UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(X) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the quarterly period ended September 26, 1999
or
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ___________________ to ____________________
Commission File Number 1-9183
Harley-Davidson, Inc.
------------------------------------------------------
(Exact name of registrant as specified in its Charter)
Wisconsin 39-1382325
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3700 West Juneau Avenue, Milwaukee, Wisconsin 53208
- --------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (414) 342-4680
--------------
None
-----------------------------------------
(Former name, former address and former
fiscal year, if changed since last report)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes __X__ No ___
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock Outstanding as of November 8, 1999: 151,320,267 Shares
<PAGE>
HARLEY-DAVIDSON, INC.
Form 10-Q Index
For the Quarter Ended September 26, 1999
Page
----
Part I. Financial Information
Item 1. Consolidated Financial Statements
Condensed Consolidated Statements of Income 3
Condensed Consolidated Balance Sheets 4
Condensed Consolidated Statements of Cash Flows 5
Notes to Condensed Consolidated Financial Statements 6-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-17
Item 3. Quantitative and Qualitative Disclosures about Market Risk 17
Note regarding forward-looking statements 17
Part II. Other Information
Item 1. Legal Proceedings 18
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
Exhibit Index 20
2
<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)
<TABLE>
<CAPTION>
Three months ended Nine months ended
------------------ -----------------
Sep. 26, Sep. 27, Sep. 26, Sep. 27,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Sales $623,193 $517,198 $1,790,476 $1,500,889
Cost of goods sold 418,535 346,059 1,183,690 1,002,347
------- ------- --------- ---------
Gross profit 204,658 171,139 606,786 498,542
Operating income from financial services 7,514 3,599 19,274 12,539
Operating expenses (110,775) (94,599) (326,712) (272,896)
------- ------- --------- ---------
Income from operations 101,397 80,139 299,348 238,185
Interest income, net 2,090 1,056 5,571 2,442
Other, net (556) 1,287 (1,019) (508)
------- ------- --------- ---------
Income before provision for income taxes 102,931 82,482 303,900 240,119
Provision for income taxes 37,569 30,110 110,924 87,647
------- ------- --------- ---------
Net income $ 65,362 $ 52,372 $ 192,976 $ 152,472
======== ======== ========== ==========
Earnings per common share:
Basic $.43 $.34 $1.26 $1.00
==== ==== ===== =====
Diluted $.42 $.34 $1.24 $.99
==== ==== ===== ====
Weighted-average common shares outstanding:
Basic 152,196 152,434 152,770 152,069
Diluted 154,604 154,903 155,294 154,558
Cash dividends per share $.045 $.040 $.130 $.115
===== ===== ===== =====
</TABLE>
3
<PAGE>
<TABLE>
Harley-Davidson, Inc.
Condensed Consolidated Balance Sheets
(In thousands)
<CAPTION>
Sep. 26, Dec. 31, Sep. 27,
1999 1998 1998
---- ---- ----
-unaudited- -unaudited-
ASSETS
Current assets:
<S> <C> <C> <C>
Cash and cash equivalents $ 163,833 $ 165,170 $ 122,146
Accounts receivable, net 125,554 113,417 112,305
Finance receivables, net 419,955 360,341 337,924
Inventories (Note 2) 166,812 155,616 145,019
Other current assets 53,370 50,419 52,105
---------- ---------- ----------
Total current assets 929,524 844,963 769,499
Finance receivables, net 389,263 319,427 352,866
Property, plant and equipment, net 640,841 627,759 580,757
Goodwill 50,368 51,197 44,852
Other assets 75,782 76,863 69,883
---------- ---------- ----------
$2,085,778 $1,920,209 $1,817,857
========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 180,939 $ 122,722 $ 132,988
Accrued expenses and other 207,488 199,051 169,189
Current portion of finance debt 173,974 146,742 132,413
---------- ---------- ----------
Total current liabilities 562,401 468,515 434,590
Finance debt 280,000 280,000 280,000
Other long-term liabilities 66,652 69,700 63,510
Postretirement health care benefits 74,183 72,083 70,605
Contingencies (Note 6)
Total shareholders' equity 1,102,542 1,029,911 969,152
---------- ---------- ----------
$2,085,778 $1,920,209 $1,817,857
========== ========== ==========
</TABLE>
4
<PAGE>
<TABLE>
Harley-Davidson, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
<CAPTION>
Nine months ended
Sep. 26, Sep. 27,
1999 1998
---- ----
Cash flows from operating activities:
<S> <C> <C>
Net income $ 192,976 $ 152,472
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 82,443 62,725
Provision for credit losses 14,541 8,082
Long-term employee benefits (957) 5,860
Other, net 608 957
Net change in other current assets and current liabilities 42,472 (17,330)
---------- ----------
Net cash provided by operating activities 332,083 212,766
Cash flows from investing activities:
Purchase of property and equipment (93,415) (110,610)
Finance receivables acquired or originated (2,482,752) (1,996,967)
Finance receivables collected/sold 2,338,761 1,840,770
Other, net (2,168) 1,692
---------- ----------
Net cash used in investing activities (239,574) (265,115)
Cash flows from financing activities:
Net increase in finance debt 27,232 41,765
Dividends paid (13,382) (17,907)
Stock repurchase (130,284) (15,174)
Issuance of stock under employee stock option plans 22,588 18,349
---------- ----------
Net cash (used) provided by financing activities (93,846) 27,033
---------- ----------
Net decrease in cash and cash equivalents (1,337) (25,316)
Cash and cash equivalents:
At beginning of period 165,170 147,462
---------- ----------
At end of period $ 163,833 $ 122,146
========== ==========
</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 26, 1999 and September 27, 1998,
and the results of operations for the three- and nine-month periods then ended.
