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 25, 2000
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 4, 2000: 302,562,530 shares
1
<PAGE>
HARLEY-DAVIDSON, INC.
Form 10-Q Index
For the Quarter Ended June 25, 2000
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 6-8
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 4. Submission of Items to a Vote of Security Holders 18
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
Exhibit Index 21
2
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
-----------------------------------------
<TABLE>
Harley-Davidson, Inc.
Condensed Consolidated Statements of Income
(Unaudited)
(In thousands, except per share amounts)
<CAPTION>
Three months ended Six months ended
------------------ ----------------
Jun. 25, Jun. 27, Jun. 25, Jun. 27,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $754,973 $608,716 $1,436,086 $1,167,283
Cost of goods sold 497,827 395,722 947,635 765,155
------- ------- ------- -------
Gross profit 257,146 212,994 488,451 402,128
Operating income from financial services 11,282 9,118 14,614 11,760
Operating expenses (132,177) (115,478) (253,847) (215,937)
------- ------- ------- -------
Income from operations 136,251 106,634 249,218 197,951
Interest income, net 3,424 1,992 6,296 3,481
Other, net 189 (641) 18,779 (463)
------- ------- ------- -------
Income before provision for income taxes 139,864 107,985 274,293 200,969
Provision for income taxes 49,277 39,415 103,479 73,355
------- ------- ------- -------
Net income $ 90,587 $ 68,570 $ 170,814 $ 127,614
======== ======== ========== ==========
Earnings per common share:
Basic $.30 $.22 $.56 $.42
==== ==== ==== ====
Diluted $.29 $.22 $.55 $.41
==== ==== ==== ====
Weighted-average common shares outstanding:
Basic 303,337 306,162 303,123 306,128
======= ======= ======= =======
Diluted 308,104 311,212 307,914 311,292
======= ======= ======= =======
Cash dividends per share $.025 $.023 $.048 $.043
===== ===== ===== =====
</TABLE>
See accompanying notes.
3
<PAGE>
<TABLE>
Harley-Davidson, Inc.
Condensed Consolidated Balance Sheets
(In thousands)
<CAPTION>
Jun. 25, Dec. 31, Jun. 27,
2000 1999 1999
---- ---- ----
-unaudited- -unaudited-
ASSETS
Current assets:
<S> <C> <C> <C>
Cash and cash equivalents $ 297,917 $ 183,415 $ 209,984
Accounts receivable, net 115,743 101,708 100,813
Finance receivables, net 451,983 440,951 369,218
Inventories (Note 2) 157,415 168,616 149,060
Other current assets 50,760 54,304 49,745
---------- ---------- ----------
Total current assets 1,073,818 948,994 878,820
Finance receivables, net 329,082 354,888 426,000
Property, plant and equipment, net 677,785 681,741 629,941
Goodwill (Note 8) 38,834 55,408 51,182
Other assets 65,707 71,046 76,247
---------- ---------- ----------
$2,185,226 $2,112,077 $2,062,190
========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 185,637 $ 137,660 $ 112,521
Accrued and other liabilities 236,429 199,331 211,752
Current portion of finance debt 48,163 181,163 217,655
---------- ---------- ----------
Total current liabilities 470,229 518,154 541,928
Finance debt 280,000 280,000 280,000
Other long-term liabilities 81,749 77,124 62,895
Post-retirement health care benefits 78,222 75,719 73,934
Contingencies (Note 6)
Total shareholders' equity 1,275,026 1,161,080 1,103,433
---------- ---------- ----------
$2,185,226 $2,112,077 $2,062,190
========== ========== ==========
</TABLE>
See accompanying notes.
