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 27, 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 53201
(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 9, 1998 152,807,205 Shares
- ---------------------------------------------------------------------------
1
<PAGE>
HARLEY-DAVIDSON, INC.
Form 10-Q Index
For the Quarter Ended September 27, 1998
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 6-9
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 17
Part II. Other Information
Item 1. Legal Proceedings 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
Exhibit Index 21
2
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
<TABLE>
Harley-Davidson, Inc.
Condensed Consolidated Statements of Income
(Unaudited)
(In thousands, except per share amounts)
<CAPTION>
Three months ended Nine months ended
Sep. 27, Sep. 28, Sep. 27, Sep. 28,
1998 1997 1998 1997
---------- ---------- ------------ -----------
<S> <C> <C> <C> <C>
Sales $517,198 $444,222 $1,500,889 $1,315,403
Cost of goods sold 346,059 299,044 1,002,347 881,687
------- -------- --------- -------
Gross profit 171,139 145,178 498,542 433,716
Operating income from financial services 3,599 3,002 12,539 8,567
Operating expenses (94,599) (83,925) (272,896) (241,587)
------- ------- -------- --------
Income from operations 80,139 64,255 238,185 200,696
Interest income - net 1,056 2,386 2,442 6,052
Other income (expense) - net 1,287 (1,404) (508) 597
------- ------- --------- ---------
Income before provision for income taxes 82,482 65,237 240,119 207,345
Provision for income taxes 30,110 24,138 87,647 76,719
-------- -------- ---------- ----------
Net income $ 52,372 $ 41,099 $ 152,472 $ 130,626
======== ======== ========= ==========
Earnings per common share:
Basic $.34 $.27 $1.00 $.86
==== ==== ===== ====
Diluted $.34 $.27 $.99 $.85
==== ==== ===== ====
Weighted-average common shares
outstanding:
Basic 152,434 151,792 152,069 151,481
Diluted 154,903 154,178 154,558 153,761
Cash dividends per share $.04 $.035 $.115 $.10
==== ===== ===== ====
</TABLE>
3
<PAGE>
<TABLE>
Harley-Davidson, Inc.
Condensed Consolidated Balance Sheets
(In thousands)
ASSETS
<CAPTION>
Sep. 27, Dec. 31, Sep. 28,
1998 1997 1997
---------------- -------------- ---------------
(Unaudited) (Unaudited)
Current assets:
<S> <C> <C> <C>
Cash and cash equivalents $ 122,146 $ 147,462 $ 105,365
Accounts receivable, net 112,305 102,797 99,601
Finance receivables 337,924 293,329 274,259
Inventories (Note 2) 145,019 117,475 112,144
Other current assets 52,105 42,958 42,030
---------- ---------- ----------
Total current assets 769,499 704,021 633,399
Finance receivables, net 352,866 249,346 242,810
Property, plant and equipment, net 580,757 528,869 473,699
Goodwill 44,852 38,707 39,254
Other assets 69,883 77,958 77,280
----------- ----------- -----------
$1,817,857 $1,598,901 $1,466,442
========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 132,988 $ 106,112 $ 109,793
Accrued expenses and other 169,189 164,938 153,000
Current portion of finance debt 132,413 90,638 30,919
------- -------- --------
Total current liabilities 434,590 361,688 293,712
Finance debt 280,000 280,000 250,000
Other long-term liabilities 63,510 62,131 66,764
Postretirement health care benefits 70,605 68,414 67,819
Contingencies (Note 7)
Total shareholders' equity 969,152 826,668 788,147
----------- ----------- -----------
$1,817,857 $1,598,901 $1,466,442
========== ========== ===========
</TABLE>
4
<PAGE>
<TABLE>
Harley-Davidson, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
<CAPTION>
Nine months ended
Sep. 27, Sep. 28,
1998 1997
Cash flows from operating activities:
<S> <C> <C>
Net income $ 152,472 $ 130,626
Depreciation and amortization 62,725 51,305
Long-term employee benefits 5,860 3,893
Other-net 9,039 4,173
Net change in other current assets and current
liabilities (17,330) 54,846
-------- --------
Net cash provided by operating activities 212,766 244,843
Cash flows from investing activities:
Purchase of property and equipment (110,610) (112,886)
Finance receivables acquired or originated (1,996,967) (1,075,482)
Finance receivables collected/sold 1,840,770 893,705
Other - net 1,692 (6,388)
