Cycle News - Archive Issues - 1980's

order or MasterCard or Visa credit card number), from the V.S. Postal Service, Philatelic Sales Division, Washington, DC 20265-9997. • . MOTORCYCLE INDUSTRY tlANGES The V.S. Postal Service, bane of speedy Cycle News delivery, has issued a 5<1: motorcycle stamp. The stamp, known in Postal Service jargon as Item #0735, is available in rolls of 500 for $25.50 (payable by check, money Bom Taylor Christain Oesterle, to Karl and Linda Oesterle on May 28 in Buffalo, New York; Oesterle is the Dunlop Tire & Rubber account executive for Faller Klenk & Quinlan, Inc. • 'Harley-Davids-on goes public By Robert Marich A contingent of American businessmen visiting Malaysia in southeast Asia last year presented the country's monarch with an FX model Harley-Davidson motorcycle.. Upon seeing his gift of a 1340cc Super Glide, King Mahmood Iskandar was awe struck. "I have wanted a Harley for such a long time," he fina·lIy stammered. .uAnd now, God has sent me one." The behemoth motorcycles of Harley-Davidson have a mystique around the world. Now enthusiasts have the opportunity to own a piece of what is America's only motorcycle manufacturer. Harley-Davidson Inc., which is priVately owned, is going public. The Mi'lwaukee, Wisconsin-based manufacturing concern, which made a brief announcement about the plan a we.ek ago (Cycle News, june 4):just issued an extensive report about the stock offering. The document also proviqes a glimpse of the company's inner workings and financial performance since 1982. In going public, the company intends to sell 1.43 million shares, or 28% of its 5.11 million overall shares. The other 82% will remain in the hands of management, which is its current owners. , The stock sale will be completed in the next few weeks after HarleyDavidson's report, which is called a prospectus, is approved by government officials that regulate Wall Street. The expectation is that stock will be priced between $9 and $11 a share. The brokerage firm handling the deal is Dean Witter Reynolds. Anyone interested in purchasing shares can do so through any stock broker, not just Dean Witter (although if there's i big demand, Dean Witter's own orokers will have beS.l access to what's wailable ). At the same time it is going public, Harley-Davidson will sell $50 million in subordinated notes. The notes, which will be priced atabout $Ioooa :rack, are a way of borrowing money without going to a bank. In many' ways, notes are like U.S. Savings Bonds that are issued by the governoent. Harley-Davidson promises to pay a set amount of interest regularly to holders of the notes, whether profits are good or bad (this is unlike stock, whose value rises and falls depending on profits). When the notes mature in 1996, holders get their original $1000 back, coming after years of 'getting interest paymems. The precise rate of interest will be established depending on market condi tions when issued. The sale of stock and notes is expected to gross about $64.3 million. The net proceeds, or what's left after expenses are subtracted, will be used to payoff $47.6 million in existing debt and fund on-going operations. The prospectus notes that the company's most important lender (probably a bank) decided last year not 10 extend loans for reason that were not specified. As for its stock, Harley-Davidson has applied to be listed on the American Stock Exchange, which is Wall Street's second most prestigious marketplace after the New York Stock Exchange. The company's ticker symbol, or identification code, will be the letters "HDI" once it is public. In becoming one of the 945 stocks traded on the Amei.can Stock Exchange, Harley-Davidson will join an odd assortment of companies in a diverse-rangeof business. Other firms traded on the Amex range from Giant Yellowknife Mines to U.S. shares of japanese car maker Toyota to that well-known marketer of scanty lingerie, the infamous Frederick's of Hollywood. For Harley-Davidson, just being alive and well enough to go public is something of an achievement. Most companies in its business category, which is essentially being a maker of common-place products that are sold to the mass consumer market, have been wiped out by foreign competition. The company, which was founded in 1903, still makes its motorcycles at plants in Wisconsin and Pennsylvania. "This is one of the few manufacturers of consumer durable products that still tries to do it here," said Charles V. Bromley, an analyst covering the machinery industry at Duff & Phelps Inc., a stock bl'Okerage firm in Chicago. "The other companies are manufacturing outside the U.S. in an .effort to keep labor costs down." For example, the videocassette record.ers that are sold by RCA Corp., an American firm, are actually made in japan. Being one of a handful of survivIng old-line manufacturing firms in the V .5. probably means stock market gurus won't be especially drawn to Harley-Davidson. The Wall Street crowd likes glamorous industries in the fast-lane such as bio-tech/genetics, fiber-optics, high-technology computers and aerospace. The Harley-Davidson prospectus reveals that company sales in calendar year 1985 were $287.4 million. While that seems Iike a pretty good-sized hunk of change, the company is dwarfed by other vehicle manufacturers. For example, Chrysler Corp., the smallest of Detroit's Big Three car makers, racked up sales of $19.6 billion (or 68 times more than HarleyDavidson). As for motorcycle companies based in japan, Honda Motor Co. Ltd. 