For further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's Annual Report on Form 10-K for the
year ended December 31, 1998.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
Note 2 - Inventories
- --------------------
The Company values its inventories at the lower of cost, principally using the
last-in, first-out (LIFO) method, or market. Inventories consist of the
following (in thousands):
Sep. 26, Dec. 31, Sep. 27,
1999 1998 1998
---- ---- ----
Components at the lower of cost, first-in,
first-out (FIFO), or market:
Raw material & work-in-process $ 62,182 $ 55,336 $ 55,060
Finished goods 33,899 27,295 24,884
Parts & accessories and general merchandise 92,206 93,710 89,354
-------- -------- --------
188,287 176,341 169,298
Excess of FIFO over LIFO 21,475 20,725 24,279
-------- -------- --------
Inventories as reflected in the accompanying
condensed consolidated balance sheets $166,812 $155,616 $145,019
======== ======== ========
6
<PAGE>
Note 3 - Business Segments
- --------------------------
The Company operates in two business segments: Motorcycles and Related Products
(Motorcycles) and Financial Services which consists of the Company's subsidiary,
Harley-Davidson Financial Services, Inc., formerly Eaglemark Financial Services,
Inc. The Company's reportable segments are strategic business units that offer
different products and services. They are managed separately based on the
fundamental differences in their operations. Selected segment information is set
forth below (in thousands):
Three months ended Nine months ended
------------------ -----------------
Sep. 26, Sep. 27, Sep. 26, Sep. 27,
1999 1998 1999 1998
---- ---- ---- ----
Net sales:
Motorcycles and Related Products $623,193 $517,198 $1,790,476 $1,500,889
Financial Services n/a n/a n/a n/a
-------- -------- ---------- ----------
$623,193 $517,198 $1,790,476 $1,500,889
======== ======== ========== ==========
Income from operations:
Motorcycles and Related Products $ 95,907 $ 79,870 $ 287,524 $ 234,167
Financial Services 7,514 3,599 19,274 12,539
General corporate expenses (2,024) (3,330) (7,450) (8,521)
-------- -------- ---------- ----------
$101,397 $ 80,139 $ 299,348 $ 238,185
======== ======== ========== ==========
Note 4 - Earnings Per Share
- ---------------------------
The following table sets forth the computation for basic and diluted earnings
per share (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Three months ended Nine months ended
------------------ -----------------
Sep. 26, Sep. 27, Sep. 26, Sep. 27,
1999 1998 1999 1998
---- ---- ---- ----
Numerator
- ---------
Net income used in computing
<S> <C> <C> <C> <C>
basic and diluted earnings per share $ 65,362 $ 52,372 $192,976 $152,472
======== ======== ======== ========
Denominator
- -----------
Denominator for basic earnings per share -
weighted-average common shares 152,196 152,434 152,770 152,069
Effect of dilutive securities - employee stock
options and nonvested stock 2,408 2,469 2,524 2,489
-------- -------- -------- --------
Denominator for diluted earnings per share-
adjusted weighted-average shares 154,604 154,903 155,294 154,558
======= ======= ======== ========
Basic earnings per share $.43 $.34 $1.26 $1.00
==== ==== ===== =====
Diluted earnings per share $.42 $.34 $1.24 $.99
==== ==== ===== ====
</TABLE>
7
<PAGE>
Note 5 - Comprehensive Income
- -----------------------------
Total comprehensive income, which was comprised of net income and foreign
currency translation adjustments, amounted to approximately $70.6 million and
$54.1 million for the three months ended September 26, 1999 and September 27,
1998, respectively. Total comprehensive income for the nine months ended
September 26, 1999 and September 27, 1998 was $193.9 million and $156.0 million,
respectively.
