# HARLEY-DAVIDSON, INC. (HOG) FY 2023 MD&A Verbatim Item 7 Management's Discussion and Analysis from HARLEY-DAVIDSON, INC.'s 10-K for fiscal year 2023. SEC filing source: https://www.sec.gov/Archives/edgar/data/793952/000079395224000076/hog-20231231.htm Accession: 0000793952-24-000076 Filing date: 2024-02-23 Report date: 2023-12-31 Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Published MD&A gate trimmed front/tail over-capture. Confidence: high Company profile: /company/HOG/ All MD&A years: /company/HOG/mda/ Previous year: /company/HOG/mda/fy2022/ (FY 2022) Next year: /company/HOG/mda/fy2024/ (FY 2024) Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Harley-Davidson, Inc. operates in three segments: Harley-Davidson Motor Company (HDMC), LiveWire, and Harley-Davidson Financial Services (HDFS). Unless the context otherwise requires, all references to the "Company" include Harley-Davidson, Inc. and all its subsidiaries. The “% Change” figures included in the Results of Operations section were calculated using unrounded dollar amounts and may differ from calculations using the rounded dollar amounts presented. Certain “% Change” deemed not meaningful (NM) have been excluded. (1) Note Regarding Forward-Looking Statements The Company intends that certain matters discussed in this report are “forward-looking statements” intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. These forward-looking statements can generally be identified as such by reference to this footnote or because the context of the statement will include words such as the Company “believes,” “anticipates,” “expects,” “plans,” “may,” “will,” “estimates,” “targets,” “intends,” "forecasts," "sees," "feels," or words of similar meaning. Similarly, statements that describe or refer to future expectations, future plans, strategies, objectives, outlooks, targets, guidance, commitments or goals are also forward-looking statements. Such forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially, unfavorably or favorably, from those anticipated as of the date of this report. Certain of such risks and uncertainties are described in close proximity to such statements or elsewhere in this report, including in Item 1A. Risk Factors and under the Cautionary Statements section in this Item 7. Shareholders, potential investors, and other readers are urged to consider these factors in evaluating the forward-looking statements and are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements included in the Overview and Guidance sections in this Item 7 are only made as of February 8, 2024 and the remaining forward-looking statements in this report are only made as of the date of the filing of this report (February 23, 2024), and the Company disclaims any obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances. 30 Overview(1) During 2023, a challenging economic environment, including high-interest rates, adversely impacted consumer demand for premium discretionary products as the Company continued to progress on key elements of The Hardwire strategy, including a continued focus on its most profitable products and markets. Net income attributable to Harley-Davidson, Inc. for 2023 was $706.6 million, or $4.87 per diluted share, compared to $741.4 million, or $4.96 per diluted share, in 2022 due to lower operating income in the HDMC and HDFS segments as well as a higher operating loss in the LiveWire segment, partially offset by higher non-operating income and a lower income tax provision on lower income before income taxes. HDMC operating income was $661.2 million in 2023 compared to operating income of $677.1 million in 2022. The reduction in operating income in 2023 was due primarily to a decrease in motorcycle shipments which decreased following a decline in retail motorcycle sales. Operating income was also impacted by higher manufacturing and operating expenses and unfavorable foreign currency exchange rates which were mostly offset by the positive impact of higher prices and a more profitable motorcycle product mix as well as lower raw material costs compared to 2022. LiveWire operating loss was $116.8 million in 2023 compared to an operating loss of $85.3 million in 2022. The increase in operating loss in 2023 was due primarily to higher operating expenses as LiveWire continued to invest in new products. HDFS operating income was $234.7 million in 2023 compared to operating income of $317.5 million in 2022. The decline in operating income was due primarily to higher interest expense, an increase in the provision for credit losses and higher operating expenses, partially offset by higher interest income. Retail sales of Harley-Davidson motorcycles declined during 2023 as high interest rates adversely impacted consumer discretionary spending and as the Company focused on its more profitable products with the discontinuation of the legacy Sportster. Worldwide dealer retail unit sales of new Harley-Davidson motorcycles decreased 8.8% in 2023 compared to 2022. During 2023, retail sales decreased 9.8% and 7.2% in U.S. and international markets, respectively, compared to 2022. Refer to the Retail Sales and Registration Data section for further discussion of retail sales results. Key Factors Impacting the Company Supply Matter – During the second quarter of 2022, the Company received information from a Tier 2 supplier, Proterial Cable America, Inc. ("PCA" f/k/a Hitachi Cable America, Inc.), concerning a potential regulatory compliance matter relating to PCA's brake hose assemblies. As a result, out of an abundance of caution, the Company suspended all vehicle assembly and shipments for approximately two weeks during the second quarter of 2022. Since then, the Company has been working through the regulatory compliance matter with PCA, the Company’s relevant Tier-1 suppliers, and the National Highway Traffic Safety Administration (NHTSA), the agency responsible for brake hose assembly compliance in the United States. In connection with this matter, in July 2022, PCA notified NHTSA of a population of brake hose assemblies manufactured between May and July of 2022 that were non-compliant with select NHTSA laboratory test standards. Based on that filing, in August 2022, the Company notified NHTSA of the corresponding population of Harley-Davidson motorcycles containing those brake hose assemblies. In October 2022, PCA amended its original notification, expanding its population of non-compliant brake hose assemblies to include units produced by PCA for use in Harley-Davidson motorcycles beginning as early as model year 2008. In December 2022, the Company amended its August notification, expanding the population to also include Harley-Davidson motorcycles that contained PCA's newly identified brake hose assemblies. In March 2023, PCA again amended its NHTSA notification, identifying additional compliance issues with the previously identified brake hose assemblies. The Company followed PCA's March amendment with a derivative amended notification to NHTSA in May 2023. In June 2023, the Company received a letter from PCA advising that PCA was investigating a new, separate potential quality issue with brake hose assemblies produced by PCA after the Company’s 2022 production suspension. Due to this issue, the Company was forced to suspend production of most of the motorcycles manufactured at its York facility and run limited motorcycle manufacturing operations there for approximately two weeks. The Company continued to manufacture, among other motorcycles, the recently launched 2023 CVO Road Glide and Street Glide, which do not use PCA's brake hose assemblies. It also continued its normal motorcycle manufacturing operations at its international facilities. In connection with this matter, in late June 2023, PCA filed a new and separate NHTSA notification, identifying certain brake hose assemblies produced between June of 2022 and June of 2023 as noncompliant with select NHTSA laboratory test standards. The Company followed PCA’s June 2023 notification by filing a derivative notification with NHTSA in early July 2023. 31 As permitted by federal law, both PCA and the Company have utilized NHTSA’s standard process to petition the agency to determine that these compliance issues are inconsequential to motor vehicle safety ("Inconsequentiality Determinations"). If NHTSA makes the Inconsequentiality Determinations requested, the Company will be exempt from conducting a field action or recall of its motorcycles related to these matters. In its inconsequentiality petitions, the Company has presented NHTSA with: (1) extensive independent, third-party and internal testing demonstrating that the brake hose assemblies at issue are robust to extreme conditions - which far exceed maximum expected motorcycle lifetime demands - with no impact to brake performance; and (2) real-world field safety data showing no documented crashes or injuries attributable to the identified compliance issues for the relevant affected populations. The Company believes its petitions are closely comparable to inconsequentiality petitions that have resulted in successful inconsequentiality determinations in the past. The Company is also confident that its position that the compliance issues are inconsequential to motor vehicle safety is strong and, therefore, no field action or recall will be necessary. Based on its expectation that NHTSA will make Inconsequentiality Determinations, the Company does not expect that these regulatory noncompliance matters will result in material costs in the future, and no costs have been accrued to date. However, it is possible that a field action or recall could be required that could cause the Company to incur material costs. There are several variables and uncertainties associated with any potential field action or recall that are not yet fully known including, but not limited to, the population of brake hose assemblies and motorcycles, the specific field action or recall required, the complexity and cost of the required repair, the need for and availability of replacement parts, and the number of motorcycle owners that would participate. The Company estimates, based on its available information and assumptions, that the cost of a potential field action or recall in the aggregate, if any were to occur, could range from approximately $100 million to $400 million. The Company continues to evaluate and update its estimates as it learns more about these regulatory matters, including the variables and uncertainties discussed above. The Company also continues to maintain its expectation that NHTSA will make the requested Inconsequentiality Determinations and that these regulatory matters will not result in any material field action or recall costs. If a material field action or recall were to result, the Company would seek full recovery of those amounts. Interest Rates - Interest rates increased significantly during 2022 and into 2023 as central banks attempted to reduce inflation. Rising interest rates have adversely impacted HDFS' interest income margin as HDFS could only partially offset the higher cost of funds with increased interest rates on products it offered to its customers. Additionally, higher interest rates have adversely impacted consumer discretionary purchases like the Company's motorcycles as higher borrowing costs made these purchases less affordable or impacted the consumer's ability to obtain financing. Supply Chain Inflation – During 2023, overall supply chain cost inflation continued to moderate compared to 2022 with lower inflation in manufacturing and logistics and declining raw material costs compared to 2022. The Company expects cost inflation to continue to be relatively muted in 2024.