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Polaris announces Q2 earnings with gross profit increase

News Release

Polaris Industries Inc. (NYSE:PII) on Wednesday reported record second quarter net income of $100.9 million for the quarter ended June 30, 2015, an increase of four percent from the prior year’s second quarter net income of $96.9 million. Earnings per share were a record $1.49 per diluted share for the second quarter of 2015 compared to $1.42 per diluted share for the second quarter of 2014. Second quarter results included additional manufacturing costs and inefficiencies approximating $9.0 million, as the Company worked to scale-up production and add capacity to the paint system at the Company’s motorcycle facility in Spirit Lake, Iowa. Sales for the second quarter 2015 totaled a record $1,124.3 million, an increase of 11 percent over last year’s second quarter sales of $1,014.0 million.

“In addition to reporting record second quarter sales and earnings, there are numerous positive undertones to our results this quarter. Motorcycle demand, notably including Slingshot, remains exceptionally high. Our Asia Pacific/Latin America business continues to grow and we are encouraged by the favorable response to the Multix launch in India last month. Between ongoing improvements in our inventory management systems and North American retail sales growing 11 percent, dealer inventory growth moderately decelerated in the second quarter,” stated Scott Wine, Polaris’ chairman and Chief Executive Officer. “However, earnings were dampened by significant cost pressures, and delayed shipments, related to continued difficulties with our new motorcycle paint system in Spirit Lake, Iowa. We pulled out all the stops to increase throughput in an effort to meet the growing demand for our Indian, Victory and Slingshot customers, accepting the substantial costs commensurate with that push. Although production still cannot keep pace with demand, we are confident in our plans to further increase our motorcycle throughput in the second half of the year, and as such, are maintaining and narrowing full year guidance for sales and earnings per share.”

Wine continued, “Innovation remains a cornerstone of Polaris’ success, and at our dealer show next week we will introduce our model year 2016 powersports lineup that will further extend our market leadership. In spite of the short-term headwinds we are facing, both external and of our own making, I am confident this strong and talented Polaris team can continue to deliver industry-leading returns for our shareholders.”

2015 Business Outlook

For the full year 2015, the company is narrowing its earnings guidance range to $7.32 to $7.42 per diluted share, an increase of 10 to 12 percent over full year 2014 earnings of $6.65 per diluted share. Full year 2015 sales are now expected to grow in the range of 10 to 12 percent when compared to 2014, narrowed slightly from previously issued sales guidance.

Off-Road Vehicle (“ORV”) sales increased two percent to $688.8 million in the second quarter of 2015 compared to the second quarter of 2014. This increase reflects a combination of ongoing strong customer demand in North America for ORVs, offset by a planned deceleration of shipment growth to improve dealer inventory mix. Polaris North American ORV unit retail sales increased mid-single digits percent from the second quarter last year, with consumer purchases of side-by-side vehicles increasing high-single digits percent and ATV’s increasing mid-single digits percent. Consumer awareness of the Sportsman ACE category also continued to build during the quarter. The Company estimates North American industry ORV retail sales in the second quarter of 2015 increased mid-single-digits percent year-over-year, resulting in a modest market share gain for Polaris. Polaris North American ORV dealer inventories during the second quarter of 2015 increased mid-teens percent year-over-year and, as anticipated, the rate of increase improved sequentially from the first quarter of 2015.

Snowmobile sales increased 215 percent to $19.3 million for the second quarter of 2015 compared to $6.1 million for the second quarter of 2014. Snowmobile sales in the Company’s second quarter are historically low as they reflect the off-season for snowmobile retail sales and shipments. The increase in shipments during the second quarter of 2015 is related to the timing of snowmobile production and a higher mix of Polaris’s new premium snowmobiles with the Axys chassis being shipped to dealers ahead of the upcoming snowmobile retail selling season.

