Polaris - 10-Q quarterly report FY

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FORM 10-Q
For the Quarterly Period Ended
June 30, 2003

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

For the quarterly period ended      JUNE 30, 2003      

OR

For the transition period from                      to                     

Commission File Number      1-11411     

     Indicate by check mark whether the registrant (1) has filed all reports to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.

Yes      X      No           

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Section 12b-2 of the Exchange Act).

Yes      X      No           

APPLICABLE ONLY TO CORPORATE ISSUERS:

     Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

     As of August 8, 2003, 21,738,767 shares of Common Stock of the issuer were outstanding.

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FORM 10-Q
For the Quarterly Period Ended
June 30, 2003

POLARIS INDUSTRIES INC.
FORM 10-Q
For Quarterly Period Ended June 30, 2003

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FORM 10-Q
For the Quarterly Period Ended
June 30, 2003

Part I FINANCIAL INFORMATION

     Item 1 — Consolidated Financial Statements

POLARIS INDUSTRIES INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands)

The accompanying footnotes are an integral part of these consolidated statements.

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FORM 10-Q
For the Quarterly Period Ended
June 30, 2003

POLARIS INDUSTRIES INC.
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except Per Share Data)
UNAUDITED

The accompanying footnotes are an integral part of these consolidated statements.

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FORM 10-Q
For the Quarterly Period Ended
June 30, 2003

POLARIS INDUSTRIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
Unaudited

The accompanying footnotes are an integral part of these consolidated statements.

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FORM 10-Q
For the Quarterly Period Ended
June 30, 2003

POLARIS INDUSTRIES INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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FORM 10-Q
For the Quarterly Period Ended
June 30, 2003

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FORM 10-Q
For the Quarterly Period Ended
June 30, 2003

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FORM 10-Q
For the Quarterly Period Ended
June 30, 2003

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FORM 10-Q
For the Quarterly Period Ended
June 30, 2003

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FORM 10-Q
For the Quarterly Period Ended
June 30, 2003

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FORM 10-Q
For the Quarterly Period Ended
June 30, 2003

Item 2 — 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 Polaris Industries Inc., a Minnesota corporation (“Polaris” or the “Company”) for the quarter and year to date periods ended June 30, 2003 and 2002. Due to the seasonality of the snowmobile, all terrain vehicle (ATV), personal watercraft (PWC), parts, garments and accessories (PG&A) and motorcycle business, and to certain changes in production and shipping cycles, results of such periods are not necessarily indicative of the results to be expected for the complete year.

Results of Operations

Sales were $377.1 million in the second quarter of 2003, representing a four percent increase from $362.6 million in sales for the same period in 2002.

Sales of ATVs were $248.3 million in the second quarter of 2003, up 24 percent from second quarter 2002 sales of $200.2 million. The Sportsman line of ATVs, including the Sportsman 600 and 700, continues to sell well in the premium segment of the ATV market and the all new Predator 500™ which was named “Sport ATV of the Year” by three industry publications continues to gain market share in the sport segment. The RANGER line of utility vehicles sales increased sharply during the second quarter while sales of Polaris ATVs outside of North America continued its growth, increasing 80 percent during the second quarter 2003. The all new Polaris ATP (all-terrain pickup with turf, two and four wheel traction options) also added to the sales growth during the second quarter. The average per unit sales price for the second quarter 2003 was eight percent higher than last year’s second quarter due primarily to a mix change as more of the new higher priced Sportsman 600 and 700, ATP (all-terrain pickup) and RANGER models were sold during the current quarter.

Sales of snowmobiles were $29.6 million for the second quarter of 2003, a decrease of 68 percent from sales of $91.4 million for the comparable period in 2002. The lack of snowfall in the last two riding seasons, particularly in the Midwest, is the overriding factor in the decline in snowmobile sales anticipated for the full year 2003 as dealer carryover inventories remain at unusually high levels and the Company has proactively adjusted current model year production downward to compensate for the high inventory and slower sales. In order to ease the pressure of the dealer snowmobile carryover inventory, the Company delayed initial shipments of the 2004 model year snowmobiles until late in the second quarter 2003. The average per unit sales price for the second quarter 2003 was higher than last year’s second quarter due primarily to a change in the mix of products sold during the quarter.

