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 30, 2002
or
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ____________________ to ____________________
Commission File Number 1-9183
Harley-Davidson, Inc.
------------------------------------------------------
(Exact name of registrant as specified in its Charter)
Wisconsin 39-1382325
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3700 West Juneau Avenue, Milwaukee, Wisconsin 53208
- --------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (414) 342-4680
--------------
None
------------------------------------------
(Former name, former address and former
fiscal year, if changed since last report)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock Outstanding as of August 7, 2002: 302,313,368 Shares
HARLEY-DAVIDSON, INC.
Form 10-Q Index
For the Quarter Ended June 30, 2002
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 10-19
Item 3. Quantitative and Qualitative Disclosures about Market
Risk 20
Note regarding forward looking statements 20
Part II. Other Information
Item 1. Legal Proceedings 21
Item 4. Submission of Items to a Vote of Security Holders 21
Item 5. Other Information 22
Item 6. Exhibits and Reports on Form 8-K 22
Signatures 23
Exhibit Index 24
2
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
- ------- ---------------------------------
Harley-Davidson, Inc.
Condensed Consolidated Statements of Income
(Unaudited)
(In thousands, except per share amounts)
Three-months ended Six-months ended
------------------ ----------------
June 30, June 24, June 30, June 24,
2002 2001 2002 2001
---------- ---------- ---------- ----------
Net sales $1,001,094 $ 862,309 $1,928,939 $1,639,250
Cost of goods sold 666,006 573,614 1,278,574 1,096,657
---------- ---------- ---------- ----------
Gross profit 335,088 288,695 650,365 542,593
Financial services income 60,149 52,020 101,840 84,954
Financial services interest and operating
expense 23,109 28,934 52,649 56,889
---------- ---------- ---------- ------
Operating income from financial services 37,040 23,086 49,191 28,065
Operating expenses 155,811 138,671 301,516 259,815
---------- ---------- ---------- ----------
Income from operations 216,317 173,110 398,040 310,843
Interest income, net 4,415 4,794 6,661 9,593
Other income (expense), net (366) (17) (1,131) (937)
---------- ---------- ---------- ----------
Income before provision for income taxes 220,366 177,887 403,570 319,499
Provision for income taxes 76,025 62,260 139,231 111,824
---------- ---------- ---------- ----------
Net income $ 144,341 $ 115,627 $ 264,339 $ 207,675
========== ========== ========== ==========
Earnings per common share:
Basic $.48 $.38 $.87 $.69
==== ==== ==== ====
Diluted $.47 $.38 $.87 $.68
==== ==== ==== ====
Weighted-average common shares
outstanding:
Basic 302,209 302,621 302,341 302,285
======= ======= ======= =======
Diluted 305,194 306,569 305,405 306,233
======= ======= ======= =======
Cash dividends per share $.035 $.030 $.065 $.055
===== ===== ===== =====
See accompanying notes.
3
Harley-Davidson, Inc.
Condensed Consolidated Balance Sheets
(In thousands)
June 30, Dec. 31, June 24,
2002 2001 2001
----------- ---------- -----------
(Unaudited) (Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 524,049 $ 439,438 $ 546,656
Marketable securities 203,246 196,011 -
Accounts receivable, net 150,728 118,843 136,781
Finance receivables, net 609,730 656,421 545,883
Inventories (Note 2) 203,255 181,115 177,678
Other current assets 88,371 73,436 63,025
---------- ---------- ----------
Total current assets 1,779,379 1,665,264 1,470,023
Finance receivables, net 519,935 379,335 452,247
Property, plant and equipment,
net 924,337 891,820 774,749
Goodwill 51,382 49,711 51,084
Other assets 130,823 132,365 94,198
---------- ---------- ----------
$3,405,856 $3,118,495 $2,842,301
========== ========== ==========
LIABILITIES AND SHAREHOLDERS'
EQUITY
Current liabilities:
Accounts payable $ 233,725 $ 194,683 $ 186,611
Accrued expenses and other
liabilities 401,206 304,376 290,893
Current portion of finance
debt 147,837 217,051 192,044
---------- ---------- ----------
Total current liabilities 782,768 716,110 669,548
Finance debt 380,000 380,000 355,000
Other long-term liabilities 177,239 176,190 101,911
Post-retirement health care
benefits 97,414 89,912 85,148
Contingencies (Note 6) -
Total shareholders' equity 1,968,435 1,756,283 1,630,694
---------- --------- ----------
$3,405,856 $3,118,495 $2,842,301
========== ========== ==========
See accompanying notes.
4
Harley-Davidson, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
Six-months Ended
June 30, June 24,
2002 2001
----------- -----------
Cash flows from operating activities:
Net income $ 264,339 $ 207,675
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 87,514 72,811
Tax benefit of stock options 8,058 20,507
Provision for finance credit losses 3,207 7,678
Long-term employee benefits 12,266 7,137
Other, net 2,690 1,435
Net changes in current assets and current
liabilities 49,084 40,063
----------- -----------
Net cash provided by operating activities 427,158 357,306
Cash flows from investing activities:
Purchase of property and equipment (122,461) (92,072)
Finance receivables acquired or originated (2,697,748) (2,169,130)
Finance receivables collected 1,930,046 1,567,981
Finance receivables sold 679,324 366,000
Purchase of marketable securities (474,572) -
Sales and redemptions of marketable securities 467,337 -
Other, net 13,804 (3,325)
----------- -----------
Net cash used in investing activities (204,270) (330,546)
Cash flows from financing activities:
Net increase (decrease) in finance debt (69,214) 102,535
Dividends paid (19,975) (16,963)
Purchase of common stock for treasury (56,814) -
Issuance of common stock under employee
stock plans 7,726 14,588
----------- -----------
Net cash provided by (used in) financing
activities (138,277) 100,160
Net increase in cash and cash equivalents 84,611 126,920
Cash and cash equivalents:
At beginning of period 439,438 419,736
----------- -----------
At end of period $ 524,049 $ 546,656
=========== ===========
See accompanying notes.
