Polaris reports North American Q3 ORV sales flat

Polaris today released third quarter 2019 results with sales of $1.772 billion on a reported and adjusted basis, up 7 percent from reported and adjusted sales of $1.651 billion and $1.653 billion for the third quarter of 2018, respectively.

The company reported third quarter 2019 net income of $88 million, or 1.42 per diluted share, compared with net income of $96 million, or 1.50 per diluted share, for the 2018 third quarter. Adjusted net income for the quarter ended September 30, 2019 was $104 million, or $1.68 per diluted share compared to $118 million, or $1.86 per diluted share in the 2018 third quarter.

“Through the strength of our brand portfolio and solid execution from our team, Polaris delivered 7 percent revenue growth and modest margin expansion amid mounting macroeconomic ambiguity,” said Scott Wine, chairman and chief executive officer of Polaris Inc. “We augmented our industry-leading Off-Road Vehicle lineup with the introduction of our Model Year ’20 products, and continued to improve dealer satisfaction and engagement. We also launched our evolved Polaris brand and Think Outside tagline. This more modern compass appeals to broader demographics — as seen in Polaris Adventures bringing 90 percent new customers to the brand or the uptick in millennial purchases of the RZR and RANGER.

“Indeed, our RANGER/GENERAL and RZR brands continue to perform well, driving growth in side-by-sides despite an increasingly competitive market. We converted this growth into increased profitability, as our strategic supply chain investments, which are driving organization-wide value enhancement, began realizing cost savings in the quarter. Our commitment to being a customer-centric, highly efficient growth company remains steadfast, and coupled with industry-leading innovation, it will further solidify our position as the global leader in Powersports.”

Gross profit increased 9 percent to $437 million for the third quarter of 2019 from $401 million in the third quarter of 2018. Reported gross profit margin was 24.6 percent of sales for the third quarter of 2019, up 30 basis points compared to 24.3 percent of sales for the third quarter of 2018.

Adjusted gross profit for the third quarter 2019 was $441 million, or 24.9 percent of adjusted sales compared to the third quarter of 2018 adjusted gross profit of $410 million, or 24.8 percent of adjusted sales. Adjusted gross profit margins were up 10 basis points during the quarter.

Adjusted gross profit for the third quarter of 2019 excludes the negative impact of $5 million of restructuring and realignment costs, and adjusted gross profit for the third quarter of 2018 excludes the negative impact of $4 million of restructuring and realignment costs, $3 million of acquisition-related costs, and $1 million of Victory Motorcycles wind-down costs.

Operating expenses increased 16 percent for the third quarter of 2019 to $328 million, or 18.5 percent of sales, from $284 million, or 17.2 percent of sales, in the same period in 2018. Operating expenses in dollars and as a percent of sales, increased primarily due to the addition of the new multi-brand distribution center in Nevada, the costs associated with the 65th anniversary celebration and summer dealer meeting and ongoing investment in research and development.

Income from financial services was $22 million for the third quarter of 2019, up 1 percent compared with $21 million for the third quarter of 2018. Wholesale credit income increased due to higher dealer inventory levels while retail credit income declined due to slightly lower penetration rates during the quarter.

Interest expense was $20 million for both 2019 and 2018 third quarters.

Equity in loss of other affiliates was $4 million for the third quarter of 2019 compared to $111 thousand for the same period last year primarily due to the write-down of certain investments during the quarter.

Other income, net, was $2 million in the third quarter of 2019 compared to $4 million in the third quarter of 2018. Other income is the result of 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 third quarter of 2019 was $20 million, or 18.3 percent of pretax income, compared with $28 million, or 22.4 percent of pretax income for the third quarter of 2018. The decrease in the effective income tax rate is primarily due to additional Section 199 benefits realized from the filing of amended tax returns in the third quarter of 2019 as compared to the third quarter of 2018.

Product Segment Highlights (Reported)

Off-Road Vehicles (“ORV”) and Snowmobiles segment sales, including PG&A, totaled $1.152 billion for the third quarter of 2019, up 11 percent over $1.036 billion for the third quarter of 2018 driven by growth in side-by-side sales and timing of snowmobile shipments.

