UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

 

FORM 10-K

 

ý		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: December 31, 2004
o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from             to

 

Commission file number 1-9183

 

Harley-Davidson, Inc.

(Exact name of registrant as specified in its charter)

 

Wisconsin		39-1382325
(State of organization)		(I.R.S. Employer Identification No.)
3700 West Juneau Avenue,
Milwaukee, Wisconsin		53208
(Address of principal executive offices)		(Zip code)

 

Registrants telephone number: (414) 342-4680

 

Securities registered pursuant to Section 12(b) of the Act:

 

		Name of each Exchange
Title of each class		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, 2004:

$17,747,151,212

 

Number of shares of the registrant’s common stock outstanding at March 7, 2005:

291,972,467 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 30, 2005.

 

 

Harley-Davidson, Inc.

 

Form 10-K

 

For The Year Ended December 31, 2004

 

Part I
Item 1.	Business
Item 2.	Properties
Item 3.	Legal Proceedings
Item 4.	Submission of Matters to a Vote of Security Holders
Part II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
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
Item 13.	Certain Relationships and Related Transactions
Item 14.	Principal Accounting Fees and Services
Part IV
Item 15.	Exhibits and Financial Statements Schedules
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 35 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

 

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).  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 had the largest share of the United States heavyweight (651+cc) motorcycle market since 1986. At the end of 2004, the Company’s market share, based on retail sales of new Harley-Davidson motorcycles, was 49.5% in the United States (Data provided by the Motorcycle Industry Council).

 

The Financial Services (Financial Services) segment includes the group of companies doing business as Harley-Davidson Financial Services (HDFS).  HDFS is engaged in the business of financing and servicing wholesale inventory receivables and retail loans, primarily for the purchase of motorcycles. HDFS conducts business in the United States, Canada and Europe.

 

See Note 12 to the Consolidated Financial Statements for financial information related to 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%, 80.0% and 78.9% of the total net revenue in the Motorcycles segment during 2004, 2003 and 2002, respectively.

 

The Company’s Harley-Davidson branded motorcycle products emphasize traditional styling, design simplicity, durability and quality.  The Company’s 2005 model year line up includes 32 models of Harley-Davidson touring and custom heavyweight motorcycles, with domestic manufacturer’s suggested retail prices ranging from $6,495 to $20,405.  The Company also offers exclusive limited-edition factory-custom motorcycles through its Custom Vehicle Operation (CVO) program.  Motorcycles sold through the CVO program are available in limited quantities and offer unique features, paint schemes and accessories.  The Company currently has three motorcycle offerings available through the CVO program with domestic manufacturer’s suggested retail prices ranging from $25,495 to $29,995.

 

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 1690cc’s.

 

The average U.S. purchaser of a new Harley-Davidson motorcycle is a married male in his mid-forties (over two-thirds of purchasers are between the ages of 35 and 54), with a median household income of approximately $81,400. These customers generally purchase a motorcycle for recreational purposes rather than to provide transportation. Over two-thirds of the Company’s U.S. retail sales of new Harley-Davidson motorcycles are to buyers with at least one year of education beyond high school, and 30% of the buyers have college degrees.  Approximately 10% of the Company’s Harley-Davidson U.S. retail motorcycle sales are to female buyers.  (Source: 2004 Company studies)

 

The Company’s Buell^® motorcycle products emphasize innovative design, responsive handling and overall performance.  Buell currently manufactures and sells six models, including five heavyweight models in its XB family, and the Blast^®.  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 XB motorcycle models have domestic manufacturer’s suggested retail prices ranging from $8,695 to $10,495.  The Buell Blast is smaller and less expensive than the Buell XB models and is powered by a 492cc single-cylinder engine.  The Blast, which competes in the standard market segment, has a domestic manufacturer’s suggested retail price of $4,595.

 

The average U.S. purchaser of a new Buell XB motorcycle is a male at the age of 36 with a household income of approximately $79,600.  Approximately 9% of all new Buell XB U.S. retail motorcycle sales are to females. The average U.S. purchaser of a new Buell Blast is at the age of 37, with over one-half of them being female.  Approximately 57% of new Buell Blast purchasers have never owned a motorcycle before and in excess of 97% of them had never owned a Buell motorcycle before.  (Source: 2004 Company studies).

 

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 United States, suggested retail prices for the Company’s Harley-Davidson motorcycles range from being competitive to 50% higher than suggested retail prices for 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 high-end of the custom portion of the Harley-Davidson product line represents the Company’s highest unit volumes and the Company believes Harley-Davidson custom products continue 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’s 2004 surveys of retail purchasers in the United States indicate that 83% of the purchasers of its Sportster models 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.  The Company expects to see sales of its Sportster models lead to future sales of its higher-priced models.

