Harley Davidson: Over Engineering the Numbers

Harley Davidson (HOG) reported disappointing Q4 and year end results. This was expected as naturally, the domestic US demand for product is off. Overseas demand is up dramatically in many countries and one wonders why they are not looking overseas for more growth. It’s not a secret that other economies are doing well and more than a few consumers can afford a Harley.

Check out the year end cash and marketable securities position. At the end of 2007 they came in at approximately $402 million. That’s down from $896 at the end of 2006. Where did it all go? 2007 Net cash from operating activities was actually up slightly to approximately $798 million from $762 million in 2006.

Working Capital Ratio has dropped from 2.23 at the end of 2006 to 1.88 at the end of 2007. The traditional sources and uses of cash actually make it look like the cash position went up, but liquidity is really down. Finance debt is up by approximately $400. The current portion has jumped by $288 million and the long term portion jumped $110. Yet cash from operations is the same. Inventories are up only slightly but receivables held for sale is up $234 million.

In today’s credit environment I do not believe consumer lenders are looking for motorcycle loans. Harley has continued with its share buyback and spent almost the same amount of money in 2007 as in 2006, except then they had a rising share price and in 2007 they had the mirror image chart of a falling share price. Smart in '06, not smart in '07.

The company continues to focus on the financial engineering side of the financials and are not paying attention to the fundamentals of running the business. They have also increased the total payout of dividends from $213 million to $261 million in the face of radically reduced profits.