5
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 accounting principles generally
accepted in the United States 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 30,
2002 and June 24, 2001 and the results of operations for the three- and
six-month periods then ended. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's annual
report on Form 10-K for the year ended December 31, 2001.
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States 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):
June 30, Dec. 31, June 24,
2002 2001 2001
-------- -------- --------
Components at the lower of cost,
first-in, First-out (FIFO), or
market:
Raw material & work-in-process $ 79,664 $ 80,363 $ 65,880
Motorcycle finished goods 53,228 36,418 42,929
Parts & accessories and general
merchandise 87,976 81,447 88,194
-------- -------- --------
220,868 198,228 197,003
Excess of FIFO over LIFO 17,613 17,113 19,325
-------- -------- --------
$203,255 $181,115 $177,678
======== ======== ========
6
Note 3 - Business Segments
- --------------------------
The Company operates in two business segments: Motorcycles & Related Products
(Motorcycles) and Financial Services, which consists of the Company's
subsidiary, Harley-Davidson , 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):
Three-months ended Six-months ended
------------------ ----------------
June 30, June 24, June 30, June 24,
2002 2001 2002 2001
---------- ---------- ---------- ----------
Net sales $1,001,094 $ 862,309 $1,928,939 $1,639,250
Gross profit 335,088 288,695 650,365 542,593
Operating expenses 152,167 134,697 294,317 253,039
---------- ---------- ---------- ----------
Operating income from motorcycles
& related products 182,921 153,998 356,048 289,554
Financial services income 60,149 52,020 101,840 84,954
Financial services interest and
operating expense 23,109 28,934 52,649 56,889
---------- ---------- ---------- ----------
Operating income from financial
services 37,040 23,086 49,191 28,065
Corporate expenses 3,644 3,974 7,199 6,776
---------- ---------- ---------- ----------
Income from operations $ 216,317 $ 173,110 $ 398,040 $ 310,843
========== ========== ========== ==========
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):
Three-months ended Six-months ended
------------------ ----------------
June 30, June 24, June 30, June 24,
2002 2001 2002 2001
---------- ---------- ---------- ----------
Numerator
- ---------
Net income used in computing
basic and diluted earnings per share $ 144,341 $ 115,627 $ 264,339 $ 207,675
========== ========== ========== ==========
Denominator
Denominator for basic earnings per share
- weighted-average common shares 302,209 302,621 302,341 302,285
Effect of dilutive securities - employee
stock options and nonvested stock 2,985 3,948 3,064 3,948
---------- ---------- ---------- ----------
Denominator for diluted earnings per
share - adjusted weighted-average shares 305,194 306,569 305,405 306,233
========== ========== ========== ==========
Basic earnings per share $.48 $.38 $.87 $.69
==== ==== ==== ====
Diluted earnings per share $.47 $.38 $.87 $.68
==== ==== ==== ====
7
Note 5 - Comprehensive Income
- -----------------------------
Total comprehensive income was approximately $151.4 million and $115.7 million
for the three-month periods ended June 30, 2002 and June 24, 2001, respectively.
Total Comprehensive income is comprised of net income, foreign currency
translation adjustments, the change in net unrealized gains on investment in
retained securitization interests and the change in the fair market value of
derivative instruments designated as hedges of forecasted cash flows. Total
comprehensive income for the six-month periods ended June 30, 2002 and June 24,
2001 was $273.1 million and $206.9 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 full extent of the environmental contamination at the Facility, it has
been working with the Pennsylvania Department of Environmental Protection in
undertaking certain environmental 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
environmental investigation and remediation activities at the Facility (response
costs). The trust administers the payment of the response costs at the Facility
as covered by the Agreement. Recently, the United States Environmental
Protection Agency (EPA) advised the Company that it considers some of the
Company's remediation activities at the Facility to be subject to the EPA's
corrective action program and has offered the Company the option of addressing
corrective action under a facility lead agreement. The objectives and procedures
for facility lead corrective action are consistent with the investigation and
remediation already being conducted under the Agreement with the Navy, and the
Company has agreed to participate in EPA's corrective action program. 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 Agreement with the Navy, the Company estimates that
it will incur approximately $5.0 million of future response costs at the
Facility. The Company has established reserves for this amount. The Company's
estimate of future response costs is based on reports of independent
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 several years, ending in 2009.
Note 7 - Pension Plans
- ----------------------
The Company has several noncontributory defined benefit pension plans which
cover substantially all employees of the Motorcycles segment. During the second
quarter of 2002, the Company adjusted its long-term expected rate of return on
pension assets from 10.5% to 8.5% as a result of current and projected market
conditions. This change resulted in a $3 million pre-tax charge to operations in
the second quarter of 2002. The remaining impact of this change in 2002 is
approximately $3 million and will be charged to operations over the last
six-months of 2002.
