UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(X) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the quarterly period ended June 27, 1999
or
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ___________________ to ___________________
Commission File Number 1-9183
Harley-Davidson, Inc.
(Exact name of registrant as specified in its Charter)
Wisconsin 39-1382325
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3700 West Juneau Avenue, Milwaukee, Wisconsin 53208
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (414) 342-4680
None
(Former name, former address and former
fiscal year, if changed since last report)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock Outstanding as of August 6, 1999: 152,400,174 Shares
<PAGE>
HARLEY-DAVIDSON, INC.
Form 10-Q Index
For the Quarter Ended June 27, 1999
Page
----
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Statements of Income 3
Condensed Consolidated Balance Sheets 4
Condensed Consolidated Statements of Cash Flows 5
Notes to Condensed Consolidated Financial Statements 6-9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10-18
Item 3. Quantitative and Qualitative Disclosures about Market Risk 19
Note regarding forward looking statements 19
Part II. Other Information
Item 1. Legal Proceedings 20
Item 4. Submission of Items to a Vote of Security Holders 20
Item 6. Exhibits and Reports on Form 8-K 21
Signatures 22
Exhibit Index 23
2
<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 Six months ended
------------------ ----------------
Jun. 27, Jun. 28, Jun. 27, Jun. 28,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $608,716 $517,164 $1,167,283 $983,691
Cost of goods sold 395,722 339,636 765,155 656,288
-------- -------- ---------- -------
Gross profit 212,994 177,528 402,128 327,403
Operating income from financial services 9,118 6,355 11,760 8,940
Operating expenses (115,478) (96,644) (215,937) (178,297)
-------- -------- ---------- --------
Income from operations 106,634 87,239 197,951 158,046
Interest income, net 1,992 612 3,481 1,386
Other, net (641) (607) (463) (1,796)
-------- -------- ---------- --------
Income before provision for income taxes 107,985 87,244 200,969 157,636
Provision for income taxes 39,415 31,843 73,355 57,537
-------- -------- ---------- --------
Net income $ 68,570 $ 55,401 $ 127,614 $100,099
======== ======== ========== ========
Earnings per common share:
Basic $ .45 $ .36 $ .83 $ .66
======== ======== ========== ========
Diluted $ .44 $ .36 $ .82 $ .65
======== ======== ========== ========
Weighted-average common shares outstanding:
Basic 153,081 151,930 153,064 151,883
======== ======== ========== ========
Diluted 155,606 154,545 155,646 154,385
======== ======== ========== ========
Cash dividends per share $ .045 $ .040 $ .085 $ .075
======== ======== ========== ========
</TABLE>
3
<PAGE>
Harley-Davidson, Inc.
Condensed Consolidated Balance Sheets
(In thousands)
<TABLE>
<CAPTION>
Jun. 27, Dec. 31, Jun. 28,
1999 1998 1998
---- ---- ----
-unaudited- -unaudited-
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 209,984 $ 165,170 $ 154,475
Accounts receivable, net 100,813 113,417 91,336
Finance receivables, net 369,218 360,341 302,247
Inventories (Note 2) 149,060 155,616 131,525
Other current assets 49,745 50,419 44,565
---------- ---------- ----------
Total current assets 878,820 844,963 724,148
Finance receivables, net 426,000 319,427 346,097
Property, plant and equipment, net 629,941 627,759 561,966
Goodwill 51,182 51,197 45,323
Other assets 76,247 76,863 68,467
---------- ---------- ----------
$2,062,190 $1,920,209 $1,746,001
========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 112,521 $ 122,722 $ 118,395
Accrued and other liabilities 211,752 199,051 176,059
Current portion of finance debt 217,655 146,742 125,951
---------- ---------- ----------
Total current liabilities 541,928 468,515 420,405
Finance debt 280,000 280,000 280,000
Other long-term liabilities 62,895 69,700 63,308
Postretirement health care benefits 73,934 72,083 70,164
Contingencies (Note 6)
Total shareholders' equity 1,103,433 1,029,911 912,124
---------- ---------- ----------
$2,062,190 $1,920,209 $1,746,001
========== ========== ==========
</TABLE>
4
<PAGE>
Harley-Davidson, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Six months ended
----------------
Jun. 27, Jun. 28,
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 127,614 $ 100,099
Adjustments to reconcile net income to net
cash provided by operating
activities:
Depreciation and amortization 52,911 40,387
Provision for credit losses 9,712 4,570
Long-term employee benefits (4,968) 4,430
Other, net 1,474 329
Net change in other current assets and current liabilities 24,436 16,861
---------- ----------
Net cash provided by operating activities 211,179 166,676
Cash flows from investing activities:
Purchase of property and equipment (54,789) (69,135)
Finance receivables acquired or originated (1,638,283) (1,283,629)
Finance receivables collected/sold 1,513,121 1,183,082
Other, net (7,794) (7,677)
---------- ----------
Net cash used in investing activities (187,745) (177,359)
Cash flows from financing activities:
Net increase in finance debt 70,913 35,292
Dividends paid (13,382) (11,668)
Stock repurchase (56,458) (15,174)
Issuance of stock under employee stock and option plans 20,307 9,246
---------- ----------
Net cash provided by financing activities 21,380 17,696
---------- ----------
Net increase in cash and cash equivalents 44,814 7,013
Cash and cash equivalents:
At beginning of period 165,170 147,462
---------- ----------
At end of period $ 209,984 $ 154,475
========== ==========
</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 June 27, 1999 and June 28, 1998, and the
results of operations for the three- and six-month periods then ended. Certain
