Harley-Davidson(HOG) - 2023 Q1 - Quarterly Report

PART I – FINANCIAL INFORMATION Item 1. Financial Statements This section presents Harley-Davidson's unaudited consolidated financial statements and detailed notes for Q1 2023 Consolidated Statements of Operations This table summarizes the company's revenues, expenses, and net income for Q1 2023 and Q1 2022 Consolidated Statements of Operations (Three months ended) | Metric | March 31, 2023 (in thousands) | March 27, 2022 (in thousands) | |:---|:---|:---| | Revenue | $1,788,686 | $1,495,186 | | Costs and expenses | $1,419,077 | $1,205,954 | | Operating income | $369,609 | $289,232 | | Income before income taxes | $392,010 | $290,572 | | Net income attributable to Harley-Davidson, Inc. | $304,090 | $222,502 | | Basic EPS | $2.08 | $1.46 | | Diluted EPS | $2.04 | $1.45 | | Cash dividends per share | $0.1650 | $0.1575 | Consolidated Statements of Comprehensive Income This table details the company's net income and other comprehensive income components for Q1 2023 and Q1 2022 Consolidated Statements of Comprehensive Income (Three months ended) | Metric | March 31, 2023 (in thousands) | March 27, 2022 (in thousands) | |:---|:---|:---|\n| Net income | $301,829 | $222,502 | | Other comprehensive (loss) income, net of tax | $(12,723) | $11,309 | | Comprehensive income attributable to Harley-Davidson, Inc. | $291,367 | $233,811 | Consolidated Balance Sheets This table presents the company's assets, liabilities, and equity as of March 2023, December 2022, and March 2022 Consolidated Balance Sheets (As of) | Metric | March 31, 2023 (in thousands) | December 31, 2022 (in thousands) | March 27, 2022 (in thousands) | |:---|:---|:---|:---|\n| Total Assets | $12,029,585 | $11,492,476 | $10,894,640 | | Total Liabilities | $8,933,736 | $8,585,668 | $8,385,539 | | Total Equity | $3,095,849 | $2,906,808 | $2,509,101 | Consolidated Statements of Cash Flows This table summarizes the company's cash flows from operating, investing, and financing activities for Q1 2023 and Q1 2022 Consolidated Statements of Cash Flows (Three months ended) | Metric | March 31, 2023 (in thousands) | March 27, 2022 (in thousands) | |:---|:---|:---|\n| Net cash provided by operating activities | $46,677 | $139,321 | | Net cash used by investing activities | $(70,586) | $(121,135) | | Net cash provided (used) by financing activities | $178,590 | $(483,505) | | Net increase (decrease) in cash, cash equivalents and restricted cash | $158,501 | $(467,062) | | Cash, cash equivalents and restricted cash, end of period | $1,737,678 | $1,558,157 | Consolidated Statements of Shareholders' Equity This section details changes in shareholders' equity, including net income, other comprehensive income, dividends, and share repurchases Shareholders' Equity Changes (Three months ended March 31, 2023) | Metric | Balance, Dec 31, 2022 (in thousands) | Net Income (in thousands) | Other Comprehensive Income (in thousands) | Dividends (in thousands) | Repurchase of Common Stock (in thousands) | Share-based Compensation (in thousands) | Balance, Mar 31, 2023 (in thousands) | |:---|:---|:---|:---|:---|:---|:---|:---|\n| Total Equity Attributable to Harley-Davidson, Inc. | $2,903,519 | $304,090 | $(12,723) | $(24,123) | $(96,767) | $19,062 | $3,093,058 | Shareholders' Equity Changes (Three months ended March 27, 2022) | Metric | Balance, Dec 31, 2021 (in thousands) | Net Income (in thousands) | Other Comprehensive Income (in thousands) | Dividends (in thousands) | Repurchase of Common Stock (in thousands) | Share-based Compensation (in thousands) | Balance, Mar 27, 2022 (in thousands) | |:---|:---|:---|:---|:---|:---|:---|:---|\n| Total Equity Attributable to Harley-Davidson, Inc. | $2,553,244 | $222,502 | $11,309 | $(24,056) | $(261,737) | $7,839 | $2,509,101 | Notes to Consolidated Financial Statements This section provides detailed explanations of the accounting policies and specific financial statement line items 1. Basis of Presentation and Use of Estimates This note outlines consolidation principles, reportable segments, and foreign currency remeasurement impact - The consolidated financial statements include Harley-Davidson, Inc., its subsidiaries, and certain variable interest entities (VIEs) where the Company is the primary beneficiary. LiveWire Group, Inc. is consolidated as the Company is the controlling shareholder[26] - The Company operates in three reportable segments: Harley-Davidson Motor Company (HDMC), LiveWire, and Harley-Davidson Financial Services (HDFS). Segment changes from December 31, 2022, have been retrospectively applied[27] - Foreign currency remeasurement resulted in an aggregate transaction gain of $3.3 million for the three months ended March 31, 2023, compared to $1.6 million for the same period in 2022[28] 2. New Accounting Standards This note discusses the adoption of ASU 2022-02 and its immaterial impact on the financial statements - The Company adopted ASU 2022-02, Financial Instruments-Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures, on