8
Note 8- Goodwill
- ----------------
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 142 "Goodwill and Other Intangible Assets,"
which became effective for the Company January 1, 2002. Under the new standard,
goodwill is no longer amortized but is subject to annual impairment tests in
accordance with the Statement. The Company has assessed the impact of the new
standard on its goodwill balances in accordance with the provisions of the
standard. There were no adjustments recorded as a result of the Company's review
of goodwill balances. At December 31, 2001, total goodwill related to the
Company's Motorcycles and Related Products and Financial Services segments was
approximately $20.9 million and $28.8 million, respectively. Total goodwill
amortization for 2001 was approximately $3.5 million, of which approximately
$1.8 million was recorded as of June 24, 2001.
Note 9 - Reclassifications
- ---------------------------
Certain prior year amounts have been reclassified to conform to the current year
presentation. Prior year shipping and handling fees totaling $17.0 million for
the second quarter and $31.1 million for the six-months ended June 24, 2001 were
reclassified from cost of sales to net sales. Sales incentive expense totaling
$6.3 million for the second quarter of 2001 and $15.5 million for the six-months
ended June 24, 2001 were reclassified from operating expense to net sales and
cost of sales.
9
Item 2. Management's Discussion and Analysis of Financial Condition and Results
- ------- -----------------------------------------------------------------------
of Operations
--------------
Results of Operations for the Three-months Ended June 30, 2002
Compared to the Three-months Ended June 24, 2001
For the quarter ended June 30, 2002, consolidated net sales totaled $1.0
billion, a $138.8 million or 16.1% increase over the same period last year. Net
income and diluted earnings per share for the second quarter of 2002 were $144.3
million and $.47 on 305.2 million weighted average shares outstanding versus
$115.6 million and $.38 on 306.6 million weighted average shares outstanding in
2001, increases of 24.8% and 25.4%, respectively.
Motorcycle Unit Shipments and Net Sales
For the Three-Month Periods Ended
June 30, 2002 and June 24, 2001
===============================================================================
2002 2001 Change % Change
===============================================================================
Motorcycle Unit Shipments
===============================================================================
Harley-Davidson(R)motorcycle units 65,540 60,161 5,379 8.9%
- ---------------------------------- -------- ------ ------ --------
Buell(R)motorcycle units 3,309 2,468 841 34.1
- ---------------------------------- -------- ------ ------ --------
Total motorcycle units 68,849 62,629 6,220 9.9%
===============================================================================
Net sales (in millions)
===============================================================================
Harley-Davidson motorcycles $760.1 $674.7 $85.4 12.7%
- ---------------------------------- -------- ------ ------ --------
Buell motorcycles 20.0 15.7 4.3 26.9
- ---------------------------------- -------- ------ ------ --------
Total motorcycles 780.1 690.4 89.7 13.0
- ---------------------------------- -------- ------ ------ --------
Motorcycle Parts and Accessories 168.8 138.6 30.2 21.8
- ---------------------------------- -------- ------ ------ --------
General Merchandise 51.3 33.2 18.1 54.7
- ---------------------------------- -------- ------ ------ --------
Other .9 .1 .8 N/A
- ---------------------------------- -------- ------ ------ --------
Total Motorcycles and Related
Products $1,001.1 $862.3 $138.8 16.1%
===============================================================================
The second quarter increase in net sales of $138.8 million was driven primarily
by an 8.9% increase in Harley-Davidson motorcycle unit shipments. During the
second quarter of 2002, the Company increased its Harley-Davidson motorcycle
unit shipments to 65,540 units, 5,379 units higher than the same period last
year. This increase in units is primarily the result of continued demand for
Harley-Davidson motorcycles combined with 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 shipment and production levels achieved in the second
quarter of 2002, the Company has increased its 2002 annual production target to
262,000 Harley-Davidson units and set a third quarter production target of
67,000 units.(1)
Second quarter 2002 Buell motorcycle net sales were up $4.3 million compared to
the same period last year, on 841 additional unit shipments. In April 2002, the
Company began production of its new Buell Firebolt(TM) XB9R and, in July 2002,
announced plans for a second new model, the XB9S Lightning(R), which the Company
expects to commence shipping sometime in the fourth quarter of 2002. The new XB
models combined with the Blast(R) will complete the Buell 2003 model year line
up. In the second quarter of 2002, approximately 39% of Buell unit shipments
consisted of the lower priced Blast motorcycles, compared to 29% in the same
quarter last year. The Company expects the annual mix of Buell unit shipments to
consist of approximately 33% Blast motorcycles in 2002 and maintains its total
calendar year Buell production target of 11,500 units.(1)
10
Parts and Accessories (P&A) net sales in the second quarter of 2002 were up
$30.2 million or 21.8% compared to the second quarter of 2001. P&A net sales
increases were driven by strong motorcycle shipments, with especially strong
results in the accessories line. The Company expects that the long-term growth
rate for P&A will be slightly higher than the growth rate for Harley-Davidson
motorcycle units.(1)
Second quarter 2002 General Merchandise sales, which include clothing and
collectibles, were up $18.1 million, or 54.7%, compared to the second quarter of
2001. General Merchandise results were positively impacted during the second
quarter of 2002 by the sale of items related to the Company's upcoming 100th
Anniversary, which accounted for over $10 million in sales during the quarter.
