10-Q 1 cmw92.txt QUARTERLY REPORT 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 29, 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) (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 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 August 7, 2003: 302,660,790 Shares 1 HARLEY-DAVIDSON, INC. Form 10-Q Index For the Quarter Ended June 29, 2003 Page Part I. Financial Information Item 1. Consolidated 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 11-24 Item 3. Quantitative and Qualitative Disclosures about Market Risk 25 Item 4. Controls and Procedures 25 Note regarding forward-looking statements 25 Part II. Other Information Item 1. Legal Proceedings 26 Item 4. Submission of Items to a Vote of Security Holders 27 Item 5. Other Information 27 Item 6. Exhibits and Reports on Form 8-K 27 Signatures 28 Certifications 29 Exhibit Index 31 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 Six months ended ------------------ ---------------- June 29, June 30, June 29, June 30, 2003 2002 2003 2002 ---- ---- ---- ---- Net revenue $1,218,872 $1,001,094 $2,332,563 $1,928,939 Cost of goods sold 775,654 666,006 1,486,313 1,278,574 ---------- ---------- ---------- ---------- Gross profit 443,218 335,088 846,250 650,365 Financial services income 71,287 60,149 142,056 101,840 Financial services expense 26,821 23,109 54,233 52,649 ---------- ---------- ---------- ---------- Operating income from financial services 44,466 37,040 87,823 49,191 Operating expenses 180,648 155,811 348,528 301,516 ---------- ---------- ---------- ---------- Income from operations 307,036 216,317 585,545 398,040 Interest income, net 6,388 4,415 12,345 6,661 Other expense, net (4,659) (366) (4,875) (1,131) ---------- ---------- ---------- ---------- Income before provision for income taxes 308,765 220,366 593,015 403,570 Provision for income taxes 106,523 76,025 204,589 139,231 ---------- ---------- ---------- ---------- Net income $ 202,242 $ 144,341 $ 388,426 $ 264,339 ========== ========== ========== ========== Earnings per common share: Basic $.67 $.48 $1.29 $.87 ==== ==== ===== ==== Diluted $.66 $.47 $1.28 $.87 ==== ==== ===== ==== Weighted-average common shares outstanding: Basic 302,164 302,209 302,263 302,341 ========== ========== ========== ========== Diluted 304,339 305,194 304,448 305,405 ========== ========== ========== ========== Cash dividends per share $.04 $.035 $.075 $.065 ==== ===== ===== =====
See accompanying notes. 3 Harley-Davidson, Inc. Condensed Consolidated Balance Sheets (In thousands)
June 29, Dec. 31, June 30, 2003 2002 2002 ---- ---- ---- (Unaudited) (Unaudited) ASSETS Current assets: Cash and cash equivalents $ 691,459 $ 280,928 $ 524,049 Marketable securities 500,669 514,800 203,246 Accounts receivable, net 113,025 108,694 150,728 Finance receivables, net 910,963 855,771 609,730 Inventories (Note 2) 206,574 218,156 203,255 Other current assets 73,169 88,237 88,371 ---------- ---------- ---------- Total current assets 2,495,859 2,066,586 1,779,379 Finance receivables, net 606,619 589,809 519,935 Property, plant and equipment, net 1,014,063 1,032,596 924,337 Goodwill 51,609 49,930 51,382 ---------- ---------- ---------- Other assets 128,964 122,296 130,823 $4,297,114 $3,861,217 $3,405,856 ========== ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable 243,976 $ 226,977 $ 233,725 Accrued expenses and other liabilities 452,777 380,496 401,206 Current portion of finance debt 343,331 382,579 147,837 ---------- ---------- ---------- Total current liabilities 1,040,084 990,052 782,768 Finance debt 380,000 380,000 380,000 Other long-term liabilities 219,789 152,831 177,239 Post-retirement health care benefits 116,487 105,419 97,414 Contingencies (Note 8) Total shareholders' equity 2,540,754 2,232,915 1,968,435 ---------- ---------- ---------- $4,297,114 $3,861,217 $3,405,856 ========== ========== ==========
See accompanying notes. 4 Harley-Davidson, Inc. Condensed Consolidated Statements of Cash Flows (Unaudited) (In thousands)
Six months ended ---------------- June 29, June 30, 2003 2002 ---- ---- Cash flows from operating activities: Net income $ 388,426 $ 264,339 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 95,262 87,514 Provision for long-term employee benefits 39,007 15,356 Provision for finance credit losses 1,963 3,207 Current year gain on securitizations (48,587) (26,375) Collection of retained securitization interests 44,177 31,603 Contribution to pension plans (12,000) (3,090) Tax benefit of stock options 3,575 8,058 Other, net 5,741 2,690 Net changes in current assets and current liabilities 92,300 32,033 ---------- ---------- Total adjustments 221,438 150,996 ---------- ---------- Net cash provided by operating activities 609,864 415,335 Cash flows from investing activities: Capital expenditures (82,649) (122,461) Finance receivables acquired or originated (3,317,841) (2,668,915) Finance receivables collected 2,325,549 1,930,046 Proceeds from securitizations 958,260 662,314 Purchase of marketable securities (616,014) (474,572) Sales and redemptions of marketable securities 629,281 467,337 Other, net 1,212 13,804 ---------- ---------- Net cash used in investing activities (102,202) (192,447) Cash flows from financing activities: Net decrease in finance debt (47,922) (69,214) Dividends paid (22,739) (19,975) Purchase of common stock for treasury (30,563) (56,814) Issuance of common stock under employee stock plans 4,093 7,726 ---------- ---------- Net cash used in financing activities (97,131) (138,277) Net increase in cash and cash equivalents 410,531 84,611 Cash and cash equivalents: At beginning of period 280,928 439,438 ---------- ---------- At end of period $ 691,459 $ 524,049 ========== ==========
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 June 29, 2003 and June 30, 2002, the results of operations for the three- and six-month periods then ended and the statements of cash flows for the six months ended June 29, 2003 and June 30, 2002. 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):
