Polaris Industries, Inc. reported first quarter 2018 sales of $1,297 million, up 12 percent from $1,154 million for the first quarter of 2017. Adjusted sales for the first quarter of 2018 were $1,297 million, up 12 percent from the prior year period. The company reported first quarter 2018 net income of $56 million, or $0.85 per diluted share, compared with a net loss of $3 million, or $0.05 per diluted share, for the 2017 first quarter. Adjusted net income for the quarter ended March 31, 2018 was $69 million, or $1.06 per diluted share, up 41 percent compared to $48 million, or $0.75 per diluted share in the 2017 first quarter.
“We delivered record first quarter Off-Road Vehicle retail sales to begin the year, driven by innovation and improved dealer engagement. This translated into strong revenue and earnings growth for the quarter. Through the tireless efforts of our team and the efficacy of various quality and productivity initiatives, we overcame commodity and freight inflation and product mix pressures in the first quarter to maintain our gross margin year-over-year, while leveraging operating expenses even as we continue to invest heavily in research and development," commented Scott Wine, chairman and chief executive officer of Polaris Industries.
“We are fully prepared to build upon this early success and deliver solid growth for the full year. Our production flow improved steadily throughout the quarter and inventory, snow notwithstanding, is in great shape. With the recent introduction of the all new RANGER XP 1000 and the 72-inch RZR XPTurbo S, and a robust innovation pipeline, we are exceptionally well positioned to bring more customers into Polaris dealers. While we must overcome significant commodity, freight and tariff headwinds throughout the remainder of the year, I am confident Polaris is taking the necessary steps towards becoming a customer centric, highly efficient growth company,” Wine concluded.
Off-Road Vehicle (“ORV”) and Snowmobile segment sales, including PG&A, totaled $833 million for the first quarter of 2018, up 15 percent over $724 million for the first quarter of 2017 driven by growth across all categories. PG&A sales for ORV and Snowmobiles combined, increased five percent in the 2018 first quarter compared to the first quarter last year. Gross profit increased 14 percent to $244 million, or 29 percent of sales, in the first quarter of 2018, compared to $213 million, or 29 percent of sales, in the first quarter of 2017. Gross profit percentage was approximately flat year-over-year, as unfavorable product mix and higher commodity and freight pressures were offset by lower warranty expense.
ORV wholegood sales for the first quarter of 2018 increased 17 percent primarily driven by strong RANGER, RZR, and ATV shipments. Polaris North American ORV retail sales in units were a record for the company in the 2018 first quarter, increasing in the mid-single digits percent range on a comparable first quarter basis. Side-by-side vehicles grew retail sales in the high-single digit percent range and ATVs were up low-single digits percent. All brands, which includes RANGER, Polaris GENERAL, RZR, and Sportsman, gained market share during the quarter in their respective categories. The North American ORV industry was up low-single digits percent compared to the first quarter last year. ORV dealer inventory was flat in the 2018 first quarter compared to the same period last year.
Snowmobile wholegood sales in the first quarter of 2018 increased 28 percent to $18 million, due to strong international sales. Polaris snowmobile retail sales were down high single digit percent during the 2018 first quarter and down about ten percent for the twelve month season ending March 2018. North American industry retail was down high-single digits percent for the first quarter and up mid-single digits percent for the 2018 March season-end. Polaris lost share for the quarter and season partly due to a lack of snow in regions where the Company has its highest market share which disproportionately impacted Polaris' retail sales and market share relative to its competitors.
Motorcycle segment sales, including PG&A, totaled $132 million, an increase of nine percent compared to $120 million reported in the first quarter of 2017. Indian Motorcycles wholegood sales increased in the low-double digits percent range in the first quarter of 2018, while Slingshot sales were down low-double digits percent. Gross profit for the first quarter of 2018 was a positive $17 million compared to a loss of $20 million in the first quarter of 2017. Adjusted for the Victory wind down costs recorded in both the 2018 and 2017 first quarters, motorcycle gross profit was $17 million, or 13 percent of sales in the 2018 first quarter compared to $19 million, or 15 percent of sales for the 2017 first quarter, down on a dollar and percent of sales basis due to higher warranty expense for Slingshot.
North American consumer retail demand for the Polaris motorcycle segment, including Indian Motorcycle and Slingshot, increased low-single digit percent during the 2018 first quarter. Indian Motorcycle retail sales increased low-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-teens percent in the 2018 first quarter. Both Indian Motorcycle and Slingshot gained market share for the 2018 first quarter on a year-over-year basis, in spite of unusually cold and wet weather in March and an overall weak N.A. industry motorcycle market in the first quarter.
