The 5-year restructuring plan enacted by CEO Keith Wandell is beginning to pay dividends by lowering production costs. Harley’s gross margins have reportedly grown a full percentage point year-over-year to 37.7% this quarter, bolstered by a reduction of $ 300 million in annual costs to its manufacturing operations. Though some of the moves and consolidations were unpopular in the court of public appeal when they were made, the business-based decisions apparently are now paying off.
Harley-Davidson’s first quarter net income was $ 265.9 million, up from $ 224.1 million a year ago. Consolidated revenue jumped from 2013’s $ 1.57 billion in the first quarter to $ 1.73 billion in Q1 2014. These numbers helped Harley shares rise by 6 percent in pre-market trading this morning, exchanging in the $ 72.98 per-share range.
Harley-Davidson, Inc. (NYSE: HOG) first-quarter 2014 diluted earnings per share of $ 1.21 grew 22.2% from the year-ago period on higher motorcycle shipments and continued improvement in operating efficiencies. First-quarter net income was $ 265.9 million on consolidated revenue of $ 1.73 billion, compared to net income of $ 224.1 million in the year-ago period on consolidated revenue of $ 1.57 billion.
“Harley-Davidson delivered gains on many fronts in the first quarter, with shipments up 7.3%, strong margin improvement and solid growth in dealer new motorcycle sales,” said Keith Wandell, Chairman, President and Chief Executive Officer of Harley-Davidson, Inc.
“Thanks to the great contributions of our employees, dealers and suppliers, we continue to lead at delivering exceptional customer experiences in 89 countries,” said Wandell. “Our Project RUSHMORE motorcycles were in high demand in the quarter and we began shipping the Harley-Davidson Street 750 and 500 into select markets. These motorcycles, together with continuous improvement in our operations at every level, underscore the momentum we’ve established as a customer-led company.”
Retail Harley-Davidson Motorcycle Sales
Dealers worldwide sold 57,415 new Harley-Davidson motorcycles in the first quarter of 2014 compared to 54,254 motorcycles in the year-ago quarter. In the U.S., dealers sold 35,730 new Harley-Davidson motorcycles in the quarter, up 3.0% compared to sales of 34,706 motorcycles in the year-ago period. In international markets, dealers sold 21,685 new Harley-Davidson motorcycles during the first quarter, up 10.9% compared to 19,548 motorcycles in the year-ago period, with sales up 20.5% in the Asia Pacific region, 8.2% in the EMEA region and 8.9% in the Latin America region, and down 2.4% in Canada.
“Our dealers had a solid quarter of retail motorcycle sales. Sales in the Asia Pacific region were up strongly, and we are encouraged by the continued growth of new Harley-Davidson motorcycle sales in Europe. We’re also excited to be entering the heart of the retail selling season in the U.S., having achieved first-quarter retail growth of 3.0% in the midst of a long, cold winter,” said Wandell.
According to Wandell, “there’s also great news for Harley-Davidson in the annual reporting of our demographic market share data.”
In 2013, for the sixth consecutive year, Harley-Davidson was the number-one seller of new on-road motorcycles in the U.S., both 601cc-plus and across all displacements, to young adults age 18-34, women, African-Americans and Hispanics (“outreach” customers) and Caucasian men age 35-plus (“core” customers), according to Polk 2013 U.S. new motorcycle registration data from IHS Automotive. The Company grew its U.S. market share and also increased its share gap to the nearest competitor in each of these segments, compared to 2012.
“Together with our dealers, we continued to expand the appeal of our products and the Harley-Davidson experience,” said Wandell. “Harley-Davidson dealers sold more than 4 times as many new, on-road motorcycles, 601cc and up, to U.S. young adults last year, and among riders age 35-plus, more than 9 times as many to women, more than 6 times as many to African Americans and more than 6 times as many to Hispanics, as the nearest competitor.”
According to Harley-Davidson’s internal data, retail sales of its motorcycles to U.S. outreach customers grew at more than twice the rate of sales growth to core customers in 2013 compared to 2012.
Harley-Davidson Motorcycles and Related Products Segment Results
First-quarter operating income from motorcycles and related products grew 25.6% to $ 347.7 million, compared to operating income of $ 276.8 million in the year-ago period. Operating income in the quarter benefited from higher motorcycle shipments and higher gross margin compared to the prior-year period.
Revenue from motorcycles grew 13.1% to $ 1.31 billion, compared to revenue of $ 1.15 billion in the year-ago period. The Company shipped 80,682 motorcycles to dealers and distributors worldwide during the quarter, in line with guidance and a 7.3% increase compared to shipments of 75,222 motorcycles in the year-ago period.
Revenue from motorcycle parts and accessories was $ 198.1 million during the quarter, up 7.7%, and revenue from general merchandise, which includes MotorClothes apparel and accessories, was $ 64.1 million, down 11.1%, compared to the year-ago period.
Gross margin was 37.7% in the first quarter of 2014, compared to 36.7% in the first quarter of 2013. First-quarter operating margin from motorcycles and related products was 22.1%, compared to operating margin of 19.6% in last year’s first quarter.
Financial Services Segment Results
Operating income from financial services was $ 63.2 million in the first quarter of 2014, an 11.7% decrease compared to operating income of $ 71.5 million in last year’s first quarter. First-quarter financial services results reflect a higher provision for credit losses.
Harley-Davidson continues to expect to ship 279,000 to 284,000 motorcycles to dealers and distributors worldwide in 2014, an approximate 7% to 9% increase from 2013. In the second quarter of 2014, the Company expects to ship 92,000 to 97,000 motorcycles, up from shipments of 84,606 motorcycles in the year-ago period. The Company continues to expect full-year 2014 operating margin of 17.5% to 18.5% in the Motorcycles segment. The Company also continues to expect capital expenditures of $ 215 million to $ 235 million in 2014.
Income Tax Rate
For the first quarter of 2014, the Company’s effective income tax rate was 35.0% compared to 33.8% in the first quarter of 2013. 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, which included the full-year impact of the 2012 Research and Development Tax Credit. The Company continues to expect its full-year 2014 effective tax rate to be approximately 35.5%.
Cash and marketable securities totaled $ 1.03 billion at the end of the first quarter, compared to $ 1.15 billion at the end of last year’s first quarter. During the first quarter of 2014, Harley-Davidson generated cash from operating activities of $ 203.6 million, compared to an outflow of $ 108.5 million in the year-ago quarter. On a discretionary basis, the Company repurchased 1.2 million shares of Harley-Davidson, Inc. common stock during the first quarter of 2014 at a cost of $ 76.6 million. In the first quarter of 2014, there were approximately 220.5 million Harley-Davidson weighted-average diluted common shares outstanding. At the end of the first quarter of 2014, 28.1 million shares remained on board-approved share-repurchase authorizations.