Polaris Inc. — Q2 2015 Form 10-Q
Business context and reporting period. Unaudited results cover the quarter and six months ended June 30, 2015, compared with the same 2014 periods. Polaris sells off-road vehicles, snowmobiles, motorcycles, Global Adjacent Markets products, and parts, garments and accessories (PG&A). Management cautions that seasonality and production and shipping cycles make interim results an imperfect guide to full-year performance.
Financial performance and position
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Sales | $1,124.3 million | $1,014.0 million | $2,157.7 million | $1,902.3 million |
| Gross profit / margin | $319.4 million / 28.4% | $304.9 million / 30.1% | $613.1 million / 28.4% | $563.3 million / 29.6% |
| Operating income | $164.0 million | $155.4 million | $314.3 million | $282.1 million |
| Net income | $100.9 million | $96.9 million | $189.5 million | $177.8 million |
| Diluted EPS | $1.49 | $1.42 | $2.79 | $2.61 |
- Q2 sales grew 11%; six-month sales grew 13%. Q2 diluted EPS rose 5%, and six-month diluted EPS rose 7%.
- For the first six months, operating cash flow was $89.9 million, versus $130.9 million a year earlier. Investing used $110.5 million; financing provided $8.8 million. Cash declined $18.8 million to $118.8 million.
- At June 30, cash was $118.8 million and reported availability on the revolving facility was $335.6 million. Total debt, capital leases and notes payable were $403.5 million, including $164.4 million drawn on the $500 million revolving facility. Debt to total capital was 31%, versus 35% at June 30, 2014. The company reported compliance with debt covenants.
- Total assets were $2.18 billion and shareholders’ equity was $884.7 million at June 30. Inventory was $708.3 million, up from $565.7 million at December 31, 2014.
Material changes and management commentary
- Q2 sales growth reflected higher volume, favorable product mix and pricing, partly offset by currency. North American consumer retail sales grew 11%; sales outside North America declined 4%.
- Q2 motorcycle sales rose 57%, snowmobile sales 215% and PG&A sales 17%; ORV sales increased 2%. Six-month sales increased across these categories, including ORVs (+6%), motorcycles (+65%) and PG&A (+15%).
- Gross margin fell 166 basis points in Q2 and 119 basis points year to date. Management cited unfavorable currency, higher promotions and approximately $9 million of additional costs and inefficiencies as production and paint-system capacity were scaled up at the Spirit Lake motorcycle facility. Foreign currency reduced gross profit by an estimated $18 million in Q2 and $25 million year to date.
- Financial services income increased 21% in Q2 and 28% year to date, attributed to improved retail-credit portfolio profitability and higher dealer-financing income. Other expense was affected by foreign-currency movements; losses from the Eicher-Polaris joint venture increased with pre-production activity.
- Operating cash flow was lower despite higher net income, primarily due to greater working-capital needs and tax effects of share-based compensation. Inventory growth and timing of supplier payments were notable working-capital factors.
Outlook, risks and unusual items
- Management expected 2015 capital expenditures to exceed $250 million. It anticipated further Spirit Lake production-related costs in the second half, but at a lower rate than in the first half. No full-year revenue or earnings guidance is provided in the filing text.
- Polaris said existing cash, expected operating cash flow and available borrowing capacity should fund operations, development, dividends, repurchases and capital needs for the foreseeable future. Management reported no known factor expected to materially impair cash flow.
- A new 600,000-square-foot Huntsville, Alabama ORV facility was under construction, with completion expected in the first half of 2016. A $14.5 million land note is forgivable if specified job commitments are met.
- Polaris repurchased about 1.072 million shares for $157.7 million during the first six months and paid $70.1 million in dividends. A further 3.978 million shares remained authorized for repurchase. The board declared a $0.53-per-share dividend payable September 15, 2015.
- Dealer receivables financed through Polaris Acceptance and its securitization arrangement totaled $1.10 billion. Polaris’s 2015 potential repurchase obligation for repossessed products was approximately $146.4 million; management reported no material losses under the arrangement. Credit losses in the Polaris Acceptance portfolio averaged less than 1%.
- Product-liability claims are self-insured up to specified coverage; the recorded accrual for pending continuing-operations claims was $17.7 million. Management considered pending legal proceedings unlikely to materially affect financial position or results. Other risks cited include currency and commodity movements, warranty costs, product safety and regulation, weather, competition, acquisitions, credit-market relationships and economic conditions.
Important facts for investors to verify
- Whether demand and dealer inventories remain aligned, particularly as North American ORV dealer inventory had increased mid-teens year over year.
- Whether Spirit Lake capacity constraints and associated costs ease as management expected, and whether they continue to affect motorcycle availability.
- How currency exposure, weaker EMEA sales and working-capital requirements affect margins and cash generation in subsequent quarters.
- Progress on the Huntsville facility, capital spending relative to the stated expectation of more than $250 million, and satisfaction of the note’s job commitments.
- Developments in product-liability claims, warranty reserves and Polaris’s dealer-finance repurchase exposure.