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Polaris reports record Q1 sales with 16 percent increase

News release

Polaris Industries Inc. (NYSE: PII) today reported record first quarter net income of $88.6 million, or $1.30 per diluted share, for the quarter ended March 31, 2015, an increase of nine percent from the 2014 first quarter net income of $80.9 million, or $1.19 per diluted share. Sales for the first quarter 2015 totaled $1,033.3 million, which represents an increase of 16 percent from last year’s first quarter sales of $888.3 million.

“I am pleased to report record sales and earnings for our 2015 first quarter, with sales up 16 percent, operating income up 19 percent and net income up nine percent, our 22nd consecutive quarter of record earnings performance,” commented Scott Wine, Polaris’ chairman and chief executive officer. “We outperformed the market again in most of our businesses in spite of increased competitive promotional pressures, weakening global markets and the corresponding negative effect from currencies. While we are justifiably proud of these accomplishments, we remain focused on seizing the numerous opportunities we missed to perform better. From factory inventory being too high to ongoing production inefficiencies, particularly in motorcycles, we did not perform to our capabilities or our expectations. However, we are making great strides towards addressing these issues, and I am confident those efforts will allow us to continue outperforming our markets.”

Wine continued, “My confidence comes first and foremost from the skill and passion of Polaris’ 8,000 team members. Our team has never been stronger or deeper, demonstrated by the recent internal promotions of Chris Wolf and Craig Scanlon, both 10+ year Polaris veterans, to run our Snowmobile and Slingshot businesses, respectively, following Mike Jonikas’s retirement. Second, product innovation remains a significant growth driver. During the quarter, we added to our stable of innovative motorcycles with the introduction of the Indian Chief Dark Horse, the Victory Magnum X-1, and a limited edition Slingshot SL. Additionally, we unveiled seven new mountain snowmobiles incorporating our award winning Axys chassis, making the best mountain sled, the Polaris RMK, even better. And we expanded our manufacturing footprint to China, while extending the breadth and reach of our ORV business, with the acquisition of Hammerhead Off-Road, which produces light gas and electric utility vehicles and gasoline powered go-karts.”

Wine concluded, “We suspected 2015 would have its share of challenges and the first quarter confirmed our suspicions. Nevertheless, we continue to see another year of solid growth and market share gains, which gives us confidence in achieving our sales and earnings guidance for the full year.”

2015 Business Outlook

For the full year 2015, the Company is narrowing its guidance range and now expects earnings to be in the range of $7.27 to $7.42 per diluted share, an increase of 9 to 12 percent over full year 2014 earnings of $6.65 per diluted share. Full year 2015 sales are expected to grow in the range of 9 to 12 percent over full year 2014 sales, unchanged from previous issued sales guidance.

Off-Road Vehicle (“ORV”) sales increased eleven percent from the first quarter 2014 to $645.4 million. This increase reflects ongoing market acceptance of our industry leading brands, particularly the RANGER and RZR side-by-side brands, during the 2015 first quarter. Polaris’ North American ORV unit retail sales were up mid-single digits percent from the first quarter of last year, with consumer purchases of RANGER’s and RZR’s each increasing from the first quarter last year. North American ATV retail sales decreased low-single digits percent due to heavy competitive promotional spending during the 2015 first quarter with ACE up significantly. The Company estimates North American industry ORV retail sales in the first quarter 2015 increased mid-single digits percent. Polaris ORV dealer inventory was higher in the 2015 first quarter compared to a year ago reflecting new segments and models added, an increase in dealer count and the change to the ATV RFM sales order process. Sales of ORVs outside of North America decreased ten percent in the first quarter 2015 when compared to the first quarter 2014, primarily due to weak economic conditions, primarily in the Europe, Middle East and Africa (“EMEA”) region, as well as the currency impact of a strengthening U.S. dollar.

Snowmobile sales totaled $14.5 million for the 2015 first quarter compared to $15.6 million for the first quarter of 2014. Historically, the first quarter is a slow quarter for snowmobile shipments to dealers. The North American snowmobile industry finished the season strong with industry retail sales up mid-single digits percent for the entire season ending March 31, 2015 due to favorable early snowfall levels in parts of the North American snowmobile riding areas and strong new product introductions. Polaris’ North American retail snowmobile sales were up high-single digits percent for the full 2014-2015 season resulting in an increase in market share. Polaris dealer inventories, while elevated from the prior season-end, remain at acceptable levels for the 2014-2015 season-end. Sales to customers outside North America decreased 12 percent in the first quarter 2015 primarily due to the currency impact of a strengthening U.S. dollar. During the quarter, the Company introduced its model year 2016 snowmobile lineup highlighted by the all-new 408-pound 800 PRO-RMK, the industry’s lightest and strongest sled designed to deliver the ultimate deep snow and mountain riding experience.