4
<PAGE>
<TABLE>
Harley-Davidson, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
<CAPTION>
Six months ended
----------------
Jun. 25, Jun. 27,
2000 1999
---- ----
Cash flows from operating activities:
<S> <C> <C>
Net income $170,814 $127,614
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 65,345 52,911
Gain of sale of credit card business (18,915) --
Provision for credit losses 499 9,712
Long-term employee benefits 7,483 (4,968)
Other, net 2,182 1,474
Net change in other current assets and current liabilities 85,785 24,436
-------- --------
Net cash provided by operating activities 313,193 211,179
Cash flows from investing activities:
Purchase of property and equipment (59,719) (54,789)
Finance receivables acquired or originated (1,843,256) (1,638,283)
Finance receivables collected/sold 1,720,155 1,513,121
Proceeds from sale of credit card business 176,391 --
Other, net (4,311) (7,794)
-------- --------
Net cash used in investing activities (10,740) (187,745)
Cash flows from financing activities:
Net (decrease) increase in finance debt (133,000) 70,913
Dividends paid (14,658) (13,382)
Purchase of common stock for treasury (64,367) (56,458)
Issuance of stock under employee stock and option plans 24,074 20,307
-------- --------
Net cash (used in) provided by financing activities (187,951) 21,380
-------- --------
Net increase in cash and cash equivalents 114,502 44,814
Cash and cash equivalents:
At beginning of period 183,415 165,170
-------- --------
At end of period $297,917 $209,984
======== ========
</TABLE>
See accompanying notes.
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 25, 2000 and June 27, 1999, 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, 1999.
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):
Jun. 25, Dec. 31, Jun. 27,
2000 1999 1999
---- ---- ----
Components at the lower of cost, first-in,
first-out (FIFO), or market:
Raw material & work-in-process $ 66,642 $ 61,893 $ 59,499
Finished goods 27,798 29,977 20,564
Parts & accessories and general merchandise 83,901 97,422 90,472
-------- -------- --------
178,341 189,292 170,535
Excess of FIFO over LIFO 20,926 20,676 21,475
-------- -------- --------
Inventories as reflected in the accompanying
condensed consolidated balance sheets $157,415 $168,616 $149,060
======== ======== ========
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. (HDFS). 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. 25, Jun. 27, Jun. 25, Jun. 27,
2000 1999 2000 1999
---- ---- ---- ----
Net sales:
<S> <C> <C> <C> <C>
Motorcycles and Related Products $754,973 $608,716 $1,436,086 $1,167,283
Financial Services n/a n/a n/a n/a
-------- -------- ---------- ----------
$754,973 $608,716 $1,436,086 $1,167,283
======== ======== ========== ==========
Income from operations:
Motorcycles and Related Products $127,228 $100,140 $239,868 $191,617
Financial Services 11,282 9,118 14,614 11,760
General corporate expenses (2,259) (2,624) (5,264) (5,426)
-------- -------- ---------- ----------
$136,251 $106,634 $249,218 $197,951
======== ======== ======== ========
</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. 25, Jun. 27, Jun. 25, Jun. 27,
2000 1999 2000 1999
---- ---- ---- ----
Numerator
---------
<S> <C> <C> <C> <C>
Net income used in computing
basic and diluted earnings per share $90,587 $68,570 $170,814 $127,614
======= ======= ======== ========
Denominator
-----------
Denominator for basic earnings per share -
weighted-average common shares 303,337 306,162 303,123 306,128
Effect of dilutive securities - employee stock
options and nonvested stock 4,767 5,050 4,791 5,166
------- ------- ------- -------
Denominator for diluted earnings per share-
adjusted weighted-average shares 308,104 311,212 307,914 311,292
======= ======= ======= =======
Basic earnings per share $.30 $.22 $.56 $.42
==== ==== ==== ====
Diluted earnings per share $.29 $.22 $.55 $.41
==== ==== ==== ====
</TABLE>
7
<PAGE>
Note 5 - Comprehensive Income
-----------------------------
Total comprehensive income, which was comprised of net income, foreign currency
translation adjustments and the change in net unrealized gains on investment in
retained securitization interests, amounted to approximately $89.3 million and
$64.6 million for the three months ended June 25, 2000 and June 27, 1999,
respectively. Total comprehensive income for the six months ended June 25, 2000
and June 27, 1999 was $168.9 million and $123.3 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 March 1995, the Company entered into a
settlement agreement (the Agreement) with the Navy. The Agreement calls for the
Navy and the Company to contribute amounts into a trust equal to 53% and 47%,
respectively, of future costs associated with investigation and remediation
activities at the Facility (response costs). The trust will administer the
payment of the future response costs at the Facility as covered by the
Agreement. 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
----------------------
On February 17, 2000, the Company's Board of Directors approved a two-for-one
split of the Company's common stock effective for shareholders of record on
March 22, 2000 and payable on April 7, 2000 (Stock Split). All share and per
share information included in this report has been adjusted to reflect the April
7, 2000 Stock Split.
