10-Q 1 irm323.txt 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 March 30, 2003 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) (414) 342-4680 -------------------------------------------------- (Registrant's telephone number, including area code) 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 by check mark whether the registrant is an accelerated filer (as defined by Rule 12b-2 of the Exchange Act). 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 April 30, 2003: 302,341,920 shares 1 HARLEY-DAVIDSON, INC. Form 10-Q Index For the Quarter Ended March 30, 2003 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 6-10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11-18 Item 3. Quantitative and Qualitative Disclosures about Market Risk 19 Item 4. Controls and Procedures 19 Note regarding forward looking statements 19 Part II. Other Information Item 1. Legal Proceedings 20 Item 6. Exhibits and Reports on Form 8-K 21 Signatures 22 Certifications 23 2 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 March 30, March 31, 2003 2002 ---- ---- Net revenue $1,113,691 $927,845 Cost of goods sold 710,659 612,568 ---------- -------- Gross profit 403,032 315,277 Financial services income 70,769 41,691 Financial services expense 27,412 29,540 ---------- -------- Operating income from financial services 43,357 12,151 Operating expenses 167,880 145,705 ---------- -------- Income from operations 278,509 181,723 Interest income, net 5,957 2,246 Other income (expense), net (216) (765) ---------- -------- Income before provision for income taxes 284,250 183,204 Provision for income taxes 98,066 63,206 ---------- -------- Net income $ 186,184 $119,998 ========== ======== Earnings per common share: Basic $ .62 $ .40 ========== ======== Diluted $ .61 $ .39 ========== ======== Weighted-average common shares outstanding: Basic 302,364 302,475 ========== ======== Diluted 304,560 305,618 ========== ======== Cash dividends per share $ .035 $ .030 ========== ======== See accompanying notes. 3
Harley-Davidson, Inc. Condensed Consolidated Balance Sheets (In thousands) (Unaudited) (Unaudited) March 30, December 31, March 31, 2003 2002 2002 ---- ---- ---- ASSETS ------ Current assets: Cash and cash equivalents $ 395,943 $ 280,928 $ 378,535 Marketable securities 494,742 514,800 201,193 Accounts receivable, net 117,907 108,694 152,083 Current portion of finance receivables, net 1,050,330 855,771 738,396 Inventories (Note 2) 214,419 218,156 183,632 Other current assets 75,851 88,237 78,475 ----------- ---------- ---------- Total current assets 2,349,192 2,066,586 1,732,314 Finance receivables, net 451,973 589,809 582,366 Property, plant and equipment, net 1,028,281 1,032,596 902,208 Goodwill, net 50,461 49,930 49,380 Other assets 119,867 122,296 133,036 ----------- ---------- ---------- $3,999,774 $3,861,217 $3,399,304 =========== ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY -------------------- Current liabilities: Accounts payable $ 252,575 $ 226,977 $ 218,229 Accrued expenses and other liabilities 401,768 380,496 313,954 Current portion of finance debt 300,060 382,579 366,286 ----------- ---------- ---------- Total current liabilities 954,403 990,052 898,469 Finance debt 380,000 380,000 380,000 Other long-term liabilities 157,194 152,831 179,068 Postretirement health care benefits 110,761 105,419 94,744 Contingencies (Note 8) Total shareholders' equity 2,397,416 2,232,915 1,847,023 ----------- ---------- ---------- $ 3,999,774 $3,861,217 $3,399,304 =========== ========== ========== See accompanying notes.
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Harley-Davidson, Inc. Condensed Consolidated Statements of Cash Flows (Unaudited) (In thousands) Three Months Ended March 30, March 31, 2003 2002 ---- ---- Cash flows from operating activities: Net income $ 186,184 $ 119,998 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 45,877 42,601 Tax benefit of stock options 1,755 4,616 Provision for finance credit losses 532 4,229 Long-term employee benefits 17,701 6,774 Other, net 223 (2,610) Net changes in current assets and current liabilities 59,239 (6,723) ----------- ----------- Net cash provided by operating activities 311,511 168,885 Cash flows from investing activities: Capital expenditures (41,796) (53,358) Finance receivables acquired or originated (1,541,386) (1,239,064) Finance receivables collected 939,704 860,172 Finance receivables sold 550,000 93,324 Purchase of marketable securities (436,925) (256,712) Sales and redemptions of marketable securities 456,526 251,530 Other, net (1,759) 722 ----------- ----------- Net cash used in investing activities (75,636) (343,386) Cash flows from financing activities: Net (decrease) increase in finance debt (91,193) 149,235 Dividends paid (10,610) (9,238) Purchase of common stock for treasury (20,164) (29,620) Issuance of common stock under employee stock plans 1,107 3,221 ----------- ----------- Net cash (used in) provided by financing activities (120,860) 113,598 Net increase (decrease) in cash and cash equivalents 115,015 (60,903) Cash and cash equivalents: At beginning of period 280,928 439,438 ----------- ----------- At end of period $ 395,943 $ 378,535 =========== =========== See accompanying notes.