June 29, Dec. 31 June 30, 2003 2002 2002 ---- ---- ---- Components at the lower of cost, first-in, First-out (FIFO), or market: Raw material & work-in-process $ 77,664 $ 82,209 $ 79,664 Motorcycle finished goods 58,077 57,076 53,228 Parts & accessories and general merchandise 88,350 95,888 87,976 -------- -------- -------- 224,091 235,173 220,868 Excess of FIFO over LIFO 17,517 17,017 17,613 -------- -------- -------- $206,574 $218,156 $203,255 ======== ======== ========
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 Six months ended ------------------ ---------------- June 29, June 30, June 29, June 30, 2003 2002 2003 2002 ---- ---- ---- ---- Balance, beginning of period $34,302 $23,785 $28,890 $21,608 Warranties issued during the period 9,580 6,976 20,863 14,908 Settlements made during the period (8,289) (6,877) (14,689) (12,632) Changes to the liability for pre-existing warranties during the period - - 529 - ------- ------- ------- ------- Balance, end of period $35,593 $23,884 $35,593 $23,884 ======= ======= ======= =======
6 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 Six months ended ------------------ ---------------- June 29, June 30, June 29, June 30, 2003 2002 2003 2002 ---- ---- ---- ---- Net income, as reported $202,242 $144,341 $388,426 $264,339 Deduct: Total stock-based employee compensation expense determined under fair value based method for all option awards, net of related tax effects (3,386) (3,112) (6,644) (5,966) -------- -------- -------- -------- Pro forma net income $198,983 $141,229 $381,782 $258,373 ======== ======== ======== ======== Earnings per share: Basic as reported $.67 $.48 $1.29 $.87 ==== ==== ===== ==== Basic pro forma $.66 $.47 $1.26 $.85 ==== ==== ===== ==== Diluted as reported $.66 $.47 $1.28 $.87 ==== ==== ===== ==== Diluted pro forma $.66 $.46 $1.26 $.85 ==== ==== ===== ====
Note 5 - Business Segments -------------------------- The Company operates in two business segments: Motorcycles & 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 Six months ended ----------------- ---------------- June 29, June 30, June 29, June 30, 2003 2002 2003 2002 ---- ---- ---- ---- Net revenue $1,218,872 $1,001,094 $2,332,563 $1,928,939 Gross profit 443,218 335,088 846,250 650,365 Operating expenses 176,465 152,167 339,872 294,317 ---------- ---------- ---------- ---------- Operating income from motorcycles & related products 266,753 182,921 506,378 356,048 Financial services income 71,287 60,149 142,056 101,840 Financial services expense 26,821 23,109 54,233 52,649 ---------- ---------- ---------- ---------- Operating income from financial services 44,466 37,040 87,823 49,191 Corporate expenses 4,183 3,644 8,656 7,199 ---------- ---------- ---------- ---------- Income from operations $ 307,036 $ 216,317 $ 585,545 $ 398,040 ========== ========== ========== ==========
7 Note 6 - Earnings Per Share --------------------------- 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 29, June 30, June 29, June 30, 2003 2002 2003 2002 ---- ---- ---- ---- Numerator Net income used in computing Basic and diluted earnings per share $202,242 $144,341 $388,426 $264,339 ======== ======== ======== ======== Denominator Denominator for basic earnings per share - Weighted-average common shares 302,164 302,209 302,263 302,341 Effect of dilutive securities - employee stock Options and nonvested stock 2,175 2,985 2,185 3,064 -------- -------- -------- -------- Denominator for diluted earnings per share- Adjusted weighted-average shares 304,339 305,194 304,448 305,405 ======== ======== ======== ======== Basic earnings per share $.67 $.48 $1.29 $.87 ==== ==== ===== ==== Diluted earnings per share $.66 $.47 $1.28 $.87 ==== ==== ===== ====
Note 7 - Comprehensive Income ----------------------------- The following table sets forth the reconciliation of net income to comprehensive income (in thousands):
Three months ended Six months ended ------------------ ---------------- June 29, June 30, June 29, June 30, 2003 2002 2003 2002 ---- ---- ---- ---- Net income $202,242 $144,341 $388,426 $264,339 Minimum pension liability adjustment, net of tax (46,654) - (46,654) - Foreign currency translation adjustments 5,996 11,743 7,190 10,300 Changes in net unrealized gains and losses, net of tax: Investment in retained securitization interests 763 3,274 4,448 5,638 Derivative financial instruments (1,064) (7,977) 513 (7,191) Marketable securities (246) - (529) - -------- -------- -------- -------- Comprehensive income $161,037 $151,381 $353,394 $273,086 ======== ======== ======== ========
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 8 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 petitioned the Wisconsin Supreme Court for review. On June 12, 2003, the Company's petition was granted and the matter will be reviewed by the Wisconsin Supreme Court. The Company believes that the Court of Appeals reversal was 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 the clean up of 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. Although substantial uncertainty exists concerning the nature and scope of the environmental investigation and 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. 9 Note 9 - Retirement Plans ------------------------- The Company has several defined benefit pension plans and several post-retirement health care benefit plans, which cover substantially all employees of the Motorcycles segment. The Company also has unfunded supplemental employee retirement plan agreements (SERPA) with certain employees which were instituted to replace benefits lost under the Tax Revenue Reconciliation Act of 1993. The plans described above are referred to collectively as "Retirement Plans." Benefit obligations and costs for the Company's Retirement Plans are developed from actuarial valuations. The projected benefit obligation represents the actuarial present value of benefits, based on service rendered, using an assumption as to future compensation levels. The accumulated benefit obligation is the actuarial present value of benefits based on service rendered and current and past compensation levels. The valuation of benefit obligations and costs relies on key assumptions including discount rates, expected return on plan assets, future compensation and medical