January 1, 2023. This update eliminates accounting guidance for troubled debt restructurings for CECL model adopters and enhances disclosures for certain loan refinancings and restructurings[35] - The adoption of ASU 2022-02 did not have a material impact on the Company's consolidated financial statements[36] 3. Revenue This note disaggregates revenue by major source and details deferred revenue balances Disaggregated Revenue by Major Source (Three months ended) | Segment/Source | March 31, 2023 (in thousands) | March 27, 2022 (in thousands) | |:---|:---|:---|\n| HDMC: Motorcycles | $1,302,378 | $1,057,005 | | HDMC: Parts and accessories | $167,671 | $165,320 | | HDMC: Apparel | $71,391 | $51,404 | | HDMC: Licensing | $6,210 | $6,497 | | HDMC: Other | $10,179 | $12,544 | | LiveWire | $7,762 | $10,401 | | Motorcycles and related products revenue | $1,565,591 | $1,303,171 | | HDFS: Interest income | $182,270 | $161,734 | | HDFS: Other | $40,825 | $30,281 | | Financial services revenue | $223,095 | $192,015 | | Total Revenue | $1,788,686 | $1,495,186 | - Deferred revenue balances, primarily from Harley Owners Group® memberships and financial services products, were $43.176 million at March 31, 2023, down from $44.100 million at the beginning of the period. The Company expects to recognize $17.8 million of remaining unearned revenue over the next 12 months[37] 4. Income Taxes This note provides the effective income tax rate for the reporting periods - The Company's effective income tax rate for the three months ended March 31, 2023, was 23.0%, a slight decrease from 23.4% for the same period in 2022[38] 5. Earnings Per Share This note details the calculation of basic and diluted earnings per share Earnings Per Share (Three months ended) | Metric | March 31, 2023 | March 27, 2022 | |:---|:---|:---|\n| Net income attributable to Harley-Davidson, Inc. (in thousands) | $304,090 | $222,502 | | Basic weighted-average shares outstanding (in thousands) | 146,048 | 152,820 | | Diluted weighted-average shares outstanding (in thousands) | 148,931 | 153,924 | | Basic EPS | $2.08 | $1.46 | | Diluted EPS | $2.04 | $1.45 | - Shares related to share-based compensation that were anti-dilutive and thus excluded from diluted EPS calculations were 1.3 million for Q1 2023 and 0.5 million for Q1 2022[39] 6. Additional Balance Sheet and Cash Flow Information This note provides details on inventories and the primary drivers of changes in operating cash flow Inventories, Net (As of) | Category | March 31, 2023 (in thousands) | December 31, 2022 (in thousands) | March 27, 2022 (in thousands) | |:---|:---|:---|:---|\n| Raw materials and work in process | $387,466 | $331,380 | $376,600 | | Motorcycle finished goods | $380,083 | $549,041 | $291,623 | | Parts and accessories and apparel | $182,905 | $187,039 | $130,156 | | Inventory at lower of FIFO cost or net realizable value | $950,454 | $1,067,460 | $798,379 | | Excess of FIFO over LIFO cost | $(119,933) | $(116,500) | $(84,120) | | Total Inventories, net | $830,521 | $950,960 | $714,259 | - Net cash provided by operating activities decreased to $46.677 million for the three months ended March 31, 2023, from $139.321 million in the prior year, primarily due to a significant increase in wholesale finance receivables related to sales[42] 7. Finance Receivables This note details finance receivables, allowance for credit losses, and aging analysis, reflecting economic outlook Finance Receivables, Net (As of) | Category | March 31, 2023 (in thousands) | December 31, 2022 (in thousands) | March 27, 2022 (in thousands) | |:---|:---|:---|:---|\n| Retail finance receivables | $6,708,103 | $6,748,201 | $6,511,845 | | Wholesale finance receivables | $1,224,051 | $748,948 | $650,181 | | Total Finance Receivables | $7,932,154 | $7,497,149 | $7,162,026 | | Allowance for credit losses | $(358,431) | $(358,711) | $(340,473) | | Finance Receivables, Net | $7,573,723 | $7,138,438 | $6,821,553 | Changes in Allowance for Credit Losses (Three months ended March 31, 2023) | Metric | Retail (in thousands) | Wholesale (in thousands) | Total (in thousands) | |:---|:---|:---|:---|\n| Balance, beginning of period | $345,275 | $13,436 | $358,711 | | Provision for credit losses | $50,969 | $1,395 | $52,364 | | Charge-offs | $(68,008) | $0 | $(68,008) | | Recoveries | $15,364 | $0 | $15,364 | | Balance, end of period | $343,600 | $14,831 | $358,431 | - The Company's outlook on economic conditions at the end of Q1 2023 was weighted towards a near-term recession due to uncertain macro-economic conditions, elevated inflation, and muted consumer confidence, impacting expected credit losses[48] Aging Analysis of Finance Receivables (March 31, 2023) | Category | Current (in thousands) | 31-60 Days Past Due (in thousands) | 61-90 Days Past Due (in thousands) | Greater than 90 Days Past Due (in thousands) | Total Past Due (in thousands) | Total (in thousands) | |:---|:---|:---|:---|:---|:---|:---|\n| Retail finance receivables | $6,488,892 | $125,327 | $44,748 | $49,136 | $219,211 | $6,708,103 | | Wholesale finance receivables | $1,223,752 | $298 | $0 | $1 | $299 | $1,224,051 | | Total | $7,712,644 | $125,625 | $44,748 | $49,137 | $219,510 | $7,932,154 | 8. Derivative Financial Instruments and Hedging Activities This note describes the company's use of derivatives for hedging and their impact on income - The Company uses derivative financial instruments (foreign currency exchange contracts, commodity contracts, treasury/swap rate lock contracts, cross-currency swaps, interest rate caps) to mitigate exposure to fluctuations in foreign currency exchange rates, interest rates, and commodity prices, strictly for hedging purposes, not speculation[61][62][63][64] Gains and Losses from Cash Flow Hedges Reclassified into Income (Three months ended) | Derivative Type | March 31, 2023 (in thousands) | March 27, 2022 (in thousands) | |:---|:---|:---|\n| Foreign currency contracts | $6,290 | $5,655 | | Commodity contracts | $(379) | $226 | | Cross-currency swaps | $21,625 | $(25,800) | | Treasury rate lock contracts | $(66) | $(127) | | Swap rate lock contracts | $(5) | $0 | | Total | $27,465 | $(20,046) | - A net loss of $17.6 million from Accumulated Other Comprehensive Loss (AOCL) is estimated to be reclassified into income over the next 12 months[68] 9. Debt This note provides a breakdown of short-term and long-term debt, including future principal payments Short-Term Debt (As of) | Debt Type | March 31, 2023 (in thousands) | December 31, 2022 (in thousands) | March 27, 2022 (in thousands) | |:---|:---|:---|:---|\n| Unsecured commercial paper | $501,243 | $770,468 | $816,016 | Long-Term Debt, Net (As of) | Debt Type | March 31, 2023 (in thousands) | December 31, 2022 (in thousands) | March 27, 2022 (in thousands) | |:---|:---|:---|:---|\n| Secured debt | $2,692,810 | $2,516,993 | $1,722,756 | | Unsecured medium-term notes | $3,245,591 | $2,879,473 | $3,329,845 | | Senior notes | $745,545 | $745,368 | $744,842 | | Total Long-Term Debt | $6,683,946 | $6,141,834 | $5,797,443 | | Current portion of long-term debt, net | $(1,408,777) | $(1,684,782) | $(1,327,357) | | Long-Term Debt, Net | $5,275,169 | $4,457,052 | $4,470,086 | Future Principal Payments of Debt Obligations (As of March 31, 2023) | Year | Amount (in thousands) | |:---|:---|\n| 2023 | $1,783,948 | | 2024 | $1,302,020 | | 2025 | $1,857,244 | | 2026 | $606,941 | | 2027 | $663,172 | | Thereafter | $1,000,007 | | Total Future Principal Payments | $7,213,332 | | Unamortized discounts and debt issuance costs | $(28,143) | | Total | $7,185,189 | 10. Asset-Backed Financing This note explains the company's asset-backed financing activities and their on-balance sheet impact - The Company engages in asset-backed financing through securitization and commercial paper conduit facilities, transferring retail motorcycle finance receivables to Special Purpose Entities (SPEs) which issue debt. These transactions are generally treated as secured borrowings and consolidated on the balance sheet[74][75][76] On-Balance Sheet Asset-Backed Financings (March 31, 2023) | Category | Finance Receivables (in thousands) | Allowance for Credit Losses (in thousands) | Restricted Cash (in thousands) | Other Assets (in thousands) | Total Assets (in thousands) | Asset-Backed Debt, Net (in thousands) | |:---|:---|:---|:---|:---|:---|:---|\n| Asset-backed securitizations (Consolidated VIEs) | $2,815,885 | $(144,336) | $142,265 | $8,799 | $2,822,613 | $2,257,799 | | Asset-backed U.S. commercial paper conduit facility (Consolidated VIEs) | $410,529 | $(21,031) | $29,020 | $1,939 | $420,457 | $372,816 | | Asset-backed Canadian commercial paper conduit facility (Unconsolidated VIEs) | $70,485 | $(2,980) | $5,193 | $151 | $72,849 | $62,195 | | Total | $3,296,899 | $(168,347) | $176,478 | $10,889 | $3,315,919 | $2,692,810 | - In Q1 2023, the Company transferred $628.5 million of U.S. retail motorcycle finance receivables to an SPE, issuing $547.7 million (net) in secured notes through an on-balance sheet asset-backed securitization. No such transactions occurred in Q1 2022[81] 11. Fair Value This note details recurring fair value measurements and the valuation methods for various financial instruments Recurring Fair Value Measurements (March 31, 2023) | Category | Balance (in thousands) | Level 1 (in thousands) | Level 2 (in thousands) | |:---|:---|:---|:---|\n| Assets: | | | | | Cash equivalents | $1,030,696 | $858,000 | $172,696 | | Marketable securities | $34,017 | $34,017 | $0 | | Derivative financial instruments | $4,647 | $0 | $4,647 | | Liabilities: | | | | | Derivative financial instruments | $50,218 | $0 | $50,218 | | LiveWire warrants | $7,320 | $4,800 | $2,520 | - Repossessed inventory, measured at the lower of cost or net realizable value, was $24.9 million at March 31, 2023, with a fair value adjustment decrease of $6.8 million. Fair value is estimated using Level 2 inputs[92] - The fair value of finance receivables is generally calculated by discounting future cash flows using Level 3 inputs, while wholesale finance receivables