-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Ex/Hky5RQOnlyiJu8b7mtPxMhChQIMVuUin9EMSRkiwi4m3u+IKDDPxHjJAO133a VfX9FVEDoQbh00PQSz4Sqg== 0000897069-99-000412.txt : 19990812 0000897069-99-000412.hdr.sgml : 19990812 ACCESSION NUMBER: 0000897069-99-000412 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990627 FILED AS OF DATE: 19990811 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HARLEY DAVIDSON INC CENTRAL INDEX KEY: 0000793952 STANDARD INDUSTRIAL CLASSIFICATION: MOTORCYCLES, BICYCLES & PARTS [3751] IRS NUMBER: 391382325 STATE OF INCORPORATION: WI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 033-05871 FILM NUMBER: 99683969 BUSINESS ADDRESS: STREET 1: 3700 W JUNEAU AVE CITY: MILWAUKEE STATE: WI ZIP: 53208 BUSINESS PHONE: 4143424680 10-Q 1 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-Q (X) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended June 27, 1999 or ( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from ___________________ to ___________________ Commission File Number 1-9183 Harley-Davidson, Inc. (Exact name of registrant as specified in its Charter) Wisconsin 39-1382325 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 3700 West Juneau Avenue, Milwaukee, Wisconsin 53208 (Address of principal executive offices) (Zip Code) (Registrant's telephone number, including area code) (414) 342-4680 None (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common Stock Outstanding as of August 6, 1999: 152,400,174 Shares HARLEY-DAVIDSON, INC. Form 10-Q Index For the Quarter Ended June 27, 1999 Page ---- Part I. Financial Information Item 1. Financial Statements Condensed Consolidated Statements of Income 3 Condensed Consolidated Balance Sheets 4 Condensed Consolidated Statements of Cash Flows 5 Notes to Condensed Consolidated Financial Statements 6-9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10-18 Item 3. Quantitative and Qualitative Disclosures about Market Risk 19 Note regarding forward looking statements 19 Part II. Other Information Item 1. Legal Proceedings 20 Item 4. Submission of Items to a Vote of Security Holders 20 Item 6. Exhibits and Reports on Form 8-K 21 Signatures 22 Exhibit Index 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 Six months ended ------------------ ---------------- Jun. 27, Jun. 28, Jun. 27, Jun. 28, 1999 1998 1999 1998 ---- ---- ---- ---- Net sales $608,716 $517,164 $1,167,283 $983,691 Cost of goods sold 395,722 339,636 765,155 656,288 -------- -------- ---------- ------- Gross profit 212,994 177,528 402,128 327,403 Operating income from financial services 9,118 6,355 11,760 8,940 Operating expenses (115,478) (96,644) (215,937) (178,297) -------- -------- ---------- -------- Income from operations 106,634 87,239 197,951 158,046 Interest income, net 1,992 612 3,481 1,386 Other, net (641) (607) (463) (1,796) -------- -------- ---------- -------- Income before provision for income taxes 107,985 87,244 200,969 157,636 Provision for income taxes 39,415 31,843 73,355 57,537 -------- -------- ---------- -------- Net income $ 68,570 $ 55,401 $ 127,614 $100,099 ======== ======== ========== ======== Earnings per common share: Basic $ .45 $ .36 $ .83 $ .66 ======== ======== ========== ======== Diluted $ .44 $ .36 $ .82 $ .65 ======== ======== ========== ======== Weighted-average common shares outstanding: Basic 153,081 151,930 153,064 151,883 ======== ======== ========== ======== Diluted 155,606 154,545 155,646 154,385 ======== ======== ========== ======== Cash dividends per share $ .045 $ .040 $ .085 $ .075 ======== ======== ========== ========
3 Harley-Davidson, Inc. Condensed Consolidated Balance Sheets (In thousands)
Jun. 27, Dec. 31, Jun. 28, 1999 1998 1998 ---- ---- ---- -unaudited- -unaudited- ASSETS Current assets: Cash and cash equivalents $ 209,984 $ 165,170 $ 154,475 Accounts receivable, net 100,813 113,417 91,336 Finance receivables, net 369,218 360,341 302,247 Inventories (Note 2) 149,060 155,616 131,525 Other current assets 49,745 50,419 44,565 ---------- ---------- ---------- Total current assets 878,820 844,963 724,148 Finance receivables, net 426,000 319,427 346,097 Property, plant and equipment, net 629,941 627,759 561,966 Goodwill 51,182 51,197 45,323 Other assets 76,247 76,863 68,467 ---------- ---------- ---------- $2,062,190 $1,920,209 $1,746,001 ========== ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 112,521 $ 122,722 $ 118,395 Accrued and other liabilities 211,752 199,051 176,059 Current portion of finance debt 217,655 146,742 125,951 ---------- ---------- ---------- Total current liabilities 541,928 468,515 420,405 Finance debt 280,000 280,000 280,000 Other long-term liabilities 62,895 69,700 63,308 Postretirement health care benefits 73,934 72,083 70,164 Contingencies (Note 6) Total shareholders' equity 1,103,433 1,029,911 912,124 ---------- ---------- ---------- $2,062,190 $1,920,209 $1,746,001 ========== ========== ==========
4 Harley-Davidson, Inc. Condensed Consolidated Statements of Cash Flows (Unaudited) (In thousands)