The Company expects that the long-term growth rate for General Merchandise will
be slightly lower than the growth rate for Harley-Davidson motorcycle units.(1)
The Company's ability to reach the 2002 annual and quarterly production targets
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 and
services, (iv) avoid unexpected supplier delays including P&A and general
merchandise backorders, (v) sell all of the motorcycles it has the capacity to
produce, (vi) continue to develop the capacity of its distributor and dealer
network, (vii) avoid unexpected changes in the regulatory environment for its
products, (viii) successfully adjust to foreign currency exchange rate
fluctuations, (ix) successfully adjust to interest rate fluctuations, and (x)
successfully manage changes in the credit quality of HDFS's loan portfolio. In
addition, the Company could experience delays in the operation of manufacturing
facilities, work stoppages, difficulties with suppliers, natural causes or other
factors. These risks, potential delays and uncertainties could also adversely
impact the Company's capital expenditure estimates (see "Liquidity and Capital
Resources" section).
Gross Profit
Gross profit in the second quarter of 2002 of $335.1 million was $46.4 million
or 16.1% higher than gross profit in the same quarter last year. The increase in
gross profit is primarily related to the increase in net sales. Gross margin was
33.5% in the second quarter of 2002, even with gross margin in the second
quarter of 2001. As discussed below, gross margin in the second quarter of 2002
was positively impacted by motorcycle product mix and the 2002 model year
wholesale price increase. However, these positive impacts were offset by the
negative impact of new model launch costs and higher pension costs.
Motorcycle product mix was favorable in the second quarter of 2002 with a higher
percentage of shipments consisting of the more profitable custom motorcycles and
a lower percentage of shipments consisting of Sportster models, when compared to
the second quarter of 2001. Wholesale price increases related to the 2002 model
year provided for higher average selling prices on units sold in the second
quarter of 2002 when compared to the same period last year.
The Company's gross margin was negatively impacted in the second quarter by
costs associated with the new model year start up, which began late in the
second quarter of 2002. Historically, the Company has not produced new model
year motorcycles until the beginning of the third quarter. The Company also
experienced lower margins on the V-Rod in the second quarter of 2002, relative
to its other existing custom motorcycles, due to the manufacturing ramp up on
this recently introduced model. Cost of goods sold was also negatively impacted
in the second quarter of 2002 by pension expense as a result of the Company's
decision to adjust the long-term expected rate of return on pension assets (See
Note 7 of the Notes to Condensed Consolidated Financial Statements). The pre-tax
impact of this change was a $3 million expense in the second quarter of 2002, of
which $2.3 million was included in cost of goods sold. The remaining expense
impact of this change of approximately $3 million will be charged to cost of
goods sold and operating expenses over the last six-months of 2002.
11
Financial Services
For the Three-month Periods Ended
June 30, 2002 and June 24, 2001
(Dollars in Millions)
===============================================================================
Increase
2002 2001 (Decrease) %Change
- -------------------------------------------------------------------------------
Financial services income $60.1 $52.0 $8.1 15.6%
- -------------------------------------------------------------------------------
Financial services interest &
operating expense 23.1 28.9 (5.8) (20.1)
===============================================================================
Operating income from financial
services $37.0 $23.1 $13.9 60.4%
===============================================================================
In the second quarter of 2002, financial services income was $60.1 million, an
increase of $8.1 million over the same period in 2001. Operating income from
financial services was $37.0 million, an increase of $13.9 million over the
second quarter of 2001. The increase in operating income was driven by strong
overall performance in Harley-Davidson Financial Services, Inc.'s (HDFS)
wholesale, retail, and insurance lines combined with lower borrowing costs. The
increase in the retail business was led by the strong customer acceptance of
HDFS' consumer financing program introduced in 2001. This program is based on
tiered pricing offering lower rates to borrowers with stronger credit ratings.
During the second quarter of 2002, HDFS securitized and sold approximately
$586.0 million of retail installment loans resulting in a gain of $21.4 million.
During the second quarter of 2001, HDFS securitized and sold approximately
$366.0 million of retail installment loans resulting in a gain of $16.8 million.
The Company expects HDFS operating income to grow at a rate of approximately 50%
for 2002.(1)
Operating Expenses
For the Three-Month Periods Ended
June 30, 2002 and June 24, 2001
(Dollars in Millions)
===============================================================================
Increase
2002 2001 (Decrease) %Change
- -------------------------------------------------------------------------------
Motorcycles & Related Products $152.2 $134.7 $17.5 13.0%
- -------------------------------------------------------------------------------
Corporate 3.6 4.0 (0.4) (8.3)
===============================================================================
Total operating expenses $155.8 $138.7 $17.1 12.4%
===============================================================================
Total operating expenses increased $17.1 million, or 12.4%, during the second
quarter of 2002 compared to the same period in 2001. Operating expenses were
15.6% and 16.1% of net sales in second quarter of 2002 and 2001, respectively.
Operating expenses continued to grow in connection with the Company's increase
in net sales, but at a slightly slower pace when compared to the same quarter
last year. The increase in operating expenses, which includes selling,
administrative and engineering expenses, was driven by the Company's ongoing
investment in various initiatives designed to support its current and future
growth objectives. In addition, during the second quarter of 2002, the Company
also experienced higher employee benefit costs driven by the higher cost of
health care and pensions (See Note 7 of the Notes to Condensed Consolidated
Financial Statements for further discussion of pension expense).