approximate fair value due to short terms or market-adjusting interest rates[95] 12. Product Warranty and Recall Campaigns This note outlines the company's warranty policies and changes in warranty and recall liabilities - The Company provides a standard two-year limited warranty on new motorcycles (three years in certain markets) and a five-year warranty on electric motorcycle batteries, accruing for claims at shipment based on historical data[98] Changes in Warranty and Recall Liabilities (Three months ended) | Metric | March 31, 2023 (in thousands) | March 27, 2022 (in thousands) | |:---|:---|:---|\n| Balance, beginning of period | $75,960 | $61,621 | | Warranties issued during the period | $11,927 | $10,711 | | Settlements made during the period | $(12,051) | $(7,096) | | Recalls and changes to pre-existing warranty liabilities | $(1,168) | $(141) | | Balance, end of period | $74,668 | $65,095 | - The liability for recall campaigns was $26.6 million at March 31, 2023, compared to $16.7 million at March 27, 2022[99] 13. Employee Benefit Plans This note describes the company's pension and postretirement benefit plans and their net periodic benefit income - The Company maintains a qualified pension plan and postretirement healthcare benefit plans for eligible HDMC segment employees and retirees, along with unfunded supplemental employee retirement plan agreements (SERPA)[100] Net Periodic Benefit Income (Three months ended) | Benefit Type | March 31, 2023 (in thousands) | March 27, 2022 (in thousands) | |:---|:---|:---|\n| Pension and SERPA Benefits | $(14,964) | $(3,847) | | Postretirement Healthcare Benefits | $(1,975) | $(1,203) | | Total Net Periodic Benefit Income | $(16,939) | $(5,050) | - No required or planned voluntary qualified pension plan contributions are expected for 2023; the Company anticipates ongoing benefit payments for SERPA and postretirement healthcare plans[100] 14. Commitments and Contingencies This note addresses legal proceedings, potential regulatory compliance matters, and estimated costs - The Company is involved in lawsuits and claims related to product, commercial, employee, and environmental matters, accruing for probable and estimable losses and maintaining insurance coverage[102] - A potential regulatory compliance matter regarding a sub-supplier's brake hose assemblies led to a two-week suspension of vehicle assembly in Q2 2022. The Company is seeking an 'Inconsequentiality Determination' from NHTSA, believing the issues are inconsequential to safety and will not result in material costs[103][105][106] - If a field action or recall were required for the brake hose assembly issue, estimated costs could range from $200 million to $400 million, though the Company expects to seek full recovery[107] 15. Accumulated Other Comprehensive Loss This note details the components and changes in accumulated other comprehensive loss Changes in Accumulated Other Comprehensive Loss (Three months ended March 31, 2023) | Category | Foreign Currency Translation Adjustments (in thousands) | Derivative Financial Instruments (in thousands) | Pension and Postretirement Benefit Plans (in thousands) | Total (in thousands) | |:---|:---|:---|:---|:---|\n| Balance, beginning of period | $(80,271) | $(10,440) | $(251,218) | $(341,929) | | Other comprehensive income (loss), before reclassifications | $10,976 | $(1,240) | $0 | $9,736 | | Income tax (expense) benefit | $(855) | $374 | $0 | $(481) | | Reclassifications before tax | $0 | $(27,465) | $(1,256) | $(28,721) | | Income tax benefit | $0 | $6,449 | $294 | $6,743 | | Other comprehensive (loss) income | $10,121 | $(21,882) | $(962) | $(12,723) | | Balance, end of period | $(70,150) | $(32,322) | $(252,180) | $(354,652) | 16. Reportable Segments This note provides financial data for the HDMC, LiveWire, and HDFS reportable segments - The Company operates in three reportable segments: Harley-Davidson Motor Company (HDMC), LiveWire, and Harley-Davidson Financial Services (HDFS). Segment changes from December 31, 2022, have been retrospectively applied[110] Selected Segment Operating Income (Three months ended) | Segment | March 31, 2023 (in thousands) | March 27, 2022 (in thousands) | |:---|:---|:---|\n| HDMC Operating income | $335,736 | $218,934 | | LiveWire Operating loss | $(24,547) | $(16,059) | | HDFS Operating income | $58,420 | $86,357 | | Total Operating income | $369,609 | $289,232 | Total Assets by Segment (As of) | Segment | March 31, 2023 (in millions) | December 31, 2022 (in millions) | March 27, 2022 (in millions) | |:---|:---|:---|:---|\n| HDMC | $3.1 | $3.3 | $2.9 | | LiveWire | $325.8 | $351.4 | $75.7 | | HDFS | $8.6 | $7.9 | $7.9 | 17. Supplemental Consolidating Data This note presents consolidating data for financial and non-financial services entities - Supplemental consolidating data is provided for Harley-Davidson Financial Services, Inc. (Financial Services Entities) and all other Harley-Davidson, Inc. entities (Non-Financial Services Entities) to highlight their separate financial statement