 

Since 1988, the Company’s research has consistently shown that U.S. purchasers of new 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 15.6%, 15.4% and 15.4% of net revenue in the Motorcycles segment in 2004, 2003 and 2002, respectively.

 

General Merchandise. Worldwide General Merchandise net revenue, which includes MotorClothes^TM apparel and collectibles, comprised 4.5%, 4.6% and 5.7% of net revenue in the Motorcycles segment in 2004, 2003 and 2002, respectively.

 

Other Services.  The Company also provides a variety of services to its dealers including service and business management training programs, customized dealer software packages, delivery of its motorcycles, a motorcycle rental and tour program and Riders Edge^®, the Company’s rider training program.

 

Licensing. The Company creates an awareness of the Harley-Davidson brand among its customers and the non-riding public through a wide range of products for enthusiasts by licensing the name “Harley-Davidson” and other trademarks owned by the Company.  The Company’s licensed products include 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, Nevada.  Although the majority of licensing activity occurs in the U.S., the Company continues to expand these activities in international markets.  Royalty revenues from licensing, included in Motorcycles segment net revenue, were approximately $41 million, $38 million and $36 million in 2004, 2003 and 2002, 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 diligently protects its intellectual property and it rights to innovative and proprietary technology.  This protection, including enforcement, is important as the Company moves forward with investments in new products, designs and technologies.

 

Trademarks are important to the Company’s motorcycle business and licensing activities.  The Company has a vigorous world wide program of trademark registration and enforcement to strengthen the value of the trademarks and prevent the unauthorized use of those trademarks. The Company believes the HARLEY-DAVIDSON trademark and the Company’s Bar 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.  Additionally, the Company uses numerous other trademarks, trade names and logos, which are registered world wide, where the Company conducts business. The following are among the Company’s trademarks:  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.  All of the Company’s

 

5

 

trademarks are owned by H-D Michigan, Inc.

 

Marketing.  The Company’s products are marketed primarily through dealer promotions, customer events and advertising through national television, print, radio 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 many major motorcycle consumer shows and rallies.

 

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 900,000 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.  The Company has also formed the Buell Riders Adventure Group, or BRAG^®, which has approximately 10,000 members.  These groups sponsor many motorcycle events, including world wide rallies and rides for Harley-Davidson and Buell motorcycle enthusiasts.

 

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

 

International Sales.  International revenue was approximately $917 million, $816 million and $675 million, or approximately 18%, 18% and 17% of net revenue of the Motorcycles segment, during 2004, 2003 and 2002, respectively.  At the end of 2004, the Company’s market share, based on retail sales of new Harley-Davidson motorcycles, was 7.7% in the European heavyweight (651+cc) market and 25.3% in the Asia/Pacific (Japan and Australia) heavyweight (651+cc) market.  See Note 12 to the Consolidated Financial Statements for additional information regarding foreign operations.

 

Distribution-United States.  The Company’s basic channel of distribution in the United States for its motorcycles and related products consists of 659 independently-owned full-service Harley-Davidson dealerships to whom the Company sells directly.  This includes 411 combined Harley-Davidson and Buell dealerships.  With respect to sales of new motorcycles, approximately 82% 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’s dealers also sell a smaller portion of 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 are satellites of the main dealership and are developed to meet the service needs of the Company’s riding customers. SRLs 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 locations such as malls, airports or popular vacation destinations and focus on selling the Company’s MotorClothes apparel, 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.  In 2004, there were approximately 87 SRLs, 64 AROs, and 10 SROs located in the United States.

 

Distribution-Europe.  The Company’s European management team is located in Oxford, England and is responsible for all sales, marketing and distribution activities in Europe, the Middle East and Africa.  The Company has sales offices in the United Kingdom, France, Germany, Italy, the Netherlands, Spain, Switzerland and seven independent distributors throughout the region. In the European region, there are approximately 389 independent Harley-Davidson dealerships serving 36 country markets.  This includes 292 combined Harley-Davidson and Buell dealerships.  Buell is further represented by 7 dealerships that do not sell Harley-Davidson motorcycles.  In addition, the Company’s dealer network includes 31 ARO’s across Europe.