12
Interest income
Interest income in the second quarter of 2002 was $4.4 million compared to $4.8
million in the same period last year. The decrease in interest income is due to
the impact of lower interest rates in the second quarter of 2002 when compared
to the same period in 2001. In connection with the Company's capacity expansion
plans (See "Liquidity and Capital Resources"), approximately $ .7 million of
interest was capitalized during the second quarter of 2002.
Consolidated income taxes
The Company's effective income tax rate was 34.5% and 35.0% during the second
quarters of 2002 and 2001, respectively. The Company expects that 34.5% will
continue to be the effective rate through the remainder of 2002.(1)
13
Results of Operations for the Six-months Ended June 30, 2002
Compared to the Six-months Ended June 24, 2001
For the six-month period ended June 30, 2002, the Company recorded net sales of
$1.93 billion, a $289.6 million or 17.7% increase over the same period last
year. Net income and diluted earnings per share were $264.3 million and $.87 on
305.4 million weighted average shares outstanding versus $207.7 million and $.68
on 306.3 million weighted average shares, increases of 27.3% and 27.7%,
respectively.
Motorcycle Unit Shipments and Net Sales
For the Six-Month Periods Ended
June 30, 2002 and June 24, 2001
================================================================================
2002 2001 Change % Change
================================================================================
Motorcycle Unit Shipments
================================================================================
Harley-Davidson(R)motorcycle units 130,209 114,315 15,894 13.9%
- ---------------------------------- -------- -------- ------ -------
Buell(R)motorcycle units 4,639 4,915 (276) (5.6)
- ---------------------------------- -------- -------- ------ -------
Total motorcycle units 134,848 119,230 15,618 13.1%
================================================================================
Net sales (in millions)
================================================================================
Harley-Davidson motorcycles $1,508.0 $1,288.5 $219.5 17.0%
- ---------------------------------- -------- -------- ------ -------
Buell motorcycles 26.3 30.7 (4.4) (14.5)
- ---------------------------------- -------- -------- ------ -------
Total motorcycles 1,534.3 1,319.2 215.1 16.3
- ---------------------------------- -------- -------- ------ -------
Motorcycle Parts and Accessories 300.0 247.5 52.5 21.2
- ---------------------------------- -------- -------- ------ -------
General Merchandise 93.6 72.3 21.3 29.4
- ---------------------------------- -------- -------- ------ -------
Other 1.0 .3 .7 N/A
- ---------------------------------- -------- -------- ------ -------
Total Motorcycles and Related
Products $1,928.9 $1,639.3 $289.6 17.7%
================================================================================
The 17.7% increase in net sales was primarily attributable to the increase in
Harley-Davidson motorcycle unit shipments as demand for the Company's
Harley-Davidson motorcycles continued to grow.
The most recent U.S. market information available (through June 2002) indicates
that the Company had a U.S. heavyweight (651+cc) market share of 44.3%
(Harley-Davidson models only) compared to 41.4% for the same period in 2001.
Through June 2002, this same market has grown at a 13.3% rate year-to-date,
while retail registrations for the Company's motorcycles (Harley-Davidson models
only) increased 21.3%.
Available data relating to the European market (through June 2002) shows the
Company with a 5.7% share (Harley-Davidson models only) of the heavyweight
(651+cc) market, up from 5.6% for the same period in 2001. Through June 2002,
retail registrations for the Company's motorcycles (Harley-Davidson models only)
were up 6.3%, while the European heavyweight market in total increased 4.7%.
Available data relating to the Japanese market (through June 2002) showed the
Company with a 21.9% share (Harley-Davidson models only) of the heavyweight
(651+cc) market, up from 17.6% for the same period in 2001. The Japanese market
remained even with prior year through June 2002, while retail registrations for
the Company's motorcycles (Harley-Davidson models only) increased 9.5%.
14
Industry retail registration data for was provided by the Motorcycle Industry
Council for the United States, Giral S.A. for Europe and JAMA for Japan.
Parts and Accessories (P&A) sales of $300.0 million were up $52.5 million or
21.2% compared to the first half of 2001. General Merchandise sales, which
include clothing and collectibles, were up $21.3 million, or 29.4%, compared to
the first half of 2001.
Gross Profit
Gross profit for the first six-months of 2002 totaled $650.4 million, an
increase of $107.8 million or 19.9% over the same period in 2001. The increase
in gross profit was primarily related to the increase in net sales. The gross
profit margin was 33.7% in 2002 compared to 33.1% for the same period of 2001.
The increase in gross margin in the first half of 2002 was driven by favorable
motorcycle product mix, favorable geographic mix, and the 2002 model year
wholesale price increase. However, these positive impacts were partially offset
by the negative impact of new model launch costs and higher pension costs.
