HOG

Harley-Davidson, Inc. 2006 Annual Report (10-K) Summary

Business Context and Reporting Period

This Form 10-K covers the fiscal year ended December 31, 2006. Harley-Davidson, Inc. operates in two primary segments: Motorcycles & Related Products (designing, manufacturing, and selling heavyweight motorcycles, parts, and accessories) and Financial Services (providing wholesale and retail financing and insurance). The Company is the largest manufacturer of heavyweight motorcycles in the United States, holding a 49.3% market share in the U.S. heavyweight segment for 2006.

Key Financial Metrics (2006)

Note: 2006 results include the adoption of SFAS No. 158 regarding pension accounting, which impacted balance sheet presentation but not net income.

Material Changes vs. Prior Period

• Revenue Growth: Net revenue increased 8.6% driven by a 6.1% increase in Harley-Davidson motorcycle shipments and favorable product mix (higher percentage of touring models).
• Profitability: Net income rose 8.7%, while diluted EPS increased 15.2%, aided by a reduction in weighted-average shares outstanding due to stock repurchases.
• International Expansion: International shipments grew 21.6%, outpacing U.S. growth of 2.5%. International sales now represent 21.8% of total wholesale shipments.
• Financial Services: Operating income from financial services increased 10.0% to $210.7 million, supported by higher interest income and securitization gains, though credit losses increased slightly.
• Share Repurchases: The Company repurchased 19.3 million shares in 2006 at a total cost of $1.06 billion.

Guidance, Outlook, and Risks

2007 Outlook and Strike Impact: Following a labor strike at the York, Pennsylvania facility in early 2007 (which lasted approximately four weeks), the Company revised its 2007 guidance downward.

• Shipments: First-quarter 2007 shipment targets were lowered by 18,000 units. Full-year 2007 shipments are now expected to be approximately 14,000 units lower than originally planned.
• Margins: The Company expects 2007 margins to be lower than 2006 due to strike-related inefficiencies and costs.
• Earnings Growth: Expected EPS growth for 2007 was revised to a range of 4% to 6%, down from a prior expectation of 11% to 17%.

Key Risks and Contingencies:

• Legal Proceedings: The Company is defending against shareholder class action lawsuits regarding 2005 production announcements, an ERISA lawsuit, and a security breach lawsuit filed in January 2007 regarding a lost laptop containing customer data.
• Environmental: Ongoing remediation costs at the York, PA facility are estimated at $7.7 million, for which reserves have been established.
• Product Liability: Ongoing litigation regarding the "Twin Cam 88" cam bearing issue remains pending before the Wisconsin Supreme Court.
• Financial Services Credit Risk: The 30-day delinquency rate for managed retail loans increased to 5.18% in 2006, suggesting potential for higher credit losses in 2007.

Investor Verification Checklist

• Strike Recovery: Verify the Company's ability to recover the 14,000 unit shipment shortfall in the remainder of 2007 and the actual impact on 2007 margins.
• International Growth Sustainability: Assess whether the 21.6% international shipment growth is sustainable given currency fluctuations and local market conditions.
• Financial Services Credit Quality: Monitor the trend of the 30-day delinquency rate and the adequacy of the allowance for credit losses in the HDFS segment.
• Legal Exposure: Track the status of the Wisconsin Supreme Court decision on the cam bearing lawsuit and the outcome of the new security breach class action.
• Warranty Costs: Review future warranty expense trends, as 2006 saw a significant increase due to the second-year warranty program and product programs.