Document/ExhibitDescriptionPagesSize 1: 10-Q Quarterly Report HTML 2.05M
2: EX-31.A Certification -- §302 - SOA'02 HTML 25K
3: EX-31.B Certification -- §302 - SOA'02 HTML 25K
4: EX-32.A Certification -- §906 - SOA'02 HTML 23K
5: EX-32.B Certification -- §906 - SOA'02 HTML 23K
11: R1 Cover HTML 75K
12: R2 Consolidated Statements of Equity (Parenthetical) HTML 23K
13: R3 Consolidated Balance Sheets HTML 170K
14: R4 Consolidated Balance Sheets (Parenthetical) HTML 39K
15: R5 Consolidated Statements Of Income HTML 163K
16: R6 Consolidated Statements Of Comprehensive Income HTML 53K
(Loss)
17: R7 Consolidated Statements of Equity HTML 133K
18: R8 Consolidated Statements Of Cash Flows HTML 133K
19: R9 Significant Accounting Policies HTML 82K
20: R10 Supplemental Balance Sheet Information HTML 45K
21: R11 Revenue Recognition HTML 137K
22: R12 Divestitures and Discontinued Operations HTML 77K
23: R13 Share-Based Compensation HTML 38K
24: R14 Financing Agreement HTML 48K
25: R15 Goodwill and Other Intangible Assets HTML 79K
26: R16 Shareholders' Equity HTML 80K
27: R17 Financial Services Arrangements HTML 28K
28: R18 Commitments and Contingencies HTML 27K
29: R19 Derivative Instruments and Hedging Activities HTML 69K
30: R20 Segment Information HTML 54K
31: R21 Significant Accounting Policies (Policies) HTML 77K
32: R22 Significant Accounting Policies (Tables) HTML 75K
33: R23 Supplemental Balance Sheet Information (Tables) HTML 45K
34: R24 Revenue Recognition (Tables) HTML 85K
35: R25 Divestitures and Discontinued Operations (Tables) HTML 76K
36: R26 Share-Based Compensation (Tables) HTML 37K
37: R27 Financing Agreement (Tables) HTML 40K
38: R28 Goodwill and Other Intangible Assets (Tables) HTML 82K
39: R29 Shareholders' Equity (Tables) HTML 79K
40: R30 Derivative Instruments and Hedging Activities HTML 70K
(Tables)
41: R31 Segment Information (Tables) HTML 49K
42: R32 Significant Accounting Policies Fair Value HTML 64K
Measurements (Details)
43: R33 Significant Accounting Policies - Property and HTML 23K
equipment narrative (Details)
44: R34 Significant Accounting Policies Activity in HTML 29K
Polaris Accrued Warranty Reserve (Detail)
45: R35 Supplemental Balance Sheet Information (Details) HTML 59K
46: R36 Revenue Recognition - Contract Revenue (Details) HTML 79K
47: R37 Revenue Recognition - Narrative (Details) HTML 31K
48: R38 Revenue Recognition - Deferred Revenue (Details) HTML 27K
49: R39 Divestitures and Discontinued Operations (Details) HTML 32K
50: R40 Divestitures and Discontinued Operations - Results HTML 54K
of Discontinued Operations (Details)
51: R41 Divestitures and Discontinued Operations - Summary HTML 75K
of Carrying Values (Details)
52: R42 Share-Based Compensation Expenses (Detail) HTML 32K
53: R43 Share-Based Compensation - Additional Information HTML 30K
(Detail)
54: R44 Financing Arrangements, Interest Rates and HTML 66K
Maturities (Details)
55: R45 Financing Agreement - Additional Information HTML 54K
(Detail)
56: R46 Goodwill and Other Intangible Assets - Goodwill HTML 28K
and Other Intangible Assets (Details)
57: R47 Goodwill and Other Intangible Assets - Changes in HTML 41K
Carrying Amount of Goodwill (Detail)
58: R48 Goodwill and Other Intangible Assets - Components HTML 44K
of Other Intangible Assets (Detail)
59: R49 Goodwill and Other Intangible Assets - Additional HTML 46K
Information (Detail)
60: R50 Shareholders' Equity Additional Information HTML 36K
(Detail)
61: R51 Shareholders' Equity Cash Dividends Declared Per HTML 23K
Common Share (Details)
62: R52 Shareholders' Equity Reconciliation of Weighted HTML 42K
Average Number of Shares (Detail)
63: R53 Shareholders' Equity Changes in Accumulated Other HTML 50K
Comprehensive Income (Loss) Balances (Detail)
64: R54 Shareholders' Equity Gains and Losses, Net of Tax HTML 37K
Reclassified from Accumulated Other Comprehensive
Income (Details)
65: R55 Financial Services Arrangements - Additional HTML 51K
Information (Detail)
66: R56 Commitments and Contingencies - Additional HTML 23K
Information (Detail)
67: R57 Derivative Instruments and Hedging Activities Open HTML 34K
Foreign Currency Contracts (Details)
68: R58 Derivative Instruments and Hedging Activities Open HTML 32K
Interest Rate Swap Contracts (Details)
69: R59 Derivative Instruments and Hedging Activities HTML 50K
Carrying Values of Derivative Instruments (Detail)
70: R60 Derivative Instruments and Hedging Activities HTML 27K
Additional Information (Details)
71: R61 Segment Information (Details) HTML 49K
74: XML IDEA XML File -- Filing Summary XML 135K
72: XML XBRL Instance -- pii-20220630_htm XML 2.58M
73: EXCEL IDEA Workbook of Financial Reports XLSX 129K
7: EX-101.CAL XBRL Calculations -- pii-20220630_cal XML 223K
8: EX-101.DEF XBRL Definitions -- pii-20220630_def XML 527K
9: EX-101.LAB XBRL Labels -- pii-20220630_lab XML 1.45M
10: EX-101.PRE XBRL Presentations -- pii-20220630_pre XML 880K
6: EX-101.SCH XBRL Schema -- pii-20220630 XSD 126K
75: JSON XBRL Instance as JSON Data -- MetaLinks 405± 603K
76: ZIP XBRL Zipped Folder -- 0001628280-22-019445-xbrl Zip 390K
(Registrant’s
telephone number, including area code)
N/A
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
Securities registered pursuant to Section 12(b) of the Act:
Title
of each class
Trading Symbol(s)
Name of each exchange on which registered
iCommon Stock, $.01 par value
iPII
iNew
York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. iYesx No ¨
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). iYesx No ¨
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,”“accelerated filer,”“smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
iLarge
accelerated filer
x
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
i☐
Emerging growth company
i☐
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes i☐ No
x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
As of July 19, 2022, i59,555,617 shares of Common Stock, $.01 par value, of the registrant were outstanding.
(1)
Polaris Inc. declared a $i0.64 dividend per share for the three month period ended June 30, 2022 and a $i0.63 dividend per
share for the three month period ended June 30, 2021.
(2)
Polaris Inc. declared a $i1.28 dividend per share for the six month period ended June 30, 2022 and a $i1.26 dividend per
share for the six month period ended June 30, 2021.
The accompanying footnotes are an integral part of these consolidated statements.
Note 1. iBasis
of Presentation and Significant Accounting Policies
i
Basis of presentation. The accompanying unaudited consolidated financial statements of Polaris Inc. (“Polaris” or the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States for interim financial statements and, therefore, do not include all information and disclosures of results of operations, financial position, and changes in cash flow in conformity with accounting principles generally accepted in the United States for complete
financial statements. Accordingly, such statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2021previously filed with the Securities and Exchange Commission (“SEC”). In the opinion of management, such statements reflect all adjustments (which include only normal recurring adjustments) necessary for a fair presentation of the financial position, results of operations, equity, and cash flows for the periods presented. Due to the seasonality trends for certain products and to certain changes in production and shipping cycles, results of such periods are not necessarily indicative of the results to be expected for the complete year.
Reclassifications. Reclassifications
of certain prior year segment results and account balances have been made to conform to the current-year presentation. The reclassifications had no impact on the consolidated balance sheets, statements of income (loss), comprehensive income (loss), equity, or cash flows, as previously reported. See further information in Note 12.
