Issue link: https://read.dmtmag.com/i/752766
10 • November 28, 2016 • Powersports Business FINANCIAL www.PowersportsBusiness.com Victory and Indian motorcycles reported increased vehicle sales growth, while Sling- shot sales were down during the quarter due to shipment timing. Gross profit decreased 26 percent to $21.2 million, or 11.6 percent of sales, in the third quarter of 2016, compared to $28.4 million, or 15.1 percent of sales, in the third quarter of 2015 due to higher warranty expense related to recent safety and service bulletins, primarily for Slingshot. North American consumer retail demand for the Polaris motorcycle segment, includ- ing Victory, Indian Motorcycle and Slingshot, increased high-single digits percent during the 2016 third quarter with Indian Motorcycle and Victory increasing low-teens percent com- bined, while overall motorcycle industry retail sales 900cc and above were down high-single digits percent in the 2016 third quarter. Prod- uct availability for all three motorcycle brands remained adequate throughout the quarter as both the company's Spirit Lake, Iowa, motor- cycle plant and the new Slingshot production line in Huntsville, Alabama, are producing at retail demand levels. Global Adjacent Markets segment sales, along with its respective PG&A sales, increased 6 percent to $78.5 million in the 2016 third quarter compared to the 2015 third quarter. Gross profit increased 3 percent to $21.8 mil- lion, or 27.8 percent of sales, in the third quar- ter of 2016, compared to $21.2 million, or 28.7 percent of sales, in the third quarter of 2015. Parts, Garments, and Accessories (PG&A) sales, which are included in each of the three respective reporting segments, declined 1 percent during the 2016 third quarter to $224.4 million driven by lower retail sales. International sales to customers outside of North America totaled $141.0 million for the third quarter of 2016, including PG&A, a decrease of 8 percent from the same period in 2015. International sales on a constant cur- rency basis were down seven percent in the 2016 third quarter. Gross profit for the total company decreased 37 percent to $260.8 million in the third quar- ter of 2016, compared to $415.6 million in the third quarter of 2015. As a percentage of sales, gross profit declined 655 basis points to 22.0 percent of sales for the third quarter of 2016, compared to 28.5 percent of sales for the same period last year. Increased warranty and promotional costs and negative product mix, partially offset by lower commodity costs and product cost reduction efforts, were the primary reasons for the gross margin erosion. Operating expenses increased 16 percent to $222.6 million, or 18.8 percent of sales, for the third quarter of 2016, compared to $192.0 mil- lion, or 13.2 percent of sales, for the third quar- ter of 2015. The change was primarily driven by higher general and administrative expenses due to higher product liability and recall related legal costs and increased research and develop- ment expenses for prod- uct revalidation and ongoing innovation. Income from financial services was $19.2 mil- lion during the third quarter 2016, a 1 percent increase compared to $19.1 million in the third quarter of 2015 directly related to lower retail sales during the quarter. Non-operating other expense (income), net, which primarily relates to foreign currency exchange-rate movements and the correspond- ing effects on foreign currency transactions related to the company's foreign subsidiaries, was $5.7 million of expense in the third quarter of 2016 compared to $1.3 million of income in the third quarter of 2015. The provision for income taxes for the third quarter of 2016 was $13.5 million or 29.5 percent of pretax income compared to $84.5 million or 35.3 percent of pretax income for the third quarter of 2015. The lower income tax provision rate in the third quarter 2016 is primarily due to the extension of the research and development credit by the U.S. Congress in the 2015 fourth quarter, in addition to certain favorable tax adjustments in the 2016 third quarter that had a more significant impact on the income tax rate due to the lower pretax income generated during the quarter. Net cash provided by operating activi- ties was $426.2 million for the nine months ended Sept. 30, compared to $464.0 million for the same period in 2015. The decrease in net cash provided by operating activities for the 2016 period was due to lower net income in the quarter offset somewhat by lower factory inventory and increased accrued expenses. Total debt for the quarter, including capital lease obligations and notes payable, was $436.7 million. The company's debt-to-total capital ratio was 32 percent at Sept. 30, com- pared to 25 percent a year ago. Cash and cash equivalents were $122.7 million at Sept. 30, down from $225.3 million for the same period in 2015. During the third quarter, the company repur- chased and retired 111,000 shares of its com- mon stock for $10.5 million. As of Sept. 30, the company currently had authorization from its Board of Directors to repurchase up to an addi- tional 8.6 million shares of Polaris stock. For the full year 2016, the company is narrowing its earnings guidance range to $3.40 to $3.60 per diluted share with sales expected to be down in the mid- to high- single digit percent range. PSB POLARIS CONTINUED FROM PAGE 8 SCOTT WINE "We are making the necessary investments, both interally and externally, to realize the true potential of our organization." Scott Wine, CEO, Polaris