Polaris Reports 2017 First Quarter Results

Sales for the first quarter of 2017 increased 17% to $1,153.8 million; adjusted sales increased 18% to $1,158.9 million

Polaris N.A. retail sales performance exceeded Company expectations in the first quarter; ORV market share stabilizing; Indian Motorcycle® market share gains continued during the quarter

First quarter 2017 reported net loss was $0.05 per diluted share; adjusted net income for the same period was $0.75 per diluted share, slightly ahead of expectations

Total dealer inventory was down 8% year-over-year; ORV dealer inventory was down 9%

Polaris reiterated its full year 2017 outlook with adjusted net income expected to be in the range of $4.25 to $4.50 per diluted share with adjusted sales for the full year 2017 expected in the range of up 10% to 13%

Note: the results and guidance in this release, including the highlights above, include references to non-GAAP operating measures, which are identified by the word “adjusted” preceding the measure. A reconciliation of GAAP to non-GAAP measures can be found at the end of this release.

MINNEAPOLIS--()--Polaris Industries Inc. (NYSE: PII) today reported first quarter 2017 sales of $1,153.8 million, up 17 percent, from $983.0 million for the first quarter of 2016. Adjusted sales, which excludes the impact from Victory Motorcycles® net sales for the first quarter of 2017, were $1,158.9 million compared to $983.0 million in the prior year period. The Company reported a first quarter 2017 net loss of $2.9 million, or $0.05 per diluted share, compared with net income of $46.9 million, or $0.71 per diluted share, for the 2016 first quarter. The reported net loss included costs related to the wind down of Victory Motorcycles and certain TAP integration and inventory step up costs taken in the first quarter. Adjusted net income for the quarter ended March 31, 2017, excluding these costs, was $48.3 million, or $0.75 per diluted share.

“While we reported an expected net loss for the quarter, adjusted earnings were slightly ahead of our expectations. We saw continued strong performance from Indian Motorcycle and our ORV business improved its performance in the face of heavy competitive activity and a sluggish powersports environment. Overall, our dealer channel remains healthy with inventories down eight percent, and we continue to diligently work to enhance our dealer engagement,” commented Scott Wine, Chairman and Chief Executive Officer of Polaris Industries.

Wine continued, “We have made significant investments in people, processes and technology to support prevention, identification and remediation of safety and quality issues and we are identifying them earlier and reacting more quickly. The safety of our riders and vehicles is our number one priority, and we will continue to develop the processes required to deliver best-in-class performance in this area. Further, we are aggressively investing in the development of innovative products that will further solidify Polaris’ position as the leader in powersports. Our first quarter results reflect our commitment to quickly and sustainably improve our strategic and tactical execution, continue enhancing overall safety and quality, and building superior products for our customers.”

Off-Road Vehicle (“ORV”) and Snowmobile segment sales, including their respective PG&A related sales, were $724.1 million for the first quarter of 2017, compared with $708.1 million for the first quarter for the prior year representing a two percent increase, year-over-year. PG&A sales for ORV and Snowmobiles combined, increased 13 percent in the 2017 first quarter compared to last year. Gross profit increased three percent to $213.0 million, or 29.4 percent of sales, in the first quarter of 2017, compared to $206.0 million, or 29.1 percent of sales, in the first quarter of 2016. Gross profit percentage increased primarily due to product mix.

ORV wholegood sales for the first quarter of 2017 were approximately flat as the Company began shipping at more normalized rates. Polaris North American ORV unit retail sales for the first quarter of 2017 were down mid-single digits percent from the 2016 first quarter, which included consumer purchases for side-by-side vehicles down low-single digits percent and ATV retail sales down low-double digits percent. The North American ORV industry was down mid-single digits percent compared to the first quarter last year. ORV dealer inventory was down nine percent in the 2017 first quarter compared to the same period last year.

Snowmobile wholegood sales in the first quarter of 2017 decreased three percent due to timing of shipments during the quarter. While the snow season did not meet our expectations, dealer inventory finished below last year and we received a strong reception to our all-new model year 2018 Polaris® TITAN™, the industry’s most capable extreme crossover snowmobile.