Financial Services
For the Six-Month Periods Ended
June 30, 2002 and June 24, 2001
(Dollars in Millions)
===============================================================================
Increase
2002 2001 (Decrease) %Change
- -------------------------------------------------------------------------------
Financial services income $101.8 $85.0 $16.8 19.9%
- -------------------------------------------------------------------------------
Financial services interest &
operating expense 52.6 56.9 (4.3) (7.5)
===============================================================================
Operating income from financial
services $49.2 $28.1 $21.1 75.3%
===============================================================================
For the six-months ended June 30, 2002, financial services income was $101.8
million, an increase of $16.8 million over the same period in 2001. Operating
income from financial services was $49.2 million, an increase of $21.1 million
over the same period in 2001. The increase in operating income was driven by
strong overall performance in HDFS' wholesale, retail, and insurance lines
combined with lower borrowing costs. The increase in the retail business was led
by continuing strong acceptance of HDFS' consumer financing program offering
lower interest rates to borrowers with stronger credit ratings.
During the six-months ended June 30, 2002, HDFS securitized and sold
approximately $679.3 million of retail installment loans resulting in a gain of
$26.4 million. During the six-months ended June 24, 2001, HDFS securitized and
sold approximately $366.0 million of retail installment loans resulting in a
gain of $16.8 million.
15
Operating Expenses
For the Six-Month Periods Ended
June 30, 2002 and June 24, 2001
(Dollars in Millions)
===============================================================================
Increase
2002 2001 (Decrease) %Change
- -------------------------------------------------------------------------------
Motorcycles and Related Products $294.3 $253.0 $41.3 16.3%
- -------------------------------------------------------------------------------
Corporate 7.2 6.8 .4 6.2
===============================================================================
Total operating expenses $301.5 $259.8 $41.7 16.1%
===============================================================================
Total operating expenses increased $41.7 million, or 16.1%, during the first
half of 2002 compared to the same period in 2001. Operating expenses were 15.6%
and 15.9% of net sales in first six-months of 2002 and 2001, respectively. The
increase in operating expenses, which includes selling, administrative and
engineering expenses, was driven by the Company's ongoing investment in various
initiatives designed to support its current and future growth objectives. In
addition, during the first half of 2002 the Company also experienced higher
employee benefit costs driven by the higher cost of health care and pensions.
Interest income
Interest income in the first half of 2002 was $6.7 million compared to $9.6
million in the same period last year. The decrease in interest income was due to
the impact of lower interest rates in the first half of 2002 when compared to
the same period in 2001. In connection with the Company's capacity expansion
plans (See "Liquidity and Capital Resources") approximately $ 1.0 million of
interest was capitalized during the fist six months of 2002.
Consolidated income taxes
The Company's effective income tax rate was 34.5% and 35.0% during the first
six-months of 2002 and 2001, respectively.
16
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 entered into a settlement agreement
with the U.S. Navy regarding soil and groundwater remediation at the Company's
manufacturing facility in York, Pennsylvania and has been conducting
environmental investigation and remediation activities at the facility working
with the Pennsylvania Department of Environmental Protection. Recently, the
United States Environmental Protection Agency (EPA) advised the Company that it
considers some of the Company's remediation activities at the facility to be
subject to the EPA's corrective action program and offered the Company the
option of addressing corrective action under a facility lead agreement. The
Company has agreed to participate in EPA's corrective action program. The
Company currently estimates that it will incur approximately $5.0 million of
future response costs related to all remediation efforts at the facility.(1) The
Company has established reserves for this amount. The Company's estimate of
future response costs is based on reports of independent 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 several
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 that has the sole purpose of meeting
environmental compliance obligations. The Company anticipates that capital
expenditures during 2002 for equipment used to limit hazardous
substances/pollutants will be approximately $10.0 million. This estimate
includes expenditures to be made in connection with the Company's current
capacity expansion plans described in the "Liquidity and Capital Resources"
section. 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)
17
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 $427.2 million of cash from operating activities during
the first half of 2002 compared to $357.3 million in the first half of 2001. The
largest component of cash from operating activities is net income, which was
approximately $264.3 million in the first half of 2002 compared to $207.7
million in the first half of 2001.
Cash provided by operating activities is also impacted by changes in other
current assets and liabilities. Changes in these balances increased/(decreased)
operating cash flows by approximately $49.1 million and $40.1 million during the
first half of 2002 and 2001, respectively. First half changes in working capital
during 2002 and 2001 consisted of the following (in millions):
Six-months ended
------------------------------
June 30, June 24,
2002 2001
-------- --------
Accounts receivable, net $ (31.9) $ (38.5)
Inventories (22.1) 14.3
Other (11.2) (5.0)
Accounts payable/Accrued expenses 114.3 69.3
------- -------
$ 49.1 $ 40.1
======= =======
The 2002 first half change in accounts receivable of $31.9 million was driven
primarily by higher accounts receivable balances in Europe. HDFS currently
offers wholesale financing to the Company's European motorcycle dealers through
a joint venture with another finance company. During 2001, HDFS exercised its
option to terminate the joint venture effective August 2002 at which time HDFS
will begin directly serving the wholesale financing needs of the Company's
European dealers. As the Company prepares for the transition from the joint
venture to HDFS, fewer accounts receivable have been financed through the joint
venture in 2002 resulting in a temporary increase in European accounts
receivable balances. Upon completion of this transition, HDFS' finance
receivables are expected to increase and European accounts receivable are
expected to decrease.
Inventory balances increased in the first half of 2002 as a result of the
Company's decision to begin production of its model year 2003 motorcycles
earlier in the year. Historically, the Company has not produced new model year
motorcycles until the beginning of the third quarter. At June 30, 2002,
approximately 3,000 model year 2003 motorcycles were held in inventory and
subsequently shipped following the introduction of the model year 2003
motorcycles at the Company's Dealer meeting in July.
