Polaris Industries Inc. (NYSE:PII) reported second quarter net income of $71.2 million, or $1.09 per diluted share, for the quarter ended June 30, 2016 compared to $100.9 million, or $1.49 per diluted share reported in the second quarter of 2015. Sales for the second quarter of 2016 totaled $1,130.8 million, up one percent from last year’s second quarter sales of $1,124.3 million.
“Our team’s diligent and methodical execution drove a modest increase in second quarter sales despite a strong year-over-year sales comparison, a weaker retail sales environment, and product recalls. Our all-out assault on costs continued to make progress during the quarter, generating earnings that finished in-line with our updated guidance. As we move into the second half of the year, and we are redoubling our commitment to providing our consumers with the safest and most reliable vehicles in the industry while building a platform to return to profitable growth,” commented Scott Wine, Polaris’ chairman and Chief Executive Officer.
“I am proud of how our employees and dealers have dedicated themselves to working through the current difficult environment, from the recall announcements to weaker industry trends. Dealer inventories are in-line with expectations. Our new Huntsville, Alabama plant began producing Rangers at the beginning of June and Slingshots in early July, and our growing lean capabilities are driving factory inventory reductions and increased cash flow, while our customer excellence initiatives are enhancing our capabilities to deliver world-class sales and service to our consumers,” continued Wine.
“Commensurate with our commitment to industry-leading innovation, we have a number of model year 2017 products that will be introduced next week at our annual dealer meeting, which include vehicles that will significantly strengthen our line-up in areas where the competition has been the most intense.”
Off-Road Vehicle (“ORV”) and Snowmobile segment sales, including its respective PG&A sales, decreased six percent from the second quarter of 2015 to $808.5 million. Gross profit decreased 17 percent to $230.6 million or 28.5 percent of sales in the second quarter of 2016, compared to$278.9 million or 32.5 percent of sales in the second quarter of 2015.
ORV wholegood sales decreased six percent to $645.4 million reflecting ongoing softness in retail sales in North American oil markets and tough comparables from the second quarter of last year. Polaris North American ORV unit retail sales were down low double-digits percent compared to the 2015 second quarter, with consumer purchases of side-by-side vehicles down high-single digits percent and ATV retail sales down mid-teens percent compared to the prior year. The North American ORV industry was down mid-single digits percent compared to the second quarter last year. ORV dealer inventory was down eight percent in the 2016 second quarter compared to the same period last year.
Snowmobile wholegood sales decreased 55 percent to $8.6 million due to the timing of shipments year-over-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 its respective PG&A sales, increased 23 percent in the 2016 second quarter to $231.3 million. All brands grew sales during the quarter. Gross profit increased 63 percent to $39.8 million or 17.2 percent of sales in the second quarter of 2016, compared to $24.5 million or 13.1 percent of sales in the second quarter of 2015.
North American consumer retail demand for the Polaris motorcycle segment, including Victory, Indian Motorcycle and Slingshot, was up mid-teens percent during the 2016 second quarter while overall motorcycle industry retail sales 900cc and above were down mid-single digits percent in the 2016 second quarter. Product availability for all three motorcycle brands remained adequate throughout the quarter as year-over-year paint capacity at the Company’s Spirit Lake, Iowa motorcycle plant has significantly improved.
Global Adjacent Markets segment sales along with its respective PG&A sales, increased 14 percent to $91.0 million in the 2016 second quarter compared to the 2015 second quarter. Gross profit increased six percent to $24.0 million or 26.3 percent of sales in the second quarter of 2016, compared to $22.6 million or 28.4 percent of sales in the second quarter of 2015.
Work and Transportation group wholegood sales were up 10 percent during the second quarter of 2016 primarily due to growth in the Aixam business.
Parts, Garments, and Accessories (“PG&A”) sales, which are included in each of the three respective reporting segments, increased five percent during the 2016 second quarter driven by increases for all reportable segments.
International sales to customers outside of North America totaled $170.5 million for the second quarter of 2016, including PG&A, an increase of five percent from the same period in 2015. International sales on a constant currency basis were up seven percent in the 2016 second quarter.
Gross profit for the total company decreased 11 percent to $284.5 million in the second quarter of 2016, compared to $319.4 million in the second quarter of 2015. As a percentage of sales, gross profit declined 325 basis points to 25.2 percent of sales for the second quarter of 2016, compared to 28.4 percent of sales for the same period last year. Negative currency movements along with increased warranty and promotional costs and negative product mix, were partially offset by lower commodity costs and product cost reduction efforts.
Operating expenses increased nine percent to $188.0 million or 16.6 percent of sales for the second quarter of 2016, compared to $173.1 million or 15.4 percent of sales for the second quarter of 2015. The change was driven by increased research and development expense for ongoing product innovation and higher general and administrative expense due to increased legal expenses and other costs related to the product recall notices. These costs were partially offset by ongoing operating cost control initiatives.
Income from financial services was $20.5 million during the second quarter 2016, an increase of 16 percent compared to $17.6 million in the second quarter of 2015. The increase is attributable to a higher penetration rate for retail financing programs in the 2016 second quarter.
Financial Position and Cash Flow
Net cash provided by operating activities was $348.3 million for the six months ended June 30, 2016, compared to $89.9 million for the same period in 2015. The significant increase in net cash provided by operating activities for the 2016 period was due to decreased working capital. Total debt for the quarter, including capital lease obligations and notes payable, was $468.1 million. The Company’s debt-to-total capital ratio was 34 percent at June 30, 2016, compared to 31 percent a year ago. Cash and cash equivalents were $146.6 million at June 30, 2016, up from $118.8 million for the same period in 2015.
Share Buyback Activity
During the second quarter 2016, the company repurchased and retired 652,000 shares of its common stock for $58.9 million. As of June 30, 2016, the Company currently has authorization from its Board of Directors to repurchase up to an additional 8.7 million shares of Polaris stock.
2016 Business Outlook
For the full year 2016, the company is revising its earnings guidance range to $6.00 to $6.30 per diluted share with sales expected in the range of down 2 percent to flat compared to 2015. Sales expectations by segment for the full year 2016 are as follows: ORV/Snowmobile sales expected down mid-single digits percent; Motorcycle sales up double-digits percent; and Global Adjacent Market sales up mid-teens percent.