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PII > SEC Filings for PII > Form 10-K on 21-Feb-2014All Recent SEC Filings

Show all filings for POLARIS INDUSTRIES INC/MN

Form 10-K for POLARIS INDUSTRIES INC/MN


21-Feb-2014

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion pertains to the results of operations and financial position of the Company for each of the three years in the period ended December 31, 2013, and should be read in conjunction with the Consolidated Financial Statements and the Notes thereto included elsewhere in this report.
Overview
In 2013, we had record sales and net income from continuing operations, with our fourth straight year of sales growth exceeding 15 percent and net income growth exceeding 20 percent. This growth is fueled by award-winning innovative new products leading to continued market share leadership in side-by-side vehicles and ATV's. In 2013, we also experienced growth in our motorcycles, international and adjacent market businesses. The overall North American powersports industry continued its positive trend with mid-single digit percentage growth in 2013. Our North America retail sales to consumers increased 10 percent in 2013, helping to drive total full year Company sales up 18 percent to a record $3.78 billion. Despite the global economy remaining difficult, our international sales increased 29 percent due to continued market share growth in all product categories and strong results by our recent European acquisitions. Full year earnings reflect the success of our margin expansion efforts, as we delivered a 40 basis point increase in net income margin from continuing operations to a record 10.1 percent of sales. The combination of increased sales growth and the expansion of gross margins by 90 basis points drove net income from continuing operations up 22 percent to $381.1 million, with diluted earnings per share from continuing operations increasing 23 percent to a record $5.40 per share. These increases came while we continued to invest in numerous longer-term diversification and growth opportunities.
In 2013, we received a benefit from prior investments while continuing to invest in both product development and strategic initiatives. In August 2013, we re-launched the iconic Indian Motorcycle brand, headlined by three all-new models: Chief Classic, Chief Vintage and Chieftain. Additionally, in 2013 we introduced 11 new ORV products and eight new snowmobile models. Our late 2012 acquisition of Klim, a market leader in the design, development and distribution of premium technical riding gear for the snowmobile and motorcycle divisions, performed exceptionally well in 2013. Meanwhile, in the second quarter of 2013, we acquired Aixam, a leader in the European on-road quadricycles market. Our footprint expanded with the doubling of our Wyoming, Minnesota research and development facility being completed in 2013, and we broke ground on a new manufacturing plant in Poland and a new manufacturing plant for our joint venture with Eicher Motors Limited, which intends to design, develop and manufacture a full range of new vehicles in India and other emerging markets. In November 2013, we repurchased 3.96 million shares held by Fuji Heavy Industries Ltd. ("Fuji") for $497.5 million. The repurchase was funded from cash on hand and borrowings under our revolving credit facility and Master Note Purchases Agreement. The repurchase is expected to decrease our 2014 diluted share count while leaving available borrowing capacity to fund future growth. On January 30, 2014, we announced that our Board of Directors approved a 14 percent increase in the regular quarterly cash dividend to $0.48 per share for the first quarter of 2014, representing the 19th consecutive year of increased dividends to shareholders. This increase reflects the continued momentum and potential of our business and the strength of our balance sheet.


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Results of Operations

Sales:
Sales were $3,777.1 million in 2013, an 18 percent increase from $3,209.8
million for the same period in 2012. The following table is an analysis of the
percentage change in total Company sales for 2013 compared to 2012 and 2012
compared to 2011:

                                 Percent change in total Company sales compared to the prior year
                                             2013                                  2012
Volume                                               12  %                                   18  %
Product mix and price                                 7                                       4
Currency                                             (1 )                                    (1 )
                                                     18  %                                   21  %

Volume for 2013 and 2012 increased 12 percent and 18 percent, respectively, compared to 2012 and 2011. The volume increase in 2013 and 2012 is primarily the result of shipping more ORVs, snowmobiles, motorcycles and related PG&A items to dealers given increased consumer retail demand for our products worldwide, along with the inclusion of Aixam in our consolidated financial statements since it was acquired on April 10, 2013. Product mix and price contributed seven percent and four percent to the growth for 2013 and 2012, respectively, primarily due to the positive benefit of a greater number of higher priced ORVs sold to dealers relative to our other businesses. The impact from currency rates on our Canadian and other foreign subsidiaries' sales, when translated to U.S. dollars decreased sales by one percent in both 2013 and 2012 compared to the respective prior years.
Our sales by product line were as follows:

                                                   For the Years Ended December 31,
                                                                       Percent                               Percent
                                 Percent                   Percent     Change                    Percent     Change
                                of Total                  of Total    2013 vs.                  of Total    2012 vs.
($ in millions)      2013        Sales         2012        Sales        2012         2011        Sales        2011
Off-Road Vehicles $ 2,521.5         67 %    $ 2,225.8         69 %        13 %    $ 1,822.3         69 %        22 %
Snowmobiles           301.7          8 %        283.0          9 %         7 %        280.1         11 %         1 %
Motorcycles           219.8          6 %        195.8          6 %        12 %        134.3          5 %        46 %
Small Vehicles        122.8          3 %         44.4          2 %       177 %         12.0          - %       268 %
PG&A                  611.3         16 %        460.8         14 %        33 %        408.2         15 %        13 %
Total Sales       $ 3,777.1        100 %    $ 3,209.8        100 %        18 %    $ 2,656.9        100 %        21 %

ORV sales of $2,521.5 million in 2013, which include core ATV and RANGER and RZR side-by-side vehicles, increased 13 percent from 2012. This increase reflects continued market share gains for both ATVs and side-by-side vehicles driven by strong consumer enthusiasm for our ORV offerings, including an expanded line-up of innovative new ATVs and side-by-side vehicles introduced in the 2013 third and fourth quarters. Polaris' North American ORV unit retail sales to consumers increased high-single digits percent for 2013 compared to 2012, with ATV unit retail sales growing mid-single digits percent and side-by-side vehicle unit retail sales increasing more than ten percent over the prior year. North American dealer inventories of ORVs increased mid-teens percent from 2012, in support of continued strong retail demand for side-by-side vehicles and incremental new market segments. ORV sales outside of North America increased nine percent in 2013 compared to 2012 resulting in market share gains. For 2013, the average ORV per unit sales price increased seven percent over 2012's per unit sales price, primarily as a result of the increased sales of higher priced side-by-side vehicle models.
ORV sales of $2,225.8 million in 2012, which include core ATV and RANGER and RZR side-by-side vehicles, increased 22 percent from 2011. This increase reflects continued market share gains for both ATVs and side-by-side vehicles driven by industry leading product offerings. Polaris' North American ORV unit retail sales to consumers increased mid-teens percent for 2012 compared to 2011, with ATV unit retail sales growing mid-single digits percent and side-by-side vehicle unit retail sales increasing more than 20 percent over the prior year. North American dealer inventories of ORVs increased 26 percent from 2011, in support of continued strong retail demand for side-by-side vehicles and incremental