prior-year balances have been reclassified in order to conform to current-year
presentation. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's annual report on Form
10-K for the year ended December 31, 1998.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
Note 2 - Inventories
The Company values its inventories at the lower of cost or market. Substantially
all inventories located in the United States are valued using the last-in,
first-out (LIFO) method. Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
Jun. 27, Dec. 31, Jun. 28,
1999 1998 1998
---- ---- ---
<S> <C> <C> <C>
Components at the lower of cost, first-in,
first-out (FIFO), or market:
Raw material & work-in-process $ 59,499 $ 55,336 $ 47,335
Finished goods 20,564 27,295 23,517
Parts & accessories and general merchandise 90,472 93,710 84,202
-------- -------- --------
170,535 176,341 155,054
Excess of FIFO over LIFO 21,475 20,725 23,529
-------- -------- --------
Inventories as reflected in the accompanying
condensed consolidated balance sheets $149,060 $155,616 $131,525
======== ======== ========
</TABLE>
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,
Eaglemark Financial Services, Inc. (Eaglemark). The Company's reportable
segments are strategic business units that offer different products and
services. They are managed separately based on the fundamental differences in
their operations. Selected segment information is set forth below (in
thousands):
<TABLE>
<CAPTION>
Three months ended Six months ended
------------------ ----------------
Jun. 27, Jun. 28, Jun. 27, Jun. 28,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales:
Motorcycles and Related Products $608,716 $517,164 $1,167,283 $983,691
Financial Services n/a n/a n/a n/a
$608,716 $517,164 $1,167,283 $983,691
======== ======== ========== ========
Income from operations:
Motorcycles and Related Products $100,140 $ 83,246 $ 191,617 $154,297
Financial Services 9,118 6,355 11,760 8,940
General corporate expenses (2,624) (2,362) (5,426) (5,191)
-------- -------- ---------- --------
$106,634 $ 87,239 $ 197,951 $158,046
======== ======== ========== ========
</TABLE>
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 Six months ended
------------------ ----------------
Jun. 27, Jun. 28, Jun. 27, Jun. 28,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Numerator
Net income used in computing
basic and diluted earnings per share $ 68,570 $ 55,401 $127,614 $100,099
======== ======== ======== ========
Denominator
Denominator for basic earnings per share -
weighted-average common shares 153,081 151,930 153,064 151,883
Effect of dilutive securities - employee stock
options and nonvested stock 2,525 2,615 2,582 2,502
-------- -------- -------- --------
Denominator for diluted earnings per share-
adjusted weighted-average shares 155,606 154,545 155,646 154,385
======== ======== ======== ========
Basic earnings per share $ .45 $ .36 $ .83 $ .66
======== ======== ======== ========
Diluted earnings per share $ .44 $ .36 $ .82 $ .65
======== ======== ======== ========
</TABLE>
7
<PAGE>
Note 5 - Comprehensive Income
Total comprehensive income, which was comprised of net income and foreign
currency translation adjustments, amounted to approximately $64.6 million and
$54.5 million for the three months ended June 27, 1999 and June 28, 1998,
respectively. Total comprehensive income for the six months ended June 27, 1999
and June 28, 1998 was $123.3 million and $101.9 million, respectively.
Note 6 - Contingencies
The Company is involved with government agencies in various environmental
matters, including a matter involving soil and groundwater contamination at its
York, Pennsylvania facility (the Facility). The Facility was formerly used by
the U.S. Navy and AMF (the predecessor corporation of Minstar). The Company
purchased the Facility from AMF in 1981. Although the Company is not certain as
to the extent of the environmental contamination at the Facility, it is working
with the Pennsylvania Department of Environmental Protection in undertaking
certain investigation and remediation activities, including a site-wide remedial
investigation/feasibility study. In January 1995, the Company entered into a
settlement agreement (the Agreement) with the Navy. The Agreement calls for the
Navy and the Company to contribute amounts into a trust equal to 53% and 47%,
respectively, of future costs associated with investigation and remediation
activities at the Facility (response costs). The trust will administer the
payment of the future response costs at the Facility as covered by the
Agreement. In addition, in March 1991 the Company entered into a settlement
agreement with Minstar related to certain indemnification obligations assumed by
Minstar in connection with the Company's purchase of the Facility. Pursuant to
this settlement, Minstar was obligated to reimburse the Company for a portion of
its response costs at the Facility. In the first quarter of 1999, the Company
received final payment of Minstar's portion of the response costs at the
Facility. Although substantial uncertainty exists concerning the nature and
scope of the environmental remediation that will ultimately be required at the
Facility, based on preliminary information currently available to the Company
and taking into account the Company's settlement agreement with the Navy, the
Company estimates that it will incur approximately $6 million of net additional
response costs at the Facility. The Company has established reserves for this
amount. The Company's estimate of additional response costs is based on reports
of environmental consultants retained by the Company, the actual costs incurred
to date and the estimated costs to complete the necessary investigation and
remediation activities. Response costs are expected to be incurred over a period
of approximately 10 years, ending in 2009.