inflation. The Company normally evaluates and updates its key valuation assumptions annually in conjunction with its September 30 actuarial measurement date. However, due to continued declining interest rates, the Company elected to establish an interim actuarial measurement date as of the beginning of the second fiscal quarter of 2003. Therefore as of March 31, 2003, the Company remeasured its Retirement Plan obligations and costs using a discount rate assumption of 6.5% compared to the previous assumption of 7.25%. The Company's assumptions for expected return on plan assets, future compensation and medical inflation remained unchanged. As a result of the March 31, 2003 actuarial remeasurement, the Company recorded an increase to its long-term Retirement Plan liabilities of approximately $75 million and a decrease to other comprehensive income of approximately $47 million, net of taxes during the second quarter of 2003. Additionally, during the second quarter of 2003 the Company recorded $4.5 million of incremental Retirement Plan expense as a result of the remeasurement. Total expense associated the Company's Retirement Plans was $22.8 million and $42.4 million for the three- and six-month periods ended June 29, 2003, respectively. This compares to Retirement Plan expense of $17.6 million and $32.1 million for the three- and six-month periods ended June 30, 2002, respectively. The following table sets forth the benefit obligations and fair value of plan assets for the Company's Retirement Plans as of its two most recent measurement dates (in thousands). As measured on March 31, Sep. 30, 2003 2002 ---- ---- Pension and SERPA Plans: Projected benefit obligation $664,974 $567,216 Accumulated benefit obligation $560,118 $482,451 Fair value of plan assets $399,239 $309,469 Post-retirement health care benefits: Accumulated benefit obligation $213,727 $184,996 Note 10 - Reclassifications --------------------------- Certain prior year balances on the condensed consolidated statement of cash flows have been reclassified in order to conform to the current year presentation. 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 sport motorcycles, including four big-twin XB models, 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. The "% Change" figures included in this section have been calculated based on unrounded amounts. Results of Operations for the Three months Ended June 29, 2003 -------------------------------------------------------------- Compared to the Three months Ended June 30, 2002 ------------------------------------------------ Overall For the quarter ended June 29, 2003, consolidated net revenue totaled $1.22 billion, a $217.8 million or 21.8% increase over the same period last year. Net income for the second quarter of 2003 was $202.2 million compared to $144.3 million in the second quarter of 2002, an increase of 40.1%. Diluted earnings per share for the second quarter of 2003 were $.66 on 304.3 million weighted average shares outstanding compared to $.47 on 305.2 million weighted average shares outstanding during the same quarter last year, an increase of 40.4% in earnings per share. Motorcycle Unit Shipments For the Three-month Periods Ended June 29, 2003 and June 30, 2002
% 2003 2002 Increase Change ---- ---- -------- ------ Touring motorcycle units 20,912 17,102 3,810 22.3% Custom motorcycle units* 36,906 29,751 7,155 24.0 VRSC motorcycle units 4,370 5,364 (994) (18.5) Sportster motorcycle units 13,837 13,323 514 3.9 ------ ------ ------ Harley-Davidson motorcycle units 76,025 65,540 10,485 16.0 Buell motorcycle units 1,942 3,309 (1,367) (41.3) ------ ------ ------ Total motorcycle units 77,967 68,849 9,118 13.2% ====== ====== ======
*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 June 29, 2003 and June 30, 2002 (In Millions)
% 2003 2002 Increase Change ---- ---- -------- ------ Harley-Davidson(R)motorcycles $ 955.4 $ 760.1 $195.3 25.7% Buell(R)motorcycles 15.0 20.0 (5.0) (24.8) -------- -------- ------ Total motorcycles 970.4 780.1 190.3 24.4 Parts & Accessories 204.2 168.8 35.4 20.9 General Merchandise 43.7 51.3 (7.6) (14.9) Other .6 .9 (0.3) (33.3) -------- -------- ------ Net revenue $1,218.9 $1,001.1 $217.8 21.8% ======== ======== ======
Second quarter 2003 net revenue for the Motorcycles segment was $1,218.9 million or 21.8% higher than in the same period last year. The 2003 second quarter increase in net revenue for the Motorcycles segment was led by a $195.3 million, or 25.7% increase in Harley-Davidson motorcycle net revenue. The increase in Harley-Davidson motorcycle revenue was driven by a 16.0% increase in Harley-Davidson motorcycle unit shipments, but also benefited from wholesale price increases, a favorable product mix, a more profitable geographic mix and favorable foreign currency exchange rates during the second quarter of 2003. During the second quarter of 2003, Harley-Davidson motorcycle unit shipments increased to 76,025 units, 10,485 units higher than the same period last year. This increase over prior year was driven by the Company's ongoing success with its manufacturing strategy and its continued confidence in retail demand for Harley-Davidson motorcycles (see discussion of retail data under "Results of Operations for Six-months"). Based on the results achieved in the first half of 2003, the Company has increased its 2003 annual wholesale shipment target to 290,600 Harley-Davidson units.(1) Wholesale price increases for the 100th Anniversary 2003 models provided for higher average selling prices on units sold during the second quarter of 2003. Harley-Davidson motorcycle product mix was favorable in the second quarter of 2003 with a higher percentage of shipments consisting of higher priced motorcycle models, both within and between the Company's motorcycle families. Geographic mix had a favorable impact on revenue during the second quarter of 2003 with approximately 81.4% of the Harley-Davidson unit shipments being shipped to U.S. dealers, compared to 80.1% in the second quarter of 2002. Shipments to U.S. dealers generally have a higher average selling price per unit than international shipments. Finally, foreign currency exchange rates had a favorable effect on international revenue primarily as a result of stronger European currencies, when compared to the second quarter of 2002. 