Six months ended ---------------- Jun. 27, Jun. 28, 1999 1998 ---- ---- Cash flows from operating activities: Net income $ 127,614 $ 100,099 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 52,911 40,387 Provision for credit losses 9,712 4,570 Long-term employee benefits (4,968) 4,430 Other, net 1,474 329 Net change in other current assets and current liabilities 24,436 16,861 ---------- ---------- Net cash provided by operating activities 211,179 166,676 Cash flows from investing activities: Purchase of property and equipment (54,789) (69,135) Finance receivables acquired or originated (1,638,283) (1,283,629) Finance receivables collected/sold 1,513,121 1,183,082 Other, net (7,794) (7,677) ---------- ---------- Net cash used in investing activities (187,745) (177,359) Cash flows from financing activities: Net increase in finance debt 70,913 35,292 Dividends paid (13,382) (11,668) Stock repurchase (56,458) (15,174) Issuance of stock under employee stock and option plans 20,307 9,246 ---------- ---------- Net cash provided by financing activities 21,380 17,696 ---------- ---------- Net increase in cash and cash equivalents 44,814 7,013 Cash and cash equivalents: At beginning of period 165,170 147,462 ---------- ---------- At end of period $ 209,984 $ 154,475 ========== ==========
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 generally accepted accounting principles for interim financial information. However, the foregoing statements contain all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of Company management, necessary to present fairly the consolidated financial position as of June 27, 1999 and June 28, 1998, and the results of operations for the three- and six-month periods then ended. Certain prior-year balances have been reclassified in order to conform to current-year presentation. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended December 31, 1998. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Note 2 - Inventories The Company values its inventories at the lower of cost or market. Substantially all inventories located in the United States are valued using the last-in, first-out (LIFO) method. Inventories consist of the following (in thousands):
Jun. 27, Dec. 31, Jun. 28, 1999 1998 1998 ---- ---- --- Components at the lower of cost, first-in, first-out (FIFO), or market: Raw material & work-in-process $ 59,499 $ 55,336 $ 47,335 Finished goods 20,564 27,295 23,517 Parts & accessories and general merchandise 90,472 93,710 84,202 -------- -------- -------- 170,535 176,341 155,054 Excess of FIFO over LIFO 21,475 20,725 23,529 -------- -------- -------- Inventories as reflected in the accompanying condensed consolidated balance sheets $149,060 $155,616 $131,525 ======== ======== ========
6 Note 3 - Business Segments The Company operates in two business segments: Motorcycles and Related Products (Motorcycles) and Financial Services which consists of the Company's subsidiary, Eaglemark Financial Services, Inc. (Eaglemark). 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 ------------------ ---------------- Jun. 27, Jun. 28, Jun. 27, Jun. 28, 1999 1998 1999 1998 ---- ---- ---- ---- Net sales: Motorcycles and Related Products $608,716 $517,164 $1,167,283 $983,691 Financial Services n/a n/a n/a n/a $608,716 $517,164 $1,167,283 $983,691 ======== ======== ========== ======== Income from operations: Motorcycles and Related Products $100,140 $ 83,246 $ 191,617 $154,297 Financial Services 9,118 6,355 11,760 8,940 General corporate expenses (2,624) (2,362) (5,426) (5,191) -------- -------- ---------- -------- $106,634 $ 87,239 $ 197,951 $158,046 ======== ======== ========== ========
Note 4 - 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 ------------------ ---------------- Jun. 27, Jun. 28, Jun. 27, Jun. 28, 1999 1998 1999 1998 ---- ---- ---- ---- Numerator Net income used in computing basic and diluted earnings per share $ 68,570 $ 55,401 $127,614 $100,099 ======== ======== ======== ======== Denominator Denominator for basic earnings per share - weighted-average common shares 153,081 151,930 153,064 151,883 Effect of dilutive securities - employee stock options and nonvested stock 2,525 2,615 2,582 2,502 -------- -------- -------- -------- Denominator for diluted earnings per share- adjusted weighted-average shares 155,606 154,545 155,646 154,385 ======== ======== ======== ======== Basic earnings per share $ .45 $ .36 $ .83 $ .66 ======== ======== ======== ======== Diluted earnings per share $ .44 $ .36 $ .82 $ .65 ======== ======== ======== ========