Note 7 - Capital Stock
During the second quarter of 1999, the Company repurchased 1,010,000 shares of
its outstanding common stock with $56.5 million of cash on hand. The shares were
repurchased by the Company under its continuing authorization to repurchase
shares to offset dilution caused by the exercise of stock options. See the
"Liquidity and Capital Resources" section below for additional information on
the Company's authorization to repurchase common stock.
The Company has designated .5 million of the 2.0 million authorized shares of
preferred stock as Series A Junior Participating preferred stock (Preferred
Stock). The Preferred Stock has a par value of $1 per share. Each share of
Preferred Stock, none of which is outstanding, is entitled to 800 votes per
share (subject to adjustment) and other rights such that the value of a one
one-hundredth interest in a share of Preferred Stock should approximate the
value of eight shares of common stock.
8
<PAGE>
Note 7 - Capital Stock (continued)
The Preferred Stock is reserved for issuance in connection with the Company's
outstanding Preferred Stock purchase rights (Rights), the agreement with respect
to which was amended effective February 19, 1999. Each outstanding share of
common stock entitles its holder to one-eighth Right. Under certain conditions,
each Right entitles the holder to purchase one one-hundredth of a share of
Preferred Stock at an exercise price of $800, subject to adjustment. The Rights
are only exercisable if a person or group has acquired 15% or more of the
outstanding common stock or has announced an intention to acquire 25% or more of
the outstanding common stock. If there is a 15% acquiring party, each holder of
a Right, other than the acquiring party, will be entitled to purchase, at the
exercise price, Preferred Stock having a market value of two times the exercise
price. In addition, prior to the acquisition of 50% or more of the outstanding
common stock by an acquiring party, the Board of Directors of the Company may
exchange the Rights (other than the rights of an acquiring party which have
become void), in whole or in part, at an exchange ratio of eight shares of
common stock or one one-hundredth of a share of Preferred Stock (or a share of
the company's preferred stock having equivalent rights, privileges, and
preferences), per Right, subject to adjustment.
9
<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 June 27, 1999
Compared to the Three Months Ended June 28, 1998
For the quarter ended June 27, 1999, consolidated net sales totaled $608.7
million, a $91.5 million or 17.7% increase over the same period last year. Net
income and diluted earnings per share for the second quarter of 1999 were $68.6
million and $.44 on 155.6 million weighted average shares outstanding versus
$55.4 million and $.36 on 154.5 million weighted average shares outstanding in
1998, increases of 23.8% and 22.9%, respectively.
<TABLE>
<CAPTION>
Motorcycle Unit Shipments and Net Sales
For the Three Month Periods Ended
June 27, 1999 and June 28, 1998
============================================= ============ =========== ============ ============
Increase
1999 1998 (Decrease) %Change
============================================= ============ =========== ============ ============
Motorcycle Unit Shipments
============================================= ============ =========== ============ ============
<S> <C> <C> <C> <C>
Harley-Davidson(R)motorcycle units 44,771 37,753 7,018 18.6%
- --------------------------------------------- ------------ ----------- ------------ ------------
Buell(R)motorcycle units 1,512 1,497 15 1.0
- --------------------------------------------- ------------ ----------- ------------ ------------
============================================= ============ =========== ============ ============
Total motorcycle units 46,283 39,250 7,033 17.9%
============================================= ============ =========== ============ ============
Net sales (in millions)
============================================= ============ =========== ============ ============
Harley-Davidson motorcycles $468.6 $400.9 $67.7 16.9%
- --------------------------------------------- ------------ ----------- ------------ ------------
Buell motorcycles 12.5 13.4 (.9) (6.4)
- --------------------------------------------- ------------ ----------- ------------ ------------
Total motorcycles 481.1 414.3 66.8 16.1
- --------------------------------------------- ------------ ----------- ------------ ------------
Motorcycle Parts and Accessories 99.7 79.3 20.4 25.7
- --------------------------------------------- ------------ ----------- ------------ ------------
General Merchandise 27.2 22.5 4.7 21.2
- --------------------------------------------- ------------ ----------- ------------ ------------
Other .7 1.1 (.4) (38.4)
============================================= ============ =========== ============ ============
Total Motorcycles and Related Products $608.7 $517.2 $91.5 17.7%
============================================= ============ =========== ============ ============
</TABLE>
The second quarter increase in net sales of $91.5 million, or 17.7%, was driven
primarily by an 18.6% increase in Harley-Davidson motorcycle unit shipments.
During the second quarter of 1999, the Company increased its Harley-Davidson
motorcycle unit shipments and production to almost 45,000 units, approximately
7,000 units higher than the same period last year. This increase in unit
production is primarily the result of the Company's ongoing success with its
manufacturing strategy. This strategy is designed to increase capacity, improve
product quality, reduce costs and increase flexibility to respond to changes in
the marketplace. In addition, 1999 second quarter unit shipments were positively
impacted by the sale of 725 FXR models, which are limited edition big twin
Harley-Davidson motorcycles. The FXR's are being produced at the York, PA
manufacturing facility on a separate low volume assembly line which was formerly
used for military contract production.