Global Adjacent Markets segment sales, including PG&A, increased 24 percent to $113 million in the 2018 first quarter compared to $92 million in the 2017 first quarter. Both Aixam and the Commercial/Government/Defense group delivered double digits sales growth during the quarter. Reported gross profit increased 11 percent to $31 million, or 28 percent of sales, in the first quarter of 2018, compared to $28 million, or 31 percent of sales, in the first quarter of 2017. Gross profit as a percent of sales, declined slightly due to product mix.
Aftermarket segment sales increased one percent to $220 million in the 2018 first quarter compared to $218 million in the 2017 first quarter. TAP sales in the first quarter of 2018 were $201 million, which was down slightly compared to the first quarter of 2017. Soft industry light-duty truck sales negatively impacted TAP's wholesale aftermarket accessory business, while TAP sales through its retail stores remained strong during the first quarter of 2018. Gross profit increased to $58 million, or 27 percent of sales in the first quarter of 2018, compared to $42 million, or 19 percent of sales, in the first quarter of 2017. Adjusted for the TAP acquisition step-up adjustment in the 2017 first quarter, Aftermarket gross profit increased seven percent, or 160 basis points as a percent of sales, due to more favorable product mix within the business.
Parts, Garments, and Accessories sales, excluding Aftermarket segment sales, increased five percent for the 2018 first quarter driven by growth in accessories and apparel sales during the quarter.
International sales to customers outside of North America, including PG&A, totaled $211 million for the first quarter of 2018, up 27 percent, from the same period in 2017. Foreign exchange movements represented 11 percent of the sales increase for the quarter. The remaining increase was driven by strong sales in the Company's EMEA business.
Gross profit increased 33 percent to $323 million for the first quarter of 2018 from $242 million in the first quarter of 2017. Reported gross profit margin was 25 percent of sales for the first quarter of 2018 compared to 21 percent of sales for the first quarter of 2017. Gross profit for the first quarter of 2018 includes the negative impact of $6 million of realignment and supply chain transformation costs. Excluding these items, first quarter 2018 adjusted gross profit was $329 million, or 25 percent of adjusted sales. For the first quarter of 2017 adjusted gross profit of $294 million, or 25 percent of adjusted sales, excludes the negative impact of $39 million in Victory Motorcycles wind down costs and $13 million in TAP inventory step-up costs. Gross profit margins on an adjusted basis were flat with the prior year due to lower warranty costs, savings generated through lean initiatives and positive foreign exchange benefits, offset by unfavorable product mix and increases in commodity prices and freight costs during the quarter.
Operating expenses increased eight percent for the first quarter of 2018 to $262 million or 20 percent of sales from $242 million or 21 percent of sales in the same period in 2017. Operating expenses as a percentage of sales, improved as the Company realized increased efficiencies through its selling, marketing and general and administrative spend, more than offsetting higher research and development expenses supporting ongoing product refinement and innovation during the first quarter of 2018.
Income from financial services was $21 million for the first quarter of 2018, up five percent compared with $20 million for the first quarter of 2017. The increase is attributable to improved retail and an increase in income generated from extended service contracts.
Equity in loss of other affiliates was $22 million for the first quarter of 2018 compared to $2 million last year. During the quarter, Polaris recorded charges of $20 million, including the impairment of the Company's equity investment in the Eicher-Polaris joint venture in India.
Non-operating other expense (income), net, was $20 million of income for the first quarter of 2018, versus $12 million of expense in the first quarter of 2017. The change primarily relates to a $13 million gain on the Company's investment in Brammo Inc., in addition to 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 first quarter of 2018 was $18 million or 24.4 percent of pretax income compared with $3 million on a pretax loss of $0.3 million for the first quarter of 2017. The increase in the provision for income taxes is due to higher pretax income partially offset by the lower tax rate resulting from the enactment of the U.S. tax reform bill in 2017.
Financial Position and Cash Flow
Net cash used for operating activities was $3 million for the first quarter of 2018, compared to net cash provided by operating activities of $47 millionfor the same period in 2017. The decrease in net cash provided by operating activities for the 2018 period was primarily due to planned higher factory inventory to support future demand, offset somewhat by increased net income. Total debt at March 31, 2018, including capital lease obligations and notes payable, was $1,029 million. The Company’s debt-to-total capital ratio was 51 percent at March 31, 2018, compared to 58 percent a year ago due primarily to repayments on the revolving and term loan facilities. Cash and cash equivalents were $166 million at March 31, 2018, up from $137 million in 2017.
2018 Business Outlook
Given the 2018 first quarter results, the Company is raising its full year sales guidance and now expects sales to be in the range of four percent to six percent over 2017 adjusted sales of $5,428 million and narrowing its earnings guidance range for the full year 2018 and now expects adjusted net income to be in the range of $6.05 to $6.20 per diluted share, compared with adjusted net income of $4.85 per diluted share for 2017. The revised guidance takes into account additional costs related to commodity price increases, higher freight costs, and the estimated impact of additional tariffs totaling approximately $15 million, pre-tax.