Polaris Quits Marine Business

“This was an extremely difficult decision for the board of directors of Polaris because our people are very proud and we have a proven record of succeeding in all we do,” said Tom Tiller, Polaris president and CEO.
“However, the personal watercraft industry and our position within the market simply is not where we need it to be for this division to be viable. This decision is designed to foster long-term growth and shareholder value.”
Company officials said Polaris would assist dealers in liquidating existing inventories and continue to provide replacement parts, service and warranties to marine dealers and customers. Polaris also said its decision does not affect any of its other product lines.
According to Tiller’s account in a conference call with investors, the Polaris PWC business lost money essentially every year since its introduction in 1992. The PWC business generated $171 million in revenue in 1996, its peak year, and by 2003 that number had fallen to $53.5 million. Tiller said the PWC operation lost a total of $120 million over the duration of its existence, and showed a pre-tax loss of $13.2 million in 2003.
Over the past few years, the company’s marine division has experienced a number of positive milestones, but they were often met with a continued decrease in sales that mirrored that of the entire industry. The company saw marine division sales increases of as much as 157% as recently as second quarter of 2003, but sales were down by 12% for fiscal year 2002 and only increased one percent for the year ending 2003.
NEW INITIATIVES DIDN’T HELP
Many new initiatives at Polaris proved to have little effect on the decline. A new management team, led by recently-departed General Manager Ron Bills, created Polaris’ best line of personal watercraft to date in addition to establishing many partnerships that were designed to minimize costs yet expand the company’s reach in the marine market.
While some of those decisions proved sound, such as the introduction of the MSX line in 2002, others, such as the introduction of a stand-up and a sport boat line, caused many industry insiders to question the company’s direction. The stand-up market had all but disappeared from the shrinking PWC industry, and the jet boat market had declined right alongside its PWC brethren.
“We did everything that we know how to do to try to make this business successful,” Tiller said. “But the reality was that once we got through the MSX launch, the market continued to shrink, Honda came into the market, which didn’t help things, we’re facing emissions regulations, and the associated powertrain costs go up, the development costs go up, and there was no sign, even with the introduction of not just our four-strokes, but competitive four-strokes, that things were going to get better in terms of overall market growth. And competitors continued to price even more aggressively.
“On the remaining (97%) of the business, things are going very, very well. Our ATV business is doing super. We’re introducing new products hand over fist. Snowmobiles have come back nicely this year. Victory Motorcycle business is growing leaps and bounds, and utility vehicles are doing very, very well.”
In 2003, sales from its marine division comprised only 3% of total sales for Polaris. The company said less than 25% of its North American dealers carry marine products, and that those products generally make up only a small percentage of their overall business.
“As technology and the distribution channel have evolved, the marine division’s lack of commonality with other Polaris product lines has created challenges for Polaris and its dealer base,” the company said in its announcement.
“This decision will ultimately strengthen Polaris’ position in the powersports industry as we focus our research and development dollars and other resources on those product lines with greater growth potential, including our all-terrain vehicles, utility vehicles, snowmobiles, Victory motorcycles and parts, garments and accessories,” Tiller said.
JOB LOSS
Tiller said the move will have minimal impact on employment levels at Polaris manufacturing facilities. Fewer than 20 employees are expected to leave Polaris, according to Polaris.
The marine division employs 35 full time employees and 70 seasonal production employees in Medina, Minn., and Spirit Lake, Iowa. The assembly line in the Spirit Lake manufacturing facility that currently produces PWC and ATVs on a seasonal basis will be converted to focus exclusively on ATVs, and all hourly employees will be retained, Polaris said
FINANCIAL FALLOUT
Polaris expects to record a loss on disposal of discontinued operations during the third quarter 2004 of approximately $36 million (or $24 million after tax, which represents 53 cents per diluted share) as a result of the move.
That loss includes the estimated costs to support the dealers in selling their remaining inventory, additional incentives and discounts to encourage consumers to purchase remaining products, the disposal of factory inventory, tooling, and other physical assets, and the cancellation of supplier arrangements.
Polaris said the marine division inventory at dealerships is at its lowest level in a number of years, which will minimize the financial impact of this decision on Polaris and its dealers.
Investors reacted positively to the news. Tim Conder, securities analyst for AG Edwards, raised his earnings estimates for Polaris by 20 cents per share in 2004 and 2005 based upon the elimination of the marine business. He bumped his estimate to $2.98 per share this year, and to $3.38 next year. “Exiting the marine business provides Polaris additional resources to invest in higher return and more attractive long-term growth initiatives, providing.higher returns to shareholders,” says Conder.
Polaris common stock closed at $48.47 on a volume of 187,000 shares the day before the announcement. It jumped $2.53 on volume of 932,000 shares the day the announcement was made, Sept. 2. The stock continued to rise through Sept. 20, when it closed at $52.90, up $4.43 or 9.1%. Volume averaged 324,758 shares per day from 9/2 through 9/20, compared to 169,825 shares per day for the period 8/23 through 9/1.