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new market segments. ORV sales outside of North America decreased six percent in 2012 compared to 2011, primarily due to weak demand in Europe. Despite decreased sales outside of North America, we widened our market share leadership in ORVs worldwide in 2012 compared to 2011. For 2012, the average ORV per unit sales price increased two percent over 2011's per unit sales price, primarily as a result of the increased sales of higher priced side-by-side vehicle models. Snowmobile sales increased seven percent to $301.7 million for 2013 compared to 2012. This increase is primarily due to lower dealer inventory coming out of the 2012-2013 snowmobile season and success of the model year 2014 new product introductions. Retail sales to consumers for the 2013-2014 season-to-date period through December 31, 2013, increased nearly ten percent. Sales of snowmobiles to customers outside of North America, principally within the Scandinavian region and Russia, increased 18 percent in 2013 as compared to 2012. The average unit sales price in 2013 decreased two percent when compared to 2012, resulting primarily from increased sales of our value-priced snowmobiles.
Snowmobile sales increased one percent to $283.0 million for 2012 compared to 2011. This increase is primarily due to increased market share in North America driven by the success of model year 2013 new product introductions. Sales of snowmobiles to customers outside of North America, principally within the Scandinavian region and Russia, increased nine percent as compared to 2011. The average unit sales price in 2012 was flat when compared to 2011.
Sales from the motorcycles division, which is comprised of Victory and Indian motorcycles, increased 12 percent to $219.8 million for 2013 compared to 2012. The increase in 2013 sales is due to the initial shipments of the new model year 2014 Indian motorcycles. North American industry heavyweight cruiser and touring motorcycle retail sales increased mid-single digits percent in 2013 compared to 2012. Over the same period, Polaris North American unit retail sales to consumers increased over 20 percent, driven by an unprecedented number of new product introductions in 2013, which includes three new Indian Motorcycle models. North American Polaris motorcycle dealer inventory increased high-single digits percent in 2013 versus 2012 levels due to stocking of the new Indian motorcycles. Sales of motorcycles to customers outside of North America increased three percent in 2013 compared to 2012. The average per unit sales price for the motorcycles division in 2013 increased five percent compared to 2012 due to the increased sales of higher priced Indian motorcycles. Sales from the motorcycle division, which in 2012 was comprised primarily of Victory motorcycles, increased 46 percent to $195.8 million for 2012 compared to 2011. The 2012 sales increase reflects an increase of Victory North American unit retail sales to consumers over ten times the North American heavyweight cruiser and touring motorcycle industry percentage growth rate. North American Victory dealer inventory increased over 2011 levels to support the sales increases, market share gains, new dealer additions and our new RFM ordering system. The RFM ordering system allows dealers to place more frequent orders based on retail sell-through along with encouraging display of each Victory model. Sales from the motorcycle division to customers outside of North America increased over 50 percent due to increased market share gains of our Victory motorcycles. The average per unit sales price for the motorcycle division increased two percent in 2012 compared to 2011.
In April 2013, we acquired Aixam. Aixam is based in France and manufactures and sells enclosed on-road quadricycles and light duty commercial vehicles. Aixam complements our SV division, which also includes GEM and Goupil vehicles. SV sales of $122.8 million in 2013 represents an increase of 177 percent compared to 2012. The increase in sales over the comparable prior year periods is primarily due to the inclusion of Aixam in our consolidated financial statements since it was acquired in April 2013. Also, both GEM and Goupil experienced an increase in sales during 2013 compared to 2012.
Sales of the SV division in 2012, which included the 2011 acquisitions of GEM and Goupil, were $44.4 million, which represented an increase of 268 percent compared to 2011. The increase in sales was due to the inclusion of GEM and Goupil in our consolidated financial statements for the full 2012 year, compared to inclusion in 2011 for the shortened periods since the acquisition of these companies in June and November of 2011, respectively.
PG&A sales increased 33 percent to $611.3 million for 2013 compared to 2012. Sales of PG&A to customers outside of North America increased 26 percent during 2013 compared to 2012. The sales increase in 2013 was driven by double digit percent increases in all product lines and categories, which was primarily driven by the addition of over 300 new model year 2014 accessories, including additions to the family of Lock and RideŽ attachments that add comfort, style and utility to ORVs and motorcycles. PG&A sales also increased over the prior year periods due to the inclusion of Klim in our consolidated financial statements since it was acquired in December 2012, and Aixam related PG&A since it was acquired in April 2013.


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PG&A sales increased 13 percent to $460.8 million for 2012 compared to 2011. Sales of PG&A to customers outside of North America increased 16 percent during 2012 compared to 2011. The sales increase in 2012 was driven by increased sales in all product lines and product categories driven by the addition of over 250 model year 2013 accessories, and higher PG&A related sales to owners of the Company's large installed base of vehicles. The acquisition of Klim late in the 2012 fourth quarter did not have a significant impact on the 2012 PG&A sales results.
Sales by geographic region were as follows:

                                                       For the Years Ended December 31,
                                                                            Percent                                    Percent
                                                                             Change                                     Change
($ in                         Percent of                    Percent of      2013 vs.                   Percent of      2012 vs.
millions)         2013        Total Sales       2012       Total Sales        2012         2011       Total Sales        2011
United States  $ 2,721.3         72 %        $ 2,311.0         72 %            18 %     $ 1,864.1         70 %            24 %
Canada             463.3         12 %            438.2         14 %             6 %         368.5         14 %            19 %
Other foreign
countries          592.5         16 %            460.6         14 %            29 %         424.3         16 %             9 %
Total sales    $ 3,777.1        100 %        $ 3,209.8        100 %            18 %     $ 2,656.9        100 %            21 %