7 Note 5 - Comprehensive Income Total comprehensive income, which was comprised of net income and foreign currency translation adjustments, amounted to approximately $64.6 million and $54.5 million for the three months ended June 27, 1999 and June 28, 1998, respectively. Total comprehensive income for the six months ended June 27, 1999 and June 28, 1998 was $123.3 million and $101.9 million, respectively. Note 6 - Contingencies The Company is involved with government agencies in various environmental matters, including a matter involving soil and groundwater contamination at its York, Pennsylvania facility (the Facility). The Facility was formerly used by the U.S. Navy and AMF (the predecessor corporation of Minstar). The Company purchased the Facility from AMF in 1981. Although the Company is not certain as to the extent of the environmental contamination at the Facility, it is working with the Pennsylvania Department of Environmental Protection in undertaking certain investigation and remediation activities, including a site-wide remedial 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 investigation and remediation activities at the Facility (response costs). The trust will administer the payment of the future response costs at the Facility as covered by the Agreement. In addition, in March 1991 the Company entered into a settlement agreement with Minstar related to certain indemnification obligations assumed by Minstar in connection with the Company's purchase of the Facility. Pursuant to this settlement, Minstar was obligated to reimburse the Company for a portion of its response costs at the Facility. In the first quarter of 1999, the Company received final payment of Minstar's portion of the response costs at the Facility. Although substantial uncertainty exists concerning the nature and scope of the environmental remediation that will ultimately be required at the Facility, based on preliminary information currently available to the Company and taking into account the Company's settlement agreement with the Navy, the Company estimates that it will incur approximately $6 million of net additional response costs at the Facility. The Company has established reserves for this amount. The Company's estimate of additional response costs is based on reports of environmental consultants retained by the Company, the actual costs incurred to date and the estimated costs to complete the necessary investigation and remediation activities. Response costs are expected to be incurred over a period of approximately 10 years, ending in 2009. Note 7 - Capital Stock During the second quarter of 1999, the Company repurchased 1,010,000 shares of its outstanding common stock with $56.5 million of cash on hand. The shares were repurchased by the Company under its continuing authorization to repurchase shares to offset dilution caused by the exercise of stock options. See the "Liquidity and Capital Resources" section below for additional information on the Company's authorization to repurchase common stock. The Company has designated .5 million of the 2.0 million authorized shares of preferred stock as Series A Junior Participating preferred stock (Preferred Stock). The Preferred Stock has a par value of $1 per share. Each share of Preferred Stock, none of which is outstanding, is entitled to 800 votes per share (subject to adjustment) and other rights such that the value of a one one-hundredth interest in a share of Preferred Stock should approximate the value of eight shares of common stock. 8 Note 7 - Capital Stock (continued) The Preferred Stock is reserved for issuance in connection with the Company's outstanding Preferred Stock purchase rights (Rights), the agreement with respect to which was amended effective February 19, 1999. Each outstanding share of common stock entitles its holder to one-eighth Right. Under certain conditions, each Right entitles the holder to purchase one one-hundredth of a share of Preferred Stock at an exercise price of $800, subject to adjustment. The Rights are only exercisable if a person or group has acquired 15% or more of the outstanding common stock or has announced an intention to acquire 25% or more of the outstanding common stock. If there is a 15% acquiring party, each holder of a Right, other than the acquiring party, will be entitled to purchase, at the exercise price, Preferred Stock having a market value of two times the exercise price. In addition, prior to the acquisition of 50% or more of the outstanding common stock by an acquiring party, the Board of Directors of the Company may exchange the Rights (other than the rights of an acquiring party which have become void), in whole or in part, at an exchange ratio of eight shares of common stock or one one-hundredth of a share of Preferred Stock (or a share of the company's preferred stock having equivalent rights, privileges, and preferences), per Right, subject to adjustment. 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section should be read in conjunction with the Management's Discussion and Analysis of Financial Condition and Results of Operations section, included in the Company's Annual Report on Form 10-K for the year ended December 31, 1998. Results of Operations for the Three Months Ended June 27, 1999 Compared to the Three Months Ended June 28, 1998 For the quarter ended June 27, 1999, consolidated net sales totaled $608.7 million, a $91.5 million or 17.7% increase over the same period last year. Net income and diluted earnings per share for the second quarter of 1999 were $68.6 million and $.44 on 155.6 million weighted average shares outstanding versus $55.4 million and $.36 on 154.5 million weighted average shares outstanding in 1998, increases of 23.8% and 22.9%, respectively.