10
<PAGE>
Based on the production levels achieved in the second quarter, the Company has
increased its 1999 annual production target to 172,000 Harley-Davidson units and
set a third quarter production target of 42,000 units. (1)
Shipments of Buell motorcycle units in the second quarter of 1999 totaled 1,512
compared to 1,497 in the second quarter of 1998. During the second quarter of
1999, Buell motorcycle production was interrupted for five weeks until the parts
associated with its recall could be supplied to the market. As a result, the
Company has reduced the 1999 Buell motorcycle production target by 300 to 7,700
units. (1)
Parts and Accessories (P & A) sales were up $20.4 million or 25.7% compared to
the second quarter of 1998. P&A sales increases were driven by increased engine
sales combined with sales growth in Twin Cam 88 performance accessories and
other new products. General Merchandise sales, which include clothing and
collectibles, were up $4.7 million, or 21.2%, compared to the second quarter of
1998. Second quarter 1999 General Merchandise sales were positively impacted by
the timing of shipments between the first and second quarters of 1999. The
Company anticipates that long term sales growth targets for P&A and General
Merchandise will continue to approximate the Harley-Davidson motorcycle unit
growth target. (1)
The Company's ability to reach the 1999 quarterly and annual targeted production
levels and to attain growth rates in other areas will depend upon, among other
factors, the Company's ability to (i) continue to realize production
efficiencies at its production facilities through the implementation of
innovative manufacturing techniques and other means, (ii) successfully implement
production capacity increases in its facilities, (iii) successfully introduce
new products, (iv) avoid unexpected product backorders and (v) sell all of the
motorcycles it has the capacity to produce. In addition, the Company could
experience delays in making changes to facilities as a result of risks normally
associated with the operation of manufacturing facilities, including delays in
the delivery of machinery and equipment or difficulties in making such machinery
and equipment operational, work stoppages, difficulties with suppliers, natural
causes or other factors. These risks, potential delays and uncertainties
regarding the costs could also adversely impact the Company's capital
expenditure estimates (see "Liquidity and Capital Resources" section).
Gross Profit
Gross profit increased $35.5 million, or 20.0%, compared to the second quarter
of 1998 primarily due to an increase in overall sales volume. The gross profit
margin in the second quarter was 35.0% in 1999 compared to 34.3% in 1998. The
increase in gross profit margin was primarily due to a greater percentage of
shipments to domestic customers, partially offset by a weaker product mix. Also,
1998 gross profit margin was negatively impacted by facilities start-up costs,
which the Company did not experience in the current year.
During the second quarter of 1999, the Company shipped approximately 80% of its
Harley-Davidson motorcycle units domestically, compared to 76% during the second
quarter of 1998. The Company's domestic motorcycle sales are direct to dealers,
while approximately one half of its international shipments are to wholesale
distributors, which carry a lower gross margin. Going forward, the Company
expects that approximately 75% of its Harley-Davidson motorcycles will be
shipped domestically. (1)
The 1999 second quarter gross profit margin was negatively impacted by a higher
mix of Sportster
11
<PAGE>
shipments, which have a lower gross margin than touring and
custom motorcycle models. Sportster motorcycle unit shipments made up 23% of the
total Harley-Davidson unit shipments in the second quarter of 1999, compared to
20% during the second quarter of 1998. The Company expects the Sportster mix in
the third and fourth quarters of 1999 to be approximately 24% of total
Harley-Davidson unit shipments. (1)
<TABLE>
<CAPTION>
Operating Expenses
For the Three-Month Periods Ended
June 27, 1999 and June 28, 1998
(Dollars in Millions)
===============================================================================================
1999 1998 Increase %Change
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Motorcycles and Related Products $112.9 $94.3 $18.6 19.7%
- -----------------------------------------------------------------------------------------------
Corporate 2.6 2.4 .2 11.1
===============================================================================================
Total operating expenses $115.5 $96.7 $18.8 19.4%
===============================================================================================
</TABLE>
Total operating expenses increased $18.8 million, or 19.4%, compared to the
second quarter of 1998. Operating expenses in the second quarter of 1999 were
higher than the same quarter a year ago primarily in the areas of sales,
marketing and engineering. Second quarter 1999 operating expenses also include a
$5.0 million charge related to the previously announced recall of Buell
motorcycles. Comparatively, the second quarter of 1998 included a $3.7 million
charge for the recall of ignition switches. The Company expects to continue to
invest in its future growth in the second half of 1999, with increased spending
in the areas of product development and marketing.(1) The Company expects
increased spending in the second half of 1999 which may result in third and
fourth quarter operating profit margins (% of sales) comparable to those
achieved in the second half of 1998. (1)
Operating income from financial services
The operating income of Eaglemark Financial Services, Inc. (Eaglemark) was $9.1
million and $6.4 million for the second quarter of 1999 and 1998, respectively.
Eaglemark benefited from the increase in the Company's U.S. motorcycle retail
sales as well as increased market share in retail installment lending for the
Company's motorcycles, which was 21.9% as of the end of the second quarter of
1999 compared to 18.7% for the same period a year ago.
Interest income
Interest income was higher than in the prior year primarily due to higher levels
of cash available for short-term investing in the second quarter of 1999
compared to 1998.