----------- -----------
Net cash used in investing activities (265,115) (301,051)
Cash flows from financing activities:
Net increase in notes payable - (2,580)
Net increase in finance debt 41,765 22,854
Dividends paid (17,907) (15,569)
Stock repurchase (15,174) -
Issuance of stock under employee stock and
option plans 18,349 14,389
--------- ----------
Net cash provided by financing activities 27,033 19,094
--------- ----------
Net decrease in cash and cash equivalents (25,316) (37,114)
Cash and cash equivalents:
At beginning of period 147,462 142,479
--------- ----------
At end of period $ 122,146 $ 105,365
========= ==========
</TABLE>
5
<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 September 27, 1998 and September 28, 1997,
and the results of operations for the three- and nine-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 - 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. 27, Dec. 31, Sep. 28,
1998 1997 1997
Components at the lower of cost, first-in,
first-out (FIFO), or market:
Raw material & work-in-process $ 55,060 $ 37,597 $ 36,969
Finished goods 24,884 26,756 30,240
Parts & accessories 89,354 75,735 67,538
-------- -------- ---------
169,298 140,088 134,747
Excess of FIFO over LIFO 24,279 22,613 22,603
-------- -------- ---------
Inventories as reflected in the
accompanying condensed consolidated
balance sheets $145,019 $117,475 $112,144
======== ======== ========
6
<PAGE>
Note 3 - 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 4 - 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. The following table sets
forth the computation for basic and diluted earnings per share (in thousands,
except per share amounts):
<TABLE>
<CAPTION>
Three months ended Nine months ended
Sep. 27, Sep. 28, Sep. 27, Sep. 28,
1998 1997 1998 1997
Numerator
Net income used in computing
<S> <C> <C> <C> <C>
basic and diluted earnings per share $ 52,372 $ 41,099 $152,472 $130,626
======== ======== ======== ========
Denominator
Denominator for basic earnings per share -
weighted-average common shares 152,434 151,792 152,069 151,481
Effect of dilutive securities - employee stock
options and nonvested stock 2,469 2,386 2,489 2,280
-------- -------- -------- --------
Denominator for diluted earnings per share-
adjusted weighted-average shares 154,903 154,178 154,558 153,761
======= ======= ======= =======
Basic earnings per share $.34 $.27 $1.00 $.86
==== ==== ===== ====
Diluted earnings per share $.34 $.27 $.99 $.85
==== ==== ==== ====
</TABLE>
Note 5 - 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
$2.2 and $5.9 million of costs associated with internal-use software were
capitalized during the three- and nine-months ended September 27, 1998,
respectively.
Note 6 - 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):
7
<PAGE>
Note 6 - Business Segments (continued)
<TABLE>
<CAPTION>
Three months ended Nine months ended
Sep. 27, Sep. 28, Sep. 27, Sep. 28,
1998 1997 1998 1997
---------- ---------- ------------ ------------
Net sales:
<S> <C> <C> <C> <C>
Motorcycles and Related Products $517,198 $444,222 $1,500,889 $1,315,403
Financial Services n/a n/a n/a n/a
$517,198 $444,222 $1,500,889 $1,315,403
======== ======== ========== ==========
Income from operations:
Motorcycles and Related Products $ 79,870 $ 62,750 $ 234,167 $ 198,236
Financial Services 3,599 3,002 12,539 8,567
General corporate expenses (3,330) (1,497) (8,521) (6,107)
-------- -------- ---------- ----------
$ 80,139 $ 64,255 $ 238,185 $ 200,696
======== ======== ========= =========
</TABLE>
Note 7 - 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. 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.
8
<PAGE>
Note 8 - 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 $54.1 and $41.9 million for the three
months ended September 27, 1998 and September 28, 1997, respectively. Total
comprehensive income for the nine months ended September 27, 1998 and September
28, 1997 was $156.0 and $126.3 million, respectively.
Note 9 - 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.
Based on information currently available, the effect of adopting this statement
is not expected to have a material impact on the Company's financial statements.
