Polaris Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2011; comparisons are with the corresponding 2010 periods. Polaris sells off-road vehicles, snowmobiles, motorcycles, electric vehicles, and parts, garments and accessories. Results are seasonal and interim performance may not indicate full-year results.
Financial results and liquidity
- Second quarter: Sales increased 41% to $607.9 million; gross profit was $177.6 million; operating income was $76.9 million; net income rose 90% to $48.7 million. Diluted EPS was $1.37 versus $0.75.
- First six months: Sales increased 44% to $1,145.1 million; gross profit was $329.4 million; operating income was $146.5 million; net income rose 112% to $96.0 million. Diluted EPS was $2.71 versus $1.34.
- Margins: Second-quarter gross margin rose 300 basis points to 29.2%; first-half gross margin rose 260 basis points to 28.8%. Second-quarter net margin was 8.0%, up 210 basis points.
- Cash flow: First-half operating cash flow was $61.8 million, compared with $57.0 million. Investing used $64.7 million, including $40.6 million for property and equipment and $28.0 million for acquisitions. Financing used $130.6 million. Cash declined $131.8 million to $262.2 million.
- Balance sheet and debt: At June 30, cash was $262.2 million, total assets $1,091.3 million and total liabilities $639.8 million. Debt was $100.0 million in senior notes; there were no revolving-facility borrowings. The $250 million unsecured revolving facility matures December 2, 2011. Debt-to-total-capital was 18%.
- Capital returns: Polaris repurchased approximately 419,000 shares for $32.9 million and paid $30.7 million in dividends during the first half. A further $0.45-per-share dividend was declared in July, before the announced stock split.
Changes versus the prior comparable period
- Growth reflected strong consumer demand and market-share gains. North American retail unit sales rose 19% in the quarter; sales outside North America increased 35%.
- Off-road vehicle sales rose 41% in the quarter and 47% year to date; on-road vehicle sales rose 99% and 86%, respectively. Parts, garments and accessories sales increased 23% and 21%. Off-road vehicles represented 79% of quarterly sales.
- Gross-margin gains were attributed to cost-reduction efforts, favorable currency, lower warranty costs and higher production volumes; higher commodity costs and unfavorable product mix partly offset those gains.
- Operating expenses increased 43% in the quarter and 37% year to date, including investments in growth markets and higher incentive compensation. Pre-tax share-based compensation was $45.0 million in the first half versus $20.0 million a year earlier.
- Polaris issued $100 million of senior notes in May and used the proceeds plus $100 million of cash to repay its $200 million term loan. Debt was restructured into notes due 2018 and 2021.
Outlook, risks and unusual items
- No numerical full-year sales or earnings guidance is provided in the filing. Management said it expected yen movements and commodity costs to weigh on costs or gross margin for the remainder of 2011, while Canadian-dollar and other currency conditions were expected to benefit sales and net income.
- In April and June, Polaris acquired Indian Motorcycle Company and certain assets of GEM, respectively, for a combined $28.0 million net of cash acquired. Results are included from acquisition dates; pro forma results were not presented because the acquisitions were deemed not material.
- The company announced a two-for-one stock split, to be effected as a stock dividend in September 2011. Reported share and per-share figures are not split-adjusted.
- Manufacturing realignment costs are expected to total approximately $10 million over 2010–2012; $6.7 million had been incurred cumulatively by June 30, 2011. Polaris revised its plans to retain snowmobile and motorcycle engine assembly in Osceola, Wisconsin.
- Risks include commodity and foreign-exchange volatility, consumer demand and economic conditions, weather, warranty costs, product liability, regulation, acquisition integration and relationships with retail-credit providers. Product liability claims are self-insured. Management did not consider pending legal proceedings likely to materially harm financial position or results.
- Polaris may be required to repurchase repossessed products under its dealer-financing arrangements, subject to an approximately $74.1 million annual maximum for 2011; the company reported no material losses under the arrangement. Letters of credit outstanding were $9.8 million.
Important facts for investors to verify
- Whether robust retail demand and market-share gains continued, and whether dealer inventories remained balanced.
- Whether gross-margin improvement persisted despite the stated commodity-cost and yen headwinds.
- Whether working-capital investment, particularly rising receivables and inventory, affected cash generation after the first half.
- Integration progress and performance of Indian Motorcycle and GEM, including any subsequent acquisition-related costs.
- Renewal or replacement of the $250 million revolving credit facility before its December 2011 maturity.
- Actual exposure and losses under dealer-financing repurchase obligations, product-liability claims and warranty reserves.
- Effects of the announced stock split and dividend on per-share comparisons; reported figures in this filing are pre-split.