Polaris Inc. 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2020. Polaris designs and manufactures powersports vehicles, boats, and related parts and accessories. Results were materially affected by COVID-19-related production suspensions and economic disruption.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Sales | $1,511.8 million | $1,779.3 million | $2,917.0 million | $3,275.0 million |
| Gross profit | $332.7 million | $436.4 million | $625.6 million | $788.9 million |
| Gross margin | 22.0% | 24.5% | 21.4% | 24.1% |
| Operating income (loss) | ($295.4) million | $135.1 million | ($289.9) million | $217.0 million |
| Net income (loss) attributable to Polaris | ($235.4) million | $88.2 million | ($240.8) million | $136.6 million |
| Diluted EPS | ($3.82) | $1.42 | ($3.90) | $2.20 |
- Sales fell 15% in Q2 and 11% year to date. Management attributed the decreases principally to COVID-19-related production suspensions and reduced shipments; volume accounted for most of the decline.
- Gross margin contracted 252 basis points in Q2 and 264 basis points year to date, reflecting lower production volume and fixed-cost absorption, COVID-19 mitigation and restructuring costs, tariffs, and higher depreciation.
- Q2 operating expenses included $379.2 million of impairment charges: $270.3 million of Aftermarket goodwill and $108.9 million of Transamerican Auto Parts brand/trade names. The goodwill impairment left no goodwill in the Aftermarket reporting unit. The tax benefit included $90.3 million associated with the impairment.
- All five reporting segments had lower Q2 sales. Global Adjacent Markets fell 36%, Motorcycles and Boats each fell 28%, Aftermarket fell 9%, and ORV/Snowmobiles fell 9%. North American retail demand was notably stronger than shipments: ORV retail sales rose over 60%, and motorcycle retail sales rose in the low twenties percent.
Cash flow, liquidity, and debt
- Six-month operating cash flow was $309.7 million, versus $202.9 million a year earlier. Inventory reduction was a key contributor. Investing cash outflow was $37.5 million, including $88.1 million of property and equipment purchases. Financing provided $115.4 million.
- Cash and cash equivalents were $544.4 million at June 30; cash, cash equivalents, and restricted cash totaled $580.8 million. The company reported $647.6 million of availability on its $700 million revolving facility.
- Total debt, finance lease obligations, and notes payable were $1,928.0 million, compared with $1,693.5 million at year-end 2019. Current maturities were $536.5 million. Debt to total capital was 72%.
- The company drew a $300 million incremental term loan in April, due April 2021, and reported $49.5 million outstanding on its revolver and $970.0 million on its term loan. Covenant limits were temporarily eased through March 31, 2021; Polaris reported compliance at quarter-end. The loan amendment prohibits share repurchases until the incremental loan is repaid and restricts dividends if specified elevated leverage metrics are met.
- Polaris paid $76.0 million in dividends in the first half and repurchased $49.3 million of shares during the first half. Management said it had suspended repurchases amid the pandemic-related liquidity measures.
Outlook, risks, and contingencies
- Management expected sequential improvement through the remainder of 2020, but did not provide specific full-year financial guidance. It said the duration and magnitude of pandemic effects remained uncertain and expected Global Adjacent Markets and Aftermarket to be more adversely affected than other markets.
- Actions to conserve cash included reducing working capital and operating costs, postponing capital expenditures, adjusting production to demand, workforce reductions and furloughs, and reducing discretionary spending. Management said cash, operating cash flow, and borrowing capacity were expected to fund foreseeable needs, while noting prolonged disruption could affect liquidity, covenant compliance, and access to financing.
- Further asset impairment charges or write-offs may result if demand, recovery, or operating performance differs from assumptions. The Boats reporting unit passed its impairment test, but management noted its valuation depended in part on pontoon-market strength and uncertain recovery assumptions.
- At June 30, the company had a $61.7 million accrual for probable product-liability claims. Three putative U.S. class actions remained pending; the company said it could not reasonably estimate the likelihood or range of loss. Management considered material adverse effects from pending proceedings unlikely, but actual losses could exceed accruals.
- Potential repurchase obligations for repossessed dealer products were approximately $198.3 million under the Polaris Acceptance arrangement and $129.9 million for boat receivables financed by TCF. The company reported no material losses under these arrangements to date.
- Other stated risks include supplier and manufacturing disruption, consumer demand and credit conditions, tariffs and commodity costs, foreign exchange, product liability and recalls, and debt covenant compliance. Management expected currency movements to negatively affect 2020 net income; commodity costs, including tariffs, were expected to favorably affect 2020 gross margins.
Important facts for investors to verify
- Whether strong North American retail demand continues and converts into shipments, sales, and margin recovery.
- Whether the assumptions underlying the $379.2 million impairment are borne out, and whether further impairment charges arise.
- Liquidity, covenant headroom, and the ability to refinance or repay the $300 million incremental loan due April 2021 and other near-term maturities.
- Potential exposure from dealer-financing repurchase arrangements, product-liability claims, class actions, warranties, and recalls.
- The timing and extent of any recovery in Global Adjacent Markets, Aftermarket, and Boats, and the effects of continued COVID-19 disruption.