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Harley’s Q1 earnings per share grow despite sales decrease

Harley Q1 Breakout

April 25, 2013
Filed under News, Top Stories

Harley-Davidson reported a 33.8-percent increase in earnings per share in the first quarter of 2013, despite a drop in retail sales.

First quarter diluted earnings per share rose to $0.99, up from $0.74 in the year-ago quarter. Net income increased 30.3 percent to $224.1 million, while consolidated revenue grew 9.9 percent to $1.57 billion. The positive results were due to a higher gross margin percentage and an 11.1-percent increase in revenue in the motorcycle segment. Operating income for financial services also rose 6.1 percent.

However, not all results were positive. Worldwide retail sales of 54,254 units were down 9.1 percent from the 2012 first quarter. In the U.S., retail sales dropped 12.7 percent, with a 1.8-percent decrease internationally.

“Worldwide retail sales of new Harley-Davidson motorcycles were down 9.1 percent, reflecting weather in the U.S. and macroeconomic challenges that continue in Europe. Despite these factors, the Harley-Davidson brand is strong and is benefitting from the success of our key growth strategies,” CFO John Olin said in the first-quarter conference call. “We, along with our dealers, continue to invest in the Harley-Davidson experience, including our remarkable products, expanding the reach of our products to new customers in the U.S. and expanding our international distribution. We continue to gain momentum in market share in many key markets, and we believe we are on track to deliver our full-year shipment guidance of 259,000-264,000 units, or up approximately 4.5-6.5 percent.”

Keith Wandell, president and CEO of Harley-Davidson, reported that the switch to a new production model at the York, Pa., facility moved seamlessly.

“In manufacturing, the implementation of seasonal surge production at our York plant in January came out without a hitch,” he said. “Our employees did an unbelievable job in this implementation, and as a result, we’re now building more motorcycles closer to when they’re needed. We also continue to see great improvement in better matching production to customer demand.”

The following is Harley-Davidson’s full first-quarter news release:

Harley-Davidson, Inc. (NYSE: HOG) first-quarter 2013 diluted earnings per share increased 33.8% on higher motorcycle shipments and continued improvement in operating efficiencies, compared to the year-ago period. First-quarter net income was $224.1 million on consolidated revenue of $1.57 billion, compared to net income of $172.0 million in the year-ago period on consolidated revenue of $1.43 billion. First-quarter 2013 diluted earnings per share were $0.99, compared $0.74 in the year-ago quarter.

“With our focus on continuous improvement throughout our operations and providing outstanding products and customer experiences, we have continued to deliver gains in Harley-Davidson’s financial and competitive performance,” said Keith Wandell, Chairman, President and Chief Executive Officer of Harley-Davidson, Inc.  “The successful launch of seasonal surge production at our York assembly operations in the first quarter is the latest example of our efforts to drive greater efficiency and be even more responsive to the market.

“Thanks to the outstanding efforts of our employees, dealers and suppliers, we believe Harley-Davidson is well positioned to deliver on all the ways we serve our customers, generate strong results for investors and build a successful business for the long term,” Wandell said.

Retail Harley-Davidson Motorcycle Sales

Dealers worldwide sold 54,254 new Harley-Davidson motorcycles in the first quarter of 2013 compared to 59,677 motorcycles in the year-ago quarter. In the U.S., dealers sold 34,706 new Harley-Davidson motorcycles in the quarter, down 12.7% compared to the year-ago period which the Company believes benefited from accelerated sales due to abnormally warm early spring weather in the U.S. In international markets, dealers sold 19,548 new Harley-Davidson motorcycles during the first quarter, compared to 19,915 motorcycles in the year-ago period, with unit sales up 11.5% in the Asia Pacific region and 6.2% in the Latin America region, and down 10.8% in the EMEA region and 0.4% in Canada.

Industry-wide U.S. heavyweight new motorcycle (601cc-plus) retail unit sales decreased 16.5% compared to last year’s first quarter. The Company has adjusted its definition of heavyweight motorcycles to 601cc-plus from the prior definition of 651cc-plus, to better align with the current U.S. industry definition.

Harley-Davidson recently reported newly available U.S. demographic market share data for 2012 new street motorcycle sales (all engine displacements) showing the Company continued its market leadership in the U.S. among young adults 18-34, women, African-Americans, Hispanics and Caucasian men 35-plus. According to the Polk data, in 2012, for the fifth straight year, Harley-Davidson was the number one seller of new street motorcycles in the U.S. to each of these groups. Sales of new Harley-Davidson motorcycles in the U.S. grew in each of these demographic segments last year, and Harley-Davidson sold nearly twice as many new street motorcycles to young adults as its nearest competitor in 2012.

