EXPERIENCEBUSINESS - Harley-Davidson

MANAGEMENT’ S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OPERATING INCOME FROM FINANCIAL SERVICES The
Financial Services segment reported operating income of
$27.7 million for 1999, an increase of $7.5 million, or 37%
over 1998 levels. This increase was due to growth in all business
lines during 1999. The growth was particularly strong in
retail installment lending where HDFS experienced increases
in both market share and profitability. During 1999, HDFS
financed 22% of new Harley-Davidson ® motorcycles retailed
in the U.S., up from 21% in 1998. Additionally, increased
volumes and outstandings in the wholesale lending business
and commission revenue growth from the insurance agency
business contributed to increased operating income in 1999.
OTHER Other expense for 1999 was $1.9 million higher than
in 1998. Included in 1998 other expense is a $1.8 million onetime
benefit related to a rebate of harbor maintenance fees.
The levy of these fees was found unconstitutional by the U.S.
Supreme Court and related to fees collected over the previous
five years. Other non-operating expense items, including
foreign currency exchange losses, remained consistent from
1998 to 1999.
INTEREST INCOME 1999 interest income was higher than in
the prior year primarily due to higher levels of cash available
for short-term investing when compared to 1998.
CONSOLIDATED INCOME TAXES The Company’s effective
tax rate was 36.5% in 1999 and 1998.
OTHER MATTERS
ACCOUNTING CHANGES In June 1998, the Financial
Accounting Standards Board issued Statement of Financial
Accounting Standards (SFAS) 133, “Accounting for Derivative
Instruments and for Hedging Activities,” which in its amended
form is effective for fiscal years beginning after June 15, 2000.
The statement requires the Company to recognize all derivatives
on the balance sheet at fair value. Derivatives that are not
hedges must be adjusted to fair value through income. If the
derivative is a hedge, depending on the nature of the hedge,
changes in the fair value will either be offset against the change
in fair value of hedged assets, liabilities or firm commitments
through earnings or recognized in other comprehensive income
until the hedged item is recognized in earnings. The ineffective
portion of a hedge’s change in fair value will be immediately
recognized in earnings. The Company anticipates it will continue
to use derivatives to reduce the impact of fluctuations in
exchange rates and interest rates. The Company intends for the
derivatives to qualify as cash flow hedges in accordance with
SFAS 133. The Company also intends that the net gain or loss
on the derivative instruments designated and qualifying as cash
flow hedges will be reported in comprehensive income. The
adoption of SFAS 133 will not have a material impact on the
Company’s statement of income.
ENVIRONMENTAL MATTERS The Company’s policy is to
comply with all applicable environmental laws and regulations,
and the Company has a compliance program in place
to monitor and report on environmental issues. The
Company has reached a settlement agreement with the U.S.
Navy regarding groundwater remediation at the Company’s
manufacturing facility in York, Pennsylvania and currently
estimates that it will incur approximately $5.4 million of net
additional costs related to the remediation effort. (1) The
Company has established reserves for this amount. The
Company’s estimate of additional response costs is based on
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