Sales of PWC were $26.8 million for the second quarter of 2003, an increase of 157 percent from second quarter 2002 sales of $10.5 million. Timing of shipments between the first and second quarter of 2003 was the primary reason for the increase as Polaris shipped a large number of the all new high performance MSX models to dealers during the second quarter of 2003. The average per unit sales price for PWC increased during the second quarter 2003 when compared to the prior year period due to a mix change as more of the new higher priced PWC were sold during the quarter. For the year to date period ended June 30, 2003, sales of PWC were 16 percent higher than the comparable period in 2002.

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FORM 10-Q
For the Quarterly Period Ended
June 30, 2003

Sales of Victory motorcycles were $17.3 million for the second quarter 2003, a 124 percent increase from $7.7 million for the comparable period in 2002. The increase is attributable to the continued market place acceptance of the all new Vegas model which was named the year’s best cruiser motorcycle by three leading motorcycle enthusiast magazines, as well as the timing of shipments as the Vegas production and shipments ramped up during the second quarter. The average per unit sales price for Victory motorcycles increased during the second quarter 2003 when compared to the prior year period due to fewer shipments of discounted non-current model year motorcycles and more of the new higher priced Victory Vegas models being sold. For the year to date period ended June 30, 2003, sales of Victory motorcycles were 58 percent higher than the comparable period in 2002.

PG&A sales were $55.1 million for the second quarter 2003, an increase of four percent from $52.8 million for the second quarter of 2002. The PG&A business was positively impacted by double digit sales growth of ATV and Victory related PG&A items during the quarter offset somewhat by lower snowmobile PG&A sales.

Total sales increased to $691.1 million for the year to date period ended June 30, 2003, up four percent from $661.8 million for the same period in 2002. The increase in sales is primarily due to higher sales of ATVs offset somewhat by lower snowmobile sales versus the prior year period.

Gross profit for the second quarter 2003 was $77.8 million or 20.6 percent of sales compared to $74.4 million or 20.5 percent of sales for the second quarter 2002. For the year to date period ended June 30, 2003, gross profit increased eight percent to $142.4 million or 20.6 percent of sales compared to $132.2 million or 20.0 percent of sales in the comparable period in 2002. The gross profit margin improvement for the quarter and year to date periods was generated by a number of company initiatives that have been in place for several quarters now, including efficiency gains from the Roseau facility redesign; sales mix change resulting from the new products introduced over the past several quarters, growth in higher margin PG&A sales; savings from various cost reduction initiatives; higher margin in the international business generated from the new dealer direct distribution model in Great Britain, Sweden and Norway and the continued positive impact of currency fluctuations. Higher levels of promotional expenses incurred during the second quarter and year to date 2003 periods offset a large portion of the positive improvements generated from the company initiatives.

Operating expenses in the second quarter of 2003 increased five percent to $50.9 million from $48.4 million in the comparable 2002 period. As a percentage of sales, operating expenses increased to 13.5 percent for the second quarter of 2003 compared to 13.4 percent for the same period in 2002. For the year to date period ended June 30, 2003, operating expenses increased 13 percent to $103.3 million or 15.0 percent of sales compared to $91.9 million or 13.9 percent of sales in the comparable period in 2002. The increase for the quarter and year to date periods was primarily due to the continuation of initiatives taken to accelerate the design and introduction of new products and improve the dealer channel.

Income from financial services increased 50 percent to $4.6 million in the second quarter 2003, up from $3.0 million in the second quarter 2002 primarily due to targeted increases in the retail credit portfolio as the penetration rate of vehicles financed by consumers continues to increase. Promotional programs more closely tied to retail financing have driven the increase in the retail credit portfolio over the past number of quarters. The credit quality of the retail credit portfolio has remained stable with losses averaging about three percent of the portfolio, in line with expectations.