Note 6 - Contingencies
- ----------------------
The Company is involved with government agencies in various environmental
matters, including a matter involving soil and groundwater contamination at its
York, Pennsylvania facility (the Facility). The Facility was formerly used by
the U.S. Navy and AMF (the predecessor corporation of Minstar). The Company
purchased the Facility from AMF in 1981. Although the Company is not certain as
to the extent of the environmental contamination at the Facility, it is working
with the Pennsylvania Department of Environmental Protection in undertaking
certain investigation and remediation activities, including a site-wide remedial
investigation/feasibility study. In January 1995, the Company entered into a
settlement agreement (the Agreement) with the Navy. The Agreement calls for the
Navy and the Company to contribute amounts into a trust equal to 53% and 47%,
respectively, of future costs associated with investigation and remediation
activities at the Facility (response costs). The trust will administer the
payment of the future response costs at the Facility as covered by the
Agreement. In addition, in March 1991 the Company entered into a settlement
agreement with Minstar related to certain indemnification obligations assumed by
Minstar in connection with the Company's purchase of the Facility. Pursuant to
this settlement, Minstar was obligated to reimburse the Company for a portion of
its response costs at the Facility. In the first quarter of 1999, the Company
received final payment of Minstar's portion of the response costs at the
Facility. Although substantial uncertainty exists concerning the nature and
scope of the environmental remediation that will ultimately be required at the
Facility, based on preliminary information currently available to the Company
and taking into account the Company's settlement agreement with the Navy, the
Company estimates that it will incur approximately $6 million of net additional
response costs at the Facility. The Company has established reserves for this
amount. The Company's estimate of additional response costs is based on reports
of environmental consultants retained by the Company, the actual costs incurred
to date and the estimated costs to complete the necessary investigation and
remediation activities. Response costs are expected to be incurred over a period
of approximately 10 years, ending in 2009.
Note 7 - Capital Stock
- ----------------------
During the third quarter of 1999, the Company repurchased 1.4 million shares of
its outstanding common stock with $73.8 million of cash on hand. Year to date,
the Company has repurchased a total of 2.4 million shares with a total of $130.3
million of cash on hand.
8
<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, 1998.
Results of Operations for the Three Months Ended September 26, 1999
-------------------------------------------------------------------
Compared to the Three Months Ended September 27, 1998
-----------------------------------------------------
For the quarter ended September 26, 1999, consolidated net sales totaled $623.2
million, a $106.0 million or 20.5% increase over the same period last year. Net
income and diluted earnings per share for 1999 were $65.4 million and $.42,
respectively, on 154.6 million weighted average shares outstanding versus $52.4
million and $.34, respectively, on 154.9 million weighted average shares
outstanding in 1998, increases of 24.8% and 25.0%, respectively.
Motorcycle Unit Shipments and Net Sales
For the Three-Month Periods Ended
September 26, 1999 and September 27, 1998
================================================================================
Increase
1999 1998 (Decrease) %Change
================================================================================
Motorcycle Unit Shipments
================================================================================
Harley-Davidson(R)motorcycle units 42,615 36,428 6,187 17.0%
- --------------------------------------------------------------------------------
Buell(R)motorcycle units 1,984 1,069 915 85.6
- --------------------------------------------------------------------------------
Total motorcycle units 44,599 37,497 7,102 18.9%
================================================================================
Net sales (in millions)
================================================================================
Harley-Davidson motorcycles $455.7 $383.3 $72.4 18.9%
- --------------------------------------------------------------------------------
Buell motorcycles 16.7 9.2 7.5 81.4
- --------------------------------------------------------------------------------
Total motorcycles 472.4 392.5 79.9 20.4
- --------------------------------------------------------------------------------
Motorcycle Parts and Accessories 109.6 90.2 19.4 21.5
- --------------------------------------------------------------------------------
General Merchandise 40.9 33.5 7.4 22.2
- --------------------------------------------------------------------------------
Other .3 1.0 (.7) (71.0)
- --------------------------------------------------------------------------------
Total Motorcycles and Related Products $623.2 $517.2 $106.0 20.5%
================================================================================
The 1999 third quarter increase in net sales of $106.0 million, or 20.5%, was
driven primarily by the 17.0% increase in Harley-Davidson motorcycle unit
shipments. During the third quarter of 1999, the Company increased its
Harley-Davidson motorcycle unit shipments and production to almost 43,000 units,
approximately 6,000 units higher than the same period last year. This production
increase was accomplished while executing an extensive model year 2000 product
launch that included a completely redesigned Softail(R) family, powered by the
Company's new Twin Cam88B(TM) counterbalanced engine.
In addition, 1999 third quarter unit shipments were positively impacted by the
sale of 608 FXR models, which are limited edition big twin Harley-Davidson
motorcycles. The FXR's are being produced at the York, PA manufacturing facility
on a separate low volume assembly line that was formerly used for military
contract production.