Consolidated income taxes
The Company's effective income tax rate was 36.5% for the second quarters of
1999 and 1998.
12
<PAGE>
Results of Operations for the Six Months Ended June 27, 1999
Compared to the Six Months Ended June 28, 1998
For the six month period ended June 27, 1999, the Company recorded net sales of
$1,167.3 million, a $183.6 million or 18.7% increase over the same period last
year. Net income and diluted earnings per share were $127.6 million and $.82 on
155.6 million weighted average shares outstanding versus $100.1 million and $.65
on 154.4 million weighted average shares, increases of 27.5% and 26.5%,
respectively.
<TABLE>
<CAPTION>
Motorcycle Unit Shipments and Net Sales
For the Six-Month Periods Ended
June 27, 1999 and June 28, 1998
================================================ =========== ========== ============ ===========
1999 1998 Increase %Change
================================================ =========== ========== ============ ===========
Motorcycle Unit Shipments
================================================ =========== ========== ============ ===========
<S> <C> <C> <C> <C>
Harley-Davidson(R)motorcycle units 85,952 72,235 13,717 19.0%
- ------------------------------------------------ ----------- ----------- ----------- -----------
Buell(R)motorcycle units 3,525 2,847 678 23.8
- ------------------------------------------------ ----------- ----------- ----------- -----------
================================================ =========== ========== ============ ===========
Total motorcycle units 89,477 75,082 14,395 19.2%
================================================ =========== ========== ============ ===========
Net sales (in millions)
================================================ =========== ========== ============ ===========
Harley-Davidson motorcycles $905.1 $762.2 $142.9 18.7%
- ------------------------------------------------ ----------- ---------- ------------ -----------
Buell motorcycles 28.6 25.7 2.9 11.3
- ------------------------------------------------ ----------- ---------- ------------ -----------
Total motorcycles 933.7 787.9 145.8 18.5
- ------------------------------------------------ ----------- ---------- ------------ -----------
Motorcycle Parts and Accessories 174.7 142.6 32.1 22.5
- ------------------------------------------------ ----------- ---------- ------------ -----------
General Merchandise 56.7 51.7 5.0 9.7
- ------------------------------------------------ ----------- ---------- ------------ -----------
Other 2.2 1.5 .7 43.5
================================================ =========== ========== ============ ===========
Total Motorcycles and Related Products $1,167.3 $983.7 $183.6 18.7%
================================================ =========== ========== ============ ===========
</TABLE>
The 18.7% increase in revenue was largely attributable to additional motorcycle
unit shipments as demand for the Company's motorcycles continued to grow. The
most recent information available (through May) indicates a combined U.S.
heavyweight (651+cc) market share of 46.9% (for Harley-Davidson and Buell)
compared to 44.5% for the same period in 1998. This same market has grown at a
28.4% rate year-to-date, while retail registrations for the Company's
motorcycles (Harley-Davidson and Buell motorcycles) increased 35.2%. However,
even with the planned production increases the Company does not expect to be
able to sustain a thirty-plus percent rate of retail registration growth during
the second half of 1999. (1)
European data (through May) show the Company with a 6.0% share of the
heavyweight (651+cc) market, up from 5.7% for the same period in 1998. The
European market (651+cc) has grown at a 9.1% rate year-to-date, while retail
registrations for the Company's motorcycles (Harley-Davidson and Buell)
increased 14.6% compared to last year. The Company continues to actively work on
improving its European distribution network and implement European focused
marketing programs. The introduction of the Company's new Twin Cam 88 engine has
also been well received by the European market.
13
<PAGE>
Asia/Pacific (Japan and Australia) data (through May) show the Company with a
18.2% share of the heavyweight (651+cc) market, up from 14.2% for the same
period in 1998. Asia/Pacific market registrations are 9.2% behind last year's
year-to-date numbers, while registrations for the Company's motorcycles
(Harley-Davidson and Buell) have increased 16.0% over 1998 year-to-date levels.
Parts and Accessories (P & A) sales of $174.7 million were up $32.1 million or
22.5% compared to the first half of 1998. General Merchandise sales, which
include clothing and collectibles, of $56.7 million were up $5.0 million, or
9.7%, compared to the first half of 1998. P&A sales did grow slightly faster
than the long-term target during the first half of 1999. However, long term
sales growth targets for P&A and General Merchandise will continue to
approximate the Harley-Davidson motorcycle unit growth target.(1)
Gross Profit
Gross profit for the first six months of 1999 totaled $402.1 million, an
increase of $74.7 million or 22.8% over the same period in 1998. The gross
profit margin was 34.4% in 1999 compared to 33.3% for the first six months of
1998. The increase in gross profit margin was primarily due to a higher
percentage of shipments to domestic customers in the first half of the current
year. In addition, the half-year comparison of gross margin is also impacted by
higher costs incurred during the first half of 1998 in connection with the
ramp-up of two new production facilities.
