Harley-Davidson, Inc. — FY2022 Form 10-K Summary
Business context and reporting period
Annual report for the fiscal year ended December 31, 2022, filed February 24, 2023. Harley-Davidson operates through Harley-Davidson Motor Company (HDMC), LiveWire, and Harley-Davidson Financial Services (HDFS). HDMC designs and sells motorcycles, parts, accessories, apparel, and licensed products; LiveWire develops and sells electric motorcycles and related products; HDFS provides wholesale and retail motorcycle financing and insurance-related services.
Following the September 26, 2022 LiveWire transaction, Harley-Davidson retained approximately 89.4% of LiveWire Group, Inc. and continues to consolidate its results. The company’s strategy, “The Hardwire,” emphasizes profitable core motorcycle segments, selective expansion, electric motorcycles, complementary businesses, customer experience, and stakeholder management.
Key financial metrics
| Metric | 2022 | 2021 | Change |
|---|---|---|---|
| Revenue | $5.755 billion | $5.336 billion | +7.9% |
| Operating income | $909.3 million | $823.4 million | +10.4% |
| Net income attributable to Harley-Davidson | $741.4 million | $650.0 million | +14.1% |
| Diluted EPS | $4.96 | $4.19 | +$0.77 |
| Operating margin | 15.8% | 15.4% | +0.4 points |
| Operating cash flow | $548.5 million | $975.7 million | -$427.2 million |
| Capital expenditures | $151.7 million | $120.2 million | +$31.5 million |
| Cash and cash equivalents | $1.433 billion | $1.875 billion | -$441.6 million |
HDMC revenue increased 8.5% to $4.888 billion, with operating income rising 42.0% to $677.1 million. HDMC operating margin improved to 13.9% from 10.6%, driven primarily by pricing and higher wholesale shipments, partly offset by unfavorable currency effects and supply-chain costs.
LiveWire revenue increased 30.8% to $46.8 million, but its operating loss widened to $85.3 million from $68.2 million as product-development, standalone-company, and personnel costs increased. LiveWire shipped 597 electric motorcycles versus 461 in 2021.
HDFS revenue increased 3.1% to $820.6 million, while operating income declined 23.5% to $317.5 million. The principal pressures were a $120.1 million increase in provision for credit losses and higher interest expense.
Worldwide retail sales of new Harley-Davidson motorcycles declined 7.7% to 178,451 units. North American retail sales fell 12.4%, while markets outside North America increased 3.0%. Wholesale motorcycle shipments increased 2.9% to 193,527 units.
Balance sheet, debt, liquidity, and credit performance
- Total debt was $6.912 billion at year-end 2022 versus $6.889 billion in 2021; brokered certificates of deposit totaled $317.4 million.
- Available liquidity, including cash and net credit and conduit facility availability, was approximately $3.303 billion. Management stated that liquidity was sufficient for projected requirements and targeted at least 12 months of needs.
- Debt maturities totaled approximately $2.448 billion in 2023, including commercial paper and current long-term debt.
- HDFS finance receivables, net, totaled $7.138 billion, up from $6.572 billion. The allowance for credit losses increased to $358.7 million from $339.4 million.
- Annual losses on retail motorcycle loans increased to 1.88% from 1.19%; the 30-day delinquency rate rose to 4.50% from 3.33%.
- The company paid $93.2 million of dividends and made $324.5 million of discretionary share repurchases in 2022. A further 9.9 million shares remained authorized for repurchase at year-end.
Material changes versus the prior comparable period
- Profitability improved despite lower retail motorcycle sales, primarily because HDMC realized higher pricing and increased wholesale shipments.
- HDFS results deteriorated as credit performance normalized after unusually favorable pandemic-era conditions and borrowing costs increased with interest rates.
- Operating cash flow declined substantially because of higher working capital, inventory, accounts receivable, and wholesale financing activity.
- The company suspended HDMC vehicle assembly and shipments for approximately two weeks in the second quarter because of a potential brake-hose regulatory compliance issue. The disruption contributed to low dealer inventory during the riding season.
- The LiveWire transaction created a separately traded public company while Harley-Davidson retained control and continued to fund and consolidate the business.
- The European Union motorcycle tariff rate was reduced from 31% to 6% beginning January 1, 2022, with the arrangement scheduled to remain in effect through December 31, 2023.
- The company completed restructuring activities initiated in 2020; cumulative restructuring expense was approximately $132.8 million.
Guidance, outlook, risks, and unusual items
Guidance issued February 2, 2023 calls for HDMC revenue growth of 4% to 7% in 2023 and an HDMC operating margin of 14.1% to 14.6%. LiveWire motorcycle shipments are expected to be 750 to 2,000 units, with a LiveWire operating loss of $115 million to $125 million, assuming a second-half 2023 Del Mar launch. HDFS operating income is expected to decline 20% to 25% because of higher funding costs and credit losses. Capital investment is expected to be $225 million to $250 million.
Management targets $400 million of incremental cost elimination by 2025, including approximately $140 million expected in 2023 after approximately $50 million achieved in 2022. Capital allocation priorities are growth investments, dividends, and discretionary share repurchases.
The most material contingent item is the brake-hose matter. No related recall costs had been accrued at filing, but a required recall or field action could cost approximately $200 million to $400 million; the company expects to seek recovery from responsible parties. Other principal risks include supply-chain and semiconductor shortages, inflation, foreign exchange, tariffs, higher interest rates, HDFS credit losses and access to capital markets, dealer performance, product recalls, cybersecurity, labor negotiations, competition in electric motorcycles, regulatory changes, geopolitical conflict, and the economic effects of COVID-19.
Harley-Davidson committed to net-zero carbon emissions by 2050 and intends to establish interim science-based targets. The filing notes that achieving these objectives may increase operating, product-development, and supply-chain costs.
The company and Ernst & Young reported effective disclosure controls and internal control over financial reporting. The audit opinion on the financial statements was unqualified; the critical audit matter concerned the allowance for credit losses on retail finance receivables.
Important facts for investors to verify
- Whether NHTSA grants the inconsequentiality petition for the brake-hose matter or requires a recall or field action, and the ultimate cost and recovery.
- HDMC’s ability to sustain pricing, improve retail inventory, and achieve the 2023 revenue and margin guidance despite lower industry registrations and currency headwinds.
- HDFS delinquency, charge-off, allowance, interest-margin, and funding trends as recession risk and borrowing costs increase.
- LiveWire’s Del Mar launch timing, shipment volume, cash needs, operating losses, and ability to develop a profitable electric-motorcycle business.
- Refinancing and liquidity plans for the approximately $2.448 billion of 2023 debt maturities and the scheduled expiration of certain conduit facilities.
- The status of the U.S.-EU tariff arrangement after December 31, 2023 and the company’s appeals concerning European tariff treatment.
- The effect of supply-chain normalization, semiconductor availability, raw-material prices, labor agreements, and freight costs on future margins and cash flow.