During the first six months of 2000, the Company repurchased 1,772,200 shares of
its outstanding common stock with $64.4 million of cash on hand. Approximately
1.5 million of these shares were repurchased in the second quarter of 2000.
Note 8 - Sale of Credit Card Business
-------------------------------------
In March 2000, the Company sold its Harley-Davidson(R) Chrome Visa(R) Card
business, which included approximately $142 million of revolving charge
receivables. The sale resulted in a pre-tax gain of approximately $18.9 million
after a $15 million write-off of goodwill, which related to the business sold.
Net of taxes, the transaction resulted in a net gain of approximately $6.9
million. Proceeds from the sale have been used to reduce finance debt.
8
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
-------------------------------------------------------------------------------
of Operations
-------------
Results of Operations for the Three Months Ended June 25, 2000
--------------------------------------------------------------
Compared to the Three Months Ended June 27, 1999
------------------------------------------------
For the quarter ended June 25, 2000 consolidated net sales totaled $755 million,
a $146 million or 24% increase over the same period last year. Net income and
diluted earnings per share for the second quarter of 2000 were $90.6 million and
$.29 on 308.1 million weighted average shares outstanding versus $68.6 million
and $.22 on 311.2 million weighted average shares outstanding in 1999, increases
of 32.1% and 33.4%, respectively.
Motorcycle Unit Shipments and Net Sales
For the Three Month Periods Ended
June 25, 2000 and June 27, 1999
===============================================================================
2000 1999 Change %Change
===============================================================================
Motorcycle Unit Shipments
===============================================================================
Harley-Davidson(R)motorcycle units 53,329 44,771 8,558 19.1%
-------------------------------------------------------------------------------
Buell(R)motorcycle units 3,280 1,512 1,768 116.9
-------------------------------------------------------------------------------
Total motorcycle units 56,609 46,283 10,326 22.3%
===============================================================================
Net sales (in millions)
===============================================================================
Harley-Davidson motorcycles $576.9 $468.6 $108.3 23.1%
-------------------------------------------------------------------------------
Buell motorcycles 20.2 12.5 7.7 61.3
-------------------------------------------------------------------------------
Total motorcycles 597.1 481.1 116.0 24.1
-------------------------------------------------------------------------------
Motorcycle Parts and Accessories 121.1 99.7 21.4 21.4
-------------------------------------------------------------------------------
General Merchandise 36.1 27.2 8.9 32.3
-------------------------------------------------------------------------------
Other .7 .7 0.0 0.0
-------------------------------------------------------------------------------
Total Motorcycles and Related Products $755.0 $608.7 $146.3 24.0%
===============================================================================
The second quarter increase in net sales of $146.3 million, or 24.0%, was driven
primarily by a 19.1% increase in Harley-Davidson motorcycle unit shipments.
During the second quarter of 2000, the Company increased its Harley-Davidson
motorcycle unit shipments and production to 53,329 units, 8,558 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
which is designed to increase capacity, improve product quality, reduce costs
and increase flexibility to respond to changes in the marketplace.
Based on the production levels achieved in the second quarter, the Company has
increased its 2000 annual production target to 202,000 Harley-Davidson units and
set a third quarter production target of 48,500 units. (1) The Company has also
set an annual production target of 223,000 units for 2001. (1)
Shipments of Buell motorcycle units in the second quarter of 2000 totaled 3,280
compared to 1,512 in the second quarter of 1999. This includes 1,325 units of
the Company's newest Buell offering, the Blast(R), which were produced and
shipped in the second quarter of 2000. Comparatively, 1999 second quarter
production and shipments were negatively impacted by a five week interruption
related to the
9
<PAGE>
recall announced in April of 1999.
In June 2000, Buell announced a voluntary recall of certain Buell motorcycle
models produced for the 1999 and 2000 model years. The recall related to the
shock absorber on the 1999 and 2000 Cyclone(R)M2, the 2000 Lightning(R)X1 and
the 2000 Thunderbolt(TM)S3T. Approximately 11,000 units are affected by the
recall. The Company established a pretax reserve of approximately $3 million,
which was charged to operating expenses in June 2000. Production of the affected
Buell models (which includes all of Buell's V Twin models) has been temporarily
interrupted while validation testing is completed on the replacement components.