5 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 accounting principles generally accepted in the United States 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 March 30, 2003 and March 31, 2002 and the results of operations and cash flows for the three-month periods then ended. 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, 2002. The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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 - Inventories -------------------- The Company costs 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):
March 30, Dec. 31 March 31, 2003 2002 2002 ---- ---- ---- Components at the lower of FIFO cost or market: Raw material & work-in-process $ 78,605 $ 82,209 $ 74,702 Finished goods 61,985 57,076 45,602 Parts and accessories and general merchandise 91,096 95,888 80,691 --------- --------- --------- 231,686 235,173 200,995 Excess of FIFO over LIFO 17,267 17,017 17,363 --------- --------- --------- $ 214,419 $ 218,156 $ 183,632 ========= ========= =========
6 Note 3 - Product Warranty ------------------------- The Company maintains reserves for future warranty claims based on an estimated cost per unit sold, which is based on historical Company claim information. The Company generally provides a standard one-year (except in Europe) limited warranty on all new motorcycles sold. Beginning in 2002, the Company's warranty coverage was extended to two years for new motorcycles sold in Europe to comply with European regulations. The Company's warranty coverage includes parts and labor and begins when the new motorcycle is sold to the retail customer. Changes in the Company's warranty liability were as follows (in thousands):
Three Months Ended ------------------ March 30, March 31, 2003 2002 ---- ---- Balance, beginning of period $28,890 $21,608 Warranties issued during the period 11,283 7,932 Settlements made during the period (6,400) (5,755) Changes to the liability for pre-existing warranties during the period 529 - ------- ------- Balance, end of period $34,302 $23,785 ======= =======
Note 4 - Stock Options ---------------------- The Company has a Stock Option Plan under which the Board of Directors may grant to employees nonqualified stock options with or without appreciation rights. The company accounts for those plans under the recognition and measurement principles of APB Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. No stock-based employee compensation cost is reflected in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. For purposes of pro forma disclosures under SFAS No. 123, "Accounting for Stock based Compensation," the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information follows (in thousands, except per share amounts):
Three months ended March 30, March 31, 2003 2002 ---- ---- Net income, as reported $186,184 $119,998 Deduct: Total stock-based employee compensation expense determined under fair value based method for all option awards, net of related tax effects (3,275) (2,854) -------- -------- Pro forma net income $182,909 $117,144 ======== ======== Earnings per share: Basic as reported $ .62 $ .40 ======== ======== Basic pro forma $ .60 $ .39 ======== ======== Diluted as reported $ .61 $ .39 ======== ======== Diluted pro forma $ .60 $ .38 ======== ========
7 Note 5 - Business Segments -------------------------- The Company operates in two business segments: Motorcycles and Related Products (Motorcycles) and Financial Services (Financial Services) which consists of the Company's subsidiary, Harley-Davidson Financial Services, Inc. (HDFS). 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. Selected segment information is set forth below (in thousands):
Three Months Ended ------------------ March 30, March 31, 2003 2002 ---- ---- Net revenue $1,113,691 $927,845 Gross profit 403,032 315,277 Operating expenses 163,407 142,150 ---------- -------- Operating income from Motorcycles and Related Products 239,625 173,127 Financial Services income 70,769 41,691 Financial Services expense 27,412 29,540 ---------- -------- Operating income from Financial Services 43,357 12,151 Corporate expenses 4,473 3,555 ---------- -------- Income from operations $ 278,509 $181,723 ========== ========
Note 6 - Earnings Per Share --------------------------- The following table sets forth the computation for basic and diluted earnings per common share (in thousands, except per share amounts).
