Polaris Q2 results: ORV North America retail sales up mid-single digits

Polaris Industries Inc. (NYSE: PII) today reported second quarter 2018 sales of $1,503 million, up 10 percent from $1,365 million for the second quarter of 2017. Adjusted sales for the second quarter of 2018 were $1,505 million, up 11 percent from the prior year period.

The Company reported second quarter 2018 net income of $93 million, or $1.43 per diluted share, compared with net income of $62 million, or $0.97 per diluted share, for the 2017 second quarter. Adjusted net income for the quarter ended June 30, 2018 was $115 million, or $1.77 per diluted share, up 45 percent compared to $78 million, or $1.22 per diluted share in the 2017 second quarter.

Gross profit increased 10 percent to $385 million for the second quarter of 2018 from $350 million in the second quarter of 2017. Reported gross profit margin was 26 percent of sales for the second quarter of 2018 compared to 26 percent of sales for the second quarter of 2017. Gross profit for the second quarter of 2018 includes the negative impact of $5 million of Victory Motorcycles wind-down costs and realignment and restructuring costs. Excluding these items, second quarter 2018 adjusted gross profit was $390 million, or 26 percent of adjusted sales. For the second quarter of 2017 adjusted gross profit of $364 million, or 27 percent of adjusted sales, excludes the negative impact of $13 million in Victory Motorcycles wind down costs and restructuring and realignment costs. Gross profit margins on an adjusted basis were down slightly due to unfavorable product mix, the impact of tariff, commodity and freight cost pressure during the quarter, offset by improvements in warranty expense, VIP savings and favorable exchange rates.

“I am very pleased with the Polaris team and the strong execution they delivered across the business during the second quarter,” said Scott Wine, chairman and chief executive officer of Polaris Industries Inc. “With solid retail growth and market share gains in both our Off-Road Vehicle business and Indian Motorcycles, we are clearly reaping the benefits of our safety and quality investments, new product innovations and improved delivery performance. Consumer sentiment and dealer traffic improved throughout the quarter, building momentum which will help offset the rising risk of tariffs in the second half. During the quarter we were excited to announce another expansion of the Polaris powersports portfolio with the acquisition of Boat Holdings, the largest manufacturer of pontoon boats in the U.S. Between organic growth and considered acquisitions, Polaris’ underlying performance has significantly improved, but much of our success is being masked by substantial cost escalation driven by tariffs and commodities. As we navigate through increasingly dynamic markets, our efforts to enhance product quality and innovation, boost productivity and become a more customer centric Company are paying off, and Polaris is well-positioned for further success.”

Operating expenses increased five percent for the second quarter of 2018 to $284 million, or 19 percent of sales, from $270 million, or 20 percent of sales, in the same period in 2017. Operating expenses as a percentage of sales, improved as the Company realized efficiencies through its selling, marketing and general and administrative spend.

Income from financial services was $21 million for the second quarter of 2018, up 11 percent compared with $19 million for the second quarter of 2017. The increase is attributable to improved retail penetration and higher income from Polaris Acceptance due to higher dealer inventory levels.

Equity in loss of other affiliates was $4 million for the second quarter of 2018 compared to $1 million last year’s second quarter resulting from losses associated with the wind-down of the Eicher-Polaris joint venture in India.

Other expense (income), net, was $4 million of income for the second quarter of 2018, versus $2 million of income in the second quarter of 2017 resulting from foreign currency exchange rate movements and the corresponding effects on foreign currency transactions related to the Company’s foreign subsidiaries.

The provision for income taxes for the second quarter of 2018 was $20 million, or 18.0 percent, of pretax income compared with $30 million, or 32.5 percent of pretax income for the second quarter of 2017. The decrease in the effective income tax rates is primarily due to the reduction in the federal statutory tax rate to 21 percent as a result of U.S. Tax Reform and an increase in excess tax benefits related to stock based compensation.

Off-Road Vehicle (“ORV”) and Snowmobile segment sales, including PG&A, totaled $991 million for the second quarter of 2018, up 17 percent over $846 million for the second quarter of 2017 driven by growth across most categories. PG&A sales for ORV and Snowmobiles combined, increased 13 percent in the 2018 second quarter compared to the second quarter last year. Gross profit increased 12 percent to $297 million, in the second quarter of 2018, compared to $266 million in the second quarter of 2017.

ORV wholegood sales for the second quarter of 2018 increased 18 percent primarily driven by strong RANGER, RZR, and ATV shipments. Polaris North American ORV retail sales increased in the mid-single digits percent range with side-by-side and ATV vehicles growing retail sales in the mid-single digit percent range. Side-by-Sides and ATVs again gained market share during the quarter in their respective categories. The North American ORV industry was flat compared to the second quarter last year. ORV dealer inventory was up high-single digits in the 2018 second quarter compared to the same period last year due to increased shipments of newly introduced products.