 

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Distribution-Asia/Pacific.  The Asia/Pacific region is served by 170 independent dealers in 10 countries.  Of these dealers, 134 sell both Harley-Davidson and Buell products, while three are Buell-only dealers.  The Company’s distribution in Japan, which is the largest market in this region, is managed directly by the Company’s subsidiary in Tokyo.  Operations of this subsidiary include sales, marketing, and distribution of product to the country’s network of 113 independent dealers.  Independent distributors manage distribution for the region’s second largest market, Australia/New Zealand, with 51 dealerships currently in operation.  Of these, 24 sell both Harley-Davidson and Buell products.  The Company supplies product directly from its U.S. operations to the remaining Asia/Pacific dealers, which are located in East and Southeast Asia.

 

Distribution-Latin America.  In Latin America, 14 countries are served by 31 independent dealers.  Mexico is the Company’s largest market in Latin America with 10 dealers.  In Brazil, the region’s second largest market, products are distributed by an independent master dealer through eight dealership locations.  Certain motorcycle models sold in Brazil are assembled at the Company’s subsidiary in Manaus, Brazil.  The remaining dealers in Latin America receive product directly from the Company’s U.S. operations.

 

Distribution-Canada. In Canada, there are approximately 75 independent Harley-Davidson dealerships and three AROs, all served by a single independent distributor, Deeley Harley-Davidson Canada/Fred Deeley Imports Ltd. Currently, 43 of the 75 dealerships are combined Harley-Davidson and Buell dealerships.

 

Seasonality.  In general, the Motor Company has not experienced seasonal fluctuations in its wholesale sales.  This has been primarily the result of 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.

 

As the Company works to narrow the gap between supply and demand for its Harley-Davidson motorcycles, the Company’s independent dealers are likely to experience a greater degree of seasonality in their retail sales patterns.

 

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. Beginning in 2002, HDFS 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.

 

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 United States.  These 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 significant market shares.

 

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 and 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. (source: 2004 Company data)

 

7

 

Domestically, the Company competes most heavily in the touring and custom segments of the heavyweight motorcycle market. These segments accounted for 81%, 82% and 80% of total heavyweight retail unit sales in the U.S. during 2004, 2003 and 2002, respectively.  The custom and touring motorcycles are generally the most expensive vehicles in the market and the most profitable for the Company.  During 2004, 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 17 years, the Company has led the industry in the United States for retail unit sales of heavyweight motorcycles.  The Company’s (Harley-Davidson motorcycles only) share of the heavyweight market was 49.5% in 2004 and 2003. This share is significantly greater than that of the Company’s largest competitor in the domestic market which ended 2004 with an 18.7% market share.

 

The following chart includes U.S. retail registration data for the Company and its major competitors for the years 2000 through 2004.

 

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

(Engine Displacement of 651+cc)

(Units in thousands)

 

		Year Ended December 31
		2004		2003		2002		2001		2000
New U.S. Registrations (thousands of units):
Total market new registrations		494.0		461.2		442.3		394.3		340.0
Harley-Davidson new registrations		244.5		228.4		209.3		177.4		155.1
Buell new registrations		3.6		3.5		2.9		2.6		4.2
Total Company new registrations		248.1		231.9		212.2		180.0		159.3
Percentage Market Share:
Harley-Davidson motorcycles		49.5	%	49.5	%	47.5	%	45.0	%	45.6	%
Buell motorcycles		0.7		0.8		0.7		0.7		1.2
Total Company		50.2		50.3		48.2		45.7		46.8
Honda		18.7		18.4		19.8		20.5		18.5
Suzuki		10.2		9.8		9.6		10.8		9.3
Yamaha		8.7		8.5		8.9		7.9		8.4
Kawasaki		6.4		6.7		6.9		8.0		9.0
Other		5.8		6.3		6.6		7.1		8.0
Total		100.0	%	100.0	%	100.0	%	100.0	%	100.0	%

 

(a)         Motorcycle registration data provided by the Motorcycle Industry Council.

 

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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.  In addition, the standard and performance segments represent approximately 80% of the European heavyweight (651+cc) motorcycle market. The Company continues to expand its product offerings to compete in these segments by including motorcycles like the VRSC family and the Buell XB.  The Company’s traditional Harley-Davidson products compete primarily in the custom and touring segments.