Motorcycle Unit Shipments and Net Sales For the Three Month Periods Ended June 27, 1999 and June 28, 1998 ============================================= ============ =========== ============ ============ Increase 1999 1998 (Decrease) %Change ============================================= ============ =========== ============ ============ Motorcycle Unit Shipments ============================================= ============ =========== ============ ============ Harley-Davidson(R)motorcycle units 44,771 37,753 7,018 18.6% - --------------------------------------------- ------------ ----------- ------------ ------------ Buell(R)motorcycle units 1,512 1,497 15 1.0 - --------------------------------------------- ------------ ----------- ------------ ------------ ============================================= ============ =========== ============ ============ Total motorcycle units 46,283 39,250 7,033 17.9% ============================================= ============ =========== ============ ============ Net sales (in millions) ============================================= ============ =========== ============ ============ Harley-Davidson motorcycles $468.6 $400.9 $67.7 16.9% - --------------------------------------------- ------------ ----------- ------------ ------------ Buell motorcycles 12.5 13.4 (.9) (6.4) - --------------------------------------------- ------------ ----------- ------------ ------------ Total motorcycles 481.1 414.3 66.8 16.1 - --------------------------------------------- ------------ ----------- ------------ ------------ Motorcycle Parts and Accessories 99.7 79.3 20.4 25.7 - --------------------------------------------- ------------ ----------- ------------ ------------ General Merchandise 27.2 22.5 4.7 21.2 - --------------------------------------------- ------------ ----------- ------------ ------------ Other .7 1.1 (.4) (38.4) ============================================= ============ =========== ============ ============ Total Motorcycles and Related Products $608.7 $517.2 $91.5 17.7% ============================================= ============ =========== ============ ============
The second quarter increase in net sales of $91.5 million, or 17.7%, was driven primarily by an 18.6% increase in Harley-Davidson motorcycle unit shipments. During the second quarter of 1999, the Company increased its Harley-Davidson motorcycle unit shipments and production to almost 45,000 units, approximately 7,000 units higher than the same period last year. This increase in unit production is primarily the result of the Company's ongoing success with its manufacturing strategy. This strategy is designed to increase capacity, improve product quality, reduce costs and increase flexibility to respond to changes in the marketplace. In addition, 1999 second quarter unit shipments were positively impacted by the sale of 725 FXR models, which are limited edition big twin Harley-Davidson motorcycles. The FXR's are being produced at the York, PA manufacturing facility on a separate low volume assembly line which was formerly used for military contract production. 10 Based on the production levels achieved in the second quarter, the Company has increased its 1999 annual production target to 172,000 Harley-Davidson units and set a third quarter production target of 42,000 units. (1) Shipments of Buell motorcycle units in the second quarter of 1999 totaled 1,512 compared to 1,497 in the second quarter of 1998. During the second quarter of 1999, Buell motorcycle production was interrupted for five weeks until the parts associated with its recall could be supplied to the market. As a result, the Company has reduced the 1999 Buell motorcycle production target by 300 to 7,700 units. (1) Parts and Accessories (P & A) sales were up $20.4 million or 25.7% compared to the second quarter of 1998. P&A sales increases were driven by increased engine sales combined with sales growth in Twin Cam 88 performance accessories and other new products. General Merchandise sales, which include clothing and collectibles, were up $4.7 million, or 21.2%, compared to the second quarter of 1998. Second quarter 1999 General Merchandise sales were positively impacted by the timing of shipments between the first and second quarters of 1999. The Company anticipates that long term sales growth targets for P&A and General Merchandise will continue to approximate the Harley-Davidson motorcycle unit growth target. (1) The Company's ability to reach the 1999 quarterly and annual targeted production levels and to attain growth rates in other areas will depend 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, (iv) avoid unexpected product backorders and (v) sell all of the motorcycles it has the capacity to produce. In addition, the Company could experience delays in making changes to facilities as a result of risks normally associated with the operation of manufacturing facilities, including delays in the delivery of machinery and equipment or difficulties in making such machinery and equipment operational, work stoppages, difficulties with suppliers, natural causes or other factors. These risks, potential delays and uncertainties regarding the costs could also adversely impact the Company's capital expenditure estimates (see "Liquidity and Capital Resources" section). Gross Profit Gross profit increased $35.5 million, or 20.0%, compared to the second quarter of 1998 primarily due to an increase in overall sales volume. The gross profit margin in the second quarter was 35.0% in 1999 compared to 34.3% in 1998. The increase in gross profit margin was primarily due to a greater percentage of shipments to domestic customers, partially offset by a weaker product mix. Also, 1998 gross profit margin was negatively impacted by facilities start-up costs, which the Company did not experience in the current year. During the second quarter of 1999, the Company shipped approximately 80% of its Harley-Davidson motorcycle units domestically, compared to 76% during the second quarter of 1998. The Company's domestic motorcycle sales are direct to dealers, while approximately one half of its international shipments are to wholesale distributors, which carry a lower gross margin. Going forward, the Company expects that approximately 75% of its Harley-Davidson motorcycles will be shipped domestically. (1) The 1999 second quarter gross profit margin was negatively impacted by a higher mix of Sportster 11 shipments, which have a lower gross margin than touring and custom motorcycle models. Sportster motorcycle unit shipments made up 23% of the total Harley-Davidson unit shipments in the second quarter of 1999, compared to 20% during the second quarter of 1998. The Company expects the Sportster mix in the third and fourth quarters of 1999 to be approximately 24% of total Harley-Davidson unit shipments. (1)
Operating Expenses For the Three-Month Periods Ended June 27, 1999 and June 28, 1998 (Dollars in Millions) =============================================================================================== 1999 1998 Increase %Change - ----------------------------------------------------------------------------------------------- Motorcycles and Related Products $112.9 $94.3 $18.6 19.7% - ----------------------------------------------------------------------------------------------- Corporate 2.6 2.4 .2 11.1 =============================================================================================== Total operating expenses $115.5 $96.7 $18.8 19.4% ===============================================================================================