impacts[112] Consolidated Net Income Attributable to Harley-Davidson, Inc. by Entity Type (Three months ended March 31, 2023) | Entity Type | Amount (in thousands) | |:---|:---|\n| Non-Financial Services Entities | $258,646 | | Financial Services Entities | $45,278 | | Consolidating Adjustments | $166 | | Consolidated Total | $304,090 | Consolidated Total Assets by Entity Type (March 31, 2023) | Entity Type | Amount (in thousands) | |:---|:---|\n| Non-Financial Services Entities | $3,995,692 | | Financial Services Entities | $8,614,991 | | Consolidating Adjustments | $(581,098) | | Consolidated Total | $12,029,585 | Consolidated Net Cash Provided by Operating Activities by Entity Type (Three months ended March 31, 2023) | Entity Type | Amount (in thousands) | |:---|:---|\n| Non-Financial Services Entities | $15,450 | | Financial Services Entities | $518,476 | | Consolidating Adjustments | $(487,249) | | Consolidated Total | $46,677 | 18. Subsequent Event This note discloses a significant financing event that occurred after the reporting period - In April 2023, the Company issued €700.0 million of medium-term notes, maturing in April 2026 with an annual interest rate of 6.36%[120] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section overviews Q1 2023 financial performance, key factors, future guidance, and detailed segment results Overview This section summarizes the company's net income, EPS, and segment operating results for Q1 2023 Net Income and EPS (Q1 2023 vs Q1 2022) | Metric | Q1 2023 | Q1 2022 | |:---|:---|:---|\n| Net income attributable to Harley-Davidson, Inc. | $304.1 million | $222.5 million | | Diluted EPS | $2.04 | $1.45 | - HDMC segment operating income increased by $116.8 million in Q1 2023, driven by higher motorcycle shipments, price increases, and favorable product mix, partially offset by unfavorable foreign currency exchange rates and increased operating expenses[126] - LiveWire segment operating loss increased to $24.5 million in Q1 2023 from $16.1 million in Q1 2022, primarily due to lower electric motorcycle and balance bike shipments and increased operating expenses[126] - HDFS segment operating income decreased by $27.9 million in Q1 2023, mainly due to higher interest expense and an increase in the provision for credit losses[126] - Retail sales of new Harley-Davidson motorcycles worldwide were down 12.4% in Q1 2023, with a 17.3% decline in the U.S. and 3.3% internationally[127] Key Factors Impacting the Company This section discusses supply chain costs, regulatory matters, interest rate impacts, and tariff developments - Supply chain cost inflation moderated in Q1 2023, with deflation in freight and raw materials partially offsetting increases in labor and warehousing costs. The Company expects overall supply-chain cost inflation to moderate for the full year 2023[129] - The Company is addressing a potential regulatory compliance matter with a sub-supplier's brake hose assemblies, seeking an 'Inconsequentiality Determination' from NHTSA to avoid a material recall, which could otherwise cost $200 million to $400 million[130][132][134] - Rising interest rates in 2022 and 2023 may negatively impact HDFS's interest income margin and could make motorcycles less affordable, affecting product mix and customer financing[135] - The suspension of additional EU tariffs, reducing the rate from 31% to 6%, is effective until December 31, 2023. Negotiations are ongoing, with no assurance of a resolution beyond this date[136] Guidance This section outlines the company's financial and operational outlook for 2023 across its segments 2023 Guidance | Metric | 2023 Outlook | |:---|:---|\n| HDMC revenue growth | 4% to 7% (YoY) | | HDMC operating margin as a percent of revenue | 14.1% to 14.6% | | LiveWire motorcycle unit sales | 750 to 2,000 units | | LiveWire operating loss | $115 million to $125 million | | HDFS operating income decline | 20% to 25% (YoY) | | Capital investments | $225 million to $250 million | | Cost productivity target (incremental by 2025) | $400 million | | Cost reduction (2022) | ~$50 million | | Expected additional cost reduction (2023) | $140 million | - HDMC expects high-teens revenue growth and operating income margin in H1 2023, followed by a decline in H2 2023 due to normalized production and seasonality[141] - LiveWire's guidance assumes the launch of its Del Mar electric motorcycle in Q3 2023[142] - HDFS's operating income decline is attributed to higher interest rates and increased credit losses, with mitigation efforts underway[143][144] Results of Operations for the Three Months Ended March 31, 2023 Compared to the Three Months Ended March 27, 2022 This section provides a detailed comparison of the company's financial and operational results for Q1 2023 versus Q1 2022 Consolidated Results This section summarizes the consolidated operating income, net income, and diluted EPS for the reporting periods Consolidated Operating Income and Net Income (Q1 2023 vs Q1 2022) | Metric | March 31, 2023 (in thousands) | March 27, 