Feb. 9, 2004 – Finance Digest

APS acquires two more dealerships
America’s PowerSports (APS), one of the country’s largest powersports dealer groups, has acquired two additional dealerships, Brockton Cycle Center and Wareham Cycle Center, both in Massachusetts.

These are the tenth and eleventh dealerships for APS. Dave Veracka, owner of the Brockton and Wareham dealerships, will continue in his role as manager of both locations.

“I love what I do and enjoy being in the dealerships on a daily basis. That is not going to change with APS. However, now I don’t have to worry about what my exit strategy will be some day – I’ve already taken care of it. I’m optimistic about our future together and what we can do to grow the business,” said Veracka.

“APS now has dealerships on the East Coast and the West Coast, as well as a few states in between,” said Clark Vitulli, president and CEO of APS.

Both dealerships have been in existence for nearly three decades and carry a full line of Kawasaki, Yamaha and Suzuki products including motorcycles, ATV’s and personal watercraft. They stock over $3 million worth of parts and accessories on the premises and are the U.S. distributor for Fieldsheer. They have over 15 years of experience in the mail order business and have been online since 1998.

Formed in November 1998, APS represents all major brands including Harley-Davidson, Honda, BMW, Yamaha, Suzuki, Kawasaki, Sea-Doo and Polaris. For more information visit www.americaspowersports.com and www.brocktoncycle.com.


Harley-Davidson posts records, but retails sales off in 4th quarter
Harley-Davidson, Inc. (NYSE: HDI) posted record revenue and earnings for its fourth quarter and year ended Dec. 31, 2003. Revenue for the quarter was $1.16 billion compared with $1.03 billion in the year-ago quarter, a 12.8% increase.

Net income for the quarter was $182.4 million compared to $150.9 million, an increase of 20.9% over the year ago quarter. Fourth quarter diluted earnings per share (EPS) was 60 cents, a 22.4% increase compared with last year’s 49 cents.

Revenue for the full year was $4.62 billion, compared with $4.09 billion in 2002, a 13.0% increase. Net income for the year was $760.9 million, a 31.1% increase versus last year’s $580.2 million, while diluted EPS for the full year was $2.50, a 31.6% increase compared with $1.90 in 2002.

MOTORCYCLE RETAIL SALES DATA
Retail sales of Harley-Davidson motorcycles for the year 2003 grew 8.8% in the U.S., 6.7% in Europe, and 9.0% in Japan compared to 2002.

According to figures compiled by the Motorcycle Industry Council (MIC), the segment in which Harley operates (651cc and larger) increased 4.3% in 2003.
However, Harley’s sales at the retail level declined in the fourth quarter by nearly 7%, compared to the same quarter in 2002.

“Although our U.S. dealer network experienced a modest decline in motorcycle sales in the fourth quarter as compared to last year’s fourth quarter, we believe it is difficult to draw meaningful conclusions from this comparison,” said Jeffrey L. Bleustein, chairman and chief executive officer of Harley-Davidson, Inc.

“The urgency to buy a 100th Anniversary motorcycle prior to the celebrations, along with an unusually late shipment plan for ’04 motorcycles, created two very different selling environments. We are confident that 2004 will be another strong year for Harley-Davidson,” he added.

It was the 18th consecutive year that Harley-Davidson achieved records for both revenue and net income.
Harley has set a new goal for the company to be able to satisfy a yearly demand of 400,000 Harley-Davidson motorcycles in 2007. By offering innovative products and services, and by driving productivity gains in all facets of our business, we are confident that we can deliver an earnings growth rate in the mid-teens for the foreseeable future,” said Bleustein.

MOTORCYCLES AND RELATED ITEMS
Revenue from Harley-Davidson motorcycles was $945.3 million, an increase of $125.0 million or 15.2% over the same period last year.

Shipments of Harley-Davidson motorcycles totaled 77,056 units, an increase of 11,086 units or 16.8% over last year’s fourth quarter. The company’s shipment target remains 317,000 Harley-Davidson motorcycles for 2004.

Revenue from Parts and Accessories (P&A), which consists of Genuine Motor Parts and Genuine Motor Accessories, totaled $141.0 million, an increase of $11.1 million, or 8.5% over the year-ago quarter.

Revenue from General Merchandise, which consists of MotorClothes, apparel and collectibles, totaled $50.7 million, a decrease of $4.1 million or 7.4%.

Excluding revenue from 100th Anniversary products in 2002’s fourth quarter, the P&A growth rate would have been 20.3% over last year’s fourth quarter and the General Merchandise growth rate would have been 20.0% over the same period.

Gross margin was 35.9% of revenue, down slightly from the prior year’s 36.1%. Gross margin was reduced, the company said, by a higher proportion of Sportster motorcycle shipments and higher manufacturing costs, but partially offset by favorable foreign currency exchange. Fourth quarter operating margin improved to 21.5% in 2003 from 20.7% in 2002.

FINANCIAL SERVICES SEGMENT
Harley-Davidson Financial Services, Inc. (HDFS), a subsidiary of Harley-Davidson, Inc., reported fourth quarter operating income of $33.8 million, up $8.5 million or 33.4% compared to the year-ago quarter.
Full year operating income for HDFS was $167.9 million, an increase of $63.6 million or 61.1% compared to 2002.

TWELVE MONTH RESULTS
For the fiscal year ended 2003, total Harley-Davidson motorcycle shipments were 291,147 units compared with 263,653 units in 2002, a 10.4% increase. Harley-Davidson motorcycle revenue was $3.62 billion, an increase of $460.4 million or 14.6%.

P&A revenue totaled $712.8 million, a 13.3% increase, while General Merchandise revenue totaled $211.4 million, an 8.7% decrease compared with 2002. Excluding revenue from 100th Anniversary products for both 2002 and 2003, the P&A growth rate would have been 14.4% and the General Merchandise growth rate would have been 12.7%.

During the fourth quarter, the company invested $73.3 million in repurchasing 1.6 million shares of its stock.

ANALYSTS GENERALLY POSITIVE
Securities analysts who follow Harley-Davidson generally made positive comments about the company’s performance for 2003, but also expressed some concern over lower retail sales in the fourth quarter.

Joe Hovorka, analyst with Raymond James & Associates, called the fourth quarter results a “positive surprise,” noting that Harley’s EPS figure of 60 cents beat his forecast by three cents. Hovorka said he’s increasing his 2004 EPS from $2.72 to $2.74, based on projected higher margins.

In his report, Hovorka says that “the decline in retail sales units suggests that the dealer inventory is again increasing as wholesale shipments grew 16.8% in the quarter.” While noting that fourth quarter dealer inventory normally is expected to increase in preparation for the upcoming selling season, Hovorka says “the numbers would indicate that dealer inventory is in excess of the normal season build.”

He rates Harley a Strong Buy with a 12-month price target of $58; it’s currently trading at about $45.
Another analyst, Tim Conder of AG Edwards, also gives Harley a Buy recommendation and sees a $58 price objective over the next 12-18 months.

Here are some other comments from Conder:
– 2004 EPS estimate is raised from $2.85 to $2.86 and the 2005 estimate is set at $3.33. The 2004 estimate assumes that Harley will repurchase 4 million shares of stock.

– Harley’s cash position increased from $280.9 million in 2002 to $812.5 million on Dec. 31, 2003. The “only realistic alternative for (Harley’s) building a cash position is accelerated share repurchase and higher dividends with share repurchase the most logical alternative.”

– While Harley’s revenues increased, they were partially offset by a 1.3% decline in the average wholesale selling price in the fourth quarter. This was based in part upon a larger mix of lower margin Sportsters.

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