-----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, UAnq6DxhZH+GBVv2QwoW4TYwT+M8TzLoBZLc5Q1eH8ChTq8CFlpIChftCQitFq+n oBaK+rZImX294we7BA17qQ== 0000897069-99-000543.txt : 19991111 0000897069-99-000543.hdr.sgml : 19991111 ACCESSION NUMBER: 0000897069-99-000543 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990926 FILED AS OF DATE: 19991110 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: 99745246 BUSINESS ADDRESS: STREET 1: 3700 W JUNEAU AVE CITY: MILWAUKEE STATE: WI ZIP: 53208 BUSINESS PHONE: 4143424680 10-Q 1 HARLEY-DAVIDSON, INC. FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-Q (X) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended September 26, 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 November 8, 1999: 151,320,267 Shares HARLEY-DAVIDSON, INC. Form 10-Q Index For the Quarter Ended September 26, 1999 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 6-8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9-17 Item 3. Quantitative and Qualitative Disclosures about Market Risk 17 Note regarding forward-looking statements 17 Part II. Other Information Item 1. Legal Proceedings 18 Item 6. Exhibits and Reports on Form 8-K 18 Signatures 19 Exhibit Index 20 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 Nine months ended ------------------ ----------------- Sep. 26, Sep. 27, Sep. 26, Sep. 27, 1999 1998 1999 1998 ---- ---- ---- ---- Net Sales $623,193 $517,198 $1,790,476 $1,500,889 Cost of goods sold 418,535 346,059 1,183,690 1,002,347 ------- ------- --------- --------- Gross profit 204,658 171,139 606,786 498,542 Operating income from financial services 7,514 3,599 19,274 12,539 Operating expenses (110,775) (94,599) (326,712) (272,896) ------- ------- --------- --------- Income from operations 101,397 80,139 299,348 238,185 Interest income, net 2,090 1,056 5,571 2,442 Other, net (556) 1,287 (1,019) (508) ------- ------- --------- --------- Income before provision for income taxes 102,931 82,482 303,900 240,119 Provision for income taxes 37,569 30,110 110,924 87,647 ------- ------- --------- --------- Net income $ 65,362 $ 52,372 $ 192,976 $ 152,472 ======== ======== ========== ========== Earnings per common share: Basic $.43 $.34 $1.26 $1.00 ==== ==== ===== ===== Diluted $.42 $.34 $1.24 $.99 ==== ==== ===== ==== Weighted-average common shares outstanding: Basic 152,196 152,434 152,770 152,069 Diluted 154,604 154,903 155,294 154,558 Cash dividends per share $.045 $.040 $.130 $.115 ===== ===== ===== =====
3 Harley-Davidson, Inc. Condensed Consolidated Balance Sheets (In thousands)
Sep. 26, Dec. 31, Sep. 27, 1999 1998 1998 ---- ---- ---- -unaudited- -unaudited- ASSETS Current assets: Cash and cash equivalents $ 163,833 $ 165,170 $ 122,146 Accounts receivable, net 125,554 113,417 112,305 Finance receivables, net 419,955 360,341 337,924 Inventories (Note 2) 166,812 155,616 145,019 Other current assets 53,370 50,419 52,105 ---------- ---------- ---------- Total current assets 929,524 844,963 769,499 Finance receivables, net 389,263 319,427 352,866 Property, plant and equipment, net 640,841 627,759 580,757 Goodwill 50,368 51,197 44,852 Other assets 75,782 76,863 69,883 ---------- ---------- ---------- $2,085,778 $1,920,209 $1,817,857 ========== ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 180,939 $ 122,722 $ 132,988 Accrued expenses and other 207,488 199,051 169,189 Current portion of finance debt 173,974 146,742 132,413 ---------- ---------- ---------- Total current liabilities 562,401 468,515 434,590 Finance debt 280,000 280,000 280,000 Other long-term liabilities 66,652 69,700 63,510 Postretirement health care benefits 74,183 72,083 70,605 Contingencies (Note 6) Total shareholders' equity 1,102,542 1,029,911 969,152 ---------- ---------- ---------- $2,085,778 $1,920,209 $1,817,857 ========== ========== ==========
4 Harley-Davidson, Inc. Condensed Consolidated Statements of Cash Flows (Unaudited) (In thousands)
Nine months ended Sep. 26, Sep. 27, 1999 1998 ---- ---- Cash flows from operating activities: Net income $ 192,976 $ 152,472 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 82,443 62,725 Provision for credit losses 14,541 8,082 Long-term employee benefits (957) 5,860 Other, net 608 957 Net change in other current assets and current liabilities 42,472 (17,330) ---------- ---------- Net cash provided by operating activities 332,083 212,766 Cash flows from investing activities: Purchase of property and equipment (93,415) (110,610) Finance receivables acquired or originated (2,482,752) (1,996,967) Finance receivables collected/sold 2,338,761 1,840,770 Other, net (2,168) 1,692 ---------- ---------- Net cash used in investing activities (239,574) (265,115) Cash flows from financing activities: Net increase in finance debt 27,232 41,765 Dividends paid (13,382) (17,907) Stock repurchase (130,284) (15,174) Issuance of stock under employee stock option plans 22,588 18,349 ---------- ---------- Net cash (used) provided by financing activities (93,846) 27,033 ---------- ---------- Net decrease in cash and cash equivalents (1,337) (25,316) Cash and cash equivalents: At beginning of period 165,170 147,462 ---------- ---------- At end of period $ 163,833 $ 122,146 ========== ==========