(1) Suspension of Additional European Union Tariffs – In April 2021, the Company received notification from the Economic Ministry of Belgium that, following a request from the European Union (EU), the Company would be subject to revocation of the Binding Origin Information (BOI) decisions that allowed it to supply its EU markets with certain motorcycles produced at its Thailand manufacturing facility at tariff rates of 6%. As a result of the revocation, all non-electric motorcycles that Harley-Davidson imported into the EU, regardless of origin, were subject to a total tariff rate of 31% from April 19, 2021 through the end of 2021. On October 30, 2021, the U.S. and EU announced an agreement related to the Section 232 tariffs on steel and aluminum that were implemented in 2018 by the U.S. and the subsequent rebalancing tariff measures taken by the EU. This agreement suspended the additional tariffs initially imposed by the EU on the Company's motorcycles, reducing the total EU tariff rate on the Company’s motorcycles from 31% to 6%, effective January 1, 2022. The lower 6% tariff rate applies to all motorcycles imported by the Company into the EU, regardless of origin. Under the initial agreement between the U.S. and the EU, the lower tariff rate remained in effect until December 31, 2023. In December 2023, the EU extended its suspension of the additional tariffs through March 31, 2025 and the U.S. extended its suspension of the additional tariffs through December 31, 2025. The U.S. and EU will monitor and review the operation of the agreement, seeking to conclude the negotiations on steel and aluminum tariffs by March 31, 2025. These negotiations are ongoing, and there are no assurances the U.S. and EU will reach a resolution that concludes the trade conflict on steel and aluminum tariffs beyond March 31, 2025. To date, the Company continues to pursue its appeals of the revocation of the BOI decisions and the denial of its application for temporary extended reliance on the 6% tariff rate (for motorcycles produced in Thailand and ordered prior to April 19, 2021), although there is no assurance that these appeals will continue or be successful. 32 Guidance(1) On February 8, 2024, the Company announced the following expectations for 2024: The Company expects HDMC revenue to be flat to down 9% in 2024 compared to 2023. The Company expects worldwide dealer retail unit sales of Harley-Davidson motorcycles in 2024 to be flat to up 9% compared to 2023. The Company believes dealer inventory is currently appropriately positioned; therefore, the Company's expectation is for wholesale shipments to move on a balanced basis with dealer retail unit sales in 2024 so that dealer inventory remains appropriately positioned throughout the course of the year. Therefore, the Company expects wholesale unit shipments of Harley-Davidson motorcycles in 2024 to be down between 1% and 10% compared to 2023. In addition, the Company's revenue expectation for 2024 assumes (i) pricing to be down slightly compared to 2023 given the elimination of the pricing surcharge in 2023 and a fine-tuned pricing strategy in 2024, especially with respect to the Company's new Touring models, (ii) the impact of motorcycle shipment mix to be favorable compared to 2023 given the Company's continued focus on core products as part of The Hardwire strategy and (iii) an adverse impact of foreign currency exchange rates in 2024. The Company expects HDMC operating margin as a percent of revenue to be 12.6% to 13.6% in 2024. The Company believes the expected decline in operating margin compared to 2023 will be due to (i) lower expected wholesale unit volumes compared to 2023 and the resulting negative impact of higher costs per unit, (ii) lower overall pricing compared to 2023 and continued modest supply chain inflation, and (iii) the impact of unfavorable foreign currency exchange rates. Finally, the Company also expects some incremental manufacturing costs to re-align factory processes in the initial year of production of its new model year 2024 Touring motorcycles. The Company expects LiveWire motorcycle sales of 1,000 to 1,500 units and a LiveWire operating loss of $115 million to $125 million in 2024. This range is consistent with the 2023 operating loss while selling between 50% and 125% more motorcycle units. The Company expects HDFS operating income to be flat to up 5% in 2024 compared to 2023. The Company expects HDFS results to stabilize in 2024 as it compares to the higher interest rate environment that began in 2022 and with a moderation in borrowing costs in 2024 based on anticipated actions of the U.S. Federal Reserve. The Company also expects the average yield on the retail and wholesale finance receivable portfolios to be more in-line with the recent higher interest rate environment as the retail portfolio shifts to include a higher mix of recent loans with higher interest rates resulting in greater interest revenue. Additionally, the Company expects the credit loss rate will begin to moderate in the second half of 2024 compared to the second half of 2023 as consumers adjust to the existing economic environment. The Company has a cost productivity target to eliminate $400 million of incremental supply chain cost incurred since 2020 by 2025. The Company achieved approximately $50 million in productivity savings in 2022 and approximately $70 million in 2023. The Company remains focused on production efficiency, logistics network optimization and supplier cost optimization through consolidation and regionalization in 2024. The Company expects approximately $100 million of additional cost productivity savings in 2024. The Company expects capital investments in 2024 of between $225 and $250 million. The Company plans to continue to invest in product development and capability enhancements that support The Hardwire strategy. The Company's focus remains on core product innovation, investments in manufacturing to automate and reduce costs to improve productivity as well as planned investments for LiveWire.  The Company's capital allocation priorities are to fund profitable growth through The Hardwire initiatives, to pay dividends, and to execute share repurchases on a discretionary basis. The Company is currently planning to repurchase a similar dollar amount of shares in 2024 as were repurchased in 2023. 33 Results of Operations 2023 Compared to 2022 Consolidated Results [[GREPCENT_TABLE]] [["(in thousands, except earnings per share)","2023","","2022","","Increase (Decrease)"],["Operating income - HDMC","$","661,151","","","$","677,087","","","$","(15,936)"],["Operating loss - LiveWire","(116,809)","","","(85,315)","","","(31,494)"],["Operating income - HDFS","234,742","","","317,506","","","(82,764)"],["Operating income","779,084","","","909,278","","","(130,194)"],["Other income, net","71,808","","","48,652","","","23,156"],["Investment income","46,771","","","4,538","","","42,233"],["Interest expense","30,787","","","31,235","","","(448)"],["Income before income taxes","866,876","","","931,233","","","(64,357)"],["Income tax provision","171,830","","","192,019","","","(20,189)"],["Net income","695,046","","","739,214","","","(44,168)"],["Less: Loss attributable to noncontrolling interests","11,540","","","2,194","","","9,346"],["Net income attributable to Harley-Davidson, Inc.","$","706,586","","","$","741,408","","","$","(34,822)"],["Diluted earnings per share","$","4.87","","","$","4.96","","","$","(0.09)"]] [[/GREPCENT_TABLE]] The Company reported operating income of $779.1 million in 2023 compared to $909.3 million in 2022. The HDMC segment reported operating income of $661.2 million compared to $677.1 million in 2022. Operating loss from the LiveWire segment increased $31.5 million compared to 2022. Operating income from the HDFS segment decreased $82.8 million compared to 2022. Refer to the HDMC Segment, LiveWire Segment and HDFS Segment discussions for a more detailed analysis of the factors affecting operating results. Other income, net in 2023 was impacted by higher non-operating income related to the Company's defined benefit plans, partially offset by a loss related to an increase in the fair value of LiveWire's warrants. Investment income increased in 2023 as compared to 2022 driven by higher income from cash equivalents and investments in marketable securities. The Company's effective income tax rate for 2023 was a 19.8% expense compared to a 20.6% expense for 2022. The Company's 2023 effective tax rate was favorably impacted by discrete income tax benefits recorded during the year. Refer to Note 3 of the Notes to Consolidated financial statements for further discussion regarding the Company’s effective tax rate. Diluted earnings per share was $4.87 in 2023 compared to $4.96 in 2022. Diluted weighted average shares outstanding decreased from 149.4 million in 2022 to 145.1 million in 2023 primarily due to repurchases of common stock, which benefited diluted earnings per share. 34 Harley-Davidson Motorcycle Retail Sales and Registration Data Harley-Davidson Motorcycle Retail Sales(a) Retail unit sales of new Harley-Davidson motorcycles were as follows: [[GREPCENT_TABLE]] [["","2023","","2022","","Increase (Decrease)","","% Change"],["United States","98,468","","","109,190","","","(10,722)","","","(9.8)","%"],["Canada","7,422","","","7,924","","","(502)","","","(6.3)"],["North America","105,890","","","117,114","","","(11,224)","","","(9.6)"],["Europe/Middle East/Africa (EMEA)","27,005","","","30,510","","","(3,505)","","","(11.5)"],["Asia Pacific","26,953","","","27,905","","","(952)","","","(3.4)"],["Latin America","2,923","","","2,922","","","1","","","\u2014"],["","162,771","","","178,451","","","(15,680)","","","(8.8)","%"]] [[/GREPCENT_TABLE]] (a)Data source for retail sales figures shown above is new sales warranty and registration information provided by dealers and compiled by the Company. The Company must rely on information that its dealers supply concerning new retail sales, and the Company does not regularly verify the information that its dealers supply. This information is subject to revision. Worldwide retail sales of new motorcycles decreased 8.8% during 2023 compared to 2022 driven primarily by a decline in North America. North America retail sales were adversely impacted by macro-economic conditions and changes in product as the Company focused on more profitable models. During 2023, the Company believes high interest rates continued to impact consumer discretionary purchases. Additionally, retail sales were impacted by the discontinuation of legacy Sportster models at the end of 2022 as the Company shifted to the more profitable Sport models in 2023. The decline in EMEA was primarily driven by challenging economic conditions and a planned unit mix shift towards more profitable core motorcycle models. In Asia Pacific, retail sales growth was strong in the first half of the year, but slowed in the second half of the year, with modest annual growth in Japan offset by a decline in Australia and South Korea. Worldwide retail inventory of new motorcycles was up approximately 50% at the end of the fourth quarter of 2023 compared to the end of the fourth quarter of 2022, but remained nearly 20% lower than levels experienced at the end of the fourth quarter of 2019. 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. Changes in retail inventory of new motorcycles are calculated based on units at the end of each quarter rather than based on an average of monthly inventory levels within the quarter. In the U.S., retail transaction prices for new motorcycles on average fell below the Company's targeted range of plus or minus 2% of Manufacturer's Suggested Retail Prices during 2023 as the Company introduced promotions in the fourth quarter of 2023. The Company's Harley-Davidson motorcycle U.S. market share of new 601+cc motorcycles for 2023 was 37.9%, down 3.3 percentage points compared to 2022 (Source: Motorcycle Industry Council). The Company's Harley-Davidson motorcycle European market share of new 601+cc motorcycles for 2023 was 4.8%, down 1.3 percentage points compared to 2022 (Source: Management Services Helwig Schmitt GmbH). 