HARLEY-DAVIDSON, INC. annual report, FY2023

Harley-Davidson, Inc. 2023 Form 10-K Summary

Business Context and Reporting Period

Harley-Davidson operates three reportable segments: Harley-Davidson Motor Company (HDMC), LiveWire, and Harley-Davidson Financial Services (HDFS). The filing covers the fiscal year ended December 31, 2023, with comparisons to 2022 and 2021. The company continued executing its 2021–2025 “Hardwire” strategy, emphasizing premium motorcycle segments, selective geographic expansion, electric motorcycles, complementary lifestyle businesses, and shareholder returns.

• HDMC designs and sells motorcycles, parts and accessories, apparel, and licensed products through a global dealer network.
• LiveWire develops and sells electric motorcycles and electric balance bikes and remains a majority-owned, consolidated business.
• HDFS provides retail and wholesale motorcycle financing, insurance-related products, and licensing activities, primarily in the United States and Canada.

Financial and Operating Metrics

Metric	2023	2022	Change
Revenue	$5.836 billion	$5.755 billion	+1.4%
Operating income	$779.1 million	$909.3 million	-14.3%
Net income	$695.0 million	$739.2 million	-6.0%
Net income attributable to Harley-Davidson	$706.6 million	$741.4 million	-4.7%
Diluted EPS	$4.87	$4.96	-1.8%
Operating margin	13.3%	15.8%	-2.5 pts.
Cash flow from operating activities	$754.9 million	$548.5 million	+$206.4 million
Capital expenditures	$207.4 million	$151.7 million	+36.7%

Revenue increased despite lower motorcycle volume because HDFS revenue rose substantially and HDMC benefited from pricing and a more profitable shipment mix. Net income was reduced by lower HDMC and HDFS operating income and increased LiveWire losses, partly offset by higher investment and other income and a lower effective tax rate.

• HDMC: Revenue was $4.845 billion, down 0.9%; operating income was $661.2 million, down 2.4%; operating margin was 13.6% versus 13.9%. Motorcycle shipments declined 7.0% to 179,984 units, while Grand American Touring and Cruiser represented a greater share of shipments.
• LiveWire: Revenue was $38.3 million, down 18.2%; operating loss was $116.8 million versus $85.3 million; motorcycle shipments rose 10.6% to 660 units. Higher product development and organizational costs drove the larger loss.
• HDFS: Revenue increased 16.2% to $953.6 million, but operating income declined 26.1% to $234.7 million. Higher funding costs, credit-loss provisions, operating expenses, and lower interest margins more than offset higher interest income.
• Retail demand: Worldwide Harley-Davidson retail motorcycle sales fell 8.8% to 162,771 units, including declines of 9.8% in the United States and 7.2% internationally. U.S. 601+cc market share declined to 37.9% from 41.2%; European share declined to 4.8% from 6.1%.
• HDFS credit quality: Annual retail loan losses increased to 3.00% from 1.88%, and the 30-day delinquency rate increased to 5.09% from 4.50%. The allowance for credit losses increased to $382.0 million from $358.7 million.
• Liquidity: Cash and cash equivalents were $1.534 billion. Including available credit and conduit capacity, reported liquidity was approximately $3.365 billion. Management targets at least 12 months of projected liquidity needs.
• Debt: Total outstanding debt was $7.126 billion versus $6.912 billion, and brokered certificates of deposit were $447.8 million versus $317.4 million. Debt principal payments due in 2024 totaled approximately $2.135 billion.
• Shareholder returns: The company paid $96.3 million in dividends and repurchased $350.0 million of common stock on a discretionary basis during 2023. Diluted weighted-average shares declined to 145.1 million from 149.4 million.

