Polaris Inc. — Form 10-Q Summary
Reporting period: Quarter ended September 30, 2013; comparisons are with the corresponding 2012 periods unless noted. Polaris manufactures off-road vehicles, snowmobiles, motorcycles, small vehicles, and parts, garments and accessories (PG&A). Results are seasonal and may not indicate full-year performance.
Financial performance
| Metric | Q3 2013 | Q3 2012 | First nine months 2013 | First nine months 2012 |
|---|---|---|---|---|
| Sales | $1,102.6 million (+25%) | $879.9 million | $2,693.4 million (+17%) | $2,309.1 million |
| Gross profit | $334.8 million | $259.8 million | $803.8 million | $671.5 million |
| Gross margin | 30.4% (+0.9 pts) | 29.5% | 29.8% (+0.7 pts) | 29.1% |
| Operating income | $181.3 million | $141.6 million | $408.8 million | $343.5 million |
| Continuing-operations net income | $116.9 million; diluted EPS $1.64 | $94.3 million; diluted EPS $1.33 | $272.4 million; diluted EPS $3.84 | $224.2 million; diluted EPS $3.16 |
| Net income, including discontinued operations | $113.1 million; diluted EPS $1.59 | $94.3 million; diluted EPS $1.33 | $268.6 million; diluted EPS $3.79 | $224.2 million; diluted EPS $3.16 |
- Q3 sales growth reflected volume (+21%) and product mix/pricing (+5%), partly offset by currency (-1%). Management cited higher ORV, snowmobile and PG&A shipments, stronger pricing and the addition of Aixam.
- Q3 operating expenses were $165.2 million, up 31%; expenses rose to 15.0% of sales from 14.4%. Higher marketing, infrastructure and incentive costs, plus acquired businesses, contributed.
- Income from financial services rose 42% to $11.7 million in Q3 and 41% to $33.2 million year to date. Q3 tax rate was 35.7%; the nine-month rate was 33.4%.
Cash, liquidity and capital
- Nine-month operating cash flow was $381.2 million, versus $254.5 million. Investing used $331.1 million, including $192.4 million of property and equipment purchases and $134.8 million net cash for the Aixam acquisition. Financing used $79.4 million. Cash declined $29.2 million to $387.8 million.
- At September 30, cash was $387.8 million; long-term debt was $100.0 million and capital lease obligations totaled $7.2 million. No borrowings were outstanding under the $350 million revolving facility, extended to January 2018. Polaris reported compliance with debt covenants and a 10% debt-to-total-capital ratio.
- Management expected full-year 2013 capital expenditures of approximately $240 million and said cash, operating cash flow and available credit should fund foreseeable operating, dividend, repurchase, acquisition and capital needs.
- Polaris paid $86.5 million in dividends and repurchased about 373,000 shares for $31.9 million in the first nine months. The board authorized repurchase of up to 1.608 million additional shares. A $0.42-per-share dividend was declared for payment in December 2013.
Business trends and material changes
- Q3 sales increased across ORVs (+23%), snowmobiles (+25%), small vehicles (+188%) and PG&A (+37%); motorcycle sales fell 6%. Small-vehicle growth primarily reflected Aixam, acquired in April 2013. Motorcycle sales were affected by Victory dealer inventory management and weaker international demand; initial 2014 Indian shipments began late in the quarter.
- North American consumer retail sales grew 12% in Q3; sales outside North America grew 38%. ORV dealer inventories in North America were up high-teens year over year, primarily supporting new model-year products.
- Aixam’s acquisition cost was $141.2 million, funded with cash; purchase-price allocation remained preliminary as to taxes. The acquisition added $66.1 million of goodwill and contributed to higher intangible assets.
- Gross margin improved despite an approximately $9 million Q3 charge for additional royalties following an unfavorable contract-dispute resolution. Product-cost reductions and higher selling prices supported margins; higher promotional costs partly offset those benefits.
Outlook, risks and contingencies
- No specific revenue or earnings guidance was provided. Management expected commodity prices to have a slightly positive impact on gross margins for the remainder of 2013 versus the prior year; currency effects varied by exposure, with some currencies expected to be unfavorable.
- A jury verdict in a discontinued personal-watercraft case resulted in approximately $10 million of Polaris liability, recorded as a current discontinued-operations liability and expected to be paid in Q4 2013. The quarter included a $3.8 million after-tax discontinued-operations loss for the award and legal fees; management expected no additional charges from this lawsuit.
- Polaris had a $14.3 million accrual for probable product-liability claims in continuing operations. Other ordinary-course proceedings were not expected by management to materially affect financial position or results.
- Polaris’s dealer-financing arrangements included an approximately $97.9 million potential 2013 annual product-repurchase obligation for repossessed dealer products, subject to contractual limits; the company reported no material losses under the arrangement. Dealer wholesale receivables, including securitized receivables, were $851.8 million, up 19% year over year.
- Risks cited include seasonality and weather, competition and pricing, acquisition integration, warranty costs, product liability and safety regulation, foreign exchange, commodity and transportation costs, economic conditions, and consumer and dealer credit-market relationships. Management reported effective disclosure controls and no material change in internal controls.
Important facts for investors to verify
- How much of sales and earnings growth reflects underlying demand and pricing versus acquired businesses, dealer shipments and mix; monitor ORV dealer inventories and consumer retail sales.
- Whether operating-expense growth and investment spending translate into sustained earnings and cash generation; reconcile expected full-year capital expenditures with cash-flow trends.
- Track the $9 million royalty charge, warranty accruals and product-liability exposure, including the expected settlement payment and any developments in other claims.
- Review the terms and potential exposure of dealer-financing repurchase arrangements, as well as credit quality and the continuation of financing-partner agreements.
- Assess acquisition integration and the final Aixam purchase-price allocation, and monitor foreign-exchange, commodity, weather and seasonal effects on margins and demand.