Significant regional trends were as follows:
United States:
Sales in the United States for 2013 increased 18 percent compared to 2012, primarily resulting from higher shipments in all product lines and related PG&A, improved pricing and more sales of higher priced side-by-side vehicles. The United States represented 72 percent, 72 percent and 70 percent of total company sales in 2013, 2012 and 2011, respectively. Sales in the United States for 2012 increased 24 percent compared to 2011, primarily resulting from higher shipments in all product lines due to market share gains driven by innovative products. Canada:
Canadian sales increased six percent in 2013 compared to 2012. Increased shipments of ORVs and snowmobiles was the primary contributor for the increase in 2013, partially offset by currency rate movements which had an unfavorable three percent impact on sales for 2013 compared to 2012. Sales in Canada represented 12 percent, 14 percent and 14 percent of total company sales in 2013, 2012, and 2011, respectively. Canadian sales increased 19 percent in 2012 compared to 2011 due to increased volume from strong retail sales demand in Canada for our products, offset by an unfavorable one percent impact on sales from fluctuation in the Canadian currency compared to the United States dollar. Other Foreign Countries:
Sales in other foreign countries, primarily in Europe, increased 29 percent for 2013 compared to 2012. The increase was primarily driven by the acquisition of Aixam in April 2013, along with increased sales of side-by-side vehicles and PG&A. This increase was partially offset by currency rate movements, which had an unfavorable one percent impact on sales for 2013 compared to 2012. Sales in other foreign countries, primarily in Europe, increased nine percent for 2012 compared to 2011. The increase was primarily driven by the additional sales from the Goupil acquisition, higher sales of Victory motorcycles and snowmobiles, and a 21 percent increase in the Asia/Pacific and Latin America region sales. Currency rates had an unfavorable two percent impact on sales for 2012 compared to 2011.


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Cost of Sales:
The following table reflects our cost of sales in dollars and as a percentage of
sales:
                                                                     For the Years Ended December 31,
                                                                                                                           Percent of         Change
                                   Percent of Total                    Percent of Total     Change 2013                       Total          2012 vs.
($ in millions)        2013          Cost of Sales         2012          Cost of Sales        vs. 2012        2011        Cost of Sales        2011
Purchased materials
and services        $ 2,336.1             88 %          $ 2,008.9             88 %                 16 %    $ 1,650.8             86 %             22  %
Labor and benefits      198.7              8 %              177.7              8 %                 12 %        165.5              9 %              7  %
Depreciation and
amortization             64.5              2 %               51.8              2 %                 25 %         53.9              3 %             (4 )%
Warranty costs           56.9              2 %               46.1              2 %                 23 %         46.2              2 %              -  %
Total cost of sales $ 2,656.2            100 %          $ 2,284.5            100 %                 16 %    $ 1,916.4            100 %             19  %
Percentage of sales      70.3 %                              71.2 %                         -90 basis           72.1 %                     -90 basis
                                                                                               points                                         points

For 2013, cost of sales increased 16 percent to $2,656.2 million compared to $2,284.5 million in 2012. The increase in cost of sales in 2013 resulted primarily from the effect of a 12 percent increase in sales volume on purchased materials and services and labor and benefits, and also includes an unfavorable resolution regarding a contract dispute resulting in an approximate $10.0 million charge for additional royalties in 2013.
For 2012, cost of sales increased 19 percent to $2,284.5 million compared to $1,916.4 million in 2011. The increase in cost of sales in 2012 resulted primarily from the effect of an 18 percent increase in sales volumes on purchased materials and services and labor and benefits offset somewhat by continued product cost reduction efforts in 2012.
Gross Profit:
The following table reflects our gross profit in dollars and as a percentage of sales:

                                                For the Years Ended December 31,
                                                           Change                               Change
($ in millions)          2013            2012          2013 vs. 2012          2011          2012 vs. 2011
Gross profit dollars $   1,120.9     $     925.3                   21 %   $     740.6                   25 %
Percentage of sales         29.7 %          28.8 %   +90 basis points            27.9 %   +90 basis points

Gross profit, as a percentage of sales, was 29.7 percent for 2013, an increase of 90 basis points from 2012. Gross profit dollars increased 21 percent to $1,120.9 million in 2013 compared to 2012. The increases in gross profit dollars and the increase in gross profit margin percentage resulted primarily from continued product cost reduction, production efficiencies on increased volumes and higher selling prices, partially offset by unfavorable foreign currency fluctuations, higher promotional costs and royalty expenses as a result of a contract dispute resolution.
For 2012, gross profit dollars increased 25 percent to $925.3 million compared to 2011. Gross profit, as a percentage of sales, increased 90 basis points to 28.8 percent compared to 27.9 percent for 2011. The increase in gross profit dollars and the 90 basis points increase in the gross profit margin percentage in 2012 resulted primarily from continued product cost reduction efforts, production efficiencies on increased volumes, higher selling prices, and ongoing cost savings from the manufacturing realignment project, partially offset by higher sales promotions and unfavorable product mix.


