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HARLEY DAVIDSON INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

August 7, 2014

Harley-Davidson, Inc. is the parent company of the groups of companies doing business as Harley-Davidson Motor Company (HDMC) and Harley-Davidson Financial Services (HDFS). HDMC produces heavyweight cruiser and touring motorcycles. HDMC currently manufactures six platforms of motorcycles: Touring, Dyna®, Softail®, Sportster®, V-Rod®, and Street. HDFS provides wholesale and retail financing and insurance programs primarily to Harley-Davidson dealers and customers. The Company operates in two business segments: Motorcycles & Related Products (Motorcycles) and Financial Services (Financial Services). 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 "% Change" figures included in the "Results of Operations" section were calculated using unrounded dollar amounts and may differ from calculations using the rounded dollar amounts presented. Overview The Company's net income was $354.2 million, or $1.62 per diluted share, for the second quarter of 2014 compared to $271.7 million, or $1.21 per diluted share, in the second quarter of 2013. Operating income from Motorcycles increased $115.6 million or 32.3% compared to last year's second quarter driven by a 12.4% increase in revenue behind a 9.0% increase in wholesale shipments of Harley-Davidson motorcycles. Motorcycles segment operating income also benefited from a higher gross margin percentage, partially offset by higher year-over-year selling, general and administrative and engineering expenses. Operating income from Financial Services in the second quarter of 2014 was $74.4 million, up 0.4% compared to $74.2 million in the year-ago quarter. The Company's net income also benefited from lower year-over-year interest expense due to the retirement of its high interest debt in the first quarter of 2014. During the second quarter of 2014, worldwide independent dealer retail sales of new Harley-Davidson motorcycles were flat compared to the same period in 2013 in both the U.S. and International markets. Retail sales in the second quarter of 2014 were lower than the Company had expected due in part to prolonged poor weather conditions across parts of the U.S. and soft Sportster® sales related to anticipated shipments of the Company's new Street motorcycles, coupled with start-up issues impacting the timing of Street availability. As a result of the lower than expected second quarter retail sales, the Company made a decision to adjust its wholesale motorcycle shipment guidance downward by 9,000 motorcycles for 2014. Also, as anticipated, the absence of the popular Road Glide models from the 2014 model year continued to adversely impact U.S. retail sales as compared to the prior year. Although second quarter worldwide retail sales were below the Company's expectations, the Company believes the core demand fundamentals for the business remain intact and underlying growth trends are strong when adjusting for the absence of Road Glide. (1) Note Regarding Forward-Looking Statements



The Company intends that certain matters discussed in this report are "forward-looking statements" intended to qualify for the safe harbor 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," "plans," or "estimates" or words of similar meaning. Similarly, statements that describe future plans, objectives, outlooks, targets, guidance 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 under the caption "Cautionary Statements" and in Item 1A "Risk Factors" of the Company's Annual Report on Form 10-K for the year ended December 31, 2013. Shareholders, potential investors, and other readers are urged to consider these factors in evaluating the forward-looking statements and cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements included in this report are only made as of the date of the filing of this report (August 7, 2014), and the Company disclaims any obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances.

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Outlook(1)

On July 22, 2014, the Company provided the following information concerning its expectations for the remainder of 2014. The Company stated its expectation to ship 270,000 to 275,000 Harley-Davidson motorcycles to dealers and distributors worldwide in 2014, an increase of 3.7% to 5.6% over 2013. The Company's previous guidance was 279,000 to 284,000 motorcycles. In addition, the Company announced that its full-year shipment estimate includes expected shipments of 49,000 to 54,000 motorcycles in the third quarter of 2014, down from 54,025 in the third quarter of 2013. The Company believes it is critical for it to support a healthy retail channel and protect its premium brand by aggressively managing supply in line with demand, as it has consistently done over the past several years. The Company expects retail sales will benefit from the following for the remainder of 2014: • Project Rushmore motorcycles

• Increased product availability of Street motorcycles, which represent 7,000 to 10,000 units of the 2014 unit shipment estimate. The Company now believes these shipments will be more heavily weighted towards the end of the year than originally planned



• The 2015 model year motorcycle line-up which will include the new Road Glide

The Company expects gross margin in the third quarter of 2014 to be lower by approximately 2.5 percentage points compared to 35.3% in the third quarter of 2013. The Company expects the lower gross margin to be driven by the following: • The shipment mix of wholesale motorcycles is expected to be unfavorable.

Project Rushmore models, which delivered strong mix gains since its introduction, will be included in both the current year and prior year results as the initial launch was in the third quarter of 2013, while Street, at a lower gross margin, is expected to be an increasing portion of the shipment mix in the third quarter of 2014



• The Company expects lower year-over-year production due to its revised

shipment expectations

• The Company expects additional Street start-up costs of approximately $5

million

The Company continues to expect 2014 operating margin percent for the Motorcycles segment to be between 17.5% and 18.5% compared to 16.6% in 2013. The Company believes operating margin percent improvement will be driven by a modest increase in gross margin, as well as lower selling, administrative and engineering expenses as a percent of revenue. The Company expects selling, administrative and engineering expenses to grow in 2014 as it continues to invest in future growth opportunities but that they will decrease as a percent of revenue as the Company leverages its current spending. The Company continues to expect operating income for the Financial Services segment to be down modestly in 2014 as compared to 2013. Going forward, the Company continues to expect pressure on Financial Services operating income as a result of modestly higher credit losses and tightening net interest margins due to increasing competition and higher year-over-year borrowing costs. The Company continues to estimate capital expenditures for 2014 to be between $215 million and $235 million. The Company anticipates it will have the ability to fund all capital expenditures in 2014 with cash flows generated by operations. The Company continues to expect the full year 2014 effective income tax rate to be approximately 35.5%. This guidance excludes the effect of any potential future adjustments such as changes in tax legislation or audit settlements which are recorded as discrete items in the period in which they are settled.

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Source: Edgar Glimpses


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