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 September 26, 1999 and September 27, 1998, and the results of operations for the three- and nine-month periods then ended. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 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, principally using the last-in, first-out (LIFO) method, or market. Inventories consist of the following (in thousands): Sep. 26, Dec. 31, Sep. 27, 1999 1998 1998 ---- ---- ---- Components at the lower of cost, first-in, first-out (FIFO), or market: Raw material & work-in-process $ 62,182 $ 55,336 $ 55,060 Finished goods 33,899 27,295 24,884 Parts & accessories and general merchandise 92,206 93,710 89,354 -------- -------- -------- 188,287 176,341 169,298 Excess of FIFO over LIFO 21,475 20,725 24,279 -------- -------- -------- Inventories as reflected in the accompanying condensed consolidated balance sheets $166,812 $155,616 $145,019 ======== ======== ======== 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, Harley-Davidson Financial Services, Inc., formerly Eaglemark Financial Services, Inc. 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 Nine months ended ------------------ ----------------- Sep. 26, Sep. 27, Sep. 26, Sep. 27, 1999 1998 1999 1998 ---- ---- ---- ---- Net sales: Motorcycles and Related Products $623,193 $517,198 $1,790,476 $1,500,889 Financial Services n/a n/a n/a n/a -------- -------- ---------- ---------- $623,193 $517,198 $1,790,476 $1,500,889 ======== ======== ========== ========== Income from operations: Motorcycles and Related Products $ 95,907 $ 79,870 $ 287,524 $ 234,167 Financial Services 7,514 3,599 19,274 12,539 General corporate expenses (2,024) (3,330) (7,450) (8,521) -------- -------- ---------- ---------- $101,397 $ 80,139 $ 299,348 $ 238,185 ======== ======== ========== ========== 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 Nine months ended ------------------ ----------------- Sep. 26, Sep. 27, Sep. 26, Sep. 27, 1999 1998 1999 1998 ---- ---- ---- ---- Numerator - --------- Net income used in computing basic and diluted earnings per share $ 65,362 $ 52,372 $192,976 $152,472 ======== ======== ======== ======== Denominator - ----------- Denominator for basic earnings per share - weighted-average common shares 152,196 152,434 152,770 152,069 Effect of dilutive securities - employee stock options and nonvested stock 2,408 2,469 2,524 2,489 -------- -------- -------- -------- Denominator for diluted earnings per share- adjusted weighted-average shares 154,604 154,903 155,294 154,558 ======= ======= ======== ======== Basic earnings per share $.43 $.34 $1.26 $1.00 ==== ==== ===== ===== Diluted earnings per share $.42 $.34 $1.24 $.99 ==== ==== ===== ====
7 Note 5 - Comprehensive Income - ----------------------------- Total comprehensive income, which was comprised of net income and foreign currency translation adjustments, amounted to approximately $70.6 million and $54.1 million for the three months ended September 26, 1999 and September 27, 1998, respectively. Total comprehensive income for the nine months ended September 26, 1999 and September 27, 1998 was $193.9 million and $156.0 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 third quarter of 1999, the Company repurchased 1.4 million shares of its outstanding common stock with $73.8 million of cash on hand. Year to date, the Company has repurchased a total of 2.4 million shares with a total of $130.3 million of cash on hand. 8 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 September 26, 1999 ------------------------------------------------------------------- Compared to the Three Months Ended September 27, 1998 ----------------------------------------------------- For the quarter ended September 26, 1999, consolidated net sales totaled $623.2 million, a $106.0 million or 20.5% increase over the same period last year. Net income and diluted earnings per share for 1999 were $65.4 million and $.42, respectively, on 154.6 million weighted average shares outstanding versus $52.4 million