“We believe our continued market leadership in these customer segments demonstrates the strong and growing appeal of our products and brand across generations and cultures,” said Wandell.

“In 2012, nearly four in ten sales of new Harley-Davidson motorcycles in the U.S. were to customers who are new to the brand. Outside the U.S., two-thirds of sales were to customers new to the brand. And nearly six in ten sales worldwide were to customers outside our traditional U.S. base of Caucasian men 35-plus. We believe our strategy to expand our reach to new customers and market segments in the U.S. and internationally, while also growing the base, holds tremendous opportunity for Harley-Davidson’s future,” Wandell said.

Harley-Davidson Motorcycles and Related Products Segment Results

First-quarter operating income from motorcycles and related products grew 33.0% to $276.8 million, compared to operating income of $208.1 million in the year-ago period. Operating income in the quarter benefited from higher motorcycle shipments, higher gross margin and lower restructuring costs compared to the prior-year period.

Revenue from motorcycles grew 15.9% to $1.15 billion, compared to revenue of $995.9 million in the year-ago period. The Company shipped 75,222 motorcycles to dealers and distributors worldwide during the quarter, in line with guidance and a 17.1% increase compared to shipments of 64,263 motorcycles in the year-ago period. In the first quarter of 2013, the Company launched seasonal surge production at its York, Pa. plant, which provides the flexibility to produce more motorcycles closer to customer demand during the prime selling season.

Revenue from motorcycle parts and accessories was $184.0 million during the quarter, down 7.5%, and revenue from general merchandise, which includes MotorClothes® apparel and accessories, was $72.1 million, down 3.3%, compared to the year-ago period.

Gross margin was 36.7% in the first quarter of 2013, compared to 35.9% in the first quarter of 2012. First-quarter operating margin from motorcycles and related products was 19.6%, compared to operating margin of 16.3% in last year’s first quarter.

Financial Services Segment Results

Operating income from financial services was $71.5 million in the first quarter of 2013, a 6.1% increase compared to operating income of $67.4 million in last year’s first quarter. First-quarter financial services results reflect higher net interest income on favorable cost of funds, partially offset by slightly higher provision for credit losses.

Guidance

Harley-Davidson continues to expect to ship 259,000 to 264,000 motorcycles to dealers and distributors worldwide in 2013, an approximate 4.5% to 6.5%  increase from 2012. In the second quarter of 2013, the Company expects to ship 80,000 to 85,000 motorcycles, in line with shipments of 83,502 motorcycles in the year-ago period. The Company continues to expect full-year 2013 gross margin of 35.25% to 36.25%.  The Company also continues to expect capital expenditures of $200 million to $220 million in 2013.

Restructuring Update

In the first quarter of 2013, Harley-Davidson incurred restructuring charges of $2.9 million, compared to restructuring charges of $11.5 million in the year-ago period. Upon the expected completion of restructuring in 2013, Harley-Davidson expects restructuring activities initiated since 2009 to result in one-time overall costs of approximately $495 million, including approximately $13 million in 2013. The Company expects savings of approximately $305 million in 2013 from restructuring activities initiated since 2009, rising to annual ongoing savings of approximately $320 million beginning in 2014.

Income Tax Rate

For the first quarter of 2013, the Company’s effective income tax rate was 33.8% compared to 35.3% in the first quarter of 2012.  The lower effective tax rate in the first quarter of 2013 was primarily driven by the retroactive reinstatement of the Research and Development Tax Credit with the enactment of the American Taxpayer Relief Act of 2012.   The full-year impact of the 2012 Research and Development Tax Credit was recorded in the first quarter of 2013.  The Company continues to expect its full-year 2013 effective tax rate to be approximately 34.8%.

Cash Flow

Cash and marketable securities totaled $1.15 billion at the end of the first quarter, compared to $1.41 billion at the end of last year’s first quarter. During the first quarter of 2013, Harley-Davidson experienced a cash outflow from operating activities of $108.5 million, compared to an outflow of $73.6 million in the year-ago quarter. Cash flow was affected by a $175 million voluntary contribution to its pension plan in the first quarter of 2013 and $200 million voluntary contribution in the year-ago period. On a discretionary basis, the Company repurchased 2.0 million shares of Harley-Davidson, Inc. common stock during the first quarter of 2013 at a cost of $105.4 million. At the end of the first quarter of 2013, there were 13.5 million shares remaining on board-approved share repurchase authorizations.

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