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