9
<PAGE>
Based on the production and shipment levels achieved this year, the Company has
increased its 1999 annual production target to 175,000 Harley-Davidson units and
has established a production target of 193,000 units for the year 2000. (1)
Third quarter Buell motorcycle revenue was up $7.5 million over the same period
last year on 915 additional unit shipments. The average revenue per unit,
however, was down slightly from prior year as a result of the high demand for
Buell's lower priced M2 cyclone model. The M2 Cyclone made up 29% of the total
unit sales in the third quarter of 1999 as compared to 23% in the third quarter
of 1998. The Company remains committed to its 1999 Buell motorcycle production
target of 7,700 units. (1)
Parts and Accessories (P & A) sales of $109.6 million were up $19.4 million or
21.5%, compared to the third quarter of 1998. Two key factors that contributed
to the strong growth in P & A include a custom paint set, which was offered in
limited quantities at the July dealer show, and the new accessories offered in
connection with the redesigned Softail family. The Company expects that
long-term growth rates for P & A will return to levels that should approximate
the Harley-Davidson motorcycle growth target. (1)
General Merchandise sales, which includes clothing and collectibles, of $40.9
million were up $7.4 million, or 22.2%, compared to the third quarter of 1998.
The third quarter comparison to prior year was positively impacted by a change
in the timing of current year shipments. To better accommodate dealers'
preparations, for the holiday season, the Company shipped certain product
offerings during the third quarter of 1999 that were not shipped until the
fourth quarter during 1998. As a result, the Company expects lower growth for
General Merchandise in the fourth quarter and an annual growth rate for 1999 of
approximately 10%. (1)
The Company's ability to reach the 1999 and 2000 targeted production levels and
to attain growth rates in other areas will depend upon, among other factors, the
Company's ability to (i) continue to realize production efficiencies at its
production facilities through the implementation of innovative manufacturing
techniques and other means, (ii) successfully implement production capacity
increases in its facilities, (iii) successfully introduce new products, (iv)
avoid unexpected product backorders and (v) sell all of the motorcycles it has
the capacity to produce. In addition, the Company could experience delays in
making changes to facilities as a result of risks normally associated with the
operation of manufacturing facilities, including delays in the delivery of
machinery and equipment or difficulties in making such machinery and equipment
operational, work stoppages, difficulties with suppliers, natural causes or
other factors. These risks, potential delays and uncertainties regarding the
costs could also adversely impact the Company's capital expenditure estimates
(see "Liquidity and Capital Resources" section).
10
<PAGE>
Gross Profit
Gross profit increased $33.5 million, or 19.6%, compared to the third quarter of
1998, primarily due to the increase in overall sales volume. The gross profit
margin was 32.8% in 1999 compared to 33.1% in 1998. The decrease in the gross
profit margin was driven primarily by a combination of additional costs
associated with the model year 2000 product launch and a higher proportion of
Sportster motorcycle sales.
The model year 2000 product launch included the introduction of a completely
redesigned Softail family as well as the new Twin Cam 88B engine. As a result of
the aggressive launch, the Company experienced higher costs, including overtime,
as it worked through the extensive model year changes.
The Company's third quarter 1999 Harley-Davidson motorcycle sales consisted of
24.9% Sportsters compared to 23.8% in the same quarter last year. The higher
proportion of lower margin Sportsters negatively impacted the 1999 third quarter
margins as compared to the same quarter in 1998. The Company expects the
Sportster mix to be approximately 24% in 2000. (1)
Operating Expenses
For the Three-Month Periods Ended
September 26, 1999 and September 27, 1998
================================================================================
Increase
1999 1998 (Decrease) %Change
- --------------------------------------------------------------------------------
Motorcycles and Related Products $108.8 $91.3 $17.5 19.2%
- --------------------------------------------------------------------------------
Corporate 2.0 3.3 (1.3) (39.2)
================================================================================
Total operating expenses $110.8 $94.6 $16.2 17.1%
================================================================================
Total operating expenses increased $16.2 million, or 17.1%, compared to the
third quarter of 1998. The increase was largely the result of higher spending in
the areas of sales, marketing and engineering. The Company expects to continue
to invest in its future growth in the remainder of 1999, with increased spending
in the areas of product development and marketing.(1)
Operating income from Financial Services
Third quarter 1999 operating income of Harley-Davidson Financial Services, Inc.
(HDFS) was $7.5 million for the third quarter of 1999, or $3.9 million higher
than the same period last year. HDFS benefited in 1999 from the increase in the
Company's U.S. motorcycle retail sales and an increase in the percentage of
those sales financed by HDFS, which was 24.0% for the third quarter of 1999, up
from 21.1% for the third quarter of 1998.
Interest
Third quarter 1999 interest income was higher than in the prior year primarily
due to higher levels of cash available for short-term investing when compared to
the same period in 1998.
Other income (expense)
Third quarter 1999 other income was lower than the same period last year as a
result of a $1.3 million one-time settlement, which was recorded in the third
quarter of 1998. The settlement related to a rebate of harbor maintenance fees
that where found to be unconstitutional by the U.S. Supreme Court.
Consolidated income taxes
The Company's effective income tax rate was 36.5% for the third quarters of 1999
and 1998.
