Polaris Industries Inc. — Q1 2011 Form 10-Q
Reporting period: Three months ended March 31, 2011. Figures are unaudited. Polaris manufactures off-road vehicles, snowmobiles, motorcycles, and parts, garments and accessories (PG&A). Results are seasonal and may not indicate full-year performance.
Financial performance
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Sales | $537.2 million | $361.7 million | +49% |
| Gross profit | $151.8 million | $94.9 million | +60% |
| Gross margin | 28.3% | 26.2% | +210 basis points |
| Operating income | $69.6 million | $31.9 million | — |
| Net income | $47.3 million | $19.8 million | +139% |
| Diluted EPS | $1.34 | $0.59 | +127% |
| Operating cash flow | $4.8 million | $3.8 million | +$1.0 million |
Operating expenses were $87.5 million, or 16.3% of sales, versus $67.2 million, or 18.6%. Income from financial services was $5.3 million, up 24%. The effective tax rate was 34.5%, compared with 36.3%.
Q1 sales growth reflected a 44% increase in volume, 3% from product mix and price, and 2% from currency. By product line, ORV sales rose 55% to $388.0 million; snowmobile sales rose 61% to $8.9 million; on-road sales rose 77% to $44.9 million; and PG&A rose 19% to $95.4 million.
Cash, debt and liquidity
- Cash and cash equivalents were $345.9 million at March 31, 2011, down $48.0 million from year-end 2010. Cash was $124.4 million at March 31, 2010.
- Operating cash flow was modest despite higher earnings, primarily because of a $27.4 million net working-capital investment, including higher receivables. Capital expenditures were $19.0 million.
- Cash used in financing was $34.8 million, including $31.0 million of share repurchases and $15.3 million of dividends, partly offset by employee-plan stock proceeds.
- Borrowings under the credit agreement totaled $200 million at March 31, 2011: $100 million current and $100 million classified long term. The unsecured agreement included a $250 million revolving facility and a $200 million term loan, and was due to expire December 2, 2011. The effective borrowing rate was 0.64%.
- On May 2, 2011, the company issued $100 million of senior notes and retired the $200 million term loan. The notes comprise $25 million due 2018 at 3.81% and $75 million due 2021 at 4.60%.
- Debt-to-total-capital ratio was 34% at March 31, 2011, versus 48% at March 31, 2010. Management said cash, operating cash flow and available borrowing capacity should fund operations, regular dividends, repurchases and capital needs for the foreseeable future.
Material changes, outlook and risks
- Management attributed earnings growth to stronger sales volume and gross margins, cost-reduction efforts, lower warranty costs, pricing and favorable currency movements. North American consumer retail sales increased 13%; sales to customers outside North America rose 21%. Polaris reported market-share gains, particularly in ORVs and snowmobiles.
- Management expected the Japanese yen to negatively affect cost of sales for the remainder of 2011; it expected Canadian-dollar and other foreign-currency movements to benefit sales and net income. Commodity costs were expected to weigh on gross margins. The filing provides no specific full-year revenue or earnings guidance.
- Manufacturing realignment charges are expected to total approximately $10 million over 2010–2012. Cumulative exit costs through March 31, 2011 were $7.3 million; $1.8 million was incurred in Q1. In April, Polaris said it would retain snowmobile and motorcycle engine assembly in Osceola, Wisconsin.
- April 2011 subsequent events: Polaris announced acquisitions of Indian Motorcycle and substantially all assets of electric-vehicle maker GEM. The filing does not provide purchase prices or detailed integration forecasts.
- Japan’s March 2011 earthquake and tsunami affected some suppliers. Polaris said much of its supply chain had recovered, alternative sources or engineering solutions were in place where needed, and it did not then anticipate significant 2011 production disruption; major supply interruptions could still materially affect operations.
- Other disclosed exposures include commodity-price and foreign-exchange volatility, product liability and warranty costs, weather, regulation, consumer demand, credit-market conditions and acquisition integration. Management said pending legal matters were not expected to have a material adverse effect. Product liability claims are self-insured.
- Polaris’s dealer-financing arrangements carried a potential 2011 repurchase obligation of approximately $74.1 million for repossessed products, subject to the stated annual cap; the company reported no material losses under the arrangement.
Important facts for investors to verify
- Whether strong retail demand and dealer shipments persist, and how dealer inventory levels develop across product lines.
- Whether margin improvement can continue amid expected commodity-cost pressure, manufacturing transition costs and currency effects.
- Actual operating cash generation and working-capital needs, given Q1 operating cash flow was only $4.8 million despite $47.3 million of net income.
- Completion and terms of the Indian Motorcycle and GEM acquisitions, including purchase prices, financing, integration costs and contribution to results.
- Execution of the manufacturing realignment and the scale of remaining exit and startup costs.
- Effects of Japan-related supplier disruption, foreign-exchange movements and the dealer-financing repurchase exposure.