PG&A sales for ORV and Snowmobiles combined increased 10 percent in the third quarter of 2019 compared to the third quarter last year. Gross profit increased 11 percent to $324 million in the third quarter of 2019, compared to $291 million in the third quarter of 2018. Gross profit percentage increased four basis points during the 2019 third quarter.

ORV wholegood sales for the third quarter of 2019 increased 8 percent primarily driven by increased price and mix. Polaris North American ORV retail sales were flat for the quarter with side-by-side vehicles up low-single digits percent and ATV vehicles down mid-single digits percent. The North American ORV industry was up mid-single digits percent compared to the third quarter last year.

Snowmobile wholegood sales in the third quarter of 2019 were $106 million, up 53 percent compared to $69 million in the third quarter last year. Snowmobile sales were favorably impacted by the timing of shipments for the company’s pre-season snowmobile orders.

Motorcycles segment sales, including PG&A, totaled $150 million, down 3 percent compared to the third quarter of 2018. Both Indian and Slingshot reported sales decline during the quarter. Gross profit for the third quarter of 2019 was $12 million compared to $20 million in the third quarter of 2018. The decrease in gross profit was primarily due to tariff costs and negative mix.

North American consumer retail sales for Polaris Indian motorcycles decreased mid-teens percent during the third quarter of 2019 primarily due to the weak mid to heavyweight two-wheel motorcycle industry that was down high-single digits percent and retail pressure from heavy competitive promotional spending.

North American consumer retail sales for Polaris’ motorcycle segment, including both Indian Motorcycles and Slingshot, decreased low-double digit percent during the third quarter of 2019, while the North American Motorcycle industry retail sales for mid to heavy-weight motorcycles including three-wheel vehicles, was down low-single digits percent in the third quarter of 2019.

Global Adjacent Markets segment sales, including PG&A, increased 18 percent to $114 million in the 2019 third quarter compared to $96 million in the 2018 third quarter primarily due to strong commercial, government and defense sales, and growth in Polaris Adventures. Gross profit increased 29 percent to $31 million or 27.3 percent of sales in the third quarter of 2019, compared to $24 million or 25.1 percent of sales in the third quarter of 2018, due to increased volume and favorable product mix.

Aftermarket segment sales of $236 million in the 2019 third quarter increased three percent compared to $230 million in the 2018 third quarter. TAP sales of $193 million in the third quarter of 2019 increased two percent compared to $189 million in the third quarter of 2018. The Company’s other aftermarket brands increased sales by five percent. Gross profit decreased to $62 million in the third quarter of 2019, compared to $66 million in the third quarter of 2018 primarily due to higher tariff costs.

Boats segment sales decreased 11 percent to $119 million in the 2019 third quarter compared to $134 million in the 2018 third quarter primarily due to a slowing marine industry. Gross profit increased 10 percent to $22 million or 18.8 percent of sales in the third quarter of 2019, compared to $20 million or 15.1 percent of sales in the third quarter of 2018 due to favorable product mix.

Supplemental Data:

Parts, Garments, and Accessories (“PG&A”) sales increased 11 percent for the 2019 third quarter primarily driven by growth in all segments and categories.

International sales to customers outside of North America, including PG&A, totaled $187 million for the third quarter of 2019, up eight percent from the same period in 2018. The increase in sales is attributable to growth in ORV, motorcycles and Global Adjacent markets.

Net cash provided by operating activities was $436 million for the nine months ended September 30, 2019, compared to $354 million for the same period in 2018. Total debt at September 30, 2019, including finance lease obligations and notes payable, was $1,784 million. The Company’s debt-to-total capital ratio was 64 percent at September 30, 2019 compared to 67 percent at September 30, 2018. Cash and cash equivalents were $122 million at September 30, 2019, down from $183 million at September 30, 2018.

2019 Business Outlook

Taking into account its year-to-date performance, the Company is narrowing its earnings guidance range for the full year 2019 by increasing the lower end to $6.20 per diluted share and maintaining the upper end of the range at $6.30 per diluted share. Sales are expected to increase approximately 12 percent for the full year 2019 compare to the prior year.