12 In the second quarter of 2003, Buell(R) motorcycle net revenue was down $5.0 million compared to the same period last year, on 1,367 fewer unit shipments. Production during the second quarter of 2003 was negatively impacted by a supplier issue, which reduced production during the quarter. Most of the lost production capacity was related to Blast(R) models, but all models were affected. Buell shipments in the second quarter of 2003 consisted of 1,804 XB models and 138 Blast models. The Company expects that normal production rates will resume by the middle of the third quarter of 2003.(1) The third quarter of 2003 will also include the introduction of two additional new XB models. During the second quarter of 2003, net revenue from Parts and Accessories (P&A) totaled $204.2 million, a 20.9% increase over the second quarter of 2002. Total P&A revenue in the second quarter of 2003 included $16.5 million from sales of 100th Anniversary P&A products. Sales of 100th Anniversary products began in the third quarter of 2002 and were essentially complete by the end of the second quarter of 2003. The Company expects that shipments of 100th Anniversary P&A products during the remainder of 2003 will not be significant.(1) For the full year 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) General Merchandise revenue during the second quarter of 2003 was $43.7 million, down $7.6 million relative to the same period last year. General Merchandise results were positively impacted during the second quarter of last year by the sale of items related to the Company's 100th Anniversary, which accounted for $12.0 million of revenue during the quarter. As of the end of the first quarter of 2003, shipments of 100th Anniversary General Merchandise products were essentially complete. As a result of the strong prior year 100th Anniversary revenue, the Company expects General Merchandise revenue for the full year 2003 to be lower than in 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 second quarter of 2003 of $443.2 million was $108.1 million, or 32.3%, higher than gross profit in the same quarter last year. The gross margin was 36.4% in the second quarter of 2003 compared to 33.5% in the second quarter of 2002. The increase in gross margin in the second quarter of 2003 was driven by higher revenue (net of related cost increases) associated with wholesale price increases, a favorable product mix, a more profitable geographic mix and favorable foreign currency exchange rates. These positive factors were partially offset by higher costs associated with the Company's retirement plans and health care benefits. Retirement plan costs increased in the second quarter of 2003 primarily as a result of the Company's decision to adjust the discount rate used to determine retirement plan costs and obligations (see "Retirement Plans" under Other Matters). 13 Financial Services For the Three-month Periods Ended June 29, 2003 and June 30, 2002 (In Millions)
% 2003 2002 Increase Change ---- ---- -------- ------ Interest income $21.0 $17.3 $3.7 21.6% Gain on current year securitizations 22.2 21.4 0.8 3.8 Servicing fee income 5.9 4.7 1.2 25.0 Insurance commissions 12.8 11.1 1.7 14.9 Other income 9.4 5.6 3.8 66.0 ----- ----- ---- Financial services income 71.3 60.1 11.2 18.5 Interest expense 4.3 3.4 0.9 25.5 Provision for credit losses 1.4 (1.0) 2.4 N.M. Operating expenses 21.1 20.7 0.4 1.9 ----- ----- ---- Financial services expense 26.8 23.1 3.7 16.1 ----- ----- ---- Operating income from financial services $44.5 $37.0 $7.5 20.0% ===== ===== ====
In the second quarter of 2003, financial services income was $71.3 million, an increase of $11.2 million over the same period in 2002. Operating income from financial services was $44.5 million, an increase of $7.5 million over the second quarter of 2002. The increase in operating income during the second quarter of 2003 was primarily due to strong overall performance in HDFS' wholesale, retail, and insurance lines and a favorable interest rate environment. During the second quarter of 2003, HDFS sold $425.0 million of retail motorcycle installment loans resulting in a gain of $22.2 million. This transaction is the second securitization transaction completed in 2003 and is part of the Company's plan to complete four securitization transactions during 2003 to better match funding with loan originations.(1) During the second quarter of 2002, HDFS sold approximately $586.0 million of retail motorcycle installment loans resulting in a gain of $21.4 million. The net gain as a percentage of the amount of loans securitized increased from 3.65% in the second quarter of 2002 to 5.22% in the second quarter of 2003 as HDFS continued to benefit from a declining interest rate environment. The provision for finance credit losses was higher in the second quarter of 2003 than the second quarter of 2002. The increase is due to an increase in outstanding finance receivables. Changes in HDFS' allowance for finance credit losses during the three-month periods ended June 29, 2003 and June 30, 2002 were as follows (in millions): 2003 2002 ---- ---- Balance, beginning of period $31.0 $32.3 Provision for finance credit losses 1.4 (1.0) Charge-offs (1.1) (1.4) ----- ----- Balance, end of period $31.3 $29.9 ===== ===== The Company expects HDFS' full year operating income to be approximately 40% 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) 14 Operating Expenses For the Three-month Periods Ended June 29, 2003 and June 30, 2002 (In Millions) % 2003 2002 Increase Change ---- ---- -------- ------ Motorcycles and Related Products $176.5 $152.2 $24.3 16.0% Corporate 4.1 3.6 .5 14.8 ------ ------ ----- Total operating expenses $180.6 $155.8 $24.8 15.9% ====== ====== ===== Total operating expenses during the second quarter of 2003 increased $24.8 million or 15.9% compared to the same period last year. Operating expenses as a percent of net revenue were 14.8% and 15.6% for second 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 