<TABLE>
<CAPTION>
Operating Expenses
For the Six-Month Periods Ended
June 27, 1999 and June 28, 1998
(Dollars in Millions)
===============================================================================================
1999 1998 Increase %Change
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Motorcycles and Related Products $210.5 $173.1 $37.4 21.6%
- -----------------------------------------------------------------------------------------------
Corporate 5.4 5.2 .2 4.5
===============================================================================================
Total operating expenses $215.9 $178.3 $37.6 21.1%
===============================================================================================
</TABLE>
Total operating expenses of $215.9 million for the first six months of 1999
increased $37.6 million or 21.1% compared to the first six months of 1998.
Operating expenses in the first half of 1999 were higher than the same period a
year ago primarily in the areas of sales, marketing, engineering and information
services. Operating expenses in the first half of 1999 also included a $5.0
million charge related to the previously announced recall of Buell motorcycles.
Comparatively, the second quarter of 1998 includes a $3.7 million charge for the
recall of ignition switches.
14
<PAGE>
Operating income from financial services
The operating income of Eaglemark was $11.8 million and $8.9 million for the
first half of 1999 and 1998, respectively. Eaglemark benefited from the increase
in the Company's U.S. motorcycle retail sales as well as increased market share
in retail installment lending for the Company's motorcycles. The Company's goal
is to sustain Eaglemark's June year to date operating income growth rate of
approximately 30% through the end of 1999.
(1)
Interest income
Interest income was higher than prior year primarily due to higher levels of
cash available for short-term investing in the first half of 1999 compared to
1998.
Other income (expense)
Other expense in the first half of 1999 was approximately $1.3 million lower
than the first half of 1998. The decrease in other expense over prior year
relates to foreign exchange losses recorded in the first half of 1998 that did
not recur in 1999.
Consolidated income taxes
The Company's effective income tax rate was 36.5% first six months of 1999 and
1998.
Other Matters
Environmental
The Company's policy is to comply with all applicable environmental laws and
regulations, and the Company has a compliance program in place to monitor, and
report on, environmental issues. The Company has reached settlement agreements
with its former parent (Minstar, successor to AMF Incorporated) and the U.S.
Navy regarding soil and groundwater remediation at the Company's manufacturing
facility in York, Pennsylvania and currently estimates that it will incur
approximately $6 million of net additional costs related to the remediation
effort. The Company has established reserves for this amount. See Note 6 of the
notes to condensed consolidated financial statements. Recurring costs associated
with managing hazardous substances and pollution in on-going operations have not
been material.
The Company regularly invests in equipment to support and improve its various
manufacturing processes. While the Company considers environmental matters in
capital expenditure decisions, and while some capital expenditures also act to
improve environmental compliance, only a small portion of the Company's annual
capital expenditures relate to equipment that has the sole purpose of meeting
environmental compliance obligations. The Company anticipates that capital
expenditures for equipment used to limit hazardous substances/pollutants during
1999 will approximate $.5 million.(1) The Company does not expect that these
expenditures related to environmental matters will have a material effect on
future operating results or cash flows.
15
<PAGE>
Impact of Year 2000
The Company has implemented a comprehensive Year 2000 initiative to identify and
address issues associated with the Year 2000. A team of internal staff is
managing the initiative with the assistance of some outside consultants. The
team's activities are designed to ensure that there are no material adverse
effects on the Company.
The Company's assessment of its internal information services computer systems
indicated that many of the Company's systems were vulnerable to Year 2000
issues. In response to this assessment, the Company made plans to remediate the
affected systems by modifying or replacing portions of its software and hardware
so that these computer systems will function properly with respect to dates in
the year 2000 and thereafter. To date, the Company has completed the remediation
(including testing) of all affected internal computer systems related to its
ability to produce and distribute motorcycles. In addition, the Company is in
the process of completing the remaining remediation required on other affected
systems identified in the assessment. The majority of remaining remediation
efforts are being accomplished as components of existing projects which include
the replacement of current software and hardware. The remaining remediation
including testing is expected to be complete by the end of the third quarter of
1999. (1)
The Company also has assessed Year 2000 issues related to its non-information
technology systems used in product development, engineering, manufacturing, and
facilities. The Company has completed these assessments and is currently working
to modify or replace any non-information technology systems so that these
systems will function properly with respect to dates in the year 2000 and
thereafter. These remediation efforts are also expected to be complete by the
end of the third quarter of 1999. (1)
The Company is also working with its significant suppliers and financial
institutions to ensure that those parties have appropriate plans to remediate
Year 2000 issues where their systems interface with the Company's systems or
otherwise impact its operations. The Company has communicated in writing or in
person with all of its principal suppliers to confirm their status in regards to
Year 2000 issues. Currently, the Company has received confirmation from over 95%
of its significant suppliers confirming their systems are currently compliant or
will be compliant by year end, with respect to the year 2000. The Company will
continue to assess the extent to which its operations are vulnerable should any
of its suppliers fail to properly remediate their computer systems.
The Company has also communicated with its dealers and distributors regarding
their potential Year 2000 issues. Based on these communications the Company does
not anticipate that potential Year 2000 issues at its dealers and distributors
would have a material adverse effect on its ability to deliver its products and
services to its dealers and ultimately to its customers.(1)
The Company's Year 2000 initiative, which is substantially complete, is expected
to be complete, including system modifications, replacements and testing, by the
end of the third quarter of 1999.(1) However the Company will continue to
monitor Year 2000 issues throughout the remainder of 1999 and into 2000 to
ensure that any additional or previously unidentified issues are properly
addressed. While the Company believes its planning efforts are adequate to
address its Year 2000 concerns, there can be no assurance that the systems of
other companies on which the Company's systems and operations rely will be
converted on a timely basis and will not have a material adverse effect on the
Company. However, based on the progress the Company has made on its internal
initiative and the information available from third parties, the Company has not
identified a need to develop an extensive company-wide contingency plan for
non-remediation issues at this time. The need for such a plan is evaluated on an
on-going basis as part of the Company's overall Year 2000 initiative.
