Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended March 28, 2004, for Harley-Davidson, Inc. The Company operates two primary segments: Motorcycles and Related Products (manufacturing Touring, Dyna Glide, Softail, VRSC, Sportster, and Buell motorcycles) and Financial Services (providing financing and insurance). As of April 30, 2004, there were 295,145,463 shares of common stock outstanding.
Key Financial Metrics
| Metric | Q1 2004 | Q1 2003 |
|---|---|---|
| Net Revenue | $1,165.7 million | $1,113.7 million |
| Gross Profit | $440.1 million | $403.0 million |
| Gross Margin | 37.8% | 36.2% |
| Operating Income | $312.9 million | $278.5 million |
| Net Income | $204.6 million | $186.2 million |
| Diluted EPS | $0.68 | $0.61 |
| Cash from Operating Activities | $350.9 million | $292.1 million |
| Cash and Cash Equivalents (End of Period) | $590.6 million | $395.9 million |
| Finance Debt (Total) | $865.7 million | $680.1 million |
Material Changes vs. Prior Period
- Revenue Growth: Net revenue increased 4.7% ($52.0 million) driven by a 4.9% increase in Harley-Davidson unit shipments (74,090 units vs. 70,608). This was partially offset by lower wholesale prices for 2004 models compared to the 100th Anniversary models in 2003 and a shift in product mix toward lower-priced Sportster models.
- Profitability: Net income rose 9.9% and diluted EPS increased 11.5%. The EPS increase was aided by a reduction in weighted-average shares outstanding due to significant stock repurchases.
- Financial Services: Operating income from Financial Services increased 16.0% to $50.3 million, driven by strong acceptance of finance products and increased income from retained securitization interests.
- Share Repurchases: The Company repurchased 7.8 million shares for $403.5 million in Q1 2004, compared to only 0.5 million shares in Q1 2003.
- Dividends: Cash dividends per share increased to $0.08 from $0.035 in the prior year.
Guidance, Outlook, and Risks
- 2004 Objectives: Management aims to ship 317,000 Harley-Davidson units and achieve earnings growth in the mid-teens for the full year 2004.
- Long-Term Goals: The Company targets shipping 400,000 units by 2007 with sustained mid-teens earnings growth.
- Capital Expenditures: Estimated total capital expenditures for 2004 are projected between $250 million and $300 million, expected to be funded by internally generated funds.
- Legal Contingencies:
- Cam Bearing Litigation: A third class action regarding Twin Cam 88 engines was filed in April 2004 after the Wisconsin Supreme Court dismissed previous claims. The Company intends to vigorously defend the matter, believing the existing 5-year/50,000-mile warranty extension addresses the issue.
- Environmental: The Company estimates its share of future remediation costs at the York, Pennsylvania facility to be approximately $7.6 million, which is reserved.
- Risk Factors: Key risks include foreign currency fluctuations, interest rate changes, credit quality of the loan portfolio, supply chain disruptions, and the ability to sell planned production volumes.
Investor Verification Checklist
- Verify the sustainability of the 4.9% unit shipment growth given the shift to lower-priced Sportster models and the removal of 100th Anniversary premium pricing.
- Monitor the outcome of the renewed class action lawsuit regarding Twin Cam 88 engines filed in April 2004.
- Assess the impact of the $403.5 million share repurchase on future liquidity and capital allocation priorities.
- Review the $7.6 million environmental reserve for the York facility and potential for cost escalation.
- Confirm the Company's ability to meet the 317,000 unit shipment target for 2004 amidst global economic conditions.