NEWS – SEC to Question Harley-Davidson

The United States Securities and Exchange Commission (SEC) is looking into matters surrounding several investor lawsuits filed against Harley-Davidson, the company said at the same time it announced a soft second quarter financial performance.
Several shareholders have sued Harley following its April announcement that it would limit short-term production and decrease planned motorcycle shipments, citing weak first-quarter sales and excess models on dealer showfloors.
In response, the share price of HDI plunged to $45.14 – the lowest price in more than 14 months and the biggest one-day decline in 14 years.
Shareholders became more unhappy when it was learned that several of Harley’s executives had sold large blocks of stock prior to the first quarter earnings announcements. The result was a number of shareholder lawsuits, and the request that they be combined into a class-action lawsuit filed in the U.S. District Court for the Eastern District of Wisconsin.
“The company believes the allegations in the lawsuits are without merit, and it intends to vigorously defend against these actions,” Harley-Davidson said in a prepared statement denying the accusations. In a filing with the SEC on July 13, HDI noted that in light of the pending shareholder litigation, it wasn’t surprised by the SEC inquiry.
In its earnings news, Harley reported the first quarterly drop in net income in more than seven years for the second quarter ended June 26.
HDI said second quarter net income was $237.4 million, or 84 cents per share, down 4% from $247.2 million, or 83 cents per share, for the second quarter 2004.
Operating income from motorcycles and related operations dropped 4.7% to $319.4 million, while second quarter revenue was $1.33 billion, up 0.4% from $1.328 billion for the same period last year.
The company shipped 77,128 motorcycles to dealers in the quarter, down 6% from a year ago. Plans are to ship 329,000 motorcycles for full-year 2005, an improvement in shipments of 3.7% compared to last year’s total of 317,289 units shipped.
The Milwaukee-based company forecast 2005 earnings per share growth of 10%-13%, up from its prior forecast of 5%-8%, due to an increase in share buybacks during the quarter. HDI bought back 17.7 million of its own shares during the second quarter, up from 2.9 million shares bought back in the first quarter.
Analysts who follow Harley-Davidson had mixed observations following the second quarter earnings release.
“We maintain our Neutral rating on HDI,” said Gary Cooper of Banc of America Securities Equity Research. “Results were inline with our expectations.”
Cooper estimates Harley-Davidson’s second quarter U.S. retail inventory is nearly 16,000 units or more than twice the level of 7,500 units during the same period last year. Despite the production decline in the second quarter, the company’s retail inventory continues to increase year-over-year, he said.
“HDI is forecasting that retail sales will re-accelerate in the second half of the year to double the rate of recent growth. We believe these expectations will prove too aggressive.”
Another analyst was cautious about the quality of Harley’s earnings.
“While we are encouraged by HDI’s focus on enhancing shareholder value, it is a lower quality of earnings,” said Greg Badishkanian, Equity Researcher at Smith Barney.
“If retail sales do not materially improve in the second half of 2005, HDI will either need to implement another one-time shipment cut along with a reduction in long term shipment guidance or incur an inventory build – which jeopardizes Harley’s brand equity.”

– Joe Delmont