On July 1, 2022, the Company completed the sale of its Transamerican Auto Parts (“TAP”) business. The operating results of the TAP business are reported in Income (loss) from discontinued operations, net of tax, in the Consolidated statements of income (loss) for all periods presented. In addition, the related assets and liabilities are reported as assets and liabilities held for sale in the consolidated balance sheets. All amounts and disclosures included in
the Notes to consolidated financial statements reflect only the Company's continuing operations unless otherwise noted. See further information in Note 4.
i
Fair value measurements. Fair value is the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants
on the measurement date. Assets and liabilities measured at fair value are classified using the following hierarchy, which is based upon the transparency of inputs to the valuation as of the measurement date:
Level 1 — Quoted prices in active markets for identical assets or liabilities.
Level 2 — Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
In
making fair value measurements, observable market data must be used when available. When inputs used to measure fair value fall within different levels of the hierarchy, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement. The Company utilizes the market approach to measure fair value for its non-qualified deferred compensation assets and liabilities, and the income approach for foreign currency contracts and interest rate contracts. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities, and for the income approach,
the Company uses significant other observable inputs to value its derivative instruments used to hedge foreign currency and interest rate transactions.
Fair
value of other financial instruments. The carrying values of the Company’s short-term financial instruments, including cash and cash equivalents, trade receivables and short-term debt, including current maturities of long-term debt, finance lease obligations and notes payable, approximate their fair values. As of June 30, 2022 and December 31, 2021, the fair value of the Company’s long-term debt, finance lease obligations and notes payable was approximately $i2,047.4
million and $i1,870.0 million, respectively, and was determined primarily using Level 2 inputs, including quoted market prices or discounted cash flows based on quoted market rates for similar types of debt. The carrying value of long-term debt, finance lease obligations and notes payable including current maturities was $i2,016.8
million and $i1,800.7 million as of June 30, 2022 and December 31, 2021, respectively.
iProperty
and equipment. Depreciation expense was $i52.3 million and $i45.6 million for the three months ended June 30, 2022 and 2021,
respectively, and $i103.9 million and $i92.4 million for the six months ended June 30, 2022 and 2021, respectively. Substantially all
of the Company’s property and equipment is located in North America.
iProduct warranties.iThe
activity in the warranty reserve during the periods presented was as follows (in millions):
Reference Rate Reform. In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This ASU provides practical expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met. The FASB also issued ASU 2021-01, Reference Rate Reform (Topic 848): Scope in January 2021, which adds implementation guidance to clarify which optional expedients in Topic 848 may be applied to derivative instruments that do not reference LIBOR or a reference rate that is expected to be discontinued, but that are being
modified as a result of the discounting transition. The Company adopted ASU 2020-04 and ASU 2021-01 on January 1, 2022. The adoption of the ASUs did not have a material impact on the Company’s consolidated financial position, results of operations, equity or cash flows.
There are no other new accounting pronouncements that are expected to have a significant impact on the Company’s consolidated financial statements.
The Company recognizes revenue when it satisfies a performance obligation by transferring control of a good or service to a customer (primarily dealers and distributors). Revenue is measured based on the amount of consideration that the Company expects to be entitled to in exchange for the goods or services transferred.
Sales, value add, and other taxes that are collected from a customer concurrent with revenue-producing activities are excluded from revenue. Revenue from goods and services transferred to customers at a point-in-time accounts for the majority of the Company’s revenue. Revenue from products or services transferred over time is discussed in the contract liabilities section.
For
the majority of wholegood vehicles, boats, and Parts, Garments, and Accessories (“PG&A”), the Company transfers control and recognizes a sale when it ships the product from its manufacturing facility, distribution center, or vehicle holding center to its customer. The amount of consideration the Company receives and revenue it recognizes varies with changes in marketing incentives and rebates it offers to its dealers and their customers. Payment terms vary by customer and most of the Company’s sales are financed by the customer under floorplan financing arrangements whereby the Company receives payment within a few days of
shipment of the product.
When the right of return exists, the Company adjusts the consideration for the estimated effect of returns. The Company estimates expected returns based on historical sales levels, the timing and magnitude of historical sales return levels as a percent of sales, type of product, type of customer, and a projection of this experience into the future. The Company adjusts its estimate of revenue at the earlier of when the most likely amount of consideration it expects to receive changes or when the consideration becomes fixed.
Depending on the terms of the arrangement, the
Company may also defer the recognition of a portion of the consideration received because it has to satisfy a future obligation. The Company uses an observable price to determine the stand-alone selling price for separate performance obligations. The Company has elected to recognize the cost for freight and shipping when control over vehicles, boats, parts, garments or accessories has transferred to the customer as an expense in cost of sales.
Financial Products.The Company sells separately-priced service contracts (“ESCs”) that extend mechanical
coverages beyond the base limited warranty as well as prepaid maintenance agreements to vehicle owners. Each of these separately priced service contracts range from i12 months to i84
months. The Company typically receives payment at the inception of the
contract and recognizes revenue over the term of the agreement in proportion to the costs expected to be incurred in satisfying the obligations under the contract.
Contract liabilities relate to deferred revenue recognized for cash consideration received at contract inception in advance of the Company's performance under the respective contract and generally relate to the sale of separately priced ESCs. The Company finances its self-insured risks related to ESCs. The premiums for ESCs are primarily recognized in income in proportion to the costs expected to be incurred over the contract
period. Warranty costs are recognized as incurred.
The Company expects to recognize approximately $i36.4 million of the unearned amount over the next 12 months and $i77.2
million thereafter. iThe activity in the deferred revenue reserve during the periods presented was as follows (in millions):
(1)
The unamortized ESC premiums recorded in other current liabilities totaled $i36.4 million and $i33.8 million as of June 30, 2022 and 2021,
respectively, while the amount recorded in other long-term liabilities totaled $i77.2 million and $i71.7 million as of June 30, 2022 and 2021,
respectively.
Note 4. iDivestitures and Discontinued Operations
2021 Divestitures.
In an effort to more strategically allocate the Company’s
resources, the Company sold its Global Electric Motorcar (“GEM”) and Taylor-Dunn businesses on December 31, 2021. The sale resulted in a loss of $i36.8 million. The 2021 financial results of these businesses are reflected in the Corporate segment.
2022 Divestitures.
In June 2022, the
Company entered into a definitive agreement to sell Transamerican Auto Parts (“TAP”), an aftermarket parts business. TAP is a vertically integrated manufacturer, distributor, retailer, and installer of off-road Jeep and truck parts and accessories. The transaction includes TAP’s full portfolio of operations, including all brands, product lines, manufacturing operations, distribution facilities, more than 100 4 Wheel Parts retail locations, and more than 1,700 TAP employees.
The results of TAP have been presented as discontinued operations and the related assets and liabilities have been classified as held for sale for all periods presented. As a result, an impairment of $i187.8 million
was recorded to adjust TAP’s assets and liabilities to fair value less costs to sell. The impairment resulted in a $i45.6 million income tax benefit (deferred tax asset). As of June 30, 2022, the fair value of the assets and liabilities held for sale were measured based on a purchase offer, which is considered a Level 3 input in the fair value hierarchy.
TAP
was historically included within the Company’s Aftermarket segment; however, as a result of the planned divestiture the Company began management of its portfolio of businesses under a new basis as of June 30, 2022. The Aftermarket segment was eliminated and the results of the Company’s remaining aftermarket businesses historically included within the Aftermarket segment were reclassified to the Off-Road and On-Road segments. The comparative 2021 segment results were reclassified for comparability.
The sale was completed on July
1, 2022 for a sales price of $i50.0 million, subject to customary post-closing purchase price adjustments.
Total
share-based compensation expense included in net income (loss)
$
i9.5
$
i10.5
$
i17.5
$
i17.8
/
In
addition to the above share-based compensation expenses, the Company sponsors a qualified non-leveraged employee stock ownership plan (“ESOP”). Shares allocated to eligible participants’ accounts vest at various percentage rates based on years of service and require no cash payments from the recipient.
As of June 30, 2022, there was $i72.9
million of total unrecognized share-based compensation expense related to unvested share-based equity awards. Unrecognized share-based compensation expense is expected to be recognized over a weighted-average period of i1.6 years. Included in unrecognized share-based compensation expense was approximately $i8.9
million related to stock options and $i64.0 million related to restricted stock.