As a result of the temporary interruption of production of some Buell models,
Buell is diverting the unused assembly capacity to increasing Blast production.
The Company expects the net result to yield an increase in 2000 Buell production
to a target of 11,000 units, up from the prior target of 10,000.(1)
Parts and Accessories (P&A) sales were up $21.4 million or 21.4% compared to the
second quarter of 1999. P&A sales increases were driven by strong motorcycle
shipments and solid growth in existing products. General Merchandise sales,
which include clothing and collectibles, were up $8.9 million, or 32.3%,
compared to the second quarter of 1999. General Merchandise sales were
positively impacted in the second quarter of 2000 by shipments of various
seasonal products. In the prior year, similar seasonal products were shipped in
the third quarter. The Company anticipates that long term sales growth targets
for P&A revenues will continue to increase slightly faster than
Harley-Davidson's motorcycle unit growth rate, and General Merchandise revenues
will grow slightly slower than the motorcycle unit growth rate. (1)
The Company's ability to reach the 2000 quarterly production levels and 2000 and
2001 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
produce quality products and 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 $44.2 million, or 20.7%, in the second quarter of 2000
compared to the same period in 1999 primarily due to an increase in overall
sales volume. The gross profit margin in the second quarter was 34.1% in 2000
compared to 35.0% in 1999. The decrease in gross profit margin related primarily
to the negative impact of foreign currency exchange in connection with weakening
European currencies. This unfavorable foreign exchange impact was approximately
$7 million in the second quarter of 2000. The Company intends to adjust pricing
on its 2001 models in Europe and will continue to utilize forward foreign
exchange contracts to mitigate the negative impacts of foreign exchange rate
fluctuations. (1)
10
<PAGE>
Operating Expenses
For the Three-Month Periods Ended
June 25, 2000 and June 27, 1999
(Dollars in Millions)
===============================================================================
2000 1999 Change %Change
-------------------------------------------------------------------------------
Motorcycles and Related Products $129.9 $112.9 $17.0 15.1
-------------------------------------------------------------------------------
Corporate 2.3 2.6 (.3) (11.5)
===============================================================================
Total operating expenses $132.2 $115.5 $16.7 14.5
===============================================================================
Total operating expenses increased $16.7 million, or 14.5%, during the second
quarter of 2000 compared to the same period in 1999 and were 17.5% and 19.0% of
net sales in the respective second quarters of 2000 and 1999. Operating expenses
continued to grow in connection with the Company's increase in net sales.
However, these increases were partially offset by lower spending for certain
marketing programs, lower European selling expenses, and lower Buell recall
expenses. Second quarter 2000 operating expenses include a $3.0 million charge
related to the current recall of Buell motorcycles. Comparatively, the second
quarter of 1999 includes a $5.0 million charge for the 1999 recall of certain
Buell motorcycles.
Operating income from financial services
For the three months ended June 25, 2000, HDFS reported operating income of
$11.3 million, an increase of $2.2 million, or 23.7%, over the same period in
1999. The favorability is primarily due to an increase in loan volume at
generally higher rates of interest, partially offset by an increase in interest
expense and operating expenses. In addition, the second quarter of the prior
year was negatively impacted by operating losses related to the credit card
business, which was sold in the first quarter of 2000.
Interest income
Interest income was higher in the second quarter of 2000 primarily due to higher
interest rates and higher levels of cash available for short-term investing,
compared to the second quarter of 1999.
Consolidated income taxes
The Company's effective income tax rate was 35.2% for the second quarter of
2000, compared with 36.5% for the same period of 1999. The change in rates is a
direct result of various tax minimization programs. The Company expects an
effective income tax rate of 35.5% going forward.
