FORM 10-QFor the Quarterly Period EndedJune 30, 2001
UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549FORM 10-Q
For the quarterly period ended _________________JUNE 30, 2001_________________
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 ___
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 3, 2001, 23,184,017 shares of Common Stock of the issuer were outstanding.
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TABLE OF CONTENTS
POLARIS INDUSTRIES INC.FORM 10-QFor Quarter Period Ended June 30, 2001
Table of Contents
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POLARIS INDUSTRIES INC.CONSOLIDATED BALANCE SHEETS(In Thousands)
See Notes to Consolidated Financial Statements
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POLARIS INDUSTRIES INC.CONSOLIDATED STATEMENTS OF OPERATIONS(In Thousands, Except Per Share Data)UNAUDITED
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POLARIS INDUSTRIES INC.CONSOLIDATED STATEMENTS OF CASH FLOWS(In Thousands)UNAUDITED
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POLARIS INDUSTRIES INC.CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITYAND COMPREHENSIVE INCOME(In Thousands)UNAUDITED
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POLARIS INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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Item 2
MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL 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, 2001 and 2000. 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 $362.5 million in the second quarter of 2001, representing a five percent increase from $344.7 million in sales for the same period in 2000.
Sales of ATVs were $194.2 million for the second quarter of 2001, 6 percent lower than $206.4 million for the comparable period in 2000. The decrease is related to the continued higher than usual dealer and consumer promotional activity of several of our competitors, which has adversely impacted Polaris’ sales volumes during 2001. The average per unit sales price for the second quarter 2001 was slightly lower compared to last year’s second quarter, primarily due to a change in the mix of products, as more youth ATVs were sold in the 2001 period.
Snowmobile sales of $97.6 million for the second quarter of 2001 were 30 percent higher than the $75.3 million for the comparable period in 2000. The increase can be attributed to more normal snowfall this past season, the excitement of a new custom order program, Snow Check Select™ and the introduction of several new models which has boosted interest in the up-coming 2002 model year snowmobiles. As a result, production and shipments of snowmobiles have occurred somewhat earlier this year than in the previous year to meet the increased demand. The average per unit sales price has increased slightly from the prior year due to higher priced features being requested on custom-ordered snowmobiles this year.
Sales of PWC were $10.0 million for the second quarter of 2001, a decrease of 46 percent compared to second quarter 2000 sales of $18.5 million. The decrease is primarily related to many dealers becoming more cautious with orders as the economy softens as well as the timing of shipments between the first and second quarters of 2001 versus last year. The average per unit sales price decreased from the second quarter 2000 primarily as a result of more promotions being implemented during the 2001 period.
Sales of Victory motorcycles were $10.3 million for the second quarter 2001, a significant increase from $3.0 million for the comparable period in 2000. The increase relates to improving consumer acceptance of the product and an unusually low sales comparison in the second quarter of 2000. The average per unit sales price for the second quarter 2001 increased considerably due to a product mix change as sales increased for the new Victory Deluxe model, which has a higher selling price as well as lower promotional costs during the second quarter 2001 compared to the prior year.
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Parts, garments and accessories sales were $50.4 million for the second quarter 2001, an increase of 21 percent from $41.5 million for the second quarter of 2000. The increase occurred across all product lines and sales are benefiting from a new dedicated sales force, as well as new product offerings that have been introduced across each product line.
Total sales increased to $656.5 million for the year-to-date period ended June 30, 2001, up five percent from $623.8 million for the same period in 2000. The increase in sales is primarily due to higher sales of snowmobiles and parts, garments, and accessories, offset somewhat by lower ATV sales versus the prior year comparable period.
Gross profit for the second quarter 2001 decreased one percent to $74.3 million or 20.5 percent of sales compared $74.9 million or 21.7 percent of sales for the second quarter of 2000. The decrease in the gross margin percentage for the second quarter 2001 is primarily the result of incurring $4.1 million in incremental promotional costs across all business lines to react to a more competitive market place environment. In addition, certain manufacturing inefficiencies were incurred in the second quarter 2001 as a result of production adjustments necessary to compensate for lower retail demand for Polaris ATVs.
Gross profit of $140.1 million for the year to date period ended June 30, 2001 increased three percent from $136.4 million in 2000. This increase is primarily the result of higher sales volume during the current year period. The gross margin percentage in the 2001 period decreased 0.6 percent to 21.3 percent compared to last year’s six month gross profit margin of 21.9 percent. The decrease is primarily attributable to higher promotional costs and certain manufacturing inefficiencies incurred in the 2001 period compared to last year.