35 Motorcycle Registration Data - 601+cc(a) Industry retail registration data for new motorcycles was as follows: [[GREPCENT_TABLE]] [["","2023","","2022","","Increase","","% Change"],["United States(b)","256,710","","","264,367","","","(7,657)","","","(2.9)","%"],["Europe(c)","473,486","","","406,145","","","67,341","","","16.6","%"]] [[/GREPCENT_TABLE]] (a)Data includes on-road models with internal combustion engines with displacements greater than 600cc's and electric motorcycles with kilowatt peak power equivalents greater than 600cc's (601+cc). On-road 601+cc models include dual purpose models, three-wheeled motorcycles and autocycles. (b)United States industry data is derived from information provided by Motorcycle Industry Council. This third-party data is subject to revision and update. (c)Europe data includes Austria, Belgium, Denmark, Finland, France, Germany, Italy, Luxembourg, Netherlands, Norway, Spain, Sweden, Switzerland, and the United Kingdom. Industry data is derived from information provided by Management Services Helwig Schmitt GmbH. This third-party data is subject to revision and update. HDMC Segment Harley-Davidson Motorcycle Unit Shipments Wholesale motorcycle unit shipments were as follows: [[GREPCENT_TABLE]] [["","2023","","2022","","Unit","","Unit"],["","Units","","Mix %","","Units","","Mix %","","Increase (Decrease)","","% Change"],["Motorcycle Units:"],["United States","113,867","","","63.3","%","","118,836","","","61.4","%","","(4,969)","","","(4.2)","%"],["International","66,117","","","36.7","%","","74,691","","","38.6","%","","(8,574)","","","(11.5)"],["","179,984","","","100.0","%","","193,527","","","100.0","%","","(13,543)","","","(7.0)","%"],["Motorcycle Units:"],["Grand American Touring(a)","92,683","","","51.6","%","","89,849","","","46.4","%","","2,834","","","3.2","%"],["Cruiser","63,945","","","35.5","%","","59,010","","","30.5","%","","4,935","","","8.4"],["Sport and Lightweight","18,228","","","10.1","%","","33,894","","","17.5","%","","(15,666)","","","(46.2)"],["Adventure Touring","5,128","","","2.8","%","","10,774","","","5.6","%","","(5,646)","","","(52.4)"],["","179,984","","","100.0","%","","193,527","","","100.0","%","","(13,543)","","","(7.0)","%"]] [[/GREPCENT_TABLE]] (a)Includes CVOTM and Trike HDMC shipped 179,984 motorcycles worldwide during 2023, which was 7.0% lower than during 2022 and in line with the decrease in retail sales during 2023. HDMC's shipments during 2023 were adversely impacted by market conditions and the discontinuation of legacy Sportster models in North America at the end of 2022 as the Company shifted to more profitable Sport models in 2023. The motorcycles shipped during 2023 compared to 2022 included a higher mix of Grand American Touring and Cruiser motorcycles as a percent of total shipments and a lower mix of Sport and Lightweight and Adventure Touring motorcycles reflecting the Company's focus on more profitable models. A limited number of select model year 2024 motorcycles, representing approximately 2% of total 2023 shipments, were shipped in late 2023 to better position Harley-Davidson dealers for the launch of the new 2024 model year motorcycles. 36 Segment Results Condensed statements of operations for the HDMC segment were as follows (in thousands): [[GREPCENT_TABLE]] [["","2023","","2022","","Increase (Decrease)","","% Change"],["Revenue:"],["Motorcycles","$","3,798,977","","","$","3,787,484","","","$","11,493","","","0.3","%"],["Parts and accessories","698,095","","","731,645","","","(33,550)","","","(4.6)"],["Apparel","244,333","","","271,107","","","(26,774)","","","(9.9)"],["Licensing","28,599","","","39,423","","","(10,824)","","","(27.5)"],["Other","74,590","","","58,013","","","16,577","","","28.6"],["","4,844,594","","","4,887,672","","","(43,078)","","","(0.9)"],["Cost of goods sold","3,278,052","","","3,359,799","","","(81,747)","","","(2.4)"],["Gross profit","1,566,542","","","1,527,873","","","38,669","","","2.5"],["Operating expenses:"],["Selling & administrative expense","799,375","","","719,800","","","79,575","","","11.1"],["Engineering expense","106,016","","","131,530","","","(25,514)","","","(19.4)"],["Restructuring expense","\u2014","","","(544)","","","544","","","(100.0)"],["","905,391","","","850,786","","","54,605","","","6.4","%"],["Operating income","$","661,151","","","$","677,087","","","$","(15,936)","","","(2.4)","%"],["Operating margin","13.6","%","","13.9","%","","(0.3)","","","pts."]] [[/GREPCENT_TABLE]] The estimated impacts of the significant factors affecting the change in revenue, cost of goods sold and gross profit from 2022 to 2023 were as follows (in millions): [[GREPCENT_TABLE]] [["","Revenue","","Cost of Goods Sold","","Gross Profit"],["2022","$","4,887.7","","","$","3,359.8","","","$","1,527.9"],["Volume","(364.0)","","","(232.8)","","","(131.2)"],["Price, net of related costs","139.0","","","\u2014","","","139.0"],["Foreign currency exchange rates and hedging","(26.7)","","","27.3","","","(54.0)"],["Shipment mix","208.6","","","75.6","","","133.0"],["Raw material prices","\u2014","","","(38.2)","","","38.2"],["Manufacturing and other costs","\u2014","","","86.4","","","(86.4)"],["","(43.1)","","","(81.7)","","","38.6"],["2023","$","4,844.6","","","$","3,278.1","","","$","1,566.5"]] [[/GREPCENT_TABLE]] The following factors affected the change in net revenue, cost of goods sold and gross profit from 2022 to 2023: •The decrease in volume was primarily due to lower wholesale motorcycle shipments. •Revenue benefited from higher prices on new model year 2023 motorcycles partially offset by higher promotional costs in the fourth quarter of 2023. A portion of these promotional costs involved promotions that will continue into calendar year 2024 to promote the sale of model year 2023 carryover inventory at dealers. The Company expects this will help drive dealer retail performance in 2024(1). •Revenue and gross profit were negatively impacted by weaker foreign currency exchange rates relative to the U.S. dollar as well as less favorable net foreign currency impacts associated with hedging and balance sheet remeasurements recorded in cost of goods sold. •Changes in the shipment mix had a favorable impact on gross profit. •Raw material costs benefited from a decline in prices, primarily related to metals. •Manufacturing and other costs were negatively impacted by continued moderate inflation, higher costs associated with producing fewer units than in 2022 and supply challenges, partially offset by productivity savings, including a reduced reliance on expedited modes of freight. Operating expenses were higher in 2023 compared to 2022 as the Company continued to execute Hardware strategic priorities and included higher spending related to marketing and advertising and employee-related costs. 37 LiveWire Segment Segment Results Condensed statements of operations for the LiveWire segment were as follows (in thousands, except unit shipments): [[GREPCENT_TABLE]] [["","2023","","2022","","(Decrease) Increase","","% Change"],["Revenue","38,298","","","46,833","","","(8,535)","","","(18.2)"],["Cost of goods sold","44,254","","","43,929","","","325","","","0.7"],["Gross profit","(5,956)","","","2,904","","","(8,860)","","","(305.1)"],["Selling, administrative and engineering expense","110,853","","","88,219","","","22,634","","","25.7"],["Operating loss","$","(116,809)","","","$","(85,315)","","","$","(31,494)","","","36.9","%"],["LiveWire motorcycle unit shipments","660","","","597","","","63","","","10.6","%"]] [[/GREPCENT_TABLE]] During 2023, revenue decreased by $8.5 million, or 18.2%, compared to 2022. The decrease was primarily due to lower volumes of electric balance bikes and lower average prices on electric motorcycles, partially offset by higher volumes of electric motorcycles. Cost of sales increased by $0.3 million, or 0.7%, during 2023 compared to 2022 on higher volumes of electric motorcycles. During 2023, selling, administrative and engineering expense increased $22.6 million, or 25.7%, compared to 2022 driven by higher product development costs as well as higher costs associated with standing up the new organization. HDFS Segment Segment Results Condensed statements of operations for the HDFS segment were as follows (in thousands): [[GREPCENT_TABLE]] [["","2023","","2022","","(Decrease) Increase","","% Change"],["HDFS revenue:"],["Interest income","$","802,078","","","$","693,615","","","$","108,463","","","15.6","%"],["Other income","151,508","","","127,010","","","24,498","","","19.3"],["","953,586","","","820,625","","","132,961","","","16.2"],["HDFS expenses:"],["Interest expense","332,380","","","217,653","","","114,727","","","52.7"],["Provision for credit losses","227,158","","","145,133","","","82,025","","","56.5"],["Operating expenses","159,306","","","140,333","","","18,973","","","13.5"],["","718,844","","","503,119","","","215,725","","","42.9"],["Operating income","$","234,742","","","$","317,506","","","$","(82,764)","","","(26.1)","%"]] [[/GREPCENT_TABLE]] Interest income was higher in 2023 compared to 2022, primarily due to higher average outstanding finance receivables at a higher average yield. Other income increased largely driven by higher investment and licensing income, partially offset by unfavorable insurance revenue. Interest expense increased due to higher average outstanding debt at higher average interest rates. The provision for credit losses increased $82.0 million compared to 2022 on higher actual retail credit losses and an increase in the allowance for credit losses. The allowance for credit losses increased on a higher reserve rate resulting from unfavorable loss performance and the Company’s outlook on economic conditions, partially offset by lower receivables growth. The Company’s probability weighting of its economic forecast scenarios is weighted towards a near-term recession given continued challenging macro-economic conditions including a persistently high interest rate environment, ongoing elevated inflation levels and muted consumer confidence. The Company’s expectations surrounding its economic forecasts may change in future periods as additional information becomes available. 38 Annual losses on the Company's retail motorcycle loans were 3.00% during 2023 compared to 1.88% in 2022. The 30-day delinquency rate for retail motorcycle loans at December 31, 2023 increased to 5.09% from 4.50% at December 31, 2022. The unfavorable retail credit loss and delinquency performance were driven by several factors connected to the macro-economic environment and the related customer and industry dynamics, including the impact of higher motorcycle payments and general inflationary pressures on customers. Additionally, the Company continues to experience downward pressure on recovery values at auction. Operating expenses were higher in 2023 compared to 2022 due in part to higher employee-related and repossession costs combined with a loss resulting from a change in value of a securitization interest rate cap derivative. Changes in the allowance for credit losses on finance receivables were as follows (in thousands):  [[GREPCENT_TABLE]] [["","2023","","2022"],["Balance, beginning of period","$","358,711","","","$","339,379"],["Provision for credit losses","227,158","","","145,133"],["Charge-offs, net of recoveries","(203,903)","","","(125,801)"],["Balance, end of period","$","381,966","","","$","358,711"]] [[/GREPCENT_TABLE]] At December 31, 2023, the allowance for credit losses on finance receivables was $367.0 million for retail receivables and $14.9 million for wholesale receivables. At December 31, 2022, the allowance for credit losses on finance receivables was $345.3 million for retail receivables and $13.4 million for wholesale receivables. Refer to Note 6 of the Notes to Consolidated financial statements for further discussion regarding the Company’s allowance for credit losses on finance receivables. Results of Operations 2022 Compared to 2021 Consolidated Results [[GREPCENT_TABLE]] [["(in thousands, except earnings per share)","2022","","2021","","Increase (Decrease)"],["Operating income - HDMC","$","677,087","","","$","476,807","","","$","200,280"],["Operating loss - LiveWire","(85,315)","","","(68,182)","","","(17,133)"],["Operating income - HDFS","317,506","","","414,814","","","(97,308)"],["Operating income","909,278","","","823,439","","","85,839"],["Other income, net","48,652","","","20,076","","","28,576"],["Investment income","4,538","","","6,694","","","(2,156)"],["Interest expense","31,235","","","30,972","","","263"],["Income before income taxes","931,233","","","819,237","","","111,996"],["Income tax provision","192,019","","","169,213","","","22,806"],["Net income","739,214","","","650,024","","","89,190"],["Less: Loss attributable to noncontrolling interests","2,194","","","\u2014","","","2,194"],["Net income attributable to Harley-Davidson, Inc.","$","741,408","","","$","650,024","","","$","91,384"],["Diluted earnings per share","$","4.96","","","$","4.19","","","$","0.77"]] [[/GREPCENT_TABLE]] The Company reported operating income of $909.3 million in 2022 compared to $823.4 million in 2021. The HDMC segment reported operating income of $677.1 million, an improvement from $476.8 million in 2021. Operating loss from the LiveWire segment increased $17.1 million compared to 2021. Operating income from the HDFS segment decreased $97.3 million compared to 2021. Refer to the HDMC Segment, LiveWire Segment and HDFS Segment discussions for a more detailed analysis of the factors affecting operating results. Other income (expense) in 2022 was impacted by higher non-operating income related to the Company's defined benefit plans as well as income related to a decrease in the fair value of LiveWire's warrants. Investment income decreased in 2022 as compared to 2021 driven by lower income from investments in marketable securities. 