and $.34, respectively, on 154.9 million weighted average shares outstanding in 1998, increases of 24.8% and 25.0%, respectively. Motorcycle Unit Shipments and Net Sales For the Three-Month Periods Ended September 26, 1999 and September 27, 1998 ================================================================================ Increase 1999 1998 (Decrease) %Change ================================================================================ Motorcycle Unit Shipments ================================================================================ Harley-Davidson(R)motorcycle units 42,615 36,428 6,187 17.0% - -------------------------------------------------------------------------------- Buell(R)motorcycle units 1,984 1,069 915 85.6 - -------------------------------------------------------------------------------- Total motorcycle units 44,599 37,497 7,102 18.9% ================================================================================ Net sales (in millions) ================================================================================ Harley-Davidson motorcycles $455.7 $383.3 $72.4 18.9% - -------------------------------------------------------------------------------- Buell motorcycles 16.7 9.2 7.5 81.4 - -------------------------------------------------------------------------------- Total motorcycles 472.4 392.5 79.9 20.4 - -------------------------------------------------------------------------------- Motorcycle Parts and Accessories 109.6 90.2 19.4 21.5 - -------------------------------------------------------------------------------- General Merchandise 40.9 33.5 7.4 22.2 - -------------------------------------------------------------------------------- Other .3 1.0 (.7) (71.0) - -------------------------------------------------------------------------------- Total Motorcycles and Related Products $623.2 $517.2 $106.0 20.5% ================================================================================ The 1999 third quarter increase in net sales of $106.0 million, or 20.5%, was driven primarily by the 17.0% increase in Harley-Davidson motorcycle unit shipments. During the third quarter of 1999, the Company increased its Harley-Davidson motorcycle unit shipments and production to almost 43,000 units, approximately 6,000 units higher than the same period last year. This production increase was accomplished while executing an extensive model year 2000 product launch that included a completely redesigned Softail(R) family, powered by the Company's new Twin Cam88B(TM) counterbalanced engine. In addition, 1999 third quarter unit shipments were positively impacted by the sale of 608 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 that was formerly used for military contract production. 9 Based on the production and shipment levels achieved this year, the Company has increased its 1999 annual production target to 175,000 Harley-Davidson units and has established a production target of 193,000 units for the year 2000. (1) Third quarter Buell motorcycle revenue was up $7.5 million over the same period last year on 915 additional unit shipments. The average revenue per unit, however, was down slightly from prior year as a result of the high demand for Buell's lower priced M2 cyclone model. The M2 Cyclone made up 29% of the total unit sales in the third quarter of 1999 as compared to 23% in the third quarter of 1998. The Company remains committed to its 1999 Buell motorcycle production target of 7,700 units. (1) Parts and Accessories (P & A) sales of $109.6 million were up $19.4 million or 21.5%, compared to the third quarter of 1998. Two key factors that contributed to the strong growth in P & A include a custom paint set, which was offered in limited quantities at the July dealer show, and the new accessories offered in connection with the redesigned Softail family. The Company expects that long-term growth rates for P & A will return to levels that should approximate the Harley-Davidson motorcycle growth target. (1) General Merchandise sales, which includes clothing and collectibles, of $40.9 million were up $7.4 million, or 22.2%, compared to the third quarter of 1998. The third quarter comparison to prior year was positively impacted by a change in the timing of current year shipments. To better accommodate dealers' preparations, for the holiday season, the Company shipped certain product offerings during the third quarter of 1999 that were not shipped until the fourth quarter during 1998. As a result, the Company expects lower growth for General Merchandise in the fourth quarter and an annual growth rate for 1999 of approximately 10%. (1) The Company's ability to reach the 1999 and 2000 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). 