Three months ended ------------------ March 30, March 31, 2003 2002 ---- ---- Numerator --------- Net income used in computing basic And diluted earnings per common share $186,184 $119,998 ======== ======== Denominator ----------- Denominator for basic earnings per common share- Weighted-average common shares 302,364 302,475 Effect of dilutive securities - employee Stock options and nonvested stock 2,196 3,143 -------- -------- Denominator for diluted earnings per common share - Adjusted weighted-average common shares outstanding 304,560 305,618 ======== ======== Basic earnings per common share $.62 $.40 ======== ======== Diluted earnings per common share $.61 $.39 ======== ========
8 Note 7 -Comprehensive Income ---------------------------- Total comprehensive income was $192.4 and $121.7 million for the three-month periods ended March 30, 2003 and March 31, 2002, respectively. Total comprehensive income is comprised of net income, foreign currency translation adjustments and changes in net unrealized gains and losses related to: investment in retained securitization interests, derivative financial instruments designated as cash flow hedges and marketable securities. The following is a reconciliation of net income to comprehensive income (in thousands): Three months ended March 30, March 31 2003 2002 ---- ---- Net income, reported $186,184 $119,998 Foreign currency translation adjustments 1,300 (1,443) Changes in net unrealized gains and losses, net of tax: Retained securitization interests 3,579 2,603 Derivative financial instruments 1,577 547 Marketable securities (283) ------------------------ Comprehensive income $192,357 $121,705 ======================== Note 8 -Contingencies --------------------- The Company is subject to lawsuits and other claims related to environmental, product and other matters. In determining required reserves 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 probable loss. The required reserves are monitored on an on-going basis and are updated based on new developments or new information in each matter. In January 2001, the Company, on its own initiative, notified each owner of 1999 and early-2000 model year Harley-Davidson(R) motorcycles equipped with Twin Cam 88 and Twin Cam 88B engines that the Company was extending the warranty for a rear cam bearing to 5 years or 50,000 miles. Subsequently, on June 28, 2001, a putative nationwide class action was filed against the Company in state court in Milwaukee County, Wisconsin, which was amended by a complaint filed September 28, 2001. The complaint alleged that this cam bearing is defective and asserted various legal theories. The complaint sought unspecified compensatory and punitive damages for affected owners, an order compelling the Company to repair the engines, and other relief. On February 27, 2002 the Company's motion to dismiss the amended complaint was granted by the Court and the amended complaint was dismissed in its entirety. An appeal was filed with the Wisconsin Court of Appeals. On April 12, 2002, the same attorneys filed a second putative nationwide class action against the Company in state court in Milwaukee County, Wisconsin relating to this cam bearing issue and asserting different legal theories than in the first action. The complaint sought unspecified compensatory damages, an order compelling the Company to repair the engines and other relief. On September 23, 2002, the Company's motion to dismiss was granted by the Court, the complaint was dismissed in its entirety, and no appeal was taken. On January 14, 2003, the Wisconsin Court of Appeals reversed the trial court's February 27, 2002 dismissal of the complaint in the first action and the Company has petitioned the Wisconsin Supreme Court to consider confirming the earlier dismissal. The Company believes that this reversal is in error, and the Company intends to continue to vigorously defend this matter. The Company believes that the 5 year/50,000 mile warranty extension it announced in January 2001 adequately addresses the condition for affected owners. 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 York facility was formerly used by the U.S. Navy and AMF prior to the purchase of the York facility by the Company from AMF in 1981. Although the Company is not certain as to the full extent of the environmental contamination at the York facility, it has been working with the Pennsylvania Department of Environmental Protection since 1986 in undertaking environmental investigation and remediation activities, including an on-going site-wide investigation/feasibility study. In January 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 environmental investigation and remediation activities at the York facility (Response Costs). The trust administers the payment of the Response Costs at the York facility as covered by the Agreement. 9 In February 2002, the Company was advised by the U.S. Environmental Protection Agency (EPA) that it considers some of the Company's remediation activities at the York facility to be subject to the EPA's corrective action program and offered the Company the option of addressing corrective action under a facility lead agreement. The objectives and procedures for facility lead corrective action are consistent with the investigation and remediation already being conducted under the Agreement with the Navy, and the Company agreed to participate in EPA's corrective action program under a facility lead agreement. Although substantial uncertainty exists concerning the nature and scope of the environmental remediation that will ultimately be required at the York facility, the Company estimates that its share of the future Response Costs at the York facility will be approximately $8.2 million. The Company has established reserves for this amount which are included in Accrued expenses and other liabilities in the consolidated balance sheets. The Company's estimate of future Response Costs it will incur is based on reports of independent 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 several years ending in 2010. 