39 The Company's effective income tax rate for 2022 was a 20.6% expense compared to a 20.7% expense for 2021. The Company's 2022 effective tax rate was favorably impacted by discrete income tax benefits recorded during the year. Refer to Note 3 of the Notes to Consolidated financial statements for further discussion regarding the Company’s effective tax rate. Diluted earnings per share was $4.96 in 2022 compared to $4.19 in 2021. Diluted weighted average shares outstanding decreased from 155.0 million in 2021 to 149.4 million in 2022. Harley-Davidson Motorcycle Retail Sales and Registration Data Harley-Davidson Motorcycle Retail Sales(a) Retail unit sales of new Harley-Davidson motorcycles were as follows: [[GREPCENT_TABLE]] [["","2022","","2021","","Increase (Decrease)","","% Change"],["United States","109,190","","","125,713","","","(16,523)","","","(13.1)","%"],["Canada","7,924","","","8,005","","","(81)","","","(1.0)"],["North America","117,114","","","133,718","","","(16,604)","","","(12.4)"],["Europe/Middle East/Africa (EMEA)","30,510","","","30,907","","","(397)","","","(1.3)"],["Asia Pacific","27,905","","","25,020","","","2,885","","","11.5"],["Latin America","2,922","","","3,652","","","(730)","","","(20.0)"],["","178,451","","","193,297","","","(14,846)","","","(7.7)","%"]] [[/GREPCENT_TABLE]] (a)Data source for retail sales figures shown above is new sales warranty and registration information provided by dealers and compiled by the Company. The Company must rely on information that its dealers supply concerning new retail sales, and the Company does not regularly verify the information that its dealers supply. This information is subject to revision. Worldwide retail sales of new motorcycles decreased 7.7% during 2022 compared to 2021. Retail sales during 2022 were adversely impacted by low dealer inventory levels during the 2022 riding season following the Company's suspension of production and shipments for approximately two weeks during the second quarter of 2022. In North America, retail sales in 2022 were down compared to 2021 led by a 13.1% decline in the U.S. where results were most heavily impacted by lower production and retail inventory levels. Retail sales were down slightly in EMEA and Latin America, but increased in Asia Pacific during 2022 compared to 2021. Worldwide retail inventory of new motorcycles at Harley-Davidson dealers was up approximately 14,700 units at the end of the fourth quarter of 2022 compared to the prior year but remained at historically low levels. In the U.S., retail transaction prices for new motorcycles on average were within the Company's targeted range of plus or minus 2% of Manufacturer's Suggested Retail Prices during 2022. The Company's Harley-Davidson motorcycle U.S. market share of new 601+cc motorcycles for 2022 was 41.2%, down 3.2 percentage points compared to 2021 (Source: Motorcycle Industry Council). The Company's U.S. market share declined on lower retail sales following the suspension of production and shipments for approximately two weeks during the second quarter of 2022. The Company's Harley-Davidson motorcycle European market share of new 601+cc motorcycles for 2022 was 6.1%, up 0.2 percentage points compared to 2021 reflecting an increase in HDMC retail sales relative to the rest of the market in Europe (Source: Management Services Helwig Schmitt GmbH). 40 Motorcycle Registration Data - 601+cc(a) Industry retail registration data for new motorcycles was as follows: [[GREPCENT_TABLE]] [["","2022","","2021","","Increase","","% Change"],["United States(b)","264,367","","","281,502","","","(17,135)","","","(6.1)","%"],["Europe(c)","406,145","","","431,127","","","(24,982)","","","(5.8)","%"]] [[/GREPCENT_TABLE]] (a)Data includes on-road models with internal combustion engines with displacements greater than 600cc's and electric motorcycles with kilowatt peak power equivalents greater than 600cc's (601+cc). On-road 601+cc models include dual purpose models, three-wheeled motorcycles and autocycles. Registration data for Harley-Davidson Street® 500 motorcycles is not included in this table. (b)United States industry data is derived from information provided by Motorcycle Industry Council. This third-party data is subject to revision and update. (c)Europe data includes Austria, Belgium, Denmark, Finland, France, Germany, Italy, Luxembourg, Netherlands, Norway, Spain, Sweden, Switzerland, and the United Kingdom. Industry data is derived from information provided by Management Services Helwig Schmitt GmbH. This third-party data is subject to revision and update. HDMC Segment Harley-Davidson Motorcycle Unit Shipments Wholesale motorcycle unit shipments were as follows: [[GREPCENT_TABLE]] [["","2022","","2021","","Unit","","Unit"],["","Units","","Mix %","","Units","","Mix %","","Increase (Decrease)","","% Change"],["Motorcycle Units:"],["United States","118,836","","","61.4","%","","119,761","","","63.7","%","","(925)","","","(0.8)","%"],["International","74,691","","","38.6","%","","68,272","","","36.3","%","","6,419","","","9.4"],["","193,527","","","100.0","%","","188,033","","","100.0","%","","5,494","","","2.9","%"],["Motorcycle Units:"],["Grand American Touring(a)","89,849","","","46.4","%","","93,961","","","49.9","%","","(4,112)","","","(4.4)","%"],["Cruiser","59,010","","","30.5","%","","59,033","","","31.4","%","","(23)","","","\u2014"],["Sport and Lightweight","33,894","","","17.5","%","","25,123","","","13.4","%","","8,771","","","34.9"],["Adventure Touring","10,774","","","5.6","%","","9,916","","","5.3","%","","858","","","8.7"],["","193,527","","","100.0","%","","188,033","","","100.0","%","","5,494","","","2.9","%"]] [[/GREPCENT_TABLE]] (a)Includes CVOTM and Trike HDMC shipped 193,527 motorcycles worldwide during 2022, which was 2.9% higher than during 2021. HDMC's shipments during 2022 were impacted by the suspension of production and shipments during the second quarter of 2022, which disrupted the flow of inventory to dealers during the peak riding season. The motorcycles shipped during 2022 compared to 2021 included a lower mix of Grand American Touring and Cruiser motorcycles shipped as a percent of total shipments and a higher mix of Sport and Lightweight and Adventure Touring motorcycles. The Company's Pan America™ Adventure Touring motorcycles were launched in the second quarter of 2021. 41 Segment Results Condensed statements of operations for the HDMC segment were as follows (in thousands): [[GREPCENT_TABLE]] [["","2022","","2021","","Increase (Decrease)","","% Change"],["Revenue:"],["Motorcycles","$","3,787,484","","","$","3,468,689","","","$","318,795","","","9.2","%"],["Parts and accessories","731,645","","","$","740,893","","","(9,248)","","","(1.2)"],["Apparel","271,107","","","$","228,011","","","43,096","","","18.9"],["Licensing","39,423","","","$","37,790","","","1,633","","","4.3"],["Other","58,013","","","$","29,051","","","28,962","","","99.7"],["","4,887,672","","","$","4,504,434","","","383,238","","","8.5"],["Cost of goods sold","3,359,799","","","$","3,204,907","","","154,892","","","4.8"],["Gross profit","1,527,873","","","$","1,299,527","","","228,346","","","17.6"],["Operating expenses:"],["Selling & administrative expense","719,800","","","$","686,753","","","33,047","","","4.8"],["Engineering expense","131,530","","","$","133,226","","","(1,696)","","","(1.3)"],["Restructuring expense","(544)","","","$","2,741","","","(3,285)","","","(119.8)"],["","850,786","","","$","822,720","","","28,066","","","3.4","%"],["Operating income (loss)","$","677,087","","","$","476,807","","","$","200,280","","","42.0","%"],["Operating margin","13.9","%","","10.6","%","","3.3","","","pts."]] [[/GREPCENT_TABLE]] The estimated impacts of the significant factors affecting the change in revenue, cost of goods sold and gross profit from 2021 to 2022 were as follows (in millions): [[GREPCENT_TABLE]] [["","Revenue","","Cost of Goods Sold","","Gross Profit"],["2021","$","4,504.4","","","$","3,204.9","","","$","1,299.5"],["Volume","152.9","","","94.8","","","58.1"],["Price, net of related costs","330.4","","","\u2014","","","330.4"],["Foreign currency exchange rates and hedging","(148.8)","","","(83.3)","","","(65.5)"],["Shipment mix","48.8","","","48.0","","","0.8"],["Raw material prices","\u2014","","","30.0","","","(30.0)"],["Manufacturing and other costs","\u2014","","","65.4","","","(65.4)"],["","383.3","","","154.9","","","228.4"],["2022","$","4,887.7","","","$","3,359.8","","","$","1,527.9"]] [[/GREPCENT_TABLE]] The following factors affected the change in net revenue, cost of goods sold and gross profit from 2021 to 2022: •The increase in volume was due to higher wholesale motorcycle shipments and higher apparel sales. •During 2022, revenue benefited from higher prices on new model year 2022 motorcycles coupled with pricing surcharges in select markets. •Revenue and gross profit were negatively impacted by weaker foreign currency exchange rates relative to the U.S. dollar, partially offset by favorable net foreign currency gains associated with hedging and balance sheet remeasurements recorded in cost of goods sold. •Changes in the shipment mix had a favorable impact on gross profit during 2022 due primarily to a change in the mix of models within motorcycle families. •Raw material cost increases were driven by cost inflation as well as other supply chain challenges. •Manufacturing and other costs increased due primarily to higher costs associated with supply chain challenges. These higher costs were partially offset by lower EU tariff costs compared to 2021 and a lower fixed cost per unit resulting from higher production volumes. The Company also benefited from cost productivity savings. Operating expenses were higher in 2022 compared to 2021 due primarily to The Hardwire initiatives and higher warranty and recall expenses. These cost increases were partially offset by the Company's ongoing effort to prudently manage spending. 