10-Q: Harley-Davidson Reports Mixed Q1 Results Amidst Economic Headwinds

Harley-Davidson's first quarter results show a decrease in net income despite flat retail sales, with North American sales growth offset by international market declines.

Summary

• Harley-Davidson's net income attributable to the company decreased to $234.9 million, or $1.72 per diluted share, in the first quarter of 2024, compared to $304.1 million, or $2.04 per diluted share, in the same period last year.
• HDMC segment operating income fell by $97.3 million year-over-year to $238.4 million, primarily due to lower motorcycle shipments and pricing.
• The LiveWire segment experienced an increased operating loss of $29.2 million, compared to $24.5 million in the prior year quarter, due to lower revenue from electric balance bikes and changes in the mix of electric motorcycle models sold.
• HDFS segment operating income decreased by $4.5 million to $53.9 million, due to higher interest expense, an increase in the provision for credit losses, and higher operating expenses, partially offset by higher interest income.
• Worldwide retail sales of new Harley-Davidson motorcycles were flat compared to the first quarter of 2023, with a 5.6% increase in North America offset by declines in EMEA and Asia-Pacific.
• The company reaffirmed its expectations for HDMC and HDFS and revised its expectations for LiveWire for 2024.
• HDMC revenue is expected to be flat to down 9% in 2024, with wholesale unit shipments down between 1% and 10%.
• The company expects LiveWire motorcycle sales of 1,000 to 1,500 units in 2024, with an operating loss between $105 million and $115 million.
• HDFS operating income is expected to be flat to up 5% in 2024.

Sentiment

Score: 5

Explanation: The document presents a mixed picture with some positive aspects like North American sales growth and cost-saving initiatives, but these are overshadowed by the overall decline in profitability and the challenges in international markets. The reaffirmed guidance for HDMC and HDFS and the revised guidance for LiveWire suggest some confidence in the future, but the risks and uncertainties remain significant.

Positives

• North American retail sales increased by 5.6%, driven by the launch of new 2024 Touring models.
• The company is focused on production efficiency, logistics network optimization and supplier cost optimization.
• The company expects approximately $100 million of additional cost productivity savings in 2024.
• The company plans to continue to invest in product development and capability enhancements that support The Hardwire strategy.

Negatives

• Net income attributable to Harley-Davidson, Inc. decreased by 22.7% year-over-year.
• HDMC segment operating income decreased by 29% year-over-year.
• LiveWire segment operating loss increased by 19.1% year-over-year.
• HDFS segment operating income decreased by 7.8% year-over-year.
• Worldwide retail sales were flat, with declines in EMEA and Asia-Pacific.
• The company expects HDMC revenue to be flat to down 9% in 2024.
• The company expects wholesale unit shipments to be down between 1% and 10% in 2024.
• The company expects LiveWire operating loss for 2024 to be $105 million to $115 million.

Risks

• The company is working through a regulatory compliance matter with a supplier regarding brake hose assemblies, which could result in material recall costs.
• The higher interest rate environment has adversely impacted HDFS' interest income margin and consumer discretionary purchases.
• The company is exposed to risks from fluctuations in foreign currency exchange rates, interest rates and commodity prices.
• The company is subject to lawsuits and other claims related to product, commercial, employee, environmental and other matters.

Future Outlook

The company expects HDMC revenue to be flat to down 9% in 2024, with wholesale unit shipments down between 1% and 10%. LiveWire motorcycle sales are expected to be 1,000 to 1,500 units in 2024, with an operating loss between $105 million and $115 million. HDFS operating income is expected to be flat to up 5% in 2024.

Management Comments

• The company's results for the first quarter of 2024 were generally in line with the company's expectations which included a decline in the company's wholesale shipments and an improvement in retail sales in North America as the company launched its new 2024 model year motorcycles.
• The company believes current overall dealer inventory is appropriate given the upcoming spring riding season and the recent launch of new model year 2024 motorcycles.

Industry Context

The flat worldwide retail sales and the increase in North America offset by declines in EMEA and Asia-Pacific reflect the current challenging macroeconomic conditions and the impact of higher interest rates on consumer discretionary spending. The company's focus on core products and cost optimization aligns with industry trends towards efficiency and profitability.

Comparison to Industry Standards

• Harley-Davidson's U.S. market share of new 601+cc motorcycles increased during the first three months of 2024 compared to the first three months of 2023 on higher retail sales relative to the industry.
• The company's European market share of new 601+cc motorcycles for first three months of 2024 was down compared to the first three months of 2023.
• The company's worldwide retail inventory of new motorcycles was approximately 69,000 units at the end of the first quarter of 2024, which is up approximately 26% compared to the end of the first quarter of 2023, but remained lower than historical levels experienced prior to 2020. The average historical retail inventory level at the end of the first quarter during 2015 through 2019 was approximately 83,000 units.

Legal Proceedings

• The company is subject to lawsuits and other claims related to product, commercial, employee, environmental and other matters.
• The company is working through a regulatory compliance matter with a supplier regarding brake hose assemblies, which could result in material recall costs.

Related Party Transactions

• On January 27, 2023, Harley-Davidson, Inc. entered into a revolving line of credit with Harley-Davidson Financial Services, Inc. whereby Harley-Davidson Financial Services, Inc. may borrow up to $200.0 million at market interest rates with an expiration date of July 27, 2024.
• Harley Davidson, Inc. also has a support agreement with Harley-Davidson Financial Services Inc. whereby, if required, Harley-Davidson, Inc. agrees to provide Harley-Davidson Financial Services Inc. with financial support to maintain Harley-Davidson Financial Services Inc.s fixed-charge coverage at 1.25 and minimum net worth of $40.0 million.
• On February 14, 2024, Harley-Davidson, Inc. entered into a Convertible Delayed Draw Term Loan Agreement (the Convertible Term Loan) with LiveWire Group, Inc. and a wholly-owned subsidiary of LiveWire Group, Inc. whereby LiveWire may obtain term loans in one or more advances up to an aggregate principal amount of $100.0 million.

Stakeholder Impact

• Shareholders may be concerned about the decrease in net income and operating income.
• Employees may be affected by the company's cost-cutting measures.
• Customers may be impacted by changes in pricing and product availability.
• Suppliers may be affected by the company's efforts to optimize its supply chain.
• Creditors may be concerned about the company's increased debt levels and potential risks.

Next Steps

• The company plans to continue to invest in product development and capability enhancements that support The Hardwire strategy.
• The company plans to continue to invest in manufacturing to automate and reduce costs to improve productivity.
• The company plans to continue to invest in planned investments for LiveWire.
• The company is currently planning to repurchase a similar dollar amount of shares in 2024 as were repurchased in 2023.

Key Dates

Keywords

Harley-Davidson, Motorcycles, Financial Services, LiveWire, Retail Sales, Operating Income, Net Income, Supply Chain, Interest Rates, Recall, Electric Motorcycles