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FORM 10-Q
For the Quarterly Period Ended
June 30, 2003

The effective tax rate for the second quarter 2003 was 32.5 percent and reflects a reduction from 33.5 percent in the second quarter of 2002. The lower rate is the result of continued benefits received from the implementation of tax planning strategies.

Cash Dividends

Polaris paid a $0.31 per share dividend on May 15, 2003 to shareholders of record on May 1, 2003. In July, the Board of Directors declared a $0.31 per share dividend payable on or about August 15, 2003 to shareholders of record on August 1, 2003.

Liquidity and Capital Resources

Net cash used for operating activities totaled $9.9 million for the six months ended June 30, 2003 compared to net cash provided by operating activities of $54.7 million in the first half of 2002. An increase in inventories was the primary reason for the increase in net cash used for operating activities during the first half of 2003. ATV inventory was higher as a result of slower than anticipated ATV unit sales growth in the first quarter of 2003 brought on by the war in Iraq, and unusually low ATV inventory in the second quarter last year due to the timing of the model year changeover in 2002 compared to 2003. In addition, snowmobile inventories at June 30, 2003 were higher than a year ago as the Company delayed and reduced shipments of the 2004 model year snowmobiles until late in the second quarter 2003 to ease the pressure of dealer snowmobile carryover inventory levels. Net cash used for investing activities was $30.0 million during the six months ended June 30, 2003 and primarily represents the purchase of property and equipment. Net cash used for financing activities was $29.5 million during the six months ended June 30, 2003, which primarily represents an increase in borrowings offset by dividends paid to shareholders and the repurchase of common shares. Cash and cash equivalents totaled $11.8 million at June 30, 2003.

The seasonality of production and shipments causes working capital requirements to fluctuate during the year. Polaris has unsecured bank line of credit arrangements with maximum available borrowings of $250.0 million. Interest is charged at rates based on LIBOR or “prime” (effective rate was 1.70 percent at June 30, 2003). As of June 30, 2003, total borrowings under these credit arrangements were $47.0 million and have been classified as long-term in the accompanying consolidated balance sheets. The Company’s debt to total capital ratio was 16 percent at June 30, 2003 compared to seven percent at June 30, 2002.

In the past, Polaris has entered into interest rate swap agreements to manage exposures to fluctuations in interest rates. Currently the Company has one agreement in place. The effect of the agreement is to fix the interest rate at 7.21 percent for $18.0 million of borrowings under the credit line until June 2007.

Year to date 2003, Polaris paid $48.3 million to repurchase and retire 932,000 shares of its common stock compared to 461,000 shares repurchased in the year to date period 2002. The shares repurchased had a positive impact on the year to date June 30, 2003 earnings per share of approximately $0.03 per share. During the second quarter 2003 the Board of Directors authorized a new repurchase plan giving the Company authorization to repurchase up to 2.0 million additional shares of the Company’s common stock on a discretionary basis in the open market. The newest share repurchase authorization, together with approximately 500,000 shares available for repurchase under the previous authorization brings the total authorized shares remaining to be repurchased to approximately 2.5 million shares as of June 30, 2003.

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FORM 10-Q
For the Quarterly Period Ended
June 30, 2003

Management believes that existing cash balances and bank borrowings, cash flow to be generated from operating activities and available borrowing capacity under the line of credit arrangements will be sufficient to fund operations, regular dividends, share repurchases, and capital requirements for the foreseeable future. At this time, management is not aware of any factors that would have a material impact on cash flow.

In 1996, a wholly owned subsidiary of Polaris entered into a partnership agreement with a subsidiary of Transamerica Distribution Finance (TDF) to form Polaris Acceptance. Polaris Acceptance provides floor plan financing to Polaris’ dealers in the United States. Polaris’ subsidiary has a 50 percent equity interest in Polaris Acceptance. The receivable portfolio is recorded on Polaris Acceptance’s books, which is consolidated onto TDF’s books and is funded 85 percent with a loan from an affiliate of TDF and 15 percent by cash investment shared equally between the two partners. Polaris has not guaranteed the outstanding indebtedness of Polaris Acceptance. Substantially all of Polaris’ U.S. sales are financed through Polaris Acceptance whereby Polaris receives payment within a few days of shipment of the product.