2022 (in thousands) | Increase (Decrease) (in thousands) | |:---|:---|:---|:---|\n| Operating income - HDMC | $335,736 | $218,934 | $116,802 | | Operating loss - LiveWire | $(24,547) | $(16,059) | $(8,488) | | Operating income - HDFS | $58,420 | $86,357 | $(27,937) | | Total Operating income | $369,609 | $289,232 | $80,377 | | Net income attributable to Harley-Davidson, Inc. | $304,090 | $222,502 | $81,588 | | Diluted earnings per share | $2.04 | $1.45 | $0.59 | - Other income increased in Q1 2023 due to higher non-operating income from defined benefit plans. The effective income tax rate slightly decreased to 23.0% from 23.4%[149] - Diluted EPS rose 40.7% year-over-year, partly due to a decrease in diluted weighted average shares outstanding from 153.9 million to 148.9 million, driven by common stock repurchases[150] Harley-Davidson Motorcycles Retail Sales and Registration Data This section presents worldwide retail sales, inventory levels, and market share data for Harley-Davidson motorcycles Harley-Davidson Motorcycle Retail Sales (Three months ended) | Region | March 31, 2023 (Units) | March 31, 2022 (Units) | Unit Change | % Change | |:---|:---|:---|:---|\n| United States | 24,277 | 29,344 | (5,067) | (17.3)% | | Canada | 1,744 | 1,869 | (125) | (6.7)% | | North America | 26,021 | 31,213 | (5,192) | (16.6)% | | Europe/Middle East/Africa (EMEA) | 5,917 | 6,290 | (373) | (5.9)% | | Asia Pacific | 6,881 | 6,699 | 182 | 2.7% | | Latin America | 606 | 809 | (203) | (25.1)% | | Worldwide Total | 39,425 | 45,011 | (5,586) | (12.4)% | - Worldwide retail sales declined 12.4% in Q1 2023, primarily due to a decrease in North America, impacted by the timing of new model year shipments and shifting macro-economic conditions[153] - Average retail inventory of new motorcycles increased 70% year-over-year and 24% quarter-over-quarter, reflecting improved production ahead of the riding season[154] 601+cc Motorcycle Registration Data and Market Share (Three months ended) | Metric | March 31, 2023 | March 31, 2022 | Change | |:---|:---|:---|:---|\n| U.S. Industry new motorcycle registrations | 59,262 | 62,207 | (4.7)% | | Europe Industry new motorcycle registrations | 121,574 | 107,786 | 12.8% | | Harley-Davidson U.S. market share | 39.5% | 47.1% | (7.6) pts. | | Harley-Davidson Europe market share | 5.0% | 4.9% | 0.1 pts. | HDMC Segment Results This section details HDMC's motorcycle unit shipments, revenue, gross profit, and operating income performance HDMC Motorcycle Unit Shipments (Three months ended) | Category | March 31, 2023 (Units) | March 27, 2022 (Units) | Unit Change | % Change | |:---|:---|:---|:---|\n| U.S. motorcycle shipments | 42,588 | 35,819 | 6,769 | 18.9% | | Worldwide motorcycle shipments | 62,237 | 54,746 | 7,491 | 13.7% | | Grand American Touring | 32,219 | 26,012 | 6,207 | 23.9% | | Cruiser | 21,258 | 15,563 | 5,695 | 36.6% | | Sportster® / Street | 5,544 | 9,654 | (4,110) | (42.6)% | | Lightweight | 1,041 | 0 | 1,041 | 100.0% | | Adventure Touring | 2,175 | 3,517 | (1,342) | (38.2)% | - Worldwide motorcycle shipments increased 13.7% in Q1 2023 due to higher production and the launch of new 2023 models. The Company also began shipping Lightweight motorcycles to China[161] HDMC Segment Revenue and Gross Profit (Three months ended) | Metric | March 31, 2023 (in thousands) | March 27, 2022 (in thousands) | Increase (Decrease) (in thousands) | % Change | |:---|:---|:---|:---|:---|\n| Total Revenue | $1,557,829 | $1,292,770 | $265,059 | 20.5% | | Cost of goods sold | $1,000,803 | $885,188 | $115,615 | 13.1% | | Gross profit | $557,026 | $407,582 | $149,444 | 36.7% | | Operating income | $335,736 | $218,934 | $116,802 | 53.4% | | Operating margin | 21.6% | 16.9% | 4.6 pts. | | - Revenue growth was driven by higher volume, price increases on new models, and favorable shipment mix, partially offset by negative foreign currency exchange rates. Gross profit benefited from raw material cost moderation but was impacted by increased manufacturing and other costs[163][164] LiveWire Segment Results This section analyzes LiveWire's revenue, gross profit, operating loss, and unit shipments LiveWire Segment Performance (Three months ended) | Metric | March 31, 2023 | March 27, 2022 | Change | % Change | |:---|:---|:---|:---|\n| Revenue (in thousands) | $7,762 | $10,401 | $(2,639) | (25.4)% | | Cost of goods sold (in thousands) | $6,498 | $10,348 | $(3,850) | (37.2)% | | Gross profit (in thousands) | $1,264 | $53 | $1,211 | 2,284.9% | | Selling, administrative and engineering expense (in thousands) | $25,811 | $16,112 | $9,699 | 60.2% | | Operating loss (in thousands) | $(24,547) | $(16,059) | $(8,488) | 52.9% | | LiveWire motorcycle unit shipments | 63 | 97 | (34) | (35.1)% | - Revenue decreased due to lower volumes of electric motorcycles and balance bikes. Gross profit significantly increased despite lower revenue, indicating improved cost efficiency per unit or product mix[166] - Selling, administrative, and engineering expenses increased by 60.2%, driven by higher product