9
<PAGE>
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 September 27, 1998
Compared to the Three Months Ended September 28, 1997
For the quarter ended September 27, 1998, consolidated net sales totaled $517.2
million, a $73.0 million or 16.4% increase over the same period last year. Net
income and diluted earnings per share for 1998 were $52.4 million and $.34 on
154.9 million shares outstanding versus $41.1 million and $.27 on 154.2 million
shares outstanding in 1997, increases of 27.4% and 26.9%, 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 September 27, 1998 and September 28, 1997
(Dollars in Millions)
================================================================================
Incr
1998 1997 (Decr) %
================================================================================
Harley-Davidson motorcycle units 36,428 31,503 4,925 15.6%
- --------------------------------------------------------------------------------
Buell motorcycle units 1,069 1,014 55 5.4
- --------------------------------------------------------------------------------
Total motorcycle units 37,497 32,517 4,980 15.3%
================================================================================
Net sales (in millions):
- --------------------------------------------------------------------------------
Harley-Davidson motorcycles $383.3 $331.9 $51.4 15.5%
- --------------------------------------------------------------------------------
Buell motorcycles 9.2 9.3 (.1) (1.1)
- --------------------------------------------------------------------------------
Total motorcycles 392.5 341.2 51.3 15.0%
- --------------------------------------------------------------------------------
Motorcycle Parts and Accessories 90.2 74.1 16.1 21.7
- --------------------------------------------------------------------------------
General Merchandise 33.5 28.7 4.8 16.6
- --------------------------------------------------------------------------------
Other 1.0 .2 .8 400.0
- --------------------------------------------------------------------------------
Total Motorcycles and
Related Products $517.2 $444.2 $73.0 16.4%
================================================================================
The Motorcycles segment reported record third quarter net sales driven by a
15.3% increase in motorcycle unit shipments compared to the same period in 1997.
The increase in Harley-Davidson motorcycle unit shipments over the third quarter
of 1997 was due to a higher average daily production rate achieved in connection
with the Company's production capacity expansion plans. During the third quarter
of 1998, motorcycle production averaged approximately 620 units per day versus
540 units per day in the same period last year. The Company expects to produce
approximately 39,000 Harley-Davidson motorcycle units in the fourth quarter of
1998, and anticipates it will produce approximately 148,000 motorcycles by the
end of calendar 1998.(1)
10
<PAGE>
Parts and Accessories (P & A) sales of $90.2 million were up $16.1 million or
21.7% compared to the third quarter of 1997. General Merchandise sales, which
includes clothing and collectibles, of $33.5 million were up $4.8 million, or
16.6%, compared to the third quarter of 1997. P&A and General Merchandise sales
grew faster than anticipated during the third quarter due in part to dealers
replenishing their stores after brisk retail sales surrounding 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)
Gross Profit
Gross profit increased $26.0 million, or 17.9%, compared to the third quarter of
1997, primarily due to the increase in motorcycle volume. The gross profit
margin was 33.1% in 1998 compared to 32.7% in 1997. The increase in gross profit
margin is primarily due to lower plant start-up expenses in the third quarter of
1998 compared to 1997. Start up expenses related to the ramp-up of two new
production plants and reconfiguration at existing plants were approximately $4.5
million higher in the third quarter of 1997 compared to the same period in 1998.
Operating Expenses
For the Three-Month Periods Ended September 27, 1998 and September 28, 1997
(Dollars in Millions)
================================================================================
Incr
1998 1997 (Decr) %
- --------------------------------------------------------------------------------
Motorcycles and Related Products $91.3 $82.4 $8.9 10.7%
- --------------------------------------------------------------------------------
Corporate 3.3 1.5 1.8 122.4
================================================================================
Total operating expenses $94.6 $83.9 $10.7 12.8%
================================================================================
Total operating expenses increased $10.7 million, or 12.8%, compared to the
third quarter of 1997. The increase was largely the result of higher motorcycle
sales volumes, but was partially offset by lower than expected engineering and
risk management expenses.
Operating income from financial services
The operating income of the Financial Services (Eaglemark) segment was $3.6
million and $3.0 million in the third quarter of 1998 and 1997, respectively.