Note 6. iFinancing
Agreements
i
The carrying value of debt, finance lease obligations, and notes payable and the average related interest rates were as follows (in millions):
Total
debt, finance lease obligations, and notes payable
$
i2,016.8
$
i1,800.7
Less:
current maturities
i553.3
i553.3
Total
long-term debt, finance lease obligations, and notes payable
$
i1,463.5
$
i1,247.4
/
In
December 2010, the Company entered an unsecured Master Note Purchase Agreement, which has been amended and supplemented, under which it has issued senior notes. In July 2018, the Company issued $i350 million of unsecured senior notes due July 2028 which remain outstanding.
The Company maintains an unsecured credit
facility which consists of a term loan facility (the “Term Loan Facility”) and a revolving loan facility (the “Revolving Loan Facility”). In July 2018, the Company amended its unsecured credit facility to increase its Term Loan Facility to $i1,180 million, of which $i852
million was outstanding as of June 30, 2022. In June 2021, the Company further amended its unsecured credit facility to increase its Revolving Loan Facility to $i1.0 billion and extend the maturity date to June 2026. Interest is charged at rates based on a LIBOR or “prime” base rate.
On December 17, 2021,
the Company amended the Term Loan Facility to provide an incremental 364-day term loan (the “Incremental Term Loan”) in the amount of $i500.0 million. The incremental term loan, which was fully drawn on closing, is unsecured and matures on December 16, 2022. There are no required principal payments prior to the maturity date. In addition to the payment of the $i500.0
million Incremental Term Loan, the Company is required to make principal payments under the Term Loan Facility totaling $i45 million over the next 12 months. These payments are classified as current maturities in the consolidated balance sheets.
The credit facility and the Master Note Purchase Agreement contain covenants that require the
Company to maintain certain financial ratios, including minimum interest coverage and maximum leverage ratios. The agreements also require the
Company to maintain an interest coverage ratio of not less than i3.00 to 1.00 and a leverage ratio
of not more than i3.50 to 1.00 on a rolling four quarter basis. The Company was in compliance with all such covenants as of June 30, 2022.
Debt issuance costs are recognized as a reduction in the carrying value of the related long-term debt in the consolidated balance sheets and are being amortized to interest expense in the consolidated statements of income (loss) over the expected remaining terms
of the related debt.
As a component of the Boat Holdings merger agreement, the Company has committed to make a series of deferred payments to the former owners following the closing date of the merger through July 2030. The original discounted payable was for $i76.7 million, of which $i61.0
million was outstanding as of June 30, 2022. The outstanding balance is included in long-term debt and current portion of long-term debt in the consolidated balance sheets.
Note 7. iGoodwill and Other Intangible Assets
i
Goodwill
and other intangible assets, net of accumulated amortization, as of June 30, 2022 and December 31, 2021 are as follows (in millions):
The accumulated goodwill impairment losses recorded relate to the Company’s $i270.3 million goodwill impairment of its Aftermarket segment in 2020. As part of the Company’s segment reorganization in the second quarter of 2022, the Aftermarket segment was eliminated and historical goodwill impairments were allocated to existing segments on a relative
fair value basis.
i
The components of other intangible assets were as follows ($ in millions):
Amortization
expense for intangible assets was $i4.8 million and $i5.5 million for the three months ended June 30,
2022 and 2021, respectively, and $i9.8 million and $i11.4 million for the six months ended June
30, 2022 and 2021, respectively. Estimated amortization expense for the remainder of 2022 through 2027 is as follows: 2022 (remainder), $i9.0 million; 2023, $i17.7
million; 2024, $i17.7 million; 2025, $i17.7 million;
2026, $i17.7 million; 2027, $i17.7 million; and after
2027, $i173.2 million. The preceding expected amortization expense is an estimate and actual amounts could differ due to additional intangible asset acquisitions, changes in foreign currency rates or impairments of intangible assets.
Note 8. iShareholders’
Equity
During the six months ended June 30, 2022, the Company paid $i172.3 million to repurchase approximately i1.5
million shares of its common stock. As of June 30, 2022, the Board of Directors has authorized the Company to repurchase up to an additional $i681.7 million of the Company’s common stock. The repurchase of any or all such shares authorized for repurchase will be governed by applicable
SEC rules and dependent on management’s assessment of market conditions and subject to the restrictions on share repurchases set forth in the incremental amendment.
The Company paid a regular cash dividend of $i0.64 per share on June 15, 2022 to holders of record at the close of business on June 1, 2022. iCash
dividends declared and paid per common share for the three and six months ended June 30, 2022 and 2021, were as follows:
Basic income (loss) per share is computed by dividing net income (loss) available to common shareholders by the weighted average number of common shares outstanding during each period, including shares earned under the Deferred Compensation Plan for Directors (“Director Plan”), the ESOP and deferred stock units under the 2007 Omnibus Incentive Plan (“Omnibus Plan”). Diluted income per share is computed under the treasury stock method and is calculated to compute the dilutive effect of outstanding stock options and certain share-based awards issued under the Omnibus Plan. iA
reconciliation of these amounts is as follows (in millions):
Weighted
average number of common shares outstanding
i59.5
i61.0
i59.7
i61.3
Director
Plan and deferred stock units
i0.2
i0.2
i0.2
i0.2
ESOP
i0.2
i0.1
i0.2
i0.1
Common
shares outstanding—basic
i59.9
i61.3
i60.1
i61.6
Dilutive
effect of restricted stock units
i0.3
i0.7
i0.4
i0.7
Dilutive
effect of stock option awards
i0.3
i0.8
i0.4
i0.8
Common
and potential common shares outstanding—diluted
i60.5
i62.8
i60.9
i63.1
During
the three and six months ended June 30, 2022, the number of options that were not included in the computation of diluted income (loss) per share because the option exercise price was greater than the market price, and therefore, the effect would have been anti-dilutive were i1.6 million, compared to i0.6
million and i0.8 million for the same periods in 2021, respectively.
Accumulated other comprehensive loss
i
Changes
in the accumulated other comprehensive loss balance were as follows (in millions):
The
table below provides the amount of gains and losses, net of tax, reclassified from accumulated other comprehensive loss into the statements of income (loss) for cash flow derivatives designated as hedging instruments and retirement plan activity for the three and six months ended June 30, 2022 and 2021 (in millions):
Derivatives
in Cash Flow Hedging Relationships and Other Activity
Location of Gain (Loss) Reclassified from Accumulated Other Comprehensive Loss into Income
The
net amount of the existing gains or losses as of June 30, 2022 that is expected to be reclassified into the statements of income (loss) within the next 12 months is not expected to be material. See Note 11 for further information regarding derivative activities.
Note 9. iFinancial
Services Arrangements
Polaris Acceptance, a joint venture between the Company and Wells Fargo Commercial Distribution Finance Corporation, a direct subsidiary of Wells Fargo Bank, N.A. (“Wells Fargo”), which is supported by a partnership agreement between their respective wholly owned subsidiaries, finances substantially all of the Company’s United States sales of snowmobiles, off-
road
vehicles (“ORV”), motorcycles, and related PG&A, whereby the Company receives payment within a few days of shipment of the product.
The Company’s subsidiary has a i50 percent equity interest in Polaris Acceptance. Polaris Acceptance sells a portion of its receivable portfolio to a securitization facility (the “Securitization
Facility”) arranged by Wells Fargo. The sale of receivables from Polaris Acceptance to the Securitization Facility is accounted for in Polaris Acceptance’s financial statements as a “true-sale” under Accounting Standards Codification (“ASC”) Topic 860. The Company’s allocable share of the income of Polaris Acceptance has been included as a component of income from financial services in the consolidated statements of income (loss). The partnership agreement is effective through February 2027.
The Company’s total investment in Polaris Acceptance of $i37.1
million as of June 30, 2022 is accounted for under the equity method and is recorded in investment in finance affiliate in the consolidated balance sheets. As of June 30, 2022, the outstanding amount of net receivables financed for dealers under this arrangement was $i601.8 million, which included $i478.3
million in the Polaris Acceptance portfolio and $i123.5 million of receivables within the Securitization Facility (“Securitized Receivables”).
The Company has agreed to repurchase products repossessed by Polaris Acceptance up to an annual maximum of i15
percent of the aggregate average month-end outstanding Polaris Acceptance receivables and Securitized Receivables during the prior calendar year. For calendar year 2022, the potential i15 percent aggregate repurchase obligation is approximately $i69.2
million.