Motorcycle sales increased 57 percent to $162.1 million for the second quarter of 2015 compared to same period last year due to continued strong demand for Indian motorcycles and the new Slingshot roadster. Victory, Indian Motorcycle and Slingshot North American retail sales increased over 80 percent during the second quarter of 2015 driven by Indian Motorcycle and Slingshot retail sales, while North American industry midsize and heavyweight motorcycle retail sales were flat with the second quarter of 2014. Demand for the Indian Scout, Roadmaster and the new Indian Dark Horse drove an over 100 percent increase in retail sales for Indian Motorcycle during the quarter. Victory retail sales in the second quarter of 2015 were lower than the prior year largely due to poor product availability of the new Victory Magnum and Magnum X-1, a result of the paint capacity constraints in the Spirit Lake facility. Slingshot retail sales continued to perform well ahead of expectations, as consumer appeal for the new 3-wheeled roadster remained high. Polaris has increased production to meet the ongoing strong consumer demand for Slingshot.

Global Adjacent Markets sales decreased three percent to $66.6 million in the second quarter of 2015 compared to the same period last year. The Work and Transportation (“W&T”) group sales decreased during the second quarter of 2015 with higher unit shipments more than offset by negative currency impacts. The Company’s defense business experienced low-single digit percent sales growth year-over-year during the second quarter of 2015.

Parts, Garments, and Accessories (“PG&A”) sales increased 17 percent to $187.5 million during the second quarter of 2015 as compared to the same period last year. All product lines experienced double digits percent sales growth during the quarter.

International sales to customers outside of North America totaled $162.9 million for the second quarter of 2015, down four percent from the same period in 2014 driven by weak currencies. The EMEA regions’ sales declined 12 percent in the 2015 second quarter, partially offset by a 32 percent increase in Latin American sales and a 15 percent increase in sales in the Asia/Pacific region. International sales by component in the second quarter compared to last year were as follows: ORV sales were down 13 percent; motorcycles sales were up 41 percent; Global Adjacent Markets declined 16 percent; and PG&A sales increased four percent. Snowmobile sales to customers outside of North America were insignificant in the second quarter of 2015.

Gross profit increased five percent to $319.4 million in the second quarter of 2015, compared to $304.9 million in the second quarter of 2014. As a percentage of sales, gross profit margin declined 166 basis points to 28.4 percent of sales for the second quarter of 2015, compared to 30.1 percent of sales for the same period last year. As expected, currency movements from a year ago, primarily the Canadian dollar, along with higher sales promotion costs negatively impacted gross margins during the second quarter of 2015. However, gross margins were further pressured by approximately $9.0 million of incremental costs associated with the Company’s efforts to correct manufacturing inefficiencies and add capacity to the paint system at the Spirit Lake motorcycle facility. These increased costs were partially offset by lower product costs and lower commodity costs.

Operating expenses grew five percent to $173.0 million or 15.4 percent of sales for second quarter of 2015, compared to $164.1 million or 16.2 percent of sales for the second quarter of 2014. Ongoing research and development investments and higher long-term incentive compensation expenses were largely offset by operating expense leverage from prior year’s infrastructure investments.

Income from financial services was $17.6 million during second quarter 2015, an increase of 21 percent compared to $14.6 million in the second 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 $1.7 million for the second quarter 2015 compared to $1.0 million last year, which represents the Company’s portion of the start-up costs related to the Polaris/Eicher joint venture in India.

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 $2.7 million of expense in the second quarter of 2015 compared to $1.9 million of income in the second quarter of 2014.

The provision for income taxes for the second quarter of 2015 was $55.7 million or 35.5 percent of pretax income compared to $56.4 million or 36.8 percent of pretax income for the second quarter of 2014. The lower income tax rate for the 2015 second quarter is primarily due to unfavorable outcomes of foreign income tax audits impacting the income tax rate in the second quarter of 2014.

Financial Position and Cash Flow

Net cash provided by operating activities was $89.9 million for the year-to-date period ended June 30, 2015 compared to $130.9 million for the same period in 2014. The decline in net cash provided by operating activities was the result of increased working capital requirements primarily from decreased accounts payables. The Company repurchased approximately 1.1 million shares of Polaris stock for $157.7 million during the first half of 2015. Total debt, including capital lease obligations and notes payable, at the end of the second quarter of 2015 was $403.5 million. The Company’s debt-to-total capital ratio was 31 percent at June 30, 2015, compared to 35 percent a year ago. Cash and cash equivalents were $118.8 million on June 30, 2015, similar to the same period in 2014.

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