11
<PAGE>
Results of Operations for the Six Months Ended June 25, 2000
------------------------------------------------------------
Compared to the Six Months Ended June 27, 1999
----------------------------------------------
For the six month period ended June 25, 2000, the Company recorded net sales of
$1,436.2 million, a $268.9 million or 23.0% increase over the same period last
year. Net income and diluted earnings per share were $170.8 million and $.55 on
307.9 million weighted average shares outstanding versus $127.6 million and $.41
on 311.3 million weighted average shares, increases of 33.9% and 35.3%,
respectively. First quarter 2000 net income includes a one-time after tax gain
of $6.9 million which resulted from the sale of the Harley-Davidson(R) Chrome
Visa(R) Card business. Excluding the one-time gain, net income and diluted
earnings per share increased 28.4% and 29.9%, respectively, over the same period
last year.
Motorcycle Unit Shipments and Net Sales
For the Six-Month Periods Ended
June 25, 2000 and June 27, 1999
===============================================================================
2000 1999 Change %Change
===============================================================================
Motorcycle Unit Shipments
===============================================================================
Harley-Davidson(R)motorcycle units 102,386 85,952 16,434 19.1%
Buell(R)motorcycle units 5,618 3,525 2,093 59.4
Total motorcycle units 108,004 89,477 18,527 20.7%
===============================================================================
Net sales (in millions)
===============================================================================
Harley-Davidson motorcycles $1,112.2 $905.1 207.1 22.7%
-------------------------------------------------------------------------------
Buell motorcycles 37.0 28.6 8.4 29.4
-------------------------------------------------------------------------------
Total motorcycles 1,149.2 933.7 215.5 22.9
-------------------------------------------------------------------------------
Motorcycle Parts and Accessories 216.0 174.7 41.3 23.6
-------------------------------------------------------------------------------
General Merchandise 69.6 56.7 12.9 22.7
-------------------------------------------------------------------------------
Other 1.4 2.2 (.8) (36.4)
-------------------------------------------------------------------------------
Total Motorcycles and Related Products $1,436.2 $1,167.3 268.9 23.0%
===============================================================================
The 23.0% 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 45.0% (for Harley-Davidson and Buell)
compared to 46.9% for the same period in 1999. This same market has grown at a
25.1% rate year-to-date, while retail registrations for the Company's
motorcycles (Harley-Davidson and Buell motorcycles) increased 20.0%. The Company
believes the faster growth rate in the U.S. heavyweight market as compared to
retail registrations for the Company's motorcycles is due to the fact that the
Company continues to experience capacity constraints.
12
<PAGE>
European data (through April) shows the Company with a 6.4% share of the
heavyweight (651+cc) market, up from 5.9% for the same period in 1999. The
European market (651+cc) has remained relatively flat through April, while
retail registrations for the Company's motorcycles (Harley-Davidson and Buell)
increased 7.8% compared to last year. The Company continues to actively work on
improving its European distribution network and implement European- focused
marketing programs.
Asia/Pacific (Japan and Australia) data (through April) show the Company with a
19.5% share of the heavyweight (651+cc) market, up from 18.2% for the same
period in 1999. Asia/Pacific market registrations are 4.5% behind last year's
year-to-date numbers, while registrations for the Company's motorcycles
(Harley-Davidson and Buell) have increased 2.4% over 1999 year-to-date levels.
Parts and Accessories (P&A) sales of $216.0 were up $41.3 million or 23.6%
compared to the first half of 1999. General Merchandise sales, which include
clothing and collectibles, were up $12.9 million, or 22.7%, compared to the
first half of 1999.
Gross Profit
Gross profit for the first six months of 2000 totaled $488.5 million, an
increase of $86.3 million or 21.5% over the same period in 1999. The gross
profit margin was 34.0% in 2000 compared to 34.4% for the first six months of
1999. While gross margin was positively impacted by favorable product mix and
lower average unit costs in the first quarter of 2000, this favorability was
more than offset by the negative impact of foreign currency exchange related to
European currencies in both the first and second quarters of 2000.
Operating Expenses
For the Six-Month Periods Ended
June 25, 2000 and June 27, 1999
(Dollars in Millions)
===============================================================================
2000 1999 Change %Change
-------------------------------------------------------------------------------
Motorcycles and Related Products $248.6 $210.5 $38.1 18.1%
-------------------------------------------------------------------------------
Corporate 5.2 5.4 (.2) (3.0)
===============================================================================
Total operating expenses $253.8 $215.9 $37.9 17.6%
===============================================================================
Total operating expenses of $253.8 million for the first six months of 2000
increased $37.9 million or 17.6% compared to the first six months of 1999.