'weighs in with $1O.I·billion (35 times more). Kawasaki Heavy Industries Ltd. reponed its sales were $2.83 billion (10 times more). The prospectus said that HarleyDavidson's basic profit from operations was $70.2 million in 1985. Expenses re.]ated to interest on debt. taxes, unusual items and corporate overhead (charges that all companies bear) whittled the net profit down to $9.95 million. If the company would have been public in 1985, its profits· would have amounted to 72¢ per share (or $2.71 a share when a raft of non-recurring, or special, gains.such as tax credits from previous losses boosted the bottom line). The company posted steady profits for three consecutive years. But in 1982, it reported a huge loss of $25 million, according to the prospectus. The prospectus said the company does not intend to pay cash dividends on its stock for the foreseeable future. Profits will be plowed.right back into operations for new equipment and product development. Many companies have such a policy. Anyone thinking of buying its stock should note, though, that the only way they can expect a gain on their investment under such a policy is' if HarleyDavidson stock is bid uJ? in trading on the American Stock Exchange. There's no guarantee it will rise and it could even decline. The company's balance sheet is cluttered with the residue of its past business activi ties: - While management bought the company from its previous owner, AMF Corp., in 1981, AMF still is entitled to a series of payments as pan of a separation agreement finalized in 1983. - The company holds $11.3 million in federal and $24 million in Wisconsin state operating loss carry forwards. These can be used to shelter future profits from heavy taxation. Thecompany also has $2.2 million in unused investment tax credits, which can also be used to reduce the tax bite on it future profits. - A change. in accounting allowed the company to record a $900,000 "paper" profit in 1984, which is entirely proper and one of the several non-recurring items cited earlier. The prospectus portrays HarleyDavidson as a company that made modest gains in market share in the past two years. However, the market in which it competes, heavyweight motorcycles defined as 650cc or larger, is shrinking. Company sales measured in units (or motorcycles, not dollars) account- ed for 16.1% of: the U.S. heavyweight motorcycle market in 1985, up from a 12.5% market share in 1983. But in that span, unit sales for the entire heavyweight market (all brands) fell 15% to 185,300 units, compared to 217,000 unus before. Using those figures, it appears Harley-Davidson sold about 29,800 motorcycles in 1985, up from 27,100 in 1983. In the company's hey-day of the 1970s, unit sales were estimated at 50,000 annually. "The company does not anticipate further growth in the heavyweight motorcycle market," the prospectus gloomily notes. The typical HarleyDavidson owner is a male in his mid 30s with household income of $35,000 annually who uses the motorcycle primarily for recreation, not basic transportation. The motorcycles are sold througH a domestic network of 640 dealers and exported to 20 foreign countries. The company employs 2200 persons. Motorcycles are priced from $4000 to $10,000, which is anywhere from 10% to 100% more than those of competitors, depending on model, according to the prospectus. In 1984, Harley-Davidson purchased Trihaw~ In~., a small company that designeiI a HglWweight threewheel car. 'Yhe 'P~os~cij.Is indicates that production bf tP;t!. ihawk vehicle is on the backburner because necessary funding. is not available. The prospectus sheds light on the company's little-known second line of business. While motorcycle products account for 84% of sales, they chip in just 52% of profits. HarleyDavidson's other business as a defense contractor, a small segment accounting for 16% of overall sales, contributes a whopping 48% of profits. Defense contractor? . The company has a thriving operation making metal cases for 500pound bombs that are sold to the military. Harley-Davidson shipped 196,000 casings to Uncle Sam in 1985. Most of the company's bomb casings are used by the military for target practice. The prospectus notes that as a result sales are "not dependent on any military conflict." In other words, it's a steady business. While stories of shocking overcharges by wasteful defense contractors are rampant (the $600 toilet seats, the. $75 screw drivers and so fonh), Harley-Davidson is giving Uncle Sam a good bang for a buck. The unit price of its bomb casings actually have declined 29% since 1981 "while allowing for adquate levels of profitability," the prospectus said. This is an example or the company's devotion to increased efficiency and productivity paying off. Many of its techniques are adapted from the japanese, the prospectus said. The .revenue per employee from all its operations has doubled since 1981. Other U.S. companies are.so curious about how Harley-Davidson does it, the company charges outsiders a fee for a peek inside its factories at seminars. "As a means to funher diversify sources of revenue, -the comPany's long-range strategy with respect to defense and other businesses is to use its manufacturing expertise toaggressively pursue new defense and other business opportunities in bo.th domestic and interna tional markers," the prospectus states. The expertise came from making motorcycles. Another line of defense products is rocket engines. The company is a subcontractor to Beech Aircraft Corp. in making rocket-like engines for drone, or unmanned, airplanes that are shot-down in target practice. The prospectus only goes back to 1932, just as the company was com(Continued to page 28)' i8 B .~ 3

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