Total operating expenses increased $18.8 million, or 19.4%, compared to the second quarter of 1998. Operating expenses in the second quarter of 1999 were higher than the same quarter a year ago primarily in the areas of sales, marketing and engineering. Second quarter 1999 operating expenses also include a $5.0 million charge related to the previously announced recall of Buell motorcycles. Comparatively, the second quarter of 1998 included a $3.7 million charge for the recall of ignition switches. The Company expects to continue to invest in its future growth in the second half of 1999, with increased spending in the areas of product development and marketing.(1) The Company expects increased spending in the second half of 1999 which may result in third and fourth quarter operating profit margins (% of sales) comparable to those achieved in the second half of 1998. (1) Operating income from financial services The operating income of Eaglemark Financial Services, Inc. (Eaglemark) was $9.1 million and $6.4 million for the second quarter of 1999 and 1998, respectively. Eaglemark benefited from the increase in the Company's U.S. motorcycle retail sales as well as increased market share in retail installment lending for the Company's motorcycles, which was 21.9% as of the end of the second quarter of 1999 compared to 18.7% for the same period a year ago. Interest income Interest income was higher than in the prior year primarily due to higher levels of cash available for short-term investing in the second quarter of 1999 compared to 1998. Consolidated income taxes The Company's effective income tax rate was 36.5% for the second quarters of 1999 and 1998. 12 Results of Operations for the Six Months Ended June 27, 1999 Compared to the Six Months Ended June 28, 1998 For the six month period ended June 27, 1999, the Company recorded net sales of $1,167.3 million, a $183.6 million or 18.7% increase over the same period last year. Net income and diluted earnings per share were $127.6 million and $.82 on 155.6 million weighted average shares outstanding versus $100.1 million and $.65 on 154.4 million weighted average shares, increases of 27.5% and 26.5%, respectively.
Motorcycle Unit Shipments and Net Sales For the Six-Month Periods Ended June 27, 1999 and June 28, 1998 ================================================ =========== ========== ============ =========== 1999 1998 Increase %Change ================================================ =========== ========== ============ =========== Motorcycle Unit Shipments ================================================ =========== ========== ============ =========== Harley-Davidson(R)motorcycle units 85,952 72,235 13,717 19.0% - ------------------------------------------------ ----------- ----------- ----------- ----------- Buell(R)motorcycle units 3,525 2,847 678 23.8 - ------------------------------------------------ ----------- ----------- ----------- ----------- ================================================ =========== ========== ============ =========== Total motorcycle units 89,477 75,082 14,395 19.2% ================================================ =========== ========== ============ =========== Net sales (in millions) ================================================ =========== ========== ============ =========== Harley-Davidson motorcycles $905.1 $762.2 $142.9 18.7% - ------------------------------------------------ ----------- ---------- ------------ ----------- Buell motorcycles 28.6 25.7 2.9 11.3 - ------------------------------------------------ ----------- ---------- ------------ ----------- Total motorcycles 933.7 787.9 145.8 18.5 - ------------------------------------------------ ----------- ---------- ------------ ----------- Motorcycle Parts and Accessories 174.7 142.6 32.1 22.5 - ------------------------------------------------ ----------- ---------- ------------ ----------- General Merchandise 56.7 51.7 5.0 9.7 - ------------------------------------------------ ----------- ---------- ------------ ----------- Other 2.2 1.5 .7 43.5 ================================================ =========== ========== ============ =========== Total Motorcycles and Related Products $1,167.3 $983.7 $183.6 18.7% ================================================ =========== ========== ============ ===========
The 18.7% increase in revenue was largely attributable to additional motorcycle unit shipments as demand for the Company's motorcycles continued to grow. The most recent information available (through May) indicates a combined U.S. heavyweight (651+cc) market share of 46.9% (for Harley-Davidson and Buell) compared to 44.5% for the same period in 1998. This same market has grown at a 28.4% rate year-to-date, while retail registrations for the Company's motorcycles (Harley-Davidson and Buell motorcycles) increased 35.2%. However, even with the planned production increases the Company does not expect to be able to sustain a thirty-plus percent rate of retail registration growth during the second half of 1999. (1) European data (through May) show the Company with a 6.0% share of the heavyweight (651+cc) market, up from 5.7% for the same period in 1998. The European market (651+cc) has grown at a 9.1% rate year-to-date, while retail registrations for the Company's motorcycles (Harley-Davidson and Buell) increased 14.6% compared to last year. The Company continues to actively work on improving its European distribution network and implement European focused marketing programs. The introduction of the Company's new Twin Cam 88 engine has also been well received by the European market. 13 Asia/Pacific (Japan and Australia) data (through May) show the Company with a 18.2% share of the heavyweight (651+cc) market, up from 14.2% for the same period in 1998. Asia/Pacific market registrations are 9.2% behind last year's year-to-date numbers, while registrations for the Company's motorcycles (Harley-Davidson and Buell) have increased 16.0% over 1998 year-to-date levels. Parts and Accessories (P & A) sales of $174.7 million were up $32.1 million or 22.5% compared to the first half of 1998. General Merchandise sales, which include clothing and collectibles, of $56.7 million were up $5.0 million, or 9.7%, compared to the first half of 1998. P&A sales did grow slightly faster than the long-term target during the first half of 1999. However, long term sales growth targets for P&A and General Merchandise will continue to approximate the Harley-Davidson motorcycle unit growth target.(1) Gross Profit Gross profit for the first six months of 1999 totaled $402.1 million, an increase of $74.7 million or 22.8% over the same period in 1998. The gross profit margin was 34.4% in 1999 compared to 33.3% for the first six months of 1998. The increase in gross profit margin was primarily due to a higher percentage of shipments to domestic customers in the first half of the current year. In addition, the half-year comparison of gross margin is also impacted by higher costs incurred during the first half of 1998 in connection with the ramp-up of two new production facilities.
