Polaris Inc. 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2019. Polaris designs and manufactures powersports vehicles, boats, parts, garments and accessories. Results are seasonal and interim performance may not indicate full-year results.
Key financial results
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Sales | $1,779.3 million | $1,502.5 million | $3,275.0 million | $2,800.0 million |
| Gross profit | $436.4 million | $385.2 million | $788.9 million | $708.7 million |
| Gross margin | 24.5% | 25.6% | 24.1% | 25.3% |
| Operating income | $135.1 million | $122.5 million | $217.1 million | $205.7 million |
| Net income attributable to Polaris | $88.3 million | $92.5 million | $136.6 million | $148.3 million |
| Diluted EPS | $1.42 | $1.43 | $2.20 | $2.28 |
- Q2 sales grew 18%; six-month sales grew 17%. The Boat Holdings acquisition contributed 12 percentage points to Q2 growth and 13 points year to date; product mix and price added 6 points in each period, while currency reduced sales growth by 1 point.
- Q2 sales included $182.4 million from Boats; first-half sales included $367.2 million. Boat Holdings was acquired in July 2018, so the prior-year reported periods did not include boat sales.
- Q2 gross profit rose 13%, but gross margin fell 111 basis points. Six-month gross margin declined 122 basis points. Management cited tariffs and the acquired Boats business’s lower margins, partly offset by higher selling prices and productivity.
- Q2 interest expense rose to $20.6 million from $9.2 million, primarily reflecting acquisition-related borrowing and higher rates on variable-rate debt. The effective tax rate was 22.9%, versus 18.0%.
Cash flow, debt and liquidity
- For the six months, operating cash flow was $202.9 million, compared with $165.1 million. Investing cash use was $128.8 million, including $137.2 million of property and equipment purchases. Financing cash use was $139.6 million, including $64.8 million of net debt repayments and $74.4 million of dividends.
- Cash and cash equivalents were $96.1 million at June 30, 2019, versus $161.2 million at December 31, 2018. Cash, cash equivalents and restricted cash totaled $127.5 million at June 30.
- Total debt, finance lease obligations and notes payable were $1.898 billion, including $1.832 billion classified as long term. The company reported a 67% debt-to-total-capital ratio and $545.6 million of availability under its revolving facility. It was in compliance with debt covenants.
- Current assets were $1.571 billion and current liabilities $1.332 billion. Inventories increased to $1.130 billion from $969.5 million at year-end.
Changes, outlook and risks
- Q2 net income attributable to Polaris declined 5% and diluted EPS declined 1%, despite higher sales and operating income. For the first half, net income fell 8% and diluted EPS fell 4%.
- North American consumer retail sales of ORVs, snowmobiles and motorcycles decreased 2% in Q2. ORV retail was down low-single digits, motorcycle retail down low-teens, and dealer inventories for both categories were up mid-single digits year over year. Sales to North American customers increased 19%, largely due to Boats.
- Management expected additional tariff costs to continue through the rest of 2019 and adversely affect gross profit. It also expected commodities, including tariffs, to weigh on 2019 gross margins and foreign exchange to negatively affect 2019 net income. The filing provides no numeric full-year earnings or sales guidance.
- Polaris stated that cash, operating cash flow and borrowing capacity should be adequate for foreseeable operating and capital needs. It paid a $0.61-per-share dividend in June; the board had authorization to repurchase up to an additional 3.175 million shares.
- Potential dealer-product repurchase obligations were approximately $180.6 million under the Polaris Acceptance arrangement and $201.5 million for boat-related TCF financing. The company said losses had not been material; exposure generally depends on resale proceeds for repossessed products.
- Polaris accrued $55.7 million for probable pending product-liability claims. Two U.S. putative class actions concerning alleged fire and excessive-heat hazards remained pending; the company could not estimate the likelihood or range of loss. Management said pending matters were not expected to materially affect results, while noting actual losses could exceed reserves.
- Adoption of the new lease standard added approximately $115.7 million of net lease assets and liabilities at January 1, 2019, with no material impact on results, equity or cash flows at adoption. A shareholder derivative action was dismissed in July 2019, subject to a 60-day appeal period.
Important facts for investors to verify
- How much future sales growth is attributable to Boat Holdings versus underlying unit demand, pricing and product mix.
- Whether tariffs, promotions, warranty costs and the Boats segment continue to pressure gross margins.
- North American retail trends and dealer inventory levels, particularly for ORVs and motorcycles.
- Debt reduction, variable-rate exposure, interest expense and availability under the credit facility.
- Developments in product-liability claims and the dealer-financing repurchase obligations, including any changes in reserves or realized losses.