16
<PAGE>
Based on the Company's assessments to date, the costs of the Year 2000
initiative (which are expensed as incurred) are estimated to be approximately
$11 million.(1) Approximately $ 2.3 million of Year 2000 expense has been
incurred in 1999 and $8.8 million in the aggregate since the initiative began in
1997.
The costs of the project and the date on which the Company believes it will
complete its Year 2000 initiative are forward-looking statements and are based
on management's best estimates, according to information available through the
Company's assessments to date. However, there can be no assurance that these
estimates will be achieved, and actual results could differ materially from
those anticipated. Specific factors that might cause such material differences
include, but are not limited to, the availability and cost of personnel trained
in this area, the retention of these professionals, the ability to locate and
correct all relevant computer codes, and similar uncertainties. At present, the
Company has not experienced any significant problems in these areas.
Liquidity and Capital Resources as of June 27, 1999
The Company's main source of liquidity is cash from operating activities which
consists of net income adjusted for non-cash operating activities and changes in
other current assets and liabilities such as accounts receivable, inventory,
prepaid expenses and accounts payable.
The Company generated $211.2 million of cash from operating activities during
the first half of 1999 compared to $166.7 million in 1998. The largest component
of cash from operating activities is net income adjusted for depreciation and
provision for credit losses, which contributed $190.2 million in 1999 compared
to $145.1 million in 1998.
Changes in other current assets and liabilities increased operating cash flows
by approximately $24.4 million and $16.9 million in the first half of 1999 and
1998, respectively. Changes in working capital during the first six months of
1999 and 1998 consisted of the following (in millions):
Six months ended
----------------
Working capital item 1999 1998
------------------------ ---- ----
Accounts receivable, net $12.6 $ 13.5
Inventories 6.6 (10.2)
Prepaid expenses .6 (1.5)
Accounts payable and accrued expenses 4.6 15.1
----- ------
Total $24.4 $ 16.9
===== ======
In the first half of 1999 inventories decreased by approximately $6.6 million,
primarily due a corresponding decrease in finished units on-hand. Comparatively,
inventory levels increased approximately $10.2 million in the first half of
1998, largely due to the ramp up of new production facilities. In addition,
increases in accounts payable and accrued expenses in the first half of 1999
were $4.6 million as compared to $15.1 million during the first half of 1998.
17
<PAGE>
Capital expenditures amounted to approximately $54.8 million and $69.1 million
during the first half of 1999 and 1998, respectively. For the past several
years, the Company has been implementing a manufacturing strategy to, among
other things, increase its motorcycle production capacity. Going forward, the
Company's capital expenditures will continue to focus on capacity expansion at
its new and previously existing facilities and will also focus on other areas
such as product development, systems development and continuing operations.
Although the Company does not know the exact amount of capital expenditures it
will incur, it estimates the capital required in 1999 will be in the range of
$150-$170 million.(1) The Company anticipates it will have the ability to fund
all capital expenditures with internally generated funds and short-term
financing.(1)
The Company (excluding Eaglemark) currently has nominal levels of long-term debt
and has lines of credit of approximately $42.8 million, of which approximately
$41.9 million remained available at June 27, 1999.
Eaglemark finances its business through an unsecured commercial paper program,
revolving credit facilities, senior subordinated debt and asset-backed
securitizations. Eaglemark issues short-term commercial paper with maximum
issuance available of $600 million of which approximately $423 million was
outstanding at June 27, 1999. Maturities of commercial paper issued can range
from 1 to 270 days. Eaglemark has in place a $350 million 364-day revolving
credit facility and a $250 million five-year revolving credit facility of which
approximately $45 million was outstanding at June 27, 1999. The primary uses of
the credit facilities are to provide liquidity to the unsecured commercial paper
program and to fund normal business operations. Eaglemark has also issued $30
million of senior subordinated notes which expire in 2007. During the second
quarter, Eaglemark securitized and sold approximately $195 million of its retail
installment loans to investors with limited recourse, with servicing rights
being retained by Eaglemark. The Company expects that the future growth of
Eaglemark will be financed from internally generated funds, additional capital
contributions from the Company, bank lines of credit, and continuation of its
subordinated debt, commercial paper and securitization programs. Eaglemark
anticipates that further securitization transactions will be completed during
the remainder of 1999, depending on market conditions. (1) The Company has a
support agreement with Eaglemark, whereby the Company agrees to provide
Eaglemark with certain financial support payments if required. The payments may
be provided at the Company's option either as a capital contribution or as a
loan.
