UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

 

FORM 10-K

 

 

Commission file number 1-9183

 

 

Title of each class		Name of each Exchange on which registered
COMMON STOCK, $.01 PAR VALUE PER SHARE		NEW YORK STOCK EXCHANGE
PREFERRED STOCK PURCHASE RIGHTS		NEW YORK STOCK EXCHANGE

 

Securities registered pursuant to Section 12(g) of the Act:      NONE

 

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 and (2) has been subject to such requirements for the past 90 days.  Yes ý No o.

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).  Yes ý   No o.

 

Aggregate market value of the voting stock held by non-affiliates of the registrant at June 27, 2003:

$11,965,851,735

Number of shares of the registrant’s common stock outstanding at March 4, 2004:

294,431,681 shares.

 

Documents Incorporated by Reference

Part III of this report incorporates information by reference from registrant’s Proxy Statement for the annual meeting of its shareholders to be held on April 25, 2004.

 

 

Harley-Davidson, Inc.

 

Form 10-K

 

For The Year Ended December 31, 2003

 

Part I
Item 1.		Business Summary
Item 2.		Properties
Item 3.		Legal Proceedings
Item 4.		Submission of Matters to a Vote of Security Holders
Part II
Item 5.		Market for Harley-Davidson, Inc. Common Stock and Related Shareholder Matters
Item 6.		Selected Financial Data
Item 7.		Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7a.		Quantitative and Qualitative Disclosures about Market Risk
Item 8.		Consolidated Financial Statements and Supplementary Data
Item 9.		Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A.		Controls and Procedures
Part III
Item 10.		Directors and Executive Officers of the Registrant
Item 11.		Executive Compensation
Item 12.		Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters
Item 13.		Certain Relationships and Related Transactions
Item 14.		Principal Accounting Fees and Services
Part IV
Item 15.		Exhibits, Financial Statements Schedules, and Reports on Form 8-K
Signatures

 

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Part I

 

Note regarding forward-looking statements

 

Certain matters discussed by the Company 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, including the Risk Factors discussed on page 41 of this report.  Shareholders, potential investors and other readers are urged to consider these factors in evaluating the forward-looking statements and are cautioned not to place undue reliance on such forward-looking statements.  The forward-looking statements included herein are only made as of the date of this report, and the Company undertakes no obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances.

 

Item 1. Business Summary

 

Harley-Davidson, Inc. was incorporated in 1981, at which time it purchased the Harley-Davidson^® motorcycle business from AMF Incorporated in a management buyout.  In 1986, Harley-Davidson, Inc. became publicly held. Unless the context otherwise requires, all references to the “Company” include Harley-Davidson, Inc., all of its subsidiaries and all of its majority-owned affiliates.  The Company operates in two segments:  the Motorcycles & Related Products segment and the Financial Services segment.  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.

 

The Motorcycles & Related Products (Motorcycles) segment includes the group of companies doing business as Harley-Davidson Motor Company (Motor Company) and the group of companies doing business as Buell Motorcycle Company (BMC), all of which are subsidiaries of H-D Michigan, Inc. and the Company.  The Motorcycles segment designs, manufactures and sells primarily heavyweight (engine displacement of 651+cc) touring, custom and performance motorcycles as well as a complete line of motorcycle parts, accessories, clothing and collectibles. The Company, which is the only major American motorcycle manufacturer, has held the largest share of the United States heavyweight (651+cc) motorcycle market since 1986 and ended 2003 with a domestic market share of 49.5% (Harley-Davidson models only) (Data provided by the Motorcycle Industry Council).

 

The Financial Services (Financial Services) segment consists of the Company’s subsidiary, Harley-Davidson Financial Services, Inc. and its subsidiaries (HDFS).  HDFS is engaged in the business of financing and servicing wholesale inventory receivables and retail loans, primarily for the purchase of motorcycles.  Additionally, HDFS is an agency for certain unaffiliated insurance carriers providing property/casualty insurance and extended service contracts to motorcycle owners. Prior to the sale of the Harley-Davidson Chrome Visa ® Card business in March 2000, HDFS was engaged in the business of financing and servicing revolving charge receivables. HDFS conducts business in the United States, Canada and Europe.

 

See Note 11, “Business segments and foreign operations,” to the 2003 consolidated financial statements for financial information on the Company’s business segments.

 

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Motorcycles and Related Products

 

Motorcycles. The primary business of the Motorcycles segment is to design, manufacture and sell premium motorcycles for the heavyweight market.  The Company is best known for its Harley-Davidson^® motorcycle products, but also offers a line of motorcycles and related products under the Buell brand name.  The Company’s worldwide motorcycle sales generated 80.0%, 78.9% and 80.0% of the total net revenue in the Motorcycles segment during 2003, 2002 and 2001, respectively.

 

The majority of the Company’s Harley-Davidson-branded motorcycle products emphasize traditional styling, design simplicity, durability, ease of service and evolutionary change.  In 2001, the Company expanded its traditional approach to styling, with the introduction of the V-Rod™ motorcycle, the first member of a new family of Harley-Davidson motorcycles - the VRSC family.  The VRSC family of motorcycles was inspired by Harley-Davidson’s racing heritage and combines the characteristics of a performance motorcycle with the styling of a custom motorcycle. The Company currently manufactures and sells 25 models of Harley-Davidson touring and custom heavyweight motorcycles, with domestic manufacturer’s suggested retail prices ranging from approximately $6,495 to $28,595.

 

The Motor Company manufactures five families of motorcycles: Sportster^®, Dyna Glide, Softail^®, Touring and VRSC.  These motorcycles are powered by one of four air-cooled, twin-cylinder engines with a 45-degree “V” configuration, or in the case of the VRSC family, a liquid-cooled, twin-cylinder engine with a 60-degree “V” configuration. The Motor Company’s Harley-Davidson engines range in size from 883cc’s to 1650cc’s.

 

Studies by the Company indicate that the average U.S. Harley-Davidson motorcycle purchaser is a married male in his mid-forties (over two-thirds of purchasers are between the ages of 35 and 54), with a household income of approximately $79,500. These customers generally purchase a motorcycle for recreational purposes rather than to provide transportation. Over two-thirds of the Company’s U.S. sales of Harley-Davidson motorcycles are to buyers with at least one year of education beyond high school, and 31% of the buyers have college degrees.  Approximately 9% of the Company’s Harley-Davidson U.S. retail motorcycle sales are to female buyers.

 

The Company’s Buell^® motorcycle products emphasize innovative design, responsive handling and overall performance.  During 2003, the Company expanded its Buell motorcycle line up with the introduction of two new motorcycles, the Firebolt™ XB12R and the Lightning^® XB12S.  These new motorcycles, along with the two existing XB9 models, and the Blast^® complete the current Buell motorcycle family.  The Buell XB motorcycles focus on superior handling and are powered by either a 984cc (XB9) or a 1203cc (XB12) air-cooled, twin-cylinder engine with a 45-degree “V” configuration.  The Buell Blast is considerably smaller, lighter and less expensive than the Buell XB models and is powered by a 492cc single-cylinder engine.  The Buell XB motorcycle models have domestic manufacturer’s suggested retail prices of $9,195 to $10,995. The Blast, which competes in the standard market segment, has a domestic manufacturer’s suggested retail price of $4,595.

 

Company studies indicate that the average U.S. purchaser of a Buell XB motorcycle is a male at the age of 38 with a household income of approximately $79,100.  Approximately 9% of all Buell XB U.S. retail motorcycle sales are to females. The Company’s studies indicate that 58% of Buell Blast purchasers have never owned a motorcycle before and in excess of 97% of them had never owned a Buell motorcycle before.  The average age of Blast purchasers is 37, with over one-half of them being female.

 

The motorcycle market is comprised of four segments: standard, which emphasizes simplicity and cost; performance, which emphasizes handling and acceleration; touring, which emphasizes comfort and amenities for long-distance travel; and custom, which emphasizes styling and individual owner customization.  The touring segment of the heavyweight market was pioneered by the Company and includes motorcycles equipped for long-distance touring with fairings, windshields, saddlebags and Tour Pak^® luggage carriers.  The custom segment of the market includes motorcycles featuring the distinctive styling associated with classic Harley-Davidson motorcycles. The standard and performance segments of the market are served primarily by the Company’s Buell motorcycle line.

 

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In the U.S., suggested retail prices for the Company’s Harley-Davidson motorcycles range from being competitive to 50% higher than comparable motorcycles available in the market.  Although there are some differences in accessories between the Company’s top-of-the line touring motorcycles and those of its competitors, suggested retail prices are generally comparable.  The prices for the high-end of the Company’s Harley-Davidson custom product line range from being competitive to 50% more than its competitors’ custom motorcycles.  The high-end of the custom portion of the Harley-Davidson product line represents the Company’s highest unit volumes and continues to command a premium price because of the features, styling and high resale value associated with Harley-Davidson custom products.  The Company’s smallest displacement custom motorcycle (the 883cc Sportster^®) is price competitive with comparable motorcycles available in the market. The Company expects to see sales of its 883cc Sportster model partially translated into sales of its higher-priced models.  The Company’s surveys of retail purchasers in the U.S. indicate that 41% of the purchasers of its Sportster model either have previously owned competitive-brand motorcycles, are completely new to the sport of motorcycling or have not participated in the sport for at least five years.

 

Since 1988, the Company’s research has consistently shown that U.S. purchasers of Harley-Davidson motorcycles have a repurchase intent at or in excess of 90%.

 

Parts & Accessories. The major Parts and Accessories (P&A) products are replacement parts (Genuine Motor Parts) and mechanical and cosmetic accessories (Genuine Motor Accessories).  Worldwide P&A net revenue comprised 15.4%, 15.4% and 15.1% of net revenue in the Motorcycles segment in 2003, 2002 and 2001, respectively.

 

General Merchandise. Worldwide General Merchandise net revenue, which includes MotorClothes^TM apparel and collectibles, comprised 4.6%, 5.7% and 4.9% of net revenue in the Motorcycles segment in 2003, 2002 and 2001, respectively.

 

Other Services.  The Company also provides a variety of services to its dealers including service and business management training schools, customized dealer software packages, delivery of its motorcycles, a motorcycle rental program and a rider training program.

 

Licensing. The Company creates an awareness of the Harley-Davidson brand among the non-riding public and provides a wide range of products for enthusiasts by licensing the name “Harley-Davidson” and numerous related trademarks owned by the Company.  The Company currently has licensed the production and sale of a broad range of consumer items, including t-shirts, jewelry, small leather goods, toys and numerous other products.  The Company also licenses the use of its name in connection with a cafe located in Las Vegas.  Although the majority of licensing activity occurs in the U.S., the Company continues to expand these activities in international markets.

 

The Company’s licensing activity provides a valuable source of advertising and goodwill.  Licensing also has proven to be an effective means for enhancing the Company’s image with consumers.  It also provides an important tool for policing the unauthorized use of the Company’s trademarks, thereby protecting the Harley-Davidson brand and its use.  Royalty revenues from licensing, included in Motorcycles segment net revenue, were approximately $38 million, $36 million and $32 million during 2003, 2002 and 2001, respectively.  While royalty revenues from licensing activities are relatively small, the profitability of this business is relatively high.

 

Patents and Trademarks.  The Company owns certain patents that relate to its motorcycles and related products and processes for their production. The Company has increased its efforts to patent its technology and certain motorcycle related designs and to enforce those patents. The Company sees such actions as important as it moves forward with new products, designs and technologies.

 

Trademarks are important to the Company’s motorcycle business and licensing activities.  The Company has a vigorous global program of trademark registration and enforcement to strengthen the value of the trademarks associated with its products and services, prevent the unauthorized use of those trademarks and enhance its image and customer goodwill. The Company believes the HARLEY-DAVIDSON trademark and the Company’s Bar

 

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and Shield trademark are each highly recognizable to the public and are very valuable assets. The BUELL trademark is well-known in performance motorcycle circles, as is the associated Pegasus logo. The Company is making efforts to improve the awareness of the Buell trademarks as the Buell business expands. Additionally, the Company uses numerous other trademarks, trade names and logos, which are registered both in the United States and abroad. The following are among the trademarks of H-D Michigan, Inc.:  Harley-Davidson, H-D, Harley, the Bar & Shield Logo, MotorClothes, the MotorClothes Logo, Rider’s Edge, Harley Owners Group, H.O.G., the H.O.G. Logo, Softail, Sportster, V-Rod, Buell, the Pegasus Logo and BRAG.  The HARLEY-DAVIDSON trademark has been used since 1903 and the Bar and Shield trademark since at least 1910.  The BUELL trademark has been used since 1984.