development costs and expenses associated with establishing the new organization[167] HDFS Segment Results This section reviews HDFS's revenue, interest expense, credit loss provision, and operating income HDFS Segment Performance (Three months ended) | Metric | March 31, 2023 (in thousands) | March 27, 2022 (in thousands) | Change (in thousands) | % Change | |:---|:---|:---|:---|:---|\n| Total Revenue | $223,095 | $192,015 | $31,080 | 16.2% | | Interest expense | $73,549 | $42,099 | $31,450 | 74.7% | | Provision for credit losses | $52,364 | $28,822 | $23,542 | 81.7% | | Operating income | $58,420 | $86,357 | $(27,937) | (32.4)% | - Interest income increased due to higher average outstanding finance receivables and yields, while other income rose from higher investment and insurance revenue[169] - Interest expense surged by 74.7% due to higher average outstanding debt and increased interest rates. The provision for credit losses jumped 81.7% due to higher retail delinquencies and credit losses returning to pre-COVID-19 levels[169][170] - Annualized losses on retail motorcycle loans increased to 3.21% in Q1 2023 from 1.77% in Q1 2022, and the 30-day delinquency rate rose to 3.74% from 2.87%[173] Liquidity and Capital Resources This section discusses the company's liquidity position, capital resources, and cash flow activities Cash and Availability This section details the company's cash, cash equivalents, and available credit facilities - The Company aims to maintain a minimum of twelve months of projected liquidity through cash, cash equivalents, and credit facility availability[179] Cash and Availability Under Credit and Conduit Facilities (March 31, 2023) | Category | Amount (in thousands) | |:---|:---|\n| Cash and cash equivalents | $1,561,200 | | Total net U.S. commercial paper conduit facility availability | $1,200,000 | | Net asset-backed Canadian commercial paper conduit facility | $30,100 | | Net credit facility availability | $918,757 | | Total | $3,710,057 | - The Company's short- and long-term debt ratings as of March 31, 2023, were P3/Baa3 (Moody's), A3/BBB- (S&P), and F2/BBB+ (Fitch), all with a Stable outlook[182] Cash Flow Activity This section provides a summary of net cash flows from operating, investing, and financing activities Cash Flow Activities (Three months ended) | Activity | March 31, 2023 (in thousands) | March 27, 2022 (in thousands) | |:---|:---|:---|\n| Net cash provided by operating activities | $46,677 | $139,321 | | Net cash used by investing activities | $(70,586) | $(121,135) | | Net cash provided (used) by financing activities | $178,590 | $(483,505) | | Effect of exchange rate changes on cash, cash equivalents and restricted cash | $3,820 | $(1,743) | | Net increase (decrease) in cash, cash equivalents and restricted cash | $158,501 | $(467,062) | Operating Activities This section explains the factors impacting cash flow from operating activities - Cash flow from operating activities in Q1 2023 was negatively impacted by an increase in wholesale finance receivables, partially offset by positive changes in working capital, particularly inventory[184] - The Company expects sufficient operating cash inflows to fund ongoing operating requirements, excluding finance receivable originations, which will be debt-funded[185] Investing Activities This section details capital expenditures and net cash outflows for finance receivables - Capital expenditures increased to $45.1 million in Q1 2023 from $28.0 million in Q1 2022. The 2023 plan estimates capital investments between $225 million and $250 million, to be funded by operating cash flow[186] - Net cash outflows for finance receivables decreased by $67.0 million in Q1 2023 compared to Q1 2022, driven by lower retail finance receivable originations[186] Financing Activities This section describes changes in debt, dividends, share repurchases, and credit facility renewals - Financing cash flows shifted from a net outflow of $0.2 billion in Q1 2022 to a net inflow of $0.3 billion in Q1 2023, primarily due to debt and brokered certificates of deposit activity[189] Outstanding Debt and Deposits (As of) | Category | March 31, 2023 (in thousands) | March 27, 2022 (in thousands) | |:---|:---|:---|\n| Total Outstanding Debt | $7,185,189 | $6,613,459 | | Deposits, net | $369,311 | $348,083 | - The Company paid dividends of $0.165 per share ($24.1 million total) in Q1 2023, slightly up from $0.158 per share ($24.1 million total) in Q1 2022[187] - Cash outflows for share repurchases decreased to $96.8 million in Q1 2023 from $261.7 million in Q1 2022, including $84.0 million in discretionary repurchases. As of March 31, 2023, 7.8 million shares remained under the board-approved authorization[188][229] - In Q1 2023, $350.0 million of 3.35% medium-term notes matured and were paid in full. A new $700.0 million, 6.50% medium-term note due March 2028 was issued[193][192] - The Company renewed its $1.50 billion U.S. Commercial Paper Conduit Facility in November 2022, with an expiration date of November 