11
<PAGE>
Results of Operations for the Nine Months Ended September 26, 1999
-------------------------------------------------------------------
Compared to the Nine Months Ended September 27, 1998
----------------------------------------------------
For the nine-month period ended September 26, 1999, the Company recorded net
sales of $1.8 billion, a $289.6 million, or 19.3%, increase over the same period
last year. Net income and diluted earnings per share were $193.0 million and
$1.24, respectively, on 155.3 million weighted average shares outstanding versus
$152.5 million and $ .99, respectively, on 154.6 million weighted average shares
outstanding in the first nine months of 1998, increases of 26.6% and 26.0%,
respectively.
Motorcycle Unit Shipments and Net Sales
For the Nine-Month Periods Ended
September 26, 1999 and September 27, 1998
================================================================================
Increase
1999 1998 (Decrease) %Change
================================================================================
Motorcycle Unit Shipments
================================================================================
Harley-Davidson(R)motorcycle units 128,567 108,663 19,904 18.3%
- --------------------------------------------------------------------------------
Buell(R)motorcycle units 5,509 3,916 1,593 40.7
- --------------------------------------------------------------------------------
Total motorcycle units 134,076 112,579 21,497 19.1%
================================================================================
Net sales (in millions)
================================================================================
Harley-Davidson motorcycles $1,360.7 $1,145.6 $215.1 18.8%
- --------------------------------------------------------------------------------
Buell motorcycles 45.3 34.9 10.4 29.9
- --------------------------------------------------------------------------------
Total motorcycles 1,406.0 1,180.5 225.5 19.1
- --------------------------------------------------------------------------------
Motorcycle Parts and Accessories 284.4 232.8 51.6 22.1
- --------------------------------------------------------------------------------
General Merchandise 97.6 85.2 12.4 14.6
- --------------------------------------------------------------------------------
Other 2.5 2.4 .1 4.2
- --------------------------------------------------------------------------------
Total Motorcycles and Related Products $1,790.5 $1,500.9 $289.6 19.3%
================================================================================
The 19.3% increase in revenue was primarily attributable to additional
motorcycle unit shipments. The most recent information available (through
August) indicated that the Company had a U.S. heavyweight (651+cc) market share
of 46.1%, compared to 45.1% for the same period in 1998. The U.S. heavyweight
market has grown at a 22.7% rate year to date, while retail registrations for
the Company's motorcycles (Harley-Davidson and Buell) has increased 25.7%.
European data (through July) showed the Company with a 6.3% share of the
heavyweight (651+cc) market, up from 6.1% for the same period in 1998. The
European market (651+cc) has grown at a 13.5% rate year to date, while retail
registrations for the Company's motorcycles (Harley-Davidson and Buell)
increased 17.0%, compared to last year. The Company continues to actively work
on improving its European distribution network and implementing European focused
marketing programs. The Company believes the introduction of its new Twin Cam 88
engine has also been well-received by the European market.
12
<PAGE>
Asia/Pacific (Japan and Australia) data (through July) showed the Company with a
17.6% share of the heavyweight (651+cc) market, up from 16.3% for the same
period in 1998. The Asia/Pacific market has grown at a 2.4% rate year to date,
while retail registrations for the Company's motorcycles (Harley-Davidson and
Buell) increased 10.8%.
Parts and Accessories (P & A) sales of $284.4 million were up $51.6, million or
22.1%, compared to the first three quarters of 1998. General Merchandise sales
of $97.6 million were up $12.4 million, or 14.6%, compared to the first three
quarters of 1998. P&A sales grew faster than long-term targeted growth rates
during the first three quarters of 1999. The Company expects P&A growth will
return to levels that should approximate the Harley-Davidson motorcycle growth
target and slightly lower growth for General Merchandise that should result in
an annual growth rate for General Merchandise of approximately 10% for 1999. (1)
Gross Profit
Gross profit for the first nine months of 1999 totaled $606.8 million, an
increase of $108.2 million, or 21.7%, over the same period in 1998. The gross
profit margin was 33.9% in the first nine months of 1999 compared to 33.2% for
the same period in 1998. The increase in gross profit margin was primarily due
to a higher percentage of shipments to domestic customers, a higher average
revenue per unit related to modest price increases and the absence of facilities
start up costs incurred in the prior year. These items were partially offset by
the negative impact of additional costs related to the extensive model year 2000
product launch and a higher proportion of lower margin Sportster motorcycle
sales in 1999.
