Ups and Downs in Harley-Davidson's Quarterly Announcement&#151and an SEC Inquiry

Harley-Davidson Motor Company's second-quarter 2005 announcement shows that demand for big cruiser motorcycles remains solid.

Harley-Davidson Motor Company is often regarded as an indicator for the American motorcycle market, especially for cruisers,, so we watch the company's quarterly announcements with interest. That's doubly true after Harley's April 2005 announcement, when it reported that sales were flat for the first time in just short of forever. At that time, it reduced its target figures for motorcycle production and shipments, though it retained an optimistic outlook for the future.

On July 13, the company announced its results for the second quarter of 2005 with both positive and negative numbers. Sales at the dealer level were up strongly, along with earnings per share, the company's growth target, and total revenue. On the down side, shipments of motorcycles were reduced as indicated three months ago, and net income also slipped. Harley has stepped up its repurchases of its stock. Overall, the market liked what it saw—which exceeded the predictions of most analysts—and its stock price rose by over by over 3.0% in morning trading, though it had retreated some later in the day.

Harley also confirmed that the Securities and Exchange Commission (SEC) is looking into claims made in lawsuits reacting to its first-quarter announcements. It says that it is cooperating and that the suits are "without merit."

For most motorcycle enthusiasts, motorcycle sales are the most interesting part of these announcements. Although Harley shipped 153,844 motorcycles in the first six months of 2005, down 1.5% from last year's 156,124, the revenue received from those shipments was $1.99 billion, 2.4% more than the $1.94 billion of the first half on 2004. Sales during the quarter just reported were were quite strong, especially internationally, where they grew by 11%, with 23% growth in Europe (where overall sales of big bikes of all brands dropped 2.6%). In the U.S., sales by dealers increased by 3.2% over the second quarter of 2004—when sales grew by 19%. Even though Harley reduced shipments of bikes to dealers to 77,000 machines, dealers sold 114,000 bikes. Combined with increases in sales and profit from accessories, clothes, other products, and financial services, the sales increases seems to indicate that you can continue wearing your rose-colored Harley-Davidson eyewear.

Harley will announce its 2006 model line near the end of July.

An abbreviated version of the company's announcement follows.


Milwaukee, Wis. (July 13, 2005) - Harley-Davidson, Inc. (NYSE: HDI) today announced record earnings per share (EPS) of 84 cents for the quarter ended June 26, 2005 compared to 83 cents for the year ago quarter. Revenue for the quarter was $1.333 billion compared with $1.328 billion in the year ago quarter, a 0.4 percent increase. Net income for the quarter was $237.4 million, slightly lower than last year's $247.2 million. During the second quarter, the Company repurchased 17.7 million shares of its common stock, in addition to the 2.9 million shares repurchased during the first quarter of this year.

Harley-Davidson had a successful second quarter," said Jim Ziemer, Chief Executive Officer, Harley-Davidson, Inc. The Company produced record revenue despite lower motorcycle shipments compared to the year ago quarter. We shipped 77,000 motorcycles to our dealers as planned, while retail sales of Harley-Davidson motorcycles grew to record levels of 114,000 units, up nearly 6 percent compared to the same period last year. In addition, we increased our stock repurchase investment to over $1 billion year-to-date. Earnings per share were at an all-time high for any quarter in our history," said Ziemer.

During the quarter, our dealers' retail sales continued to grow worldwide. European demand for Harley-Davidson motorcycles drove an increase of more than 23 percent in retail sales in that market. Retail sales in the remainder of our international markets grew more than 11 percent compared to last year's second quarter. In the U.S., sales of Harley-Davidson motorcycles were at an all time high, up 3.2 percent over an exceptional increase of nearly 19 percent in the year-ago quarter," said Ziemer.

For the full year, the Company is on course to ship our target of 329,000 Harley-Davidson motorcycles, yielding a shipment growth rate of 3.7 percent. At the end of the first quarter, we set expectations that this wholesale shipment volume would drive earnings per share growth of 5 - 8 percent for the year. Given the number of shares we repurchased during the first half of the year, 2005 earnings per share growth is now anticipated to be in the 10 - 13 percent range," he said.

Harley-Davidson's longer-term guidance remains at 7 - 9 percent annual growth in motorcycle unit shipments, supporting earnings per share growth in the mid-teens," said Ziemer.

Motorcycles and Related Products Segment

In line with prior guidance, motorcycle shipments during the second quarter of 2005 totaled 77,128 units, down 6 percent compared to the second quarter of 2004. Second quarter revenue from Harley-Davidson motorcycles was just over $1.0 billion, 1.4 percent lower than the second quarter last year.