Motorcycle sales increased 74 percent in the 2015 first quarter to $137.4 million. All three brands, Victory, Indian Motorcycle and Slingshot, increased sales in the first quarter. Consumer retail demand for Victory and Indian Motorcycles during the 2015 first quarter, was up nearly 40 percent over last year’s first quarter, driven primarily by strong Indian Motorcycle retail sales, while first quarter North American industry heavyweight cruiser and touring motorcycle retail sales were up low-single digits percent from 2014. Slingshot retail sales were ahead of expectations. All three brands added to their product portfolios during the quarter with Indian Motorcycle introducing the Indian Chief Dark Horse, which is built upon the successful and award-winning Indian Chief platform with only a flash of chrome and a heavy dose of matte black paint; Victory showcased the new Magnum X-1, a new bagger with a 200-watt, 10 speaker audio system and custom factory paint; and Slingshot adding a limited-edition model packed with head-turning features, including striking Nuclear Sunset Orange coloring, dual windscreens and an interior LED lighting package. Sales of Polaris motorcycles outside of North America decreased 12 percent in the first quarter of 2015 as compared to a year ago due to the currency impact of a strengthening U.S. dollar.

Global Adjacent Markets’ sales increased seven percent to $65.4 million compared to the first quarter of 2014. The Company’s government/military group experienced double digit percent sales growth during the 2015 first quarter. Work and Transportation (“W&T”) group sales increased mid-single digits percent during the 2015 first quarter with North American W&T sales increasing double digits percent while W&T outside North America declined partly resulting from lower Aixam sales in EMEA due to the impact of negative currencies.

Parts, Garments and Accessories (“PG&A”) sales increased 12 percent during the first quarter 2015 to $170.6 million compared to the same period last year. The Company experienced sales increases in ORV, Motorcycles and Global Adjacent Markets driven by continued product innovation, increased integration of accessories, improved product availability and an ongoing focus on apparel sales through the Klim business, offset somewhat by weak snowmobile parts sales due to poor snowfall levels in key riding areas during the 2015 first quarter.

International sales to customers outside of North America totaled $153.1 million for the 2015 first quarter, down seven percent from the same period in 2014. The decrease in first quarter sales was due to a 15 percent decline in sales in the EMEA region, partially offset by a 75 percent increase in Latin American sales and a six percent increase in sales in Asia/Pacific.

Gross profit increased 14 percent to $293.7 million in the 2015 first quarter compared to $258.4 million in the first quarter of 2014. As a percentage of sales, gross profit margin declined 66 basis points to 28.4 percent of sales for the first quarter of 2015, compared to 29.1 percent of sales for the same period last year. As expected, negative currency movements, primarily the Canadian dollar, along with unfavorable product mix, pressured gross margins during the 2015 first quarter, which was somewhat offset by lower product costs and higher pricing.

Operating expenses for first quarter 2015 grew 11 percent to $158.1 million or 15.3 percent of sales, compared to $142.4 million or 16.0 percent of sales for the first quarter of 2014. The Company began to realize operating expense leverage from prior year’s research and development and infrastructure investments offset somewhat by higher long-term incentive compensation expenses.

Income from financial services was $14.6 million during first quarter 2015, an increase of 38 percent compared to $10.6 million in the first quarter of 2014 due to higher income from increased profitability of the retail credit portfolio as well as higher income from Polaris Acceptance’s dealer inventory financing.

Equity in loss of affiliates was $1.6 million for the first quarter 2015 compared to $0.9 million last year, which represents the Company’s portion of the start-up costs related to the Polaris/Eicher joint venture in India established in 2012.

Non-operating other expense (income) net, which primarily relates to foreign currency exchange rate movements and the corresponding effects on foreign currency transactions related to the Company’s foreign subsidiaries, was $7.4 million of expense in the first quarter of 2015 compared to $2.1 million of income in the first quarter of 2014.

The provision for income taxes for the first quarter 2015 was $49.8 million or 36.0 percent of pretax income compared to $44.2 million or 35.3 percent of pretax income for the first quarter 2014. The higher income tax rate for the first quarter 2015 is primarily due to lower income from the Company’s international operations in the 2015 first quarter compared to the same period last year and the income tax rate in the first quarter 2014 reflecting favorable outcomes of income tax audits.

Financial Position and Cash Flow

Net cash provided by operating activities was $4.2 million for the first quarter ended March 31, 2015 compared to net cash provided by operating activities of $44.7 million for the first quarter of 2014. The decline in net cash provided by operating activities in the 2015 first quarter was the result of increased working capital requirements primarily from higher factory inventory, decreased accounts payable and lower accrued expenses offset somewhat by higher net income. Total debt, including capital lease obligations and notes payable, at the end of the first quarter 2015 was $329.1 million. The Company increased its quarterly dividend payment for the 20th consecutive year by ten percent to $0.53 per share and paid a total of $35.1 million in dividends to shareholders, and repurchased 571,000 shares for $86.3 million during the 2015 first quarter. The Company’s debt-to-total capital ratio was 28 percent at March 31, 2015, compared to 35 percent a year ago. Cash and cash equivalents were $111.0 million at March 31, 2015, compared to $101.8 million for the same period in 2014.

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