Harley-Davidson, Inc. 10-Q Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended June 29, 2003, and the six-month period ended on the same date. Harley-Davidson, Inc. operates two primary segments: Motorcycles & Related Products and Financial Services (HDFS). The company manufactures heavyweight motorcycles (Sportster, Dyna Glide, Softail, Touring, VRSC) and sport motorcycles (Buell), alongside parts, accessories, and apparel. HDFS provides wholesale and retail financing and insurance programs.
Key Financial Metrics
| Metric | Three Months Ended June 29, 2003 |
Six Months Ended June 29, 2003 |
|---|---|---|
| Net Revenue | $1,218.9 million | $2,332.6 million |
| Gross Profit | $443.2 million | $846.3 million |
| Gross Margin | 36.4% | 36.3% |
| Operating Income | $307.0 million | $585.5 million |
| Net Income | $202.2 million | $388.4 million |
| Diluted EPS | $0.66 | $1.28 |
| Cash from Operations | N/A | $609.9 million |
| Cash & Equivalents | $691.5 million | $691.5 million |
| Total Debt (Finance) | $723.3 million | $723.3 million |
Material Changes vs. Prior Period
- Revenue Growth: Net revenue increased 21.8% ($217.8 million) for the quarter and 20.9% ($403.7 million) for the six months compared to the prior year. This was driven by a 16.0% increase in Harley-Davidson motorcycle unit shipments (76,025 units in Q2) and favorable wholesale price increases.
- Profitability: Net income rose 40.1% for the quarter and 46.9% for the six months. Gross margins improved to 36.4% (Q2) and 36.3% (YTD) from 33.5% and 33.7% respectively in 2002, aided by product mix and foreign currency rates.
- Financial Services: Operating income from financial services increased 20.0% in Q2 and 78.5% YTD, largely due to higher securitization gains ($22.2 million in Q2 vs. $21.4 million in 2002) and a favorable interest rate environment.
- Unit Shipments: Total motorcycle units shipped increased 13.2% in Q2. While Harley-Davidson units grew 16.0%, Buell units declined 41.3% due to supplier issues affecting Blast model production.
Guidance, Outlook, and Risks
- Second Half Outlook: Management expects gross margins in the second half of 2003 to be lower than the first half. This is due to the elimination of 100th Anniversary pricing, the completion of sales for anniversary P&A and General Merchandise, and startup costs for the new York, Pennsylvania plant.
- Production Changes: The company will begin shipping 2004 model year motorcycles in September 2003. The new York facility will ramp up Softail production, while a redesigned Sportster family will be introduced. Sportsters have lower margins than Softails, potentially impacting mix.
- Retirement Plans: Due to declining interest rates, the company remeasured retirement plan obligations, increasing liabilities by approximately $75 million. Total annual retirement plan expense is expected to be $86.2 million in 2003, up from $64.3 million in 2002.
- Legal Contingencies: A class action lawsuit regarding Twin Cam 88 engine cam bearings is pending review by the Wisconsin Supreme Court. The company maintains a $8.2 million reserve for environmental remediation at its York facility.
- Capital Expenditures: Total capital expenditures for 2003 are estimated between $270 million and $300 million, funded by internally generated cash.
Investor Verification Checklist
- Margin Sustainability: Verify the impact of the 100th Anniversary product phase-out on second-half gross margins.
- York Plant Ramp-Up: Monitor the transition of Softail production to the new York facility and associated startup costs.
- Retirement Plan Costs: Confirm the full-year impact of the $11.5 million incremental retirement plan expense resulting from the discount rate adjustment.
- Buell Production: Track the resolution of supplier issues affecting Buell Blast model production and the introduction of new XB models.
- Legal Exposure: Review the outcome of the Wisconsin Supreme Court review regarding the Twin Cam 88 cam bearing class action.