 

Marketing.  The Company’s marketing efforts consist mainly of dealer promotions, customer events and advertising through television, print and direct mailings.  Many of the Company’s marketing efforts are accomplished through a cooperative program with its independent dealers. The Company also sponsors racing activities and special promotional events and participates in most major motorcycle consumer shows and rallies.

 

During 2003, the Company completed its 14 month-long 100^th Anniversary celebration, the Company’s most significant customer event to date.  This unprecedented celebration began with The Open Road Tour, which included festivals in five cities across North America and four international locations throughout the world.  The celebration culminated in August at a four-day event located in Milwaukee, Wisconsin.  The Company estimates that more than one million people participated in its 100^th Anniversary events.  Additionally, the Company estimates that through its media relations effort, the 100^th Anniversary celebration was further extended through 2.6 billion media impressions.

 

On an ongoing basis, the Company promotes its products and lifestyle through the Harley Owners Group^®, or H.O.G.^® H.O.G. has approximately 840,000 members worldwide and is the industry’s largest company-sponsored motorcycle enthusiast organization.  The Company formed the Harley Owners Group in 1983 in an effort to encourage Harley-Davidson owners to become more actively involved in the sport of motorcycling.  More recently, the Company formed the Buell Riders Adventure Group, or “BRAG^®” which has approximately 10,000 members.  These groups sponsor many motorcycle events, including local and national rallies and rides, throughout the U.S. and abroad for Harley-Davidson and Buell motorcycle enthusiasts.

 

The Company website (www.harley-davidson.com) is also utilized to market its products and services and features an online catalog which allows customers to create and share product wish lists, utilize a dealer locator and place catalog orders.  Internet catalog orders are fulfilled by the participating authorized Harley-Davidson dealer that is selected by the customer. Those same dealers handle any after-sale services that customers may require.

 

International Sales.  International revenue was approximately $816 million, $675 million and $597 million, accounting for approximately 18%, 17% and 18% of net revenue of the Motorcycles segment, during 2003, 2002, and 2001, respectively.  The Company ended 2003 with a 8.1% share of the European heavyweight (651+cc) market and a 25.8% share of the Asia/Pacific (Japan and Australia) heavyweight (651+cc) market (Harley-Davidson models only).  See Note 11 to the consolidated financial statements for additional information regarding foreign operatons.

 

 

Distribution-United States. The Company’s basic channel of distribution in the United States for its motorcycles and related products consists of approximately 648 independently-owned full-service Harley-Davidson dealerships to whom the Company sells directly.  This includes 439 combined Harley-Davidson^® and Buell^® dealerships.  There are no Buell-only dealerships.  With respect to sales of new motorcycles, approximately 81% of the U.S. dealerships sell the Company’s motorcycles exclusively.  All dealerships stock and sell the Company’s genuine replacement parts, accessories, and MotorClothes™ apparel and collectibles, and perform service for the Company’s motorcycles.  The Company also sells a smaller portion of its parts and accessories and general merchandise through “non-traditional” retail outlets.  The “non-traditional” outlets, which are extensions of the main dealership, consist of Secondary Retail Locations (SRLs), Alternate Retail Outlets (AROs), and Seasonal Retail Outlets (SROs).  SRLs, also known as Harley Shops, are satellites of the main dealership and are

 

6

 

developed to meet the service needs of the Company’s riding customers.  Harley Shops also provide replacement parts and accessories and MotorClothes apparel and collectibles and are authorized to sell new motorcycles.  AROs are located primarily in high traffic areas such as malls, airports or popular vacation destinations and focus on selling the Company’s MotorClothes apparel and collectibles and licensed products. SROs are located in similar high traffic areas, but operate on a seasonal basis out of temporary locations such as vendor kiosks.  AROs and SROs are not authorized to sell new motorcycles.  There are approximately 85 SRLs, 55 AROs, and 10 SROs located in the United States.

 

Distribution-Europe.  The Company’s European management team is based out of a subsidiary located in the United Kingdom and is responsible for all sales, marketing and distribution activities in the European region (Europe/Middle East/Africa).  The United Kingdom operation is further supported by six subsidiaries in France, Germany, Italy, the Netherlands, Spain, Switzerland and eight independent distributors throughout the region. In the European region, there are approximately 383 independent Harley-Davidson dealerships serving 32 country markets.  This includes 247 combined Harley-Davidson and Buell dealerships.  Buell is further represented by 10 dealerships that do not sell Harley-Davidson motorcycles.  In addition, the Company’s dealer network includes 31 ARO’s across the 32 European country markets.

 

Distribution-Asia/Pacific.  The Asia/Pacific region is currently served by 221 independent dealers serving nine country markets.  Of these dealers, 90 sell both Harley-Davidson and Buell products, while three are Buell-only dealerships.  Japan, which is the largest market in this region, is managed directly from the Company’s subsidiary in Tokyo.  Operations of this subsidiary include sales, marketing and distribution of product to the country’s network of 159 independent dealers.  Independent distributors manage distribution for the region’s second largest market, Australia/New Zealand, with 53 dealerships currently in operation.  Of these, 24 sell both Harley-Davidson and Buell products.  The Company ships product directly from its it U.S. operations to the remaining Asia/Pacific dealerships which are located in East and Southeast Asia.

 

Distribution-Latin America.  In Latin America, 15 country markets are served by 30 dealerships and six ARO’s/SRO’s.  Mexico is currently the largest Harley-Davidson market in Latin America.  Mexico’s 10 independent dealers are served by an independent distributor who distributes product through a warehouse in Laredo, Texas.  In Brazil, the region’s second largest market, motorcycles and related products are distributed by an independent distributor.  Some of models sold in Brazil are assembled locally at the Company’s subsidiary in Manaus.  The remaining dealerships in Latin America receive product that is shipped directly from the Company’s U.S. operation.

 

Distribution-Canada.  In Canada, there are approximately 75 independent Harley-Davidson^® dealerships, one independent stand-alone Buell^® dealership, and 6 AROs, all served by a single independent distributor, Fred Deeley Imports Ltd. This network includes 42 combined Harley-Davidson and Buell dealerships resulting in a total of 43 Buell dealerships in Canada.

 

 

Seasonality.  In general, the Motor Company has not experienced significant seasonal fluctuations in its wholesale sales.  This has been primarily the result of a strong demand for the Company’s Harley-Davidson motorcycles and related products, as well as the availability of floor plan financing arrangements for its North American and European independent dealers.  Floor plan financing allows dealers to build their inventory levels in anticipation of the spring and summer selling seasons.   For further discussion of seasonal fluctuations in retail sales, see “Seasonality” under the Financial Services business summary on page 14.

 

Retail Customer and Dealer Financing.  The Company believes that HDFS as well as other financial services companies provide adequate financing to the Company’s distributors, dealers and their retail customers.  HDFS provides financing to the Company’s dealers, distributors and dealers’ retail customers in the U.S. and Canada, and beginning in 2002, it began servicing the wholesale financing needs of many of the Company’s European dealers.  The Company’s customers in the Asia/Pacific and Latin America regions are not serviced by HDFS, but have access to financing though other established financial services companies.

 

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Competition.  The heavyweight (651+cc) motorcycle market is highly competitive.  The Company’s major competitors are based outside the U.S. and generally have financial and marketing resources that are substantially greater than those of the Company.  They also have larger worldwide revenue and are more diversified than the Company.  In addition to these larger, established competitors, the Company has competitors headquartered in the U.S.  The U.S. competitors generally offer heavyweight motorcycles with traditional styling that compete directly with many of the Company’s products.  These competitors currently have production and sales volumes that are lower than the Company’s and do not hold a significant market share.

 

Competition in the heavyweight motorcycle market is based upon a number of factors, including price, quality, reliability, styling, product features, customer preference and warranties.  The Company emphasizes quality, reliability and styling in its products and offers a 2 year warranty for its motorcycles.  The Company regards its support of the motorcycling lifestyle in the form of events, rides, rallies, H.O.G.^® and its financing through HDFS as a competitive advantage. In general, resale prices for used Harley-Davidson motorcycles, as a percentage of prices when new, are significantly higher than resale prices for used motorcycles of the Company’s competitors.

 

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Domestically, the Company competes most heavily in the touring and custom segments of the heavyweight motorcycle market. These segments accounted for 82%, 80% and 79% of total heavyweight retail unit sales in the U.S. during 2003, 2002 and 2001, respectively.  The custom and touring motorcycles are generally the most expensive vehicles in the market and the most profitable for the Company.  During 2003, the heavyweight segment (including standard, performance, touring and custom motorcycles) represented approximately one-half of the total U.S. motorcycle market (on- and off-highway motorcycles and scooters) in terms of new units registered.

 

For the last 16 years, the Company has led the industry in domestic (United States) retail unit sales of heavyweight motorcycles.  The Company’s share of the heavyweight market was 50.3% in 2003 compared to 48.2% in 2002. This share is significantly greater than the Company’s largest competitor in the domestic market which ended 2003 with an 18.4% market share.

 

The following chart includes U.S. retail registration data for the Company and its major competitors for the years 1999 through 2003.

 

Market share of U.S. Heavyweight Motorcycles (1)

(Engine Displacement of 651+cc)

 

		Year Ended December 31,
		2003		2002		2001		2000		1999
New U.S. Registrations (thousands of units):
Total market new registrations		461.2		442.3		394.3		340.0		275.6
Harley-Davidson new registrations		228.4		209.3		177.4		155.1		134.5
Buell new registrations		3.5		2.9		2.6		4.2		3.9
Total Company new registrations		231.9		212.2		180.0		159.3		138.4
Percentage Market Share:
Harley-Davidson® motorcycles		49.5	%	47.5	%	45.0	%	45.6	%	48.8	%
Buell® motorcycles		0.8		0.7		0.7		1.2		1.4
Total Company		50.3		48.2		45.7		46.8		50.2
Honda		18.4		19.8		20.5		18.5		16.4
Suzuki		9.8		9.6		10.8		9.3		9.4
Kawasaki		6.7		6.9		8.0		9.0		10.3
Yamaha		8.5		8.9		7.9		8.4		7.0
Other		6.3		6.6		7.1		8.0		6.7
Total		100.0	%	100.0	%	100.0	%	100.0	%	100.0	%

 

(1)          Motorcycle registration and market share information has been derived from data published by the Motorcycle Industry Council (MIC).

 

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The Company faces unique competitive challenges in the international markets.  The European heavyweight motorcycle market (as defined below) is roughly two-thirds of the size of the U.S. market; but unlike the domestic market, it is comprised of the unique tastes of many individual countries that together represent the total European market.  In addition, 81% of the European heavyweight (651+cc) motorcycle market is comprised of the standard and performance segments.  The Company’s traditional Harley-Davidson products are designed to compete in the custom and touring segments.  However, the Company continues to expand its product offerings to include new motorcycles like the VRSC, which can compete in both the custom and performance segments, and the Buell XB, a motorcycle specifically designed to compete in the performance segment.

 

On a worldwide basis, the Company measures its market share using the heavyweight classification.  Although definitive market share information does not exist for many of the smaller foreign markets, the Company estimates its worldwide competitive position, using data reasonably available to the Company, to be as follows:

 

Worldwide Heavyweight Motorcycle Registration Data

(Engine Displacement of 651+cc)

(Units in thousands)

 

		2003				2002				2001
		Units		% Share		Units		% Share		Units		% Share
North America(1)
Harley-Davidson new registrations		238.3		48.1	%	220.1		46.4	%	185.6		43.9	%
Buell new registrations		3.7		0.8		3.0		.6		2.7		.6
Company registrations		242.0		48.9	%	223.1		47.0	%	188.3		44.5	%
Market new registrations		495.5				475.0				422.8
Europe(2)
Harley-Davidson new registrations		26.3		8.1	%	23.5		7.1	%	22.8		7.1	%
Buell new registrations		4.0		1.2		1.9		0.6		2.3		0.7
Company registrations		30.3		9.3	%	25.5		7.7	%	25.1		7.8	%
Market new registrations		323.1				331.8				319.9
Japan/Australia(3)
Harley-Davidson new registrations		15.2		25.8	%	13.6		21.3	%	12.7		20.4	%
Buell new registrations		1.0		1.7		.7		1.2		.7		1.2
Company registrations		16.2		27.5	%	14.3		22.5	%	13.4		21.6	%
Market new registrations		58.9				63.9				62.1
Total(4)
Harley-Davidson new registrations		279.8		31.9	%	257.2		29.6	%	221.1		27.5	%
Buell new registrations		8.7		1.0		5.6		0.7		5.7		0.7
Company registrations		288.5		32.9	%	262.8		30.3	%	226.8		28.2	%
Market new registrations		877.5				870.7				804.8

 

(1)                      Includes the United States and Canada.  Data provided by the Motorcycle Industry Council (MIC).