Motorcycle segment sales, including its PG&A related sales in the first quarter of 2017, was $120.3 million, a decrease of 35 percent compared to $185.3 million reported in the first quarter of 2016 which included $46.3 million of Victory Motorcycles wholegood, accessory and apparel sales. Indian Motorcycle wholegood sales increased in the first quarter driven by strong retail sales, offset by lower Slingshot® sales which were negatively impacted by low availability of salable product due to quality holds during the quarter. Gross profit for the first quarter of 2017 was a negative $19.9 million compared to positive $27.3 million in the first quarter of 2016. Adjusted for the Victory wind down costs of $38.6 million, motorcycle gross profit was a positive $18.7 million, down from the first quarter last year due to product mix and lower Slingshot volume.

North American consumer retail demand for the Polaris motorcycle segment, including Indian Motorcycle and Slingshot, was down mid-single digits percent during the 2017 first quarter, while the overall motorcycle industry retail sales, 900cc and above, was down mid-single digits percent in the 2017 first quarter. Indian Motorcycle retail sales increased low double-digits percent and continued to gain market share, partly driven by sales of the Company's new highly customizable, split-screen Ride Command™ touchscreen infotainment system available on Indian Chieftain® and Roadmaster® models. Additionally, during the quarter, the Company added its 10th model to the line-up with the introduction of the Roadmaster Classic with genuine leather saddlebags and trunk, giving it distinctive vintage styling. Slingshot retail sales were down significantly due to low product availability and a more difficult comparable as the Company released its top of the line Slingshot SLR model in the first quarter last year.

Global Adjacent Markets segment sales along with its PG&A related sales, increased 24 percent to $91.6 million in the 2017 first quarter compared to $74.1 million in the 2016 first quarter. Gross profit increased 38 percent to $28.1 million, or 30.7 percent of sales, in the first quarter of 2017, compared to $20.4 million, or 27.5 percent of sales, in the first quarter of 2016. Sales and gross profit were up primarily due to increased sales in the Company’s Government and Defense business in the 2017 first quarter which more than doubled from the previous year's quarter sales. Work and Transportation group wholegood sales were up 12 percent during the first quarter of 2017 primarily due to increased Aixam® sales and a full quarter of Taylor-Dunn® sales compared to last year.

Aftermarket segment sales which includes Transamerican Auto Parts ("TAP"), along with the Company's other aftermarket brands of Klim®, Kolpin®, Pro Armor®, Trail Tech and 509®, increased significantly to $217.8 million in the 2017 first quarter compared to $15.5 million in the 2016 first quarter. TAP added $202.0 million of sales in the first quarter of 2017. Gross profit increased significantly to $41.6 million, or 19.1 percent of sales in first quarter of 2017, compared to $4.7 million, or 30.3 percent of sales, in the first quarter of 2016. Adjusted for the TAP acquisition step-up adjustment, Aftermarket gross profit was $54.5 million, or 25.0 percent of sales. Sales and gross profit dollars were up primarily due to the addition of TAP acquired in the fourth quarter of 2016.

Supplemental Data:

Parts, Garments, and Accessories (“PG&A”) sales, excluding Aftermarket segment sales, increased 13 percent for the 2017 first quarter. The increase was primarily driven by higher ORV and Global Adjacent Markets related PG&A sales during the quarter.

International sales to customers outside of North America totaled $166.2 million for the first quarter of 2017, including PG&A, up two percent, from the same period in 2016.

Gross profit decreased two percent to $242.5 million for the first quarter of 2017 from $247.6 million in the first quarter of 2016. As a percentage of sales, reported gross profit margin was 21.0 percent compared with 25.2 percent of sales for the first quarter of 2016. Gross profit for the first quarter of 2017 includes the negative impact of $38.6 million of Victory wind down costs and $12.9 million in purchase accounting adjustments related to the TAP acquisition. Excluding these items, adjusted gross profit was $294.0 million, or 25.4 percent of sales. Gross margins on an adjusted basis improved slightly due to product cost reduction efforts generated through lean initiatives and favorable product mix offsetting increased warranty and promotional costs incurred during the quarter.