second quarter of 2003, operating expenses were higher due to costs associated with the Company's 100th Anniversary celebration and various marketing programs and higher retirement plan costs (see "Retirement Plans" under Other Matters). Other expense, net Other net expense was $4.7 million and $.4 million during the second quarters of 2003 and 2002, respectively. Other net expense in the second quarter of 2003 included a $4.0 million charitable contribution to the Harley-Davidson Foundation, Inc. Interest income, net Net interest income in the second quarter of 2003 was $6.4 million compared to $4.4 million in the same period last year. The increase in net interest income resulted from higher average balances of cash and cash equivalents during the second quarter of 2003 when compared to the same period in 2002. In connection with the Company's capacity expansion efforts, $1.2 million of interest cost was capitalized during the second quarter of 2003 compared to $.7 million during the second quarter of 2002. Consolidated income taxes The Company's effective income tax rate was 34.5% during the second 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) 15 Results of Operations for the Six months Ended June 29, 2003 ------------------------------------------------------------ Compared to the Six months Ended June 30, 2002 ---------------------------------------------- Overall For the Six months ended June 29, 2003, consolidated net revenue totaled $2.33 billion, a $403.7 million or 20.9% increase over the same period last year. Net income for the first half of 2003 was $388.4 million compared to $264.3 million in the first half of 2002, an increase of 46.9%. Diluted earnings per share for the first six months of 2003 were $1.28 on 304.4 million weighted average shares outstanding compared to $.87 on 305.4 million weighted average shares outstanding during the same period last year, an increase in earnings per share of 47.1%. Motorcycle Unit Shipments For the Six-month Periods Ended June 29, 2003 and June 30, 2002
% 2003 2002 Increase Change ---- ---- -------- ------ Touring motorcycle units 39,400 34,420 4,980 14.5% Custom motorcycle units* 71,219 61,614 9,605 15.6 VRSC motorcycle units 9,029 8,524 505 5.9 Sportster(R)motorcycle units 26,985 25,651 1,334 5.2 ------- ------- ------ Harley-Davidson(R)motorcycle units 146,633 130,209 16,424 12.6 Buell(R)motorcycle units 4,883 4,639 244 5.3 ------- ------- ------ Total motorcycle units 151,516 134,848 16,668 12.4% ======= ======= ======
*Custom motorcycle units, as used in this table, includes Softail, Dyna Glide and other custom models. Net Revenue For the Six-month Periods Ended June 29, 2003 and June 30, 2002 (In Millions)
% 2003 2002 Increase Change ---- ---- -------- ------ Harley-Davidson motorcycles $1,831.9 $1,508.0 $323.9 21.5% Buell motorcycles 35.5 26.3 9.2 35.2 -------- -------- ------ Total motorcycles 1,867.4 1,534.3 333.1 21.7 Parts & Accessories 364.1 300.0 64.1 21.4 General Merchandise 100.1 93.6 6.5 7.0 Other 1.0 1.0 0.0 - -------- -------- ------ Net revenue $2,332.6 $1,928.9 $403.7 20.9% ======== ======== ======
The 20.9% increase in net revenue for the Motorcycles segment during the first half of 2003 was led by a $323.9 million, or 21.5% increase in Harley-Davidson motorcycle net revenue. The increase in Harley-Davidson motorcycle revenue was driven by a 12.6% increase in Harley-Davidson motorcycle unit shipments, but also benefited from wholesale price increases, a favorable product mix, a more profitable geographic mix and favorable foreign currency exchange rates during the first half of 2003. The 12.6% increase in Harley-Davidson motorcycle unit shipments was driven by an increase in retail sales as demand for the Company's Harley-Davidson motorcycles continued to grow. 16 Retail sales of the Company's Harley-Davidson(R) motorcycles in the United States were up 6.3% for the first six-months of 2003, when compared to the same period last year. Through June 2003, retail sales of the Company's Harley-Davidson motorcycles in Europe and Japan were up 4.2% and 7.6% percent, respectively, when compared with the same period in 2002. Retail sales of the Company's Harley-Davidson motorcycles have outpaced the heavyweight motorcycle industry in all of the Company's major markets. Market data is listed in the following table. Motorcycle Retail Registrations (Units) Year-to-date Heavyweight (651+ cc)
2003 2002 % Change ---- ---- -------- United States (a) ------------- Harley-Davidson models only (though June) 121,414 114,174 6.3% Industry (through June) 257,929 258,031 0.0% Europe (b) ------ Harley-Davidson models only (through June) 14,875 14,278 4.2% Industry (through May) 163,519 174,830 (6.5)% Japan (c) ----- Harley- Davidson models only (through June) 5,232 4,864 7.6% Industry (through May) 19,611 21,089 (7.0)%
(a) U.S. data provided by the Motorcycle Industry Council. (b) Europe Harley-Davidson data is based on Company data and includes retail sales in all European countries. Europe industry data, provided by Giral S.A., includes retail sales in Austria, Belgium, France, Germany, Italy, The Netherlands, Spain, Switzerland and United Kingdom. (c) Japan Harley-Davidson data is based on Company data. Japan industry data is derived from industry sources. During the first half of 2003, net revenue from Parts and Accessories (P&A) totaled $364.1 million, a 21.4% increase over the first half of 2002. Total P&A revenue for the first six months of 2003 included $30.4 million from sales of 100th Anniversary P&A products. Sales of 100th Anniversary products began in the third quarter of 2002 and were essentially complete by the end of the second quarter of 2003. General Merchandise revenue during the first six months of 2003 was $100.1 million, up 7.0% over the same period last year. Revenue from 100th Anniversary General Merchandise products accounted for $9.0 million of total General Merchandise revenue during the first half of 2003 compared to $12.0 million during the same period last year. Sales of 100th Anniversary General Merchandise products were essentially complete as of