(2)                      Europe data, provided by Giral S.A., includes retail sales in Austria, Belgium, France, Germany, Italy, The Netherlands, Spain, Switzerland, United Kingdom, Denmark, Finland, Greece, Norway, Portugal and Sweden.

(3)                      Data provided by ERG, International and industry sources.

(4)                      Includes the North American, European and Japan/Australia markets as defined above.

 

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Motorcycle Manufacturing. The Motor Company’s ongoing manufacturing strategy is designed to increase capacity, improve product quality, reduce costs and increase flexibility to respond to changes in the marketplace. The Motor Company incorporates manufacturing techniques focused on continuous improvement. These techniques, which include employee involvement, just-in-time inventory principles, partnering agreements with the local unions, high performance work organizations and statistical process control, are designed to improve product quality, productivity and asset utilization in the production of Harley-Davidson^® motorcycles.

 

The Motor Company’s use of just-in-time inventory principles allows it to minimize its inventories of raw materials and work in process, and minimize scrap and rework costs.  This system also allows quicker reaction to engineering design changes, quality improvements and market demands.  The Motor Company continues to train the majority of its manufacturing employees in problem solving and statistical methods.

 

The Company believes the worldwide heavyweight (651+cc) market will continue to grow and plans to continue to increase its Harley-Davidson motorcycle production capacity to have the capability to sustain growth in unit shipments. During 2003, the Company continued work on its capacity expansion efforts at several of the Company’s existing facilities.  These efforts resulted in a new 350,000 square foot Softail^® factory at the Company’s York, Pennsylvania location and a 165,000 square foot addition to the Company’s Product Development Center in Wauwatosa, Wisconsin.

 

Raw Material and Purchased Components.  The Company continues to proceed aggressively to establish long-term, mutually beneficial relationships with its suppliers.  Through these collaborative relationships, the Company gains access to technical and commercial resources for application directly to product design, development and manufacturing initiatives and gains commitment from suppliers to advance Company interests efficiently and effectively.  This strategy is resulting in improved product technical integrity, application of new features and innovations, reduced lead times for product development, and smoother/faster manufacturing ramp-up of new vehicle introductions.  The Company engaged in a significant initiative with all suppliers during the latter half of 2003 to explore ways to continuously reduce component and material cost.  The Company anticipates that its focus on collaboration and strong supplier relationships will be beneficial to achieving cost improvement over the long-term.

 

The Company purchases all of its raw materials, principally steel and aluminum castings, forgings, sheets and bars, and certain motorcycle components, including carburetors, batteries, tires, seats, electrical components and instruments.  Given current economic conditions in the metal markets, the Company is closely monitoring supply, availability and pricing for both its suppliers and in-house operations.  However at this time the Company does not anticipate any significant difficulties in obtaining raw materials or components.

 

Research and Development.  The Company believes research and development are significant factors in its ability to lead the custom and touring motorcycling market and to develop products for the performance segment.  The Company’s 397,000 square foot Product Development Center (PDC) brings employees from styling, purchasing and manufacturing together with regulatory professionals and supplier representatives to create a concurrent product and process development team.  The Company also operates a 43,000 square foot Buell research and development facility.  The Company incurred research and development expenses of $150.3 million, $139.7 million and $129.5 million during 2003, 2002 and 2001, respectively.

 

11

 

Regulation. Federal, state and local authorities have various environmental control requirements relating to air, water and noise pollution that affect the business and operations of the Company.  The Company strives to ensure that its facilities and products comply with all applicable environmental regulations and standards.

 

The Company’s motorcycles are subject to certification by the U.S. Environmental Protection Agency (EPA) for compliance with applicable emissions and noise standards and by the State of California Air Resources Board (CARB) with respect to CARB’s more stringent emissions standards.  Company motorcycles sold in California are also subject to certain tailpipe and evaporative emissions standards that are unique to California. The Company’s motorcycle products have been certified to comply fully with all such applicable standards. CARB’s motorcycle emissions standards will become more stringent in model year 2008.  The EPA has finalized new tail pipe emission standards for 2006 and 2010, respectively.  The EPA standards are harmonized with the California emissions standards, and Harley-Davidson expects its motorcycle products will comply with the new requirements when they go into effect. Additionally, the European Union, Japan and certain emerging markets are considering making motorcycle emissions and noise standards more stringent, which in the European Union are already more stringent than those of the EPA.  Consequently, the Company will continue to incur some level of research and development and production costs related to motorcycle emissions and noise for the foreseeable future. The Company does not anticipate that any of these standards will have a materially adverse impact on its capital expenditures, earnings or competitive position.

 

The Company, as a manufacturer of motorcycle products, is subject to the National Traffic and Motor Vehicle Safety Act, which is administered by the National Highway Traffic Safety Administration (NHTSA).  The Company has certified to NHTSA that its motorcycle products comply fully with all applicable federal motor vehicle safety standards and related regulations.  The Company has from time to time initiated certain voluntary recalls.  During the last three years, the Company has initiated 14 voluntary recalls at a total cost of $3.8 million. The Company reserves for all estimated costs associated with recalls in the period that the recalls are announced.

 

Employees.  As of December 31, 2003, the Motorcycles segment had approximately 8,800 employees.  Unionized employees at the motorcycle manufacturing and distribution facilities in Wauwatosa, Menomonee Falls, Franklin and Tomahawk, Wisconsin and Kansas City, Missouri are represented by the Paper Allied-Industrial Chemical and Energy Workers International Union (PACE) of the AFL-CIO, as well as the International Association of Machinist and Aerospace Workers (IAM).  Production workers at the motorcycle manufacturing facility in York, Pennsylvania, are represented principally by the IAM.  The collective bargaining agreement with the Wisconsin-PACE and IAM will expire on March 31, 2008, the collective bargaining agreement with the Kansas City-PACE and IAM will expire on August 1, 2007, and the collective bargaining agreement with the Pennsylvania-IAM will expire on February 2, 2007.

 

Internet Access. The Company’s Internet address is www.harley-davidson.com.  The Company makes available free of charge (other than an investor’s own Internet access charges) through its Internet website the Company’s Annual Report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and amendments to those reports, as soon as reasonably practicable after it electronically files such material with, or furnishes such material to, the Securities and Exchange Commission.  In addition, the Company makes available, through its website, the following corporate governance materials: (a) the Harley-Davidson, Inc. Corporate Governance Policy, (b) Committee Charters approved by the Harley-Davidson, Inc. Board of Directors for the Audit Committee, Human Resources Committee and Nominating and Corporate Governance Committee, (c) the Company’s Financial Code of Ethics,  (d) the Company’s Code of Business Conduct (the “Code of Conduct”) and (e) the Conflict of Interest Process for Directors and Executive Officers of Harley-Davidson, Inc. (the “Conflict Process”).  This information is also available from the Company upon request.  The Company intends to satisfy the disclosure requirements under the Code of Conduct, the Conflict Process and applicable New York Stock Exchange listing requirements regarding waivers of the Code of Conduct or the Conflict Process for executive officers and directors by posting such information on its website at www.harley-davidson.com or disclosing the information in the Company’s proxy statement for its annual meeting of shareholders.  The Company is not including the information contained on or available through its website as a part of, or incorporating such information by reference into, this Annual Report on Form 10-K.

 

12

 

Financial Services

 

HDFS is engaged in the business of financing and servicing wholesale inventory receivables and consumer retail loans (primarily for the purchase of motorcycles). Additionally, HDFS is an agency for certain unaffiliated insurance carriers providing property/casualty insurance and extended service contracts to motorcycle owners. HDFS conducts business in the United States, Canada and Europe.

 

Harley-Davidson and Buell . HDFS, operating under the trade name Harley-Davidson Credit and Insurance, provides wholesale financial services to Harley-Davidson and Buell dealers and retail financing to consumers. Wholesale financial services include floorplan and open account financing of motorcycles and motorcycle parts and accessories, real estate loans, computer loans, showroom remodeling loans and the brokerage of a range of commercial insurance products. HDFS offers wholesale financial services to Harley-Davidson dealers in the U.S. and Canada, and during 2003, approximately 95% of such dealers utilized those services. Prior to August 2002, HDFS offered wholesale financing to some of the Company’s European motorcycle dealers through a joint venture with Transamerica Distribution Finance.  In August 2002, HDFS terminated this joint venture relationship and began directly serving the wholesale financing needs of some European dealers.  The wholesale finance operations of HDFS are located in Plano, Texas and Oxford, England.

 

Retail financial services include installment lending for new and used Harley-Davidson and Buell motorcycles and the brokerage of a range of motorcycle insurance policies and extended service warranty agreements. HDFS acts as an insurance agent and does not assume underwriting risk with regard to insurance policies and extended service warranty agreements. Prior to the sale of the Harley-Davidson Chrome Visa® Card business in March 2000, HDFS financed and serviced revolving charge receivables. HDFS’ retail financial services are available through most Harley-Davidson and Buell dealers in the United States and Canada. HDFS’ retail finance operations are located in Carson City, Nevada and Reno, Nevada.

 

Other Manufacturers. HDFS’ retail aircraft financial service programs are similar to programs for Harley-Davidson and Buell consumers described above. HDFS’ aircraft business is a small portion of its total business and made up less than 5% of total managed loans as of the end of 2003.

 

Funding.  HDFS is financed by operating cashflow, asset-backed securitizations, the issuance of commercial paper, revolving credit facilities, medium term notes, senior subordinated debt and advances and loans from the Company.

 

Competition. The ability to offer a package of wholesale and retail financial services is a significant competitive advantage for HDFS. Competitors compete for business based largely on price and, to a lesser extent, service. HDFS competes based on convenience, service, brand association, strong dealer relations, industry experience, terms, and price.

 

During 2003, HDFS financed 38% of the new Harley-Davidson^® motorcycles retailed in the U.S., as compared to 35% in 2002. HDFS faces competition for the Company’s retail motorcycle finance business. Competitors are primarily banks and other financial institutions providing retail financing to local or regional markets. Credit unions, banks, other financial institutions and insurance agencies also compete for retail financial services business in selected markets.

 

HDFS faces little national competition for the Company’s wholesale motorcycle finance business. Competitors are primarily regional and local banks and other financial institutions providing wholesale financing to Harley-Davidson and Buell dealers in their local markets.

 

Trademarks.  HDFS utilizes various trademarks and trade names licensed from the Company. Additionally, HDFS has a registered trademark for the “Eaglemark and Design logo” utilized in aircraft financing programs.

 

13

 

Seasonality.  In the northern United States and Canada, motorcycles are primarily used during warmer months. Accordingly, HDFS experiences seasonal variations. From mid-March through August, retail financing volume increases and wholesale financing volume decreases as dealers deplete their inventories. From September through mid-March, there is a decrease in retail financing volume while dealer inventories build and turn over more slowly, substantially increasing wholesale financing volume.

 

Regulation.  The operations of HDFS are subject, in certain instances, to supervision and regulation by state, federal, and various foreign governmental authorities. Operations may be subject to various laws and judicial and administrative decisions imposing requirements and restrictions, which among other things, (i) regulate credit granting activities, including establishing licensing requirements, in applicable jurisdictions, (ii) establish maximum interest rates, finance charges and other charges, (iii) regulate customers’ insurance coverages, (iv) require disclosure to customers, (v) govern secured transactions, (vi) set collection, foreclosure, repossession and claims handling procedures and other trade practices, (vii) prohibit discrimination in the extension of credit and administration of loans, and (viii) regulate the use and reporting of information related to a borrower.

 

Depending on the provisions of the applicable laws and regulations and the specific facts and circumstances involved, violations of these laws may limit the ability of HDFS to collect all or part of the principal or interest on applicable loans, may entitle the borrower to rescind the loan or to obtain a refund of amounts previously paid.  In addition, these laws and regulations could subject HDFS to damages and administrative sanctions.

 

The above regulation and supervision could limit the discretion of HDFS in operating its business. For example, state laws often establish maximum allowable finance charges for certain consumer and commercial loans. Noncompliance with applicable statutes or regulations could result in the suspension or revocation of any license or registration at issue, as well as the imposition of civil fines and criminal penalties. The Company can not assure that the applicable laws or regulations will not be amended or construed differently, that new laws and regulations will not be adopted or that interest rates charged by HDFS will not rise to maximum levels permitted by law, the effect of any of which could be to adversely affect the business of HDFS or its results of operations.