Operating expenses increased 27 percent for the first quarter of 2017 to $241.8 million from $189.9 million, including $6.0 million in Victory wind down costs and $3.3 million of TAP integration expenses. Excluding these costs, operating expenses increased primarily due to the addition of operating expenses from TAP, as well as more normalized variable compensation expenses and increased research and development expenses for ongoing product refinement and innovation.

Income from financial services was $20.4 million for the first quarter of 2017, up five percent compared with $19.5 million for the first quarter of 2016. The increase is attributable to higher income generated from the sale of extended service contracts.

Non-operating other expense, net, was $11.6 million for the first quarter of 2017, including $13.0 million in impairment charges on an investment related to the Victory wind down, versus $0.1 million in the first quarter of 2016. Excluding the impairment charge, the remaining change primarily relates to foreign currency exchange rate movements and the corresponding effects on foreign currency transactions related to the Company’s foreign subsidiaries.

The provision for income taxes for the first quarter of 2017 was $2.6 million, compared with $25.3 million for the first quarter of 2016. The reduction in the provision for income taxes is due to lower pretax income offset by certain non-deductible costs related to the Victory motorcycle wind down, incurred in the first quarter 2017.

Financial Position and Cash Flow

Net cash provided by operating activities was $50.9 million for the quarter ended March 31, 2017, compared to $139.0 million for the same period in 2016. The significant decrease in net cash provided by operating activities for the 2017 period was due to the net loss reported in the first quarter 2017 as well as the timing of warranty and other accrued expense payments and higher factory inventory ahead of the seasonally high spring retail selling season. Total debt for the quarter, including capital lease obligations and notes payable, was $1,177.7 million. The Company’s debt-to-total capital ratio was 58 percent at March 31, 2017, compared to 36 percent a year ago. Cash and cash equivalents were $137.5 million at March 31, 2017, down from $145.8 million for the same period in 2016.

Share Buyback Activity

During the first quarter 2017, the Company repurchased and retired 256,000 shares of its common stock for $21.8 million. As of March 31, 2017, the Company has authorization from its Board of Directors to repurchase up to an additional 7.2 million shares of Polaris stock.

2017 Business Outlook

The Company guidance range for the full year 2017 remains unchanged from previously issued guidance. The Company continues to expect adjusted net income to be in the range of $4.25 to $4.50 per diluted share, compared with adjusted net income of $3.48 per diluted share for 2016. Full year 2017 adjusted sales are anticipated to increase in the range of 10 percent to 13 percent over 2016 sales of $4,516.6 million, also unchanged from previously issued guidance.

Wind down of Victory Motorcycles

Polaris announced on January 9, 2017 its intention to wind down its Victory Motorcycles operations. The decision is expected to improve the long-term profitability of Polaris and its global motorcycle business, while materially improving the Company’s competitive position in the industry. The Company will record costs associated with supporting Victory dealers in selling their remaining inventory, the disposal of factory inventory, tooling, and other physical assets, and the cancellation of various supplier arrangements. These costs will be recorded in the 2017 income statement in respective sales, gross profit and operating expense beginning in the first quarter of 2017. These costs are excluded from Polaris’ 2017 sales and earnings guidance on a non-GAAP basis.

Use of Non-GAAP Financial Information

This press release and our related earnings call contains certain non-GAAP financial measures, consisting of “adjusted sales, gross profits, operating expenses, other expense, net income and net income per diluted share” as measures of our operating performance. Management believes these measures may be useful in performing meaningful comparisons of past and present operating results, to understand the performance of its ongoing operations and how management views the business. Reconciliations of adjusted non-GAAP measures to reported GAAP measures are included in the financial schedules contained in this press release. These measures, however, should not be construed as an alternative to any other measure of performance determined in accordance with GAAP.

