Polaris Inc. — Q2 2013 Form 10-Q
Business context and period: Unaudited results for the quarter and six months ended June 30, 2013, compared with the corresponding 2012 periods. Polaris sells off-road vehicles (ORVs), snowmobiles, motorcycles, small vehicles and parts, garments and accessories (PG&A). Results are seasonal and interim performance may not indicate full-year results.
Financial performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Sales | $844.8m | $755.4m | $1,590.7m | $1,429.2m |
| Gross profit | $252.3m | $216.7m | $469.0m | $411.7m |
| Gross margin | 29.9% | 28.7% | 29.5% | 28.8% |
| Operating income | $125.6m | $110.4m | $227.5m | $202.0m |
| Net income | $80.0m | $69.8m | $155.5m | $129.9m |
| Diluted EPS | $1.13 | $0.98 | $2.20 | $1.83 |
- Q2 sales rose 12%, net income and diluted EPS each rose 15%. First-half sales increased 11%, net income and diluted EPS each increased 20%.
- Gross margin expanded 120 basis points in Q2 and 70 basis points year to date, reflecting volume, pricing, product-cost reductions and favorable PG&A mix, partly offset by promotions and higher warranty costs.
- Operating expenses increased 21% in Q2 and 17% for the first half; as a share of sales they rose 120 and 70 basis points, respectively. Higher marketing and advertising, Indian Motorcycle relaunch spending, growth investments and acquired-business expenses contributed.
- Financial-services income rose 40% to $11.5m in Q2 and $21.6m year to date, mainly from dealer financing and consumer credit programs.
Cash flow, balance sheet and capital
- First-half operating cash flow was $103.5m, versus $78.4m in 2012. Investing used $230.6m, including $134.8m net cash for the Aixam acquisition and $93.7m of property and equipment purchases. Financing used $69.7m.
- Cash declined $199.3m from year-end to $217.7m at June 30, 2013, primarily reflecting acquisition and capital spending, dividends and share repurchases.
- Long-term debt was $100.0m; capital lease obligations totaled $7.6m. Cash was $217.7m, and management reported debt and leases of $107.6m. No revolver borrowings were outstanding under the $350m facility, extended to January 2018; the company reported covenant compliance. Debt to total capital was 12% at June 30, 2013, versus 16% a year earlier.
- Total assets were $1,610.4m and shareholders’ equity was $807.5m. Inventories were $428.6m, up from $345.0m at December 31, 2012.
- Dividends paid were $57.5m for the first half; the declared dividend was $0.42 per share in Q2. Polaris repurchased about 372,000 shares for $31.9m and had authorization for a further 1.609m shares.
Material changes and management commentary
- Growth was driven by ORVs and PG&A, higher selling prices and favorable product mix, plus Aixam, acquired April 10, 2013. Aixam contributed to small-vehicle sales; its purchase price was $141.2m, funded with cash, and purchase accounting remained preliminary.
- ORV sales increased 7% in Q2; PG&A increased 33%; small-vehicle sales increased 190%, primarily due to Aixam. Motorcycle sales decreased 6% and snowmobile sales decreased 5% in Q2. North American consumer retail sales grew 11% overall; sales to customers outside North America rose 22%.
- Management said existing cash, operating cash flow and available borrowing capacity should fund operations, regular dividends, repurchases, acquisitions and capital needs for the foreseeable future.
- Management expected commodity prices to have a positive gross-margin impact for the remainder of 2013 versus the prior-year period. It disclosed specific expected currency effects by currency, including negative impacts from Australian and Canadian dollar positions and a positive impact from the yen position. No specific full-year revenue or earnings guidance is provided in the supplied filing text.
- The first-half effective tax rate was 31.6%, versus 35.5% in 2012, including $8.2m of tax benefits from the retroactive R&D credit and releases of certain tax reserves following favorable audit conclusions. Q2 tax rates were approximately 35.9% and 35.8%, respectively.
Risks, contingencies and unusual items
- A product-liability lawsuit involving a 2001 Polaris personal watercraft was in trial as of the filing. Management disputes the claim; it could not estimate the reasonably possible loss range and stated the outcome could adversely affect financial condition or results. The company had a $19.7m accrual for probable pending product-liability claims overall.
- Polaris’s 2013 agreement to repurchase certain repossessed dealer products has an annual maximum potential obligation of approximately $97.9m; stated exposure is limited to the resale shortfall and related costs. No material losses had been incurred under the arrangement.
- Key stated risk factors include product liability, warranty costs, litigation, acquisition integration, weather, foreign exchange and commodity costs, regulation, economic conditions, and dealer and consumer credit-market relationships. The company reported no material change in market risks from its 2012 Form 10-K.
Important facts for investors to verify
- Whether ORV and PG&A demand, dealer inventories and market-share gains remain supportive, particularly given the reported mid-teens year-over-year increase in North American ORV dealer inventories.
- Aixam’s contribution and integration, and the final purchase-price allocation, which was still preliminary.
- Cash conversion and working-capital needs: inventory rose materially, while first-half cash use included substantial acquisition and facility investment.
- Developments in the watercraft litigation, the product-liability reserve and the dealer-product repurchase exposure.
- Whether the stated positive commodity outlook and currency-hedging expectations are realized; these are forward-looking and subject to change.