 

A subsidiary of HDFS, Eaglemark Savings Bank (ESB), formerly known as Eaglemark Bank, N.A., is a Nevada state thrift. As such, the activities of this subsidiary are governed by federal and State of Nevada banking laws and are subject to examination by federal and state examiners. ESB is also required to maintain minimum capital reserves. During 2002, ESB began to originate retail motorcycle and aircraft loans and sell the loans to a non-banking subsidiary of HDFS. This process allows HDFS to offer retail products with common characteristics across the United States and uniformly manage all domestic retail customers.

 

Employees.  As of December 31, 2003, the Financial Services segment had approximately 660 employees. No employees of HDFS are represented by labor unions.

 

14

 

Item 2. Properties

 

The following is a summary of the principal operating properties of the Company as of December 31, 2003.

 

Motorcycles and Related Products Segment

 

Type of Facility		Location		Approximate Square Feet		Status
Corporate office		Milwaukee, WI		515,000		Owned
Warehouse		Milwaukee, WI		24,000		Lease expiring 2006
Airplane hangar		Milwaukee, WI		14,600		Lease expiring 2006
Product Development Center		Wauwatosa, WI		397,000		Owned
Manufacturing		Wauwatosa, WI		422,000		Owned
Manufacturing		Menomonee Falls, WI		479,000		Owned
Manufacturing		Tomahawk, WI		189,000		Owned
Manufacturing		York, PA		1,331,000		Owned
Materials Velocity Center		York, PA		193,000		Owned
Manufacturing		Kansas City, MO		330,000		Owned
Materials Velocity Center		Kansas City, MO		87,000		Lease expiring 2004
Manufacturing		East Troy, WI		40,000		Lease expiring 2008
Product Development and office		East Troy, WI		54,000		Lease expiring 2008
Distribution Center		Franklin, WI		250,000		Owned
Office		Cleveland, OH		23,000		Lease expiring 2014
Motorcycle Testing		Talladega, AL		24,000		Leases expiring 2004 & 2007
Motorcycle Testing		Mesa, AZ		12,000		Lease expiring 2005
Motorcycle Testing		Naples, FL		82,000		Owned
Office		Ann Arbor, MI		3,000		Lease expiring 2005
Office		Morfelden-Waldorf, Germany		22,000		Lease expiring 2005
Office and Warehouse		Oxford, England		27,000		Lease expiring 2017
Office		Windsor, England		10,000		Owned
Office		Liederdorp, The Netherlands		8,000		Lease expiring 2006
Office		Paris, France		6,000		Lease expiring 2005
Office and Warehouse		Arese, Italy		17,000		Lease expiring 2006
Office		Zurich, Switzerland		1,000		Lease expiring 2004
Office		Barcelona, Spain		2,000		Lease expiring 2010
Office		Tokyo, Japan		14,000		Lease expiring 2006
Warehouse		Yokohama, Japan		15,000		Lease expiring 2006
Manufacturing and Office		Manaus, Brazil		30,000		Lease expiring 2005

 

The Company has seven facilities that perform manufacturing operations:  Wauwatosa and Menomonee Falls, Wisconsin (motorcycle powertrain production); Tomahawk, Wisconsin (fiberglass parts production and painting); York, Pennsylvania (motorcycle parts fabrication, painting and Softail^® and touring model assembly); Kansas City, Missouri (motorcycle parts fabrication, painting and Dyna Glide, Sportster^® and VRSC assembly); East Troy, Wisconsin (Buell^® motorcycle assembly); Manaus, Brazil (assembly of select models for Brazilian market).

 

15

 

Financial Services Segment

 

Type of Facility		Location		Approximate Square Feet		Status
Office		Chicago, IL		35,000		Lease expiring 2007
Office		Carson City, NV		100,000		Lease expiring 2004
Office		Reno, NV		14,000		Lease expiring 2004
Office		Plano, TX		16,000		Lease expiring 2007
Office		Oxford, England		6,000		Lease expiring 2017

 

HDFS owns 10 acres of land in Carson City, Nevada on which it intends to construct a 100,000 square foot office building, in place of the existing leased facility in 2004.

 

The Financial Services segment has five office facilities: Chicago, Illinois (corporate headquarters); Carson City, Nevada and Reno, Nevada (retail and insurance operations); Plano, Texas (wholesale operations) and Oxford, England (European wholesale operations).

 

16

 

Item 3.  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. On February 27, 2002, the Company’s motion to dismiss the amended complaint was granted by the Court and the amended complaint was dismissed in its entirety. An appeal was filed with 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 sought unspecified compensatory damages, an order compelling the Company to repair the engines and other relief. On September 23, 2002, the Company’s motion to dismiss was granted by the Court, the complaint was dismissed in its entirety, and no appeal was taken.  On January 14, 2003, the Wisconsin Court of Appeals reversed the trial court’s February 27, 2002 dismissal of the complaint in the first action, and the Company petitioned the Wisconsin Supreme Court for review.  The Company’s petition was granted and oral argument before the Wisconsin Supreme Court was held on November 5, 2003. A decision is expected sometime in 2004 and the Company intends to continue to vigorously defend this matter.  The Company believes that the 5 year/50,000 mile warranty extension it announced in January 2001 adequately addresses the condition for affected owners.

 

17

 

The Company is involved with government agencies and groups of potentially responsible parties in various environmental matters, including a matter involving the clean up of soil and groundwater contamination at its York, Pennsylvania facility. The York facility was formerly used by the U.S. Navy and AMF prior to the purchase of the York facility by the Company from AMF in 1981. Although the Company is not certain as to the full extent of the environmental contamination at the York facility, it has been working with the Pennsylvania Department of Environmental Protection since 1986 in undertaking environmental investigation and remediation activities, including an on-going site-wide remedial investigation/feasibility study (RI/FS).

 

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 York facility (Response Costs). The trust administers the payment of the Response Costs incurred at the York facility as covered by the Agreement.

 

In February 2002, the Company was advised by the U.S. Environmental Protection Agency (EPA) that it considers some of the Company’s remediation activities at the York facility to be subject to the EPA’s corrective action program under the Resource Conservation and Recovery Act (RCRA) and offered the Company the option of addressing corrective action under a RCRA facility lead agreement.  The objectives and procedures for facility lead corrective action under RCRA are consistent with the investigation and remediation already being conducted under the Agreement with the Navy, and the Company agreed to participate in EPA’s corrective action program under a RCRA facility lead agreement.

 

Although the RI/FS is still underway and substantial uncertainty exists concerning the nature and scope of the environmental investigation and remediation that will ultimately be required at the York facility, the Company estimates that its share of the future Response Costs at the York facility will be approximately $7.9 million. The Company has established reserves for this amount, which are included in accrued expenses and other liabilities in the Company’s consolidated balance sheets.

 

The estimate of the Company’s future Response Costs that will be incurred at the York facility 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 2010.

 

18

 

Item 4.  Submission of matters to a vote of security holders

 

No matters were submitted to a vote of shareholders of the Company in the fourth quarter of 2003.

 

Executive officers of the registrant

 

The following sets forth, as of December 31, 2003, the name, age and business experience for the last five years for each of the executive officers of Harley-Davidson, Inc.  Executive officers are defined by the Company as Corporate Officers of Harley-Davidson, Inc. plus all members of the Leadership and Strategy Council (LSC).  The LSC, which is comprised of selected members of senior management from various areas within the Company, makes high-level resource decisions, develops policies, and acts as an advisory group to the Chief Executive Officer.

 

Executive Officers

 

Name		Age
Jeffrey L. Bleustein		64
Chairman and Chief Executive Officer
James M. Brostowitz		51
Vice President and Treasurer
William B. Dannehl		45
Vice President of Strategic Planning and New Business Development
- Harley-Davidson Motor Company
Jon R. Flickinger		46
Vice President of North American Sales and Dealer Services
- Harley-Davidson Motor Company
John A. Hevey		46
Vice President - Harley-Davidson Motor Company and
President and Chief Operating Officer-Buell Motorcycle Company
Ronald M. Hutchinson		56
Vice President, Parts and Accessories-Harley-Davidson Motor Company
Gail A. Lione		54
Vice President, General Counsel and Secretary
James A. McCaslin		55
President and Chief Operating Officer-Harley-Davidson Motor Company
W. Kenneth Sutton, Jr.		55
Vice President, Engineering-Harley-Davidson Motor Company
Donna F. Zarcone		46
President and Chief Operating Officer-Harley-Davidson Financial Services
James L. Ziemer		53
Vice President and Chief Financial Officer

 

19

 

Except for the following persons, all such executive officers have been employed by the Company in an executive officer capacity, as defined above, for more than five years:  William B. Dannehl, Jon R. Flickinger, John A. Hevey, Kenneth Sutton and Donna F. Zarcone. The following is additional biographical information relating to these five executive officers:

 

Mr. Dannehl became the Vice President, Strategic Planning and New Business Development for Harley-Davidson Motor Company in August 2002.  Prior to his current role, Mr. Dannehl served as Vice President and General Manager of York Vehicle Operations since September 1997.  Prior to this Mr. Dannehl served in various capacities at the Company including, Director of Manufacturing for York Vehicle Operations, Product Plant Manager for Powertrain Operations in Milwaukee, and Area Manager of Aluminum Component Machining in Powertrain Operations.  Mr. Dannehl joined the Motor Company in 1993.

 

Mr. Flickinger has served as Vice President, North American Sales and Dealer Serivces for Harley-Davidson Motor Company since April 1999. From July 1997 until March 1999, Mr. Flickinger served as General Sales Manager.  From June 1996 until June 1997, Mr. Flickinger served as Field Sales Manager, and from January 1995 until May 1996, Mr. Flickinger served as Director, Field Operations

 

Mr. Hevey became the President and Chief Operating Officer of Buell Motorcycle Company in January 2001. Prior to that he served as Vice President, General Manager Asia/Pacific and Latin America Regions of the Motor Company since January 1998.  From June 1997 to December 1997, Mr. Hevey served as General Manager Asia/Pacific and Latin America of the Motor Company.

 

Mr. Sutton became the Vice President, Engineering for the Motor Company in 2002.  From 2000 to 2002, Mr. Sutton served as Vice President, Continuous Improvement for the Motor Company.  From 1996 to 2000 Mr. Sutton served as Vice President, Powertrain Operations for the Motor Company.

 

Ms. Zarcone has served as President and Chief Operating Officer of HDFS since August 1998.

 

20

 

PART II

 

Item 5.  Market for Harley-Davidson, Inc. common stock and related shareholder matters

 

Harley-Davidson, Inc. common stock is traded on the New York Stock Exchange, Inc.  The high and low market prices for the common stock, reported as New York Stock Exchange, Inc. Composite Transactions, were as follows:

 

 

The Company paid the following dividends per share:

 

 

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 (1) the number of shares issued in connection with the exercise of stock options occurring on or after January 1, 1998 plus (2) 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 750,000 and 1,089,000 shares of its common stock during 2003 and 2002, respectively, under this authorization.

 

The Board of Directors has also separately authorized the Company to repurchase shares of its outstanding common stock and, as of the beginning of 2003, 9.4 million shares remained under this authorization.  During 2003, the Company repurchased 1.6 million shares of its common stock under this authorization.  Subsequent to year-end the Company repurchased an additional 7.8 million shares under this authorization, at an average price of less than $52 per share.

 

As of March 4, 2004 there were 84,909 shareholders of record of Harley-Davidson, Inc. common stock.

