Polaris Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. Polaris designs and manufactures powersports vehicles, boats, parts and accessories, and aftermarket products. Financial figures are in U.S. dollars; amounts are in millions unless stated otherwise.
Financial results
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Sales | $1,959.5 | $1,954.6 | $6,027.8 | $4,871.6 |
| Gross profit | $465.6 | $534.6 | $1,497.5 | $1,160.2 |
| Gross margin | 23.8% | 27.3% | 24.8% | 23.8% |
| Operating income (loss) | $155.3 | $239.4 | $554.1 | $(50.5) |
| Net income (loss) attributable to Polaris | $114.6 | $166.8 | $407.1 | $(74.0) |
| Diluted EPS | $1.84 | $2.66 | $6.48 | $(1.20) |
| Operating cash flow | Not provided by quarter | $153.4 | $675.7 |
- Q3 sales were essentially flat year over year. Higher pricing and lower promotional costs were mostly offset by reduced shipments; volume lowered sales 6%, while price and mix added 5%.
- Q3 gross profit declined 13% and margin fell 359 basis points, mainly from higher component, commodity and logistics costs and production inefficiencies amid supply constraints. Pricing and lower promotions partly offset the pressure.
- Year-to-date sales increased 24%, with growth across all segments and regions. Comparisons reflect the prior-year temporary plant suspensions and disruption from COVID-19. The 2020 nine-month operating loss included $379.2 million of goodwill and intangible impairments.
- Q3 segment sales: ORV/Snowmobiles declined 6%; Motorcycles rose 16%; Global Adjacent Markets rose 37%; Aftermarket declined 4%; Boats rose 18%. Segment gross profit was weaker year over year for ORV/Snowmobiles and Aftermarket, while other listed segments improved.
Cash, debt and liquidity
- Cash and cash equivalents were $316.5 at September 30, 2021, down from $634.7 at December 31, 2020. Cash, cash equivalents and restricted cash totaled $337.3 at period-end.
- Nine-month operating cash flow was $153.4, down from $675.7, primarily due to a $604.0 inventory cash outflow from demand and supply-chain inefficiencies. Capital expenditures were $199.3; investing cash outflow was $165.6.
- Financing cash outflow was $301.1, including $411.3 of share repurchases and $115.2 of dividends, partly offset by net borrowings. Total debt, finance leases and notes payable were $1,523.3, including $53.3 current and $1,470.0 long term. Debt to total capital was 56%.
- The filing reports $782.4 of revolving-facility availability, and says the company complied with debt covenants. Revolving borrowings are stated as $210.0 in the debt table and financing discussion, but another MD&A passage says there was no outstanding revolving balance; investors should reconcile this inconsistency.
- Current assets were $2,447.7 and current liabilities $1,844.8. The company said cash, operating cash flow and borrowing capacity should fund operations, product development, dividends, repurchases and capital needs for the foreseeable future.
Outlook, risks and other notable items
- No quantified earnings or sales guidance is provided in the supplied filing text. Management expects supply-chain constraints, production disruption, and elevated commodity and logistics costs to continue into 2022, pressure profitability, and make dealer inventory replenishment difficult. Strong retail demand continued, while North American dealer inventories remained well below pre-pandemic levels.
- Management said pricing actions were intended to address rising costs; commodity costs, including tariff costs, were expected to negatively affect 2021 gross margins. Foreign currencies were expected to have a positive impact on 2021 net income versus 2020.
- Principal stated risks include the duration of supply constraints, timely parts sourcing and production, dealer inventory recovery, COVID-19 effects, input and freight costs, consumer demand and credit conditions, product liability and recalls, currency movements, and regulatory changes.
- Potential product-repurchase obligations were approximately $138.7 for Polaris Acceptance, $71.8 for boat financing, and $27.8 for foreign arrangements. The company said its exposure is generally limited to losses on repossessed products and that no material losses had been incurred under these arrangements.
- Product-liability accruals were $79.1. Four putative class actions were pending; Polaris said it could not reasonably estimate the likelihood or range of loss. Management did not expect pending proceedings to materially affect the company, while noting actual losses could exceed reserves.
- On October 26, 2021, Polaris announced plans to divest its GEM and Taylor-Dunn businesses, expecting completion by year-end 2021.
- During the first nine months, Polaris repurchased about 3.3 million shares for $411.3; up to $888.8 remained authorized at September 30. The quarterly dividend was $0.63 per share.
Key facts for investors to verify
- Resolve the reported revolving-loan balance inconsistency ($210.0 outstanding versus a statement of no outstanding balance), and confirm actual facility availability.
- Assess how supply-chain disruptions, low dealer inventories, elevated input costs and pricing actions affect shipments and margins, particularly into 2022.
- Track whether inventory investment converts to operating cash flow and whether cash generation supports capital spending, dividends and planned repurchases.
- Review the terms, expected proceeds and accounting effects of the planned GEM and Taylor-Dunn divestiture when disclosed.
- Monitor developments in the four class actions, product-liability claims and financing-related repurchase obligations.