Operating Expenses For the Six-Month Periods Ended June 27, 1999 and June 28, 1998 (Dollars in Millions) =============================================================================================== 1999 1998 Increase %Change - ----------------------------------------------------------------------------------------------- Motorcycles and Related Products $210.5 $173.1 $37.4 21.6% - ----------------------------------------------------------------------------------------------- Corporate 5.4 5.2 .2 4.5 =============================================================================================== Total operating expenses $215.9 $178.3 $37.6 21.1% ===============================================================================================
Total operating expenses of $215.9 million for the first six months of 1999 increased $37.6 million or 21.1% compared to the first six months of 1998. Operating expenses in the first half of 1999 were higher than the same period a year ago primarily in the areas of sales, marketing, engineering and information services. Operating expenses in the first half of 1999 also included a $5.0 million charge related to the previously announced recall of Buell motorcycles. Comparatively, the second quarter of 1998 includes a $3.7 million charge for the recall of ignition switches. 14 Operating income from financial services The operating income of Eaglemark was $11.8 million and $8.9 million for the first half of 1999 and 1998, respectively. Eaglemark benefited from the increase in the Company's U.S. motorcycle retail sales as well as increased market share in retail installment lending for the Company's motorcycles. The Company's goal is to sustain Eaglemark's June year to date operating income growth rate of approximately 30% through the end of 1999. (1) Interest income Interest income was higher than prior year primarily due to higher levels of cash available for short-term investing in the first half of 1999 compared to 1998. Other income (expense) Other expense in the first half of 1999 was approximately $1.3 million lower than the first half of 1998. The decrease in other expense over prior year relates to foreign exchange losses recorded in the first half of 1998 that did not recur in 1999. Consolidated income taxes The Company's effective income tax rate was 36.5% first six months of 1999 and 1998. Other Matters Environmental The Company's policy is to comply with all applicable environmental laws and regulations, and the Company has a compliance program in place to monitor, and report on, environmental issues. The Company has reached settlement agreements with its former parent (Minstar, successor to AMF Incorporated) and the U.S. Navy regarding soil and groundwater remediation at the Company's manufacturing facility in York, Pennsylvania and currently estimates that it will incur approximately $6 million of net additional costs related to the remediation effort. The Company has established reserves for this amount. See Note 6 of the notes to condensed consolidated financial statements. Recurring costs associated with managing hazardous substances and pollution in on-going operations have not been material. The Company regularly invests in equipment to support and improve its various manufacturing processes. While the Company considers environmental matters in capital expenditure decisions, and while some capital expenditures also act to improve environmental compliance, only a small portion of the Company's annual capital expenditures relate to equipment that has the sole purpose of meeting environmental compliance obligations. The Company anticipates that capital expenditures for equipment used to limit hazardous substances/pollutants during 1999 will approximate $.5 million.(1) The Company does not expect that these expenditures related to environmental matters will have a material effect on future operating results or cash flows. 15 Impact of Year 2000 The Company has implemented a comprehensive Year 2000 initiative to identify and address issues associated with the Year 2000. A team of internal staff is managing the initiative with the assistance of some outside consultants. The team's activities are designed to ensure that there are no material adverse effects on the Company. The Company's assessment of its internal information services computer systems indicated that many of the Company's systems were vulnerable to Year 2000 issues. In response to this assessment, the Company made plans to remediate the affected systems by modifying or replacing portions of its software and hardware so that these computer systems will function properly with respect to dates in the year 2000 and thereafter. To date, the Company has completed the remediation (including testing) of all affected internal computer systems related to its ability to produce and distribute motorcycles. In addition, the Company is in the process of completing the remaining remediation required on other affected systems identified in the assessment. The majority of remaining remediation efforts are being accomplished as components of existing projects which include the replacement of current software and hardware. The remaining remediation including testing is expected to be complete by the end of the third quarter of 1999. (1) The Company also has assessed Year 2000 issues related to its non-information technology systems used in product development, engineering, manufacturing, and facilities. The Company has completed these assessments and is currently working to modify or replace any non-information technology systems so that these systems will function properly with respect to dates in the year 2000 and thereafter. These remediation efforts are also expected to be complete by the end of the third quarter of 1999. (1) The Company is also working with its significant suppliers and financial institutions to ensure that those parties have appropriate plans to remediate Year 2000 issues where their systems interface with the Company's systems or otherwise impact its operations. The Company has communicated in writing or in person with all of its principal suppliers to confirm their status in regards to Year 2000 issues. Currently, the Company has received confirmation from over 95% of its significant suppliers confirming their systems are currently compliant or will be compliant by year end, with respect to the year 2000. The Company will continue to assess the extent to which its operations are vulnerable should any of its suppliers fail to properly remediate their computer systems. The Company has also communicated with its dealers and distributors regarding their potential Year 2000 issues. Based on these communications the Company does not anticipate that potential Year 2000 issues at its dealers and distributors would have a material adverse effect on its ability to deliver its products and services to its dealers and ultimately to its customers.