 

21

 

Item 6.   Selected financial data

 

		2003			2002			2001			2000			1999
Income statement data:
Net revenue		$	4,624,274		$	4,090,970		$	3,406,786		$	2,943,346		$	2,482,738
Cost of goods sold		2,958,708			2,673,129			2,253,815			1,979,572			1,666,863
Gross profit		1,665,566			1,417,841			1,152,971			963,774			815,875
Financial services income		279,459			211,500			181,545			140,135			132,741
Financial services expense		111,586			107,273			120,272			102,957			105,056
Operating income from financial services		167,873			104,227			61,273			37,178			27,685
Selling, administrative and engineering expense		684,175			639,366			551,743			485,980			427,701
Income from operations		1,149,264			882,702			662,501			514,972			415,859
Gain on sale of credit card business		—			—			—			18,915			—
Interest income, net		23,088			16,541			17,478			17,583			8,014
Other, net		(6,317		)	(13,416		)	(6,524		)	(2,914		)	(3,080		)
Income before provision for income taxes		1,166,035			885,827			673,455			548,556			420,793
Provision for income taxes		405,107			305,610			235,709			200,843			153,592
Net income		$	760,928		$	580,217		$	437,746		$	347,713		$	267,201
Weighted-average common shares:
Basic		302,271			302,297			302,506			302,691			304,748
Diluted		304,470			305,158			306,248			307,470			309,714
Earnings per common share:
Basic		$	2.52		$	1.92		$	1.45		$	1.15		$	.88
Diluted		$	2.50		$	1.90		$	1.43		$	1.13		$	.86
Dividends paid		$	.195		$	.135		$	.115		$	.098		$	.088
Balance sheet data:
Working capital		$	1,773,354		$	1,076,534		$	949,154		$	799,521		$	430,840
Current finance receivables, net		1,001,990			855,771			656,421			530,859			440,951
Long-term finance receivables, net		735,859			589,809			379,335			234,091			354,888
Total assets		4,923,088			3,861,217			3,118,495			2,436,404			2,112,077
Current finance debt		324,305			382,579			217,051			89,509			181,163
Long-term finance debt		670,000			380,000			380,000			355,000			280,000
Total finance debt		994,305			762,579			597,051			444,509			461,163
Shareholders’ equity		$	2,957,692		$	2,232,915		$	1,756,283		$	1,405,655		$	1,161,080

 

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 Item 7.  Management’s discussion and analysis of financial condition and results of operations

 

Harley-Davidson, Inc. is the parent company for the group of companies doing business as Harley-Davidson Motor Company, Buell Motorcycle Company and Harley-Davidson Financial Services.  Harley-Davidson Motor Company produces heavyweight motorcycles and offers a complete line of motorcycle parts, accessories, apparel and general merchandise.  Harley-Davidson Motor Company manufactures five families of motorcycles: Touring, Dyna Glide, Softail^®, VRSC and Sportster^®.  Buell Motorcycle Company produces sport motorcycles, including four big-twin XB models and the single-cylinder Buell^® Blast^®.  Buell also offers a line of motorcycle parts, accessories, apparel and general merchandise. Harley-Davidson Financial Services provides wholesale and retail financing and insurance programs primarily to Harley-Davidson/Buell dealers and customers.

 

Overview

 

The Company’s eighteen years of record revenues and earnings since its initial public stock offering in 1986 are the result of a combination of factors.  These include the ability to deliver new products to market, attract new customers, retain existing ones and expand capacity in a responsible way. Unique marketplace events have also created special growth opportunities for Harley-Davidson.

 

Based on long-term historical trend analysis, the Company believes that demand for Harley-Davidson motorcycles grows at an average core rate of 7% to 9% per year. However, in most of the 18 years since 1986, the Company’s growth has exceeded this core rate.  The Company believes that its higher growth rate was driven by increasing market share, the stock market bubble and its associated wealth effect of the mid- and late- 1990s, and more recently, the excitement leading up to Harley-Davidson’s 100th Anniversary.  The Company’s growth since 1986 required several factory expansions, which provided the opportunity to thoroughly modernize and improve productivity, quality and manufacturing margins. In 2004 and beyond the Company believes its Harley-Davidson motorcycle unit growth rate will return to a more normal 7% to 9%.(1)

 

As such, the Company has set a wholesale shipment target for Harley-Davidson motorcycles of 317,000 units in 2004 and has established a longer-term goal to ship 400,000 Harley-Davidson units in 2007.(1)  These shipping goals represent annual increases in Harley-Davidson motorcycle units that range from 7% to 9%. The Company believes that by continuing to offer innovative products and services, and by driving productivity gains in all facets of the business that it will achieve earnings growth rates in the mid-teens for the foreseeable future.(1)

 

23

 

The “% Change” figures included in the “Results of Operations” section have been calculated using unrounded dollar amounts and may differ from calculations using the rounded dollar amounts presented.

 

Results of Operations 2003 Compared to  2002

 

Overall

 

The Company’s net revenue for 2003 totaled $4.62 billion, a $533.3 million, or 13.0%, increase over 2002.  Net income for 2003 was $760.9 million compared to $580.2 million in 2002, an increase of 31.1%.  Diluted earnings per share for 2003 was $2.50 on 304.5 million weighted-average shares outstanding compared to $1.90 on 305.2 million weighted-average shares outstanding in 2002, an increase of 31.6% in earnings per share.

 

The Company increased its quarterly dividend payment in June 2003 from $.035 per share to $.04 per share and again in December to $.08 per share which resulted in an aggregate annual dividend of $.195 per share in 2003.

 

Worldwide Motorcycle Unit Shipments

 

 

*Custom motorcycle units, as used in this table, includes Softail, Dyna Glide and other custom models.

 

During 2003, the Company shipped 291,147 Harley-Davidson motorcycle units, 27,494 more units than in 2002. This increase in units was driven by demand for the Company’s 100^th Anniversary models and its new 2004 model year motorcycles.  Shipments during the first eight months of 2003 consisted of the Company’s 100^th Anniversary models as the Company completed its fourteen-month 100^th Anniversary model year.  In September 2003, the Company introduced its new 2004 model year motorcycles, including the completely redesigned family of Sportster motorcycles.

 

The Company’s increase in motorcycle shipments was supported by a manufacturing strategy, which is designed to increase capacity, improve product quality, reduce costs and increase flexibility to respond to changes in the marketplace. During 2003, this included the successful launch of a new factory in York, Pennsylvania for the production of Softail^® motorcycles.

 

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The Company’s wholesale motorcycle unit shipments are distributed through an independent worldwide dealer network.  During 2003, growth in retail sales of the Company’s Harley-Davidson motorcycles outpaced the heavyweight motorcycle (651+cc) industry in the U.S., Europe and Japan/Australia.  Retail sales of the Company’s Harley-Davidson motorcycles were up 8.8% in the United States for 2003. In Europe and Japan/Australia, retail sales of the Company’s Harley-Davidson motorcycles were up 11.8% and 11.7%, respectively, during 2003.  Retail sales information for the United States, Europe and Japan/Australia is as follows (units in thousands):

 

 

(a)          U.S. data provided by the Motorcycle Industry Council.

(b)         Europe data, provided by Giral S.A., includes retail sales in Austria, Belgium, France, Germany, Italy, The Netherlands, Spain, Switzerland, United Kingdom, Denmark, Finland, Greece, Norway, Portugal and Sweden.

(c)          Japan/Australia data provided by ERG, industry sources and the Australian Bureau of Statistics.

 

Net Revenue

(Dollars in Millions)

 

 

The 13.0% increase in net revenue for the Motorcycles segment during 2003 was led by a $460.5 million, or 14.6%, increase in Harley-Davidson motorcycle net revenue.  Harley-Davidson motorcycle revenue was driven by the 10.4% increase in Harley-Davidson motorcycle unit shipments, but also benefited from wholesale price increases, a slightly favorable product mix and favorable foreign currency exchange rates during 2003.

 

Wholesale price increases for the 100^th Anniversary models provided for higher average selling prices on units sold during the first half of 2003 when compared to the same period in 2002. As a result of the extended 100^th Anniversary model year, wholesale shipments of 100th Anniversary models, carrying the same pricing, occurred in the third quarters of both 2003 and 2002.  Finally, revenue in the fourth quarter of 2003 was only slightly impacted by the lower wholesale prices associated with the 2004 model year motorcycles.  Wholesale prices on the 2004 models reflect the elimination of 100^th Anniversary special edition features and as a result are slightly lower than the wholesale prices for the 100^th Anniversary models.

 

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During 2003 the Company experienced product mix changes both within and between its motorcycle families. Changes in product mix within the Company’s motorcycle families generally resulted in higher revenue during 2003 when compared to 2002. The net result of mix changes between motorcycle families did not have a significant net impact on Harley-Davidson motorcycle revenue in 2003.

 

Finally, foreign currency exchange rates had a favorable effect on revenue of approximately $60 million in 2003, primarily as a result of stronger foreign currencies in Europe and Japan, when compared to 2002.

 

During 2003, Buell^® motorcycle net revenue was up $9.2 million, compared to 2002, on 969 fewer unit shipments.  The average selling price per unit was higher in 2003 than in the prior year due to a change in the mix of units sold.  Buell shipments in 2003 included a higher percentage of the more expensive XB models when compared to 2002.  Buell shipments in 2003 consisted of 8,784 XB models and 1,190 Blast models compared to 6,887 XB models and 4,056 Blast models in 2002.

 

During 2003, net revenue from Parts and Accessories (P&A) totaled $712.8 million, a 13.3% increase over 2002.  The 2003 increase in P&A revenue was driven primarily by higher motorcycle shipments.  P&A revenue was positively impacted in 2003 and 2002 by sales of 100^th Anniversary P&A products.  Total P&A revenue for 2003 included $32.1 million from sales of 100th Anniversary P&A products compared to $34.0 million last year. Excluding the impact of 100^th Anniversary revenue from both 2003 and 2002 the P&A revenue growth rate for 2003 is 14.4%. On a longer-term basis the Company expects that the growth rate for P&A revenue will be slightly higher than the growth rate for Harley-Davidson^® motorcycle units.(1)

 

General Merchandise revenue during 2003, was $211.4 million, down 8.7% from the same period last year. Sales from 100th Anniversary General Merchandise products accounted for $9.3 million of total General Merchandise revenue during 2003 compared to $52.2 million during 2002. Sales of 100^th Anniversary General Merchandise were more heavily concentrated in 2002 in order to prepare the Company’s independent dealers for the fourteen month-long 100^th Anniversary celebration.  Excluding the revenue from the sale of 100^th Anniversary products from both 2003 and 2002 the General Merchandise revenue growth rate for 2003 is 12.7%. The Company expects that the long-term growth rate for General Merchandise will be lower than the growth rate for Harley-Davidson motorcycle units. (1)

 

Gross Profit

 

Gross profit in 2003 of $1.7 billion was $247.7 million or 17.5% higher than gross profit in 2002.  The increase in gross profit is primarily related to the increase in net revenue.  The gross profit margin was 36.0% in 2003 compared to 34.7% in 2002. The increase in gross margin in 2003 was driven by wholesale price increases on 2003 models, favorable motorcycle product mix and foreign currency exchange rates.  Gross profit was higher in 2003 when compared to 2002 by approximately $38 million from foreign currency exchange rate changes to both revenue and costs.

 

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Financial Services

(In Millions)

 

 

Financial services income in 2003 was $279.5 million, an increase of $68.0 million over 2002. Operating income from financial services in 2003 was $167.9 million, an increase of $63.7 million over 2002. The increase in operating income in 2003 was driven by continued strong marketplace acceptance of HDFS’ finance and insurance products as well as increased securitization related income.

 

During 2003, HDFS sold $1.7 billion of retail motorcycle loans through securitization transactions resulting in gains of $82.2 million.  During 2002, HDFS sold approximately $1.3 billion of retail motorcycle loans resulting in gains of $56.1 million.  The net gain as a percentage of the amount of loans securitized increased from 4.39% in 2002 to 4.70% in 2003 as HDFS continued to benefit from a favorable interest rate environment. Gains on securitization transactions are based on certain assumptions (credit loss, prepayment, and discount rate) which are outlined in Note 3 to the consolidated financial statements.

 

During 2003, income on investment in retained securitization interests increased $13.4 million over 2002 as the portfolios continued to perform better than anticipated.

 

Changes in HDFS’ allowance for credit losses during 2003 and 2002 were as follows (in millions):

 

		2003			2002
Balance, beginning of period		$	31.0		$	28.7
Provision for credit losses		4.1			6.2
Charge-offs		(3.8		)	(3.9		)
Balance, end of period		$	31.3		$	31.0

 

HDFS’ periodic evaluation of the adequacy of the allowance for credit losses is generally based on HDFS’ past loan loss experience, known and inherent risks in the portfolio, and current economic conditions.  HDFS believes the allowance is adequate to cover the losses of principal and accrued interest in the existing portfolio.

 

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Operating Expenses

(Dollars in Millions)

 

		2003			2002			Increase			% Change
Motorcycles and Related Products		$	668.7		$	626.7		$	42.0		6.7	%
Corporate		15.5			12.6			2.9			22.6
Total operating expenses		$	684.2		$	639.3		$	44.9		7.0	%

 

Total operating expenses during 2003 increased $44.9 million or 7.0% compared to last year. Operating expenses as a percent of net revenue were 14.8% and 15.6% for 2003 and 2002, respectively. Operating expenses, which include selling, administrative and engineering expenses, increased in connection with the Company’s ongoing investment in initiatives designed to support its current and future growth objectives.  However, the increase in 2003 was partially offset by lower net expenditures related to the Company’s 100^th Anniversary celebration as compared to 2002.  The Company began its fourteen month-long 100^th Anniversary celebration during the third quarter of 2002 and net expenses associated with the celebration were most heavily concentrated in 2002.  Comparatively, costs incurred during 2003 for the 100^th Anniversary celebration were mostly offset by event proceeds and sponsorships.

