-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PHup5Gvy8W3iXovIVy8v/UEMGiMsVJZkZeXPkjAAflBTFrpo/GxdyfKH0NaxVTUg PvztDc8JV/4omnlYgMPWMw== 0000897069-98-000406.txt : 19980812 0000897069-98-000406.hdr.sgml : 19980812 ACCESSION NUMBER: 0000897069-98-000406 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980628 FILED AS OF DATE: 19980811 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: HARLEY DAVIDSON INC CENTRAL INDEX KEY: 0000793952 STANDARD INDUSTRIAL CLASSIFICATION: MOTORCYCLES, BICYCLES & PARTS [3751] IRS NUMBER: 391382325 STATE OF INCORPORATION: WI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 033-05871 FILM NUMBER: 98681851 BUSINESS ADDRESS: STREET 1: 3700 W JUNEAU AVE CITY: MILWAUKEE STATE: WI ZIP: 53208 BUSINESS PHONE: 4143424680 10-Q 1 HARLEY-DAVIDSON, INC. FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-Q (X) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended June 28, 1998 or ( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from _______________ to ______________ Commission File Number 1-9183 Harley-Davidson, Inc. (Exact name of registrant as specified in its Charter) Wisconsin 39-1382325 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 3700 West Juneau Avenue, Milwaukee, Wisconsin 53208 (Address of principal executive offices) (Zip Code) (Registrant's telephone number, including area code) (414) 342-4680 None (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common Stock Outstanding as of August 7, 1998 152,665,638 Shares HARLEY-DAVIDSON, INC. Form 10-Q Index For the Quarter Ended June 28, 1998 Page Part I. Financial Information Item 1. Financial Statements Condensed Consolidated Statements of Income 3 Condensed Consolidated Balance Sheets 4 Condensed Consolidated Statements of Cash Flows 5 Notes to Condensed Consolidated Financial Statements 6-9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10-17 Item 3. Quantitative and Qualitative Disclosures about Market Risk 18 Part II. Other Information Item 1. Legal Proceedings 19 Item 4. Submission of Items to a Vote of Security Holders 19 Item 5. Other Information 19 Item 6. Exhibits and Reports on Form 8-K 20 Signatures 21 Exhibit Index 22 PART I - FINANCIAL INFORMATION Item 1. Consolidated Financial Statements Harley-Davidson, Inc. Condensed Consolidated Statements of Income (Unaudited) (In thousands, except per share amounts) Three months ended Six months ended June 28, June 29, June 28, June 29, 1998 1997 1998 1997 Sales $517,164 $444,085 $983,691 $871,180 Cost of goods sold 339,636 293,766 656,288 582,647 -------- -------- -------- -------- Gross profit 177,528 150,319 327,403 288,533 Operating income from financial services 6,355 3,346 8,940 5,565 Operating expenses (96,644) (79,875) (178,297) (157,660) -------- -------- -------- -------- Income from operations 87,239 73,790 158,046 136,438 Interest income - net 612 2,092 1,386 3,666 Other income (expense)-net (607) 2,188 (1,796) 2,003 -------- -------- -------- -------- Income before provision for income taxes 87,244 78,070 157,636 142,107 Provision for income taxes 31,843 28,886 57,537 52,581 -------- -------- -------- -------- Net income $ 55,401 $ 49,184 $100,099 $ 89,526 ======== ======== ======== ======== Earnings per common share: Basic $.36 $.32 $.66 $.59 ==== ==== ==== ==== Diluted $.36 $.32 $.65 $.58 ==== ==== ==== ==== Weighted-average common shares outstanding: Basic 151,930 151,406 151,883 151,321 ======== ======== ======== ======== Diluted 154,545 153,603 154,385 153,453 ======== ======== ======== ======== Cash dividends per share $.04 $.035 $.075 $.065 ==== ===== ===== ===== Harley-Davidson, Inc. Condensed Consolidated Balance Sheets (In thousands) ASSETS June 28, Dec. 31, June 29, 1998 1997 1997 (Unaudited) (Unaudited) Current assets: Cash and cash equivalents $154,475 $147,462 $144,474 Accounts receivable, net (Note 2) 91,336 102,797 198,707 Finance receivables, net (Note 2) 302,247 293,329 158,549 Inventories (Note 3) 131,525 117,475 101,437 Other current assets 44,565 42,958 40,898 ---------- ---------- ---------- Total current assets 724,148 704,021 644,065 Finance receivables, net 346,097 249,346 237,741 Property, plant and equipment, net 561,966 528,869 454,058 Goodwill 45,323 38,707 39,801 Other assets 68,467 77,958 77,708 ---------- ---------- ---------- $1,746,001 $1,598,901 $1,453,373 ========== ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $118,395 $106,112 $117,405 Accrued expenses and other 176,059 164,938 150,716 Current portion of finance debt 125,951 90,638 56,325 ---------- ---------- ---------- Total current liabilities 420,405 361,688 324,446 Finance debt 280,000 280,000 250,000 Other long-term liabilities 63,308 62,131 70,021 Postretirement health care benefits 70,164 68,414 67,167 Contingencies (Note 9) Total shareholders' equity 912,124 826,668 741,739 ---------- ---------- ---------- $1,746,001 $1,598,901 $1,453,373 ========== ========== ========== Harley-Davidson, Inc. Condensed Consolidated Statements of Cash Flows (Unaudited) (In thousands) Six months ended June 28, June 29, 1998 1997 Cash flows from operating activities: Net income $100,099 $89,526 Depreciation and amortization 40,387 33,370 Long-term employee benefits 4,430 2,557 Other-net 4,899 2,256 Net change in other current assets and current liabilities 16,861 (27,093) --------- -------- Net cash provided by operating activities 166,676 100,616 Cash flows from investing activities: Purchase of property and equipment (69,135) (76,279) Finance receivables acquired or originated (1,283,629) (577,542) Finance receivables collected/sold 1,183,082 518,042 Other - net (7,677) (2,914) --------- -------- Net cash used in investing activities (177,359) (138,693) Cash flows from financing activities: Net decrease in notes payable (21) (2,580) Net increase in finance debt 35,313 48,260 Dividends paid (11,668) (10,108) Stock repurchase (15,174) - Issuance of stock under employee stock and option plans 9,246 4,500 --------- -------- Net cash provided by financing activities 17,696 40,072 --------- -------- Net increase in cash and cash equivalents 7,013 1,995 Cash and cash equivalents: At beginning of period 147,462 142,479 --------- -------- At end of period $154,475 $144,474 ========= ======== HARLEY-DAVIDSON, INC. Notes to Condensed Consolidated Financial Statements (Unaudited) Note 1 - Basis of Presentation and Use of Estimates The condensed interim consolidated financial statements included herein have been prepared by Harley-Davidson, Inc. (the "Company") without audit. Certain information and footnote disclosures normally included in complete financial statements have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission and generally accepted accounting principles for interim financial information. However, the foregoing statements contain all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of Company management, necessary to present fairly the consolidated financial position as of June 28, 1998 and June 29, 1997, and the results of operations for the three- and six-month periods then ended. Certain prior-year balances have been reclassified in order to conform to current- year presentation. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended December 31, 1997. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Note 2 - Accounts Receivable Effective September 1, 1997, Eaglemark Financial Services, Inc. (Eaglemark), a majority-owned subsidiary, became responsible for all credit and collection activities for the Motorcycles and Related Products segment's domestic receivables. As such, approximately $121.9 and $69.1 million of accounts receivable are classified as finance receivables as of June 28, 1998 and December 31, 1997, respectively. In addition, the presentation of finance receivables has been changed from prior year to classify receivables representing wholesale motorcycle and parts and accessories receivables and retail finance receivables with maturities of less than one year as current. Note 3 - Inventories The Company values its inventories at the lower of cost, principally using the last-in, first-out (LIFO) method, or market. Inventories consist of the following (in thousands): June 28, Dec.31, June 29, 1998 1997 1997 Components at the lower of cost, first-in, first-out (FIFO), or market: Raw material & work-in-process $ 47,335 $ 37,597 $ 32,759 Finished goods 23,517 26,756 24,275 Parts & accessories 84,202 75,735 66,379 -------- -------- -------- 155,054 140,088 123,413 Excess of FIFO over LIFO 23,529 22,613 21,976 -------- -------- -------- Inventories as reflected in the accompanying condensed consolidated balance sheets $131,525 $117,475 $101,437 ======== ======== ======== Note 4 - Acquisition of Business In February 1998, the Company acquired substantially all of the remaining common stock of Buell Motorcycle Company ("BMC"), a company in which it held a 49% interest since 1993. The acquisition was a stock-for-stock transaction accounted for as a purchase in which 37,640 shares of the Company's Common Stock (valued at approximately $1 million) were exchanged for the BMC interest. Prior to the acquisition, the Company accounted for its investment in BMC using the equity method. Pro-forma financial information would not be materially different from the financial statements as reported and as a result has not been presented. Note 5 - Earnings Per Share Effective December 31, 1997, the Company adopted SFAS No. 128, "Earnings Per Share." Earnings per share amounts for all prior periods presented have been restated to conform to the Statement 128 requirements. All share and per share data have been adjusted to reflect the stock split described in Note 8. The following table sets forth the computation for basic and diluted earnings per share (in thousands, except per share amounts): Three months ended Six months ended June 28, June 29, June 28, June 29, 1998 1997 1998 1997 Numerator Net income used in computing basic and diluted earnings per share $55,401 $49,184 $100,099 $89,526 ======= ======= ======== ======= Denominator Denominator for basic earnings per share - weighted-average common shares 151,930 151,406 151,883 151,321 Effect of dilutive securities - employee stock options and nonvested stock 2,615 2,197 2,502 2,132 Denominator for diluted earnings per share - adjusted weighted-average shares 154,545 153,603 154,385 153,453 ======= ======= ======= ======= Basic earnings per share $.36 $.32 $.66 $.59 ==== ==== ==== ==== Diluted earnings per share $.36 $.32 $.65 $.58 ==== ==== ==== ==== Note 6 - Internal Use Software Effective January 1, 1998, the Company adopted the Statement of Position (SOP) 98-1, "Accounting for Costs of Computer Software Developed or Obtained for Internal Use." The SOP requires the Company to capitalize certain costs incurred in connection with developing or obtaining internal-use software. Approximately $2.4 and $3.7 million of costs associated with internal-use software were capitalized during the three and six months ended June 28, 1998, respectively. Note 7 - Business Segments The Company operates in two business segments: Motorcycles and Related Products and Financial Services. The Company's reportable segments are strategic business units that offer different products and services. They are managed separately based on the fundamental differences in their operations. Effective December 