A subsidiary of Huntington Bancshares Incorporated (“Huntington”) finances a portion of the Company’s United States sales of boats whereby the Company receives payment within a few days of shipment of the product. The Company has agreed to repurchase products repossessed by Huntington up to a maximum of i100
percent of the aggregate outstanding Huntington receivables balance. As of June 30, 2022, the potential aggregate repurchase obligation was approximately $i140.6 million.
The Company has other financing arrangements related to its foreign subsidiaries
in which it has agreed to repurchase repossessed products. For calendar year 2022, the potential aggregate repurchase obligations are approximately $i21.8 million.
The Company’s financial exposure under these repurchase agreements is limited to the difference between the amounts unpaid by the dealer or distributor with
respect to the repossessed product plus costs of repossession and the amount received on the resale of the repossessed product. No material losses have been incurred under these agreements during the periods presented.
The Company has agreements with third-party financing companies to provide financing options to end consumers of the Company’s products. The Company has no material contingent liabilities for residual value or credit collection risk under these agreements. The Company’s income generated from these agreements has been included as a component of income from financial services in
the consolidated statements of income (loss).
Note 10. iCommitments and Contingencies
Product liability.The Company is subject to product liability claims in the normal course of business. In 2012, the
Company began purchasing excess insurance coverage for product liability claims. The Company self-insures product liability claims before the policy date and up to the purchased insurance coverage after the policy date. The estimated costs resulting from any losses are charged to operating expenses when it is probable a loss has been incurred and the amount of the loss is reasonably estimable. The Company utilizes historical trends and actuarial analysis, along with an analysis of current claims, to assist in determining the appropriate loss reserve levels. As of June 30, 2022, the Company had an accrual of $i101.6
million for the probable payment of pending claims related to product liability litigation associated with the Company’s products. This accrual is included as a component of other accrued expenses in the consolidated balance sheets.
Litigation.The Company is a defendant in lawsuits and subject to other claims arising in the normal course of business, including matters related to intellectual property, commercial matters, and product liability claims. In addition, as of June 30, 2022, the Company is party to putative class actions pending against the
Company in the United States which are described in more detail in Item 1 – Legal Proceedings. The Company is unable to provide an evaluation of the likelihood that a loss will be incurred or an estimate of the range of possible loss on the putative class actions.
In the opinion of management, it is presently unlikely that any legal proceedings pending against or involving the Company will have a material adverse effect on the Company’s financial position, results of operations, or cash flows. However, in many of these matters, it is inherently difficult to determine whether a loss is probable or reasonably possible or to
estimate the size or range of the possible loss given the variety of potential outcomes of actual and potential claims, the uncertainty of
future rulings, the behavior or incentives of adverse parties, and other factors outside of the control of the Company. Accordingly, the Company’s loss reserve may change from time to time, and actual losses could exceed the amounts accrued by an amount that could be material to the
Company’s consolidated financial position, results of operations, or cash flows in any particular reporting period.
Regulatory. In the normal course of business, the Company’s products are subject to extensive laws and regulations relating to safety, environmental, and other regulations promulgated by the United States federal government and individual states, as well as international regulatory authorities. Failure to comply with applicable regulations could result in fines, penalties or other costs.
Note 11. iDerivative
Instruments and Hedging Activities
The Company is exposed to certain risks relating to its ongoing business operations. The primary risks managed by using derivative instruments are foreign currency risk and interest rate risk. Derivative contracts on various currencies are entered into in order to manage foreign currency exposures associated with certain product sourcing activities and intercompany cash flows. Interest rate swaps are entered into in order to maintain a balanced risk of fixed and floating interest rates associated with the Company’s debt.
The
Company’s foreign currency management objective is to mitigate the potential impact of currency fluctuations on the value of its U.S. dollar cash flows and to reduce the variability of certain cash flows at the subsidiary level. The Company actively manages certain forecasted foreign currency exposures and uses a centralized currency management operation to take advantage of potential opportunities to naturally offset foreign currency exposures. The decision of whether and when to execute derivative instruments, along with the duration of the instrument, may vary from period to period depending on market conditions, the relative costs of the instruments and capacity to hedge. The duration is linked to the timing of the underlying exposure, with the connection between the two being regularly monitored. The
Company does not use any financial contracts for trading purposes.
These
contracts, with maturities through December 2023, met the criteria for cash flow hedges, and are recorded in other current assets or other current liabilities in the consolidated balance sheet. The unrealized gains or losses, after tax, are recorded as a component of accumulated other comprehensive loss in shareholders’ equity.
The Company enters into interest rate swap transactions to hedge the variable interest rate payments for the Term Loan Facility. In connection with these transactions, the Company pays interest based upon a fixed rate and receives variable rate interest payments based on the one-month LIBOR.
These
contracts, with maturities through September 2023, met the criteria for cash flow hedges, and are recorded in other current assets or other current liabilities in the consolidated balance sheet. Assets and liabilities are offset in the consolidated balance sheet if the right of offset exists. The unrealized gains or losses, after tax, are recorded as a component of accumulated other comprehensive loss in shareholders’ equity.
Total
derivatives designated as hedging instruments
$
i2.4
$
(i8.1)
$
(i5.7)
/
Assets
are included in prepaid expenses and other and liabilities are included in other accrued expenses in the consolidated balance sheets. Gains and losses on derivative instruments representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in the current statement of income.
The amount of gains (losses), net of tax, related to the effective portion of derivative instruments designated as cash flow hedges included in accumulated other comprehensive loss for the three and six months ended June 30, 2022 were $i6.1
million and $i14.4 million, respectively, compared to $i1.8
million and $i3.2 million for the same periods in 2021, respectively.
See Note 8 for information about the amount of gains and losses, net of tax, reclassified from accumulated other comprehensive loss into the statements of income (loss) for derivative instruments designated as hedging instruments. The ineffective portion of foreign currency contracts
was not material for the three and six month period ended June 30, 2022.
Note 12. iSegment Reporting
On January 1, 2022, the Company began management of its
portfolio of businesses under a new basis, which was intended to create a simplified reporting structure to provide better focus and allow for resources to be best leveraged for future growth and profitability improvement. As a result, the Company eliminated its Global Adjacent Markets reporting segment.
On June 30, 2022, the Company again began management of its portfolio of businesses under a new basis as a result of the planned divestiture of TAP. As such, the Aftermarket segment was eliminated and the results of the Company’s remaining aftermarket businesses historically included within the Aftermarket segment were reclassified
to the Off-Road and On-Road segments. The comparative 2021 segment results were reclassified for comparability.
The Company’s reportable segments are based on the Company’s method of internal reporting and are comprised of various product offerings that serve multiple end markets. These results are not necessarily indicative of the results of operations that would have occurred had each segment been an independent, stand-alone entity during the periods presented. The internal reporting of these operating segments is defined based, in part, on the reporting and review process used by the Company’s Chief Executive Officer. The
Company has ithree operating segments: 1) Off-Road, 2) On-Road, and 3) Marine which are all reportable segments. The Corporate amounts include revenues and costs of businesses that were divested in 2021, as well as costs that are not allocated to segments, including certain unallocated manufacturing costs. Businesses that are presented as discontinued operations are excluded from the table below.
Item 2
– MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion pertains to the results of operations and financial position of Polaris Inc., a Minnesota corporation, for the three and six month period ended June 30, 2022 compared to the three and six month period ended June 30, 2021. The terms “Polaris,” the “Company,”“we,”“us,” and “our” as used herein refer to the business and operations of Polaris Inc., its subsidiaries and its predecessors, which began doing business in 1954. We design, engineer and manufacture powersports vehicles, which include: off-road vehicles (“ORV”), including all-terrain vehicles (“ATV”) and side-by-side vehicles;
military and commercial off-road vehicles; snowmobiles; motorcycles; moto-roadsters; quadricycles; boats; and related Parts, Garments and Accessories (“PG&A”), which includes aftermarket accessories and apparel. Due to the seasonality of certain products and to certain changes in production and shipping cycles, results of such periods are not necessarily indicative of the results to be expected for the complete year. Unless otherwise noted, all “quarter” comparisons are from the second quarter of 2022 to the second quarter of 2021 and all “year-to-date” comparisons are from the six month period ended June 30, 2022 to the six month period ended June 30, 2021. Estimates related to industry retail sales are unaudited and based on internally-generated management estimates, including estimates based on extrapolations from third-party surveys of the
industries in which we compete, and are subject to change.