 

Other, net

 

Other net expense was $6.3 million and $13.4 million in 2003 and 2002, respectively.  The most significant component of other, net expense in 2003 was $4.5 million in charitable contributions.  During 2002, the most significant components of other net expense were $7.1 million in losses on the disposal of fixed assets, $5.5 million in charitable contributions and $4.8 million in costs associated with environmental matters.

 

Interest Income, net

 

Net interest income (excluding Financial Services interest income) in 2003 was $23.1 million compared to $16.5 million in 2002. The increase in net interest income resulted from higher average balances of cash and marketable securities during 2003 when compared to 2002.  In connection with the Company’s capacity expansion efforts, $3.9 million of interest cost was capitalized during 2003 compared to $2.7 million during 2002.

Consolidated Income Taxes

 

The Company’s effective income tax rate was 34.7% and 34.5% during 2003 and 2002, respectively.  The Company’s effective income tax rate increased during 2003 as pre-tax income grew faster than certain permanent tax differences.  The Company expects that the income tax rate will be 35.5% during 2004.(1)

 

28

 

Results of Operations 2002 Compared to  2001

 

Overall

 

The Company’s net revenue for 2002 totaled $4.09 billion, a $684.2 million, or 20.1%, increase over 2001.  Net income for 2002 was $580.2 million compared to $437.7 million in 2001, an increase of 32.5%.  Diluted earnings per share for 2002 was $1.90 on 305.2 million weighted-average shares outstanding compared to $1.43 on 306.2 million weighted-average shares outstanding in 2001, an increase of 32.9% in earnings per share.

 

The Company increased its quarterly dividend payment in June 2002 from $.03 per share to $.035 per share which resulted in an aggregate annual dividend of $.135 per share in 2002.

 

Worldwide Motorcycle Unit Shipments

 

 

During 2002, the Company shipped 263,653 Harley-Davidson motorcycle units, 29,192 more units than in 2001. 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.  The VRSC V-Rod motorcycle was first introduced in October 2001, making 2002 the first full year of shipments for that family of motorcycles.

 

29

 

Retail sales of the Company’s Harley-Davidson motorcycles were up 18.3% in the United States for 2002. In Europe and Japan/Australia, retail sales of the Company’s Harley-Davidson motorcycles were up 3.4% and 7.4%, respectively, during 2002. Retail sales information for the United States, Europe and Japan/Australia is as follows (units in thousands):

 

 

(a)          U.S. data provided by the Motorcycle Industry Council.

(b)         Europe data provided by Giral S.A., includes retail sales in Austria, Belgium, France, Germany, Italy, The Netherlands, Spain, Switzerland, United Kingdom, Denmark, Finland, Greece, Norway, Portugal and Sweden.

(c)          Japan/Australia data provided by ERG, industry sources and the Australian Bureau of Statistics.

 

Net Revenue

(Dollars in Millions)

 

 

The Motorcycles segment recorded a 20.1% increase in net revenue driven by the 12.5% increase in Harley-Davidson unit shipments.  In addition to higher unit volumes, the increase in revenue in 2002 was also driven by favorable product mix and the model year wholesale price increase.

 

Motorcycle product mix was favorable in 2002 with a higher percentage of shipments consisting of custom motorcycles and a smaller percentage of shipments consisting of lower priced Sportster^® models, when compared to 2001.  In addition, wholesale price increases related to the new model year provided for higher average selling prices on units sold in 2002 when compared to 2001.

 

30

 

In 2002, Buell motorcycle net revenue was up $5.2 million from 2001 on 1,018 additional unit shipments.  During 2002, the Company shipped 6,887 Buell Big Twin units compared to 6,436 units in 2001. During 2002 Buell completely revamped its Big Twin line up with the introduction of the XB series which currently includes the new Buell Firebolt™ XB9R and the new Buell Lightning^® XB9S. During 2002 the Company also shipped 4,056 units of the smaller and lower priced Buell Blast^® compared to 3,489 units in 2001. Blast motorcycle units represented 37% of total Buell units shipped in 2002 compared to 35% in 2001.

 

During 2002, P&A net revenue totaled $629.2 million, up $119.6 million, or 23.5%, compared to 2001.  The increase in P&A revenue was driven by continued demand for Harley-Davidson motorcycles and sales of the Company’s 100^th Anniversary products. Total 2002 revenue from the sale of 100^th Anniversary P&A products was $34.0 million.

 

General Merchandise net revenue for 2002 of $231.5 million was up $67.6 million, or 41.2%, compared to 2001. The increase in General Merchandise revenue was driven primarily by sales of 100^th Anniversary commemorative products which totaled approximately $52.2 million in 2002.

 

Gross Profit

 

Gross profit in 2002 of $1.4 billion was $264.9 million or 23.0% higher than gross profit in 2001.  The increase in gross profit is primarily related to the increase in net revenue.  The gross profit margin was 34.7% in 2002 compared to 33.8% in 2001. The increase in gross margin in 2002 was driven by favorable product mix and the model year wholesale price increase as discussed under “Net Revenue” earlier in this section.

 

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Financial Services

(In Millions)

 

 

Financial services income in 2002 was $211.5 million, an increase of $30.0 million, or 16.5%, over 2001. Operating income from financial services in 2002 was $104.2 million, an increase of $42.9 million, or 70.1%, over 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 a lower provision for credit losses, lower borrowing costs, and higher securitization gains.  During 2001, the allowance for credit losses was increased in response to significant growth in the wholesale and retail loan portfolios, a decline in economic conditions, and HDFS’ uncertainty of consumer behavior after the September 11^th tragedies. During 2002, the required provision for credit losses decreased as portfolio performance was better than expected.  The Company believes that the allowance for credit losses is adequate at December 31, 2002.

 

During 2002 and 2001, HDFS sold approximately $1.3 billion and $1.0 billion, respectively, of retail motorcycle loans through securitization transactions. In connection with the securitization transactions, HDFS recorded gains of $56.1 million and $45.0 million in 2002 and 2001, respectively.  In both 2002 and 2001, gains on securitizations were favorably impacted by declining market interest rates.

 

32

 

Operating Expenses

(Dollars in Millions)

 

		2002			2001			Increase			% Change
Motorcycles and Related Products		$	626.7		$	539.6		$	87.1		16.1	%
Corporate		12.6			12.1			.5			4.7
Total operating expenses		$	639.3		$	551.7		$	87.6		15.9	%

 

Total operating expenses in 2002 increased $87.6 million or 15.9% compared to 2001. Operating expenses as a percent of net revenue were 15.6% and 16.2% for 2002 and 2001, respectively.  The increase in operating expenses, which include 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. During 2002, this included expenses associated with the Company’s fourteen month-long 100th Anniversary celebration.  Other increases in operating expenses related to higher employee benefit costs driven by the increasing cost of health care and pensions.

 

Other, net

 

Other net expense was $13.4 million and $6.5 million in 2002 and 2001, respectively.  The most significant components of other net expense in 2002 were $7.1 million in losses on the disposal of fixed assets, $5.5 million in charitable contributions and $4.8 million in costs associated with environmental matters.

 

Interest Income, net

 

Net interest income (excluding Financial Services interest income) in 2002 was $16.5 million compared to $17.5 million in 2001. Net interest income was lower than prior year primarily due to lower interest rates in 2002 when compared to 2001.  In connection with the Company’s capacity expansion plans, approximately $2.7 million of interest was capitalized during 2002.  No interest was capitalized in 2001.

 

Consolidated Income Taxes

 

The Company’s effective income tax rate was 34.5% and 35.0% during 2002 and 2001, respectively.

 

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Other Matters

 

Critical Accounting Policies

 

The Company’s financial statements are based on the selection and application of significant accounting policies, which require management to make significant estimates and assumptions. Management believes that the following are some of the more critical judgment areas in the application of accounting policies that currently affect the Company’s financial condition and results of operations.

 

Finance Receivable Securitizations - The Company sells retail motorcycle loans through securitization transactions utilizing qualifying special purpose entities. Upon sale of retail loans in a securitization transaction, HDFS receives cash and retains interest-only strip receivables, servicing rights, and cash reserve account deposits, all of which are collectively referred to as retained interests in the securitized receivables. Retained interests are carried at fair value and periodically reviewed for impairment. Market value quotes are generally not available for retained interests, therefore HDFS estimates fair value based on the present value of future expected cash flows using management’s best estimates of the key assumptions for credit losses, prepayment speeds and discount rates. The impact of changes to key assumptions is shown in Note 3 of the Consolidated Financial Statements.

 

Gains on current year securitizations from the sale of retail loans are recorded as a component of financial services income and are based in part on certain assumptions including expected credit losses, prepayment speed, and discount rates. Gain on sale also depends on the original carrying amount of the retail loans, which is allocated between the assets sold and the retained interests based on their relative fair value at the date of transfer.

 

Finance Receivable Credit Losses - The allowance for uncollectible accounts is maintained at a level management believes is adequate to cover the losses of principal and accrued interest in the existing finance receivables portfolio. Management’s periodic evaluation of the adequacy of the allowance is generally based on HDFS’ past loan loss experience, known and inherent risks in the portfolio, current economic conditions, specific borrower’s ability to repay, and the estimated value of any underlying collateral.

 

34

 

Pensions and Other Postretirement Benefits - Retirement Plan (Pension, SERPA and Post-retirement health care) obligations and costs are developed from actuarial valuations.  The valuation of projected benefit obligations and net periodic benefit costs relies on key assumptions including discount rates, long-term expected return on plan assets, future compensation and medical trend rates.  The Company evaluates and updates all of its assumptions annually in conjunction with its September 30 actuarial measurement date.  Although the Company’s process results in assumptions that are valid as of the measurement date, certain assumptions are driven by short term external economic factors, and as result, these assumptions are more volatile.  Based on recent economic conditions the Company has changed its assumptions for discount rates and medical trend rates.  Although the Company’s 2004 Retirement Plan costs have already been determined in connection with the September 30, 2003 measurement process a change in either of these two assumptions could have a material impact on the valuation of costs as of the Company’s next measurement date.  The following information is provided to illustrate the sensitivity of these obligations and costs to changes in these major assumptions (in thousands).

 

		Amounts based on Current Assumptions			Impact of a 1% decrease in the Discount Rate			Impact of a 1% increase in the Medical Trend Rate
2003 Net periodic benefit costs
Pension and SERPA		$	54,468		$	14,214		n/a
Postretirement healthcare		$	30,449		$	3,675		$	3,719
2003 Projected benefit obligations
Pension and SERPA		$	711,357		$	119,165		n/a
Postretirement healthcare		$	250,863		$	35,685		$	27,271

 

This information is provided only to illustrate the sensitivity of these amounts to certain assumptions and not as a means to predict future amounts.  The calculation of Retirement plan obligations and costs is based on many factors in addition to those discussed here.  This information should be considered in combination with the information provided in Note 6 to the consolidated financial statements.

 

Contractual Obligations

 

A summary of the Company’s expected payments for significant contractual obligations as of December 31, 2003 is as follows (in thousands):

 

		2004			2005- 2006			2007- 2008			Thereafter			Total
Finance Debt		$	324,305		$	241,114		$	428,886		$	—		$	994,305
Operating Leases		6,155			7,892			5,841			17,283			37,171
		$	330,460		$	249,006		$	434,727		$	17,283		$	1,031,476

 

As of December 31, 2003, the Company had no material purchase obligations other than those created in the ordinary course of business related to inventory and property, plant and equipment which generally have terms of less than 90 days.  The Company also has long-term obligations related to its pension and postretirement plans which are discussed in detail in Note 6 to the financial statements.  As of its most recent actuarial measurement date, no pension plan contributions are required in 2004 and postretirement medical claims are paid as they are submitted.

 

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Off-Balance Sheet Arrangements

 

As part of its securitization program, HDFS transfers retail motorcycle loans to a special purpose bankruptcy-remote wholly-owned subsidiary.  The subsidiary sells the retail loans to a securitization trust in exchange for the proceeds from asset-backed securities issued by the securitization trust.  The asset-backed securities, usually notes with various maturities and interest rates, are secured by future collections of the purchased retail installment loans.  Activities of the securitization trust are limited to acquiring retail loans, issuing asset-backed securities and making payments on securities to investors.  Due to the nature of the assets held by the securitization trust and the limited nature of its activities, the securitization trusts are considered qualifying special purpose entities (QSPEs) as defined by Statement of Financial Accounting Standards (SFAS) No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities”.  In accordance with SFAS No. 140, assets and liabilities of the QSPEs are not consolidated in the financial statements of HDFS.

