Business Context and Reporting Period
Company: Harley-Davidson, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Three and nine months ended September 28, 2003.
Business Overview: The Company operates two primary segments: Motorcycles and Related Products (manufacturing heavyweight motorcycles, parts, accessories, and apparel) and Financial Services (providing wholesale and retail financing and insurance). The Company is currently managing the transition to 2004 model year motorcycles and the startup of a new Softail factory in York, Pennsylvania.
Key Financial Metrics
(Amounts in thousands, except per share data)
| Metric | Three Months Ended Sep 28, 2003 |
Nine Months Ended Sep 28, 2003 |
|---|---|---|
| Net Revenue | $1,133,641 | $3,466,204 |
| Gross Profit | $403,290 | $1,249,540 |
| Gross Margin | 35.6% | 36.0% |
| Operating Income | $284,819 | $870,364 |
| Net Income | $190,072 | $578,498 |
| Diluted EPS | $0.62 | $1.90 |
| Cash from Operations (9mo) | $862,330 | |
| Cash & Equivalents (End of Period) | $942,021 | |
| Total Finance Debt | $717,700 (Includes $337,657 current) |
Material Changes vs. Prior Period
- Revenue: Nine-month net revenue increased 13.1% to $3.47 billion, driven by an 8.3% increase in Harley-Davidson unit shipments, favorable foreign currency exchange rates, and higher wholesale prices for 100th Anniversary models. Third-quarter revenue was flat (-0.2%) due to the extended 100th Anniversary model year overlapping with the prior year.
- Profitability: Net income for the nine months increased 34.7% to $578.5 million. Gross margins improved to 36.0% (9mo) and 35.6% (3mo) compared to 34.2% and 34.9% in the prior year, respectively, aided by currency and product mix.
- Financial Services: Operating income from Financial Services surged 69.9% for the nine months to $134.0 million, driven by higher securitization gains and insurance commissions in a favorable interest rate environment.
- Operating Expenses: Total operating expenses decreased 7.0% in the third quarter compared to the prior year, primarily due to lower 100th Anniversary celebration costs in 2003 versus the heavy spending in Q3 2002.
- Liquidity: Cash and cash equivalents increased significantly to $942.0 million from $280.9 million at year-end 2002, bolstered by strong operating cash flows of $862.3 million for the nine-month period.
Guidance, Outlook, and Risks
Outlook and Guidance
- Q4 2003 Expectations: Management expects fourth-quarter revenue and earnings to be higher than the same period in 2002. Earnings are projected to be approximately 15% higher.
- Shipment Targets: The annual 2003 wholesale shipment target for Harley-Davidson motorcycles was raised to 291,000 units. The Q4 2003 target is approximately 77,000 units (16.7% higher than Q4 2002). The 2004 annual target is set at 317,000 units.
- Capital Expenditures: Estimated at approximately $250 million for 2003 and $270–$300 million for 2004, funded by internally generated funds.
- Pension Contribution: Subsequent to the quarter-end, the Company contributed $180 million to its defined benefit pension plans to improve funded status.
Risks and Contingencies
- Legal Proceedings: A class action lawsuit regarding rear cam bearings on 1999/2000 Twin Cam engines is currently under review by the Wisconsin Supreme Court after a lower court reversal. The Company intends to vigorously defend the matter.
- Environmental: The Company is involved in remediation at its York, PA facility. It estimates its share of future response costs to be approximately $7.9 million, for which reserves have been established.
- Operational Risks: Risks include supplier backorders, work stoppages, foreign currency fluctuations, and the successful ramp-up of the new York factory and 2004 model year changeover.
Investor Verification Checklist
- Q4 Execution: Verify the ability to meet the aggressive Q4 shipment target of 77,000 units amidst 2004 model year changeover costs and new factory startup expenses.
- Margin Sustainability: Monitor gross margins in Q4 as the premium pricing associated with 100th Anniversary models is eliminated and replaced by standard 2004 pricing.
- Legal Exposure: Track the outcome of the Wisconsin Supreme Court review regarding the Twin Cam 88 cam bearing class action.
- Financial Services Credit Quality: Review the annualized credit loss rate (0.73% in 9mo 2003) to ensure it remains stable despite portfolio growth.
- Capital Allocation: Confirm the impact of the $180 million pension contribution on Q4 cash flow and liquidity ratios.