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20 Nov 2003
MOODY'S ASSIGNS A1 LONG-TERM RATING TO MTN PROGRAM OF HARLEY-DAVIDSON FUNDING CORP; OUTLOOK IS STABLE
Approximately $800 Million of Securities Affected.
New York, November 20, 2003 -- Moody's Investors Service assigned an A1 rating to the $800
medium-term note program and the $400 million of notes issued
under the program by Harley-Davidson Funding Corp. (HDFC).
The rating is based on the exceptional brand strength and competitive
position of the Harley-Davidson motorcycle franchise; the
strong cash generation, operating performance, and debt-free
balance sheet of Harley-Davidson, Inc.'s (HDI) manufacturing
operations; and, the sound asset quality, capital structure
and earnings characteristics of HDI's captive financing operations
-- Harley-Davidson Financial Services (HDFS) and Harley-Davidson
Credit Corp (HDCC). The rating also reflects the unconditional
guarantees of the notes by HDFS and HDCC, as well as a support agreement
that HDI extends to HDFS.
These operational and financial strengths should provide ample support
for the A1 rating despite various challenges. These challenges
include more aggressive competition from Japanese manufacturers in the
highly profitable US market for heavyweight motorcycles; HDI's
attempt to expand and strengthen its position in non-US markets
for heavyweight motorcycles and in the US market for sport and sport-touring
motorcycles; and, the highly discretionary nature of motorcycle
purchases in the US.
The rating outlook is stable. This outlook reflects Moody's
expectation that HDI is well positioned to defend and preserve the strength
and profitability of the Harley-Davidson brand, and that
the company has ample financial flexibility to weather most competitive,
cyclical, or financial stress that it might face. The outlook
also anticipates that HDI would pursue any potential acquisitions in a
very operationally and financially prudent manner, and that such
an acquisition would be undertaken only if it directly supported the domestic
or international motorcycle operations. The rating and outlook
consider the risk that HDI may come under pressure to undertake share
repurchases due to its large cash position. Notwithstanding this
potential pressure, Moody's expects that HDI will maintain
a large liquidity position, and will not compromise its controlled
growth strategy or its superior level of financial flexibility in the
pursuit of a higher share price.
HDI's principal market is the US heavyweight motorcycle segment.
The company has established an exceptionally strong and profitable position
in this market by building the "Harley-Davidson" brand
name into one of the most recognizable and respected brands in the US.
Moreover the company has remained highly focused on: nurturing the
long-term strength and value of this brand name; managing
its growth in a very diligent and controlled manner that does not undermine
the long-term position of the Harley-Davidson brand;
and maintaining a highly efficient, cost competitive manufacturing
operation that can produce extremely high-quality products.
Between 1991 and 2002, unit registrations in the US heavyweight
motorcycle market have grown at a compound annual rate of about 15%.
Within this market, HDI's performance has been impressive:
at year--end 2002 the company had a market share of 48%,
with historic market share ranging between 45% and 50% (with
periodic declines in share due to capacity constraints); for the
last five years HDI's revenues and earnings have grown at compound
annual rates of 18% and 27% respectively; and,
the manufacturing company's operating margin has risen steadily
from 15.7% in 1998 to 19.3% in 2002 --
for the nine months to September 2003, the margin surged to 21%.
This strong historic operating performance has supported robust cash generation.
Free cash generation of HDI's manufacturing operations (after working
capital, capital expenditures and dividends) approximated $300
million per year from 2000 through 2002; following the completion
of a large capital spending program in 2002, free cash flow grew
to over $600 million for the nine months to September 2003.
As a result of this strong cash generation, HDI's manufacturing
operations are debt free and the company has approximately $1.4
billion in cash and marketable securities. Moreover, the
company maintained its strong revenue, earnings, and cash
generation performance through two economic downturns in the US -
that of the early 1990s and, more critically, that of 2001
through 2003. Despite the highly discretionary nature of motorcycle
purchases in the US, this performance through the downturns is,
in Moody's view, important evidence of the sustainability
of HDI's business.
The key factor underlying HDI's strong operating and financial performance
has been the success with which it has built the "Harley-Davidson"
name, which is now one of the most well-established brand
franchises in the US. HDI's key long-term strategic
focus is on preserving the strength of this name and supporting the growing
popularity of motorcycle riding in the US through a broad range of initiatives.