17, 2023. The Canadian Conduit Facility, with a C$125.0 million commitment, expires on June 30, 2023[197][195] Cautionary Statements This section highlights risks and uncertainties associated with forward-looking statements and business operations - Forward-looking statements are subject to risks and uncertainties, including the Company's ability to execute its business plans (The Hardwire, LiveWire evolution), manage supply chain issues (semiconductor shortages, inflation, logistics costs), and realize benefits from LiveWire's public operation[124][209][210] - Other significant risks include accurately predicting market conditions, accessing capital markets, timely product development, managing regulatory compliance (e.g., brake hose assembly matter), and the impact of tariffs and foreign currency fluctuations[209][210] - HDFS's retail credit losses are normalizing to higher levels due to changing consumer credit behavior, macroeconomic conditions (inflation), and challenges in motorcycle repossessions[213] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section details the company's exposure to market risks from foreign currency, commodity prices, and interest rates - The Company uses derivative financial instruments to manage market risks from foreign currency exchange rates, commodity prices, and interest rates, prohibiting their use for speculative trading[215] HDMC Segment Market Risk This section discusses HDMC's exposure to foreign currency fluctuations and commodity price changes - HDMC's operating results are affected by U.S. dollar fluctuations against foreign currencies, particularly the Euro, Australian dollar, Japanese yen, Brazilian real, Canadian dollar, Mexican peso, Chinese yuan, Singapore dollar, Thai baht, and Pound sterling. Foreign currency contracts are used to mitigate this risk[216] - HDMC's operating income is also impacted by changes in commodity prices for motorcycle production, with derivative financial instruments used on a limited basis for hedging[217] LiveWire Segment Market Risk This section addresses LiveWire's foreign currency exposure, expected to increase with international expansion - LiveWire's operating results are affected by foreign currency fluctuations, though the impact has been immaterial to date due to most sales being in the U.S. This exposure is expected to increase with international expansion[218] HDFS Segment Market Risk This section outlines HDFS's sensitivity to interest rate changes and foreign currency fluctuations - HDFS's operating income is sensitive to interest rate changes due to financial receivables, debt, and interest rate derivative instruments. Interest rate caps are used to reduce the impact of fluctuations on asset-backed securitization transactions[219][220] - HDFS's foreign-denominated medium-term notes expose it to Euro fluctuations and interest rate changes, mitigated by cross-currency swaps[222] Item 4. Controls and Procedures This section confirms the effectiveness of disclosure controls and procedures and no material changes to internal control - The Company's disclosure controls and procedures were deemed effective as of March 31, 2023, ensuring timely and accurate reporting of information[224] - There were no material changes in the Company's internal control over financial reporting during the quarter ended March 31, 2023[225] PART II – OTHER INFORMATION Item 1. Legal Proceedings This section refers to Note 14 for details on the company's legal proceedings, commitments, and contingencies - Information on legal proceedings is incorporated by reference from Note 14 of the Notes to Consolidated Financial Statements[227] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section details the company's share repurchase activities and remaining authorization under the 2020 plan Share Repurchases (Q1 2023) | Fiscal Month | Total Number of Shares Purchased | Average Price Paid per Share | |:---|:---|:---|\n| January 1 to March 31 | 331 | $42 | | February 1 to February 28 | 259,229 | $49 | | March 1 to March 31 | 2,040,212 | $41 | | Total | 2,299,772 | $42 | - The Company repurchased 2.0 million shares on a discretionary basis in Q1 2023. As of March 31, 2023, 7.8 million shares remained under the 2020 authorization, which has no dollar limit or expiration date[229] - Employees surrendered 263,503 shares of common stock in Q1 2023 to satisfy tax withholding obligations related to vesting restricted stock units and performance shares[231] Item 6. Exhibits This section provides an index of exhibits filed with the Form 10-Q, including officers' and CEO/CFO certifications - The exhibit index includes Officers' Certificates, CEO and CFO Certifications, and XBRL Instance, Schema, Calculation, Definition, and Label Linkbase Documents[235] Signatures This section contains the required signatures for the Form 10-Q, dated May 10, 2023 - The report is signed by David W. Viney, Vice President, Treasurer, and Interim Chief Financial Officer, and Mark R. Kornetzke, Chief Accounting Officer, on May 10, 2023[239]