10 Item 2. Management's Discussion and Analysis of Financial Condition and ------------------------------------------------------------------------ Results of Operations --------------------- Harley-Davidson, Inc. is the parent company for the group of companies doing business as Harley-Davidson Motor Company, Buell Motorcycle Company and Harley-Davidson Financial Services. Harley-Davidson Motor Company produces heavyweight motorcycles and offers a complete line of motorcycle parts, accessories, apparel and general merchandise. Harley-Davidson Motor Company manufacturers five families of motorcycles: Sportster(R), Dyna Glide, Softail(R), Touring and VRSC. Buell Motorcycle Company produces three models of sport motorcycles, the Lightning(R) XB9S and the Firebolt(TM) XB9R, and the single-cylinder Buell(R) Blast(R). Buell also offers a line of motorcycle parts, accessories, apparel and general merchandise. Harley-Davidson Financial Services provides wholesale and retail financing and insurance programs primarily to Harley-Davidson/Buell dealers and customers. Results of Operations for the Three Months Ended March 30, 2003 --------------------------------------------------------------- Compared to the Three Months Ended March 31, 2002 ------------------------------------------------- For the first quarter ended March 30, 2003, consolidated net revenue totaled $1.1 billion, a $185.8 million or 20.0% increase over the same period last year. Net income and diluted earnings per share for the first quarter of 2003 were $186.2 million and $.61, respectively, on 304.6 million weighted average shares outstanding. This compares to net income and diluted earnings per share for the first quarter of 2002 of $120.0 million and $.39, respectively, on 305.6 million weighted average shares outstanding. In the first quarter of 2003 net income and diluted earnings per share were higher than in the first quarter of 2002 by 55.2% and 56.4%, respectively. Motorcycle Unit Shipments For the Three Month Periods Ended March 30, 2003 and March 31, 2002 % 2003 2002 Increase Change ---- ---- -------- ------ Touring motorcycle units 18,488 17,318 1,170 6.8% Custom motorcycle units* 34,313 31,863 2,450 7.7 VRSC motorcycle units 4,659 3,160 1,499 47.4 Sportster motorcycle units 13,148 12,328 820 6.7 ------ ------ ----- Harley-Davidson motorcycle units 70,608 64,669 5,939 9.2 Buell motorcycle units 2,941 1,330 1,611 121.1 ------ ------ ----- Total motorcycle units 73,549 65,999 7,550 11.4% ====== ====== ===== *Custom motorcycle units, as used in this table, includes Softail, Dyna Glide and other custom models. 11 Net Revenue For the Three Month Periods Ended March 30, 2003 and March 31, 2002 (in Millions) % 2003 2002 Increase Change ---- ---- -------- ------ Harley-Davidson(R)motorcycles $ 876.5 $747.9 $128.6 17.2% Buell(R)motorcycles 20.5 6.3 14.2 224.9 -------- ------ ------ Total motorcycles 897.0 754.2 142.8 18.9 Parts & Accessories 159.8 131.1 28.7 21.9 General Merchandise 56.5 42.3 14.2 33.6 Other .4 .2 .2 100.0 -------- ------ ------ Net revenue $1,113.7 $927.8 $185.9 20.0% ======== ====== ====== The 2003 first quarter increase in net revenue was led by a $128.6 million, or 17.2%, increase in Harley-Davidson motorcycles net revenue, driven by a 9.2% increase in Harley-Davidson motorcycle unit shipments. Harley-Davidson motorcycle revenue also benefited from wholesale price increases, product mix and foreign currency exchange rates during the first quarter of 2003. During the first quarter of 2003, the Company increased its Harley-Davidson motorcycle unit shipments to 70,608 units, 5,939 units higher than the same period last year. These results were driven by the Company's ongoing success with its manufacturing strategy and its continued confidence in retail demand. Based on the results achieved in the first quarter, the Company has increased its 2003 annual production target to 290,000 Harley-Davidson units and set a second quarter production target of 75,400 Harley-Davdison units.(1) Harley-Davidson retail motorcycle sales for the first quarter of 2003 were down 3.2% in the U.S., but up 15.7% in Europe and up 12.9% in Japan, when compared to the same period last year. The Company believes that many U.S. customers have delayed purchasing their motorcycles as a result of the long winter experienced by much of the Country and that this delay has had an unfavorable impact on US retail sales through March 2003. In addition, other factors used by the Company to track Harley-Davidson motorcycle demand, including dealer confidence, remain strong. (Retail sales information provided by: United States -Motorcycle Industry Council; Europe - Company reports and Giral S.A.; Japan - Company reports and Industry Sources.) In the first quarter of 2003 Buell motorcycle net revenue was up $14.2 million compared to the same period last year, on 1,611 additional unit shipments. The significant increase in Buell unit shipments during the first quarter of 2003 was due in part to lower than normal unit shipments during the first quarter of 2002. During the first quarter of 2002 the Company discontinued its production of Buell V-Twin models to make capacity available for the launch of its new XB family of motorcycles. Buell shipments in the first quarter of 2003 consisted of 2,356 XB models and 585 Blast(R) models. The Company expects to maintain its total calendar year 2003 Buell production target of 12,500 units.(1) During the first quarter of 2003 net revenue from Parts and Accessories (P&A) totaled $159.8 million, a 21.9% increase over the first quarter of 2002. Total P&A revenue in the first quarter of 2003 included $13.9 million from sales of 100th Anniversary P&A products. The Company expects shipments of 100th Anniversary P&A products to continue to benefit P&A performance through the second quarter of 2003.(1) During the third quarter of 2003 and for the longer-term, the Company expects that P&A revenue will grow at a rate that is slightly higher than the motorcycle unit growth rate.(1) 12 General Merchandise revenue during the first quarter of 2003 was $56.5 million, up 33.6% over the same period last year. Revenue from 100th Anniversary General Merchandise products accounted for $8.3 million of total General Merchandise revenue during the first quarter of 2003. Shipments of 100th Anniversary General Merchandise products are essentially complete and, as a result, the Company expects General Merchandise revenue to be lower for the remaining three quarters of 2003 when compared with the strong performance during the last 9 months of 2002.(1) The Company continues to expect that the longer-term growth rate for General Merchandise will be lower than the motorcycle unit growth rate.(1) Gross Profit Gross profit in the first quarter of 2003 of $403.0 million was $87.8 million, or 27.8%, higher than gross profit in the same quarter last year. The increase in gross profit is primarily related to the increase in net revenue. The gross margin was 36.2% in the first quarter of 2003 compared to 34.0% in the first quarter of 2002. The increase in gross margin in the first quarter of 2003 was driven by wholesale price increases, favorable motorcycle product mix and favorable foreign currency exchange rates. Wholesale price increases for the 100th Anniversary 2003 models provided for higher average selling prices and higher margins on units sold during the first quarter of 2003. Motorcycle product mix was favorable in the first quarter of 2003 with a higher percentage of shipments consisting of more profitable motorcycle models within the Company's motorcycle families. Finally, foreign currency exchange rates had a favorable effect on gross margins when compared to the first quarter of 2002.