31, 1997, the Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." The Statement requires the Company to disclose selected segment information on an interim basis, this information is set forth below (in thousands): Three months ended Six months ended June 28, June 29, June 28, June 29, 1998 1997 1998 1997 Net sales: Motorcycles and Related Products $517,164 $444,085 $983,691 $871,180 Financial Services n/a n/a n/a n/a -------- -------- -------- -------- $517,164 $444,085 $983,691 $871,180 ======== ======== ======== ======== Income from operations: Motorcycles and Related Products $ 83,246 $ 72,465 $154,297 $135,481 Financial Services 6,355 3,346 8,940 5,565 General corporate expenses (2,362) (2,021) (5,191) (4,608) -------- -------- -------- -------- $ 87,239 $ 73,790 $158,046 $136,438 ======== ======== ======== ======== Note 8 - Capital Stock On August 20, 1997, the Company's Board of Directors declared a two-for- one stock split for shareholders of record on September 12, 1997, payable on September 26, 1997. Stock option agreements have been adjusted to reflect the split. An amount equal to the par value of the shares issued has been transferred from additional paid-in capital to the common stock account. All references to number of shares have been adjusted to reflect the stock split on a retroactive basis. During the first quarter of 1998, the Company repurchased 600,000 shares of its common stock for approximately $15 million. Note 9 - Contingencies The Company is involved with government agencies in various environmental matters, including a matter involving soil and groundwater contamination at its York, Pennsylvania facility (the Facility). The Facility was formerly used by the U.S. Navy and AMF (the predecessor corporation of Minstar). The Company purchased the Facility from AMF in 1981. Although the Company is not certain as to the extent of the environmental contamination at the Facility, it is working with the Pennsylvania Department of Environmental Resources in undertaking certain investigation and remediation activities. In March 1995 the Company entered into a settlement agreement (the Agreement) with the Navy. The Agreement calls for the Navy and the Company to contribute amounts into a trust equal to 53% and 47%, respectively, of future costs associated with investigation and remediation activities at the Facility (response costs). The trust will administer the payment of the future response costs at the Facility as covered by the Agreement. In addition, in March 1991 the Company entered into a settlement agreement with Minstar related to certain indemnification obligations assumed by Minstar in connection with the Company's purchase of the Facility. Pursuant to this settlement, Minstar is obligated to reimburse the Company for a portion of its response costs at the Facility. Although substantial uncertainty exists concerning the nature and scope of the environmental remediation that will ultimately be required at the Facility, based on preliminary information currently available to the Company and taking into account the Company's settlement agreement with the Navy and the settlement agreement with Minstar, the Company estimates that it will incur approximately $6 million of net additional response costs at the Facility.(1) The Company has established reserves for this amount. The Company's estimate of additional response costs is based on reports of environmental consultants retained by the Company, the actual costs incurred to date and the estimated costs to complete the necessary investigation and remediation activities. Response costs are expected to be incurred over a period of approximately 10 years. Note 10 - Comprehensive Income Effective January 1, 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income." Statement 130 establishes new rules for the reporting and display of comprehensive income and its components. The adoption of this Statement had no impact on the Company's net income or shareholders' equity. Statement 130 requires the Company's foreign currency translation adjustments, which prior to adoption were reported separately in shareholders' equity, to be included in other comprehensive income. Prior year financial statements have been reclassified to conform to the requirements of Statement 130. Total comprehensive income, which was comprised of net income and foreign currency translation adjustments, was approximately $56.3 and $47.3 million for the three months ended June 28, 1998 and June 29, 1997, respectively. Total comprehensive income for the six months ended June 28, 1998 and June 29, 1997 was $98.3 and $91.8 million, respectively. Note 11 - Pending Accounting Change - Accounting for Derivative Instruments and for Hedging Activities In June 1998, the Financial Accounting Standards Board issued Statement No. 133, "Accounting for Derivative Instruments and for Hedging Activities," which is required to be adopted by the Company in Fiscal Year 2000; earlier adoption is also permitted. The statement will require the Company to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value will either be offset against the change in fair value of hedged assets, liabilities or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value will be immediately recognized in earnings. The impact of adopting this statement is not expected to have a material impact on the Company's financial statements. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section should be read in conjunction with the Management's Discussion and Analysis of Financial Condition and Results of Operations section, included in the Company's annual report on Form 10-K for the year ended December 31, 1997. Results of Operations for the Three Months Ended June 28, 1998 Compared to the Three Months Ended June 29, 1997 For the quarter ended June 28, 1998, consolidated net sales totaled $517.2 million, a $73.1 million or 16.5% increase over the same period last year. Net income and diluted earnings per share for 1998 were $55.4 million and $.36 on 154.5 million shares outstanding versus $49.2 million and $.32 on 153.6 million shares outstanding in 1997, increases of 12.6% and 12.0%, respectively. All Harley-Davidson, Inc. sales are generated by the Motorcycles and Related Products ("Motorcycles") segment. Motorcycle Unit Shipments and Net Sales For the Three-Month Periods Ended June 28, 1998 and June 29, 1997 Incr 1998 1997 (Decr) % Harley-Davidson motorcycle units 37,753 33,965 3,788 11.2% Buell motorycle units 1,497 1,020 477 46.8 Total motorcyle units 39,250 34,985 4,265 12.2% Net sales (in millions): Harley-Davidson motorcycles $400.9 $351.3 $49.6 14.1% Buell motorcycles 13.4 9.6 3.8 40.1 Total motorcycles 414.3 360.9 53.4 14.8% Motorcycle Parts and Accessories 79.3 63.0 16.3 25.9 General Merchandise 22.5 19.4 3.1 16.1 Other 1.1 .8 .3 30.5 Total Motorcycles and Related Products $517.2 $444.1 $73.1 16.5% The Motorcycles segment reported record second quarter net sales due primarily to a 12.2% increase in motorcycle unit shipments in the second quarter of 1998 compared to the same period in 1997. The increase in Harley-Davidson motorcycle unit shipments was driven by higher production, despite one fewer production day in the second quarter of 1998. This was the result of a higher average daily production rate which was achieved in connection with the ongoing implementation of the Company's manufacturing strategy. During the second quarter of 1998, the Company produced approximately 37,700 Harley-Davidson motorcycles, an average of approximately 600 units per day compared to an average of 535 units per day in the same period last year. At the end of the second quarter the Company announced the introduction of its new big twin engine - the Twin Cam 88. This engine will be introduced on 1999 model year motorcycles and is expected to be included on approximately 45% of Harley-Davidson motorcycles.(1) Even with the complexities of introducing and manufacturing a completely new engine, the total year production target for Harley-Davidson motorcycles remains 148,000 units, and the third quarter production target is 37,000 units.(1) During the second quarter the Company completed its ramp-up of the new Sportster motorcycle manufacturing plant in Kansas City as well as the conversion of the Sportster capacity at York to production capacity for custom motorcycles. Parts and Accessories (P & A) sales of $79.3 million were up $16.3 million or 25.9% compared to the second quarter of 1997. General Merchandise sales, which includes clothing and collectibles, of $22.5 million were up $3.1 million or 16.1%, compared to the second quarter of 1997. P&A and General Merchandise sales grew faster than anticipated during the second quarter due in part to Harley-Davidson's 95th anniversary celebration in June. The Company does not anticipate P & A and General Merchandise revenue growth to continue at these rates.(1) The Company's earnings are affected by fluctuations in the value of the U.S. dollar against foreign currencies, as result of sales made in foreign markets. The Company uses forward foreign exchange contracts (primarily for European currencies) to hedge against the earnings effects of such fluctuations. In addition, the Company's exposure to the Japanese Yen is mitigated by the existence of a natural hedge, which is sustained through balancing Yen cash inflows from revenue, with Yen cash outflows for motorcycle component purchases and other operating expenses. The impact of such fluctuations has not had a material impact on the Company's financial performance for the three and six months ended June 28, 1998, when compared to the same periods in 1997. Gross Profit Gross profit increased $27.2 million, or 18.1%, compared to the second quarter of 1997 primarily due to an increase in motorcycle volume. The gross profit margin in the second quarter was 34.3% in 1998 compared to 33.8% in 1997. The increase in the gross profit percentage was primarily due to a favorable product mix (a greater mix of custom and touring motorcycles) which was temporarily higher than normal due to lower Sportster shipments, as the Company completed its transition of Sportster production from the York manufacturing plant to the new Kansas City plant. This increase in the gross profit margin was partially offset by start-up expenses related to the new Kansas City plant as well as higher depreciation related to the Company's significant investment in capacity expansion. Operating Expenses For the Three-Month Periods Ended June 28, 1998 and June 29, 1997 (Dollars in Millions) Incr 1998 1997 (Decr) % Motorcycles and Related Products $94.3 $77.9 $16.4 21.1% Corporate 2.4 2.0 0.4 20.0 Total operating expenses $96.7 $79.9 $16.8 21.0% Total operating expenses increased $16.8 million, or 21.0%, compared to the second quarter of 1997. The increase was largely the result of greater motorcycle volume, but was also impacted by costs associated with computer system modifications, related to the year 2000. In addition, the second quarter represents the first full quarter of Buell Manufacturing Company's operating expenses since it was acquired in February of 1998 (see Note 4 of the notes to condensed consolidated financial statements). Second quarter operating expenses were also negatively impacted by a $3.7 million non-recurring charge for the voluntary