Second quarter revenue from Parts and Accessories (P&A;), which consists of Genuine Motor Parts and Genuine Motor Accessories, totaled $237.8 million, a 3.3 percent increase over the year-ago quarter. For the longer term, the Company expects P&A; revenue to grow at a rate slightly faster than the motorcycle unit growth rate.

General Merchandise revenue, which consists of MotorClothes apparel and collectibles, was $63.4 million in the second quarter, up 19.5 percent compared to the same period last year. For the longer term, the Company expects General Merchandise revenue to grow at a rate less than the motorcycle unit growth rate.

Second quarter gross margin was 37.5 percent of revenue versus 37.9 percent in the year ago quarter. This slight decrease is due to lower motorcycle shipments and higher raw material costs, which have been partially offset by a stronger model mix. Higher operating expenses during the second quarter resulted in an operating margin of 24.0 percent compared to 25.2 percent in the same quarter last year. On a year-to-date basis, operating expenses as a percent of revenue were 13.5 percent in 2005 compared to 13.7 percent a year ago.

Motorcycle Retail Sales Data

Worldwide retail sales of Harley-Davidson motorcycles grew nearly 6 percent for the quarter, driven by strong performance in Europe and Japan which increased 23.6 and 10.4 percent respectively. On an industry-wide basis through May 2005, the 651+cc segment was down 2.6 percent in Europe, while the heavyweight market in Japan was down 6.0 percent for the same period.

In the United States for the second quarter, Harley-Davidson retail motorcycle sales finished up 3.2 percent compared to 2004. Similarly, the U. S. heavyweight motorcycle market finished up 4.4 percent in the second quarter. Data is listed in the accompanying tables.

Financial Services Segment

Harley-Davidson Financial Services (HDFS) reported operating income of $51.0 million, up $2.0 million or 4.1 percent compared to the year-ago quarter.

During the quarter, HDFS sold $775 million in retail motorcycle loans and recorded a gain of $14.0 million. This compares with a gain of $19.3 million on $626 million of loans securitized during the second quarter of 2004. The gain of 1.8 percent as a percentage of loans sold falls within management's prior guidance. In this current competitive market and interest rate environment, HDFS expects future gains in the range of 1.3 to 2.0 percent.

Annualized credit losses on a managed portfolio basis during the first six months were 0.89 percent, compared to 0.63 percent in 2004. This increase is a result of lower recovery rates and a higher incidence of loss. Management's annualized credit loss target remains at 1 percent or less.

For the full year 2005, HDFS operating income is expected to be slightly lower than that achieved in 2004. For the longer term, the Company expects the HDFS operating income growth rate to be slightly higher than the Company's motorcycle unit growth rate.

Harley-Davidson, Inc. - Six Month Results

For the first six months of 2005, revenue totaled $2.57 billion, a 3.0 percent increase over the year-ago period. Earnings per share were $1.62, an increase of 6.6 percent compared to the same period last year.

Through the first six months of this year, shipments of Harley-Davidson motorcycles were 153,844 units, a 1.5 percent decrease compared to last year's 156,124 units. Harley-Davidson motorcycle revenue was $1.99 billion, up 2.4 percent compared to last year's $1.94 billion. P&A; revenue totaled $414.7 million, a 3.8 percent increase over last year's $399.3 million. General Merchandise revenue totaled $122.9 million, a 14.3 percent increase compared with $107.5 million during the same period in 2004.

HDFS operating income was $104.6 million, a 5.3 percent increase over last year's $99.3 million.

Cash Flow

Cash and marketable securities decreased $876 million during the first six months in 2005 as the Company repurchased $1.0 billion of its common stock, contributed $102 million to post-retirement health care trusts, invested $75 million in capital expenditures and paid $80 million in dividends.

Recent Lawsuits - SEC Request for Information

On July 11, 2005, Harley-Davidson was advised by the Securities and Exchange Commission (SEC) that it is inquiring into matters relating generally to certain claims made in lawsuits recently filed by shareholders against the Company. The lawsuits were filed subsequent to our April 13, 2005 announcement to reduce our planned Harley-Davidson motorcycle shipment growth during 2005 by 10,000 units from our original target. The Company believes the lawsuits are without merit.

The Company disclosed this matter in a Form 8-K filed with the SEC on July 12, 2005. In light of the pending shareholder litigation, the Company was not surprised by the SEC's inquiry. The Company is cooperating with the SEC. _

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