Accounts payable and accrued expenses increased $114.3 million in the first half
of 2002. The increase relates primarily to increased unit volumes and higher
accrued income taxes during the first half of 2002.
Capital expenditures were $122.5 million and $92.1 million during the first half
of 2002 and 2001, respectively. During 2002, the Company continued work on its
capacity expansion efforts that are taking place at several of the Company's
existing facilities. These plans include a 350,000 square foot expansion at the
Company's York, Pennsylvania assembly facility; a 60,000 square foot expansion
at the Company's Tomahawk, Wisconsin facility; and a 165,000 square foot
addition to the Company's Product Development Center in Wauwatosa, Wisconsin.
The Company began its investment in these plans during 2001 and will continue to
invest capital related to these plans during 2002 and 2003. The Company
estimates that total capital expenditures required in 2002 will be in the range
of $270 to $300 million.(1) The Company anticipates it will have the ability to
fund all capital expenditures in 2002 with internally generated funds.(1)
18
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 $437.2 million of commercial
paper was outstanding at June 30, 2002. Subject to limitations discussed below,
HDFS may issue up to $750 million of short-term commercial paper with maturities
up to 270 days.
HDFS has a $350 million revolving credit facility due in 2005 and a $400 million
364-day revolving credit facility due September 2002 with approximately $60.6
million outstanding at June 30, 2002. The Company expects the $400 million
credit facility expiring in September 2002 will be renewed and believes that
suitable financing alternatives exist should the facility not be renewed. The
primary uses of the credit facilities are to provide liquidity to the unsecured
commercial paper program and to fund HDFS' business operations. Under the terms
of the credit facilities, commercial paper outstanding cannot exceed liquidity
support provided by the unused portion of the combined $750 million credit
facilities. Accordingly, at June 30, 2002, HDFS had aggregate remaining
availability under these existing facilities of $252.1 million.
At June 30, 2002, HDFS had $30 million of senior subordinated notes outstanding,
expiring in 2007.
In connection with its various debt agreements, HDFS has various operating and
financial covenants and was in compliance with all such covenants at June 30,
2002. The Company has a support agreement with HDFS whereby, if required, the
Company agrees to provide HDFS with certain financial support 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.
HDFS currently offers wholesale financing to the Company's European motorcycle
dealers through a joint venture with another finance company. The joint venture
partner provides the majority of the capital for the European wholesale lending
program. During 2001, HDFS exercised its option to terminate the joint venture
effective August 2002 at which time HDFS will begin directly serving the
wholesale financing needs of the Company's European dealers. Upon termination of
the joint venture, HDFS has the option to purchase the then outstanding
portfolio of dealer wholesale loans. Outstanding wholesale loans to European
dealers held by the joint venture at June 30, 2002 were approximately $30
million. Outstanding European accounts receivable held by the Motorcycles
segment at June 30, 2002 were approximately $97.9 million.
During July 2002, HDFS entered into a three year $200 million revolving credit
facility. The primary purpose of the $200 million credit facility is to fund
HDFS' European business operations.
The Company expects future activities of HDFS will be financed from internally
generated funds, securitization programs, commercial paper, revolving credit
facilities, continuation of its subordinated debt, redeemable preferred stock,
and advances or loans from the Company.(1)
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. The Company repurchased 1,089,000 shares of
its common stock during the first half of 2002 under the latter authorization.
There were no shares repurchased during the first half of 2001.
The Company declared a $.035 per share dividend during the second quarter of
2002, payable June 21, 2002 to shareholders of record as of June 11, 2002.
19
Item 3. Quantitative and Qualitative Disclosures about Market Risk
- ------- ----------------------------------------------------------
The Company is exposed to market risk from changes in foreign exchange and
interest rates. To reduce such risks, the Company selectively uses financial
instruments. All hedging transactions are authorized and executed pursuant to
regularly reviewed policies and procedures, which prohibit the use of financial
instruments for trading purposes. Sensitivity analysis is used to manage and
monitor foreign exchange and interest rate risk.
Refer to the notes to the consolidated financial statements included in the
Company's annual report on Form 10-K for the year ended December 31, 2001 for a
discussion of the Company's accounting policies and additional disclosure
related to derivative financial instruments.
The Company's earnings are affected by fluctuations in the value of the U.S.
dollar against foreign currencies, predominately in European countries and
Japan, as a result of the sales of its products in foreign markets. Forward
foreign exchange contracts are used to hedge against the earnings effects of
Euro fluctuations. At June 30, 2002 these contracts represented a combined U.S.
dollar equivalent of approximately $255.1 million. A uniform 10% strengthening
in the value of the dollar relative to the currency underlying these contracts
would have resulted in a decrease in the fair market value of the contracts of
approximately $27.0 million at June 30, 2002. In accordance with SFAS No. 133,
the Euro contracts, which are highly effective at June 30, 2002, are designated
as cash flow hedges, and gains and losses that result from changes in the fair
value are initially recorded in other comprehensive income and subsequently
reclassified into earnings when the hedged transaction affects income.