the end of the first quarter of 2003. Gross Profit Gross profit for the first six months of 2003 totaled $846.3 million, an increase of $195.9 million or 30.1% over the same period in 2002. The gross margin was 36.3% in the first six months of 2003, up from 33.7% for the six months of 2002. The increase in gross margin in the first six months of 2003 was driven by higher revenue (net of related cost increases) associated with wholesale price increases, favorable motorcycle product mix, a more profitable geographic mix and favorable foreign currency exchange rates. These positive factors were partially offset by increased costs associated with the Company's retirement plans and the rising cost of health care benefits. Retirement plan expense increased in the first half of 2003 partially as a result of the Company's decision to adjust the discount rate used to determine retirement plan costs and obligations (see "Retirement Plans" under Other Matters). 17 Financial Services For the Six-month Periods Ended June 29, 2003 and June 30, 2002 (In Millions)
% 2003 2002 Increase Change ---- ---- -------- ------ Interest income $43.7 $37.7 $ 6.0 15.8% Gain on current year securitizations 48.6 26.4 22.2 84.1 Servicing fee income 11.2 8.6 2.6 30.8 Insurance commissions 22.4 18.4 4.0 21.5 Other income 16.2 10.7 5.5 50.6 ----- ----- ----- Financial services income 142.1 101.8 40.3 39.5 Interest expense 8.9 7.3 1.6 22.7 Provision for credit losses 2.0 3.2 (1.2) (38.8) Operating expenses 43.4 42.1 1.3 2.8 ----- ----- ----- Financial services expense 54.3 52.6 1.7 3.0 ----- ----- ----- Operating income from financial services $87.8 $49.2 $38.6 78.5% ===== ===== =====
In the first six months of 2003, financial services income was $142.1 million, an increase of $40.3 million over the same period in 2002. Operating income from financial services was $87.8 million, an increase of $38.6 million over the first six months of 2002. The increase in operating income during the first six months of 2003 was primarily driven by higher securitization gains as compared to the same period last year. During the first six months of 2003, HDFS sold $975.0 million of retail motorcycle installment loans resulting in a gain of $48.6 million. During the first six months of 2002, HDFS sold $679.3 million of retail motorcycle installment loans resulting in a gain of $26.4 million. The increase in the 2003 gain over 2002 is primarily due to a larger volume of loans sold as HDFS went to market with two securitizartion transactions in the first half of 2003 versus one transaction in the first half of 2002. In addition, securitization gains as a percentage of receivables sold were higher in 2003 due to a more favorable interest rate environment in 2003 when compared to the same period in 2002. The provision for finance credit losses was lower in the first six months of 2003 than the first six months of 2002 due to the strong credit performance of finance receivables. Changes in HDFS' allowance for finance credit losses during the six-month periods ended June 29, 2003 and June 30, 2002 were as follows (in millions): 2003 2002 ---- ---- Balance, beginning of period $31.0 $28.7 Provision for finance credit losses 2.0 3.2 Charge-offs (1.7) (2.0) ----- ----- Balance, end of period $31.3 $29.9 ===== ===== 18 Operating Expenses For the Six-month Periods Ended June 29, 2003 and June 30, 2002 (In Millions) % 2003 2002 Increase Change ---- ---- -------- ------ Motorcycles and Related Products $339.9 294.3 $45.6 15.5% Corporate 8.6 7.2 1.4 20.2 ------ ------ ----- Total operating expenses $348.5 $301.5 $47.0 15.6% ====== ====== ===== Total operating expenses during the first six months of 2003 increased $47.0 million or 15.6% compared to the same period last year. Operating expenses as a percent of net revenue were 14.9% and 15.6% for first half 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 six months of 2003, operating expenses were higher due to costs associated with the Company's 100th Anniversary celebration and various marketing programs and higher retirement plan costs (see "Retirement Plans" under Other Matters). Other expense, net Other net expense was $4.9 million and $1.1 million during the first half of 2003 and 2002, respectively. Other net expense in 2003 included a $4.0 million charitable contribution to the Harley-Davidson Foundation, Inc. Interest income Net interest income in the first half of 2003 was $12.3 million compared to $6.7 million in the same period last year. The increase in net interest income resulted from higher average balances of cash and cash equivalents during the first half of 2003 when compared to the same period in 2002. In connection with the Company's capacity expansion efforts, $2.3 million of interest cost was capitalized during the first six months of 2003 compared to $1.0 million during the first six months of 2002. Consolidated income taxes The Company's effective income tax rate was 34.5% during the first six months of 2003 and 2002. 19 Other Matters ------------- 2003 Second Half Outlook The Company believes that gross margin during the second half of the 2003 will be lower than in the first half due to the elimination 100th Anniversary pricing, the completion of sales of 100th Anniversary P&A and General Merchandise products, a change in product mix, and startup costs associated with its new plant in York, Pennsylvania. (1) The Company will begin shipping its 2004 model year motorcycles in September of 2003; which is two months later than historically due to the fourteen-month 100th Anniversary model year. The pricing on 2004 model year motorcycles will reflect the elimination of 100th Anniversary special edition features. Furthermore, the additional revenue and margin benefit from the sale of 100th Anniversary P&A and General Merchandise will not occur in the 3rd and 4th quarters as sales of these products are now essentially complete. The second half of 2003 will also include the ramp up of a new facility in York, Pennsylvania for the production of Softail(R) motorcycles and the introduction of a completely redesigned Sportster(R) family. The Company anticipates that the third quarter ramp up of the new factory will reduce the number of Softail motorcycles relative to other product families, while the redesigned Sportster(R) line of motorcycles will become a larger part of the product mix for the foreseeable future. (1) Softail motorcycles are among the Company's highest margin motorcycles, while Sportster motorcycles have lower margins. Finally, as the new production facility in York is ramped up the Company expects to incur startup costs as hundreds of employees are transitioned to the new plant during the third quarter of 2003.