Material Changes Versus the Prior Comparable Period

• High interest rates and inflation reduced demand for premium discretionary products and increased HDFS funding costs and consumer credit losses.
• HDMC’s profitability benefited from higher pricing, favorable product mix, and lower raw-material costs, but these benefits were offset by lower volume, unfavorable foreign exchange, higher manufacturing costs, and increased selling and administrative spending.
• HDFS credit performance weakened, with higher charge-offs, delinquencies, and reserve requirements. Management’s economic forecast weighting at year-end was tilted toward a near-term recession.
• LiveWire continued to generate substantial losses while investing in new products and building its stand-alone organization.
• Worldwide dealer inventory of new motorcycles was approximately 50% higher at year-end than a year earlier, but remained nearly 20% below year-end 2019 levels. Management considered inventory appropriately positioned for the 2024 riding season.
• The company repurchased 10.2 million shares during 2023 and ended the year with approximately 9.7 million shares remaining under its repurchase authorization.
• Operating cash flow improved materially, while investing cash outflows declined because of lower net finance-receivable originations and collections dynamics.

Guidance, Outlook, Risks, and Unusual Items

Management’s 2024 guidance, issued February 8, 2024, assumes continued economic and interest-rate pressure and a focus on higher-profit motorcycle products.

• HDMC revenue: Expected to be flat to down 9% versus 2023.
• HDMC retail units: Expected to be flat to up 9%; wholesale shipments expected to decline 1% to 10%.
• HDMC operating margin: Expected at 12.6% to 13.6%, below the 2023 level.
• LiveWire: Expected motorcycle sales of 1,000 to 1,500 units and an operating loss of $115 million to $125 million.
• HDFS: Operating income expected to be flat to up 5%, with credit-loss rates expected to moderate in the second half of 2024.
• Cost productivity: Approximately $100 million of additional savings expected in 2024; the company targets elimination of $400 million of incremental supply-chain costs incurred since 2020 by 2025.
• Capital expenditures: Expected to be $225 million to $250 million in 2024.
• Share repurchases: Management planned to repurchase a similar dollar amount in 2024 as in 2023.

A significant contingency relates to potential NHTSA action concerning brake-hose assemblies supplied by Proterial Cable America. Production at the York facility was suspended for approximately two weeks in 2023. The company expects NHTSA to determine that the issues are inconsequential to motor-vehicle safety and has accrued no related future costs, but estimates a potential recall or field action could cost approximately $100 million to $400 million if required.

• Collective bargaining agreements covering approximately 1,100 Milwaukee and Tomahawk employees were scheduled to expire March 31, 2024, creating potential labor-disruption risk.
• The suspension of additional European Union motorcycle tariffs was extended through March 31, 2025, but future tariff treatment remains uncertain.
• HDFS depends on continued access to capital markets and is exposed to interest-rate, credit, residual-value, and liquidity risks.
• Key risks include weaker discretionary demand, used-motorcycle price declines, dealer financial stress, foreign exchange, tariffs, supply-chain disruptions, cybersecurity incidents, product recalls, evolving emissions and electric-vehicle regulations, and LiveWire’s continuing losses.
• The company has committed to net-zero carbon emissions by 2050 and expects increasing costs and regulatory requirements related to climate, emissions, and sustainability reporting.
• Management and Ernst & Young concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2023. The financial statement audit opinion was unqualified.

Important Facts for Investors to Verify

• Whether 2024 HDMC retail demand, wholesale shipments, margins, and dealer inventory develop within management’s guidance ranges.
• Whether HDFS retail delinquencies, charge-offs, recovery values, and allowance requirements stabilize or worsen.
• The outcome of NHTSA’s brake-hose determinations and the potential $100 million to $400 million recall exposure.
• Renewal or refinancing of debt and conduit facilities, including maturities and facilities expiring in 2024 and 2025.
• The effect of interest rates, foreign exchange, tariffs, and macroeconomic conditions on margins and financing costs.
• LiveWire’s unit growth, cash requirements, operating losses, and the $100 million convertible delayed-draw term loan entered into in February 2024.
• The outcome of labor negotiations and any resulting effects on production, costs, or capacity.
• Execution of the $100 million 2024 productivity-savings target and the planned $225 million to $250 million capital-investment program.