Operating Expenses
For the Nine-Month Periods Ended
September 26, 1999 and September 27, 1998
(Dollars in Millions)
================================================================================
Increase
1999 1998 (Decrease) %Change
================================================================================
Motorcycles and Related Products $319.2 $264.4 $54.8 20.8%
- --------------------------------------------------------------------------------
Corporate 7.5 8.5 (1.0) (12.6)
================================================================================
Total operating expenses $326.7 $272.9 $53.8 19.8%
================================================================================
Operating expenses of $326.8 million for the first nine months of 1999 increased
$53.9 million, or 19.8%, compared to the first nine months of 1998. Operating
expenses in the first half of 1999 were higher than the same period a year ago
primarily in the areas of sales, marketing, engineering and information
services. Operating expenses in the first three quarters of 1999 also included a
$5.0 million charge related to a recall of Buell motorcycles.
Operating income from Financial Services
Operating income for HDFS was $19.3 million for the first nine months of 1999,
or $6.7 million higher than the same period last year. The increase was
primarily attributable to the increase in the Company's U.S. motorcycle retail
sales and an increase in the percentage of those sales financed by HDFS. During
the first nine months of 1999 HDFS financed 22.5% of the Company's U.S.
motorcycle retail sales compared with 19.9% for the same period in 1998.
13
<PAGE>
Other income (expense)
The 1999 third quarter year to date other income was lower than the same period
last year, due to a $1.3 million one-time settlement recorded in 1998. However,
the first nine months of 1999 included lower foreign currency transaction
losses, which partially offset the impact of the 1998 settlement.
Interest income
Interest income was higher than in the prior year primarily due to higher levels
of cash available for short-term investing in the first nine months of 1999
compared to 1998.
Consolidated income taxes
The Company's effective income tax rate was 36.5% for the first nine months of
1999 and 1998.
Other Matters
Environmental
The Company's policy is to comply with all applicable environmental laws and
regulations, and the Company has a compliance program in place to monitor, and
report on, environmental issues. The Company has reached settlement agreements
with its former parent (Minstar, successor to AMF Incorporated) and the U.S.
Navy regarding soil and groundwater remediation at the Company's manufacturing
facility in York, Pennsylvania and currently estimates that it will incur
approximately $6 million of net additional costs related to the remediation
effort. The Company has established reserves for this amount. See Note 6 of the
notes to condensed consolidated financial statements. Recurring costs associated
with managing hazardous substances and pollution in on-going operations have not
been material.
The Company regularly invests in equipment to support and improve its various
manufacturing processes. While the Company considers environmental matters in
capital expenditure decisions, and while some capital expenditures also act to
improve environmental compliance, only a small portion of the Company's annual
capital expenditures relate to equipment that has the sole purpose of meeting
environmental compliance obligations. The Company anticipates that capital
expenditures for equipment used to limit hazardous substances/pollutants during
1999 will approximate $.5 million.(1) The Company does not expect that these
expenditures related to environmental matters will have a material effect on
future operating results or cash flows.
Impact of Year 2000
The Company has implemented a comprehensive Year 2000 initiative to identify and
address issues associated with the Year 2000. A team of internal staff is
managing the initiative with the assistance of outside consultants. The team's
activities are designed to ensure that there are no material adverse effects on
the Company.
The Company's assessment of its internal information services computer systems
indicated that many of the Company's systems were vulnerable to Year 2000
issues. In response to this assessment, the Company made plans to remediate the
affected systems by modifying or replacing portions of its software and hardware
so that these computer systems will function properly with respect to dates in
the year 2000 and thereafter. To date, the Company has completed the remediation
(including testing) of all affected internal computer systems related to its
ability to produce and distribute motorcycles, and is ninety-nine percent
complete with its remediation efforts on remaining affected systems. The
remaining remediation efforts are being accomplished as components of existing
projects that include the
14
<PAGE>
replacement of current software and hardware. The Company expects the remaining
remediation including testing to be complete by the end of November 1999. (1)
The Company has also assessed Year 2000 issues related to its non-information
technology systems used in product development, engineering, manufacturing, and
facilities. The Company has completed the assessments and is ninety-five percent
complete with the necessary modifications, replacements and testing to those
systems. The remaining remediation efforts are expected to be complete by the
end of November 1999. (1)
The Company is also working with its significant suppliers and financial
institutions to ensure that those parties have appropriate plans to remediate
Year 2000 issues where their systems interface with the Company's systems or
otherwise impact its operations. The Company has communicated in writing or in
person with all of its principal suppliers to confirm their status in regards to
Year 2000 issues. Currently, the Company has received confirmation from 100% of
its significant suppliers confirming their systems are currently compliant, or
will be compliant by year end, with respect to the year 2000. The Company will
continue to assess the extent to which its operations are vulnerable should any
of its suppliers fail to properly remediate their computer systems.