Snowmobile wholegood sales in the second quarter of 2018 was $4 million compared to $7 million in the second quarter last year. Snowmobile sales in the Company’s second quarter are routinely low as it is the off-season for snowmobile retail sales and shipments.

Motorcycle segment sales, including PG&A, totaled $171 million, a decrease of 13 percent compared to $198 million reported in the second quarter of 2017 due to a weak motorcycle industry and timing of shipments for Indian motorcycles year-over-year. Slingshot sales were also down due to the weak motorcycle industry. Gross profit for the second quarter of 2018 was $25 million compared to $21 million in the second quarter of 2017. Adjusted for the Victory wind down costs recorded in both the 2018 and 2017 second quarters, and restructuring and realignment costs, motorcycle gross profit was $25 million in the 2018 second quarter compared to $30 million for the 2017 second quarter.

North American consumer retail demand for the Polaris motorcycle segment, including Indian Motorcycle and Slingshot, increased low-single digit percent during the 2018 second quarter. Indian Motorcycle retail sales increased mid-single digits percent. Slingshot’s retail sales were down mid-single digits percent during the quarter. Motorcycle industry retail sales, 900cc and above, were down mid-single digit percent in the 2018 second quarter. Indian Motorcycle gained market share for the 2018 second quarter on a year-over-year basis, in spite of an overall weak N.A. industry motorcycle market in the second quarter. Motorcycle dealer inventory was down low-single digits percent in the 2018 second quarter compared to the same period last year due to moderated shipments in an overall weak motorcycle market.

Global Adjacent Markets segment sales, including PG&A, increased 17 percent to $113 million in the 2018 second quarter compared to $97 million in the 2017 second quarter. Sales of Goupil and the Commercial, Government, Defense businesses drove most of the increase. Reported gross profit increased 32 percent to $28 million in the second quarter of 2018, compared to $21 million in the second quarter of 2017.

Aftermarket segment sales increased one percent to $227 million in the 2018 second quarter compared to $224 million in the 2017 second quarter. TAP sales in the second quarter of 2018 were $210 million, which was up slightly compared to the second quarter of 2017. Growth at TAP’s retail stores and online platforms were largely offset by lower accessory sales for the new Jeep Wrangler which was available for sale later than anticipated. Gross profit decreased to $58 million in the second quarter of 2018, compared to $60 million in the second quarter of 2017.

Parts, Garments, and Accessories (“PG&A”) sales, excluding Aftermarket segment sales, increased eleven percent for the 2018 second quarter driven by growth across all segments, regions and product lines during the quarter.

International sales to customers outside of North America, including PG&A, totaled $204 million for the second quarter of 2018, up 7 percent, from the same period in 2017. Foreign exchange movements represented four percent of the sales increase for the quarter. The remaining increase was driven by strong sales in the Company’s EMEA business for ORV and motorcycles.

Net cash provided by operating activities was $165 million for the six months ended June 30, 2018, compared to $263 million for the same period in 2017. The decrease in net cash provided by operating activities for the 2018 period was due to higher factory inventory related to the higher sales and the model year changeover. Total debt at June 30, 2018, including capital lease obligations and notes payable, was $1,113 million. The Company’s debt-to-total capital ratio was 56 percent at June 30, 2018 and 2017. Cash and cash equivalents were $182 million at June 30, 2018, up from $127 million for the same period in 2017.

Share Buyback Activity: During the second quarter of 2018, the Company repurchased and retired 1,429,000 shares of its common stock for $177 million. Year-to-date through June 30, 2018, the Company has repurchased and retired 1,562,000 shares of its common stock for $192 million. As of June 30, 2018, the Company has authorization from its Board of Directors to repurchase up to an additional 4.9 million shares of Polaris common stock.

2018 Business Outlook

The Company is raising its full year sales guidance and now expects sales to be in the range of 11 percent to 12 percent over 2017 adjusted sales of $5,428 million and narrowing and adjusting its earnings guidance range for the full year 2018 to account for Boat Holdings income and elimination of intangible amortization of previously acquired companies to better reflect the true underlying performance of Polaris’ core businesses. Adjusted net income is now expected to be in the range of $6.48 to $6.58 per diluted share, compared with adjusted net income of $5.10 per diluted share for 2017. The revised guidance takes into account approximately $40 million of escalating tariff and related commodity cost increases as the Company understands them today.