recall of ignition switches on all 1994 through 1998 FL touring model motorcycles. The Company estimates that approximately 63,000 motorcycles are subject to the recall. Operating income from financial services The operating income of the Financial Services (Eaglemark Financial Services) segment was $6.4 million and $3.4 million in 1998 and 1997, respectively. Eaglemark experienced growth in all of its core business lines, particularly in retail installment lending, as Eaglemark increased both its market share and its profitability in this business. This growth was partially offset by promotion expense for the new Harley-Davidson Chrome VISA Card. Other income (expense) Included in other income for the second quarter of 1997 is a one-time $1.6 million benefit related to the sale of the Monaco Coach Corporation preferred stock which was acquired from the sale of the Transportation Vehicles segment. Consolidated income taxes The Company's effective income tax rate was 36.5% and 37.0% for the second quarter of 1998 and 1997, respectively. Results of Operations for the Six Months Ended June 28, 1998 Compared to the Six Months Ended June 29, 1997 For the six month period ended June 28, 1998, the Company recorded net sales of $983.7 million, a $112.5 million or 12.9% increase over the same period last year. Net income and diluted earnings per share were $100.1 million and $.65 on 154.4 million shares outstanding versus $89.5 million and $.58 on 153.5 million shares, increases of 11.8% and 11.1%, respectively. Motorcycle Unit Shipments and Net Sales For the Six-Month Periods Ended June 28, 1998 and June 29, 1997 Incr 1998 1997 (Decr) % Harley-Davidson motorcycle units 72,235 66,825 5,410 8.1% Buell motorycle units 2,847 2,107 740 35.1 Total motorcyle units 75,082 68,932 6,150 8.9% Net sales (in millions): Harley-Davidson motorcycles $762.2 $688.8 $73.4 10.7% Buell motorcycles 25.7 19.1 6.6 34.0 Total motorcycles 787.9 707.9 80.0 11.3% Motorcycle Parts and Accessories 142.6 117.5 25.1 21.4 General Merchandise 51.7 43.8 7.9 18.0 Other 1.5 2.0 (.5) (25.0) Total Motorcycles and Related Products $983.7 $871.2 $112.5 12.9% The 12.9% increase in revenue was primarily attributable to additional motorcycle unit shipments as demand for the Company's motorcycles continued to grow and capacity increased. The most recent information available (through June) indicates a U.S. heavyweight (651+cc) market share of 45.1% compared to 46.2% for the same period in 1997. This same market has grown at a 17.8% rate year-to-date, while retail registrations for the Company's motorcycles (Harley-Davidson and Buell motorcycles) increased 14.5%. The Company's growth was slightly out-paced by the market in the first six months of 1998 as a result of production capacity constraints. European data (through May) show the Company with a 5.8% share of the heavyweight (651+cc) market, down from 6.0% for the same period in 1997. The European market (651+cc) has grown at a 10.5% rate year-to-date, while retail registrations for the Company's motorcycles increased 5.6% compared to last year. The Company has focused, over the last three years, on upgrading the European infrastructure by developing a European management team, installing new information systems, improving distribution and implementing European focused marketing programs. Recently the Company has introduced two new models specifically targeted at the European market. Asia/Pacific (Japan and Australia) data (through May) show the Company with a 14.2% share of the heavyweight (651+cc) market, down from 18.6% for the same period in 1997. The Asia/Pacific market has grown at a 35.4% rate year-to-date, while retail registrations for the Company's motorcycles increased 3.3%. The large increase in the Asia/Pacific market is primarily due to a change in the licensing requirements in Japan which made it easier for an individual to obtain a heavyweight motorcycle license. The greatest increase has occurred in the performance segment of the market. Parts and Accessories (P & A) sales of $142.6 million were up $25.2 million or 21.4% compared to the first half of 1997. General Merchandise sales, which includes clothing and collectibles, of $51.7 million were up $7.9 million or 18.0%, compared to the first half of 1997. P&A and General Merchandise sales grew faster than anticipated during the first half of 1998. The Company does not anticipate P&A and General Merchandise revenue growth to continue at these rates.(1) Gross Profit Gross profit for the first six months of 1998 totaled $327.4 million, an increase of $38.9 million or 13.5% over the same period in 1997. The gross profit percentage was 33.3% in 1998 compared to 33.1% for the first six months of 1997. The increased gross profit percentage which resulted from favorable product mix (a greater mix of touring motorcycles) was partially offset by plant start-up and transition expenses combined with higher depreciation as a result of the significant investment in capacity expansion. The first half of 1998 included the start-up of the new manufacturing plant in Kansas City and the transition to the new powertrain plant in Milwaukee. Operating Expenses For the Six-Month Periods Ended June 28, 1998 and June 29, 1997 (Dollars in Millions) Incr 1998 1997 (Decr) % Motorcycles and Related Products $173.1 $153.1 $20.0 13.1% Corporate 5.2 4.6 0.6 13.0 Total operating expenses $178.3 $157.7 $20.6 13.1% Total operating expenses of $178.3 million for the first six months of 1998 increased $20.6 million or 13.1% compared to the first six months of 1997. The increase was primarily driven by additional motorcycle volume, but was also impacted by year 2000 computer