Eaglemark experienced growth in all of its core business lines, except the
credit card business. The growth was particularly strong in retail installment
lending, as Eaglemark increased both its market share and its profitability in
this business. Promotional expenses for the new Harley-Davidson Chrome VISA Card
will keep the credit card business in a loss position for 1998.
Other income (expense)
The third quarter of 1998 benefited from a rebate of harbor maintenance fees of
$1.3 million. The levy of these fees was found unconstitutional by the U.S.
Supreme Court and related to fees collected over the previous five years.
Interest
The Company capitalized approximately $1.0 million of interest in the third
quarter of 1997 in connection with its manufacturing expansion initiatives. No
interest was capitalized during the same period in 1998.
Consolidated income taxes
The Company's effective income tax rate was 36.5% and 37.0% for the third
quarter of 1998 and 1997, respectively.
11
<PAGE>
Results of Operations for the Nine Months Ended September 27, 1998
Compared to the Nine Months Ended September 28, 1997
For the nine month period ended September 28, 1997, the Company recorded net
sales of $1.5 billion, a $185.5 million or 14.1% increase over the same period
last year. Net income and diluted earnings per share were $152.5 million and
$.99 on 154.6 million shares outstanding versus $130.6 million and $.85 on 153.8
million shares outstanding in the first nine months of 1997, increases of 16.7%
and 16.1%, respectively.
Motorcycle Unit Shipments and Net Sales
For the Nine-Month Periods Ended September 27, 1998 and September 28, 1997
(Dollars in Millions)
===============================================================================
Incr
1998 1997 (Decr) %
===============================================================================
Harley-Davidson motorcycle units 108,663 98,328 10,335 10.5%
-------------------------------------------------------------------------------
Buell motorcycle units 3,916 3,121 795 25.5
-------------------------------------------------------------------------------
Total motorcycle units 112,579 101,449 11,130 11.0%
===============================================================================
Net sales (in millions):
-------------------------------------------------------------------------------
Harley-Davidson motorcycles $1,145.6 $1,020.8 $124.8 12.2%
-------------------------------------------------------------------------------
Buell motorcycles 34.9 28.5 6.4 22.5
-------------------------------------------------------------------------------
Total motorcycles 1,180.5 1,049.3 131.2 12.5%
-------------------------------------------------------------------------------
Motorcycle Parts and Accessories 232.8 191.6 41.2 21.5%
-------------------------------------------------------------------------------
General Merchandise 85.2 72.5 12.7 17.4
-------------------------------------------------------------------------------
Other 2.4 2.0 .4 19.3
-------------------------------------------------------------------------------
Total Motorcycles and
Related Products $1,500.9 $1,315.4 $185.5 14.1%
===============================================================================
The 14.1% 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
September) indicates that the Company has a U.S. heavyweight (651+cc) market
share of 45.9% compared to 47.4% for the same period in 1997. This same market
has grown at a 16.8% rate year-to-date, while retail registrations for the
Company's motorcycles (Harley-Davidson and Buell motorcycles) increased 13.1%.
The Company's growth was slightly out-paced by the market in the first nine
months of 1998 as a result of production capacity constraints.
European data (through August) show the Company with a 6.1% share of the
heavyweight (651+cc) market, down from 6.4% for the same period in 1997. The
European market (651+cc) has grown at an 11.2% rate year-to-date, while retail
registrations for the Company's motorcycles increased 7.1% 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. The Company's 1998 model year offering included two new
models specifically targeted at the European market which, based on information
available to the Company to date, have been very well received by European
customers..
12
<PAGE>
Asia/Pacific (Japan and Australia) data (through August) show the Company with a
14.9% share of the heavyweight (651+cc) market, down from 16.1% for the same
period in 1997. The Asia/Pacific market has grown at a 28.0% rate year-to-date,
while retail registrations for the Company's motorcycles increased 18.2%. 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 in registrations
has occurred in the performance segment of the market.
Parts and Accessories (P & A) sales of $232.8 million were up $41.2 million or
21.5% compared to the first three quarters of 1997. General Merchandise sales,
which includes clothing and collectibles, of $85.2 million were up $12.7
million, or 17.4%, compared to the first three quarters of 1997. P&A and General
Merchandise sales grew faster than anticipated during the first three quarters
of 1998 due in part to the 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 a 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 effect of such fluctuations has not had a
material impact on the Company's financial performance for the three and nine
months ended September 27, 1998, when compared to the same periods in 1997.
