Polaris Q1 North America ORV retail sales decrease

“Polaris opened 2020 on an upswing, with retail demand significantly outpacing our expectations, but the abrupt impact of COVID-19 in mid-March drastically altered our momentum. Since then we have honed our focus to four goals which will guide us through this crisis: the safety of our employees, the viability of Polaris, the strength of our dealer network, and stewardship for our shareholders and other stakeholders. Through fast action and bold decisions, we enhanced workplace safety and re-aligned our operations to match evolving demand trends. We also moved aggressively to optimize our cost structure, preserve liquidity, and augment our financial strength and flexibility, and we are actively supporting our dealers as they find innovative ways to serve customers and reignite demand. We expect the COVID-19 pandemic, and its corresponding shock to the economy, to be a substantial challenge for the global economy and our business through the remainder of the year and possibly longer. Nevertheless, I am confident in our dedicated and hard-working Polaris team’s ability to navigate through this unprecedented environment and emerge a better, stronger, and more agile business. Regardless of the headwinds we face, our commitment to being a customer-centric, highly efficient growth company remains unchanged, as we believe this vision will propel our business forward and further solidify our position as the global leader in powersports.”

That’s how Scott Wine, chairman and chief executive officer of Polaris Inc., summed up the company’s first quarter 2020 results, which included reported sales of $1.405 billion, down 6 percent from reported sales of $1.496 billion for the first quarter of 2019.

The company reported a first quarter 2020 net loss of $5 million, or $(0.09) per diluted share, compared with net income of $48 million, or $0.78 per diluted share, for the 2019 first quarter. Adjusted net income for the quarter ended March 31, 2020 was $14 million, or $0.22 per diluted share compared to $67 million, or $1.08 per diluted share in the 2019 first quarter.

The rapid decline in retail demand over the last two weeks of March 2020 driven by the COVID-19 related economic slowdown significantly impacted sales and gross profit for the first quarter of 2020. Sales were adversely impacted by approximately $125 million in the quarter, while gross profit was impacted by approximately $50 million compared to previous company expectations.

Gross profit decreased 17 percent to $293 million for the first quarter of 2020 from $353 million in the first quarter of 2019. Reported gross profit margin was 20.8 percent of sales for the first quarter of 2020, down 272 basis points compared to 23.6 percent of sales for the first quarter of 2019. Adjusted gross profit for the first quarter 2020 was $298 million, or 21.2 percent of sales compared to the first quarter of 2019 adjusted gross profit of $359 million, or 24.0 percent of sales. Adjusted gross profit for the first quarter of 2020 excludes the negative impact of $5 million of restructuring and realignment costs, and adjusted gross profit for the first quarter of 2019 excludes the negative impact of $7 million of restructuring and realignment costs.

Operating expenses increased six percent for the first quarter of 2020 to $307 million, or 21.9 percent of sales, from $289 million, or 19.3 percent of sales, in the same period in 2019. Operating expenses in dollars and as a percent of sales increased primarily due to incurred expenses for ongoing investment in research and development and strategic projects before the COVID-19 pandemic began to impact demand.

Income from financial services was $20 million for the first quarter of 2020, up 5 percent compared with $19 million for the first quarter of 2019. The increase was primarily due to a change in retail financing programs with one of our retail providers which allowed for the release into income certain reserves maintained under the previous program. Excluding this adjustment, financial services income would have been lower year over year.

Interest expense was $16 million for the first quarter of 2020 compared to $20 million for the same period last year due to lower average daily debt levels and lower interest rates.

Other (income) expense, net, was $1 million in the first quarter of 2020 compared to $(4) million in the first quarter of 2019. Other (income) expense 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 first quarter of 2020 was a tax benefit $6 million, or 53.8 percent of pretax loss, compared with tax expense of $16 million, or 24.9 percent of pretax income for the first quarter of 2019. The favorable tax benefit for the quarter arises from the benefit from a pretax loss and the release of tax reserves due to the expiration of certain statutes of limitations in the quarter.

