Harley-Davidson, Inc. (NYSE:HOG) third quarter 2016 diluted earnings per share decreased 7.2 percent to $0.64 compared to diluted EPS of $0.69 in the same period in 2015. Net income was $114.1 million on consolidated revenue of $1.27 billion compared to net income of $140.3 million on consolidated revenue of $1.32 billion in the third quarter of 2015.
Harley-Davidson worldwide retail motorcycle sales in the third quarter were down 4.5 percent, primarily on weak U.S. industry trends. Harley-Davidson retail motorcycle sales in the U.S. were down 7.1 percent compared to the year-ago quarter, with the overall U.S. industry also down for the same period. Harley-Davidson’s U.S. market share for the quarter was 52.3 percent in the 601cc-plus segment, essentially flat compared to the third quarter in 2015. Harley-Davidson international retail sales increased by 1.0 percent over the prior year quarter.
“We continue to effectively navigate a fiercely competitive environment and an ongoing weak U.S. industry,” said Matt Levatich, president and chief executive officer, Harley-Davidson, Inc. “We are pleased with the positive results and the enthusiasm we’ve seen for our Model Year 2017 motorcycles, featuring the new Milwaukee-Eight engine. We are confident that the entire line-up will drive retail sales growth for the remainder of 2016 and position us well heading into the spring riding season next year.”
The Milwaukee-Eight engine packs innovative technologies that deliver improved horsepower, torque, and comfort and enhanced sound. It was introduced on Touring motorcycles in August as part of the Model Year 2017 product launch. Response to the new model year motorcycles drove increased retail sales in September over prior year.
Through nine months, Harley-Davidson 2016 net income was $645.0 million on consolidated revenue of $4.89 billion compared to nine-month 2015 net income of $710.0 million on consolidated revenue of $4.81 billion. Diluted EPS was $3.55 compared to diluted EPS of $3.41 in the year-ago period. Worldwide retail motorcycle sales were down 1.9 percent compared to the same period in 2015. International retail sales were up 3.3 percent, offset by a decline of 4.7 percent in U.S. retail sales.
Recognizing the continued slower industry growth in the U.S., the company will streamline its operations in the fourth quarter of 2016. It expects to incur expenses of approximately $20 million to $25 million in the fourth quarter, primarily for employee separation and reorganization costs.
“Our value as a company and as a brand is the sum of 113 years of commitment to our riders and the freedom seekers we will inspire to ride in the future,” said Levatich. “We remain intensely focused on growing the sport and delivering strong business results.”
Retail Harley-Davidson Motorcycle Sales
| $ in thousands | 3rd Quarter | Nine Months | ||||
| 2016 | 2015 | Change | 2016 | 2015 | Change | |
| Americas Region | ||||||
| U.S. | 45,469 | 48,918 | (7.1)% | 135,581 | 142,196 | (4.7)% |
| Canada | 2,663 | 2,554 | 4.3% | 8,946 | 8,414 | 6.3% |
| Latin America | 2,605 | 2,818 | (7.6)% | 7,064 | 8,091 | (12.7)% |
| Europe, Middle East, Africa (EMEA) Region | 10,224 | 10,031 | 1.9% | 37,947 | 35,598 | 6.6% |
| Asia Pacific Region | 7,994 | 7,857 | 1.7% | 24,141 | 23,471 | 2.9% |
| Worldwide Total | 68,955 | 72,178 | (4.5)% | 213,679 | 217,770 | (1.9)% |
Retail sales in EMEA were up 1.9 percent in the third quarter and up 6.6 percent for the first nine months due to the popularity of Model Year 2016 cruiser motorcycles and our focus on driving demand through test rides. Asia Pacific retail sales were up 1.7 percent in the quarter and up 2.9 percent for the first nine months compared to 2015 behind strong growth in Australia and Japan.