The Company has also communicated with its dealers and distributors regarding
their potential Year 2000 issues. Based on these communications, the Company
does not anticipate that potential Year 2000 issues at its dealers and
distributors would have a material adverse effect on its ability to deliver its
products and services to its dealers and ultimately to its customers.(1)
The Company's Year 2000 initiative, which is substantially complete, is expected
to be complete, including system modifications, replacements and testing, by the
end of November 1999.(1) However the Company will continue to monitor Year 2000
issues throughout the remainder of 1999 and into 2000 to ensure that any
additional or previously unidentified issues are properly addressed. While the
Company believes its planning efforts are adequate to address its Year 2000
concerns, there can be no assurance that the systems of other companies on which
the Company's systems and operations rely will be converted on a timely basis
and will not have a material adverse effect on the Company. The Company is
currently developing contingency plans for its critical business systems and
processes. These plans may include activities such as manual processes, special
supplier arrangements and other actions necessary to minimize any adverse
effects on the Company. These plans are expected to be complete by mid-fourth
quarter of 1999. (1)
Based on the Company's assessments to date, the costs of the Year 2000
initiative (which are expensed as incurred) are estimated to be approximately
$11 million.(1) Approximately $ 2.9 million of Year 2000 expense has been
incurred in 1999 and $9.4 million in the aggregate since the initiative began in
1997.
The costs of the project and the date on which the Company believes it will
complete its Year 2000 initiative are forward-looking statements and are based
on management's best estimates, according to information available through the
Company's assessments to date. However, there can be no assurance that these
estimates will be achieved, and actual results could differ materially from
those anticipated. Specific factors that might cause such material differences
include, but are not limited to, the availability and cost of personnel trained
in this area, the retention of these professionals, the ability to locate and
correct all relevant computer codes, and similar uncertainties. At present, the
Company has not experienced any significant problems in these areas.
15
<PAGE>
Liquidity and Capital Resources as of September 26, 1999
--------------------------------------------------------
The Company's main source of liquidity is cash from operating activities which
consists of net income adjusted for non-cash operating activities and changes in
other current assets and liabilities such as accounts receivable, inventory,
prepaid expenses and accounts payable.
The Company generated $332.1 million of cash from operating activities during
the first nine months of 1999 compared to $212.8 million in 1998. The largest
component of cash from operating activities is net income adjusted for
depreciation and provision for credit losses, which contributed $ 290.0 million
in 1999 compared to $223.3 million in 1998.
Changes in other current assets and liabilities increased/(decreased) operating
cash flows by approximately $42.5 million and $(17.3) million in the first nine
months of 1999 and 1998, respectively. Changes in working capital during the
first nine months of 1999 and 1998 consisted of the following (in millions):
Nine months ended
-----------------
Working capital item 1999 1998
-------------------- ---- ----
Accounts receivable, net ($12.1) ($7.5)
Inventories (11.2) (23.3)
Prepaid expenses (2.9) (9.1)
Accounts payable and accrued expenses 68.7 22.6
------ -----
Total $42.5 ($17.3)
====== =====
During the first nine months of 1999, inventories increased by approximately
$11.2 million, primarily due a corresponding increase in finished units on-hand.
In the first nine months of 1998, inventory levels increased approximately $23.3
million, largely due to the ramp up of two new production facilities. The
increase in accounts payable and accrued expenses in the first nine months of
1999 is due primarily to the timing of cash payments related to semi-annual
dealer incentives.
Capital expenditures amounted to approximately $93.4 million and $110.6 million
during the first nine months of 1999 and 1998, respectively. For the past
several years, the Company has been implementing a manufacturing strategy to,
among other things, increase its motorcycle production capacity. Going forward,
the Company's capital expenditures will continue to focus on capacity expansion
at its new and previously existing facilities and will also focus on other areas
such as product development, systems development and continuing operations.
Although the Company does not know the exact amount of capital expenditures it
will incur, it estimates the capital required in 1999 will be in the range of
$150-$170 million.(1) The Company anticipates it will have the ability to fund
all capital expenditures with internally generated funds and short-term
financing.(1)
The Company (excluding HDFS) currently has nominal levels of long-term debt and
has lines of credit of approximately $44.3 million, of which approximately $43.1
million remained available at September 26, 1999.
HDFS finances its activities through an unsecured commercial paper program,
revolving credit facilities, senior subordinated debt and asset-backed
securitizations. HDFS is authorized to issue short-term commercial paper up to a
maximum of $600 million with maturities of 1 to 270 days. At September 26, 1999,
approximately $379 million of commercial paper was outstanding. HDFS has a $350
million 364-day revolving credit facility and a $250 million five-year revolving
credit facility with approximately $45 million outstanding at September 26,
1999. The primary uses of the credit
16
<PAGE>
facilities are to provide liquidity to the unsecured commercial paper program
and to fund normal business operations. HDFS has entered into agreements with
its lenders whereby the total aggregate amount outstanding under the unsecured
commercial paper program, the 364-day revolving credit facility and the
five-year revolving credit facility may not exceed $600 million. Accordingly, at
September 26, 1999, HDFS has aggregate remaining availability of approximately
$176 million. HDFS has issued $30 million of senior subordinated notes expiring
in 2007. During the third quarter, HDFS securitized and sold with limited
recourse approximately $205 million of retail installment loans, retaining
servicing rights. The Company expects future activities of HDFS will be financed
from internally generated funds, additional capital contributions from the
Company, bank lines of credit, and continuation of subordinated debt, commercial
paper and securitization programs. The Company has agreed to provide HDFS
certain financial support if required. Support may be provided, at the Company's
option, as either capital contributions or loans.
