Polaris Inc. (formerly Polaris Industries Inc.) — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016; filed July 22, 2016. Results are seasonal and interim performance may not indicate full-year results.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Sales | $1,130.8 million | $1,124.3 million | $2,113.8 million | $2,157.7 million |
| Gross profit / margin | $284.5 million / 25.2% | $319.4 million / 28.4% | $532.1 million / 25.2% | $613.1 million / 28.4% |
| Operating income | $117.0 million | $164.0 million | $194.1 million | $314.3 million |
| Net income | $71.2 million | $100.9 million | $118.1 million | $189.5 million |
| Diluted EPS | $1.09 | $1.49 | $1.80 | $2.79 |
| Operating cash flow | Not separately reported for the quarter | $348.3 million | $89.9 million |
Q2 sales increased 1%, but diluted EPS declined 27%. First-half sales fell 2% and diluted EPS declined 35%. Q2 operating expenses rose 9% to $188.0 million; warranty costs and product recalls materially weighed on gross profit. Foreign exchange reduced gross profit by approximately $16 million in Q2 and $33 million year to date.
At June 30, 2016, cash was $146.6 million, total assets $2.396 billion, and total liabilities $1.460 billion. Debt, capital leases and notes payable totaled $468.1 million, including $4.8 million current maturities; debt to total capital was 34%, versus 31% at June 30, 2015. Management reported $863.6 million of combined availability under revolving and delayed-draw facilities and considered liquidity sufficient for foreseeable requirements. The company was in compliance with debt covenants.
Six-month investing cash outflow was $159.3 million, including $117.6 million of property and equipment purchases and $54.8 million for acquisitions. Financing cash outflow was $198.4 million, including $143.9 million of share repurchases and $70.6 million of dividends. Cash decreased $8.7 million over the six months.
Material changes and business trends
- ORV/Snowmobiles sales fell 6% in Q2 and 8% year to date; Q2 segment gross profit fell 17%. Management cited weaker North American ORV demand, recalls, lower volume, unfavorable mix, promotions and currency effects.
- Motorcycles sales increased 23% in Q2 and 21% year to date, supported by Victory, Indian Motorcycle and Slingshot shipments. Q2 segment gross profit rose 63%.
- Global Adjacent Markets sales increased 14% in Q2 and 5% year to date, including contribution from the Taylor-Dunn acquisition. The acquisition’s purchase-price allocation remained preliminary and its results were included from March 2016.
- North American consumer retail sales declined 7% overall in Q2. Outside North America, sales increased 5%, with growth in Latin America and EMEA partly offset by a decline in Asia/Pacific.
- Warranty reserve rose to $76.9 million from $56.5 million at December 31, 2015. Six-month warranty expense additions were $67.5 million, versus $28.6 million a year earlier.
Outlook, risks and unusual items
- No specific full-year sales or earnings guidance is provided in the filing. Management expected 2016 capital expenditures to be slightly higher than 2015, currencies to have an overall negative impact on 2016 results, and commodity prices to benefit gross margins in the remainder of 2016 versus the prior-year period.
- Management attributed stronger first-half operating cash flow principally to lower working-capital requirements. It stated existing cash, operating cash flow and borrowing capacity should fund operations, product development, dividends, repurchases and capital needs for the foreseeable future.
- Product recalls and service bulletins drove higher warranty costs and additional legal and other expenses. The company recorded $23.3 million for probable pending product-liability claims; it self-insures some product-liability exposure. Management did not expect pending legal proceedings to materially affect financial position or results.
- Under its dealer-financing arrangement, Polaris could be required to repurchase repossessed products up to an annual limit of approximately $182.8 million for 2016. The company said its exposure is limited to the resale shortfall and that no material losses had been incurred.
- Other key risks cited include foreign exchange, product safety and regulatory matters, weather, warranty expense, commodity and transportation costs, consumer demand and financing relationships. The filing reported effective disclosure controls and no material changes in internal control over financial reporting.
Investor facts to verify
- Whether recall-related warranty claims and the elevated reserve adequately reflect future repair, replacement and litigation costs.
- Whether North American ORV demand, dealer inventory and product mix improve, and whether motorcycle growth is sustainable.
- How currency movements and the company’s hedges affect sales, margins and earnings; the filing reported $216.5 million of foreign-currency contract notional and a net unrealized liability of $8.8 million.
- Whether cash generation and facility availability remain adequate alongside capital spending, acquisition activity, dividends and share repurchases.
- Integration and performance of Taylor-Dunn, and the conditions attached to forgivable facility-related loans, including job commitments.