 

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)

 

		2004				2003				2002
		Units		% Share		Units		% Share		Units		% Share
North America(a)
Harley-Davidson new registrations		255.8		48.2	%	238.3		48.1	%	220.1		46.4	%
Buell new registrations		3.8		0.7		3.7		0.8		3.0		.6
Company registrations		259.6		48.9	%	242.0		48.9	%	223.1		47.0	%
Market new registrations		530.8				495.5				475.0
Europe(b)
Harley-Davidson new registrations		25.9		7.7	%	26.3		8.1	%	23.5		7.1	%
Buell new registrations		4.5		1.3		3.1		1.0		1.9		0.6
Company registrations		30.4		9.0	%	29.4		9.1	%	25.5		7.7	%
Market new registrations		336.2				323.1				331.8
Japan/Australia(c)
Harley-Davidson new registrations		15.6		25.3	%	15.2		25.8	%	13.6		21.3	%
Buell new registrations		1.0		1.5		1.0		1.7		.7		1.2
Company registrations		16.6		26.8	%	16.2		27.5	%	14.3		22.5	%
Market new registrations		61.9				58.9				63.9
Total(d)
Harley-Davidson new registrations		297.3		32.0	%	279.8		31.9	%	257.2		29.6	%
Buell new registrations		9.3		1.0		7.8		0.9		5.6		0.7
Company registrations		306.6		33.0	%	287.5		32.8	%	262.8		30.3	%
Market new registrations		928.9				877.5				870.7

 

(a)          Includes the United States and Canada.  U.S. data provided by the Motorcycle Industry Council and Canada data provided by the Moped and Motorcycle Industry of Canada.

(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 data provided by Japan Automobile Importers Association and Australia data provided by ERG, International.

(d)         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.

 

Raw Material and Purchased Components.  The Company continues to proceed aggressively to establish and/or reinforce 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 has resulted in improved product quality, 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’s 2003 initiative to improve supplier productivity and component cost was fully implemented during 2004 and was instrumental in delivering improvement in cost and in offsetting raw material commodity price pressures throughout the sourcing value stream.  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 certain raw material commodity 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 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 incurred research and development expenses of $170.7 million, $150.3 million and $139.7 million during 2004, 2003 and 2002, respectively.

 

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 with model year 2008.  The EPA has finalized new tail pipe emission standards for 2006 and 2010, respectively, which are harmonized with the California emissions standards.  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.

 

10

 

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 18 voluntary recalls at a total cost of $7.9 million. The Company reserves for all estimated costs associated with recalls in the period that the recalls are announced.

 

Employees.  As of December 31, 2004, the Motorcycles segment had approximately 8,900 employees.  Unionized employees at the motorcycle manufacturing facilities in Wauwatosa and Menomonee Falls, 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).  Unionized employees at the distribution and manufacturing facilities in Franklin and Tomahawk, Wisconsin are represented by the Paper Allied-Industrial Chemical and Energy Workers International Union (PACE) of the AFL-CIO.  Production workers at the motorcycle manufacturing facility in York, Pennsylvania, are represented principally by the IAM.  The collective bargaining agreement with the Pennsylvania-IAM will expire on February 2, 2007, the collective bargaining agreement with the Kansas City-PACE and IAM will expire on August 1, 2007, and the collective bargaining agreement with the Wisconsin-PACE and IAM will expire on March 31, 2008.

 

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.

 

11

 

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).  HDFS conducts business in the United States, Canada and Europe.

 

Harley-Davidson and Buell. HDFS, operating under the trade name Harley-Davidson Credit, provides wholesale financial services to Harley-Davidson and Buell dealers and retail financing to consumers.  HDFS, operating under the trade name Harley-Davidson Insurance, provides the brokerage of a range of motorcycle insurance policies and extended service warranty agreements.

 

Wholesale financial services include floorplan and open account financing of motorcycles and motorcycle parts and accessories, real estate loans, computer loans and showroom remodeling loans.  HDFS offers wholesale financial services to Harley-Davidson dealers in the U.S. and Canada, and during 2004, 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. 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, Reno, Nevada, and Plano, Texas.

 

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 2004.

 

Funding.  HDFS is financed by operating cash flow, 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 2004, HDFS financed 40% of the new Harley-Davidson motorcycles retailed by independent dealers in the United States, as compared to 38% in 2003. 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 H-D Michigan, Inc., including: “HARLEY-DAVIDSON, H-D and the Bar & Shield logo.

 

12

 

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, (1) regulate credit granting activities, including establishing licensing requirements, in applicable jurisdictions, (2) establish maximum interest rates, finance charges and other charges, (3) regulate customers’ insurance coverages, (4) require disclosure to customers, (5) govern secured transactions, (6) set collection, foreclosure, repossession and claims handling procedures and other trade practices, (7) prohibit discrimination in the extension of credit and administration of loans, and (8) 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, and in addition, could subject HDFS to damages and administrative sanctions.