The Company has authorization from its Board of Directors to repurchase up to
4,700,000 shares of the Company's outstanding common stock. In addition, the
Company has continuing authorization from its Board of Directors to repurchase
shares of the Company's outstanding common stock under which the cumulative
number of shares repurchased, at the time of any repurchase, shall not exceed
the sum of (i) the number of shares issued in connection with the exercise of
stock options occurring on or after January 1, 1998 plus (ii) one percent of the
issued and outstanding common stock of the Company on January 1 of the current
year, adjusted for any stock split. During the first nine months of 1999 the
Company repurchased 2.4 million shares of its common stock.
The Company's Board of Directors declared three cash dividends during the first
nine months of 1999 including, most recently, a $.045 per share cash dividend
declared on August 19, 1999, paid September 27, 1999 to shareholders of record
on September 15,1999.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
- ------------------------------------------------------------------
Refer to the Company's Annual Report on Form 10-K for the year ended December
31, 1998 for a complete discussion of the Company's market risk. There have been
no material changes to the market risk information included in the Company's
1998 Annual Report on Form 10-K.
(1) Note regarding forward-looking statements
Certain matters discussed in this Quarterly Report on Form 10-Q are
"forward-looking statements" intended to qualify for the safe harbors from
liability established by the Private Securities Litigation Reform Act of 1995.
These forward-looking statements can generally be identified as such by
reference to this footnote or because the context of the statement will include
words such as the Company "believes," "anticipates," "expects" or "estimates" or
words of similar meaning. Similarly, statements that describe the Company's
future plans, objectives, targets or goals are also forward-looking statements.
Such forward-looking statements are subject to certain risks and uncertainties
that could cause actual results to differ materially from those anticipated as
of the date of this report. Certain of such risks and uncertainties are
described in close proximity to such statements or elsewhere in this report.
Shareholders, potential investors and other readers are urged to consider these
factors in evaluating the forward-looking statements and are cautioned not to
place undue reliance on such forward-looking statements. The forward-looking
statements included herein are only made as of the date of this report, and the
Company undertakes no obligation to publicly update such forward-looking
statements to reflect subsequent events or circumstances.
17
<PAGE>
Part II - OTHER INFORMATION
HARLEY-DAVIDSON, INC.
FORM 10-Q
September 26, 1999
Item 1. Legal Proceedings
- --------------------------
The Company is involved with government agencies in various environmental
matters, including a matter involving soil and groundwater contamination at its
York, Pennsylvania facility. See footnote 6 to the accompanying condensed
consolidated financial statements for additional information on the above
proceedings.
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) Exhibits
-------------
27 Financial Data Schedule for September 26, 1999
(b) Reports on Form 8-K
------------------------
None
18
<PAGE>
Part II - Other Information
HARLEY-DAVIDSON, INC.
Form 10-Q
September 26, 1999
Signatures
----------
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HARLEY-DAVIDSON, INC.
Date: 11/10/99 by: /s/ James L. Ziemer
-------------- --------------------------------------
James L. Ziemer
Vice President and Chief Financial
Officer (Principal Financial Officer)
11/10/99 by: /s/ James M. Brostowitz
-------------- --------------------------------------
James M. Brostowitz
Vice President, Controller (Principal
Accounting Officer) and Treasurer
19
<PAGE>
Exhibit Index
Exhibit No. Description
- ----------- -----------
27 Financial Data Schedule for September 26, 1999
20
<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 NINE MONTHS ENDED SEPTEMBER 26, 1999, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-26-1999
<CASH> 163,833
<SECURITIES> 0
<RECEIVABLES> 127,429
<ALLOWANCES> 1,875
<INVENTORY> 166,812
<CURRENT-ASSETS> 929,524
<PP&E> 1,168,961
<DEPRECIATION> 528,120
<TOTAL-ASSETS> 2,085,778
<CURRENT-LIABILITIES> 562,401
<BONDS> 0
0
0
<COMMON> 1,592
<OTHER-SE> 1,100,950
<TOTAL-LIABILITY-AND-EQUITY> 2,085,778
<SALES> 1,790,476
<TOTAL-REVENUES> 1,790,476
<CGS> 1,183,690
<TOTAL-COSTS> 1,183,690
<OTHER-EXPENSES> 1,019
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (5,571)
<INCOME-PRETAX> 303,900
<INCOME-TAX> 110,924
<INCOME-CONTINUING> 192,976
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 192,976
<EPS-BASIC> 1.26
<EPS-DILUTED> 1.24
</TABLE>