Gross Profit
Gross profit for the first nine months of 1998 totaled $498.5 million, an
increase of $64.8 million or 14.9% over the same period in 1997. The gross
profit margin was 33.2% in the first nine months of 1998 compared to 33.0% for
the same period in 1997. The increase in gross profit margin resulted from a
favorable product mix (a greater mix of touring motorcycles) combined with
slightly lower plant start-up expenses compared to 1997. The 1998 gross profit
margin improvement was partially offset by higher depreciation as a result of
the Company's significant investment in capacity expansion.
Operating Expenses
For the Nine-Month Periods Ended September 27, 1998 and September 28, 1997
(Dollars in Millions)
================================================================================
Incr
1998 1997 (Decr) %
- --------------------------------------------------------------------------------
Motorcycles and Related Products $264.4 $235.5 $28.9 12.3%
- --------------------------------------------------------------------------------
Corporate 8.5 6.1 2.4 39.5
================================================================================
Total operating expenses $272.9 $241.6 31.3 13.0%
================================================================================
Operating expenses of $272.9 million for the first nine months of 1998 increased
$31.3 million or 13.0% compared to the first nine 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 charge
for a voluntary recall of ignition switches on all 1994 through 1998 FL touring
model motorcycles.
13
<PAGE>
Operating income from financial services
The operating income of the Financial Services segment was $12.5 million and
$8.6 million in the first nine months of 1998 and 1997, respectively. Eaglemark
experienced growth in all of its core business lines, except the credit card
business. The growth was particularly strong in retail installment lending, as
Eaglemark increased both its market share and its profitability in this
business. Promotional expenses for the new Harley-Davidson Chrome VISA Card will
keep the credit card business in a loss position for 1998.
Other income (expense)
The third quarter benefited from a rebate of harbor maintenance fees of $1.3
million. The levy of these fees was found unconstitutional by the U.S. Supreme
Court and related to fees collected over the previous five years. This positive
impact was partially offset by foreign currency transaction losses recorded
during the first nine months of 1998. The first nine months of 1997 include a
$1.6 million, one-time benefit related to the sale of the Monaco Coach
Corporation preferred stock, which was acquired in connection with the sale of
the Transportation Vehicles segment.
Capitalized interest
The Company capitalized approximately $2.8 million of interest during the first
nine months of 1997 in connection with its manufacturing expansion initiatives.
No interest was capitalized during the same period in 1998.
Consolidated income taxes
The Company's effective income tax rate was 36.5% and 37.0% for the first nine
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 7 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
The Company has implemented a comprehensive Year 2000 initiative to identify and
address issues associated with the Year 2000. A team of internal staff is
managing the initiative with the assistance of some outside consultants. The
team's activities are designed to ensure that there are no material adverse
effects on the Company.
14
<PAGE>
The Company has completed the assessment phase of its internal information
services computer systems associated with the Year 2000. The assessment
indicated that many of the Company's internal computer systems were vulnerable
to Year 2000 issues. The Company is in the process of remediating the affected
systems identified in the assessment 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. In addition, the Company is
currently assessing Year 2000 issues related to its non-information technology
systems used in product development, engineering, manufacturing, and facilities.
The Company anticipates these assessments will be completed no later than early
1999.
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. The Company is assessing the extent to which its operations
are vulnerable should those organizations fail to properly remediate their
computer systems. The Company will also be communicating with its dealers and
distributors regarding their potential Year 2000 issues. 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 is well under way and, based on the results
of its assessment to date, is expected to be complete by mid-1999.(1) While the
Company believes its planning efforts are adequate to address its Year 2000
concerns, there can be no assurance that the systems of other companies on which
the Company's systems and operations rely will be converted on a timely basis
and will not have a material adverse effect on the Company. However, based on
the progress the Company has made on its internal initiative and the information
available from third parties, the Company has not identified a need to develop
an extensive contingency plan for non-remediation issues at this time. The need
for such a plan is evaluated on an on-going basis as part of the Company's
overall Year 2000 initiative.