Fourth Quarter and Full Year Conference Call and Webcast Presentation

Today at 9:00 AM (CT) Polaris Industries Inc. will host a conference call and webcast to discuss the 2017 first quarter results released this morning. The call will be hosted by Scott Wine, Chairman and CEO; Ken Pucel, Executive Vice President - Operations, Engineering and Lean; and Mike Speetzen, Executive Vice President - Finance and CFO. A slide presentation and link to the webcast will be posted on the Polaris Investor Relations website at http://ir.polaris.com.

To listen to the conference call by phone, dial 877-706-7543 in the U.S. and Canada, or 478-219-0273 internationally. The Conference ID is # 45015868.

A replay of the conference call will be available approximately two hours after the call for a one-week period by accessing the same link on our website, or by dialing 855-859-2056 in the U.S. and Canada, or 404-537-3406 internationally.

About Polaris

Polaris Industries Inc. (NYSE: PII) is a global powersports leader with annual 2016 sales of $4.5 billion. Polaris fuels the passion of riders, workers and outdoor enthusiasts with our RANGER®, RZR® and POLARIS GENERAL™ side-by-side off-road vehicles; our SPORTSMAN® and POLARIS ACE® all-terrain off-road vehicles; VICTORY® and INDIAN MOTORCYCLE® mid-size and heavyweight motorcycles; SLINGSHOT® moto-roadsters; and Polaris RMK®, INDY®, SWITCHBACK® and RUSH® snowmobiles. Polaris enhances the riding experience with parts, garments and accessories sold under multiple recognizable brands, and has a growing presence globally in adjacent markets with products including military and commercial off-road vehicles, quadricycles, and electric vehicles. www.polaris.com

Except for historical information contained herein, the matters set forth in this news release, including management’s expectations regarding 2017 future sales, shipments, net income, and net income per share, and operational initiatives are forward-looking statements that involve certain risks and uncertainties that could cause actual results to differ materially from those forward-looking statements. Potential risks and uncertainties include such factors as the Company’s ability to successfully implement its manufacturing operations expansion initiatives, product offerings, promotional activities and pricing strategies by competitors; economic conditions that impact consumer spending; acquisition integration costs; product recalls, warranty expenses; impact of changes in Polaris stock price on incentive compensation plan costs; foreign currency exchange rate fluctuations; environmental and product safety regulatory activity; effects of weather; commodity costs; uninsured product liability claims; uncertainty in the retail and wholesale credit markets; performance of affiliate partners; changes in tax policy and overall economic conditions, including inflation, consumer confidence and spending and relationships with dealers and suppliers. Investors are also directed to consider other risks and uncertainties discussed in documents filed by the Company with the Securities and Exchange Commission. The Company does not undertake any duty to any person to provide updates to its forward-looking statements.

(summarized financial data follows)

 
POLARIS INDUSTRIES INC.

CONSOLIDATED STATEMENTS OF INCOME (LOSS)

(In Thousands, Except Per Share Data)

(Unaudited)

 
  Three months ended March 31,
2017   2016
Sales $ 1,153,782 $ 982,996
Cost of sales 911,291   735,418
Gross profit 242,491 247,578
Operating expenses:
Selling and marketing 114,313 77,241
Research and development 52,005 43,109
General and administrative 75,514   69,580
Total operating expenses 241,832 189,930
Income from financial services 20,430   19,496
Operating income 21,089 77,144
Non-operating expense:
Interest expense 7,914 2,865
Equity in loss of other affiliates 1,900 2,058
Other expense, net 11,608   81
Income (loss) before income taxes (333 ) 72,140
Provision for income taxes 2,578   25,251
Net income (loss) $ (2,911 ) $ 46,889
 
Net income (loss) per share:
Basic $ (0.05 ) $ 0.72
Diluted $ (0.05 ) $ 0.71
Weighted average shares outstanding:
Basic 63,128 65,046
Diluted 64,133 65,982

 
POLARIS INDUSTRIES INC.

