Harley-Davidson, Inc. Form 10-Q Summary
Reporting period: Three months ended March 31, 2023, compared with the three months ended March 27, 2022. The filing covers Harley-Davidson Motor Company (HDMC), LiveWire and Harley-Davidson Financial Services (HDFS). Financial statements are unaudited.
Financial Performance and Position
| Metric | Q1 2023 | Comparable period | Change |
|---|---|---|---|
| Total revenue | $1.789 billion | $1.495 billion | 19.6% increase |
| Operating income | $369.6 million | $289.2 million | 27.8% increase |
| Net income attributable to Harley-Davidson | $304.1 million | $222.5 million | 36.7% increase |
| Diluted EPS | $2.04 | $1.45 | 40.7% increase |
| Effective tax rate | 23.0% | 23.4% | Lower |
| Operating margin | 20.7% | 19.3% | Improved |
| Net income attributable margin | 17.0% | 14.9% | Improved |
| Operating cash flow | $46.7 million | $139.3 million | Declined $92.6 million |
| Capital expenditures | $45.1 million | $28.0 million | Increased |
- HDMC: Revenue increased 20.5% to $1.558 billion and operating income increased 53.4% to $335.7 million. Operating margin improved to 21.6% from 16.9%, driven by higher shipments, pricing, favorable product mix and moderating raw-material and freight pressures, partly offset by foreign exchange and operating costs.
- LiveWire: Revenue declined 25.4% to $7.8 million, while operating loss widened to $24.5 million from $16.1 million. Results reflected lower electric motorcycle and balance-bike shipments and increased product-development and organizational costs.
- HDFS: Revenue rose 16.2% to $223.1 million, but operating income declined 32.4% to $58.4 million. Interest expense increased 74.7% to $73.5 million and provision for credit losses increased 81.7% to $52.4 million.
- Worldwide Harley-Davidson motorcycle shipments increased 13.7% to 62,237 units, but worldwide retail sales declined 12.4% to 39,425 units. U.S. retail sales fell 17.3%, and U.S. 601+cc market share declined to 39.5% from 47.1%.
- Cash, cash equivalents and restricted cash totaled $1.738 billion at March 31, 2023, including $1.561 billion of cash and cash equivalents. Total debt was $7.185 billion, compared with $6.613 billion at March 27, 2022. Brokered certificates of deposit totaled $369.3 million.
- Net cash increased $158.5 million during the quarter, primarily because financing inflows of $178.6 million exceeded investing outflows of $70.6 million and operating cash flow of $46.7 million.
- Finance receivables, net totaled $7.574 billion, up from $6.822 billion in the comparable period. The allowance for credit losses was $358.4 million.
Material Changes and Unusual Items
- HDMC shipped more motorcycles ahead of the riding season, with increased Grand American Touring and Cruiser mix. Revenue also benefited from model-year pricing and higher apparel sales.
- HDFS retail loan annualized losses increased to 3.21% from 1.77%, while the 30-day delinquency rate increased to 3.74% from 2.87%. Management cited inflation, higher consumer debt and larger loan payments, as well as constrained motorcycle repossession capacity.
- The company issued $700 million of 6.50% medium-term notes due 2028 during the first quarter and completed a $547.7 million net asset-backed securitization. A further €700 million medium-term note issuance at 6.36%, maturing in April 2026, occurred in April 2023.
- The company repurchased $96.8 million of common stock, including $84.0 million of discretionary repurchases, and paid $24.1 million in dividends. Diluted weighted-average shares declined to 148.9 million from 153.9 million.
- Accumulated other comprehensive loss increased to $354.7 million, primarily due to derivative-related losses and pension and postretirement items.
Guidance, Outlook and Risks
- For 2023, management expects HDMC revenue growth of 4% to 7% and an HDMC operating margin of 14.1% to 14.6%. Management expects stronger year-over-year comparisons in the first half and lower revenue and operating income in the second half because of normalization and seasonality.
- LiveWire guidance calls for 750 to 2,000 motorcycle units and an operating loss of $115 million to $125 million, assuming a third-quarter 2023 launch of the Del Mar model.
- HDFS operating income is expected to decline 20% to 25% in 2023 because of higher borrowing costs and credit losses. Management cautioned that losses could worsen if economic conditions deteriorate.
- Planned 2023 capital investments are $225 million to $250 million. Management also expects an additional $140 million of cost reductions in 2023 toward a $400 million incremental cost-productivity target by 2025.
- The company estimates a potential $200 million to $400 million cost if a field action or recall is required for brake-hose compliance issues. No costs have been accrued because management expects NHTSA to determine the issues are inconsequential to motor-vehicle safety; the estimate may change.
- Key risks include higher interest rates, rising HDFS credit losses, consumer affordability, supply-chain disruption, inflation, foreign exchange, tariffs, dealer and funding-market conditions, LiveWire execution, product liability and regulatory matters, cybersecurity and geopolitical events.
- The U.S. asset-backed commercial paper conduit facility expires November 17, 2023, and the Canadian facility expires June 30, 2023, unless renewed or extended. Management expects facilities expiring within 12 months to be renewed.
- Available liquidity at March 31, 2023 was reported at $3.710 billion, consisting of cash and cash equivalents plus net availability under credit and conduit facilities. The company stated that liquidity was sufficient for its requirements and that it was in compliance with applicable financial covenants.
Investor Verification Items
- Verify the sustainability of HDMC pricing, product mix, shipment growth and the guided 14.1% to 14.6% full-year operating margin as retail sales and U.S. market share weaken.
- Monitor HDFS delinquencies, charge-offs, repossession recoveries and allowance adequacy against recession and inflation scenarios.
- Confirm renewal or replacement of the Canadian and U.S. conduit facilities and assess the effect of higher funding costs on HDFS margins.
- Track the NHTSA decision and any expansion of the brake-hose population, since a recall could cost approximately $200 million to $400 million based on the company’s current estimate.
- Assess LiveWire’s Del Mar launch, unit volumes, cash needs and progress toward profitability.
- Reconcile debt maturities, including approximately $1.784 billion of scheduled 2023 principal payments, with refinancing capacity and cash generation.