10 Gross Profit Gross profit increased $33.5 million, or 19.6%, compared to the third quarter of 1998, primarily due to the increase in overall sales volume. The gross profit margin was 32.8% in 1999 compared to 33.1% in 1998. The decrease in the gross profit margin was driven primarily by a combination of additional costs associated with the model year 2000 product launch and a higher proportion of Sportster motorcycle sales. The model year 2000 product launch included the introduction of a completely redesigned Softail family as well as the new Twin Cam 88B engine. As a result of the aggressive launch, the Company experienced higher costs, including overtime, as it worked through the extensive model year changes. The Company's third quarter 1999 Harley-Davidson motorcycle sales consisted of 24.9% Sportsters compared to 23.8% in the same quarter last year. The higher proportion of lower margin Sportsters negatively impacted the 1999 third quarter margins as compared to the same quarter in 1998. The Company expects the Sportster mix to be approximately 24% in 2000. (1) Operating Expenses For the Three-Month Periods Ended September 26, 1999 and September 27, 1998 ================================================================================ Increase 1999 1998 (Decrease) %Change - -------------------------------------------------------------------------------- Motorcycles and Related Products $108.8 $91.3 $17.5 19.2% - -------------------------------------------------------------------------------- Corporate 2.0 3.3 (1.3) (39.2) ================================================================================ Total operating expenses $110.8 $94.6 $16.2 17.1% ================================================================================ Total operating expenses increased $16.2 million, or 17.1%, compared to the third quarter of 1998. The increase was largely the result of higher spending in the areas of sales, marketing and engineering. The Company expects to continue to invest in its future growth in the remainder of 1999, with increased spending in the areas of product development and marketing.(1) Operating income from Financial Services Third quarter 1999 operating income of Harley-Davidson Financial Services, Inc. (HDFS) was $7.5 million for the third quarter of 1999, or $3.9 million higher than the same period last year. HDFS benefited in 1999 from the increase in the Company's U.S. motorcycle retail sales and an increase in the percentage of those sales financed by HDFS, which was 24.0% for the third quarter of 1999, up from 21.1% for the third quarter of 1998. Interest Third quarter 1999 interest income was higher than in the prior year primarily due to higher levels of cash available for short-term investing when compared to the same period in 1998. Other income (expense) Third quarter 1999 other income was lower than the same period last year as a result of a $1.3 million one-time settlement, which was recorded in the third quarter of 1998. The settlement related to a rebate of harbor maintenance fees that where found to be unconstitutional by the U.S. Supreme Court. Consolidated income taxes The Company's effective income tax rate was 36.5% for the third quarters of 1999 and 1998. 11 Results of Operations for the Nine Months Ended September 26, 1999 ------------------------------------------------------------------- Compared to the Nine Months Ended September 27, 1998 ---------------------------------------------------- For the nine-month period ended September 26, 1999, the Company recorded net sales of $1.8 billion, a $289.6 million, or 19.3%, increase over the same period last year. Net income and diluted earnings per share were $193.0 million and $1.24, respectively, on 155.3 million weighted average shares outstanding versus $152.5 million and $ .99, respectively, on 154.6 million weighted average shares outstanding in the first nine months of 1998, increases of 26.6% and 26.0%, respectively. Motorcycle Unit Shipments and Net Sales For the Nine-Month Periods Ended September 26, 1999 and September 27, 1998 ================================================================================ Increase 1999 1998 (Decrease) %Change ================================================================================ Motorcycle Unit Shipments ================================================================================ Harley-Davidson(R)motorcycle units 128,567 108,663 19,904 18.3% - -------------------------------------------------------------------------------- Buell(R)motorcycle