(1) The Company's Year 2000 initiative, which is substantially complete, is expected to be complete, including system modifications, replacements and testing, by the end of the third quarter of 1999.(1) However the Company will continue to monitor Year 2000 issues throughout the remainder of 1999 and into 2000 to ensure that any additional or previously unidentified issues are properly addressed. While the Company believes its planning efforts are adequate to address its Year 2000 concerns, there can be no assurance that the systems of other companies on which the Company's systems and operations rely will be converted on a timely basis and will not have a material adverse effect on the Company. However, based on the progress the Company has made on its internal initiative and the information available from third parties, the Company has not identified a need to develop an extensive company-wide contingency plan for non-remediation issues at this time. The need for such a plan is evaluated on an on-going basis as part of the Company's overall Year 2000 initiative. 16 Based on the Company's assessments to date, the costs of the Year 2000 initiative (which are expensed as incurred) are estimated to be approximately $11 million.(1) Approximately $ 2.3 million of Year 2000 expense has been incurred in 1999 and $8.8 million in the aggregate since the initiative began in 1997. The costs of the project and the date on which the Company believes it will complete its Year 2000 initiative are forward-looking statements and are based on management's best estimates, according to information available through the Company's assessments to date. However, there can be no assurance that these estimates will be achieved, and actual results could differ materially from those anticipated. Specific factors that might cause such material differences include, but are not limited to, the availability and cost of personnel trained in this area, the retention of these professionals, the ability to locate and correct all relevant computer codes, and similar uncertainties. At present, the Company has not experienced any significant problems in these areas. Liquidity and Capital Resources as of June 27, 1999 The Company's main source of liquidity is cash from operating activities which consists of net income adjusted for non-cash operating activities and changes in other current assets and liabilities such as accounts receivable, inventory, prepaid expenses and accounts payable. The Company generated $211.2 million of cash from operating activities during the first half of 1999 compared to $166.7 million in 1998. The largest component of cash from operating activities is net income adjusted for depreciation and provision for credit losses, which contributed $190.2 million in 1999 compared to $145.1 million in 1998. Changes in other current assets and liabilities increased operating cash flows by approximately $24.4 million and $16.9 million in the first half of 1999 and 1998, respectively. Changes in working capital during the first six months of 1999 and 1998 consisted of the following (in millions): Six months ended ---------------- Working capital item 1999 1998 ------------------------ ---- ---- Accounts receivable, net $12.6 $ 13.5 Inventories 6.6 (10.2) Prepaid expenses .6 (1.5) Accounts payable and accrued expenses 4.6 15.1 ----- ------ Total $24.4 $ 16.9 ===== ====== In the first half of 1999 inventories decreased by approximately $6.6 million, primarily due a corresponding decrease in finished units on-hand. Comparatively, inventory levels increased approximately $10.2 million in the first half of 1998, largely due to the ramp up of new production facilities. In addition, increases in accounts payable and accrued expenses in the first half of 1999 were $4.6 million as compared to $15.1 million during the first half of 1998. 17 Capital expenditures amounted to approximately $54.8 million and $69.1 million during the first half of 1999 and 1998, respectively. For the past several years, the Company has been implementing a manufacturing strategy to, among other things, increase its motorcycle production capacity. Going forward, the Company's capital expenditures will continue to focus on capacity expansion at its new and previously existing facilities and will also focus on other areas such as product development, systems development and continuing operations. Although the Company does not know the exact amount of capital expenditures it will incur, it estimates the capital required in 1999 will be in the range of $150-$170 million.(1) The Company anticipates it will have the ability to fund all capital expenditures with internally generated funds and short-term financing.