 

The above regulation and supervision could limit the discretion of HDFS in operating its business. 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 cannot 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), 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, 2004, the Financial Services segment had approximately 680 employees. No employees of HDFS are represented by labor unions.

 

13

 

Item 2. Properties

 

The following is a summary of the principal operating properties of the Company as of December 31, 2004.

 

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		Owned
Product Development Center		Wauwatosa, WI		409,000		Owned
Manufacturing		Wauwatosa, WI		422,000		Owned
Manufacturing		Menomonee Falls, WI		479,000		Owned
Manufacturing		Tomahawk, WI		211,000		Owned
Manufacturing		York, PA		1,331,000		Owned
Materials Velocity Center		Manchester, PA		212,000		Owned
Manufacturing and Materials Velocity Center		Kansas City, MO		450,000		Owned
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 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 2009
Office		Morfelden-Waldorf, Germany		22,000		Lease expiring 2008
Office and Warehouse		Oxford, England		27,000		Lease expiring 2017
Office		Liederdorp, The Netherlands		8,000		Lease expiring 2006
Office		Paris, France		7,000		Lease expiring 2005
Office and Warehouse		Arese, Italy		17,000		Lease expiring 2009
Office		Zurich, Switzerland		2,000		Lease expiring 2009
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).

 

14

 

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		Owned
Office		Reno, NV		14,000		Lease expiring 2005
Office		Plano, TX		61,500		Lease expiring 2014
Office		Oxford, England		6,000		Lease expiring 2017

 

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, insurance and retail operations) and Oxford, England (European wholesale operations).

 

15

 

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. This complaint and a second lawsuit filed on April 12, 2002 in state court in Milwaukee County, Wisconsin were dismissed as reported in more detail in Note 6 – Commitments and Contingencies (Note 6), to the Consolidated Financial Statements.  On April 12, 2004, the same attorneys filed a third action in state court in Milwaukee County on behalf of the same plaintiffs from the action dismissed by the Wisconsin Supreme Court.  This third action was dismissed by the court on July 26, 2004.  In addition, the plaintiffs in the original case moved to reopen that matter and amend the complaint to add new causes of action, which motion was denied on August 23, 2004.  A notice of appeal to the Wisconsin Court of Appeals from the latter dismissal has now been filed. 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.

 

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).  Note 6 includes a discussion of the history of this matter in more detail.

 

Although the RI/FS is still underway and substantial uncertainty exists concerning the nature and scope of the additional environmental investigation and remediation that will ultimately be required at the York facility, the Company estimates that its share of the future costs associated with environmental investigation and remediation activities at the York facility (Response Costs) will be approximately $6.7 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 related to the remediation of soil are expected to be incurred over a period of several years ending in 2010.  Response Costs related to ground water remediation may continue for some time beyond 2010.  However these Response Costs are expected to be much lower than those related to the remediation of soil.

 

16

 

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 2004.

 

Executive Officers of the Registrant

 

The following sets forth, as of December 31, 2004, 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		65
Chairman and Chief Executive Officer
James M. Brostowitz		52
Vice President and Treasurer
William B. Dannehl		46
Vice President, North American Sales and Dealer Services - Harley-Davidson Motor Company
Jon R. Flickinger		47
Vice President – Harley-Davidson Motor Company and President and Chief Operating Officer - Buell Motorcycle Company
John A. Hevey		47
Vice President, Strategic Planning and New Business Development - Harley-Davidson Motor Company
Ronald M. Hutchinson		57
Vice President, Parts and Accessories - Harley-Davidson Motor Company
Gail A. Lione		55
Vice President, General Counsel and Secretary Chief Compliance Officer
James A. McCaslin		56
President and Chief Operating Officer - Harley-Davidson Motor Company
W. Kenneth Sutton, Jr.		56
Vice President, Engineering - Harley-Davidson Motor Company
Donna F. Zarcone		47
President and Chief Operating Officer - Harley-Davidson Financial Services
James L. Ziemer		54
Vice President and Chief Financial Officer and Director

 

17

 

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 and Kenneth Sutton. The following is additional biographical information relating to these three executive officers:

 

Mr. Dannehl became the Vice President, North American Sales and Dealer Serivces for Harley-Davidson Motor Company in August 2004.  Prior to his current position, Mr. Dannehl served as the Vice President, Strategic Planning and New Business Development for Harley-Davidson Motor Company since August 2002.  From September 1997 to July 2002, Mr. Dannehl served as Vice President and General Manager of York Vehicle Operations.