42 LiveWire Segment Segment Results Condensed statements of operations for the LiveWire segment were as follows (in thousands, except unit shipments): [[GREPCENT_TABLE]] [["","2022","","2021","","(Decrease) Increase","","% Change"],["Revenue","46,833","","","35,806","","","11,027","","","30.8"],["Cost of goods sold","43,929","","","38,380","","","5,549","","","14.5"],["Gross profit","2,904","","","(2,574)","","","5,478","","","(212.8)"],["Selling, administrative and engineering expense","88,219","","","65,608","","","22,611","","","34.5"],["Operating loss","(85,315)","","","(68,182)","","","$","(17,133)","","","25.1","%"],["LiveWire motorcycle unit shipments","597","","","461","","","136","","","29.5","%"]] [[/GREPCENT_TABLE]] During 2022, revenue increased by $11.0 million, or 30.8%, compared to 2021. The increase was primarily due to higher revenue from electric balance bikes driven by a favorable product mix and pricing as well as higher revenue from electric motorcycles driven by higher shipment volumes. Cost of sales increased by $5.5 million, or 14.5%, during 2022 compared to 2021 on higher volumes of electric motorcycles and product mix of electric balance bikes. During 2022, selling, administrative and engineering expense increased $22.6 million, or 34.5%, compared to 2021 as LiveWire continued to focus on technological innovation to support future products and growth and incurred higher operating costs associated with standing up a stand-alone public company. HDFS Segment Segment Results Condensed statements of operations for the HDFS segment were as follows (in thousands): [[GREPCENT_TABLE]] [["","2022","","2021","","(Decrease) Increase","","% Change"],["HDFS revenue:"],["Interest income","$","693,615","","","$","671,708","","","$","21,907","","","3.3","%"],["Other income","127,010","","","124,360","","","2,650","","","2.1"],["","820,625","","","796,068","","","24,557","","","3.1"],["HDFS expenses:"],["Interest expense","217,653","","","192,944","","","24,709","","","12.8"],["Provision for credit losses","145,133","","","25,049","","","120,084","","","479.4"],["Operating expenses","140,333","","","162,587","","","(22,254)","","","(13.7)"],["Restructuring expense","\u2014","","","674","","","(674)","","","(100.0)"],["","503,119","","","381,254","","","121,865","","","32.0"],["Operating income","$","317,506","","","$","414,814","","","$","(97,308)","","","(23.5)","%"]] [[/GREPCENT_TABLE]] Interest income was higher in 2022 compared to 2021, primarily due to higher average outstanding finance receivables, partially offset by a lower average yield. Other income increased largely driven by higher investment and licensing income. Interest expense increased due to higher average outstanding debt at a higher average interest rate. The provision for credit losses increased $120.1 million compared to 2021 driven by an increase in the allowance and higher retail credit losses. During 2021, economic conditions and outlook improved from 2020 following the height of the COVID-19 pandemic resulting in a reduction in the allowance. In 2022, economic recovery slowed and the pace of recovery became more uncertain in the face of an increased risk of a near-term recession along with continued elevated levels of inflation, muted consumer confidence, and other factors. As such, at the end of 2022, the Company's outlook on economic conditions and its probability weighting of its economic forecast scenarios was weighted towards a near-term recession. The Company’s expectations surrounding its economic forecasts may change in future periods as additional information becomes available. 43 Annual losses on the Company's retail motorcycle loans were 1.88% during 2022 compared to 1.19% in 2021. The 30-day delinquency rate for retail motorcycle loans at December 31, 2022 increased to 4.50% from 3.33% at December 31, 2021. The unfavorable retail credit loss and delinquency performance were driven by delinquencies and losses returning to pre-COVID-19 pandemic levels following a period of favorable performance on federal stimulus benefits and COVID-19 related extensions. The COVID-19 related extensions ended in the second quarter of 2021. Additionally, credit losses were also unfavorably impacted by lower motorcycle recovery values at auction. Operating expenses were lower in 2022 compared to 2021 due in part to lower shared services and employee-related costs, partially offset by higher sales and marketing expenses. Changes in the allowance for credit losses on finance receivables were as follows (in thousands):  [[GREPCENT_TABLE]] [["","2022","","2021"],["Balance, beginning of period","$","339,379","","","$","390,936"],["Provision for credit losses","145,133","","","25,049"],["Charge-offs, net of recoveries","(125,801)","","","(76,606)"],["Balance, end of period","$","358,711","","","$","339,379"]] [[/GREPCENT_TABLE]] At December 31, 2022, the allowance for credit losses on finance receivables was $345.3 million for retail receivables and $13.4 million for wholesale receivables. At December 31, 2021, the allowance for credit losses on finance receivables was $326.3 million for retail receivables and $13.1 million for wholesale receivables. Refer to Note 6 of the Notes to Consolidated financial statements for further discussion regarding the Company’s allowance for credit losses on finance receivables. Other Matters New Accounting Standards Issued But Not Yet Adopted Refer to Note 1 of the Notes to Consolidated financial statements for a discussion of new accounting standards that will become effective for the Company in the future. Critical Accounting Estimates The Company’s financial statements are based on the selection and application of significant accounting policies, which require management to make significant estimates and assumptions. Management believes that the following are some of the more critical judgment areas in the application of accounting policies that currently affect the Company’s financial condition and results of operations. Management has discussed the development and selection of these critical accounting estimates with the Audit and Finance Committee of the Company's Board of Directors. Allowance for Credit Losses on Retail Finance Receivables – The allowance for credit losses on retail finance receivables represents the Company’s estimate of lifetime losses for its retail finance receivables. The retail portfolio primarily consists of a large number of small balance, homogeneous finance receivables. The Company performs a collective evaluation of the adequacy of the retail allowance for credit losses. The Company utilizes a vintage-based loss forecast methodology that includes decompositions for probability of default, exposure at default, attrition rate, and recovery balance rate. Reasonable and supportable economic forecasts for a two-year period are incorporated into the methodology to reflect the estimated impact of changes in future economic conditions, such as unemployment rates, household obligations or other relevant factors, over the two-year reasonable and supportable period. For periods beyond the Company’s reasonable and supportable forecasts, the Company reverts to its average historical loss experience using a mean-reversion process over a three-year period. Adjustments to historical loss information are made for differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, or term as well as other relevant factors. Refer to Note 6 of the Notes to Consolidated financial statements for further discussion regarding the Company’s allowance for credit losses on finance receivables. Product Recalls – The estimated costs associated with voluntary recalls are recorded when the liability is both probable and estimable. The accrued cost of a recall is based on an estimate of the cost to repair each affected motorcycle and the number of motorcycles expected to be repaired based on historical data concerning the percentage of affected customers that take advantage of recall offers. As actual experience becomes available it is used to update the accruals. 44 The factors affecting actual recall costs can be volatile. As a result, actual recall costs may differ from estimates, which could lead to material changes in the Company’s accrued recall costs. The Company’s recall liabilities are discussed further in Note 13 of the Notes to Consolidated financial statements. Pensions and Other Postretirement Healthcare Benefits – The Company has a defined benefit pension plan and postretirement healthcare benefit plans, which cover certain eligible employees and retirees. The Company also has unfunded supplemental employee retirement plan agreements (SERPA) with certain employees. U.S. Generally Accepted Accounting Principles (GAAP) requires that companies recognize in their consolidated balance sheets a liability for defined benefit pension and postretirement plans that are underfunded or an asset for defined benefit pension and postretirement benefit plans that are overfunded. Pension, SERPA and postretirement healthcare obligations and costs are calculated through actuarial valuations. The valuation of benefit obligations and net periodic benefit costs relies on key assumptions including discount rates, mortality, long-term expected return on plan assets, future compensation and healthcare cost trend rates. The Company determines its discount rate assumptions by referencing high-quality long-term bond rates that are matched to the duration of its benefit obligations. Based on this analysis, the Company decreased the weighted-average discount rate for pension and SERPA obligations from 5.45% as of December 31, 2022 to 5.31% as of December 31, 2023. The Company decreased the weighted-average discount rate for postretirement healthcare obligations from 5.42% as of December 31, 2022 to 5.36% as of December 31, 2023. The Company determines its healthcare trend assumption for the postretirement healthcare obligation by considering factors such as estimated healthcare inflation, the utilization of healthcare benefits and changes in the health of plan participants. Based on the Company’s assessment of this data as of December 31, 2023, the Company set its healthcare cost trend rate for the upcoming year at 7.50% as of December 31, 2023. The Company expects the healthcare cost trend rate to reach its ultimate rate of 5.00% by 2032.(1) These assumption changes were reflected immediately in the benefit obligation and will be amortized into net periodic benefit costs over future periods. Plan assets are measured at fair value and are subject to market volatility. In estimating the expected return on plan assets, the Company considers the historical returns on plan assets, adjusted to reflect the current view of the long-term investment market. Changes in the funded status of defined benefit pension and postretirement benefit plans resulting from the difference between assumptions and actual results are initially recognized in other comprehensive income and amortized to expense over future periods. Sensitivity to changes in major assumptions used in the pension and postretirement healthcare obligations and costs was as follows (in thousands): [[GREPCENT_TABLE]] [["","Amounts based on current assumptions","","Impact of a 1% decrease in the discount rate","","Impact of a 1% increase in the healthcare cost trend rate","","Impact of a 1% decrease in the expected return on assets"],["2023 Net periodic benefit cost:"],["Pension and SERPA","$","(58,962)","","","$","(5,484)","","","n/a","","$","21,489"],["Postretirement healthcare","$","(7,904)","","","$","14","","","$","639","","","$","2,290"],["2023 Benefit obligations:"],["Pension and SERPA","$","1,568,278","","","$","181,979","","","n/a","","n/a"],["Postretirement healthcare","$","206,506","","","$","15,614","","","$","4,629","","","n/a"]] [[/GREPCENT_TABLE]] The amounts based on current assumptions above exclude the impact of settlements and curtailments. This information should not be viewed as predictive of future amounts. The calculations of pension, SERPA and postretirement healthcare obligations and costs are based on many factors in addition to those discussed here. This information should be considered in combination with the information provided in Note 14 of the Notes to Consolidated financial statements. 45 Income Taxes – The Company accounts for income taxes in accordance with Accounting Standards Codification Topic 740, Income Taxes (Topic 740). Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and other loss carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The Company reviews its deferred income tax asset valuation allowances on a quarterly basis or whenever events or changes in circumstances indicate that a review is required. In determining the requirement for a valuation allowance, the historical and projected financial results of the legal entity or consolidated group recording the net deferred income tax asset is considered, along with any positive or negative evidence including tax law changes. Since future financial results and tax law may differ from previous estimates, periodic adjustments to the Company’s valuation allowances may be necessary. The Company is subject to income taxes in the U.S. and numerous foreign jurisdictions. These tax laws and regulations are complex and significant judgment is required in determining the Company’s worldwide provision for income taxes and recording the related deferred tax assets and liabilities. In the ordinary course of the Company’s business, there are transactions and calculations where the ultimate tax determination is uncertain. Accruals for unrecognized tax benefits are provided for in accordance with the requirements of Topic 740. An unrecognized tax benefit represents the difference between the recognition of benefits related to items for income tax reporting purposes and financial reporting purposes. The unrecognized tax benefit is included within Other long-term liabilities on the Consolidated balance sheets. The Company has a liability for interest and penalties on exposure items, if applicable, which is recorded as a component of the overall income tax provision. The Company is regularly audited by tax authorities as a normal course of business. Although the outcome of tax audits is always uncertain, the Company believes that it has appropriate support for the positions taken on its tax returns and that its annual tax provision includes amounts sufficient to pay any assessments(1). Nonetheless, the amounts ultimately paid, if any, upon resolution of the issues raised by the taxing authorities may differ materially from the amounts accrued for each year. Refer to Note 3 of the Notes to Consolidated financial statements for further discussion regarding the Company's income taxes. Commitments and Contingencies The Company is subject to lawsuits and other claims related to product, commercial, employee, environmental and other matters. In determining costs to accrue related to these items, the Company carefully analyzes cases and considers the likelihood of adverse judgments or outcomes, as well as the potential range of possible loss. Any amounts accrued for these matters are monitored on an ongoing basis and are updated based on new developments or new information as it becomes available for each matter. Refer to Note 15 of the Notes to Consolidated financial statements for a discussion of the Company's commitments and contingencies. Liquidity and Capital Resources The Company’s strategy is to maintain a minimum of twelve months of its projected liquidity needs through a combination of cash and cash equivalents and availability under its credit facilities. The Company believes its current cash, cash equivalents and availability under its credit facilities are sufficient to meet its liquidity requirements. The Company expects to fund its operations, excluding the origination of finance receivables, primarily with cash flows from operating activities and cash and cash equivalents on hand.(1) The Company expects to fund the origination of finance receivables primarily with unsecured debt, unsecured commercial paper, asset-backed commercial paper conduit facilities, committed unsecured bank facilities, asset-backed securitizations and brokered certificates of deposit.(1) 46 The Company’s cash and cash equivalents and availability under its credit and conduit facilities at December 31, 2023 were as follows (in thousands): [[GREPCENT_TABLE]] [["Cash and cash equivalents(a)","","$","1,533,806"],["U.S. commercial paper conduit facility:"],["Committed asset-backed U.S. commercial paper conduit facility(b)","","1,500,000"],["Borrowings against committed facility","","(233,258)"],["Net asset-backed U.S. commercial paper conduit committed facility availability","","1,266,742"],["Asset-backed Canadian commercial paper conduit facility(b)(c)","","94,328"],["Borrowings against committed facility","","(70,742)"],["Net asset-backed Canadian commercial paper conduit facility","","23,586"],["Availability under credit and conduit facilities:"],["Credit facilities","","1,420,000"],["Commercial paper outstanding","","(878,935)"],["Net credit facility availability","","541,065"],["","","$","3,365,199"]] [[/GREPCENT_TABLE]] (a)Includes $167.9 million of cash and cash equivalents held by LiveWire Group, Inc. (b)Includes facilities expiring in the next 12 months which the Company expects to renew prior to expiration.(1) (c)C$125.0 million Canadian Conduit facility agreement remeasured to U.S. dollars at December 31, 2023 To access the debt capital markets, the Company relies on credit rating agencies to assign short-term and long-term credit ratings. Generally, lower credit ratings result in higher borrowing costs and reduced access to debt capital markets. A credit rating agency may change or withdraw the Company’s ratings based on its assessment of the Company’s current and future ability to meet interest and principal repayment obligations. The Company’s short-term debt ratings affect its ability to issue unsecured commercial paper. The Company’s short- and long-term debt ratings as of December 31, 2023 were as follows: [[GREPCENT_TABLE]] [["","Short-Term","","Long-Term","","Outlook"],["Moody\u2019s","P3","","Baa3","","Stable"],["Standard & Poor\u2019s","A3","","BBB-","","Stable"],["Fitch","F2","","BBB+","","Stable"]] [[/GREPCENT_TABLE]] The Company recognizes that it must continue to monitor and adjust its business to changes in the lending environment. The Company intends to continue with a diversified funding profile through a combination of short-term and long-term funding vehicles and to pursue a variety of sources to obtain cost-effective funding.(1) The HDFS segment results could be negatively affected by higher costs of funding and increased difficulty of raising, or potential unsuccessful efforts to raise, funding in the short-term and long-term capital markets.(1) These negative consequences could in turn adversely affect the Company’s business and results of operations in various ways, including through higher costs of capital, reduced funds available through HDFS to provide loans to dealers and their retail customers, and dilution to existing shareholders through the use of alternative sources of capital. Cash Flow Activity Cash flow activities for the years ended December 31, were as follows (in thousands): [[GREPCENT_TABLE]] [["","2023","","2022"],["Net cash provided by operating activities","$","754,887","","","$","548,461"],["Net cash used by investing activities","(512,304)","","","(773,011)"],["Net cash used by financing activities","(174,646)","","","(201,967)"],["Effect of exchange rate changes on cash, cash equivalents and restricted cash","1,697","","","(19,525)"],["Net decrease in cash, cash equivalents and restricted cash","$","69,634","","","$","(446,042)"]] [[/GREPCENT_TABLE]] Operating Activities 47 The increase in operating cash flow in 2023 compared to 2022 was primarily due to favorable changes in working capital, partially offset by an increase in wholesale financing activity. Changes in working capital resulted in a modest increase in cash flow from operations during 2023 compared to a decrease during 2022. During 2022, inventory grew as the Company increased the number of finished upcoming model-year motorcycles on hand compared to the end of 2021. During 2023, finished motorcycle inventory was down slightly compared to 2022. The Company's accounts receivable balance, which relates primarily to sales outside of North America, increased more significantly during 2022 as compared to 2023 due to lower sales in the fourth quarter of 2023 compared to the fourth quarter of 2022. The Company's increase in wholesale financing activity was primarily due to slower collections of wholesale finance receivables. The Company’s sales of motorcycles and related products to dealers in the U.S. and Canada are financed through HDFS and become finance receivables upon the sale to the dealer and become operating cash flows when the dealer repays the wholesale finance receivable. As a result, the timing of the Company's operating cash flow is impacted by the amount and duration of wholesale financing that dealers elect to utilize. The Company's ongoing operating cash requirements include those related to existing contractual commitments which it expects to fund with cash inflows from operating activities. The Company's purchase orders for inventory used in manufacturing generally do not become firm commitments until 90 days prior to expected delivery. The Company's material contractual operating cash commitments at December 31, 2023 relate to leases, retirement plan obligations and income taxes. The Company's long-term lease obligations and future payments are discussed further in Note 9 of the Notes to Consolidated financial statements. The Company’s expected future contributions and benefit payments related to its defined benefit retirement plans are discussed further in Note 14 of the Notes to Consolidated financial statements. As described in Note 3 of the Notes to Consolidated financial statements, the Company has a liability for unrecognized tax benefits of $18.2 million and related accrued interest and penalties of $8.6 million as of December 31, 2023. The Company cannot reasonably estimate the period of cash settlement for either the liability for unrecognized tax benefits or accrued interest and penalties. The Company continues to expect that it will fund its ongoing operating cash requirements related to the origination of finance receivables with the issuance of debt. Investing Activities The Company’s most significant investing activities consist of capital expenditures and retail finance receivable originations and collections. Capital expenditures were $207.4 million and $151.7 million during 2023 and 2022, respectively. The Company's 2024 plan includes estimated capital investments between $225 to $250 million, all of which the Company expects to fund with net cash flow generated by operations.(1) Net cash outflows for finance receivables in 2023, which consisted primarily of retail finance receivables, were $321.1 million lower than in 2022 primarily due to lower retail finance receivable originations, partially offset by slower collections of finance receivables, during 2023. The Company funds its finance receivables net lending activity through the issuance of debt and brokered certificates of deposit as discussed in the Financing Activities section. Financing Activities The Company’s financing activities consist primarily of dividend payments, share repurchases and debt activities. The Company paid dividends of $0.66 per share totaling $96.3 million during 2023 and $0.63 per share totaling $93.2 million during 2022. Cash outflows for discretionary share repurchases were $350.0 million in 2023 and $324.5 million in 2022. Share repurchases of common stock that employees surrendered to satisfy withholding taxes in connection with the vesting of restricted stock units and performance shares were $14.0 million or 0.3 million shares and $14.2 million or 0.4 million shares during the years ended December 31, 2023 and 2022, respectively. As of December 31, 2023, there were 9.7 million shares remaining on a board-approved share repurchase authorization. On September 26, 2022, the Company's electric motorcycle subsidiary completed a merger with AEA-Bridges Impact Corp. (ABIC), a special purpose acquisition company, to create a new publicly traded company, LiveWire Group, Inc. LiveWire Group, Inc. received net proceeds of approximately $294 million, including a $180 million investment from the Company, net of transaction expenses, a $100 million investment from an independent investor, and a $14 million investment from ABIC. 48 Financing cash flows related to debt and brokered certificates of deposit activities resulted in net cash inflows of $283.7 million and $117.8 million in 2023 and 2022, respectively. The Company’s total outstanding debt and liability for brokered certificates of deposit consisted of the following as of December 31 (in thousands): [[GREPCENT_TABLE]] [["","2023","","2022"],["Outstanding debt:"],["Unsecured commercial paper","$","878,935","","","$","770,468"],["Asset-backed Canadian commercial paper conduit facility","70,742","","","71,785"],["Asset-backed U.S. commercial paper conduit facility","233,258","","","425,794"],["Asset-backed securitization debt, net","1,877,368","","","2,019,414"],["Medium-term notes, net","3,319,138","","","2,879,473"],["Senior notes, net","746,079","","","745,368"],["","$","7,125,520","","","$","6,912,302"],["Deposits, net","$","447,782","","","$","317,375"]] [[/GREPCENT_TABLE]] Refer to Note 10 of the Notes to Consolidated financial statements for a summary of future principal payments on the Company's debt obligations. Refer to Note 5 of the Notes to Consolidated financial statements for a summary of future maturities on the Company's certificates of deposit. Deposits – HDFS offers brokered certificates of deposit to customers indirectly through contractual arrangements with third-party banks and/or securities brokerage firms through its bank subsidiary. The Company had $447.8 million