(1) The Company (excluding Eaglemark) currently has nominal levels of long-term debt and has lines of credit of approximately $42.8 million, of which approximately $41.9 million remained available at June 27, 1999. Eaglemark finances its business through an unsecured commercial paper program, revolving credit facilities, senior subordinated debt and asset-backed securitizations. Eaglemark issues short-term commercial paper with maximum issuance available of $600 million of which approximately $423 million was outstanding at June 27, 1999. Maturities of commercial paper issued can range from 1 to 270 days. Eaglemark has in place a $350 million 364-day revolving credit facility and a $250 million five-year revolving credit facility of which approximately $45 million was outstanding at June 27, 1999. The primary uses of the credit facilities are to provide liquidity to the unsecured commercial paper program and to fund normal business operations. Eaglemark has also issued $30 million of senior subordinated notes which expire in 2007. During the second quarter, Eaglemark securitized and sold approximately $195 million of its retail installment loans to investors with limited recourse, with servicing rights being retained by Eaglemark. The Company expects that the future growth of Eaglemark will be financed from internally generated funds, additional capital contributions from the Company, bank lines of credit, and continuation of its subordinated debt, commercial paper and securitization programs. Eaglemark anticipates that further securitization transactions will be completed during the remainder of 1999, depending on market conditions. (1) The Company has a support agreement with Eaglemark, whereby the Company agrees to provide Eaglemark with certain financial support payments if required. The payments may be provided at the Company's option either as a capital contribution or as a loan. The Company has authorization from its Board of Directors to repurchase up to 4,700,000 shares of the Company's outstanding common stock. In addition, the Company has continuing authorization from its Board of Directors to repurchase shares of the Company's outstanding common stock under which the cumulative number of shares repurchased, at the time of any repurchase, shall not exceed the sum of (i) the number of shares issued in connection with the exercise of stock options occurring on or after January 1, 1998 plus (ii) one percent of the issued and outstanding common stock of the Company on January 1 of the current year, adjusted for any stock split. During the second quarter of 1999 the Company repurchased 1,010,000 shares of its common stock under the latter authorization. The Company's Board of Directors declared two cash dividends during the first six months of 1999 including, most recently, a $.045 per share cash dividend declared on May 10, 1999, payable June 25, 1999 to shareholders of record June 15, 1999. 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, 1998 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 1998 annual report on Form 10-K. (1) Note regarding forward-looking statements Certain matters discussed in this Quarterly Report on Form 10-Q are "forward-looking statements" intended to qualify for the safe harbors from liability established by the Private Securities Litigation Reform Act of 1995. These forward-looking statements can generally be identified as such by reference to this footnote or because the context of the statement will include words such as the Company "believes," "anticipates," "expects" or "estimates" or words of similar meaning. Similarly, statements that describe the Company's future plans, objectives, targets or goals are also forward-looking statements. Such forward-looking statements are subject to certain risks and uncertainties which are described in close proximity to such statements or elsewhere in this report and could cause actual results to differ materially from those anticipated as of the date of this report. Shareholders, potential investors and other readers are urged to consider these factors in evaluating the forward-looking statements and are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements included herein are only made as of the date of this report, and the Company undertakes no obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances. 19 Part II - OTHER INFORMATION HARLEY-DAVIDSON, INC. FORM 10-Q June 27, 1999 Item 1. Legal Proceedings The Company is involved with government agencies in various environmental matters, including a matter involving soil and groundwater contamination at its York, Pennsylvania facility. See footnote 6 to the accompanying condensed consolidated financial statements. Item 4. Submission of Items to a Vote of Security Holders (a) The Company's Annual Meeting of Shareholders was held on May 8, 1999. (b) At the Company's Annual Meeting of Shareholders, the following directors were elected for terms expiring in 2002 by the vote indicated: Shares Shares Voted in Withholding Favor of Authority ------- --------- Richard J. Herman-Taylor 124,255,824 2,807,421 Sara L. Levinson 124,253,999 2,809,246 Richard F. Teerlink 124,281,075 2,782,170 (c) Matters other than election of directors, brought for vote at the Company's Annual Meeting of Shareholders, passed by the vote indicated.
Shares Voted ------------ For Against Abstained --- ------ --------- Approval of the Company's amended Corporate Short Term Incentive Plan 122,812,732 3,753,992 496,521 Ratification of Ernst & Young LLP as the Company's independent auditors 126,674,097 123,683 265,465
There were no broker non-votes with respect to the foregoing matters. 20 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits ------------- 27 Financial Data Schedule for June 27, 1999 (b) Reports on Form 8-K ------------------------ None 21 Part II - Other Information HARLEY-DAVIDSON, INC. Form 10-Q June 27, 1999 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: 8/11/99 by: /s/ James L. Ziemer James L. Ziemer Vice President and Chief Financial Officer (Principal Financial Officer) 8/11/99 by: /s/ James M. Brostowitz James M. Brostowitz Vice President, Controller (Principal Accounting Officer) and Treasurer 22 Exhibit Index Exhibit No. Description - ----------- ----------- 27 Financial Data Schedule for June 27, 1999 EX-27 2 FINANCIAL DATA SCHEDULE
5 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF HARLEY-DAVIDSON, INC. AS OF AND FOR THE SIX MONTHS ENDED JUNE 27, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 6-MOS DEC-31-1999 JAN-01-1999 JUN-27-1999 209,984 0 99,968 1,845 149,060 878,820 1,130,476 500,535 2,062,190 541,928 0 1,591 0 0 1,101,842 2,062,190 1,167,283 1,167,283 765,155 765,155 463 0 (3,481) 200,969 73,355 127,614 0 0 0 127,614 .83 .82
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