Overview
The global spread of the novel coronavirus (COVID-19) ultimately heightened consumer demand across industries, while the impact of the pandemic as well as other disruptive events have impacted the global economy, disrupted global supply chains and created significant volatility and disruption of financial markets. The impact of these factors has affected our business segments, employees, dealers, suppliers, and customers in a variety of ways.
Throughout 2021 and through the first half of 2022, we have seen strong retail demand for our Powersports products and boats. Navigating difficulties associated with the global supply chain as we seek to satisfy retail demand has been challenging. Due to the dynamics of the COVID-19 pandemic, heightened demand, natural disasters, and
geopolitical events, including the conflict between Russia and Ukraine and related sanctions, our supply chain and manufacturing operations have experienced inefficiencies caused by production-limiting disruptions, including supplier labor shortages. These disruptions, and related costs from associated plant, production, and labor inefficiencies, are significant, widespread and impacting many manufacturers across various industries including Polaris. We expect supply chain-related headwinds and elevated commodity costs to continue with some modest easing throughout the remainder of 2022. While we have made pricing changes to address the increase in these costs, manufacturing disruptions combined with the impact of these elevated commodity and logistics costs are expected to negatively affect the Company’s profitability. As a result of strong demand and supply chain disruptions, North
American dealer inventory as of June 30, 2022 was down significantly compared to pre-pandemic levels as retail sales outpaced shipments. We expect that these factors will challenge our ability to replenish dealer inventory levels.
Second quarter sales totaled $2,062.8 million, an increase of eight percent from last year’s second quarter sales of $1,911.1 million. Our second quarter sales to customers in North America increased nine percent and our sales to customers outside of North America increased one percent. The increase in sales in the quarter was driven primarily by increased pricing and favorable mix,
partially offset by lower shipments resulting from continued supply chain challenges.
Our gross profit of $474.4 million decreased five percent from $497.4 million in the comparable prior year second quarter. The decrease in gross profit was driven by higher input costs including logistics, components, and commodity prices, as well as plant inefficiencies related to supply chain constraints, partially offset by increased pricing. We reported net income from continuing operations attributable to Polaris of $141.8 million, or $2.34 per diluted share, compared to 2021 second quarter net income from continuing operations attributable to Polaris of $155.1 million, or $2.47 per diluted share.
During the second quarter, we entered into a material definitive agreement to sell Transamerican Auto Parts (“TAP”), an aftermarket parts business.
The results of TAP have been presented as discontinued operations and the related assets and liabilities have been classified as held for sale for all periods presented. As a result, an impairment of $187.8 million was recorded to adjust TAP’s assets and liabilities to fair value. The impairment resulted in a $45.6 million income tax benefit. The sale was completed on July 1, 2022 for a sales price of $50.0 million, subject to customary post-closing purchase price adjustments.
The consolidated results of operations were as follows:
Three
months ended June 30,
Six months ended June 30,
($ in millions except percentages and share data)
2022
2021
Change 2022 vs. 2021
2022
2021
Change 2022 vs. 2021
Sales
$
2,062.8
$
1,911.1
8
%
$
3,844.3
$
3,668.9
5
%
Cost
of sales
$
1,588.4
$
1,413.7
12
%
$
3,017.0
$
2,739.7
10
%
Gross profit
$
474.4
$
497.4
(5)
%
$
827.3
$
929.2
(11)
%
Percentage
of sales
23.0
%
26.0
%
-303 bps
21.5
%
25.3
%
-381 bps
Operating expenses:
Selling
and marketing
$
115.5
$
121.2
(5)
%
$
227.1
$
236.4
(4)
%
Research and development
$
86.8
$
86.7
—
%
$
167.6
$
164.3
2
%
General
and administrative
$
89.2
$
92.5
(4)
%
$
160.9
$
164.5
(2)
%
Total operating expenses
$
291.5
$
300.4
(3)
%
$
555.6
$
565.2
(2)
%
Percentage
of sales
14.1
%
15.7
%
-159 bps
14.5
%
15.4
%
-95 bps
Income from financial services
$
10.2
$
13.7
(26)
%
$
21.6
$
29.9
(28)
%
Operating
income
$
193.1
$
210.7
(8)
%
$
293.3
$
393.9
(26)
%
Non-operating
expense:
Interest expense
$
14.9
$
10.7
39
%
$
26.7
$
22.3
20
%
Other
(income) expense, net
$
(3.2)
$
(3.0)
7
%
$
(6.5)
$
(5.3)
23
%
Income from continuing operations before income taxes
$
181.4
$
203.0
(11)
%
$
273.1
$
376.9
(28)
%
Provision
for income taxes
$
39.4
$
47.8
(18)
%
$
57.0
$
88.6
(36)
%
Effective income tax rate
21.7
%
23.5
%
-182
bps
20.9
%
23.5
%
-265 bps
Net income from continuing operations
$
142.0
$
155.2
(9)
%
$
216.1
$
288.3
(25)
%
Net
income attributable to noncontrolling interest
$
(0.2)
$
(0.1)
NM
$
(0.2)
$
(0.2)
—
%
Net income from continuing operations attributable to Polaris Inc. shareholders
$
141.8
$
155.1
(9)
%
$
215.9
$
288.1
(25)
%
Diluted
net income from continuing operations per share attributable to Polaris Inc. shareholders
$
2.34
$
2.47
(5)
%
$
3.55
$
4.56
(22)
%
Weighted average diluted shares outstanding
60.5
62.8
(4)
%
60.9
63.1
(3)
%
NM
= not meaningful
Sales:
Sales for the quarter were $2,062.8 million, an eight percent increase from $1,911.1 million of sales in the prior year, and year-to-date sales were $3,844.3 million, a five percent increase from $3,668.9 million of sales in the prior year. The growth for both periods was primarily driven by increased pricing and favorable mix, partially offset by lower shipments resulting from continued supply chain challenges.
Volume
caused a six percent and eight percent decrease to sales for the quarter and year-to-date periods, respectively, driven by lower ORV and Indian Motorcycle shipments. Product mix and price contributed a 16 percent and 14 percent increase for the quarter and year-to-date periods, respectively, primarily due to increased product pricing. Currency drove a two percent decrease in sales for the quarter and a one percent decrease in sales for the year-to-date period.
Sales by geographic region were as follows:
Three
months ended June 30,
Six months ended June 30,
($ in millions)
2022
Percent of Total Sales
2021
Percent of Total Sales
Percent Change 2022 vs. 2021
2022
Percent of Total Sales
2021
Percent
of Total Sales
Percent Change 2022 vs. 2021
United States
$
1,601.5
78
%
$
1,458.4
76
%
10
%
$
2,946.2
77
%
$
2,801.3
76
%
5
%
Canada
146.7
7
%
141.7
8
%
4
%
293.3
7
%
268.5
8
%
9
%
Other
countries
314.6
15
%
311.0
16
%
1
%
604.8
16
%
599.1
16
%
1
%
Total
sales
$
2,062.8
100
%
$
1,911.1
100
%
8
%
$
3,844.3
100
%
$
3,668.9
100
%
5
%
Sales
in the United States increased 10 percent during the quarter and five percent for the year-to-date period, driven by increased pricing and favorable mix, partially offset by lower shipments resulting from continued supply chain challenges.
Sales in Canada increased four and nine percent for the quarter and year-to-date periods, respectively, driven by increased pricing. Currency rate movements had an unfavorable impact of four and two percentage points on quarter and year-to-date sales, respectively.
Sales in other countries, primarily in Europe, increased one percent during the quarter and year-to-date periods, primarily driven by increased pricing. Currency rate movements had an unfavorable impact of nine and seven percentage points on quarter and year-to-date sales, respectively.