CONSOLIDATED BALANCE SHEETS

(In Thousands, Except Per Share Data)

(Unaudited)

 
  March 31, 2017   March 31, 2016
 
Assets
Current Assets:
Cash and cash equivalents $ 137,494 $ 145,763
Trade receivables, net 176,277 124,553
Inventories, net 800,611 710,004
Prepaid expenses and other 81,193 68,224
Income taxes receivable 54,902   28,126
Total current assets 1,250,477 1,076,670
Property and equipment, net 729,063 675,164
Investment in finance affiliate 87,398 99,910
Deferred tax assets 185,887 165,862
Goodwill and other intangible assets, net 786,574 278,483
Other long-term assets 96,600   83,684
Total assets $ 3,135,999   $ 2,379,773
Liabilities and Shareholders’ Equity
Current Liabilities:
Current portion of debt, capital lease obligations and notes payable $ 2,888 $ 4,895
Accounts payable 348,016 293,512
Accrued expenses:
Compensation 72,915 60,168
Warranties 109,852 67,207
Sales promotions and incentives 179,587 147,204
Dealer holdback 104,905 111,480
Other 165,890 99,802
Income taxes payable 2,332   9,985
Total current liabilities 986,385 794,253
Long term income taxes payable 26,559 25,150
Capital lease obligations 17,525 20,010
Long-term debt 1,157,328 507,499
Deferred tax liabilities 9,086 13,728
Other long-term liabilities 94,021   76,076
Total liabilities $ 2,290,904   $ 1,436,716
Deferred compensation 9,249 12,190
Shareholders’ equity:
Total shareholders’ equity 835,846   930,867
Total liabilities and shareholders’ equity $ 3,135,999   $ 2,379,773

 
POLARIS INDUSTRIES INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands, Except Per Share Data)

(Unaudited)

 
  Three months ended March 31,
2017   2016
Operating Activities:
Net income (loss) $ (2,911 ) $ 46,889
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization 44,538 37,894
Noncash compensation 12,336 15,506
Noncash income from financial services (7,088 ) (7,403 )
Deferred income taxes 2,565 915
Impairment charges 18,760
Other, net 1,900 2,058
Changes in operating assets and liabilities:
Trade receivables 1,372 34,197
Inventories (48,949 ) 14,371
Accounts payable 73,091 (9,936 )
Accrued expenses (47,184 ) (31,834 )
Income taxes payable/receivable (3,801 ) 21,304
Prepaid expenses and others, net 6,287   15,047  
Net cash provided by operating activities 50,916 139,008
Investing Activities:
Purchase of property and equipment (38,391 ) (54,833 )
Investment in finance affiliate, net 13,699 6,566
Investment in other affiliates (1,694 ) (4,408 )
Acquisition and disposal of businesses, net of cash acquired 1,644   (54,830 )
Net cash used for investing activities (24,742 ) (107,505 )
Financing Activities:
Borrowings under debt arrangements / capital lease obligations 478,248 570,832
Repayments under debt arrangements / capital lease obligations (444,386 ) (504,450 )
Repurchase and retirement of common shares (21,807 ) (84,949 )
Cash dividends to shareholders (36,384 ) (35,430 )
Proceeds from stock issuances under employee plans 4,321   8,987  
Net cash used for financing activities (20,008 ) (45,010 )
Impact of currency exchange rates on cash balances 4,003   3,921  
Net increase (decrease) in cash and cash equivalents 10,169 (9,586 )
Cash and cash equivalents at beginning of period 127,325   155,349  
Cash and cash equivalents at end of period $ 137,494   $ 145,763  

 
POLARIS INDUSTRIES INC.