 

Mr. Flickinger became the President and Chief Operating Officer of Buell Motorcycle Company in August 2004. Prior to his current position, Mr. Flickinger served as Vice President, North American Sales and Dealer Services for Harley-Davidson Motor Company from March 1999 to July 2004.

 

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.

 

18

 

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:

 

 

As of March 4, 2005 there were 86,789 shareholders of record of Harley-Davidson, Inc. common stock.

 

The following table contains detail related to the Company’s authority to repurchase common stock during the quarter ended December 31, 2004.

 

 

The Company has continuing authorization from its Board of Directors to repurchase shares of its 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, 2004 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’s Board of Directors has also separately authorized the Company to buy back 20 million shares of its common stock with no dollar limit or expiration date.  No repurchases have been made under this authorization as of the end of 2004.

 

Item 12 of this Annual Report on Form 10-K contains certain information relating to the Company’s equity compensation plans

 

19

 

Item  6. Selected Financial Data

 

		2004			2003			2002			2001			2000
Income statement data:
Net revenue		$	5,015,190		$	4,624,274		$	4,090,970		$	3,406,786		$	2,943,346
Cost of goods sold		3,115,655			2,958,708			2,673,129			2,253,815			1,979,572
Gross profit		1,899,535			1,665,566			1,417,841			1,152,971			963,774
Financial services income		305,262			279,459			211,500			181,545			140,135
Financial services expense		116,662			111,586			107,273			120,272			102,957
Operating income from financial services		188,600			167,873			104,227			61,273			37,178
Selling, administrative and engineering expense		726,644			684,175			639,366			551,743			485,980
Income from operations		1,361,491			1,149,264			882,702			662,501			514,972
Gain on sale of credit card business					—			—			—			18,915
Investment income, net		23,101			23,088			16,541			17,478			17,583
Other, net		(5,106		)	(6,317		)	(13,416		)	(6,524		)	(2,914		)
Income before provision for income taxes		1,379,486			1,166,035			885,827			673,455			548,556
Provision for income taxes		489,720			405,107			305,610			235,709			200,843
Net income		$	889,766		$	760,928		$	580,217		$	437,746		$	347,713
Weighted-average common shares:
Basic		295,008			302,271			302,297			302,506			302,691
Diluted		296,852			304,470			305,158			306,248			307,470
Earnings per common share:
Basic		$	3.02		$	2.52		$	1.92		$	1.45		$	1.15
Diluted		$	3.00		$	2.50		$	1.90		$	1.43		$	1.13
Dividends paid		$	.405		$	.195		$	.135		$	.115		$	.098
Balance sheet data:
Working capital		$	2,093,576		$	1,773,354		$	1,076,534		$	949,154		$	799,521
Current finance receivables, net		1,207,124			1,001,990			855,771			656,421			530,859
Long-term finance receivables, net		905,176			735,859			589,809			379,335			234,091
Total assets		5,483,293			4,923,088			3,861,217			3,118,495			2,436,404
Current finance debt		495,441			324,305			382,579			217,051			89,509
Long-term finance debt		800,000			670,000			380,000			380,000			355,000
Total finance debt		1,295,441			994,305			762,579			597,051			444,509
Shareholders’ equity		$	3,218,471		$	2,957,692		$	2,232,915		$	1,756,283		$	1,405,655

 

20

 

Item 7. Management’s Discussion and Analysis of Financial Position and Results of Operations

 

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

 

Overview(1)

 

The Company’s 19 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 customers and expand capacity in a responsible way. Unique marketplace events have also created special growth opportunities for Harley-Davidson.

 

The Company believes that demand for Harley-Davidson^® motorcycles grows at an average core rate of 7% to 9% per year. However, in many of the 19 years since 1986, the Company’s growth has exceeded this core rate driven by a rapidly growing heavyweight motorcycle market, the stock market bubble of the mid-and late-1990s including its associated wealth effect, and more recently, the Company’s 100^th Anniversary.  The Company’s growth since 1986 required several factory expansions, which provided it with the opportunity to thoroughly modernize its facilities, resulting in improved productivity, quality and manufacturing margins.

 

In 2004, the Company shipped 317,289 Harley-Davidson motorcycle units or 9% more than in 2003. The Company expects unit shipments to grow approximately 7% in 2005 with an annual shipment target of 339,000 Harley-Davidson units. The Company believes that these growth rates are consistent with the core growth rate for Harley-Davidson motorcycles and support its longer term goal to satisfy demand for 400,000 Harley-Davidson units in 2007.  The Company also expects that by continuing to offer innovative products and services and by driving productivity gains in all facets of its business, it will achieve earnings growth rates in the mid-teens for the foreseeable future.