Cost of Sales:
The
following table reflects our cost of sales in dollars and as a percentage of sales:
Three
months ended June 30,
Six months ended June 30,
($ in millions)
2022
Percent of Total Cost of Sales
2021
Percent of Total Cost of Sales
Percent Change 2022 vs. 2021
2022
Percent of Total Cost of Sales
2021
Percent of
Total Cost of Sales
Percent Change 2022 vs. 2021
Purchased materials and services
$
1,348.1
85
%
$
1,192.0
84
%
13
%
$
2,563.2
85
%
$
2,306.9
84
%
11
%
Labor
and benefits
162.0
10
%
147.4
10
%
10
%
304.3
10
%
285.2
10
%
7
%
Depreciation
and amortization
44.7
3
%
38.5
3
%
16
%
88.8
3
%
77.2
3
%
15
%
Warranty
costs
33.6
2
%
35.8
3
%
(6)
%
60.7
2
%
70.4
3
%
(14)
%
Total
cost of sales
$
1,588.4
100
%
$
1,413.7
100
%
12
%
$
3,017.0
100
%
$
2,739.7
100
%
10
%
Percentage
of sales
77.0
%
74.0
%
+303 bps
78.5
%
74.7
%
+381 bps
Cost of sales, as a percentage of sales, increased during the quarter and year-to-date periods primarily due to
unfavorable mix and higher labor, raw material, and logistics costs.
Consolidated gross profit for the quarter and year-to-date periods, as a percentage of sales, decreased primarily due to higher input costs including logistics, components, and commodity prices, as well as plant inefficiencies related to supply chain constraints, partially offset by increased pricing.
Operating Expenses:
Operating expenses, in absolute dollars and as a percentage of sales, decreased for the quarter and
year-to-date periods due to lower selling and marketing expenses.
Income from Financial Services:
Income from financial services decreased 26 percent for the quarter and 28 percent for the year-to-date period, primarily due to lower retail credit income resulting from lower retail sales and lower penetration rates.
Interest Expense:
Interest expense increased for the quarter and year-to-date periods due to higher debt levels.
Other (income) expense, net:
Other (income) expense is the result of currency exchange rate movements and the corresponding effects on currency transactions related to the Company’s international
subsidiaries.
Provision for income taxes:
The decrease in the effective income tax rate for the quarter and year-to-date periods ended June 30, 2022 is primarily due to favorable income tax benefits from increases in various federal and state income tax credits, including research and development and investment tax credits, as compared to the prior year periods.
Weighted average diluted shares outstanding:
Over the time period within and between the comparable quarterly and year-to-date periods, weighted average diluted shares outstanding was down four percent and three percent, respectively, compared to the comparable prior year period, primarily due
to share repurchases.
Cash Dividends:
We paid a regular cash dividend of $0.64 per share on June 15, 2022 to holders of record at the close of business on June 1, 2022. We paid cash dividends of $1.28 per common share for the six months ended June 30, 2022.
Segment Results of Operations
On January 1, 2022, the Company began management of its portfolio of businesses under a new basis, which was intended to create a simplified reporting structure to provide better focus and allow
for resources to be best leveraged for future growth and profitability improvement. As a result, the Company eliminated its Global Adjacent Markets reporting segment.
On June 30, 2022, the Company again began management of its portfolio of businesses under a new basis as a result of the planned divestiture of TAP. As such, the Aftermarket segment was eliminated and the results of the Company’s remaining aftermarket businesses historically included within the Aftermarket segment were reclassified to the Off-Road and On-Road segments. The comparative 2021 segment results were reclassified for comparability.
The
summary that follows provides a discussion of the results of operations of each of our three reportable segments, Off-Road, On-Road, and Marine. Each of these segments is comprised of various product offerings that serve multiple end markets. We evaluate performance based on sales and gross profit. The Corporate amounts include revenues and costs of businesses that were divested in 2021, as well as costs that are not allocated to segments, including certain unallocated manufacturing costs. Businesses that are presented as discontinued operations are excluded from the tables below.
Our sales and gross profit by reporting segment, which includes the respective
PG&A, were as follows:
Three
months ended June 30,
Six months ended June 30,
($ in millions)
2022
Percent of Sales
2021
Percent of Sales
Percent Change 2022 vs. 2021
2022
Percent of Sales
2021
Percent
of Sales
Percent Change 2022 vs. 2021
Off-Road
$
1,490.4
72
%
$
1,397.5
73
%
7
%
$
2,832.5
74
%
$
2,699.3
73
%
5
%
On-Road
299.4
15
%
298.3
16
%
—
%
527.3
14
%
540.6
15
%
(2)
%
Marine
273.0
13
%
197.6
10
%
38
%
484.5
12
%
396.3
11
%
22
%
Corporate
—
—
%
17.7
1
%
NM
—
—
%
32.7
1
%
NM
Total
sales
$
2,062.8
100
%
$
1,911.1
100
%
8
%
$
3,844.3
100
%
$
3,668.9
100
%
5
%
NM
= not meaningful
Three
months ended June 30,
Six months ended June 30,
($ in millions)
2022
Percent of Sales
2021
Percent of Sales
Percent Change 2022 vs. 2021
2022
Percent of Sales
2021
Percent
of Sales
Percent Change 2022 vs. 2021
Off-Road
$
354.2
23.8
%
$
382.2
27.3
%
(7)
%
$
612.9
21.6
%
$
727.1
26.9
%
(16)
%
On-Road
53.4
17.8
%
55.3
18.5
%
(3)
%
94.6
17.9
%
90.5
16.7
%
5
%
Marine
66.6
24.4
%
47.4
24.0
%
41
%
113.1
23.3
%
93.8
23.7
%
21
%
Corporate
0.2
12.5
6.7
17.8
Total gross profit
$
474.4
$
497.4
(5)
%
$
827.3
$
929.2
(11)
%
Percentage
of sales
23.0
%
26.0
%
-303 bps
21.5
%
25.3
%
-381 bps
Off-Road:
Off-Road sales, inclusive of PG&A sales, increased seven percent and five percent for the quarter and year-to-date periods ended June 30, 2022, respectively. The increases were driven by increased pricing, partially offset by lower side-by-side and ATV shipments as a result of supply chain constraints and related component shortages. Off-Road sales to customers outside of North America increased eight percent and seven percent for the quarter and year-to-date periods, respectively, driven by increased snowmobile shipments. The average per unit sales price for the Off-Road segment increased approximately 18 percent and 16 percent for the quarter and year-to-date periods, respectively, driven by increased product pricing.
Additional information on our end markets for the quarter:
•Polaris
North America ATV unit retail sales down low-thirties percent
•Polaris North America side-by-side unit retail sales down high-teens percent
•Total Polaris North America ORV unit retail sales down mid-twenties percent
•Estimated North America industry ORV unit retail sales down mid-teens percent
•Total Polaris North America ORV dealer inventories up approximately 60 percent
Gross profit, as a percentage of sales, decreased during the quarter and year-to-date periods, primarily due to higher input costs including logistics, components, and commodity prices, plant inefficiencies related to supply chain constraints, and unfavorable mix, partially offset by increased
pricing.
On-Road:
On-Road sales, inclusive of PG&A sales, were approximately flat for the quarter and decreased two percent for the year-to-date period ended June 30, 2022. The decrease was primarily driven by decreased Indian Motorcycle shipments, partially offset by higher PG&A sales. On-Road sales to customers outside of North America decreased six percent for the quarter and year-to-date periods, primarily driven by decreased Indian Motorcycle shipments. The average per unit sales price for the On-Road segment decreased approximately two percent for the quarter, driven by currency rate movements while the average per unit sales price for the On-Road segment increased approximately two percent for the year-to-date period, driven by lower promotional costs and favorable mix.
Additional information on our end markets for the quarter:
•Indian Motorcycle North America unit retail sales down low-forties percent
•Estimated North America industry 900cc cruiser, touring, and standard motorcycles unit retail sales down mid-twenties percent
•Estimated Polaris North America motorcycle dealer inventories down approximately 20 percent
Gross profit, as a percentage of sales, decreased for the quarter driven by increased input costs related to supply chain constraints, partially offset by favorable mix. Gross profit, as a percentage of sales, increased for the year-to-date period driven by favorable product mix and lower promotional costs, partially
offset by increased input costs related to supply chain constraints.
Marine:
Marine sales increased 38 percent and 22 percent for the quarter and year-to-date periods, respectively, primarily due to increased volume, favorable mix and increased pricing. The average per unit sales price for the Marine segment increased approximately 16 percent and 17 percent for the quarter and year-to-date periods, respectively, driven by higher pricing.