These initiatives include: the highly successful 750,000-member
Harley Owners Group, its motorcycle riders education programs,
the continuously updated design of its cycles, the diligent focus
on the quality of its products, and the highly successful marketing
and merchandising programs that not only generate a profitable revenue
stream, but also further promote the Harley-Davidson name
and image. Moody's believes that HDI will remain highly successful
at preserving the long-term strength of the Harley-Davidson
Evidence of the success of these brand-building initiatives is
the company's ability to consistently hold close to 50% share
of the heavyweight motorcycle market in the US. It is also evidenced
by the frequency with which younger motorcycle riders, who may start
out riding lower-priced Japanese racing bikes, aspire to
owning a Harley and eventually purchase one as they become older and their
incomes rise. Each year a large portion of Harley purchasers are
those who formerly owned Japanese motorcycles.
In addition to the competitive challenges posed by Japanese manufacturers,
HDI must also contend with managing various growth initiatives prudently.
These initiatives include its attempt to expand its business in Europe
and Asia, and to build its position among younger riders through
its Buell performance-motorcycle brand. Moody's believes
that both of these initiatives represent strategically-necessary
efforts, that HDI will continue to manage the expansion prudently,
and that neither will represent a material risk to the company's
core US franchise or the company's operating performance within
the context of the A1 rating.
HDFS is a captive finance subsidiary of HDI;
HDCC is a wholly-owned subsidiary of HDFS; it provides wholesale
floor plan financing to Harley-Davidson dealers, and through
a banking subsidiary it also provides retail financing to purchasers of
HDFC is a funding vehicle that issues commercial paper and long-term
debt in support of the operations of HDFS and HDCC
HDI provides a support agreement in favor of HDFS requiring it to:
1) maintain majority ownership of HDFS (ownership was 100% at 9/30/03);
2) maintain HDFS's fixed charge coverage at no less than 1.25
times (coverage was 10.5 times at 9/30/03); and 3) maintain
HDFS's equity at not less than $40 million (equity was $347
million at 9/30/03)
At September 30, 2003, HDFS (including HDCC) had a managed
portfolio of $3.8 billion in wholesale and retail receivables.
The company benefits from a prudent capital structure, sound underwriting
standards, a healthy earnings history, and excellent liquidity:
Leverage on a managed asset basis (which includes outstanding sold
receivables of $2.6 billion) is reasonable at 8.6
During the past three years the ratio of losses to managed receivables
has remained below .90%, and retail delinquencies
more than 30 days past due have remained below 5.7%;
Earnings before taxes have expanded steadily from $28 million
in 1999 to $104 million in 2002, and has exceeded $130
million for the nine months to September 2003;
Strong earnings have supported fixed charge coverage (adjusted
for gains on the sale of receivables) of 4.2x in 2002, 1.7x
in 2001 and 1.6x in 2000.
HDFS' liquidity provides considerable margins of protection for
the timely repayment of all short-term and maturing obligations,
particularly in the aftermath of the current note issuance, proceeds
of which will be used to repay commercial paper outstandings. At
September 30, 2003 HDFS' pro forma short-term debt
was less than $300 million. Resources that will be available
to ensure prompt repayment of maturing obligations include: a $350
million revolving credit facility due in 2005; a $200 million
revolving credit facility that matures in 2005; a $400 million
364-day facility that matures in September 2004; and $1.4
billion in cash and marketable securities held by HDI. In addition,
HDFS has established solid access to the ABS market with receivable sale
transactions of $1.8 billion, $1.3 billion,
$1.0 billion and $0.7 billion in respectively
in 2003, 2002, 2001 and 2000.
Harley-Davidson Inc., headquartered in Milwaukee,
Wisconsin, is the only major American motorcycle company.
It produces heavyweight motorcycles under the Harley-Davidson name,
and sport and sport-touring motorcycles under the Buell name.
It also offers a complete line of motorcycle parts, accessories,
clothing and collectibles. Harley-Davidson Financial Services,
Inc., through its wholly owned subsidiary, Harley-Davidson
Credit Corp., offers wholesale and retail financing for Harley-Davidson
products. Harley-Davidson Funding Corp. is a funding
vehicle for HDFS and HDCC.
Michael J. Mulvaney
Corporate Finance Group
Moody's Investors Service
J. Bruce Clark
Senior Vice President
Corporate Finance Group
Moody's Investors Service
No Related Data.
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