and $317.4 million, net of fees, of interest-bearing brokered certificates of deposit outstanding as of December 31, 2023 and 2022, respectively. The deposits are classified as short- and long-term liabilities based upon the term of each brokered certificate of deposit issued. Each separate brokered certificate of deposit is issued under a master certificate, and as such, all outstanding brokered certificates of deposit are considered below the Federal Deposit Insurance Corporation insurance coverage limits. Credit Facilities – The Company has a $710.0 million five-year credit facility that matures in April 2025 and a $710.0 million five-year credit facility that matures in April 2027. The five-year credit facilities (together, the Global Credit Facilities) bear interest at variable rates, which may be adjusted upward or downward depending on certain criteria, such as credit ratings. The Global Credit Facilities also require the Company to pay a fee based on the average daily unused portion of the aggregate commitments. The Global Credit Facilities are committed facilities primarily used to support the Company's unsecured commercial paper program. Unsecured Commercial Paper – Subject to limitations, the Company could issue unsecured commercial paper of up to $1.42 billion as of December 31, 2023 supported by the Global Credit Facilities, as discussed above. Outstanding unsecured commercial paper may not exceed the unused portion of the Global Credit Facilities. Maturities may range up to 365 days from the issuance date. The Company intends to repay unsecured commercial paper as it matures with additional unsecured commercial paper or through other means, such as borrowing under the Global Credit Facilities, borrowing under its asset-backed U.S. commercial paper conduit facility or through the use of operating cash flow and cash on hand.(1) Medium-Term Notes – The Company had the following unsecured medium-term notes issued and outstanding at December 31, 2023 (in thousands): [[GREPCENT_TABLE]] [["Principal Amount","","Rate","","Issue Date","","Maturity Date"],["$662,238(a)","","3.14%","","November 2019","","November 2024"],["$700,000","","3.35%","","June 2020","","June 2025"],["$772,610(b)","","6.36%","","April 2023","","April 2026"],["$500,000","","3.05%","","February 2022","","February 2027"],["$700,000","","6.50%","","March 2023","","March 2028"]] [[/GREPCENT_TABLE]] (a) €600.0 million par value remeasured to U.S. dollar at December 31, 2023 (b) €700.0 million par value remeasured to U.S. dollar at December 31, 2023 The U.S. dollar-denominated medium-term notes provide for semi-annual interest payments and the foreign currency-denominated medium-term notes provide for annual interest payments. Principal on the medium-term notes is due at maturity. Unamortized discounts and debt issuance costs on the medium-term notes reduced the outstanding balance by $15.7 million and $8.5 million at December 31, 2023 and 2022, respectively. 49 Senior Notes – In July 2015, the Company issued $750.0 million of unsecured senior notes in an underwritten offering. The senior notes provide for semi-annual interest payments and principal due at maturity. $450.0 million of the senior notes mature in July 2025 and have an interest rate of 3.50%, and $300.0 million of the senior notes mature in July 2045 and have an interest rate of 4.625%. The Company used the proceeds from the debt to repurchase shares of its common stock in 2015. On-Balance Sheet Asset-Backed Canadian Commercial Paper Conduit Facility – In June 2023, the Company renewed its facility agreement (Canadian Conduit) with a Canadian bank-sponsored asset-backed commercial paper conduit. Under the agreement, the Canadian Conduit is contractually committed, at the Company's option, to purchase eligible Canadian retail motorcycle finance receivables for proceeds up to C$125.0 million. The transferred assets are restricted as collateral for the payment of the associated debt. The terms for this debt provide for interest on the outstanding principal based on prevailing market interest rates plus a specified margin. The Canadian Conduit also provides for a program fee and an unused commitment fee based on the unused portion of the total aggregate commitment of C$125.0 million. There is no amortization schedule; however, the debt is reduced monthly as available collections on the related finance receivables are applied to outstanding principal. Upon expiration of the Canadian Conduit, any outstanding principal will continue to be reduced monthly through available collections. The expected remaining term of the related receivables is approximately 5 years. Unless earlier terminated or extended by mutual agreement between the Company and the lenders, as of December 31, 2023, the Canadian Conduit has an expiration date of June 28, 2024. In 2023, the Company transferred $51.4 million of Canadian retail motorcycle finance receivables to the Canadian Conduit for proceeds of $42.4 million. In 2022, the Company transferred $53.1 million of Canadian retail motorcycle finance receivables to the Canadian Conduit for proceeds of $44.2 million. On-Balance Sheet Asset-Backed U.S. Commercial Paper Conduit Facilities VIE – In November 2023, the Company renewed its $1.50 billion revolving facility agreement (the U.S. Conduit Facility) with third-party banks and their asset-backed U.S. commercial paper conduits. Under the revolving facility agreement, the Company may transfer U.S. retail motorcycle finance receivables to an SPE, which in turn may issue debt to those third-party banks and their asset-backed U.S. commercial paper conduits. From November 2020 through November 2022, the U.S. Conduit Facility allowed for uncommitted additional borrowings of up to $300.0 million at the lenders' discretion. At December 31, 2022, $125.8 million remained outstanding under the uncommitted additional borrowings previously allowed. During 2023, the remaining balance of these uncommitted additional borrowings was paid in full. Availability under the U.S. Conduit Facility is based on, among other things, the amount of eligible U.S. retail motorcycle finance receivables held by the SPE as collateral. In 2023, there were no finance receivable transfers under the U.S. Conduit Facility. In 2022, the Company transferred $467.9 million of U.S. retail motorcycle finance receivables to an SPE which, in turn, issued $404.1 million of debt under the U.S. Conduit Facility. The terms for this debt provide for interest on the outstanding principal based on prevailing commercial paper rates if funded by a conduit lender through the issuance of commercial paper. The interest rate on all borrowings, if not funded by a conduit lender through the issuance of commercial paper, is based on the Secured Overnight Financing Rate (SOFR), with provisions for a transition to other benchmark rates in the future, if necessary. In addition to interest, a program fee is assessed based on the outstanding debt principal balance. The U.S. Conduit Facility also provides for an unused commitment fee based on the unused portion of the total aggregate commitment. Prior to November 2022, when calculating the unused fee, the aggregate commitment did not include any unused portion of the $300.0 million uncommitted additional borrowings allowed. There is no amortization schedule; however, the debt is reduced monthly as available collections on the related finance receivables are applied to outstanding principal. Upon expiration of the U.S. Conduit Facility, any outstanding principal will continue to be reduced monthly through available collections. The expected remaining term of the related receivables held by the SPE is approximately 4 years. Unless earlier terminated or extended by mutual agreement of the Company and the lenders, as of December 31, 2023, the U.S. Conduit Facility has an expiration date of November 20, 2024. Asset-Backed Securitization VIEs – For all of its asset-backed securitization transactions, the Company transfers U.S. retail motorcycle finance receivables to separate VIEs, which in turn issue secured notes with various maturities and interest rates to investors. All of the notes held by the VIEs are secured by future collections of the purchased U.S. retail motorcycle finance receivables. The U.S. retail motorcycle finance receivables included in the asset-backed securitization transactions are not available to pay other obligations or claims of the Company's creditors until the associated debt and other obligations are satisfied. Restricted cash balances held by the VIEs are used only to support the asset-backed securitizations. The accounting treatment for asset-backed securitizations depends on the terms of the related transaction and the Company’s continuing involvement with the VIE. The Company's current outstanding asset-backed securitizations do not meet the criteria to be accounted for as a sale because, in addition to retaining servicing rights, the Company retains a financial interest in the VIE in the form of a debt security. These transactions are treated as secured borrowings, and as such, the retail 50 motorcycle finance receivables remain on the balance sheet with a corresponding obligation reflected as debt. There is no amortization schedule for the secured notes; however, the debt is reduced monthly as available collections on the related retail motorcycle finance receivables are applied to outstanding principal. The secured notes currently have various contractual maturities ranging from 2024 to 2031. In 2023, the Company transferred $1.20 billion of U.S. retail motorcycle finance receivables to two separate SPEs which, in turn, issued $1.05 billion, or $1.04 billion net of discount and issuance costs, of secured notes through two separate on-balance sheet asset-backed securitization transactions. In 2022, the Company transferred $2.18 billion of U.S. retail motorcycle finance receivables to two separate SPEs which, in turn, issued $1.84 billion, or $1.83 billion net of discount and issuance costs, of secured notes through two separate on-balance sheet asset-backed securitization transactions. Intercompany Agreements – 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 Financial Services, Inc. did not borrow on the line of credit during 2023 and had no outstanding borrowings owed to Harley-Davidson, Inc. under this agreement as of February 23, 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. Support may be provided at Harley-Davidson, Inc.'s option as capital contributions or loans. No amount has ever been provided to Harley-Davidson Financial Services Inc. under the support agreement. 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 one of its wholly-owned subsidiaries whereby LiveWire may obtain term loans in one or more advances up to an aggregate principal amount of $100.0 million. The outstanding principal under the Convertible Term Loan bears interest at a floating rate per annum, as calculated on the date of each advance and as of each June 1 and December 1 thereafter. The interest rate is calculated based on the sum of (i) the forward-looking term rate based on SOFR for a six-month interest period, plus (ii) 4.00%. The Convertible Term Loan does not include affirmative covenants impacting the operations of LiveWire. The Convertible Term Loan includes negative covenants restricting the ability of LiveWire to incur indebtedness, create liens, sell assets, make investments, make fundamental changes, make dividends or other restricted payments and enter into affiliate transactions. The Convertible Term Loan has a maturity date of the earlier of (i) 24 months from the date of the first draw on the loan or (ii) October 31, 2026. In the event that the Convertible Term Loan cannot be settled in cash by LiveWire at maturity, unless otherwise agreed between Harley-Davidson, Inc. and LiveWire, the Convertible Term Loan will be converted to equity of LiveWire Group, Inc. at a conversion price per share of LiveWire Group, Inc. common stock equal to 90% of the volume weighted average price per share of common stock for the 30 trading days immediately preceding the conversion date. Operating and Financial Covenants – Harley-Davidson Financial Services Inc. and the Company are subject to various operating and financial covenants related to the credit facilities and various operating covenants under the medium-term and senior notes and the U.S. and Canadian asset-backed commercial paper conduit facilities. The more significant covenants are described below. The operating covenants limit the Company’s and Harley-Davidson Financial Services Inc.’s ability to: •Assume or incur certain liens; •Participate in certain mergers or consolidations; and •Purchase or hold margin stock. Under the current financial covenants of the Global Credit Facilities, the ratio of Harley-Davidson Financial Services Inc.’s consolidated debt, excluding secured debt, to Harley-Davidson Financial Services Inc.’s consolidated allowance for credit losses on finance receivables plus Harley-Davidson Financial Services Inc.’s consolidated shareholders' equity, excluding accumulated other comprehensive loss (AOCL), cannot exceed 10.0 to 1.0 as of the end of any fiscal quarter. In addition, the ratio of the Company's consolidated debt to the Company's consolidated debt and consolidated shareholders’ equity (where the Company's consolidated debt in each case excludes that of Harley-Davidson Financial Services Inc. and its subsidiaries, and the Company's consolidated shareholders’ equity excludes AOCL) cannot exceed 0.7 to 1.0 as of the end of any fiscal quarter. No financial covenants are required under the medium-term or senior notes or the U.S. or Canadian asset-backed commercial paper conduit facilities. At December 31, 2023 and 2022, Harley-Davidson Financial Services Inc. and the Company remained in compliance with all of the then existing covenants. 