Polaris’ investment in Polaris Acceptance is accounted for under the equity method, and is recorded as a component of Investments in finance affiliate and retail credit deposit in the accompanying consolidated balance sheets. The partnership agreement provides that all income and losses of the floor plan portfolio are shared 50 percent by Polaris’ wholly owned subsidiary and 50 percent by TDF’s subsidiary. Polaris’ allocable share of the income of Polaris Acceptance has been included as a component of Income from financial services in the accompanying consolidated statements of income.

In October 2001, a wholly owned subsidiary of Polaris entered into agreements with Household and an affiliate of Household to provide private label retail credit financing through installment and revolving loans to Polaris consumers through Polaris dealers in the United States. The receivable portfolio is owned and managed by Household and its affiliate and is funded by Household and its affiliate except to the extent of a cash deposit by Polaris’ subsidiary equal to seven and one-half percent of the revolving credit portfolio balance. Polaris’ deposit with Household is reflected as a component of Investments in finance affiliate and retail credit deposit in the accompanying consolidated balance sheets. Polaris’ subsidiary participates in 50 percent of the profits or losses of the revolving credit portfolio. Polaris’ allocable share of the income from the retail credit portfolio has been included as a component of Income from financial services in the accompanying consolidated statements of income. Under the terms of the agreements, either party has the right to terminate the agreements if profitability of the portfolio falls below certain minimum levels. Polaris’ financial exposure under this agreement is limited to its deposit plus an aggregate amount of not more than $15.0 million.

As of June 30, 2003, the wholesale portfolio for dealers in the United States was approximately $508.0 million, a one percent decrease from $515.0 million at June 30, 2002. Credit losses in this portfolio have been modest, averaging less than one percent of the portfolio over the eight-year life of the partnership. The Household retail credit portfolio balance as of June 30, 2003, was approximately $430.0 million, up from $192.0 million at June 30, 2002. Credit losses have averaged about three percent of the portfolio balance over the life of this portfolio, in line with Company expectations.

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FORM 10-Q
For the Quarterly Period Ended
June 30, 2003

Inflation and Exchange Rates

Polaris does not believe that inflation has had a material impact on the results of its recent operations. However, the changing relationships of the U.S. dollar to the Japanese yen, Canadian dollar and Euro have had a material impact from time to time.

During calendar 2002, purchases totaling 10 percent of Polaris’ cost of sales were from yen-denominated suppliers. Polaris’ cost of sales in the second quarter ended June 30, 2003 was not materially impacted by the Japanese yen-U.S. dollar exchange rate fluctuation when compared to the same period in 2002. In view of the foreign exchange hedging contracts currently in place, Polaris anticipates that the Japanese yen-U.S. dollar exchange rate will not have a material impact on cost of sales during the remainder of 2003 when compared to the same period in 2002.

Polaris operates in Canada through a wholly owned subsidiary. The strengthening of the Canadian dollar in relationship to the U.S. dollar has resulted in higher gross margin levels on a comparable basis in the second quarter 2003 when compared to the same period in 2002. In view of the foreign exchange hedging contracts currently in place, Polaris anticipates that the Canadian dollar-U.S. dollar exchange rate will continue to have a positive impact on net income during the remainder of 2003 when compared to the same periods in 2002.

Polaris operates in various countries in Europe through wholly owned subsidiaries and sells to distributors in other countries directly from its U.S. operations in Euro denominated transactions. The weakening of the U.S. dollar in relationship to the Euro has resulted in higher gross margin levels on a comparable basis in the second quarter 2003 when compared to the same period in 2002. In view of the foreign exchange hedging contracts currently in place, Polaris anticipates that the Euro-U.S. dollar exchange rate will continue to have a positive impact on net income during the remainder of 2003 when compared to the same periods in 2002.