 

HDFS does not guarantee securities issued by the securitization trusts or projected cash flows from the related loans purchased from HDFS.  Recourse against HDFS related to each securitization transaction is limited to the respective investment in retained securitization interests, excluding servicing rights. Total investment in retained securitization interests at December 31, 2003 is $254.4 million. The securitization trusts have a limited life and generally terminate upon final distribution of amounts owed to the investors in the asset-backed securities.  See note 3 to the consolidated financial statements for further discussion of HDFS’ securitization program.

 

Commitments and Contingencies

 

The Company is subject to lawsuits and other claims related to environmental, product and other matters. In determining required reserves related to these items, the Company carefully analyzes cases and considers the likelihood of adverse judgments or outcomes, as well as the potential range of probable loss.  The required reserves are monitored on an on-going basis and are updated based on new developments or new information in each matter.

 

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. On February 27, 2002, the Company’s motion to dismiss the amended complaint was granted by the Court and the amended complaint was dismissed in its entirety. An appeal was filed with 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 sought unspecified compensatory damages, an order compelling the Company to repair the engines and other relief. On September 23, 2002, the Company’s motion to dismiss was granted by the Court, the complaint was dismissed in its entirety, and no appeal was taken.  On January 14, 2003, the Wisconsin Court of Appeals reversed the trial court’s February 27, 2002 dismissal of the complaint in the first action, and the Company petitioned the Wisconsin Supreme Court for review.  The Company’s petition was granted and oral argument before the Wisconsin Supreme Court was held on November 5, 2003.  A decision is expected sometime in 2004, and the Company intends to continue to vigorously defend this matter.  The Company believes that the 5 year/50,000 mile warranty extension it announced in January 2001 adequately addresses the condition for affected owners.

 

36

 

The Company is involved with government agencies and groups of potentially responsible parties in various environmental matters, including a matter involving the clean up of soil and groundwater contamination at its York, Pennsylvania facility. The York facility was formerly used by the U.S. Navy and AMF prior to the purchase of the York facility by the Company from AMF in 1981. Although the Company is not certain as to the full extent of the environmental contamination at the York facility, it has been working with the Pennsylvania Department of Environmental Protection since 1986 in undertaking environmental investigation and remediation activities, including an on-going site-wide remedial investigation/feasibility study (RI/FS).

 

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 York facility (Response Costs). The trust administers the payment of the Response Costs incurred at the York facility as covered by the Agreement.

 

In February 2002, the Company was advised by the U.S. Environmental Protection Agency (EPA) that it considers some of the Company’s remediation activities at the York facility to be subject to the EPA’s corrective action program under the Resource Conservation and Recovery Act (RCRA) and offered the Company the option of addressing corrective action under a RCRA facility lead agreement.  The objectives and procedures for facility lead corrective action under RCRA are consistent with the investigation and remediation already being conducted under the Agreement with the Navy, and the Company agreed to participate in EPA’s corrective action program under a RCRA facility lead agreement.

 

Although the RI/FS is still underway and substantial uncertainty exists concerning the nature and scope of the environmental investigation and remediation that will ultimately be required at the York facility, the Company estimates that its share of the future Response Costs at the York facility will be approximately $7.9 million. The Company has established reserves for this amount, which are included in Accrued expenses and other liabilities in the consolidated balance sheets.

 

The estimate of the Company’s future Response Costs that will be incurred at the York facility 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 2010.

 

37

 

Liquidity and Capital Resources as of December 31, 2003

 

Operating Activities

 

The Company’s main source of liquidity is cash from operating activities which consists of net income adjusted for non-cash operating activities, collections of retained securitization interests, pension plan contributions, the tax benefit of stock option exercises and changes in current assets and liabilities.

 

The Company generated $935.6 million of cash from operating activities during 2003 compared to $775.6 million in 2002.  The largest component of cash from operating activities is net income adjusted for depreciation, which was approximately $957.8 million in 2003 compared to $756.0 million in 2002.

 

During 2003 and 2002, the Company contributed $192.0 million and $153.6 million, respectively, to its defined benefit pension plans. These contributions were made from cash on hand for the direct purpose of improving the funded status of the Company’s pension plans and were in excess of the minimum required amounts for the plans.

 

Cash provided by operating activities is also impacted by changes in current assets and liabilities.  Changes in these balances decreased operating cash flows by approximately $18.6 million in 2003 and increased operating cash flows by $16.1 million during 2002. Changes in current assets and liabilities during 2003 and 2002 consisted of the following (in millions):

 

 

The $18.6 million decrease in operating cash flow which resulted from changes in current assets and liabilities, during 2003, was driven by the negative cash flow impact related to an increase in finance receivables - accrued interest and other, during 2003.  The current asset balance for finance receivables - accrued interest and other grew in connection with the increase in the finance receivable loan balances during 2003.

 

Investing Activities

 

The Company’s investing activities consist primarily of capital expenditures, finance receivables activity and net changes in marketable securities.  Net cash used in investing activities was $484.7 million and $1.01 billion during 2003 and 2002, respectively.

 

Capital expenditures were $227.2 million and $323.9 million during 2003 and 2002, respectively.  During 2003, the Company completed capacity expansion efforts at two of the Company’s existing locations.  These efforts included a 350,000 square foot factory in York, Pennsylvania and a 165,000 square foot addition to the Company’s Product Development Center in Wauwatosa, Wisconsin.  The Company estimates that total capital expenditures required in 2004 will be in the range from $250 to $300 million. (1)  The Company anticipates it will have the ability to fund all capital expenditures in 2004 with internally generated funds.(1)

 

38

 

During 2003 and 2002, Financial Services received proceeds from securitizations of $1.72 billion and $1.25 billion, respectively. Finance receivables acquired or originated net of collections resulted in a $1.99 billion use of cash during 2003 compared to a $1.64 billion use of cash during 2002.

 

Financing Activities

 

The Company’s financing activities consist primarily of finance debt activity, stock transactions and dividend payments.  Net cash provided by financing activities during 2003 and 2002 was $80.6 million and $79.9 million, respectively.

 

In addition to operating cash flow and asset-backed securitizations, HDFS is financed by the issuance of commercial paper, borrowings under revolving credit facilities, medium term notes, senior subordinated debt and borrowings from the Company.  HDFS’ outstanding debt consisted of the following as of December 31 (in thousands):

 

		2003			2002
Commercial paper		$	406,907		$	592,932
Domestic credit facilities		95,913			66,546
European credit facility		62,599			73,101
Medium term notes		398,886			—
Senior subordinated notes		30,000			30,000
		$	994,305		$	762,579

 

HDFS has agreements with financial institutions providing bank credit facilities totaling $750 million (Domestic Credit Facilities). The Domestic Credit Facilities consist of a $350 million revolving term facility due in 2005 and a $400 million 364-day revolving credit facility due September 2004.  HDFS expects that the $400 million credit facility expiring in September 2004 will be renewed or that suitable alternatives exist.(1)

 

The primary uses of the Domestic Credit Facilities are to provide liquidity to the unsecured commercial paper program and to fund HDFS’ business operations.

 

Subject to limitations, HDFS may issue up to $750 million of short-term commercial paper with maturities up to 270 days. Outstanding commercial paper may not exceed the unused portion of the Domestic Credit Facilities.  As a result, the combined total of commercial paper and borrowings under the Domestic Credit Facilities was limited to $750 million as of December 31, 2003.

 

HDFS has a $200 million European revolving credit facility due July 2005.  The primary purpose of the facility is to fund HDFS’ European business operations.

 

During November 2003, HDFS issued $400 million in medium term notes (Notes) due in December 2008.  The Notes provide for semi-annual interest payments and principal due at maturity.  At December 31, 2003, the Notes include a fair value adjustment of $1.1 million due to interest rate swap agreements.  The effect of the interest rate swap agreements is to convert the interest rate on the Notes from a fixed to a floating rate.

 

HDFS has $30 million of ten year senior subordinated notes, expiring in 2007.

 

HDFS has a revolving credit line with the Company whereby HDFS may borrow up to $210 million from the Company at a market interest rate.  As of December 31, 2003, HDFS had no outstanding borrowings owed to the Company under this agreement.  As of December 31, 2002, HDFS had $100 million in outstanding borrowings to the Company under this agreement.  The $100 million loan was eliminated upon consolidation and therefore is not included in finance debt on the consolidated balance sheets.

 

In connection with debt agreements, HDFS has various operating and financial covenants and remains in compliance at December 31, 2003.  The Company has a support agreement with HDFS whereby, if required, the

 

39

 

Company agrees to provide HDFS certain 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.  No amount has ever been provided to HDFS under the support agreement.

 

The Company expects future activities of HDFS will be financed from funds internally generated by HDFS, sale of loans through securitization programs, issuance of commercial paper and medium term notes, borrowings under revolving credit facilities, advances or loans from the Company and subordinated debt. (1)

 

During 2003 and 2002 the Company repurchased a total of 2,346,000 and 1,089,000 shares of it common stock, at weighed average prices of $44.28 and $52.17, respectively.

 

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 (1) the number of shares issued in connection with the exercise of stock options occurring on or after January 1, 1998 plus (2) 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 750,000 and 1,089,000 shares of its common stock during 2003 and 2002, respectively, under this authorization.

 

In addition, the Board of Directors has also separately authorized the Company to repurchase shares of the Company’s outstanding common stock.  During 2003, the Company repurchased 1,596,000 shares of its common stock under this authorization. As of December 31, 2003 the Company may repurchase an additional 7,804,000 shares of common stock under this authorization.

 

During the fourth quarter of 2003 the Company increased its quarterly dividend payment by 100% over the previous quarter resulting in a dividend of $.08 per share.  During 2003 the Company made four quarterly dividend payments totaling $59.0 million or $.195 per share.

 

40

 

Risk Factors

 

The Company’s ability to meet the targets and expectations noted in this Form 10-K depends 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 P&A/general merchandise supplier backorders, (v) sell all of the Harley-Davidson motorcycles it plans 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 as a result of work stoppages, difficulty with suppliers, natural causes, terrorism 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).

 

41

 

Item 7a.  Quantitative and qualitative disclosures about market risk

 

The Company is exposed to market risk from changes in foreign exchange rates and interest rates.  To reduce such risks, the Company selectively uses derivative 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.

 

A discussion of the Company’s accounting policies for derivative financial instruments is included in the Summary of Significant Accounting Policies in Note 1 to the consolidated financial statements, and further disclosure relating to the fair value of derivative financial instruments is included in Note 10 to the consolidated financial statements.

 

The Company sells its products internationally and in most markets those sales are made in the foreign country’s local currency.  As a result, the Company’s earnings can be affected by fluctuations in the value of the U.S. dollar relative to foreign currency.  The Company utilizes foreign currency contracts to mitigate the effect of these fluctuations on earnings. The foreign currency contracts are entered into with banks and allow the Company to exchange a specified amount of foreign currency for U.S. dollars at a future date, based on a fixed exchange rate.  At December 31, 2003 these contracts represented a combined U.S. dollar equivalent of approximately $268.9 million.  The Company estimates that a uniform 10% weakening in the value of the dollar relative to the currency underlying these contracts would result in a decrease in the fair value of the contracts of approximately $26.8 million.

 

The Company’s exposure to the Japanese yen is substantially offset by the existence of a natural hedge, which is sustained through offsetting yen cash inflows from sales with yen cash outflows for motorcycle component purchases and other operating expenses.

 

HDFS’ earnings are affected by changes in interest rates.  HDFS utilizes interest rate swaps to reduce the impact of fluctuations in interest rates on its securitization transactions and debt.  As of December 31, 2003, HDFS had interest rate swaps outstanding with a notional value of $801.8 million.  HDFS estimates that a 10% increase in interest rates would result in a $2.4 million decrease in the fair value of the agreements.

 

42

 

(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,” “plans,” “targets” or  “estimates” or words of similar meaning.  Similarly, statements that describe the Company’s future plans, objectives, outlooks, 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.

 

43

 

Item 8.  Consolidated financial statements and supplementary data

 

	Report of Management
	Report of the Audit Committee
	Report of Ernst & Young LLP, independent auditors
	Consolidated statements of income
	Consolidated balance sheets
	Consolidated statements of cash flows
	Consolidated statements of shareholders’ equity
	Notes to consolidated financial statements
	Supplementary data Quarterly financial data (unaudited)

 

44

 

REPORT OF MANAGEMENT

 

The consolidated financial statements of Harley-Davidson, Inc. were prepared by the Company’s management, which is responsible for their reliability and objectivity. The statements have been prepared in conformity with accounting principles generally accepted in the United States and, as such, include amounts based on informed estimates and judgements of management with consideration given to materiality. Financial information elsewhere in this annual report is consistent with that in the financial statements.

