Polaris Inc. 2018 Third-Quarter 10-Q Summary
Business and period. This unaudited filing covers the three and nine months ended September 30, 2018, compared with the same 2017 periods. Polaris makes powersports vehicles and related parts and accessories, and operates in ORV/snowmobiles, motorcycles, global adjacent markets, aftermarket, and boats. Results are seasonal and may not indicate full-year performance.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Sales | $1,651.4 million | $1,478.7 million | $4,451.4 million | $3,997.4 million |
| Gross profit | $401.3 million | $364.0 million | $1,109.9 million | $956.8 million |
| Gross margin | 24.3% | 24.6% | 24.9% | 23.9% |
| Operating income | $138.9 million | $116.9 million | $344.6 million | $237.2 million |
| Net income | $95.5 million | $81.9 million | $243.8 million | $141.0 million |
| Diluted EPS | $1.50 | $1.28 | $3.78 | $2.21 |
| Operating cash flow | Not presented separately | Not presented separately | $354.1 million | $497.1 million |
- Q3 sales rose 12%; management attributed the increase mainly to Boat Holdings and strong ORV sales. North American consumer retail unit sales increased 1% in the quarter.
- For nine months, sales increased 11%, while net income rose 73%. Sales growth included acquisition contributions and higher volume; lower prior-year wind-down and acquisition-related costs also affected comparisons.
- Q3 gross margin declined 31 basis points, reflecting commodity, freight and tariff pressure and product mix, partly offset by lower promotional costs. Nine-month gross margin improved 100 basis points.
- Q3 interest expense was $19.8 million, versus $8.5 million, primarily reflecting borrowing to fund Boat Holdings. The nine-month tax rate was 21.3%, down from 29.8%, primarily due to the lower U.S. federal tax rate under tax reform.
Balance sheet, cash flow and capital
- At September 30, 2018, cash and cash equivalents were $183.4 million. Total debt, capital leases and notes payable were $1.864 billion, including $1.798 billion classified as long term; debt to total capital was 67%.
- Cash provided by operations was $354.1 million for the first nine months, down from $497.1 million. Management cited timing of accrued payments and higher factory inventory associated with retail-flow management. Inventory was $1.020 billion, up from $784.0 million at year-end 2017.
- Investing activities used $858.1 million, mainly reflecting the Boat Holdings acquisition. Financing activities provided $562.5 million, including net debt borrowings of $875.0 million. Polaris reported $625.8 million of availability on its revolving facility and said liquidity was adequate.
- Polaris acquired Boat Holdings on July 2 for $806.7 million, net of cash acquired; $100 million is payable in deferred annual payments over 12 years. The acquisition was funded through expanded credit facilities and $350 million of 4.23% senior notes due 2028.
- Polaris repurchased approximately 2.1 million shares for $246.9 million in the first nine months and paid $112.7 million in dividends. The board declared a further $0.60-per-share dividend payable in December 2018.
Material changes, outlook and risks
- Boat Holdings added $134.3 million of Q3 sales and $20.3 million of gross profit. Its purchase-price allocation remained preliminary at quarter-end.
- Segment performance varied: nine-month sales increased 11% in ORV/snowmobiles and 15% in global adjacent markets, while motorcycle sales declined 3% and aftermarket sales increased 1%. Boat results reflect ownership only from July 2.
- Other notable items included a $18.7 million impairment of the Eicher-Polaris joint-venture investment and $23.4 million of total EPPL wind-down costs for the first nine months; a $13.5 million gain related to Brammo; and acquisition and restructuring costs. Polaris estimated 2018 Victory wind-down activity would have an approximately $5 million pretax impact, with substantially all costs expected by year-end.
- Management expected commodity-price increases, higher freight costs and additional tariffs to continue pressuring gross margins for the remainder of 2018. It expected currencies to have a slightly favorable impact on 2018 net income. The filing does not provide a specific sales or EPS forecast.
- Risks include trade-policy and tariff changes, commodity and transportation costs, currency movements, product quality, recalls and warranty claims, consumer demand, weather, acquisition integration, and dealer inventory. Two U.S. putative class actions allege fire and excessive-heat hazards; the company said it could not estimate the likelihood or range of loss. It had accrued $55.3 million for probable pending product-liability claims.
- The company said it expected existing cash, operating cash flow and borrowing capacity to fund operations and planned uses for the foreseeable future. It was in compliance with debt covenants at quarter-end. No material change in market risk was reported; disclosure controls were assessed as effective.
Important facts for investors to verify
- How Boat Holdings performs after integration, including whether preliminary purchase accounting, acquisition costs and added debt affect future margins and earnings.
- Whether inventory growth and dealer inventory levels normalize, and whether operating cash flow recovers from the year-to-date decline.
- The effect of tariffs, freight and commodity costs on margins, alongside the company’s ability to offset those pressures through pricing, mix or cost savings.
- Developments in the product-liability cases, warranty claims and any product-safety actions, given the uncertainty of potential losses.
- Debt levels, interest expense, covenant headroom and ongoing capital allocation, including buybacks and dividends.