units 5,509 3,916 1,593 40.7 - -------------------------------------------------------------------------------- Total motorcycle units 134,076 112,579 21,497 19.1% ================================================================================ Net sales (in millions) ================================================================================ Harley-Davidson motorcycles $1,360.7 $1,145.6 $215.1 18.8% - -------------------------------------------------------------------------------- Buell motorcycles 45.3 34.9 10.4 29.9 - -------------------------------------------------------------------------------- Total motorcycles 1,406.0 1,180.5 225.5 19.1 - -------------------------------------------------------------------------------- Motorcycle Parts and Accessories 284.4 232.8 51.6 22.1 - -------------------------------------------------------------------------------- General Merchandise 97.6 85.2 12.4 14.6 - -------------------------------------------------------------------------------- Other 2.5 2.4 .1 4.2 - -------------------------------------------------------------------------------- Total Motorcycles and Related Products $1,790.5 $1,500.9 $289.6 19.3% ================================================================================ The 19.3% increase in revenue was primarily attributable to additional motorcycle unit shipments. The most recent information available (through August) indicated that the Company had a U.S. heavyweight (651+cc) market share of 46.1%, compared to 45.1% for the same period in 1998. The U.S. heavyweight market has grown at a 22.7% rate year to date, while retail registrations for the Company's motorcycles (Harley-Davidson and Buell) has increased 25.7%. European data (through July) showed the Company with a 6.3% share of the heavyweight (651+cc) market, up from 6.1% for the same period in 1998. The European market (651+cc) has grown at a 13.5% rate year to date, while retail registrations for the Company's motorcycles (Harley-Davidson and Buell) increased 17.0%, compared to last year. The Company continues to actively work on improving its European distribution network and implementing European focused marketing programs. The Company believes the introduction of its new Twin Cam 88 engine has also been well-received by the European market. 12 Asia/Pacific (Japan and Australia) data (through July) showed the Company with a 17.6% share of the heavyweight (651+cc) market, up from 16.3% for the same period in 1998. The Asia/Pacific market has grown at a 2.4% rate year to date, while retail registrations for the Company's motorcycles (Harley-Davidson and Buell) increased 10.8%. Parts and Accessories (P & A) sales of $284.4 million were up $51.6, million or 22.1%, compared to the first three quarters of 1998. General Merchandise sales of $97.6 million were up $12.4 million, or 14.6%, compared to the first three quarters of 1998. P&A sales grew faster than long-term targeted growth rates during the first three quarters of 1999. The Company expects P&A growth will return to levels that should approximate the Harley-Davidson motorcycle growth target and slightly lower growth for General Merchandise that should result in an annual growth rate for General Merchandise of approximately 10% for 1999. (1) Gross Profit Gross profit for the first nine months of 1999 totaled $606.8 million, an increase of $108.2 million, or 21.7%, over the same period in 1998. The gross profit margin was 33.9% in the first nine months of 1999 compared to 33.2% for the same period in 1998. The increase in gross profit margin was primarily due to a higher percentage of shipments to domestic customers, a higher average revenue per unit related to modest price increases and the absence of facilities start up costs incurred in the prior year. These items were partially offset by the negative impact of additional costs related to the extensive model year 2000 product launch and a higher proportion of lower margin Sportster motorcycle sales in 1999. Operating Expenses For the Nine-Month Periods Ended September 26, 1999 and September 27, 1998 (Dollars in Millions) ================================================================================ Increase 1999 1998 (Decrease) %Change ================================================================================ Motorcycles and Related Products $319.2 $264.4 $54.8 20.8% - -------------------------------------------------------------------------------- Corporate 7.5 8.5 (1.0) (12.6) ================================================================================ Total operating expenses $326.7 $272.9 $53.8 19.8% ================================================================================ Operating expenses of $326.8 million for the first nine months of 1999 increased $53.9 million, or 19.8%, compared to the first nine 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 three quarters of 1999 also included a $5.0 million charge related to a recall of Buell motorcycles. Operating income from Financial Services Operating income for HDFS was $19.3 million for the first nine months of 1999, or $6.7 million higher than the same period last year. The increase was primarily attributable to the increase in the Company's U.S. motorcycle retail sales and an increase in the percentage of those sales financed by HDFS. During the first nine months of 1999 HDFS financed 22.5% of the Company's U.S. motorcycle retail sales compared with 19.9% for the same period in 1998. 13 Other income (expense) The 1999 third quarter year to date other income was lower than the same period last year, due to a $1.3 million one-time settlement recorded in 1998. However, the first nine months of 1999 included lower foreign currency transaction losses, which partially offset the impact of the 1998 settlement. 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 first nine months of 1999 compared to 1998. Consolidated income taxes The Company's effective income tax rate was 36.5% for the first nine 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. 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 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, and is ninety-nine percent complete with its remediation efforts on remaining affected systems. The remaining remediation efforts are being accomplished as components of existing projects that include the 14 replacement of current software and hardware. The Company expects the remaining remediation including testing to be complete by the end of November 1999. (1) The Company has also assessed Year 2000 issues related to its non-information technology systems used in product development, engineering, manufacturing, and facilities. The Company has completed the assessments and is ninety-five percent complete with the necessary modifications, replacements and testing to those systems. The remaining remediation efforts are expected to be complete by the end of November 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 100% 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 November 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. The Company is currently developing contingency plans for its critical business systems and processes. These plans may include activities such as manual processes, special supplier arrangements and other actions necessary to minimize any adverse effects on the Company. These plans are expected to be complete by mid-fourth quarter of 1999. (1) 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 $ 2.9 million of Year 2000 expense has been incurred in 1999 and $9.4 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. 15 Liquidity and Capital Resources as of September 26, 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 $332.1 million of cash from operating activities during the first nine months of 1999 compared to $212.8 million in 1998. The largest component of cash from operating activities is net income adjusted for depreciation and provision for credit losses, which contributed $ 290.0 million in 1999 compared to $223.3 million in 1998. Changes in other current assets and liabilities increased/(decreased) operating cash flows by approximately $42.5 million and $(17.3) million in the first nine months of 1999 and 1998, respectively. Changes in working capital during the first nine months of 1999 and 1998 consisted of the following (in millions): Nine months ended ----------------- Working capital item 1999 1998 -------------------- ---- ---- Accounts receivable, net ($12.1) ($7.5) Inventories (11.2) (23.3) Prepaid expenses (2.9) (9.1) Accounts payable and accrued expenses 68.7 22.6 ------ ----- Total $42.5 ($17.3) ====== ===== During the first nine months of 1999, inventories increased by approximately $11.2 million, primarily due a corresponding increase in finished units on-hand. In the first nine months of 1998, inventory levels increased approximately $23.3 million, largely due to the ramp up of two new production facilities. The increase in accounts payable and accrued expenses in the first nine months of 1999 is due primarily to the timing of cash payments related to semi-annual dealer incentives. Capital expenditures amounted to approximately $93.4 million and $110.6 million during the first nine months 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 HDFS) currently has nominal levels of long-term debt and has lines of credit of approximately $44.3 million, of which approximately $43.1 million remained available at September 26, 1999. HDFS finances its activities through an unsecured commercial paper program, revolving credit facilities, senior subordinated debt and asset-backed securitizations. HDFS is authorized to issue short-term commercial paper up to a maximum of $600 million with maturities of 1 to 270 days. At September 26, 1999, approximately $379 million of commercial paper was outstanding. HDFS has a $350 million 364-day revolving credit facility and a $250 million five-year revolving credit facility with approximately $45 million outstanding at September 26, 1999. The primary uses of the credit 16 facilities are to provide liquidity to the unsecured commercial paper program and to fund normal business operations. HDFS has entered into agreements with its lenders whereby the total aggregate amount outstanding under the unsecured commercial paper program, the 364-day revolving credit facility and the five-year revolving credit facility may not exceed $600 million. Accordingly, at September 26, 1999, HDFS has aggregate remaining availability of approximately $176 million. HDFS has issued $30 million of senior subordinated notes expiring in 2007. During the third quarter, HDFS securitized and sold with limited recourse approximately $205 million of retail installment loans, retaining servicing rights. The Company expects future activities of HDFS will be financed from internally generated funds, additional capital contributions from the Company, bank lines of credit, and continuation of subordinated debt, commercial paper and securitization programs. The Company has agreed to provide HDFS certain financial support if required. Support may be provided, at the Company's option, as either capital contributions or loans. The Company has authorization from its Board of Directors to repurchase up to 4,700,000 shares of the Company's outstanding common stock. In addition, the Company has continuing authorization from its Board of Directors to repurchase shares of the Company's outstanding common stock under which the cumulative number of shares repurchased, at the time of any repurchase, shall not exceed the sum of (i) the number of shares issued in connection with the exercise of stock options occurring on or after January 1, 1998 plus (ii) one percent of the issued and outstanding common stock of the Company on January 1 of the current year, adjusted for any stock split. During the first nine months of 1999 the Company repurchased 2.4 million shares of its common stock. The Company's Board of Directors declared three cash dividends during the first nine months of 1999 including, most recently, a $.045 per share cash dividend declared on August 19, 1999, paid September 27, 1999 to shareholders of record on September 15,1999. 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 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. 17 Part II - OTHER INFORMATION HARLEY-DAVIDSON, INC. FORM 10-Q September 26, 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 for additional information on the above proceedings. Item 6. Exhibits and Reports on Form 8-K - ----------------------------------------- (a) Exhibits ------------- 27 Financial Data Schedule for September 26, 1999 (b) Reports on Form 8-K ------------------------ None 18 Part II - Other Information HARLEY-DAVIDSON, INC. Form 10-Q September 26, 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: 11/10/99 by: /s/ James L. Ziemer -------------- -------------------------------------- James L. Ziemer Vice President and Chief Financial Officer (Principal Financial Officer) 11/10/99 by: /s/ James M. Brostowitz -------------- -------------------------------------- James M. Brostowitz Vice President, Controller (Principal Accounting Officer) and Treasurer 19 Exhibit Index Exhibit No. Description - ----------- ----------- 27 Financial Data Schedule for September 26, 1999 20 EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF HARLEY-DAVIDSON, INC. AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 26, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS DEC-31-1999 JAN-01-1999 SEP-26-1999 163,833 0 127,429 1,875 166,812 929,524 1,168,961 528,120 2,085,778 562,401 0 0 0 1,592 1,100,950 2,085,778 1,790,476 1,790,476 1,183,690 1,183,690 1,019 0 (5,571) 303,900 110,924 192,976 0 0 0 192,976 1.26 1.24
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