Product Segment Highlights (Reported)

Off-Road Vehicles (“ORV”) and Snowmobiles segment sales, including PG&A, totaled $824 million for the first quarter of 2020, down 5 percent over $868 million for the first quarter of 2019 due to a decline in side-by-side sales.

PG&A sales for ORV and Snowmobiles combined increased 7 percent in the first quarter of 2020 compared to the first quarter last year. Gross profit decreased 16 percent to $202 million in the first quarter of 2020, compared to $240 million in the first quarter of 2019. Gross profit percentage decreased 320 basis points during the 2020 first quarter.

ORV wholegood sales for the first quarter of 2020 decreased 7 percent. Polaris North American ORV retail sales were down high-single digits percent for the quarter with both side-by-side vehicles and ATV vehicles down high-single digits percent. The North American ORV industry was approximately flat compared to the first quarter last year.

Snowmobile wholegood sales in the first quarter of 2020 were $6 million compared to $13 million in the first quarter last year. Polaris snowmobile retail sales were down mid-teens percent during the first quarter of 2020 and down low single-digits percent for the 12-month season ending March 2020. North American industry retail was down nearly 30 percent for the first quarter and down high-single digits percent for the season ending March 2020.

Motorcycles segment sales, including PG&A, totaled $127 million, up 7 percent compared to the first quarter of 2019, driven by increased sales of both Indian Motorcycle and Slingshot. Gross profit for the first quarter of 2020 was a loss of $1 million compared to a profit of $4 million in the first quarter of 2019.

North American consumer retail sales for Indian Motorcycle increased low-single digits percent during the first quarter of 2020 in a weak mid to heavy-weight two-wheel motorcycle industry that was down high-teens percent. North American consumer retail sales for Polaris’ motorcycle segment, including both Indian Motorcycle and Slingshot, increased low-single digit percent during the first quarter of 2020, while the North American motorcycle industry retail sales for mid to heavy-weight motorcycles including three-wheel vehicles, was down mid-teens percent in the first quarter of 2020.

Global Adjacent Markets segment sales, including PG&A, decreased 6 percent to $98 million in the 2020 first quarter compared to $105 million in the 2019 first quarter. Gross profit decreased nine percent to $27 million or 27.4 percent of sales in the first quarter of 2020, compared to $30 million or 28.2 percent of sales in the first quarter of 2019.

Aftermarket segment sales of $202 million in the 2020 first quarter decreased eight percent compared to $221 million in the 2019 first quarter. Transamerican Auto Parts (TAP) sales of $177 million in the first quarter of 2020 decreased 10 percent compared to $197 million in the first quarter of 2019. The company’s other aftermarket brands increased sales by 6 percent. Gross profit decreased to $46 million in the first quarter of 2020, compared to $57 million in the first quarter of 2019.

Boats segment sales decreased 16 percent to $155 million in the 2020 first quarter compared to $185 million in the 2019 first quarter. Gross profit decreased 18 percent to $30 million or 19.2 percent of sales in the first quarter of 2020, compared to $36 million or 19.6 percent of sales in the first quarter of 2019.

Supplemental Data:

• Parts, Garments, and Accessories (“PG&A”) sales increased 7 percent for the 2020 first quarter.

• International sales to customers outside of North America, including PG&A, totaled $182 million for the first quarter of 2020, down 11 percent from the same period in 2019.

Financial Position and Cash Flow

Net cash used for operating activities was $71 million for the three months ended March 31, 2020, compared to $38 million for the same period in 2019. Total debt at March 31, 2020, including finance lease obligations and notes payable, was $2,164 million. The Company’s debt-to-total capital ratio was 68 percent at March 31, 2020 compared to 71 percent at March 31, 2019. Cash and cash equivalents were $424 million at March 31, 2020, up from $151 million at March 31, 2019.

2020 Business Outlook

Given the dynamic nature of the COVID-19 pandemic and the resulting unprecedented economic uncertainty, the company withdrew its full year 2020 guidance on March 23, 2020. The company will revisit its decision to provide detailed sales and earnings guidance when visibility to accurately estimate its future results improves.