Additional information on our end markets for the quarter:
•Polaris U.S pontoon unit retail sales down mid-thirties percent
•Estimated U.S. industry pontoon unit retail sales down mid-teens percent
Gross profit, as a percentage
of sales, increased during the quarter primarily due to favorable mix. Gross profit, as a percentage of sales, decreased during the year-to-date periods, primarily due to higher input costs related to supply chain constraints, partially offset by favorable mix and increased pricing.
Liquidity and Capital Resources
Our primary sources of funds have been cash provided by operating and financing activities. Our primary uses of funds have been for acquisitions, repurchases and retirement of common stock, capital investments, new product development and cash dividends to shareholders. The seasonality of production and shipments cause working capital requirements to fluctuate during the year.
We
believe that existing cash balances, cash flow to be generated from operating activities and borrowing capacity under the credit facility arrangement will be sufficient to fund operations, new product development, cash dividends, share repurchases, and capital requirements for at least the next 12 months and for the foreseeable future thereafter.
Cash Flows
The following table summarizes the cash flows from operating, investing and financing activities of continuing operations:
The decrease in net cash provided by operating activities of continuing operations was primarily the result of lower net income and higher
working capital additions due to increases in inventory driven by strong end-market demand and supply chain inefficiencies.
Beginning in 2022, the Tax Cuts and Jobs Act ("Act") eliminates the option to deduct research and development expenditures and requires taxpayers to amortize domestic expenditures over five years and foreign expenditures over fifteen years. This
legislation is expected to decrease the Company's cash from operations beginning in 2022 and continue over the five year amortization period.
Investing
Activities:
The primary sources and uses of cash were for the purchase of property, equipment and tooling for continued capacity and capability at our manufacturing and distribution facilities and for product development, as well as distributions from and contributions to Polaris Acceptance. A decrease in distributions from Polaris Acceptance and an increase in property, equipment and tooling purchases resulted in more cash used for investing activities of continuing operations compared to the prior year.
Financing Activities:
The decrease in net cash used for financing activities was primarily due to increased net borrowings under debt arrangements. We recorded $217.5 million of net borrowings for the six months ended June 30, 2022, compared to $119.1 million of net repayments for the comparable
period in 2021. The change was also driven by lower share repurchases in the current year, partially offset by stock issuances under employee plans.
Financing Arrangements:
We are party to an unsecured Master Note Purchase Agreement, as amended and supplemented, under which we have issued senior notes. As of June 30, 2022, outstanding borrowings under the Master Note Purchase Agreement totaled $350.0 million.
We are also party to an unsecured credit agreement, which includes a $1.0 billion variable interest rate Revolving Loan Facility that matures in June 2026, under which we have unsecured borrowings. As of June 30, 2022, there were borrowings of $242.0 million outstanding under the Revolving Loan Facility. Our credit agreement also includes
a Term Loan Facility, on which $852.0 million was outstanding as of June 30, 2022. Interest is charged at rates based on LIBOR or “prime” for the credit facility. As of June 30, 2022, we had $750.5 million of availability on the Revolving Loan Facility.
On December 17, 2021, we amended the Term Loan Facility to provide an incremental 364-day term loan (the “incremental term loan”) in the amount of $500 million. The incremental term loan, which was fully drawn on closing, is unsecured and matures on December 16, 2022. There are no required principal payments prior to the maturity date. In addition to the payment of the $500 million incremental term loan, we are required to make principal payments under the Term Loan
Facility totaling $45 million over the next 12 months.
The credit facility and the Master Note Purchase Agreement contain covenants that require the Company to maintain certain financial ratios, including minimum interest coverage and maximum leverage ratios. The agreements also require the Company to maintain an interest coverage ratio of not less than 3.00 to 1.00 and a leverage ratio of not more than 3.50 to 1.00 on a rolling four quarter basis.
On July 2, 2018, pursuant to the Agreement and Plan of Merger dated May 29, 2018,
the Company completed the acquisition of Boat Holdings, LLC, a privately held Delaware limited liability company, headquartered in Elkhart, Indiana which manufactures boats (“Boat Holdings”). As a component of the Boat Holdings merger agreement, we have committed to make a series of deferred payments to the former owners through July 2030. The original discounted payable was for $76.7 million, of which $61.0 million was outstanding as of June 30, 2022.
As of June 30, 2022, we were in compliance with all debt covenants. Our debt to total capital ratio was 65 percent as of June 30, 2022. Additionally, as of June 30, 2022, we had letters of
credit outstanding of $35.4 million, primarily related to purchase obligations for raw materials.
Share Repurchases:
As of June 30, 2022, our Board of Directors has authorized us to repurchase up to an additional $681.7 million of our common stock. We repurchased a total of 1.5 million shares of our common stock for $172.3 million during the first six months of 2022, which had a favorable impact on diluted net income from continuing operations per share of six cents.
Wholesale Customer Financing Arrangements:
We have arrangements with certain finance companies to provide secured floor plan financing for our dealers. These arrangements provide liquidity by financing dealer purchases of our products without the use of our working capital. A majority
of the worldwide sales of snowmobiles, ORVs, motorcycles, boats and related PG&A are financed under similar arrangements whereby we receive payment within a few days of shipment of the product. We participate in the cost of dealer financing up to certain limits.
Under these arrangements, we have agreed to repurchase products repossessed by these finance companies. As of June 30, 2022, the potential aggregate repurchase obligations were approximately $231.6 million. Our financial exposure under these repurchase agreements is limited to the difference between the amounts unpaid by the dealer with respect
to the repossessed product plus costs of repossession and the amount received on the resale of the repossessed product. No material losses have been incurred under this agreement during the periods presented.
Retail Customer Financing Arrangements:
We have agreements with third-party financing companies to provide financing options to end consumers of our products. We have no material contingent liabilities for residual value or credit collection risk under these agreements. The income generated from these agreements has been included as a component of income from financial services in the consolidated statements of income (loss).
Inflation, Foreign Exchange Rates, and Interest Rates
Inflation:
Rising costs, including wages, logistics, components, and commodity prices, are negatively impacting our gross profit margins. We strive to minimize the effects of inflation through cost containment, productivity improvements and price increases.
We are subject to market risk from fluctuating market prices of certain purchased commodities and raw materials, including steel, aluminum, petroleum-based resins, certain rare earth metals and diesel fuel. In addition, we are a purchaser of components and parts containing various commodities, including steel, aluminum, rubber and others, which are integrated into our end products. While such materials are typically available from numerous suppliers, commodity raw materials are subject to price fluctuations. We generally buy these commodities and components based upon market prices that are established with the vendor as part of the purchase
process. Based on our current outlook for commodity prices, which we expect to remain high, the total impact of commodities, including tariff costs, is expected to have a negative impact on our gross profit margins for full-year 2022 when compared to 2021.
Foreign Exchange Rates:
The changing relationships of the U.S. dollar to foreign currencies can have a material impact on our financial results.
Euro: We have operations in the Eurozone through wholly owned subsidiaries and distributors. We also purchase components from certain suppliers directly for our U.S. operations in transactions denominated in Euros. Fluctuations in the Euro to U.S. dollar exchange rate impacts sales, cost of sales, and net income (loss).
Canadian
Dollar: We operate in Canada through a wholly owned subsidiary. The relationship of the U.S. dollar in relation to the Canadian dollar impacts both sales and net income (loss).
Other currencies: We operate in various countries, principally in Europe, Mexico and Australia, through wholly owned subsidiaries. We also sell to certain distributors in other countries. We also purchase components from certain suppliers directly for our U.S. operations in transactions denominated in these foreign currencies. The relationship of the U.S. dollar in relation to these other currencies impacts sales, cost of sales and net income (loss).
We actively manage our exposure to fluctuating foreign currency exchange rates by entering into foreign exchange hedging contracts.
A portion of our foreign currency exposure is mitigated with the following open foreign currency hedging contracts as of June 30, 2022:
During the quarter and year-to-date periods ended June 30, 2022, after consideration of the existing foreign currency hedging contracts, foreign currencies had a negative impact on net income (loss) compared to 2021. We expect currencies to have a negative impact on full-year net income (loss) from continuing operations in 2022 compared to 2021.
