Union Woes Hit Harley-Davidson

The company trims its earnings growth outlook and will ship fewer motorcyles this year, after settling a three-week strike

Harley-Davidson (HOG) learned the hard way that having unhappy staff can cost money - especially in the short run. After battling with workers who went on strike to defend their wages, the Milwaukee (Wis.) company warned on Feb. 27 that it will have lower than expected earnings growth and ship fewer motorcycles in 2007.

The motorcycle maker finally managed to end the three week strike at its manufacturing facility in York (Pa.) on Feb. 22, when most of the more than 2,500 members of the International Association of Machinists and Aerospace Workers (IAM) Local 175 agreed on a new 3-year contract.

The dispute wound up costing Harley about a month of production, as the company expects to get its plants back to normal over the next week. Now Harley thinks it will have between 64,000 and 66,000 motorcycle shipments during the first quarter, instead of the 82,000 to 84,000 predicted earlier. After carefully considering factors like the cost implications, timing of shipments to dealers, and ways to make up for the delayed start of 2008 model year production caused by the strike, Harley now expects to ship about 14,000 fewer motorcycles during the entire year than originally planned.

"While we are pleased to have reached an agreement with our unionized employees in York, a disruption of this magnitude has a significant impact on our business," said CFO Tom Bergmann in a press release Feb. 27.

Morningstar pointed out on Feb. 23 that under the new agreement, Harley's new employees will start at a lower wage rate than current employees and then begin earning a more comparable rate after the initial few years. The agreement also reduces Harley's matching percentage for new employees who make optional contributions to the pension plan. "By modifying its wage structure, the firm is rewarding employee loyalty while keeping wage inflation under control," Morningstar analyst Marisa E. Thompson said in a research note Feb. 23.

After the recent strike, Harley is expecting earnings per share growth in the range of 4% to 6% in 2007 compared to 2006. But then Harley thinks its EPS growth rate will return to the 11% to 17% range in 2008 and 2009.

Standard & Poor's Equity Research analyst Erik Kolb cut his 12-month target price on the stock by $1 to $63, citing factors like the strike and the company's costs. But Kolb wasn't entirely negative. "We believe higher rates of growth will return in '08 and '09," Kolb said in a research note. (S&P, like BusinessWeek.com, is owned by The McGraw-Hill Companies.)

Harley's stock dropped 3.5% to $66.31 on the New York Stock Exchange Feb. 27, as investors unloaded U.S. stocks and worried about a plunge in China's stock exchange and the global economy. The Dow Jones Industrial average tumbled 416.02 points, or 3.3%, to 12,216.24

Harley's profits have been rising in recent years and the company already earned nearly $1 billion last year amid surging worldwide demand for the company's products, according to the union. "There is a time for sharing sacrifices and a time for sharing success," said IAM International President Tom Buffenbarger in a statement Feb. 22. "And after eighteen straight quarters of record profits and sales at Harley, these workers know what time it is."

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