or recall were required.
- The 6% European Union motorcycle tariff rate was scheduled to remain in effect through December 31, 2023; the filing states that continuation was not assured.
- The U.S. asset-backed commercial paper conduit facility, with $1.5 billion of committed capacity, was scheduled to expire November 17, 2023 unless renewed or extended. The Canadian conduit facility was scheduled to expire June 28, 2024.
- Key risks include high interest rates, weaker consumer demand, inflation, recession risk, supply-chain and quality issues, foreign exchange, tariffs, credit deterioration, funding costs, LiveWire execution and profitability, dealer financial health, recalls, litigation, cybersecurity, and regulatory changes.
- Management reported effective disclosure controls and procedures as of September 30, 2023 and no material changes in internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Whether NHTSA grants the requested inconsequentiality determinations and whether any brake-hose recall costs arise.
- Whether HDMC achieves the 2023 revenue and operating-margin guidance after the production suspension and weak retail trends.
- Whether HDFS credit losses, delinquencies, repossession costs, and allowance requirements continue to increase.
- Renewal or replacement of the U.S. conduit facility and continuation of adequate funding-market access.
- Actual fourth-quarter motorcycle shipments, retail inventory levels, market share, and the impact of pricing and product mix.
- LiveWire unit volumes, cash requirements, operating losses, and progress toward commercial scale.
- Continuation of the reduced EU tariff rate after December 31, 2023.