expenses, Buell Manufacturing Company's operating expenses (which was acquired in February of 1998) and a $3.7 million non-recurring second quarter charge for the voluntary recall of ignition switches on all 1994 through 1998 FL touring model motorcycles. Operating income from financial services The operating income of the Financial Services segment was $8.9 million and $5.6 million in 1998 and 1997, respectively. Eaglemark experienced growth in all of its core business lines, particularly in retail installment lending, as Eaglemark increased both its market share and its profitability in this business. This growth was partially offset by promotion expense for the new Harley-Davidson Chrome VISA Card. Other income (expense) Included in other income in 1997 is a one-time $1.6 million benefit related to the sale of the Monaco Coach Corporation preferred stock which was acquired from the sale of the Transportation Vehicles segment. Capitalized interest The Company capitalized approximately $1.8 million of interest during the first six months of 1997 in connection with its manufacturing expansion initiatives. No interest was capitalized in 1998. Consolidated income taxes The Company's effective income tax rate was 36.5% and 37.0% in the first six months of 1998 and 1997, respectively. Environmental The Company's policy is to comply with all applicable environmental laws and regulations, and the Company has a compliance program in place to monitor, and report on, environmental issues. The Company has reached settlement agreements with its former parent (Minstar, successor to AMF Incorporated) and the U.S. Navy regarding groundwater remediation at the Company's manufacturing facility in York, Pennsylvania and currently estimates that it will incur approximately $6 million of net additional costs related to the remediation effort. The Company has established reserves for this amount. See Note 9 of the notes to condensed consolidated financial statements. Recurring costs associated with managing hazardous substances and pollution in on-going operations have not been material. The Company regularly invests in equipment to support and improve its various manufacturing processes. While the Company considers environmental matters in capital expenditure decisions, and while some capital expenditures also act to improve environmental compliance, only a small portion of the Company's annual capital expenditures relate to equipment which has the sole purpose of meeting environmental compliance obligations. The Company anticipates that capital expenditures for equipment used to limit hazardous substances/pollutants during 1998 will approximate $1 million. The Company does not expect that these expenditures related to environmental matters will have a material effect on future operating results or cash flows. Impact of Year 2000 In 1997, the Company completed an assessment of the computer system issues associated with the Year 2000 and began to modify or replace portions of its software so that its computer systems will function properly with respect to dates in the year 2000 and thereafter. The Company is also working with its significant suppliers and financial institutions to ensure that those parties have appropriate plans to remediate Year 2000 issues where their systems interface with the Company's systems or otherwise impact its operations. The Company is assessing the extent to which its operations are vulnerable should those organizations fail to properly remediate their computer systems. The Company's comprehensive Year 2000 initiative is being managed by a team of internal staff with the assistance of outside consultants. The team's activities are designed to ensure that there is no adverse effect on the Company's core business operations and that transactions with suppliers and financial institutions are fully supported. The Company is well under way with these efforts, which are scheduled to be completed by mid-1999.(1) While the Company believes its planning efforts are adequate to address its Year 2000 concerns, there can be no guarantee that the systems of other companies on which the Company's systems and operations rely will be converted on a timely basis and will not have a material adverse effect on the Company. The cost of the Year 2000 initiatives (which are expensed as incurred) is estimated to be approximately $11 million of which approximately $2.1 million has been incurred in the first half of 1998 and $4.3 million since the initiative began in 1997.(1) The costs of the project and the date on which the Company believes it will complete Year 2000 modifications are forward-looking statements and are based on management's best estimates, which were derived utilizing numerous assumptions of future events, including the continued availability of certain resources and other factors. However, there can be no guarantee that these estimates will be achieved, and actual results could differ materially from those anticipated. Specific factors that might cause such material differences include, but are not limited to, the availability and cost of personnel trained in this area, the ability to locate and correct all relevant computer codes, and similar uncertainties. Liquidity and Capital Resources as of June 28, 1998 The Company's main source of liquidity is cash from operating activities which consists of net income adjusted for non-cash operating activities and changes in other current assets and liabilities. The Company generated $166.7 million of cash from operating activities during the first six months of 1998 compared to $100.6 million in the same period in 1997. The increase over prior year is primarily