Product Recalls, R&D Costs Hurt Polaris’s Revenue

Acquisition of Taylor-Dunn seen to be a strategic fit to its Work & Transportation business

Source: Company's Website
Source: Company’s Website

Global power sports giant Polaris Industries Inc. (NYSE: PII) announced its Q2 FY16 financial results on July 20th, 2016. The Medina, Minnesota-based company, together with its subsidiaries, designs, engineers, manufactures, and markets off-road vehicles (ORVs), snowmobiles, motorcycles, and on-road vehicles in the U.S., Canada, Western Europe, Australia, and Mexico. Polaris operates through three segments: ORVs/Snowmobiles, Motorcycles, and Global Adjacent Markets. In addition, the Company sells related gear such as helmets, jackets, pants hats, goggles, gloves, boots, and leathers through a network of independent dealers and distributors, as well as through polaris.com, indianmotorcycle.com, klim.com, kolpin.com, cyclecountry.com, proarmor.com, timbersled.com, hammerheadoffroad.com, and 509films.com websites. It markets its products under the RANGER, RZR, RANGER Crew, Polaris RUSH, Victory Vision, Victory Cross Roads, Cross Country, Indian Chief Classic, Indian Chief Vintage, Indian Chieftain, Roadmaster, Scout, Scout Sixty, Victory Magnum, and Hammerhead Off-Road brand names.

The Company reported sales of $4.7 billion in FY15. Read more about Polaris Industries’ financial results below.

Q2 FY16 financial highlights

Source: Polaris
Source: Polaris

During Q2 FY16, the Company’s total sales inched up 1% to $1,130.8 million as compared to $1,124.3 million in the year-ago period, owing to a weak retail sales environment and some product recalls. In April 2016, Polaris initiated a recall of 160,000 RZR 900 and 1000 ORVs manufactured since model year 2013 due to reports of thermal-related incidents, including fires. The recall has dented the popularity of its hugely popular RZR ORVs, giving an opportunity for Arctic Cat’s (NASDAQ: ACAT) Wildcat Trail to take over the dominant position of the RZR.

During Q2 FY16, operating expenses grew 9% to $188.0 million, or 16.6% of sales, compared to $173.1 million, or 15.4% of sales, in the year-ago quarter, owing to higher R&D expenses for ongoing product innovation. Polaris also incurred higher general and administrative expenses related to product recalls, partially offset by cost control measures during the reporting quarter.

Income from financial services during the reporting quarter jumped 16% to $20.5 million compared to $17.6 million in Q2 FY15, primarily on account of a higher penetration rate for retail financing programs. However, gross profit fell 11% to $284.5 million in Q2 FY16, compared to $319.4 million in the year-ago quarter. As a percentage of sales, gross profit declined 325 basis points to 25.2% of sales in Q2 FY16 compared to 28.4% of sales for the year-ago period. The decline is mainly due to negative currency movements along with increased warranty and promotional costs and negative product mix, partially offset by lower commodity costs and product cost reduction efforts.

Source: Polaris
Source: Polaris

Finally, lower revenue and higher expenses resulted in a 29% fall in net income to $71.2 million, or $1.09 per diluted share, during Q2 FY16, compared to $100.9 million, or $1.49 per diluted share, reported in Q2 FY15.

Segmental highlights

Source: Polaris
Source: Polaris

ORV and Snowmobile segment sales, including its respective parts, garments, and accessory (PG&A) sales, fell 6% to $808.5 million as compared to the year-ago period. Gross profit slipped 17% to $230.6 million, or 28.5% of sales, in Q2 FY16 compared to $278.9 million, or 32.5% of sales, in Q2 FY15.

Source: Polaris
Source: Polaris

Motorcycle segment sales, including its respective PG&A sales, jumped 23% to $231.3 million in Q2 FY16, driven by robust sales of all brands. Gross profit surged 63% to $39.8 million, or 17.2% of sales, in Q2 FY16, compared to $24.5 million, or 13.1% of sales, in Q2 FY15.

U.S. consumer demand for the Victory, Indian Motorcycle, and Slingshot brands, grew by mid-teens percentages in Q2 FY16, while overall motorcycle industry retail sales for motorcycles of 900cc and above fell by mid-single digits percentages during the reporting quarter. Product availability for all three motorcycle brands remained adequate throughout the quarter as Y-o-Y paint capacity at the Company’s Spirit Lake, Iowa, motorcycle plant improved significantly.

Source: Polaris
Source: Polaris

Sales for the Global Adjacent Markets segment, including its respective PG&A sales, grew 14% to $91.0 million in Q2 FY16 compared to the year-ago quarter. Gross profit grew 6% to $24.0 million, or 26.3% of sales, in Q2 FY16, compared to $22.6 million, or 28.4% of sales, in Q2 FY15.

Work & Transportation’s whole goods sales grew 10% during Q2 FY16 due to growth in the Aixam business.

Acquisitions

On March 7th, 2016, Polaris acquired Taylor-Dunn, a manufacturer of vehicles used for warehousing, outdoor utilities, and goods and people hauling, which is seen to be a strategic fit to its Work & Transportation business, helping the Company to expand products and gain channel access.

Other highlights

Polaris’s net cash provided by operating activities jumped to $348.3 million for the six months ended June 30th, 2016, compared to $89.9 million for the same period in 2015. The significant increase in net cash was due to decreased working capital. Cash and cash equivalents increased to $146.6 million as of June 30th, 2016, from $118.8 million for the same period in 2015.

The Company also announced that its new Huntsville, Alabama, plant began producing Rangers at the beginning of June 2016 and Slingshots in early July 2016.

Source: Polaris
Source: Polaris

On July 26th, 2016, Polaris announced that it will launch the new Slingshot SLR premium model in 2017, priced at $28,499, compared to $21,999 for the base Slingshot autocycle. The new premium SLR model has an expanded range of 31 new Slingshot Engineered Accessories focused on rider comfort and customization, including the new Slingshade, in addition to premium cockpit upgrades and new colors.

Stock repurchases

Source: Polaris
Source: Polaris

During Q2 FY16, the Company repurchased and retired 652,000 shares of its common stock for $58.9 million. As of June 30th, 2016, the Company currently has authorization to repurchase up to an additional 8.7 million shares of its common stock.

Guidance for full year FY16

For the full year FY16, the Company is revising its earnings guidance range to $6.00-$6.30 per diluted share with sales expected to decline 2% to flat as compared to FY15. For full year FY16, ORV/Snowmobile sales are expected to decline by mid-single digits percentage; Motorcycle sales are expected to rise by double-digits percentage; and Global Adjacent Market sales are predicted to grow by mid-teens percentage.

Stock Performance

P9Polaris Industries’ stock stood at $98.75, gaining 3.59%, at the close on Friday, July 29th, 2016, having vacillated between an intraday high of $99.00 and a low of $93.86 during the session. The stock’s trading volume was at 3,050,375 for the day. The Company’s market cap was at $6.11 billion as of Friday’s close.

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