 

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 2004 Compared to 2003

 

Overall

 

Net revenue for 2004 totaled $5.02 billion, a $390.9 million or 8.5% increase over 2003. Net income for 2004 was $889.8 million compared to $760.9 million in 2003, an increase of 16.9%.  Diluted earnings per share for 2004 was $3.00 on 296.9 million weighted-average shares outstanding, compared to $2.50 on 304.5 million weighted-average shares outstanding in 2003, an increase in earnings per share of 20.0%.

 

The Company paid dividends in 2004 of $.08 per share in March, $.10 per share in June and September and $.125 per share in December.  The aggregate annual dividend paid in 2004 was $.405 per share, representing a 108% increase over the aggregate annual dividend of $.195 per share in 2003.

 

21

 

Motorcycle Unit Shipments & Net Revenue

 

The following table includes wholesale motorcycle unit shipments and net revenue for the Motorcycles segment for 2004 and 2003 (dollars in millions):

 

								Increase			%
		2004			2003			(Decrease)			Change
Motorcycle Unit Shipments
Touring motorcycle units		93,305			82,577			10,728			13.0	%
Custom motorcycle units*		154,163			151,405			2,758			1.8
Sportster motorcycle units		69,821			57,165			12,656			22.1
Harley-Davidson motorcycle units		317,289			291,147			26,142			9.0
Buell motorcycle units		9,857			9,974			(117		)	(1.2	)
Total motorcycle units		327,146			301,121			26,025			8.6	%
Net Revenue
Harley-Davidson motorcycles		$	3,928.2		$	3,621.5		$	306.7		8.5	%
Buell motorcycles		79.0			76.1			2.9			3.9
Total motorcycles		4,007.2			3,697.6			309.6			8.4
Parts & Accessories		781.6			712.8			68.8			9.7
General Merchandise		223.7			211.4			12.3			5.8
Other		2.7			2.5			0.2			8.0
Net revenue		$	5,015.2		$	4,624.3		$	390.9		8.5	%

 

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

 

The increase in net revenue for the Motorcycles segment during 2004 was driven by the $306.7 million or 8.5% increase in Harley-Davidson motorcycle net revenue.  Harley-Davidson motorcycle revenue was higher primarily as a result of the 9.0% increase in units shipped. Harley-Davidson motorcycle revenue also benefited from changes in foreign currency exchange rates, which resulted in $46.4 million of higher revenue during 2004. However, the benefit from exchange rates was offset by lower revenue due to changes in product mix and lower average wholesale prices, as discussed below.

 

During 2004, Harley-Davidson motorcycle revenue was impacted by changes in product mix related primarily to an increase in the percentage of shipments consisting of lower-priced Sportster motorcycles and a decrease in the percentage of shipments consisting of more expensive Custom motorcycles. Sportsters are an important part of the Company’s strategy to attract new customers to the Harley-Davidson family.  The Company introduced a completely redesigned family of Sportster models in September 2003, and demand for the redesigned models has continued to drive increases in Sportster shipments throughout 2004.  The percentage of shipments consisting of Sportster motorcycles was 22.0% in 2004, up from 19.6% in 2003.  As a result, the percentage of shipments consisting of Custom motorcycles has also been impacted during 2004.  The Company expects that the mix of Sportster motorcycles will continue to be in the range of 20% to 25% of total units shipped over the longer term.(1)

 

Harley-Davidson motorcycle revenue was also impacted by changes in average wholesale prices. Wholesale prices on the 2004 models reflected the elimination of 100^th Anniversary special edition features and, as a result, were slightly lower than the wholesale prices for the 100^th Anniversary models sold during 2003.  Wholesale prices on 2005 model year motorcycles were approximately 0.5% higher than model year 2004 prices.  However, the positive revenue impact from the 2005 model year price increase only partially offset the impact of the lower 2004 model year pricing.

 

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During 2004, net revenue from Parts and Accessories (P&A) totaled $781.6 million, a 9.7% increase over 2003. P&A revenue growth in 2004 was driven by the increase in Harley-Davidson motorcycle shipments and also benefited from favorable changes in foreign currency exchange rates.  On a long-term basis, the Company expects the growth rate for P&A revenue to be slightly higher than the growth rate for Harley-Davidson motorcycle units.(1)

 

General Merchandise revenue during 2004 was $223.7 million, up 5.8% over 2003.  The Company expects that the long-term growth rate for General Merchandise revenue will be lower than the growth rate for Harley-Davidson motorcycle units. (1)

 

Harley-Davidson Retail Motorcycle Sales

 

The Company’s wholesale motorcycle unit shipments are retailed through an independent worldwide dealer network.  Retail sales of the Company’s Harley-Davidson motorcycles in 2004 were up 7.1% in the United States. Retail sales of Harley-Davidson motorcycles also grew in most of the Company’s major international markets.  However, overall retail sales in Europe during 2004 decreased 1.7% when compared to 2003.