Financial Services For the Three Month Periods Ended March 30, 2003 and March 31, 2002 (Dollars in Millions) Increase % 2003 2002 (Decrease) Change ---- ---- ---------- ------ Interest income $22.7 $20.5 $ 2.2 11.0% Gain on current year securitizations 26.4 5.0 21.4 426.0 Servicing fee income 5.3 3.8 1.5 37.9 Insurance commissions 9.6 7.3 2.3 31.4 Other income 6.8 5.1 1.7 33.2 ----- ----- ------ Financial services income 70.8 41.7 29.1 69.7 Interest expense 4.6 3.8 0.8 20.2 Provision for credit losses 0.5 4.2 (3.7) (87.4) Operating expenses 22.3 21.5 0.8 3.7 ----- ----- ------ Financial services expense 27.4 29.5 (2.1) (7.2) ----- ----- ------ Operating income from financial services $43.4 $12.2 $ 31.2 256.8% ===== ===== ======
In the first quarter of 2003, financial services income was $70.8 million, an increase of $29.1 million over the same period in 2002. Operating income from financial services was $43.4 million, an increase of $31.2 million over the first quarter of 2002. The increase in operating income during the first quarter of 2003 was primarily driven by higher securitization gains when compared to the same period last year. 13 During the first quarter of 2003, HDFS sold $550.0 million of retail installment loans resulting in a gain of $26.4 million. HDFS realized a larger than expected gain on this sale due to a favorable interest rate environment and a larger transaction size. This transaction is part of the Company's plan to complete four securitization transactions during 2003 in order to better match funding with loan originations.(1) During the first quarter of 2002 HDFS sold approximately $93.3 million of retail installment loans resulting in a gain of $5.0 million. The 2002 sale represented the remaining portion of an agreement entered into during the fourth quarter of 2001 to securitize and sell $315.0 million of retail installment loans. The provision for finance credit losses was lower in the first quarter of 2003 than the first quarter of 2002 due to the strong credit performance of finance receivables. Changes in HDFS' allowance for finance credit losses during the three-month periods ended March 30, 2003 and March 31, 2002 were as follows (in millions): 2003 2002 ---- ---- Balance, beginning of period $31.0 $28.7 Provision for finance credit losses 0.5 4.2 Charge-offs (0.5) (0.6) ----- ----- Balance, end of period $31.0 $32.3 ===== ===== Based on anticipated interest rates and the competitive financial services environment, the Company expects HDFS' full year operating income to be approximately 25% higher than in 2002.(1) Over the longer term, the Company expects the HDFS growth rate to be slightly higher than the Company's Harley-Davidson motorcycle unit growth rate.(1) Operating Expenses For the Three Month Periods Ended March 30, 2003 and March 31, 2002 (Dollars in Millions) % 2003 2002 Increase Change ---- ---- -------- ------ Motorcycles and Related Products $163.4 $142.2 $21.2 15.0% Corporate 4.5 3.5 1.0 25.8 ------ ------ ----- Total operating expenses $167.9 $145.7 $22.2 15.2% ====== ====== ===== Total operating expenses during the first quarter of 2003 increased $22.2 million or 15.2% compared to the same period last year. Operating expenses as a percent of net revenue were 15.1% and 15.7% for first quarters of 2003 and 2002, respectively. The increase in operating expenses, which include selling, administrative and engineering expenses, was driven primarily by the Company's ongoing investment in various initiatives designed to support its current and future growth objectives. In addition, during the first quarter of 2003, operating expenses were higher due to the Company's 100th Anniversary celebration, various marketing programs and warranty costs. Interest income, net Interest income, net in the first quarter of 2003 was $6.0 million compared to $2.2 million in the same period last year. The increase in interest income, net resulted from higher average balances of cash and cash equivalents during the first quarter of 2003 when compared to the same period in 2002. In connection with the Company's capacity expansion efforts, $1.1 million of interest cost was capitalized during the first quarter of 2003 compared to $.3 million during the first quarter of 2002. 14 Consolidated income taxes The Company's effective income tax rate was 34.5% during the first quarters of 2003 and 2002, respectively. The Company expects that 34.5% will continue to be the effective tax rate through the remainder of 2003 (1). Other Matters ------------- The Company is subject to lawsuits and other claims related to environmental, product and other matters. In determining required reserves 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 probable loss. The required reserves are monitored on an on-going basis and are updated based on new developments or new information in each matter. In January 2001, the Company, on its own initiative, notified each owner of 1999 and early-2000 model year Harley-Davidson(R) motorcycles equipped with Twin Cam 88 and Twin Cam 88B engines that the Company was extending the warranty for a rear cam bearing to 5 years or 50,000 miles. Subsequently, on June 28, 2001, a putative nationwide class action was filed against the Company in state court in Milwaukee County, Wisconsin, which was amended by a complaint filed September 28, 2001. The legal proceedings are discussed in detail in Note 8 to the condensed consolidated financial statements. Harley-Davidson believes that the 5 year/50,000 mile warranty extension it announced in January 2001 adequately addresses the condition for affected owners. The Company intends to continue to vigorously defend this matter. 