 

Management is further responsible for maintaining a system of internal control to provide reasonable assurance that the Company’s books and records reflect the transactions of the Company; that assets are safeguarded; and that management’s established policies and procedures are followed. Management systematically reviews and modifies the system of internal control to improve its effectiveness. The internal control system is augmented by the communication of accounting and business policies throughout the Company, the careful selection, training and development of qualified personnel, the delegation of authority and establishment of responsibilities.

 

Independent auditors are engaged to audit the financial statements of the Company and issue a report thereon. They have informed management and the Audit Committee of the Board of Directors that their audits were conducted in accordance with auditing standards generally accepted in the United States, which requires a consideration of internal control to determine the nature, timing and extent of audit testing. Management reviews the recommendations of the independent auditors. Control procedures have been implemented or revised as appropriate to respond to these recommendations. In management’s opinion, as of December 31, 2003, the internal control system was functioning effectively and accomplished the objectives discussed herein.

 

 

Jeffrey L. Bleustein		James L. Ziemer
Chairman and Chief Executive Officer		Vice President and Chief Financial Officer

 

REPORT OF THE AUDIT COMMITTEE

 

The Audit Committee of the Board of Directors reviews the Company’s financial reporting process, the audit process and the process for monitoring compliance with the laws and regulations.  All of the Audit Committee members are independent in accordance with the Audit Committee requirements of the New York Stock Exchange, Inc.

 

The Audit Committee of the Board has reviewed and discussed with management the audited financial statements of the Company for the 2003 fiscal year and has discussed with representatives of Ernst & Young LLP, the Company’s independent auditors for the 2003 fiscal year, the matters required to be discussed by Statement of Auditing Standards No. 61, other professional standards and regulatory requirements currently in effect.  The Audit Committee has received the written disclosures and the letter from the independent auditors required by Independence Standards Board Standard No. 1, as currently in effect, and has discussed with representatives of Ernst & Young LLP the independence of Ernst & Young LLP.  Based on the review and discussions referred to above, the Audit Committee has recommended to the Board of Directors that the audited financial statements for the 2003 fiscal year be included in the Company’s Annual Report.

 

Audit Committee of the Board of Directors

 

Richard I. Beattie

George L. Miles, Jr.

James A. Norling Chairman

 

45

 

REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

 

We have audited the accompanying consolidated balance sheets of Harley-Davidson, Inc. as of December 31, 2003 and 2002, and the related consolidated statements of income, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2003.  Our audits also included the financial statement schedule listed in the index at item 15(a).  These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

 

We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Harley-Davidson, Inc. at December 31, 2003 and 2002, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States.  Also in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

 

As discussed in Note 1 to the consolidated financial statements, on January 1, 2002, the Company changed its method of accounting for goodwill.

 

 

Milwaukee, Wisconsin	ERNST & YOUNG LLP
January 19, 2004

 

46

 

HARLEY-DAVIDSON, INC.

CONSOLIDATED STATEMENTS OF INCOME

Years ended December 31, 2003, 2002 and 2001

(In thousands, except per share amounts)

 

 

		2003			2002			2001
Net revenue		$	4,624,274		$	4,090,970		$	3,406,786
Cost of goods sold		2,958,708			2,673,129			2,253,815
Gross profit		1,665,566			1,417,841			1,152,971
Financial services income		279,459			211,500			181,545
Financial services expense		111,586			107,273			120,272
Operating income from financial services		167,873			104,227			61,273
Selling, administrative and engineering expense		684,175			639,366			551,743
Income from operations		1,149,264			882,702			662,501
Interest income, net		23,088			16,541			17,478
Other, net		(6,317		)	(13,416		)	(6,524		)
Income before provision for income taxes		1,166,035			885,827			673,455
Provision for income taxes		405,107			305,610			235,709
Net income		$	760,928		$	580,217		$	437,746
Basic earnings per common share		$	2.52		$	1.92		$	1.45
Diluted earnings per common share		$	2.50		$	1.90		$	1.43
Cash dividends per common share		$	.195		$	.135		$	.115

 

The accompanying notes are an integral part of the consolidated financial statements.

 

47

 

HARLEY-DAVIDSON, INC.

CONSOLIDATED BALANCE SHEETS

December 31, 2003 and 2002

(In thousands, except share amounts)

 

		2003			2002
ASSETS
Current assets:
Cash and cash equivalents		$	812,449		$	280,928
Marketable securities		510,211			514,800
Accounts receivable, net		112,406			108,694
Current portion of finance receivables, net		1,001,990			855,771
Inventories		207,726			218,156
Deferred income taxes		51,156			41,430
Prepaid expenses & other current assets		33,189			46,807
Total current assets		2,729,127			2,066,586
Finance receivables, net		735,859			589,809
Property, plant, and equipment, net		1,046,310			1,032,596
Goodwill		53,678			49,930
Other assets		358,114			122,296
		$	4,923,088		$	3,861,217
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	223,902		$	226,977
Accrued expenses and other liabilities		407,566			380,496
Current portion of finance debt		324,305			382,579
Total current liabilities		955,773			990,052
Finance debt		670,000			380,000
Other long-term liabilities		86,337			123,353
Postretirement health care benefits		127,444			105,419
Deferred income taxes		125,842			29,478
Commitments and contingencies (Note 5)
Shareholders’ equity:
Series A Junior participating preferred stock, none issued		—			—
Common stock, 326,489,291 and 325,298,404 shares issued in 2003 and 2002, respectively		3,266			3,254
Additional paid-in capital		419,455			386,284
Retained earnings		3,074,037			2,372,095
Accumulated other comprehensive income (loss)		47,174			(46,266		)
		3,543,932			2,715,367
Less:
Treasury stock (24,978,798 and 22,636,295 shares in 2003 and 2002, respectively), at cost		(586,240		)	(482,360		)
Unearned compensation		—			(92		)
Total shareholders’ equity		2,957,692			2,232,915
		$	4,923,088		$	3,861,217

 

The accompanying notes are an integral part of the consolidated financial statements.

 

48

 

HARLEY-DAVIDSON, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years ended December 31, 2003, 2002 and 2001

(In thousands)

 

		2003			2002			2001
Cash flows from operating activities:
Net income		$	760,928		$	580,217		$	437,746
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		196,918			175,778			153,061
Provision for long-term employee benefits		76,422			57,124			40,882
Provision for finance credit losses		4,076			6,167			22,178
Current year gain on securitizations		(82,221		)	(56,139		)	(45,037		)
Collection of retained securitization interests		118,113			89,970			58,421
Contributions to pension plans		(192,000		)	(153,636		)	(19,294		)
Tax benefit from the exercise of stock options		13,805			14,452			44,968
Deferred income taxes		42,105			38,560			(3,539		)
Other		16,051			7,057			3,045
Net changes in current assets and current liabilities		(18,644		)	16,089			57,773
Total adjustments		174,625			195,422			312,458
Net cash provided by operating activities		935,553			775,639			750,204
Cash flows from investing activities:
Capital expenditures		(227,230		)	(323,866		)	(290,381		)
Finance receivables acquired or originated		(6,528,945		)	(5,574,248		)	(4,349,940		)
Finance receivables collected		4,536,661			3,933,125			3,123,941
Proceeds from securitizations		1,724,060			1,246,262			956,849
Purchase of marketable securities		(1,143,898		)	(1,508,285		)	(247,989		)
Sales and redemptions of marketable securities		1,145,000			1,190,114			51,978
Other, net		9,690			22,813			(9,361		)
Net cash used in investing activities		(484,662		)	(1,014,085		)	(764,903		)
Cash flows from financing activities:
Proceeds from issuance of medium term notes		399,953			—			—
Net (decrease) increase other finance debt		(175,835		)	165,528			152,542
Dividends paid		(58,986		)	(41,457		)	(35,428		)
Purchase of common stock for treasury		(103,880		)	(56,814		)	(111,552		)
Issuance of common stock under employee stock option plans		19,378			12,679			28,839
Net cash provided by financing activities		80,630			79,936			34,401
Net increase (decrease) in cash and cash equivalents		531,521			(158,510		)	19,702
Cash and cash equivalents:
At beginning of year		280,928			439,438			419,736
At end of year		$	812,449		$	280,928		$	439,438

 

The accompanying notes are an integral part of the consolidated financial statements.

 

49

 

 HARLEY-DAVIDSON, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

Years ended December 31, 2003, 2002 and 2001

(In thousands, except share amounts)

 

		Common Stock					Additional paid-in capital			Retained Earnings			Other comp- rehensive income(loss)			Treasury Balance			Unearned comp- ensation			Total
		Issued Shares		Balance
Balance December 31, 2000		321,185,567		$	3,210		$	285,390		$	1,431,017		$	308		$	(313,994	)	$	(276	)	$	1,405,655
Comprehensive income:
Net income		—		—			—			437,746			—			—			—			437,746
Other comprehensive income (loss):
Foreign currency translation adjustment		—		—			—			—			(6,143		)	—			—			(6,143		)
Minimum pension liability adjustment, net of tax benefit of $11,515		—		—			—			—			(19,676		)	—			—			(19,676		)
Change in net unrealized gains (losses):
Investment in retained securitization interests, net of taxes of  $(6,117)		—		—			—			—			11,115			—			—			11,115
Derivative financial instruments, net of taxes of $(407)		—		—			—			—			668			—			—			668
Comprehensive income																						423,710
Dividends		—		—			—			(35,428		)	—			—			—			(35,428		)
Repurchase of common stock		—		—			—			—			—			(111,552		)	—			(111,552		)
Amortization of unearned compensation		—		—			—			—			—			—			91			91
Exercise of stock options		3,154,865		32			28,807			—			—			—			—			28,839
Tax benefit of stock options		—		—			44,968			—			—			—			—			44,968
Balance December 31, 2001		324,340,432		$	3,242		$	359,165		$	1,833,335		$	(13,728	)	$	(425,546	)	$	(185	)	$	1,756,283
Comprehensive income:
Net income		—		—			—			580,217			—			—			—			580,217
Other comprehensive income (loss):
Foreign currency translation adjustment		—		—			—			—			14,545			—			—			14,545
Minimum pension liability adjustment, net of tax benefit of $29,896		—		—			—			—			(48,985		)	—			—			(48,985		)
Change in net unrealized gains (losses):
Investment in retained securitization interests, net of taxes of  $(6,113)		—		—			—			—			11,108			—			—			11,108
Derivative financial instruments, net of tax benefit of  $5,929		—		—			—			—			(9,824		)	—			—			(9,824		)
Marketable securities, net of taxes of $(377)		—		—			—			—			618			—			—			618
Comprehensive income																						547,679
Dividends		—		—			—			(41,457		)	—			—			—			(41,457		)
Repurchase of common stock		—		—			—			—			—			(56,814		)	—			(56,814		)
Amortization of unearned compensation		—		—			—			—			—			—			93			93
Exercise of stock options		957,972		12			12,667			—			—			—			—			12,679
Tax benefit of stock options		—		—			14,452			—			—			—			—			14,452
Balance December 31, 2002		325,298,404		$	3,254		$	386,284		$	2,372,095		$	(46,266	)	$	(482,360	)	$	(92	)	$	2,232,915
Comprehensive income:
Net income		—		—			—			760,928			—			—			—			760,928
Other comprehensive income (loss):
Foreign currency translation adjustment		—		—			—			—			19,609			—			—			19,609
Minimum pension liability adjustment, Net of taxes of  $(45,383)		—		—			—			—			74,361			—			—			74,361
Change in net unrealized gains (losses):
Investment in retained securitization interests, net of taxes of  $(3,266)		—		—			—			—			6,220			—			—			6,220
Derivative financial instruments, net of tax benefit of  $3,057		—		—			—			—			(4,596		)	—			—			(4,596		)
Marketable securities, net of tax benefit of $1,333		—		—			—			—			(2,154		)	—			—			(2,154		)
Comprehensive income																						854,368
Dividends		—		—			—			(58,986		)	—			—			—			(58,986		)
Repurchase of common stock		—		—			—			—			—			(103,880		)	—			(103,880		)
Amortization of unearned compensation		—		—			—			—			—			—			92			92
Exercise of stock options		1,190,887		12			19,366			—			—			—			—			19,378
Tax benefit of stock options		—		—			13,805			—			—			—			—			13,805
Balance December 31, 2003		326,489,291		$	3,266		$	419,455		$	3,074,037		$	47,174		$	(586,240	)	$	—		$	2,957,692

 

The accompanying notes are an integral part of the consolidated financial statements.

 

50