 

In response to current market conditions and the strength of European currencies, the Company reduced its wholesale and suggested retail prices on select motorcycle families across Europe in early 2005.

 

Retail sales data for the heavyweight motorcycle industry in the U.S., Canada, Europe and Japan are provided in the following table (units in thousands):

 

Heavyweight (651+cc) Motorcycle Retail Registrations

 

		2004		2003		% Change
United States (a)
Harley-Davidson models only		244.5		228.4		7.1	%
Industry		494.0		461.2		7.1	%
Canada (b)
Harley-Davidson models only		11.3		9.9		14.3	%
Industry		36.7		34.3		7.1	%
Europe (c)
Harley-Davidson models only		25.9		26.3		(1.7	)%
Industry		336.2		323.1		4.1	%
Japan (d)
Harley-Davidson models only		11.9		11.8		1.0	%
Industry		44.0		44.3		(0.6	)%

 

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

(b)         Canada data provided by the Moped and Motorcycle Industry of Canada.

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

(d)         Japan data provided by Japan Automobile Importers Association.

 

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Gross Profit

 

Gross profit for 2004 totaled $1.90 billion, an increase of $234.0 million or 14.0% over 2003.  Gross margin was 37.9% in 2004, up from 36.0% for 2003.  During 2004, gross margin was positively impacted by lower production costs and changes in foreign currency exchange rates, which more than offset the impact of product mix changes discussed under “Net Revenue.”  In 2004, production costs were lower due to manufacturing efficiencies, but also benefited from a new and fully integrated Softail^® factory in York, Pennsylvania.  During the second half of 2003, the Company experienced higher costs and inefficiencies associated with the rampup of the new Softail factory.  Finally, during 2004, changes in foreign currency exchange rates resulted in $38.5 million of higher gross profit when compared to 2003.

 

Price increases in the metal markets during 2004 did not have a significant impact on the Company’s gross profit. The majority of the metal market price increases were managed by the Company’s suppliers.  During 2004, the Company incurred metal surcharges from some of its suppliers of approximately $9 million. . The majority of the surcharge in 2004 was incurred during the fourth quarter and if similar surcharges continue in 2005 the Company’s gross profit in 2005 could be impacted.(1)  The Company will continue to closely monitor metal market prices in 2005.

 

Financial Services

 

The following table includes the condensed statements of operations for the Financial Services segment (which consists of HDFS) for 2004 and 2003 (in millions):

 

											%
		2004			2003			Increase			Change
Interest income		$	102.2		$	87.1		$	15.1		17.4	%
Income from securitizations		115.1			114.4			0.7			0.6
Other income		88.0			78.0			10.0			12.8
Financial services income		305.3			279.5			25.8			9.2
Interest expense		22.7			17.6			5.1			28.9
Operating expenses		94.0			94.0			0.0			—
Financial services expense		116.7			111.6			5.1			4.5
Operating income from financial services		$	188.6		$	167.9		$	20.7		12.3	%

 

The increase in operating income from Financial Services in 2004 was driven by continued strong marketplace acceptance of HDFS’ finance and insurance products. During 2004, income from securitizations was up only slightly over 2003 as the increase in income on investment in retained securitization interests was mostly offset by lower gains on current year securitization transactions.

 

During 2004, income on investment in retained securitization interests was $56.8 million, an increase of $24.6 million over 2003, due primarily to better than anticipated performance on prior years’ securitization transactions.  During 2004, HDFS sold $1.9 billion of retail motorcycle loans through securitization transactions resulting in gains of $58.3 million.  During 2003, HDFS sold approximately $1.7 billion of retail motorcycle loans resulting in gains of $82.2 million.  The gain as a percentage of the amount of loans securitized was lower when compared with the prior year’s gain due to rising market interest rates during 2004 and the cost of an enhanced dealer participation program that was introduced during the second quarter of 2004.  Under HDFS’ dealer participation program, HDFS pays Harley-Davidson dealers cash incentives for originating retail motorcycle loans.

 

Over the long term, the Company expects the HDFS operating income growth rate to be slightly higher than the Company’s motorcycle unit growth rate.(1)

 

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