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. In 1995, the Company entered into an agreement with the U.S. Navy regarding soil and groundwater remediation at the Company's manufacturing facility in York, Pennsylvania and is conducting investigation and remediation activities at the York facility. The York facility was formerly used by the Navy. The agreement with the Navy provides for the Navy and the Company to contribute to a trust equal to 53% and 47%, respectively, of future costs associated with environmental investigation and remediation activities at the York facility (Response Costs). In February 2002, the Company was advised by the U.S. Environmental Protection Agency (EPA) that it considers some of the Company's remediation activities at the York facility to be subject to the EPA's corrective action programs and offered the Company the option of addressing corrective action under a facility lead agreement. The Company currently estimates that its share of future Response Costs at the York facility will be $8.2 million related to all remediation efforts at the York facility.(1) The Company has established reserves for this amount. The Company's estimate of future Response Costs it will incur is based on reports of independent 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 several years, ending in 2010. See Note 8 to the condensed consolidated financial statements for additional information. Recurring costs associated with managing hazardous substances and pollution as part of 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 that has the sole purpose of meeting environmental compliance obligations. 15 Liquidity and Capital Resources ------------------------------- The Company's main source of liquidity is cash from operating activities which consists of net income adjusted for non-cash operating activities, pension plan contributions and changes in other current assets and liabilities including accounts receivable, inventory, prepaid expenses and accounts payable/accrued expenses. The Company generated $311.5 million of cash from operating activities during the first quarter of 2003 compared to $168.9 million in the first quarter of 2002. The largest component of cash from operating activities is net income, which was approximately $186.2 million in 2003 compared to $120.0 million in 2002. Cash provided by operating activities is also impacted by changes in other current assets and liabilities. Changes in these balances increased/(decreased) operating cash flows by approximately $59.2 million and $(6.7) million during the first quarters of 2003 and 2002, respectively. First quarter changes in working capital during 2003 and 2002 consisted of the following (in millions): Three months ended March 30, March 31, 2003 2002 ---- ---- Working capital item -------------------- Accounts receivable, net $(9.2) $(33.2) Inventories 3.7 (2.5) Other current assets 12.4 (4.1) Accounts payable and accrued expenses 52.3 33.1 ----- ------ Total $59.2 $ (6.7) ===== ====== The 2003 first quarter change in accounts receivable of $9.2 million was driven by higher accounts receivable balances related to the Company's international markets. The increase in accounts receivable during the first quarter of 2003 is significantly lower than it was during the same period last year as a result of HDFS' new operations in Europe. Prior to August 2002, HDFS offered wholesale financing to the Company's European motorcycle dealers through a joint venture with Transamerica Distribution Finance. In August 2002, HDFS terminated the joint venture relationship and began directly servicing the wholesale financing needs of many of the Company's European dealers. In connection with this change, HDFS purchased approximately $38.8 million of European accounts receivable from the Motorcycles segment in the third quarter of 2002 and began originating European receivables on an on-going basis. Accordingly, a portion of European accounts receivable are classified as finance receivables on the Company's consolidated balance sheet. Consolidated inventories decreased $3.7 million during the first quarter of 2003. This net decrease includes a $4.9 million increase in finished goods motorcycle inventory offset by decreases in the Company's other inventory categories (see Note 2 to the condensed consolidated financial statements). Finished goods motorcycle inventory included a higher level of goods in-transit due to the timing of inventory transfers from the Company's U.S. manufacturing facilities to its international subsidiaries. In addition, during the third quarter of 2002, the Company initiated a program in the UK to provide its dealers with a wider selection of product that can be quickly accessed. This program has resulted in a moderate increase of finished goods motorcycle inventory. Accounts payable and accrued expenses increased $52.3 million in the first quarter of 2003. The increase relates primarily to an increase in operations and higher accrued income taxes during the first quarter of 2003. 16 Capital expenditures were $41.8 million and $53.4 million during the first quarters of 2003 and 2002, respectively. During the first quarter of 2003, the Company continued its capacity expansion efforts at two of the Company's existing facilities. These efforts include a 350,000 square foot expansion at the Company's York, Pennsylvania assembly facility and a 165,000 square foot addition to the Company's Product Development Center in Wauwatosa, Wisconsin. The Company expects to begin motorcycle assembly operations at the new plant in York during the third quarter of 2003.(1) The Company estimates that total capital expenditures required in 2003 will be in the range of $270 to $300 million.(1) The Company anticipates it will have the ability to fund all capital expenditures in 2003 with internally generated funds.