(1) Retirement Plans As a result of continued declining interest rates, the Company elected to establish an interim actuarial measurement date for its Retirement Plans (Pension, SERPA and Post-retirement health care) as of the beginning of the second fiscal quarter of 2003. Therefore as of March 31, 2003, the Company remeasured its Retirement Plan obligations and costs using a discount rate assumption of 6.5% compared to the previous assumption of 7.25%. No other assumptions were adjusted. As a result, the Company recorded an increase to its long-term Retirement Plan liabilities of approximately $75 million and a decrease to other comprehensive income of approximately $47 million, net of taxes in the second quarter of 2003. In connection with these changes the Company's Retirement Plan expense will include an incremental increase of $11.5 million during 2003 of which $4.5 million has been recognized through June 29, 2003. The Company expects that the total annual expense associated the its Retirement Plans will be $86.2 million during 2003 compared to $64.3 million in 2002. See Note 9 to the condensed consolidated financial statements for additional information on the Company's Retirement Plans. 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 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. 20 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. 21 Liquidity and Capital Resources ------------------------------- Operating Activities The Company's main source of liquidity is cash from operating activities which consists of net income adjusted for non-cash operating activities, collections of retained securitization interests, pension plan contributions, the tax benefit of stock option exercises and changes in current assets and liabilities. The Company generated $609.9 million of cash from operating activities during the first half of 2003 compared to $415.3 million in the first half of 2002. The largest component of cash from operating activities is net income, which was approximately $388.4 million in the first half of 2003 compared to $264.3 million in the first half of 2002. Net adjustments for non-cash expenses for depreciation, long-term employee benefits and finance credit losses contributed an additional $136.2 million and $106.1 million to operating cash during the first half of 2003 and 2002, respectively. The adjustment to net income for the current year non-cash gain on securitization transactions decreased operating cash flow by $48.6 million and $26.4 million during the first six months of 2003 and 2002, respectively. Collections on the investment in retained securitization interests during the first half of 2003 and 2002 were $44.2 and $31.6 million, respectively. Cash provided by operating activities is also impacted by changes in current assets and liabilities. Changes in these balances increased operating cash flows by approximately $92.3 million and $32.0 million during the first half of 2003 and 2002, respectively. First half changes in current assets and liabilities during 2003 and 2002 consisted of the following (in millions): Six months ended ---------------- June 29, June 30, 2003 2002 ---- ---- Accounts receivable, net $ (4.3) $(31.9) Inventories 11.6 (22.1) Finance receivables accrued interest and other (28.9) (16.5) Accounts payable/Accrued expenses 93.4 113.7 Other 20.5 (11.2) ----- ------ $92.3 $ 32.0 ===== ====== The increase in accounts receivable during the first half of 2003 is significantly lower than it was during the same period last year as a result of HDFS' new operations in Europe. In August 2002, HDFS began directly servicing the wholesale financing needs of many of the Company's European dealers. Prior to August 2002, HDFS offered wholesale financing to the Company's European motorcycle dealers through a joint venture with Transamerica Distribution Finance. In connection with this change, HDFS now acquires European receivables on an on-going basis and classifies those European accounts receivable as finance receivables on the Company's consolidated balance sheet. Inventory decreases during the first half of 2003 were driven by a decrease in P&A inventory, which resulted primarily from the Company's continued focus on inventory management. Finance receivables accrued interest and other increased during the first six months of 2003 and 2002 in connection with the increase in finance receivables during those same periods. Accounts payable and accrued expenses increased $93.4 million in the first half of 2003. The increase relates primarily to higher accrued income taxes and increased unit volumes and during the first half of 2003. Similar factors contributed to the increase in 2002. 22 Investing Activities Net cash used in investing activities was $102.2 million and $192.5 million during the first six months of 2003 and 2002, respectively. The Company's investing activities consist primarily of capital expenditures, finance receivables activity and net changes in marketable securities. Capital expenditures were $82.7 million and $122.5 million during the first half of 2003 and 2002, respectively. During the first six months 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) During the first six months of 2003 and 2002, HDFS received proceeds from securitizations of $958.3 million and $662.3, respectively. Finance receivables acquired or originated net of collections resulted in a $992.3 million use of cash during the first six months of 2003 compared to $738.9 million use of cash during the same period in 2002. Financing Activities The Company's financing activities consist primarily of finance debt activity, stock transactions and dividend payments. Net cash used in financing activities during the first six months of 2003 and 2002 was $97.1 million and $138.3 million, respectively. 