HDFS' earnings are affected by changes in short-term interest rates as a result
of securitization transactions, borrowings under bank credit facilities and the
issuance of commercial paper. HDFS utilizes interest rate swap agreements to
reduce the impact of fluctuations in interest rates. During the three-months
ended June 30, 2002, HDFS entered into interest rate swap agreements with a
notional value of $142.6 million. Based on June 30, 2002 balances, HFDS
estimated that a 1% decrease in short-term interest rates would have resulted in
a decrease in the fair market value of the agreements of approximately $3
million. In accordance with SFAS No. 133, the agreements, which are highly
effective as of June 30, 2002, are designated as cash flow hedges, and gains and
losses that result from changes in the fair value are initially recorded in
other comprehensive income and subsequently reclassified into earnings when the
hedged transaction affects income.
(1) Note regarding forward-looking statements
------------------------------------------
The Company intends that certain matters discussed in this report 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.
20
Part II - OTHER INFORMATION
Item 1. Legal Proceedings
- --------------------------
In January 2001, the Company, on its own initiative, notified each owner of 1999
and early-2000 model year Harley-Davidson motorcycles equipped with Twin Cam 88
and Twin Cam 88B engines that the Company was extending the warranty for a rear
cam bearing to 5 years or 50,000 miles. Subsequently, on June 28, 2001, a
putative nationwide class action was filed against the Company in state court in
Milwaukee County, Wisconsin, which was amended by a complaint filed September
28, 2001. The complaint alleged that this cam bearing is defective and asserted
various legal theories. The complaint sought unspecified compensatory and
punitive damages for affected owners, an order compelling the Company to repair
the engines and other relief. The Company filed a motion to dismiss the amended
complaint, and on February 27, 2002, the motion was granted by the court and the
amended complaint was dismissed in its entirety. An appeal has been filed and is
currently pending in the Wisconsin Court of Appeals. On April 12, 2002, the same
attorneys filed a second putative nationwide class action against the Company in
state court in Milwaukee County, Wisconsin relating to this cam bearing issue
and asserting different legal theories than in the first action. The complaint
seeks unspecified compensatory damages, an order compelling the Company to
repair the engines and other relief. The Company intends to vigorously oppose
nationwide class certification and defend the action and has filed a motion to
dismiss the complaint in its entirety. The Company believes that the warranty
extension it announced in January 2001 adequately addresses the condition for
affected owners. The Company has established reserves for this extended
warranty.
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 Note 6 of the Notes to Condensed Consolidated
Financial Statements for additional information on the environmental matters.
Item 4. Submission of Items to a Vote of Security Holders
- ----------------------------------------------------------
(a) The Company's Annual Meeting of Shareholders was held on May 4, 2002.
(b) At the Company's Annual Meeting of Shareholders, the following
directors were elected for terms expiring in 2005 by the vote
indicated:
Shares Shares
Voted in Withholding
Favor of Authority
-------- -----------
George H. Conrades 261,654,693 1,410,016
Sara L. Levinson 258,378,883 4,685,826
(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 Withheld
----------- ---------- --------
Ratification of Ernst &
Young LLP as the Company's
independent auditors 249,493,004 13,072,254 499,451
There were no broker non-votes with respect to the foregoing
matters.
21
Item 5. Other Information.
- ---------------------------
In each of 1999, 2000 and 2001, the Company's subsidiary HDFS paid premiums of
$112,914 under a Split Dollar Agreement for the benefit of Donna F. Zarcone, who
is currently the President and Chief Operating Officer of HDFS. In the Company's
proxy statement for its annual meeting of shareholders held May 4, 2002, which
the Company filed on Schedule 14A on March 25, 2002, the Company inadvertently
failed to disclose HDFS' payment of these premiums as part of "All Other
Compensation" paid to Ms. Zarcone in each of these years. The Split Dollar
Agreement is filed as Exhibit 10.4 to this report.
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) Exhibits
--------
10.1 Deferred Long-Term Incentive Plan approved May 4, 2002
10.2 Director Compensation Policy effective May 4, 2002
10.3 1998 Director Stock Plan as amended May 4, 2002
10.4 Split Dollar Agreement between HDFS and the Donna Josephine
Frett Zarcone Irrevocable Trust dated March 30, 1999
99.1 Written Statement of the Chief Executive Officer Pursuant to
18 U.S.C. s.1350
99.2 Written Statement of the Chief Financial Officer Pursuant to
18 U.S.C. s.1350
(b) Reports on Form 8-K
-------------------
None
22
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: 8/12/02 by: /s/ James L. Ziemer
---------------------------------------
James L. Ziemer
Vice President and Chief Financial
Officer (Principal Financial Officer)
Date: 8/12/02 by: /s/ James M. Brostowitz
---------------------------------------
James M. Brostowitz
Vice President, Controller (Principal
Accounting Officer) and Treasurer
23
HARLEY-DAVIDSON, INC.
Exhibit Index to Form 10-Q
Exhibit
Number
- -------
10.1* Deferred Long-Term Incentive Plan approved May 4, 2002
10.2* Director Compensation Policy effective May 4, 2002
10.3* 1998 Director Stock Plan as amended May 4, 2002
10.4 Split Dollar Agreement between HDFS and the Donna Josephine Frett
Zarcone Irrevocable Trust dated March 30, 1999
99.1 Written Statement of the Chief Executive Officer Pursuant to
18 U.S.C. s.1350
99.2 Written Statement of the Chief Financial Officer Pursuant to
18 U.S.C. s.1350
*Represents a management contract or compensatory plan, contract or arrangement
in which a director or named executive officer of the Company participates.
24