(1) HDFS is financed by operating cash flow, asset-backed securitizations, the issuance of commercial paper, borrowings under revolving credit facilities, senior subordinated debt and borrowings from the Company. During the first quarter of 2003, HDFS sold $550.0 million of retail motorcycle installment loans through securitization transactions. As of March 30, 2003 and March 31, 2002, HDFS' outstanding debt consisted of the following (in thousands): March 30, March 31, 2003 2002 ---- ---- Commercial paper $492,909 $651,557 Domestic revolving credit facilities 76,019 64,729 European revolving credit facility 81,132 - Senior subordinated debt 30,000 30,000 -------- -------- Total finance debt $680,060 $746,286 ======== ======== Inter-company borrowings from the Company $100,000 $ 25,000 Subject to limitations, HDFS may issue up to $750 million of short-term commercial paper with maturities up to 270 days. Outstanding commercial paper may not exceed the unused portion of the Domestic Credit Facilities noted below. As a result, the combined total of commercial paper and borrowings under the Domestic Credit Facilities was limited to $750 million as of March 30, 2003. HDFS has agreements with financial institutions providing bank credit facilities totaling $750 million (Domestic Credit Facilities). The Domestic Credit Facilities consist of a $350 million revolving term facility due in 2005 and a $400 million 364-day revolving credit facility due September 2003. The Company expects the $400 million credit facility expiring in September 2003 will be renewed or that suitable alternatives exist.(1) The primary uses of the Domestic Credit Facilities are to provide liquidity to the unsecured commercial paper program and to fund HDFS' business operations. During July 2002, HDFS entered into a $200 million European revolving credit facility due July 2005. The primary purpose of the facility is to fund HDFS' European business operations. HDFS has a revolving credit line with the Company whereby HDFS may borrow up to $210 million from the Company at a market interest rate. As of March 30, 2003, HDFS had $100 million in outstanding borrowings owed to the Company under this agreement. The $100 million loan was eliminated upon consolidation and is therefore not included in finance debt on the consolidated balance sheets. In addition, HDFS has $30 million of ten-year senior subordinated notes outstanding, expiring in 2007. 17 In connection with debt agreements, HDFS has various operating and financial covenants and remains in compliance at March 30, 2003. The Company has a support agreement with HDFS whereby, if required, the Company agrees to provide HDFS with certain financial support in order to maintain certain financial covenants. Support may be provided at the Company's option as capital contributions or loans. Accordingly, certain debt covenants may restrict the Company's ability to withdraw funds from HDFS outside the normal course of business. No amount has ever been required of the Company to support HDFS' requirement to maintain certain financial covenants. The Company expects future activities of HDFS will be financed from funds internally generated by HDFS, sale of loans through securitization programs, issuance of commercial paper, borrowings under revolving credit facilities, advances or loans from the Company and subordinated debt.(1) The Company has remaining authorization from its Board of Directors to repurchase up to 9,400,000 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. The Company repurchased 500,000 shares of its common stock during the first quarter of 2003 under the latter authorization. The Company declared a $.035 per share dividend during the first quarter of 2003, payable March 24, 2003 to shareholders of record as of March 12, 2003. Risk Factors ------------ The Company's ability to meet the targets and expectations noted in this Form 10-Q depends upon, among other factors, the Company's ability to (i) continue to realize production efficiencies at its production facilities through the implementation of innovative manufacturing techniques and other means, (ii) successfully implement production capacity increases in its facilities, (iii) successfully introduce new products and services, (iv) avoid unexpected P&A/general merchandise supplier backorders, (v) sell all of the Harley-Davidson(R) motorcycles it plans to produce, (vi) continue to develop the capacity of its distributor and dealer network, (vii) avoid unexpected changes in the regulatory environment for its products, (viii) successfully adjust to foreign currency exchange rate fluctuations, (ix) successfully adjust to interest rate fluctuations, and (x) successfully manage changes in the credit quality of HDFS' loan portfolio. In addition, the Company could experience delays in the operation of manufacturing facilities as a result of work stoppages, difficulty with suppliers, natural causes, terrorism or other factors. These risks, potential delays and uncertainties could also adversely impact the Company's capital expenditure estimates (see "Liquidity and Capital Resources" section). 18 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, 2002 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 2002 annual report on Form 10-K. Item 4. Controls and Procedures ------------------------------- (a) Evaluation of disclosure controls and procedures. In accordance with Rule 13a-15(b) of the Securities Exchange Act of 1934 (the "Exchange Act"), within 90 days prior to the filing date of this Quarterly Report on Form 10-Q, an evaluation was carried out under the supervision and with the participation of the Company's management, including the Company's Chairman, President and Chief Executive Officer and Vice President and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Rule 13a-14(c) under the Exchange Act). Based upon their evaluation of these disclosure controls and procedures, the Chairman, President and Chief Executive Officer and the Vice President and Chief Financial Officer concluded that the disclosure controls and procedures were effective as of the date of such evaluation to ensure that material information relating to the Company, including its consolidated subsidiaries, was made known to them by others within those entities, particularly during the period in which this Quarterly Report on Form 10-Q was being prepared. (b) Changes in internal controls. There were no significant changes in the Company's internal controls or other factors that could significantly affect these controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. (1) Note regarding forward-looking statements The Company intends that certain matters discussed 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, targets 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 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. 