due to increases in net income adjusted for depreciation and favorable changes in working capital. Net income adjusted for depreciation contributed $140.5 million in 1998 compared to $122.9 million in 1997. Net changes in other current assets and current liabilities, which was largely due to changes in accounts receivable, contributed $16.9 million in 1998 and used $27.1 million in the first half of 1997. In 1998, accounts receivable decreases contributed $11.5 million to cash provided by operating activities while accounts receivable increases used $57.4 million for the same period in 1997. Effective September 1, 1997 Eaglemark became responsible for all credit and collection activities for the Motorcycles segment's domestic accounts receivable, and as a result these receivables have been classified as finance receivables. The increase in domestic accounts receivables in 1998 (included in finance receivables) was $52.8 million and is a component of cash flows from investing activities on the statement of cash flows. Historically, worldwide accounts receivable are higher in June than in December as a result of motorcycle volume increases, the annual shutdown during the last week of December and heavy shipments in June reflecting the end of the model year. Capital expenditures amounted to $69.1 million and $76.3 million during the first six months of 1998 and 1997, respectively. For the past two years, the Company has been implementing a manufacturing strategy to, among other things, increase its motorcycle production capacity. The construction of a new manufacturing facility in Kansas City, Missouri, and the move into a new powertrain plant in Milwaukee were both completed in 1997. In addition, expansion in and near the Company's existing facilities was completed. In 1998 and beyond the Company will continue to invest capital as it ramps-up production at its new facilities and reconfigures its existing facilities to prepare for the planned increase in production.(1) Although the Company does not know the exact amount of capital expenditures it will incur, it estimates the capital expenditures in 1998 will be in the range of $180-$200 million and in 1999 will be in the range of $120-$140 million.(1) The Company plans to continue to increase its motorcycle production capacity to be able to sustain its annual double- digit unit production growth and is on pace to do so in 1998 with a Harley-Davidson motorcycle production target of 148,000 units.(1) The Company anticipates it will have the ability to fund all capital expenditures with internally generated funds and short-term financing.(1) The Company's ability to reach the 1998 quarterly and annual target production levels will depend upon, among other factors, the Company's ability to (i) continue to realize production efficiencies at its existing production facilities through implementation of innovative manufacturing techniques and other means, (ii) successfully implement production capacity increases in its new and existing facilities, and (iii) sell all of the motorcycles it has the capacity to produce. However, there is no assurance that the Company will continue to realize additional efficiencies. In addition, the Company could experience delays in making changes to existing facilities and the new manufacturing facilities as a result of risks normally associated with the operation of new and existing manufacturing facilities, including delays in the delivery of machinery and equipment or difficulties in making such machinery and equipment operational, work stoppages, difficulties with suppliers, natural causes or other factors. These risks, potential delays and uncertainties regarding the actual costs could also impact adversely the Company's capital expenditure estimates. The Company (excluding Eaglemark Financial Services, Inc.) currently has nominal levels of long-term debt and has lines of credit of approximately $38 million, of which approximately $37 million remained available at June 28, 1998. Eaglemark finances its business through an unsecured commercial paper program, revolving credit facilities, senior subordinated debt and asset- backed securitizations. Eaglemark issues short-term commercial paper with maximum issuance available of $500 million of which approximately $346 million was outstanding at June 28, 1998. Maturities of commercial paper issued can range from 1 to 270 days. Eaglemark has in place a $250 million 364-day revolving credit facility and a $250 million five-year revolving credit facility of which approximately $30 million was outstanding at June 28, 1998. The primary uses of the credit facilities are to provide liquidity to the unsecured commercial paper program and to fund normal business operations. Eaglemark has also issued $30 million of senior subordinated notes which expire in 2007. During the second quarter, Eaglemark securitized and sold approximately $160 million of its retail installment loans to investors with limited recourse, with servicing rights being retained by Eaglemark. The Company expects that the future growth of Eaglemark will be financed from internally generated funds, additional capital contributions from the Company, bank lines of credit, and continuation of its subordinated debt, commercial paper and securitization programs.