The assets and liabilities in all our international entities are translated at the foreign exchange rate in effect at the balance sheet date. Translation gains and losses are reflected as a component of accumulated other comprehensive loss, net in the shareholders’ equity section of the consolidated balance sheets. Revenues and expenses in all of our international entities are translated at the average foreign exchange rate in effect for each month of the year. Certain assets and liabilities related to intercompany positions reported on our consolidated balance sheet that are denominated in a currency other than the entity’s functional currency are translated at the foreign exchange rates at the balance sheet date and the associated gains and losses are included in net income (loss).
Interest Rates:
We
are a party to an unsecured credit agreement with various lenders consisting of a $1.0 billion revolving loan facility, a $1.2 billion term loan facility, and a $500 million incremental term loan. Interest accrues on the revolving loan, term loans, and the incremental term loan at variable rates based on LIBOR or “prime” plus the applicable add-on percentage as defined. As of June 30, 2022, there was $242.0 million outstanding on the revolving loan, $852.0 million outstanding on the term loan, and $500 million outstanding on the incremental term loan. We enter into interest rate swaps in order to maintain a balanced risk of fixed and floating interest rates associated with our debt. We expect interest rates to have a negative impact on full-year net income (loss) from continuing operations in 2022 compared to 2021.
Critical
Accounting Policies
See our most recent Annual Report on Form 10-K for the year ended December 31, 2021 for a discussion of our critical accounting policies. There have been no material changes to our critical accounting policies discussed in such report.
Note Regarding Forward Looking Statements
This report contains not only historical information, but also “forward-looking statements” intended to qualify for the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These “forward-looking statements” can generally be identified as such because the context of the statement will include words
such as we or our management “believes,”“should,”“anticipates,”“expects,”“estimates” or words of similar import. Similarly, statements that describe our future plans or trends, objectives or goals, such as future sales, shipments, inventory levels, consumer demand, net income (loss), net income (loss) per share, future cash flows and capital requirements, operational initiatives, pricing actions, tariffs, currency fluctuations, interest rates, and commodity costs, are forward-looking statements that involve certain risks and uncertainties that could cause actual results to differ materially from those forward-looking statements, are also forward-looking. Forward-looking statements may also be made from time to time in oral presentations, including telephone conferences and/or webcasts open to the public.
Potential risks and uncertainties include such factors as the severity and duration
of the supply-chain related constraints currently impacting the Company; the Company’s ability to successfully source necessary parts and materials on a timely basis; the ability of the Company to manufacture and deliver products to dealers to meet demand; the Company’s ability to identify and meet optimal dealer inventory levels; the Company’s ability to accurately forecast and sustain consumer demand; the Company’s ability to mitigate increasing input costs through
pricing or other measures; COVID-19 pandemic and the resulting impact on the Company’s business, supply chain, and the global economy; the Company’s ability to successfully implement its manufacturing operations strategy and supply chain initiatives; product offerings, promotional activities and pricing strategies by competitors that make our products less attractive to consumers; economic conditions that impact consumer spending or consumer credit including recessionary conditions; disruptions in manufacturing facilities; product recalls and/or warranty expenses; product rework costs; 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; freight
and tariff costs (tariff relief or ability to mitigate tariffs); changes to international trade policies and agreements; uninsured product liability claims; uncertainty in the retail and wholesale credit markets; performance of affiliate partners; changes in tax policy; relationships with dealers and suppliers; and the general overall global economic, social and political environment.
The risks and uncertainties discussed in this report are not exclusive and other factors that we may consider immaterial or do not anticipate may emerge as significant risks and uncertainties.
Item 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 for a complete discussion on the Company’s market risk. There have been no material changes in market risk from those disclosed in the Company’s Form 10-K for the year ended December 31, 2021.
Item 4
– CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and its Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15 of the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based on that evaluation, the
Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this Quarterly Report on Form 10-Q, the Company’s disclosure controls and procedures were effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934 is (1) recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and (2) accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, in a manner that allows timely decisions regarding required disclosure.
Changes
in Internal Controls
There have been no changes in the Company’s internal controls over financial reporting during the latest fiscal quarter covered by this quarterly report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.
Part II OTHER INFORMATION
Item 1 – LEGAL PROCEEDINGS
We
are involved in a number of legal proceedings incidental to our business, none of which is presently expected to have a material effect on the financial results of our business.
As of the date hereof, we are also party to class actions brought by the same plaintiff’s counsel and largely repeating the same allegations regarding various consumer protection laws focused on rollover protection systems’ certifications, for various Polaris off-road vehicles sold in California, Oregon, Nevada and Texas. The first case brought related to this matter—Guzman—was first reported in the Company’s 10-K Annual Report on Form 10-K for the period ended December 31, 2020. The district court granted summary judgment and dismissed plaintiffs’ claims, and plaintiffs
appealed. Awaiting Ninth Circuit decision. The second case—Hellman—was first reported in the Company’s 10-Q quarterly report for the period ended June 30, 2021. Additional similar class actions on behalf of certain plaintiffs dismissed from the Hellman case have been filed in Texas (Lollar), Nevada (Mitchell), and Oregon (Artoff).
As previously reported in the Company’s 10-Q quarterly report for the period ended September 30, 2021, the district court in In
re Polaris dismissed the majority of plaintiffs and their claims related to alleged fire hazards in certain Polaris products. Plaintiffs’ counsel voluntarily dismissed the remaining plaintiffs to appeal. The Eighth Circuit affirmed dismissal of the claims brought by plaintiffs who had appealed. In April 2022, In re Polaris plaintiffs’ counsel filed a new, substantially similar putative class action in California State Court, seeking damages for alleged economic loss: James DeBiasio v. Polaris Industries, Inc. (County of Los Angeles, Ca.) April 28, 2022. Polaris removed the matter to federal court in June 2022 (C.D. Cal.).
As previously reported in the Company’s 10-Q quarterly report for the period ended September
30, 2021, the district court in Johannessohn denied class certification related to their claims of excessive heat hazards in Sportsman ATVs. The Eighth Circuit subsequently affirmed that denial, In June 2022, Johannessohn plaintiffs’ counsel filed a new, substantially similar putative class in Minnesota State Court, seeking damages for alleged economic loss: Jay Miller, individually and on behalf of all others similarly situated v. Polaris Inc. (4th Dist. Minn.) June 13, 2022.
With respect to each of these putative class action lawsuits, the Company is unable to provide any reasonable evaluation of the likelihood that a loss will be incurred or any
reasonable estimate of the range of possible loss.
Please consider the factors discussed in “Part I, Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021. There have been no material changes or additions to our risk factors discussed in such report, which could materially affect the
Company’s business, financial condition, or future results.
Item 2 – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
This table provides certain information with respect to Polaris Inc.’s purchases of its common stock during the second quarter of 2022:
Period
Total
Number of Shares Purchased
Average Price Paid per Share
Total Number of Shares Purchased as Part of Publicly Announced Program
Approximate Dollar Value of Shares That May Yet Be Purchased Under the Program (1)
April 1 — 30, 2022
—
$
—
—
$
681,709,711
May
1 — 31, 2022
—
$
—
—
$
681,709,711
June 1 — 30, 2022
—
$
—
—
$
681,709,711
Total
/ Average
—
$
—
—
(1) In April 2021, the Company’s Board of Directors authorized the purchase of up to $1.0 billion of the Company’s common stock (the “Program”), which replaced the previous share repurchase program. As of June 30, 2022, the approximate value of shares that may yet to be purchased pursuant to the Program
is $681.7 million. The Program does not have an expiration date.
Certification
furnished pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101
The following financial information from Polaris Inc.’s Quarterly Report on Form 10-Q for the period ended June 30, 2022, filed with the SEC on July 26, 2022, formatted in Inline eXtensible Business Reporting Language (iXBRL): (i) the Consolidated Balance Sheets as of June 30, 2022 and December 31, 2021, (ii) the Consolidated Statements of Income (Loss) for the three and six month periods ended
June 30, 2022 and 2021, (iii) the Consolidated Statements of Comprehensive Income (Loss) for the three and six month periods ended June 30, 2022 and 2021, (iv) the Consolidated Statements of Equity for the three and six month periods ended June 30, 2022 and 2021, (v) the Consolidated Statements of Cash Flows for the six month periods ended June 30, 2022 and 2021, and (vi) Notes to Consolidated Financial Statements.
104
The
cover page from the Quarterly Report on Form 10-Q of the Company for the quarter ended June 30, 2022 formatted in iXBRL.
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