Operating expenses as a percent of net sales were 17.7% and 18.5% for the first
half of 2000 and 1999, respectively. Operating expenses continued to grow in
connection with the Company's increase in net sales, however, they grew at a
slower rate than net sales due to slightly lower spending for certain marketing
programs, lower European selling expenses, and lower Buell recall expenses in
the first half of 2000 versus the same period last year.
13
<PAGE>
Operating income from financial services
For the six months ended June 25, 2000, HDFS reported operating income of $14.6
million, an increase of $2.9 million, or 24.3%, over the same period in 1999.
The favorability is primarily due to an increase in loan volume at generally
higher rates of interest, partially offset by an increase in interest expense
and operating expenses. In addition, the first half of the prior year was
negatively impacted by operating losses related to the credit card business,
which was sold in the first quarter of 2000.
Gain on sale of credit card business
In the first quarter of 2000, the Company sold its Harley-Davidson(R) Chrome
Visa(R) Card business, which consisted of approximately $142 million of
revolving charge receivables. The sale resulted in a pre-tax gain of
approximately $18.9 million after a $15 million write-down of goodwill, which
related to the business sold. Net of taxes, the transaction resulted in a net
gain of approximately $6.9 million. The majority of the proceeds from the sale
have been used to reduce finance debt.
Interest income
Interest income in the first half of 2000 was higher than the prior year due
primarily to higher interest rates and higher levels of cash available for
short-term investing.
Consolidated income taxes
The Company's effective income tax rate was 37.7% and 36.5% for the first six
months of 2000 and 1999, respectively. The increase in the tax rate for the
first half of 2000 was due to the $15 million non-deductible write-off of
goodwill recorded in connection with the sale of the Harley-Davidson(R) Chrome
Visa(R) Card business in the first quarter. This increase was partially offset
by a lower tax rate implemented in the second quarter of 2000 as a result of
various tax minimization programs. The Company expects an effective income tax
rate of 35.5% going forward.
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 a settlement agreement
with the U.S. Navy regarding groundwater remediation at the Company's
manufacturing facility in York, Pennsylvania and currently estimates that it
will incur approximately $6 million of net additional costs related to the
remediation effort.(1) The Company has established reserves for this amount. The
Company's estimate of additional response costs is based on reports of
environmental consultants retained by the Company, the actual costs incurred to
date and the estimated costs to complete the necessary investigation and
remediation activities. Response costs are expected to be incurred over a period
of approximately 10 years, ending in 2009. 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 which has the sole purpose of meeting
environmental compliance obligations. The Company anticipates that capital
expenditures for
14
<PAGE>
equipment used to limit hazardous substances/pollutants during 2000 will
approximate $1 million. The Company does not expect that these expenditures
related to environmental matters will have a material effect on future operating
results or cash flows.(1)
Liquidity and Capital Resources
-------------------------------
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 $313.2 million of cash from operating activities during
the first half of 2000 compared to $211.2 million in the first half of 1999. The
largest component of cash from operating activities is net income adjusted for
non-cash items, including depreciation, credit losses, and the gain on sale of
the credit card business. This was approximately $217.7 million in the first six
months of 2000 compared to $190.2 million in the same period of 1999.
Changes in other current assets and liabilities increased operating cash flows
by approximately $85.8 million and $24.4 million in the first half of 2000 and
1999, respectively. Changes in working capital during the first six months of
2000 and 1999 consisted of the following (in millions):
Six months ended
----------------
Working capital item 2000 1999
-------------------- ---- ----
Accounts receivable, net $(14.0) $12.6
Inventories 11.2 6.6
Prepaid expenses 3.5 .6
Accounts payable and accrued expenses 85.1 4.6
------ ------
Total $ 85.8 $24.4
====== =====
In the first half of 2000, accounts payable and accrued expenses increased $85.1
million. This increase relates primarily to the corresponding increase in
production volume and the timing of cash disbursements for accounts payable.
