PowerSports Business

November 27, 2017

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FINANCE www.PowersportsBusiness.com Powersports Business • November 27, 2017 • 13 $144.2 million due to timing of shipments year-over-year, as the company manufactured and shipped its snowmobiles later in 2016. Motorcycle segment sales, including PG&A, totaled $155.1 million, a decrease of 14 percent compared to $181.2 million reported in the third quarter of 2016 which included $39.4 million of Victory Motorcy- cle wholegood, accessory and apparel sales. Indian motorcycle wholegood sales increased in the low 20 percent range in the third quar- ter driven by new product introductions and improving brand awareness. This increase somewhat offset lower Slingshot sales. Gross profit for the third quarter of 2017 was $10.4 million compared to $20.3 million in the third quarter of 2016. Adjusted for the Vic- tory Motorcycles wind down costs of $7.6 million, motorcycle gross profit was $17.9 million, down from the third quarter last year due primarily to lower Slingshot volume. North American consumer retail demand for the Polaris motorcycle segment, including Indian Motorcycle and Slingshot, was up mid- single digits percent during the 2017 third quarter. Indian Motorcycles increased retail sales 16 percent, partly driven by new model introductions including the new Chieftain Elite and Limited models and Roadmaster Classic. Indian Motorcycle market share sur- passed the ten percent mark in September. Slingshot's retail sales were down although the rate of decline decelerated during the quarter. Motorcycle industry retail sales, 900cc and above, were down high-single digits percent in the 2017 third quarter. Global Adjacent Markets segment sales along with its PG&A related sales, increased 17 percent to $91.6 million in the 2017 third quarter compared to $78.5 million in the 2016 third quarter. Reported gross profit decreased 27 percent to $16.0 mil- lion, or 17.5 percent of sales, in the third quarter of 2017, compared to $21.8 million, or 27.8 percent of sales, in the third quarter of 2016. Adjusted gross profit, excluding the manufacturing realignment costs, increased 2 percent to $22.2 million, or 24.2 percent of sales for the third quarter 2017. Work and Transportation group wholegood sales were up 17 percent during the third quarter of 2017 primarily due to an increase in sales in the company's Aixam quadricycles and Goupil light-utility businesses. Aftermarket segment sales, which include Transamerican Auto Parts (TAP), along with the Company's other aftermarket brands of Klim, Kolpin, Pro Armor, Trail Tech and 509, increased significantly to $224.7 mil- lion in the 2017 third quarter compared to $29.9 million in the 2016 third quarter. TAP added $190.6 million of sales in the third quarter of 2017. Gross profit increased sig- nificantly to $63.2 million, or 28.1 percent of sales in third quarter of 2017, compared to $10.6 million, or 35.5 percent of sales, in the third quarter of 2016. Sales and gross profit dollars were up primarily due to the addition of TAP acquired in the fourth quar- ter of 2016. TAP sales grew 4 percent in the third quarter of 2017 compared to last year on a proforma basis, had Polaris owned TAP for the full year 2016. P a r t s , G a r m e n t s , a n d A c c e s s o r i e s ("PG&A") sales, excluding Aftermarket seg- ment sales, increased 7 percent for the 2017 third quarter. All segments and categories increased sales during the quarter. International sales to customers outside of North America, including PG&A, totaled $156.8 million for the third quarter of 2017, up 11 percent, from the same period in 2016. Sales in EMEA and Asia Pacific increased low- double digits percent in the third quarter with Latin America growing sales mid-single digits during the quarter. Gross profit increased 40 percent to $364.0 million for the third quarter of 2017 from $260.8 million in the third quarter of 2016. As a percentage of sales, reported gross profit margin was 24.6 percent compared with 22.0 percent of sales for the third quarter of 2016. Gross profit for the third quarter of 2017 includes the negative impact of $7.6 million of Victory Motorcycles wind down costs and manufacturing network realignment costs of $6.2 million. Excluding these items, adjusted gross profit was $377.7 million, or 25.5 percent of sales. Gross profit margins on an adjusted basis improved due to increased volume, lower warranty, significant gross VIP cost savings and positive product mix, somewhat offset by higher promotional costs. Sequentially, adjusted gross profit margins were 130 basis points lower than the 2017 second quarter primarily due to higher war- ranty and the added costs from a combination of supply chain and natural disaster related headwinds during the quarter. Operating expenses increased 19 percent for the third quarter of 2017 to $265.2 mil- lion from $222.6 million in the same period in 2016, which included $1.3 million in Victory wind down costs and $3.5 million of TAP integration expenses. Excluding these costs, operating expenses increased primar- ily due to the addition of operating expenses from TAP, as well as increased research and development expenses and increased selling and marketing costs related to the introduc- tion of new products, offset somewhat by lower legal related expenses. Income from financial services was $18.1 million for the third quarter of 2017, down six percent compared with $19.2 million for the third quarter of 2016. The decrease is attributable to lower income generated from the wholesale portfolio due to the lower dealer inventory levels. As part of its 2017 business outlook, the company has increased its sales guidance and expected earnings per share range for the full year 2017 from previously issued guidance. The company now expects adjusted net income to be in the range of $4.75 to $4.85 per diluted share, compared with adjusted net income of $3.48 per diluted share for 2016. Full year 2017 adjusted sales are now anticipated to increase in the range of 18 percent to 19 percent over 2016 sales of $4,516.6 million. PSB POLARIS CONTINUED FROM PAGE 10

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