(1) The Company has a support agreement with Eaglemark, whereby the Company agrees to provide Eaglemark with certain financial support payments if required. The payments may be provided at the Company's option either as a capital contribution or as a loan. The Company has authorization from its Board of Directors to repurchase up to 4,700,000 shares of the Company's outstanding common stock. In addition, the Company has continuing authorization from its Board of Directors to repurchase shares of the Company's outstanding common stock under which the cumulative number of shares repurchased, at the time of any repurchase, shall not exceed the sum of (i) the number of shares issued in connection with the exercise of stock options occurring on or after January 1, 1998 plus (ii) one percent of the issued and outstanding common stock of the Company on January 1 of the current year, adjusted for any stock split. During the first quarter of 1998, the Company repurchased 600,000 shares of its common stock under the latter authorization. The Company's Board of Directors declared two cash dividends during the first six months of 1998 including, most recently, a $.04 per share cash dividend declared on May 4, 1998 payable June 26, 1998 to shareholders of record June 16. Item 3. Quantitative and Qualitative Disclosures about Market Risk Refer to the Company's annual report on Form 10-K for the year ended December 31, 1997 for a complete discussion of the Company's market risk. There have been no material changes to the market risk information included in the Company's 1997 annual report on Form 10-K. (1) Note regarding forward-looking statements Certain matters discussed in this Quarterly Report on Form 10-Q are "forward-looking statements" intended to qualify for the safe harbors 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" or "estimates" or words of similar meaning. Similarly, statements that describe the Company's future plans, objectives or goals are also forward-looking statements. Such forward-looking statements are subject to certain risks and uncertainties which are described in close proximity to such statements and could cause actual results to differ materially from those anticipated as of the date of this report. 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 herein are only made as of the date of this report, and the Company undertakes no obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances. Part II - OTHER INFORMATION HARLEY-DAVIDSON, INC. FORM 10-Q June 28, 1998 Item 1. Legal Proceedings The Company is involved with government agencies in various environmental matters, including a matter involving soil and groundwater contamination at its York, Pennsylvania facility. See footnote 9 to the accompanying condensed consolidated financial statements.. Item 4. Submission of Items to a Vote of Security Holders (a) The Company's Annual Meeting of Shareholders was held on May 2, 1998. (b) At the Company's Annual Meeting of Shareholders, the following directors were elected for terms expiring in 2001 by the vote indicated: Shares Shares Voted Withholding in Favor of Authority Barry K. Allen 126,576,751 3,237,306 Richard I. Beattie 125,137,750 4,676,307 Richard G. LeFauve 126,583,020 3,231,037 (c) Matters other than election of directors, brought for vote at the Company's Annual Meeting of Shareholders, passed by the vote indicated. Shares Voted For Against Abstained Ratification of Ernst & Young LLP as the Company's independent auditors 129,448,288 158,448 207,321 There were no broker non-votes with respect to the foregoing matters. Item 5. Other Information Proposals of shareholders pursuant to Rule 14a-8 under the Securities Exchange Act of 1934, as amended ("Rule 14a-8"), that are intended to be presented at the 1999 Annual Meeting of Shareholders must be received by the Company no later than November 25, 1998 to be included in the Company's proxy materials for that meeting. Further, A shareholder who otherwise intends to present business at the 1999 annual meeting must comply with the requirements set forth in the Company's By-laws. Among other things, to bring business before an annual meeting, a shareholder must give written notice thereof, complying with the By-laws, to the Secretary of the Company not less than 60 days in advance of the date in the current fiscal year of the Company corresponding to the date the Company released its proxy statement to shareholders in connection with the annual meeting for the immediately preceding year. If the Company does not receive notice of a shareholder proposal submitted otherwise than pursuant to Rule 14a-8 prior to January 24, 1999, then the notice will be considered untimely and the Company is not required to present such proposal at the 1999 annual meeting. If the Board of Directors chooses to present such proposal at the 1999 annual meeting, then the persons named in the proxies solicited by the Board of Directors for the 1999 annual meeting may exercise discretionary voting power with respect to such proposal. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 27 Financial Data Schedule for June 28, 1998 (b) Reports on Form 8-K None Signatures Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. HARLEY-DAVIDSON, INC. Date: 8/10/98 by: /s/ James L. Ziemer James L. Ziemer Vice President and Chief Financial Officer (Principal Financial Officer) 8/10/98 by: /s/ James M. Brostowitz James M. Brostowitz Vice President, Controller (Principal Accounting Officer) and Treasurer Exhibit Index Exhibit No. Description 27 Financial Data Schedule for June 28, 1998 EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF HARLEY-DAVIDSON, INC. AS OF AND FOR THE SIX MONTHS ENDED JUNE 28, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 6-MOS DEC-31-1998 JAN-01-1998 JUN-28-1998 154,475 0 92,923 1,587 131,525 724,128 966,295 404,329 1,746,001 420,405 0 0 0 1,293 910,831 1,746,001 983,691 983,691 656,288 656,288 1,796 0 (1,386) 157,636 57,537 100,099 0 0 0 100,099 .66 .65
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