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Operating Expenses:
The following table reflects our operating expenses in dollars and as a
percentage of sales:
                                                     For the Years Ended December 31,
                                                               Change                              Change
($ in millions)                2013           2012         2013 vs. 2012          2011         2012 vs. 2011
Selling and marketing      $    270.3     $    210.4                   28 %   $    178.7                   18 %
Research and development        139.2          127.3                    9 %        105.6                   21 %
General and administrative      179.4          143.1                   25 %        130.4                   10 %
Total operating expenses   $    588.9     $    480.8                   22 %   $    414.7                   16 %
Percentage of sales              15.6 %         15.0 %   +60 basis points           15.6 %   -60 basis points

Operating expenses for 2013 increased 22 percent to $588.9 million, compared to $480.8 million in 2012. Operating expenses as a percentage of sales increased 60 basis points in 2013 to 15.6 percent compared to 15.0 percent in 2012. Operating expenses in absolute dollars and as a percentage of sales increased in 2013 primarily due to higher selling, marketing and advertising expenses related, in part, to the re-launch of Indian Motorcycle, increased general and administrative expenses, which includes infrastructure investments being made to support global growth initiatives and higher accrued incentive compensation due to a higher stock price. Operating expenses in absolute dollars also increased due to the inclusion of Klim and Aixam operating expenses in our consolidated financial statements since these companies were acquired in December 2012 and April 2013, respectively.
Operating expenses for 2012 increased 16 percent to $480.8 million compared to $414.7 million for 2011. Operating expenses as a percentage of sales decreased 60 basis points to 15.0 percent compared to 15.6 percent in 2011. Operating expenses in absolute dollars for 2012 increased primarily due to higher research and development expenses as we invest in growth initiatives and higher selling and marketing expenses due to sales growth, preparation for the Indian Motorcycle re-launch, and implementation of the new go-to-market program for motorcycles. Operating expenses as a percentage of sales decreased in 2012 compared to 2011 due to leverage achieved from the increased sales volume during the year.
Income from Financial Services:
The following table reflects our income from financial services:

                                                         For the Years Ended December 31,
                                                                      Change                           Change
($ in millions)                        2013            2012        2013 vs. 2012       2011        2012 vs. 2011
Equity in earnings of Polaris
Acceptance                       $      5.0         $     3.9            28 %       $     4.4           (12 )%
Income from Securitization
Facility                               15.2              11.8            28 %             7.7            54  %
Income from Capital One,
Sheffield and GE Bank retail
credit agreements                      22.5              15.3            47 %             9.1            69  %
Income from other financial
services activities                     3.2               2.9            14 %             2.9            (1 )%
Total income from financial
services                         $     45.9         $    33.9            35 %       $    24.1            41  %

Income from financial services increased 35 percent to $45.9 million in 2013 compared to $33.9 million in 2012. The increase in 2013 is primarily due to a nine percent increase in retail credit contract volume and increased profitability generated from the retail credit portfolios with Sheffield Financial ("Sheffield"), GE and Capital One, and higher income from dealer inventory financing through Polaris Acceptance and the Securitization Facility. Income from financial services increased 41 percent to $33.9 million in 2012 compared to $24.1 million in 2011. The increase was primarily due to increased profitability generated from retail credit arrangements with Sheffield, GE, and Capital One, an 11 percent increase in the retail credit volume, and higher income from dealer inventory financing through the Securitization Facility. Interest Expense:
Interest expense increased to $6.2 million in 2013 compared to $5.9 million in 2012. In the 2013 fourth quarter, we increased debt levels through borrowings on our existing revolving credit facility and additional borrowings of $100.0 million through our amended Master Note Purchases Agreement used to partially fund the $497.5 million buyback of outstanding Polaris shares held by Fuji. The additional debt resulted in an increase to interest expense in 2013. Interest


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expense increased to $5.9 million in 2012 compared to $4.0 million in 2011. This . . .

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