Polaris Industries Inc. — Q2 2012 Form 10-Q
Reporting period: Three and six months ended June 30, 2012. Unaudited results; dollar amounts below are in millions unless noted. Polaris sells off-road vehicles, snowmobiles, on-road vehicles and parts, garments and accessories. Management cautions that seasonality and production and shipping cycles make interim results an unreliable indicator of full-year performance.
Financial performance
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Sales | $755.4 | $607.9 | $1,429.2 | $1,145.1 |
| Gross profit | $216.7 | $177.6 | $411.7 | $329.4 |
| Gross margin | 28.7% | 29.2% | 28.8% | 28.8% |
| Operating income | $110.4 | $76.9 | $202.0 | $146.5 |
| Net income | $69.8 | $48.7 | $129.9 | $96.0 |
| Diluted EPS | $0.98 | $0.68 | $1.83 | $1.35 |
- Q2 sales rose 24% and six-month sales rose 25%. Management attributed growth primarily to volume (+21% in each period) and product mix/price (+5%); currency reduced sales by 2% in Q2 and 1% year to date.
- Q2 gross margin declined 50 basis points, primarily due to unfavorable currency movements. Higher volume, manufacturing savings, product-cost reductions, lower warranty costs and pricing supported gross profit growth. Six-month gross margin was unchanged.
- Q2 operating expenses increased 8% to $114.5, but fell to 15.2% of sales from 17.5%. Six-month expenses increased 16% to $225.1, while their sales share declined to 15.8% from 16.9%. Higher R&D and international infrastructure spending were partly offset by lower incentive compensation.
- Sales by product line in Q2: ORVs $581.1 (+20%); snowmobiles $8.9 (+30%); on-road vehicles $64.7 (+110%); and PG&A $100.7 (+15%). On-road growth included contributions from 2011 acquisitions.
Cash, liquidity and capital
- At June 30, cash and equivalents were $289.3, versus $325.3 at December 31, 2011. Current assets were $916.8 and current liabilities $592.6.
- Six-month operating cash flow was $78.4, compared with $61.8 a year earlier. Working-capital use included a $60.7 inventory increase; management cited higher factory inventory as a factor.
- Capital spending was $41.6. Investing cash outflow was $39.8, compared with $64.7 in 2011, when acquisitions used $28.0. Financing cash outflow was $73.7, including $50.7 of dividends and $48.6 of share repurchases. Cash declined $36.0 over the period.
- Long-term debt was $100.0; capital lease obligations were $7.6. The $350.0 revolving credit facility, expiring August 2016, had no borrowings. Polaris reported compliance with its debt covenants and a 16% debt-to-total-capital ratio. Letters of credit outstanding were $11.6.
- Polaris paid a $0.37-per-share dividend in June and declared another $0.37 dividend payable in September. Management said existing cash, expected operating cash flow and available credit should fund operations, dividends, repurchases, acquisitions and capital needs for the foreseeable future.
Material developments, outlook and risks
- North American consumer retail sales grew 17% in Q2, with market-share gains in ORVs and motorcycles. International sales increased 7%, though weaker economic conditions and currency pressure weighed on some markets. ORV dealer inventories in North America were up by a low double-digit percentage year over year.
- The manufacturing realignment was completed in Q2 2012; cumulative exit costs were $6.9, classified in cost of sales.
- Management’s currency outlook for the remainder of 2012 was mixed: yen and Mexican peso effects were expected to be slightly positive for cost of sales; Canadian-dollar and other foreign-currency effects were expected to weigh on sales and net income. Commodity costs were expected to have a positive gross-margin impact. These are management expectations, not formal earnings guidance.
- Post-quarter developments: Polaris invested an additional $7.0 in Brammo on July 2. On July 24, it announced a 50/50 joint venture with Eicher Motors to develop and manufacture vehicles for India and other emerging markets, with approximately $50.0 of investment expected over three years, shared equally.
- Financial-services exposure includes a product repurchase obligation tied to dealer financing, capped at approximately $78.9 for calendar 2012; management said losses had not been material. Dealer portfolio receivables, including securitized receivables, were $579.1, up 27% year over year; portfolio credit losses averaged less than 1%.
- Polaris self-insures product liability claims and accrued $18.7 for probable pending claims. A product-liability lawsuit concerning a 2008 personal-watercraft accident was scheduled for trial in November 2012. Management considers it without merit, but cannot estimate the reasonably possible loss range and warns the outcome could materially affect results or financial condition.
- Other risks identified include foreign exchange and commodity costs, weather, consumer demand and economic conditions, competition, warranty expenses, product-safety regulation, litigation, and retail/wholesale credit markets and financing relationships.
Most important facts for investors to verify
- Whether sales growth and North American retail demand continue, and whether dealer inventory growth remains aligned with consumer demand.
- Whether currency, commodity and input-cost trends support or further pressure gross margins and the remainder-of-2012 outlook.
- Inventory, receivables and accrued-expense movements, and their effect on operating cash conversion.
- The eventual outcome and financial impact, if any, of the pending product-liability lawsuit and the adequacy of product-liability and warranty reserves.
- Execution, funding and returns of the Eicher joint venture and other strategic investments, alongside continued dividends and repurchases.