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Polaris Reports Record Second Quarter 2012 Results; EPS Increased 44% To $0.98 With Sales Growth Of 24%

2012 Business Outlook

Based on Polaris’ performance in the first half of 2012 and projections for the remainder of the year, the Company is increasing its 2012 full year sales and earnings guidance. The Company now expects full year 2012 earnings to be in the range of $4.05 to $4.15 per diluted share, an increase of between 27 and 30 percent over full year 2011 earnings of $3.20 per diluted share. Full year 2012 sales are now expected to grow in the range of 14 percent to 17 percent from 2011.

 

Second Quarter Performance Summary (in thousands except per share data)

 

Three Months ended June 30,

 

Six Months ended June 30,

Product line sales

2012

 

2011

 

Change

2012

 

2011

 

Change

Off-Road Vehicles $ 581,143 $ 482,304 20 % $ 1,085,710 $ 870,323 25 %
Snowmobiles 8,873 6,828 30 % 13,520 15,763 -14 %
On-Road Vehicles 64,737 30,886 110 % 129,393 75,794 71 %
Parts, Garments & Accessories  

100,693

   

87,903

 

15

%

 

200,573

   

183,239

 

9

%

Total Sales

$

755,446

 

$

607,921

 

+24

%

$

1,429,196

 

$

1,145,119

 

+25

%

 

Gross profit

$ 216,749   $ 177,604  

+22

%

$ 411,712   $ 329,439   +25 %
Gross profit as a % of sales

28.7

%

29.2

%

-50 bpts

28.8

%

28.8

%

0 bpts

 

Operating expenses

$ 114,530   $ 106,209  

+8

%

$ 225,129   $ 193,747   +16 %
Operating expenses as a % of sales 15.2 % 17.5 % -230 bpts 15.8 % 16.9 % -110 bpts
 

Operating Income

  110,434   $ 76,921  

+44

%

$ 201,981   $ 146,504   +38 %
Operating Income as a % of sales 14.6 % 12.7 % +190 bpts 14.1 % 12.8 % +130 bpts
 

Net Income

$ 69,823   $ 48,729   +43 % $ 129,901   $ 96,039   +35 %
Net income as a % of sales 9.2 % 8.0 % +120 bpts 9.1 % 8.4 % +70 bpts
 

Diluted Net Income per share

$ 0.98   $ 0.68   +44 % $ 1.83   $ 1.35   +36 %
 

Off-Road Vehicle (“ORV”) sales increased 20 percent from the second quarter 2011 to $581.1 million. This increase reflects continued North American market share gains for both ATVs and side-by-side vehicles. Polaris North American ORV unit retail sales were up more than 15 percent from the second quarter last year, with consumer purchases of side-by-side vehicles climbing over 20 percent and ATV retail sales up nearly ten percent. The Company estimates the North American industry ORV retail sales increased low double digits percent from the second quarter of 2011. North American ORV dealer inventories were up low double digits percent from the second quarter of 2011, in support of continued strong retail demand for side-by-side vehicles. Sales of ORVs outside of North America decreased eight percent compared to the second quarter 2011, due to weaker international economic conditions and an unfavorable currency impact resulting from the strong U.S. dollar.

Snowmobile sales totaled $8.9 million for the 2012 second quarter compared to $6.8 million for the second quarter of 2011. The increase is partially due to a mix of higher priced products being shipped during the 2012 second quarter compared to the same period last year. Second quarter snowmobile sales are routinely low for the Company as deliveries to dealers ramp up in the second half of the calendar year before the snowmobile retail selling season begins in earnest.

Sales of the On-Road Vehicles division, comprised primarily of Victory motorcycles but also including Indian motorcycles and our GEM and Goupil electric vehicles, increased 110 percent over the same period last year to $64.7 million. North American industry heavyweight cruiser and touring motorcycle retail sales increased low single digits percent during the 2012 second quarter as compared to the prior year’s second quarter. Over the same period, Victory North American consumer unit retail sales increased over ten percent, once again gaining market share. North American Victory dealer inventory increased over 2011 levels to support the retail sales increases, market share gains and new product launches of the Victory Judge™ and Victory Hard-Ball™. Polaris sales of On-Road Vehicles to customers outside of North America, now including Goupil, increased over 130 percent during the 2012 second quarter compared to same period last year. The 2011 acquisitions of Indian, GEM and Goupil contributed over a third of On-Road Vehicles’ second quarter sales growth.

Parts, Garments, and Accessories (“PG&A”) sales increased 15 percent during the second quarter 2012 compared to the same period last year. The increase was primarily driven by higher ORV and Victory motorcycle-related PG&A sales.

International sales totaled $111.5 million for the 2012 second quarter, a seven percent increase over the same period in 2011. Unfavorable currency fluctuations negatively impacted sales outside North America by five percent during the 2012 second quarter. The increase in the second quarter sales was driven by the additional sales from the Goupil acquisition as well as higher sales of Victory motorcycles and a 38 percent increase in Asia/Pacific region sales, offset by lower ORV sales, primarily in Europe, due to sluggish economic conditions and the weak currencies.

Gross profit was 28.7 percent of sales for the second quarter of 2012, a decrease of 50 basis points from 2011’s all-time second quarter high gross profit percentage. The gross profit percentage declined primarily due to unfavorable currency fluctuations, which had well over 100 basis points negative impact on the gross profit percentage in the second quarter 2012 compared to the second quarter 2011, as well as negative product mix and commodity costs impacts. Gross profit dollars increased 22 percent to $216.7 million for the second quarter of 2012, compared to $177.6 million for the second quarter of 2011. The increase in gross profit dollars resulted primarily from increased volume, cost savings from the manufacturing realignment project, continued product cost reduction efforts and higher selling prices.

Operating expenses for the second quarter 2012 increased eight percent to $114.5 million or 15.2 percent of sales as compared to $106.2 million or 17.5 percent of sales for the second quarter of 2011. Operating expenses in absolute dollars for the second quarter of 2012 increased primarily due to research and development expenses and continued infrastructure investments being made in international and adjacent markets, offset somewhat by lower incentive compensation plan expenses due to stock price changes during the second quarter of 2012 compared to the same period in 2011.

Income from financial services increased 49 percent to $8.2 million during second quarter 2012 compared to $5.5 million in the second quarter of 2011, primarily a consequence of increased profitability generated from retail credit portfolios with GE, Capital One and Sheffield and higher income from the dealer inventory financing through Polaris Acceptance.

Non-operating other expense was $0.2 million in the second quarter of 2012, compared to $1.6 million in the second quarter of 2011. The decrease in expense is the result of foreign currency exchange rate movements and the resulting effects on foreign currency transactions related to the Company’s foreign subsidiaries.

The provision for income taxes for the second quarter 2012 was recorded at a rate of 35.8 percent of pretax income compared to 34.4 percent of pretax income for the second quarter 2011. The higher income tax rate for the second quarter 2012 is primarily due to the United States Congress not yet extending the research and development income tax credit as of June 30, 2012.

Financial Position and Cash Flow

Net cash provided by operating activities increased 27 percent to $78.4 million for the year-to-date period ended June 30, 2012 compared to $61.8 million for the first half of 2011. The increase in net cash provided by operating activities for the 2012 period was due to increased net income, partially offset by a higher investment in working capital, largely due to higher factory inventory compared to the same period in 2011. Total debt at the end of the second quarter was $107.6 million. The Company’s debt-to-total capital ratio was 16 percent at June 30, 2012, compared to 18 percent at the same period in 2011. Cash and cash equivalents were $289.3 million at June 30, 2012 compared to $262.2 million for the same period in 2011.

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