51 Cautionary Statements The Company intends that certain matters discussed in this report are “forward-looking statements” intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. These forward-looking statements can generally be identified as such by reference to this footnote or because the context of the statement will include words such as the Company “believes,” “anticipates,” “expects,” “plans,” “may,” “will,” “estimates,” “targets,” “intends,” "forecasts," "sees," "feels," or words of similar meaning. Similarly, statements that describe or refer to future expectations, future plans, strategies, objectives, outlooks, targets, guidance, commitments or goals are also forward-looking statements. Such forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially, unfavorably or favorably, from those anticipated as of the date of this report. Certain of such risks and uncertainties are described below. Shareholders, potential investors, and other readers are urged to consider these factors in evaluating the forward-looking statements and are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements included in this report are only made as of the date of this report, and the Company disclaims any obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances. Important factors that could affect future results and cause those results to differ materially from those expressed in the forward-looking statements include, among others, the Company's ability to: (a) execute its business plans and strategies, including The Hardwire, each of the pillars, and the evolution of LiveWire as a standalone brand, which includes the risks noted below; (b) manage supply chain and logistics issues, including quality issues, unexpected interruptions or price increases caused by supplier volatility, raw material shortages, inflation, war or other hostilities, including the conflict in Ukraine and the Red Sea conflict, or natural disasters and longer shipping times and increased logistics costs; (c) accurately analyze, predict and react to changing market conditions and successfully adjust to shifting global consumer needs and interests; (d) maintain and enhance the value of the Harley-Davidson brand; (e) realize the expected business benefits from LiveWire operating as a separate public company, which may be affected by, among other things: (i) the ability of LiveWire to execute its plans to develop, produce, market and sell its electric vehicles; (ii) competition; and (iii) other risks and uncertainties indicated in documents filed with the SEC by the Company or LiveWire Group, Inc., including those risks and uncertainties noted in Risk Factors under Item 1.A of LiveWire Group Inc.'s Annual Report on Form 10-K for the year ended December 31, 2023; (f) successfully access the capital and/or credit markets on terms that are acceptable to the Company and within its expectations; (g) successfully carry out its global manufacturing and assembly operations; (h) develop and introduce products, services and experiences on a timely basis that the market accepts, that enable the Company to generate desired sales levels and that provide the desired financial returns, including successfully implementing and executing plans to strengthen and grow its leadership position in Grand American Touring, large Cruiser and Trike, and grow its complementary businesses; (i) perform in a manner that enables the Company to benefit from market opportunities while competing against existing and new competitors; (j) manage the quality and regulatory non-compliance issues relating to the brake hose assemblies provided to the Company by Proterial Cable America, Inc. in a manner that avoids future quality or non-compliance issues and additional costs or recall expenses that are material; (k) manage through changes in general economic and business conditions, including changing capital, credit and retail markets, and the changing domestic and international political environments, including as a result of the conflict in Ukraine; (l) manage the impact that prices for and supply of used motorcycles may have on its business, including on retail sales of new motorcycles; (m) prevent, detect and remediate any issues with its motorcycles or any issues associated with the manufacturing processes to avoid delays in new model launches, recall campaigns, regulatory agency investigations, increased warranty costs or litigation and adverse effects on its reputation and brand strength, and carry out any product programs or recalls within expected costs and timing; (n) continue to manage the relationships and agreements that the Company has with its labor unions, including the successful negotiations of key agreements that will expire March 31, 2024, to help drive long-term competitiveness; (o) successfully manage and reduce costs throughout the business; (p) manage risks related to a resurgence of the COVID-19 pandemic, emergence of a new pandemic, epidemic, disease outbreak or other public health crises, such as supply chain disruptions, its ability to carry out business as usual, and government actions and restrictive measures implemented in response; (q) continue to develop the capabilities of its distributors and dealers, effectively implement changes relating to its dealers and distribution methods, including the Company's dealer footprint, and manage the risks that its dealers may have difficulty obtaining capital and managing through changing economic conditions and consumer demand; (r) successfully appeal: (i) the revocation of the Binding Origin Information (BOI) decisions that allowed the Company to supply its European Union (EU) market with certain of its motorcycles produced at its Thailand operations at a reduced tariff rate and (ii) the denial of the Company’s application for temporary relief from the effect of the revocation of the BOI decisions; (s) continue to develop and maintain a productive relationship with Zhejiang Qianjiang Motorcycle Co., Ltd. and launch related products in a timely manner and that meet or exceed customers' expectations; (t) maintain a productive relationship with Hero MotoCorp as a distributor and licensee of the Harley-Davidson brand name in India; (u) manage and predict the impact that new, reinstated or adjusted tariffs may have on the Company’s ability to sell products internationally, and the cost of raw materials and components, including the temporary lifting of the incremental tariffs on motorcycles imported into the EU from the U.S., which was extended to March 52 31, 2025; (v) accurately predict the margins of its segments in light of, among other things, tariffs, inflation, foreign currency exchange rates, the cost associated with product development initiatives and the Company's complex global supply chain; (w) successfully maintain a manner in which to sell motorcycles in China and the Company's Association of Southeast Asian Nations (ASEAN) countries that does not subject its motorcycles to incremental tariffs; (x) manage its Thailand corporate and manufacturing operation in a manner that allows the Company to avail itself of preferential free trade agreements and duty rates, and sufficiently lower prices of its motorcycles in certain markets; (y) retain and attract talented employees, and eliminate personnel duplication, inefficiencies and complexity throughout the organization; (z) accurately estimate and adjust to fluctuations in foreign currency exchange rates, interest rates and commodity prices; (aa) manage the credit quality, the loan servicing and collection activities, and the recovery rates of Harley-Davidson Financial Services' loan portfolio; (bb) prevent a cybersecurity breach involving consumer, employee, dealer, supplier, or Company data and respond to evolving regulatory requirements regarding cybersecurity and data privacy; (cc) adjust to tax reform, healthcare inflation and reform and pension reform, and successfully estimate the impact of any such reform on the Company’s business; (dd) manage through the effects inconsistent and unpredictable weather patterns may have on retail sales of motorcycles; (ee) implement and manage enterprise-wide information technology systems, including systems at its manufacturing facilities; (ff) manage changes, prepare for, and respond to evolving requirements in legislative and regulatory environments related to its products, services and operations, including increased environmental, safety, emissions or other regulations; (gg) manage its exposure to product liability claims and commercial or contractual disputes; (hh) achieve anticipated results with respect to the Company's preowned motorcycle program, Harley-Davidson Certified, the Company's H-D1 Marketplace, and Apparel and Licensing; and (ii) optimize capital allocation in light of the Company's capital allocation priorities. The Company’s ability to sell its motorcycles and related products and services and to meet its financial expectations also depends on the ability of the Company’s dealers to sell its motorcycles and related products and services to retail customers. The Company depends on the capability and financial capacity of its dealers to develop and implement effective retail sales plans to create demand for the motorcycles and related products and services they purchase from the Company. In addition, the Company’s dealers and distributors may experience difficulties in operating their businesses and selling Harley-Davidson motorcycles and related products and services as a result of weather, economic conditions, or other factors. In recent years, HDFS experienced historically low levels of retail credit losses, but credit losses have been normalizing to higher levels in recent quarters. Further, the Company believes that HDFS's retail credit losses will continue to change over time due to changing consumer credit behavior, macroeconomic conditions including the impact of inflation and HDFS's efforts to increase prudently structured loan approvals to sub-prime borrowers. In addition, HDFS’s efforts to adjust underwriting criteria based on market and economic conditions and the actions that the Company has taken and could take that impact motorcycle values may impact HDFS's retail credit losses. The Company's operations, demand for its products, and its liquidity could be adversely impacted by work stoppages, facility closures, strikes, natural causes, widespread infectious disease, terrorism, war or other hostilities, including the conflict in Ukraine and the Red Sea conflict, or other factors. Refer to “Risk Factors” under Item 1.A of this report for a discussion of additional risk factors and a more complete discussion of some of the cautionary statements noted above.