Polaris Inc. — Q1 2019 Form 10-Q
Business context and period. Unaudited results cover the three months ended March 31, 2019, compared with Q1 2018. Polaris designs and manufactures powersports vehicles, boats, and related parts and accessories. The period includes Boat Holdings, acquired in July 2018; the prior-year quarter did not.
Key financial results
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Sales | $1,495.7 million | $1,297.5 million | +15% |
| Gross profit / margin | $352.4 million / 23.6% | $323.5 million / 24.9% | Profit +9%; margin down 1.37 percentage points |
| Operating income | $81.9 million | $83.3 million | Down 2% |
| Net income attributable to Polaris | $48.4 million | $55.7 million | Down 13% |
| Diluted EPS | $0.78 | $0.85 | Down 8% |
| Operating cash flow | $(38.2) million | $(3.2) million | Greater cash use |
| Capital expenditures | $70.3 million | $55.6 million | Up |
At March 31, 2019, cash and cash equivalents were $151.4 million, total debt, finance lease obligations and notes payable were $2.10 billion, and reported debt to total capital was 71%. Management reported $357.3 million of availability on the revolving facility. Net cash used in operating and investing activities was funded in part by $99.6 million of financing cash flow. The quarterly dividend was $0.61 per share.
Material changes and operating drivers
- Sales growth reflected a 14% contribution from acquisitions, primarily Boat Holdings, and a 6% contribution from product mix and pricing; volume reduced sales by 4%, while currency reduced them by 1%. Boat Holdings contributed $184.8 million of sales and $36.2 million of gross profit.
- North American consumer retail sales decreased 3%. ORV/Snowmobile sales rose 4%, while motorcycle sales fell 10%, Global Adjacent Markets fell 7%, and Aftermarket sales were approximately flat. Boat sales were $184.8 million.
- Gross margin fell primarily because of tariffs and the lower-margin Boats business, partly offset by higher selling prices. Cost of sales rose to 76.4% of sales from 75.1%.
- Net income was also affected by increased interest expense, up to $20.4 million from $8.0 million, mainly due to acquisition-related borrowing and higher variable rates. Prior-year comparisons included a $19.6 million charge related to the planned closure of the Eicher-Polaris joint venture and a $13.5 million gain on the Brammo investment sale.
- Operating cash use increased mainly because of higher factory inventory, shipment timing, new-product launch preparation, and tariff-related costs. Inventory rose to $1.15 billion from $969.5 million at year-end.
Outlook, risks and contingencies
- No specific full-year revenue or earnings guidance is stated in the supplied filing text. Management expects additional tariff costs through the remainder of 2019 to weigh on gross profit, and expects currency movements to negatively affect 2019 net income compared with 2018. Commodity costs, including tariffs, are also expected to pressure gross margins.
- Management said cash, anticipated operating cash flow, and borrowing capacity should be sufficient for operations, product development, dividends, repurchases, and capital requirements for the foreseeable future. Results are seasonal and Q1 performance may not indicate full-year results.
- Debt covenants were met at quarter-end. Variable-rate borrowing creates interest-rate exposure; the company uses swaps to hedge some term-loan exposure. Foreign exchange contracts were outstanding, but no commodity hedges were in place at quarter-end.
- Product liability accruals were $55.0 million. Polaris disclosed two U.S. putative class actions concerning alleged fire and excessive-heat hazards; it could not assess the likelihood or estimate a possible loss range. A shareholder derivative suit filed in January 2019 alleges misleading statements and improper insider sales; Polaris filed a motion to dismiss.
- Dealer inventory repurchase exposure was capped at approximately $180.6 million for 2019 under the Polaris Acceptance arrangement and was approximately $270.4 million under the boat-financing arrangement with TCF. The company reported no material losses under these arrangements to date; exposure depends on resale proceeds for repossessed products.
- Adoption of the new lease standard added approximately $115.7 million of net lease assets and liabilities at January 1, 2019, without a material effect on results, equity, or cash flows.
Important facts for investors to verify
- Whether consumer demand and dealer inventories stabilize, particularly in ORVs and motorcycles, and whether Q1’s lower retail sales persist.
- How tariffs, currency, and product mix affect margins and earnings over the remainder of 2019.
- Boat Holdings’ ongoing sales and margin contribution, integration progress, and the company’s ability to manage acquisition-related debt and interest costs.
- Whether inventory growth converts to cash as shipments occur, given negative operating cash flow and higher capital spending.
- Developments in product-liability and class-action matters, warranty claims, and the potential cost of dealer repurchase commitments.