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 $3.1 million of Year 2000 expense has been
incurred in the first three-quarters of 1998 and $5.3 million since the
initiative began in 1997.(1)
The costs of the project and the date on which the Company believes it will
complete 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
<PAGE>
Liquidity and Capital Resources as of September 27, 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 $212.8 million of
cash from operating activities during the first nine months of 1998 compared to
$244.8 million in the same period in 1997. The change from prior year consists
primarily of an increase in net income adjusted for depreciation offset by less
favorable adjustments for changes in working capital (due to the 1997 one-time
transfer of accounts receivable to Eaglemark discussed below). Net income
adjusted for depreciation contributed $215.2 million in 1998 compared to $181.9
million in 1997. Adjustments for net changes in other current assets and current
liabilities reduced cash from operating activities $17.3 million in 1998 and
increased cash from operating activities $54.8 million in 1997. These
adjustments were driven by accounts receivable increases of $9.5 million in 1998
and accounts receivable decreases of $41.7 million 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 domestic receivables have been classified as finance
receivables. The decrease in accounts receivable in 1997 includes the initial
transfer of domestic accounts receivable to finance receivables, while the
increase in 1998 represents the normal change in non-domestic accounts
receivable. Had domestic accounts receivable been included in finance
receivables at the end of 1996, the 1997 cash from operating activities would
have been lower by approximately $60 million, offset by higher cash from
investing activities in the same amount.
Capital expenditures amounted to $110.6 million and $112.9 million during the
first nine months of 1998 and 1997, respectively. For the past several 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 target production level 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,
16
<PAGE>
potential delays and uncertainties regarding the actual costs could also impact
adversely the Company's capital expenditure estimates.
The Company (excluding Eaglemark) currently has nominal levels of long-term debt
and has lines of credit of approximately $42.2 million, of which approximately
$39.6 million remained available at September 27, 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 $354 million was
outstanding at September 27, 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 $28 million was outstanding at September 27, 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. Year
to date, Eaglemark has securitized and sold approximately $300 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 three cash dividends during the first
nine months of 1997 including, most recently, a $.04 per share cash dividend
declared on August 20, 1998, paid September 25, 1998 to shareholders of record
on September 15.
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.
17
<PAGE>
(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 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.
18
<PAGE>
Part II - OTHER INFORMATION
HARLEY-DAVIDSON, INC.
FORM 10-Q
September 27, 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 7 to the accompanying condensed consolidated financial statements
for additional information on the above proceedings.
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, 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 September 27, 1998
(b) Reports on Form 8-K
None
19
<PAGE>
Part II - Other Information
HARLEY-DAVIDSON, INC.
Form 10-Q
September 27, 1998
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: 11/11/98 by: /s/ James L. Ziemer
James L. Ziemer
Vice President and Chief Financial
Officer (Principal Financial Officer)
11/11/98 by: /s/ James M. Brostowitz
James M. Brostowitz
Vice President, Controller (Principal
Accounting Officer) and Treasurer
20
<PAGE>
Exhibit Index
Exhibit No. Description
27 Financial Data Schedule for September 27, 1998
21
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS OF HARLEY-DAVIDSON, INC. AS SOF AND FOR THE
NINE MONTHS ENDED SEPTEMBER 27, 1998 AND IS QULAIFIED INITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMETNS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-1-1998
<PERIOD-END> SEP-27-1998
<CASH> 122,146
<SECURITIES> 0
<RECEIVABLES> 113,899
<ALLOWANCES> 1,549
<INVENTORY> 145,019
<CURRENT-ASSETS> 769,499
<PP&E> 1,007,417
<DEPRECIATION> 426,660
<TOTAL-ASSETS> 1,817,857
<CURRENT-LIABILITIES> 434,590
<BONDS> 0
0
0
<COMMON> 1,582
<OTHER-SE> 967,570
<TOTAL-LIABILITY-AND-EQUITY> 1,817,857
<SALES> 1,500,889
<TOTAL-REVENUES> 1,500,889
<CGS> 1,002,347
<TOTAL-COSTS> 1,002,347
<OTHER-EXPENSES> 508
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (2,442)
<INCOME-PRETAX> 240,119
<INCOME-TAX> 87,647
<INCOME-CONTINUING> 152,472
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 152,472
<EPS-PRIMARY> 1.00
<EPS-DILUTED> .99
</TABLE>