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. As of June 29, 2003 and June 30, 2002, HDFS' outstanding debt consisted of the following (in thousands): June 29, June 30, 2003 2002 ---- ---- Commercial paper $558,905 $437,257 Domestic revolving credit facilities 83,897 60,580 European revolving credit facility 50,529 - Senior subordinated debt 30,000 30,000 -------- -------- Total finance debt $723,331 $527,837 ======== ======== 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 maximum combined total of commercial paper and borrowings under the Domestic Credit Facilities was limited to $750 million as of June 29, 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 HDFS' 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. 23 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 June 29, 2003 and June 30, 2002, HDFS had no outstanding borrowings owed to the Company under this agreement. In addition, HDFS has $30 million of ten-year senior subordinated notes outstanding, expiring in 2007. In connection with debt agreements, HDFS has various operating and financial covenants and remains in compliance at June 29, 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, sales 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 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 750,000 shares of its common stock during the first half of 2003 under the latter authorization. The Company declared a $.04 per share dividend during the second quarter of 2003, payable June 20, 2003 to shareholders of record as of June 10, 2003, resulting in an aggregate dividend of $.075 per share for the six months ended June 29, 2003. Risk Factors ------------ The Company's ability to meet the targets and expectations noted 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 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's 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). 24 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. 25 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 petitioned the Wisconsin Supreme Court for review. On June 12, 2003, the Company's petition was granted and the matter will be reviewed by the Wisconsin Supreme Court. The Company believes that the Court of Appeals reversal was 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 the cleanup of 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. Although substantial uncertainty exists concerning the nature and scope of the environmental investigation and 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. 26 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 4. Submission of Items to a Vote of Security Holders --------------------------------------------------------- (a) The Company's Annual Meeting of Shareholders was held on May 3, 2003 (b) At the Company's Annual Meeting of Shareholders, the following directors were elected for terms expiring in 2006 by the vote indicated: Shares Shares Voted in Withholding Favor of Authority -------- --------- Jeffrey L. Bleustein 261,730,981 4,222,881 Donald A. James 263,468,209 2,485,653 James A. Norling 261,927,847 4,028,015 (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 Withheld --- ------- -------- Ratification of Ernst & Young LLP as the 255,239,764 8,904,560 1,809,537 Company's independent auditors
There were no broker non-votes with respect to the foregoing matters. Item 6. Exhibits and Reports on Form 8-K ---------------------------------------- (a) Exhibits ------------- 10.1 Director Stock Plan as amended May 3, 2003 10.2 Deferred Compensation Plan for Nonemployee Directors initially effective May 1, 1995 amended and restated May 1, 2001 and amended May 3, 2003 99.1 Written Statement of the Chief Executive Officer Pursuant to 18 U.S.C.ss.1350, as adopted pursuant toss.906 of the Sarbanes-Oxley Act of 2002 99.2 Written Statement of the Vice President and Chief Financial Officer Pursuant to 18 U.S.C.ss.1350, as adopted pursuant toss.906 of the Sarbanes-Oxley Act of 2002 (b) Reports on Form 8-K ------------------------ On April 16, 2003, the Company issued a press release announcing the Company's first quarter financial results for the period ended March 30, 2003. A copy of the press release was attached as Exhibit 99 to a current report on Form 8-K filed April 22, 2003. 27 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: 8/11/03 by: /s/ James L. Ziemer ------------------------------------- James L. Ziemer Vice President and Chief Financial Officer (Principal Financial Officer) Date: 8/11/03 by: /s/ James M. Brostowitz ------------------------------------- James M. Brostowitz Vice President, Treasurer (Principal Accounting Officer) 28 Chief Executive Officer Certification ------------------------------------- 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: August 11, 2003 /s/ Jeffrey L. Bleustein ------------------------ Jeffrey L. Bleustein Chief Executive Officer 29 Chief Financial Officer Certification ------------------------------------- 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: August 11, 2003 /s/ James L. Ziemer ------------------------------------- James L. Ziemer, Vice President and Chief Financial Officer 30 HARLEY-DAVIDSON, INC. Exhibit Index to Form 10-Q Exhibit Number ------- 10.1* Director Stock Plan as amended May 3, 2003 10.2* Deferred Compensation Plan for Nonemployee Directors initially effective May 1, 1995 amended and restated May 1, 2001 and amended May 3, 2003 99.1 Written Statement of the Chief Executive Officer Pursuant to 18 U.S.C.ss.1350, as adopted pursuant to ss.906 of the Sarbanes-Oxley Act of 2002 99.2 Written Statement of the Vice President and Chief Financial Officer Pursuant to 18 U.S.C.ss.1350, as adopted pursuant to ss.906 of the Sarbanes-Oxley Act of 2002 *Represents a management contract or compensatory plan, contract or arrangement in which a director or named executive officer of the Company participated. 31