Motorcycles and Related Products Segment Results
| $ in thousands | 3rd Quarter | Nine Months | ||||
| 2016 | 2015 | Change | 2016 | 2015 | Change | |
| Motorcycle Shipments (vehicles) | 48,611 | 53,472 | (9.1)% | 219,807 | 218,233 | 0.7% |
| Revenue | ||||||
| Motorcycles | 788,856 | 812,398 | (2.9)% | 3,437,066 | 3,376,356 | 1.8% |
| Parts & Accessories | 231,279 | 252,226 | (8.3)% | 673,192 | 692,938 | (2.8)% |
| General Merchandise | 65,289 | 69,008 | (5.4)% | 211,664 | 212,954 | (0.6)% |
| Gross Margin Percent | 33.6 | 34.6 | (1.0)pts | 36.1 | 37.9 | (1.8)pts |
| Operating Income | 108,929 | 143,065 | (23.9)% | 764,135 | 869,122 | (12.1)% |
| Operating Margin Percent | 10.0% | 12.5% | (2.5)pts | 17.6% | 20.2% | (2.6)pts |
Revenue from motorcycles and related products was down compared to the third quarter in 2015, primarily behind decreased motorcycle shipments. Operating margin as a percent of revenue decreased versus the prior year as a result of lower gross margin behind unfavorable manufacturing expense and higher year-over-year SG&A.
Financial Services Segment Results
| $ in thousands | 3rd Quarter | Nine Months | ||||
| 2016 | 2015 | Change | 2016 | 2015 | Change | |
| Revenue | 183,183 | 177,109 | 3.4% | 547,505 | 513,093 | 6.7% |
| Operating Income | 69,447 | 72,771 | (4.6)% | 215,391 | 219,348 | (1.8)% |
Operating income from financial services was down 4.6 percent in the third quarter compared to the year ago period.
Guidance
Harley-Davidson continues to expect to ship 264,000 to 269,000 motorcycles in 2016, which is approximately down 1 percent to up 1 percent from 2015. In the fourth quarter of 2016, the company expects to ship 44,200 to 49,200 motorcycles compared to 48,149 motorcycles shipped in the year-ago period. The company continues to expect full-year 2016 operating margin of approximately 15 to 16 percent for the Motorcycles segment. The company continues to expect 2016 capital expenditures for Harley-Davidson, Inc. of $255 million to $275 million.
Income Tax Rate
For the first nine months, Harley-Davidson’s effective tax rate was 32.9 percent compared to 34.8 percent in 2015. The company continues to expect its full-year 2016 effective tax rate will be approximately 33 percent.
Cash Flow
Cash and marketable securities totaled $795.3 million at the end of the third quarter, compared to $1.42 billion a year ago. During the first nine months of the year, Harley-Davidson generated $927.8 million of cash from operating activities compared to $1.02 billion for the same period in 2015.
Shareholder Returns
In the third quarter, the company paid a cash dividend of $0.35 per share. During the same time period, on a discretionary basis, the company repurchased 2.1 million shares of Harley-Davidson common stock for $104.6 million. Also in the third quarter, there were approximately 179.3 million weighted-average diluted shares outstanding, compared to approximately 204.6 million shares in the year-ago quarter. As of September 25, 2016, a total of 20.9 million shares remained on board-approved share repurchase authorizations.
Company Background
Harley-Davidson, Inc. is the parent company of Harley-Davidson Motor Company and Harley-Davidson Financial Services. Since 1903, Harley-Davidson Motor Company has fulfilled dreams of personal freedom with custom, cruiser and touring motorcycles, riding experiences and events and a complete line of Harley-Davidson motorcycle parts, accessories, general merchandise, riding gear and apparel. Harley-Davidson Financial Services provides wholesale and retail financing, insurance, extended service and other protection plans and credit card programs to Harley-Davidson dealers and riders in the U.S., Canada and other select international markets. For more information, visit Harley-Davidson’s Web site at www.harley-davidson.com.