Polaris Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Polaris designs and manufactures powersports vehicles, boats, parts, garments, accessories and aftermarket products. Results are seasonal and may not indicate full-year performance.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Sales | $1,771.6m | $1,651.4m | $5,046.7m | $4,451.4m |
| Gross profit | $436.5m | $401.3m | $1,225.4m | $1,109.9m |
| Gross margin | 24.6% | 24.3% | 24.3% | 24.9% |
| Operating income | $130.3m | $138.9m | $347.3m | $344.6m |
| Net income attributable to Polaris | $88.4m | $95.5m | $225.0m | $243.8m |
| Diluted EPS | $1.42 | $1.50 | $3.62 | $3.78 |
| Operating cash flow | — | $436.1m | $354.1m |
Q3 sales grew 7%; nine-month sales grew 13%. Nine-month growth included an 8-percentage-point contribution from acquisitions, principally Boat Holdings, acquired in July 2018. Q3 gross margin improved on favorable mix and higher average selling prices, partly offset by tariffs; nine-month margin declined, reflecting tariffs and the lower-margin Boats business. Q3 operating expenses rose 16% to $327.9m, and operating income fell 6%. Nine-month net income declined 8% despite higher sales and operating income.
Operating cash flow increased $82.0m year over year, primarily due to working-capital timing, including accrued expenses. Investing used $179.4m, principally for property, equipment and tooling. Financing used $288.0m, including net debt repayments, dividends and share repurchases. Cash, cash equivalents and restricted cash totaled $158.7m at period-end, including $122.2m of balance-sheet cash.
Financial position and liquidity
- Total assets were $4,527.4m and total equity was $1,013.2m at September 30, 2019. Inventory was $1,270.1m, up from $969.5m at December 31, 2018.
- Debt, finance lease obligations and notes payable totaled $1,783.6m, including $66.7m current maturities; the company reported a 64% debt-to-total-capital ratio. Debt carrying value was down from $1,962.6m at year-end 2018.
- Polaris reported $639.3m available under its $700m revolving facility and said liquidity was adequate to fund operations, investment, dividends and repurchases. It was in compliance with debt covenants.
- Dividends paid were $111.7m for the first nine months. Share repurchases totaled $7.0m; authorization remained for approximately 3.2m shares.
Material changes, outlook and risks
- Segment and market trends: Q3 ORV/Snowmobiles sales rose 11%, Global Adjacent Markets 18%, and Aftermarket 3%; Motorcycles fell 3% and Boats fell 11%. Management attributed the boat decline primarily to a slowing marine industry. North American ORV retail was flat; motorcycle retail declined.
- Costs and outlook: Management expected additional tariff costs through the rest of 2019 and said commodities, including tariffs, were expected to weigh on full-year gross margins. Foreign exchange was expected to negatively affect 2019 net income. No specific quantified earnings or revenue guidance is provided in the filing text.
- Acquisition and unusual comparisons: Boat Holdings contributed $119.1m of Q3 sales and $486.3m year to date. The prior-year comparison includes acquisition-related and Victory Motorcycle wind-down costs in Q3, while prior-year nine-month results included Eicher-Polaris joint-venture wind-down costs and a $13.5m Brammo-related gain.
- Contingencies: Polaris accrued $56.8m for probable pending product-liability claims. Three putative U.S. class actions involved alleged fire hazards, excessive heat hazards and California consumer-protection claims; the company could not estimate likelihood of loss or a loss range. Management said pending proceedings were unlikely to have a material adverse effect, while noting actual losses could exceed reserves.
- Dealer-financing exposure: Potential product repurchase obligations were approximately $180.6m under the Polaris Acceptance arrangement and $165.4m for boat financing through TCF. The company reported no material losses under these arrangements during the periods presented.
- Other changes: Adoption of lease accounting added lease assets and liabilities; the company reported $107.9m of operating lease assets and $110.6m of operating lease liabilities at September 30. Management said adoption did not materially affect results, equity or cash flows.
Important facts for investors to verify
- Whether tariff costs, commodity prices and foreign exchange develop in line with management’s expectations and how they affect margins and earnings.
- Whether elevated inventory and North American dealer inventories normalize, particularly given seasonality and weaker motorcycle and boat trends.
- How much of reported sales growth reflects underlying demand versus the Boat Holdings acquisition and shipment timing.
- Developments in product-liability claims and class actions, including any change to reserves or estimated exposure.
- Debt repayment, covenant headroom, liquidity, and the potential realization of dealer-financing repurchase obligations.