During the first quarter ended March 31, 2003, the Company completed a review of the functional currency for each of its foreign entities. It was determined the economic facts and circumstances had changed such that the functional currencies in the Canadian, Australian and New Zealand entities should become their local currencies. Previously the U.S. dollar had been their functional currency. Effective January 1, 2003 the functional currency in the Canadian, Australian and New Zealand entities were changed to the Canadian dollar, Australian dollar, and the New Zealand dollar, respectively. The initial implementation of this change in functional currency had the effect of reducing the U.S. dollar value of the combined net assets of Canada, Australia and New Zealand by $869,000 and increasing the accumulated other comprehensive loss by $869,000 during the first quarter of 2003. The impact of the change in functional currencies was to record $765,000 of income for the second quarter ended June 30, 2003 and $1,879,000 of income for the year to date period ended June 30, 2003 as a component of accumulated other comprehensive loss in the shareholders’ equity section of the consolidated balance sheet that would have previously been recorded in the statement of income. Polaris entities in France, Great Britain, Sweden and Norway had been using their local currency as their functional currency and will continue to do so.

The assets and liabilities in all Polaris foreign entities are translated at the foreign exchange rate in effect at the balance sheet date. Translation gains and losses are reflected as a component of other comprehensive income (loss) in the equity section of the accompanying consolidated balance sheets.

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FORM 10-Q
For the Quarterly Period Ended
June 30, 2003

In the past, Polaris has been a party to, and in the future may enter into, foreign exchange hedging contracts for each of the Japanese yen, Euro, Taiwan dollar and Canadian dollar to minimize the impact of exchange rate fluctuations within each year. At June 30, 2003, Polaris had open Japanese yen, Canadian dollar and Euro foreign exchange hedging contracts with notional amounts totaling $42.1 million, $97.1 million and $1.9 million U.S. dollars, respectively, which mature at various times throughout the remainder of 2003 and the first quarter of 2004.

Significant Accounting Policies

There have been no material changes in the Company’s significant accounting policies as disclosed in its Annual Report to Shareholders incorporated by reference in the Company’s Form 10-K for the year ended December 31, 2002.

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FORM 10-Q
For the Quarterly Period Ended
June 30, 2003

Item 3 — Quantitative and Qualitative Disclosures About Market Risk

Refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2002 for a complete discussion on the Company’s market risk. There have been no material changes to the market risk information included in the Company’s 2002 Annual Report on Form 10-K.

Note Regarding Forward Looking Statements

Certain matters discussed in this report are “forward-looking statements” intended to qualify for the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These “forward-looking statements” can generally be identified as such because the context of the statement will include words such as the Company or management “believes,” “anticipates,” “expects,” “estimates” or words of similar import. Similarly, statements that describe the Company’s future plans, objectives or goals are also forward-looking. Shareholders, potential investors and others are cautioned that all forward-looking statements involve risks and uncertainties that could cause results in future periods to differ materially from those anticipated by some of the statements made in this report. In addition to the factors discussed above, among the other factors that could cause actual results to differ materially are the following: product offerings, promotional activities and pricing strategies by competitors; future conduct of litigation processes; warranty expenses; foreign currency exchange rate fluctuations; environmental and product safety regulatory activity; effects of weather; uninsured product liability claims; and overall economic conditions, including inflation and consumer confidence and spending.

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FORM 10-Q
For the Quarterly Period Ended
June 30, 2003

Item 4 — Controls and Procedures

The Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s President and Chief Executive Officer and its Vice President-Finance and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Exchange Act Rule 13a-15) as of the end of the period covered by this report. Based upon that evaluation, the Company’s President and Chief Executive Officer along with the Company’s Vice President-Finance and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company’s periodic SEC filings.

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FORM 10-Q
For the Quarterly Period Ended
June 30, 2003

PART II. OTHER INFORMATION

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FORM 10-Q
For the Quarterly Period Ended
June 30, 2003

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FORM 10-Q
For the Quarterly Period Ended
June 30, 2003

SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

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