Capital expenditures were $59.7 million and $54.8 million during the first half
of 2000 and 1999, respectively. The Company's capital expenditures have
continued to focus on capacity expansion at its existing facilities but have
also focused on other areas such as product development, systems development and
continuing operations. The Company estimates that capital expenditures required
in 2000 will be in the range of $160-$170 million.(1) The Company is currently
in the initial stages of developing its next strategic plan and capacity
planning will continue to be an area of focus in this plan. Accordingly, capital
expenditures related to manufacturing capacity may be increased in both the near
and long-term. The Company anticipates it will have the ability to fund all
capital expenditures with internally generated funds and short-term
financing.(1)
HDFS is financed by operating cash flow, asset-backed securitizations, the
issuance of commercial paper, revolving credit facilities, senior subordinated
debt, and redeemable preferred stock. Approximately $249.9 million of commercial
paper was outstanding at June 25, 2000. Subject to limitations discussed below,
HDFS may issue up to $600 million of short-term commercial paper with maturities
up to 270 days.
15
<PAGE>
HDFS has a $250 million revolving credit facility due in 2002 and a $350 million
364-day revolving credit facility due September 2000 with approximately $48.3
million outstanding at June 25, 2000. The Company expects the $350 million
credit facility expiring in September 2000 will be renewed and believes that
suitable alternatives exist. The primary uses of the credit facilities are to
provide liquidity to the unsecured commercial paper program and to fund foreign
business operations. Commercial paper outstanding cannot exceed liquidity
support provided by the unused portion of the combined $600 million credit
facilities. Accordingly, at June 25, 2000, HDFS had aggregate remaining
availability of $301.7 million.
In connection with various debt agreements, HDFS has met various operating and
financial covenants and remains in compliance at June 25, 2000. The Company has
a support agreement with HDFS whereby, if required, the Company agrees to
provide HDFS with financial support in order to maintain certain financial
covenants. Support may be provided at the Company's option as capital
contributions or loans. Accordingly, certain debt covenants may restrict the
Company's ability to withdraw funds from HDFS outside the normal course of
business.
During the second quarter, HDFS securitized and sold approximately $285 million
of retail installment loans retaining servicing rights and limited recourse.
The Company expects future activities of HDFS will be financed from internally
generated funds, revolving credit facilities, continuation of its subordinated
debt, redeemable preferred stock, commercial paper, securitization programs and
capital contributions from the Company.
The Company has authorization from its Board of Directors to repurchase up to
9,400,000 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 2000, the
Company repurchased 1,511,000 shares of its common stock under the latter
authorization and has purchased 1,772,200 shares year to date.
16
<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, 1999 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
1999 annual report on Form 10-K.
(1) Note regarding forward-looking statements
------------------------------------------
The Company intends that certain matters discussed 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
June 25, 2000
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 April 29,
2000
(b) At the Company's Annual Meeting of Shareholders, the following
directors were elected for terms expiring in 2003 by the vote
indicated:
Shares Shares
Voted in Withholding
Favor of Authority
-------- ---------
Jeffrey L. Bleustein 131,730,375 1,054,497
Donald A. James 125,519,535 7,265,337
James A. Norling 116,402,742 16,382,130
(c) Matters other than election of directors, brought for vote at the
Company's Annual Meeting of Shareholders, passed by the vote
indicated.
Shares Voted
------------
For Against Abstained
--- ------- ---------
Ratification of Ernst & Young LLP as
the Company's independent auditors 132,154,417 135,854 494,601
There were no broker non-votes with respect to the foregoing matters.
18
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
------------------------------------------
(a) Exhibits
-------------
27 Financial Data Schedule for June 25, 2000
(b) Reports on Form 8-K
------------------------
None
19
<PAGE>
Part II - Other Information
HARLEY-DAVIDSON, INC.
Form 10-Q
June 25, 2000
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: 8/9/00 by: /s/ James L. Ziemer
-------------------------------------
James L. Ziemer
Vice President and Chief Financial
Officer (Principal Financial Officer)
Date: 8/9/00 by: /s/ James M. Brostowitz
--------------------------------------
James M. Brostowitz
Vice President, Controller (Principal
Accounting Officer) and Treasurer
20
<PAGE>
Exhibit Index
Exhibit No. Description
----------- -----------
27 Financial Data Schedule for June 25, 2000
21