Operating expenses in the second quarter of 2001 decreased two percent to $50.5 million from the comparable 2000 period, and as a percentage of sales decreased to 13.9 percent for the second quarter of 2001 compared to 14.9 percent for the same period in 2000. Operating expenses for the year-to-date period ended June 30, 2001 were $101.0 million, an increase of four percent compared to $97.6 million in the prior year-to-date period. However, as a percent of sales, operating expenses in the year-to-date period ended June 30, 2001 decreased to 15.4 percent compared to 15.6 percent for the same period in 2000. The decrease in operating expense as a percentage of sales in the 2001 periods is primarily the result of a concerted effort by the Company to reduce operating costs as the overall economy began to soften. These expense reductions were offset somewhat by higher ATV advertising and marketing costs as well as continued increased costs related to growth initiatives in PG&A and dealer development efforts.
Interest expense increased 17 percent to $2.5 million in the second quarter 2001 compared to $2.2 million in the second quarter 2000. The increase relates primarily to higher seasonal working capital needs during 2001 for earlier snowmobile production and higher factory ATV inventory levels versus last year.
Equity in income/loss of affiliates decreased ten percent to $3.0 million income in the second quarter 2001 compared to $3.3 million income in the second quarter 2000 as a result of lower dealer inventories being financed through Polaris Acceptance as well as lower interest rates.
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Other non-operating income increased to $1.8 million in the second quarter 2001 compared to $0.5 million in the second quarter 2000. The higher income in the second quarter 2001 was due to the impact of currency fluctuations in the translation of the balance sheets of the foreign subsidiaries, particularly the Canadian subsidiary.
The income tax provision rate for the second quarter 2001 was 34.5 percent, a reduction from 35.5 percent in the second quarter last year. The revised rate is a result of tax planning activities and is the anticipated income tax provision rate for the full year 2001.
Cash Dividends
The Polaris Board of Directors declared a regular cash dividend of $0.25 per share payable on May 15, 2001 to shareholders of record on May 1, 2001. In July 2001, the Board of Directors declared a $0.25 per share dividend payable on or about August 15, 2001, to shareholders of record on August 1 , 2001.
Liquidity and Capital Resources
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 million. Interest is charged at rates based on LIBOR or “prime” (4.50 percent at June 30, 2001). As of June 30, 2001, total borrowings under these credit arrangements were $95.1 million and have been classified as long-term in the accompanying consolidated balance sheets.
In the past, Polaris has entered into interest rate swap agreements to manage exposures to fluctuations in interest rates. The effect of one of the agreements is to fix the interest rate at 7.21 percent for $18 million of borrowings under the credit line until June 2007. On May 21, 2001 the Company terminated a $20 million interest rate swap agreement at an expense of $0.4 million.
During the first six months of 2001, Polaris paid $22.1 million to repurchase and retire 489,000 shares of its common stock with cash on hand and borrowings under its line of credit arrangements. As of June 30, 2001, Polaris has approximately 1.2 million remaining shares available to repurchase under its Board of Directors’ authorization.
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 remainder of 2001. At this time, management is not aware of any factors that would have a materially adverse impact in cash flow beyond 2001.
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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 and Canadian dollar have had a material impact from time to time.
During calendar year 200, purchases totaling 16 percent of Polaris’ cost of sales were from yen-denominated suppliers. Polaris’ cost of sales in the second quarter ended June 30, 2001 was positively impacted by the Japanese yen-U.S. dollar exchange rate fluctuation when compared to the same period in 2000. In view of the foreign exchange hedging contracts currently in place, Polaris anticipates that the Japanese yen-U.S. dollar exchange rate will continue to have a positive impact on cost of sales during the remaining periods of 2001 when compared to the same periods in 2000.
Polaris operates in Canada through a wholly owned subsidiary. The weakening of the Canadian dollar in relationship to the U.S. dollar has resulted in lower gross margin levels on a comparable basis in the second quarter and year-to-date periods in 2001 when compared to the same periods in 2000. 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 negative impact on cost of sales during the remaining periods of 2001 when compared to the same periods in 2000.
Polaris’ Canadian and Australian subsidiaries use the United States dollar as their functional currency. Polaris’ French subsidiary uses the French Franc as its functional currency. Assets and liabilities are translated at the foreign exchange rates in effect at the balance sheet date, while revenues and expenses are translated at the average foreign exchange rate in effect.
Translation and exchange gains and losses are reflected in the results of operations for the Canadian and Australian subsidiaries and are reflected as Other Comprehensive Income in the Equity section of the balance sheet for the French subsidiary.
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, 2001, Polaris had open Japanese yen and Canadian dollar foreign exchange hedging contracts with notional amounts totaling $82.7 million U.S. dollars and that mature throughout 2001 and the first quarter 2002.
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Item 3
QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK
Refer to the Company’s annual report on Form 10-K for the year ended December 31, 2000 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 2000 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 uncertainty that could cause results to differ materially from those anticipated by some of the statements made herein. In addition to the factors discussed above, among the other factors that could cause actual results to differ materially are the following: product offerings and pricing strategies by competitors; future conduct of litigation or audit 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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Polaris Industries Inc.
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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