The Company has authorization from its Board of Directors to repurchase up to
4,700,000 shares of the Company's outstanding common stock. In addition, the
Company has continuing authorization from its Board of Directors to repurchase
shares of the Company's outstanding common stock under which the cumulative
number of shares repurchased, at the time of any repurchase, shall not exceed
the sum of (i) the number of shares issued in connection with the exercise of
stock options occurring on or after January 1, 1998 plus (ii) one percent of the
issued and outstanding common stock of the Company on January 1 of the current
year, adjusted for any stock split. During the second quarter of 1999 the
Company repurchased 1,010,000 shares of its common stock under the latter
authorization.
The Company's Board of Directors declared two cash dividends during the first
six months of 1999 including, most recently, a $.045 per share cash dividend
declared on May 10, 1999, payable June 25, 1999 to shareholders of record June
15, 1999.
18
<PAGE>
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Refer to the Company's Annual Report on Form 10-K for the year ended December
31, 1998 for a complete discussion of the Company's market risk. There have been
no material changes to the market risk information included in the Company's
1998 annual report on Form 10-K.
(1) Note regarding forward-looking statements
Certain matters discussed in this Quarterly Report on Form 10-Q are
"forward-looking statements" intended to qualify for the safe harbors from
liability established by the Private Securities Litigation Reform Act of 1995.
These forward-looking statements can generally be identified as such by
reference to this footnote or because the context of the statement will include
words such as the Company "believes," "anticipates," "expects" or "estimates" or
words of similar meaning. Similarly, statements that describe the Company's
future plans, objectives, targets or goals are also forward-looking statements.
Such forward-looking statements are subject to certain risks and uncertainties
which are described in close proximity to such statements or elsewhere in this
report and could cause actual results to differ materially from those
anticipated as of the date of this report. Shareholders, potential investors and
other readers are urged to consider these factors in evaluating the
forward-looking statements and are cautioned not to place undue reliance on such
forward-looking statements. The forward-looking statements included herein are
only made as of the date of this report, and the Company undertakes no
obligation to publicly update such forward-looking statements to reflect
subsequent events or circumstances.
19
<PAGE>
Part II - OTHER INFORMATION
HARLEY-DAVIDSON, INC.
FORM 10-Q
June 27, 1999
Item 1. Legal Proceedings
The Company is involved with government agencies in various environmental
matters, including a matter involving soil and groundwater contamination at its
York, Pennsylvania facility. See footnote 6 to the accompanying condensed
consolidated financial statements.
Item 4. Submission of Items to a Vote of Security Holders
(a) The Company's Annual Meeting of Shareholders was held on May 8,
1999.
(b) At the Company's Annual Meeting of Shareholders, the following
directors were elected for terms expiring in 2002 by the vote
indicated:
Shares Shares
Voted in Withholding
Favor of Authority
------- ---------
Richard J. Herman-Taylor 124,255,824 2,807,421
Sara L. Levinson 124,253,999 2,809,246
Richard F. Teerlink 124,281,075 2,782,170
(c) Matters other than election of directors, brought for vote at the
Company's Annual Meeting of Shareholders, passed by the vote
indicated.
<TABLE>
<CAPTION>
Shares Voted
------------
For Against Abstained
--- ------ ---------
<S> <C> <C> <C>
Approval of the Company's amended
Corporate Short Term Incentive Plan 122,812,732 3,753,992 496,521
Ratification of Ernst & Young LLP as the
Company's independent auditors 126,674,097 123,683 265,465
</TABLE>
There were no broker non-votes with respect to the foregoing
matters.
20
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
-------------
27 Financial Data Schedule for June 27, 1999
(b) Reports on Form 8-K
------------------------
None
21
<PAGE>
Part II - Other Information
HARLEY-DAVIDSON, INC.
Form 10-Q
June 27, 1999
Signatures
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HARLEY-DAVIDSON, INC.
Date: 8/11/99 by: /s/ James L. Ziemer
James L. Ziemer
Vice President and Chief Financial
Officer (Principal Financial Officer)
8/11/99 by: /s/ James M. Brostowitz
James M. Brostowitz
Vice President, Controller (Principal
Accounting Officer) and Treasurer
22
<PAGE>
Exhibit Index
Exhibit No. Description
- ----------- -----------
27 Financial Data Schedule for June 27, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS OF HARLEY-DAVIDSON, INC. AS OF AND FOR THE SIX
MONTHS ENDED JUNE 27, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-27-1999
<CASH> 209,984
<SECURITIES> 0
<RECEIVABLES> 99,968
<ALLOWANCES> 1,845
<INVENTORY> 149,060
<CURRENT-ASSETS> 878,820
<PP&E> 1,130,476
<DEPRECIATION> 500,535
<TOTAL-ASSETS> 2,062,190
<CURRENT-LIABILITIES> 541,928
<BONDS> 0
1,591
0
<COMMON> 0
<OTHER-SE> 1,101,842
<TOTAL-LIABILITY-AND-EQUITY> 2,062,190
<SALES> 1,167,283
<TOTAL-REVENUES> 1,167,283
<CGS> 765,155
<TOTAL-COSTS> 765,155
<OTHER-EXPENSES> 463
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (3,481)
<INCOME-PRETAX> 200,969
<INCOME-TAX> 73,355
<INCOME-CONTINUING> 127,614
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 127,614
<EPS-BASIC> .83
<EPS-DILUTED> .82
</TABLE>