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. 19 Part II - OTHER INFORMATION Item 1. Legal Proceedings -------------------------- In January 2001, the Company, on its own initiative, notified each owner of 1999 and early-2000 model year Harley-Davidson(R) motorcycles equipped with Twin Cam 88 and Twin Cam 88B engines that the Company was extending the warranty for a rear cam bearing to 5 years or 50,000 miles. Subsequently, on June 28, 2001, a putative nationwide class action was filed against the Company in state court in Milwaukee County, Wisconsin, which was amended by a complaint filed September 28, 2001. The complaint alleged that this cam bearing is defective and asserted various legal theories. The complaint sought unspecified compensatory and punitive damages for affected owners, an order compelling the Company to repair the engines, and other relief. On February 27, 2002 the Company's motion to dismiss the amended complaint was granted by the Court and the amended complaint was dismissed in its entirety. An appeal was filed with the Wisconsin Court of Appeals. On April 12, 2002, the same attorneys filed a second putative nationwide class action against the Company in state court in Milwaukee County, Wisconsin relating to this cam bearing issue and asserting different legal theories than in the first action. The complaint sought unspecified compensatory damages, an order compelling the Company to repair the engines and other relief. On September 23, 2002, the Company's motion to dismiss was granted by the Court, the complaint was dismissed in its entirety, and no appeal was taken. On January 14, 2003, the Wisconsin Court of Appeals reversed the trial court's February 27, 2002 dismissal of the complaint in the first action and the Company has petitioned the Wisconsin Supreme Court to consider confirming the earlier dismissal. The Company believes that this reversal is in error, and the Company intends to continue to vigorously defend this matter. The Company believes that the 5 year/50,000 mile warranty extension it announced in January 2001 adequately addresses the condition for affected owners. 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 York facility was formerly used by the U.S. Navy and AMF prior to the purchase of the York facility by the Company from AMF in 1981. Although the Company is not certain as to the full extent of the environmental contamination at the York facility, it has been working with the Pennsylvania Department of Environmental Protection since 1986 in undertaking environmental investigation and remediation activities, including an on-going site-wide investigation/feasibility study. In January 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 environmental investigation and remediation activities at the York facility (Response Costs). The trust administers the payment of the Response Costs at the York facility as covered by the Agreement. In February 2002, the Company was advised by the U.S. Environmental Protection Agency (EPA) that it considers some of the Company's remediation activities at the York facility to be subject to the EPA's corrective action program and offered the Company the option of addressing corrective action under a facility lead agreement. The objectives and procedures for facility lead corrective action are consistent with the investigation and remediation already being conducted under the Agreement with the Navy, and the Company agreed to participate in EPA's corrective action program under a facility lead agreement. 20 Although substantial uncertainty exists concerning the nature and scope of the environmental remediation that will ultimately be required at the York facility, the Company estimates that its share of the future Response Costs at the York facility will be approximately $8.2 million. The Company has established reserves for this amount which are included in Accrued expenses and other liabilities in the consolidated balance sheets. The Company's estimate of future Response Costs it will incur is based on reports of independent 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 several years ending in 2010. Item 6. Exhibits and Reports on Form 8-K ---------------------------------------- (a) Exhibits ------------- 99.1 Written Statement of the Chief Executive Officer Pursuant to 18 U.S.C.ss.1350 99.2 Written Statement of the Chief Financial Officer Pursuant to 18 U.S.C.ss.1350 (b) Reports on Form 8-K ------------------------ None 21 Part II - Other Information 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: May 14, 2003 /s/ James L. Ziemer ---------------- ---------------------------------------- James L. Ziemer Vice President and Chief Financial Officer (Principal Financial Officer) May 14, 2003 /s/ James M. Brostowitz ---------------- ---------------------------------------- James M. Brostowitz Vice President, Controller and Treasurer (Principal Accounting Officer) 22 Certifications ------------- I, Jeffrey L. Bleustein, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Harley-Davidson, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors: a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 14, 2003 /s/ Jeffrey L. Bleustein ----------------------------------- Jeffrey L. Bleustein Chief Executive Officer 23 I, James L. Ziemer, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Harley-Davidson, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors: a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 14, 2003 /s/ James L. Ziemer ----------------------------------- James L. Ziemer, Vice President and Chief Financial Officer 24 HARLEY-DAVIDSON, INC. Exhibit Index to form 10-Q Exhibit Number ------ 99.1 Written Statement of the Chief Executive Officer Pursuant to 18 U.S.C.s.1350 99.2 Written Statement of the Chief Financial Officer Pursuant to 18 U.S.C.s.1350 25