RECONCILIATION OF GAAP "REPORTED" TO NON-GAAP "ADJUSTED" RESULTS

(In Thousands, Except Per Share Data)

(Unaudited)

    Reported GAAP Measures   Q1 2017 Adjustments(3)   Adjusted Measures

Q1 2017

 

Q1 2016

 

% Change

Victory
Wind Down
(1)

 

TAP(2)

 

Total

Q1 2017

 

Q1 2016

 

% Change

Sales
ORV/Snowmobiles $ 724,103 $ 708,103 2 % $ 724,103 $ 708,103 2 %
Motorcycles 120,289 185,267 (35 )% $ 5,104 $ 5,104 125,393 185,267 (32 )%
Global Adjacent Markets 91,555 74,109 24 % 91,555 74,109 24 %
Aftermarket 217,835     15,517     1,304 %           217,835     15,517     1,304 %
Total sales 1,153,782 982,996 17 % 5,104 5,104 1,158,886 982,996 18 %
Gross profit
ORV/Snowmobiles 212,959 205,987 3 % 212,959 205,987 3 %
% of sales 29.4 % 29.1 % +32 bps 29.4 % 29.1 % +32 bps
Motorcycles (19,881 ) 27,259 (173 )% 38,563 38,563 18,682 27,259 (31 )%
% of sales (16.5 )% 14.7 % -3,124 bps 14.9 % 14.7 % +19 bps
Global Adjacent Markets 28,098 20,383 38 % 28,098 20,383 38 %
% of sales 30.7 % 27.5 % +319 bps 30.7 % 27.5 % +319 bps
Aftermarket 41,564 4,699 785 % 12,897 12,897 54,461 4,699 1,059 %
% of sales 19.1 % 30.3 % -1,120 bps 25.0 % 30.3 % -528 bps
Corporate (20,249 )   (10,750 )               (20,249 )   (10,750 )    
Total gross profit 242,491 247,578 (2 )% 38,563 12,897 51,460 293,951 247,578 19 %
Gross profit % 21.0 % 25.2 % (417) bps 25.4 % 25.2 % +17 bps
Operating expenses 241,832 189,930 27 % (6,017 ) (3,303 ) (9,320 ) 232,512 189,930 22 %
Other expense, net 11,608 81 NM (13,000 ) (13,000 ) (1,392 ) 81 NM
 
Net income (loss) $ (2,911 ) $ 46,889 (106 )% $ 41,021 $ 10,183 $ 51,204 $ 48,293 $ 46,889 3 %
Diluted EPS $ (0.05 ) $ 0.71     (107 )% $ 0.64     $ 0.16     $ 0.80   $ 0.75     $ 0.71     6 %
 
(1) Represents adjustments for the wind down of Victory Motorcycles, including wholegoods, accessories and apparel
(2) Represents adjustments for a TAP acquisition inventory step-up and TAP integration expenses
(3) The Company used its estimated statutory tax rate of 37.1% for the non-GAAP adjustments, except for the non-deductible items

2016 Reclassified Results: 2016 sales and gross profit results for ORV/Snowmobiles, Motorcycles and Aftermarket are reclassified for the new Aftermarket reporting segment.

2017 Adjusted Guidance: 2017 guidance excludes the pre-tax effect of TAP inventory step-up purchase accounting of approx. $15 million, acquisition integration costs of approx. $15 million, manufacturing network realignment costs of approx. $10-$15 million and the impacts associated with the Victory wind down which is estimated to be in the range of $70 to $90 million in 2017. 2017 adjusted sales guidance excludes any Victory wholegood, accessories and apparel sales and corresponding promotional costs as the Company is in the process of exiting the brand. The Company has not provided reconciliations of guidance for adjusted diluted net income per share, in reliance on the unreasonable efforts exception provided under Item 10(e)(1)(i)(B) of Regulation S-K. The Company is unable, without unreasonable efforts, to forecast certain items required to develop meaningful comparable GAAP financial measures. These items include costs associated with the Victory wind down that are difficult to predict in advance in order to include in a GAAP estimate.

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Contacts

Polaris Industries Inc.
Richard Edwards, 763-542-0500

Release Summary

POLARIS REPORTS 2017 FIRST QUARTER RESULTS

Contacts

Polaris Industries Inc.
Richard Edwards, 763-542-0500