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MarketScreener Homepage  >  Equities  >  Nyse  >  Polaris Inc.    PII

POLARIS INC.

(PII)
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POLARIS : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-K)

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02/14/2020 | 06:07am EDT
The following discussion pertains to the results of operations and financial
position of the Company and should be read in conjunction with the Consolidated
Financial Statements and the Notes thereto included elsewhere in this report.
This section of this Form 10-K generally discusses 2019 and 2018 items and
year-to-year comparisons between 2019 and 2018. Discussions of 2017 items and
year-to-year comparisons between 2018 and 2017 that are not included in this
Form 10-K can be found in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in Part II, Item 7 of Polaris' Annual
Report on Form 10-K for the fiscal year ended December 31, 2018.

Overview

2019 was a record year, with sales of $6.8 billion, a 12 percent increase from
2018, primarily due to strong Off-Road Vehicles (ORV) sales and a full year of
results related to Boat Holdings, LLC ("Boat Holdings"), which was acquired on
July 2, 2018. Boat Holdings added $621.4 million and $279.7 million of sales in
2019 and 2018, respectively. Our annual sales to North American customers
increased 13 percent and our annual sales to customers outside of North America
increased four percent in 2019.
Our unit retail sales of ORVs, snowmobiles, and motorcycles to consumers in
North America decreased low single-digits percent for the full year, driven by
the increasingly competitive ORV and motorcycle markets. Polaris North American
dealer inventory was up approximately five percent, driven by higher model year
2020 ORV shipments, as well as higher motorcycle shipments.
Full year net income attributable to Polaris Inc. of $324.0 million was a three
percent decrease from 2018, with diluted earnings per share decreasing one
percent to $5.20 per share. The decrease was driven by higher tariff costs,
negative foreign currency impacts, and investments in strategic projects.
Additionally, the Company recorded a $13 million gain on the sale of the
Company's investment in Brammo Inc. in the 2018 comparative period. The decrease
was partially offset by increased volume, higher average selling prices, and a
full year of Boats operations.
On January 31, 2020, we announced that our Board of Directors approved a two
percent increase in the regular quarterly cash dividend to $0.62 per share for
the first quarter of 2020, representing the 25th consecutive year of increased
dividends to shareholders effective with the 2020 first quarter dividend.


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Consolidated Results of Operations
The consolidated results of operations were as follows:
                                                      For the Years Ended December 31,
($ in millions except per share                                  Change                          Change
data)                               2019          2018        2019 vs. 2018       2017        2018 vs. 2017
Sales                            $ 6,782.5$ 6,078.5             12  %     $ 5,428.5             12  %
Cost of sales                    $ 5,133.7$ 4,577.3             12  %     $ 4,103.8             12  %
Gross profit                     $ 1,648.8$ 1,501.2             10  %     $ 1,324.7             13  %
Percentage of sales                 24.3%         24.7%       -39 basis           24.4%       +29 basis
                                                                 points                          points

Operating expenses:
Selling and marketing            $   559.1$   491.8             14  %     $   471.8              4  %
Research and development             292.9         259.7             13  %         238.3              9  %
General and administrative           393.9         349.8             13  %         331.2              6  %
Total operating expenses         $ 1,246.0$ 1,101.2             13  %     $ 1,041.3              6  %
Percentage of sales                   18.4 %        18.1 %    +25 basis             19.2 %   -107 basis
                                                                 points                          points
Income from financial services   $    80.9$    87.4             (7 )%     $    76.3             15  %
Operating income                 $   483.7$   487.4             (1 )%     $   359.7             36  %

Non-operating expense:
Interest expense                 $    77.6$    57.0             36  %     $    32.2             77  %
Equity in loss of other          $     5.1$    29.3            (83 )%     $     6.8            331  %

affiliates

Other (income) expense, net $ (6.9 )$ (28.1 ) (75 )%

    $     2.0             NM
Income before income taxes       $   407.8$   429.2             (5 )%     $   318.8             35  %
Provision for income taxes       $    83.9$    94.0            (11 )%     $   146.3            (36 )%
Effective income tax rate           20.6%         21.9%      -132 basis           45.9%              NM
                                                                 points

Net income                       $   323.9$   335.3             (3 )%     $   172.5             94  %
Net loss attributable to               0.1             -             NM                -             NM
noncontrolling interest
Net income attributable to       $   324.0$   335.3             (3 )%     $   172.5             94  %

Polaris Inc.


Diluted net income per share     $    5.20$    5.24             (1 )%     $    2.69             95  %
attributable to Polaris Inc.
shareholders
Weighted average diluted shares       62.3          63.9             (3 )%          64.2              0  %
outstanding
NM = not meaningful


Sales:
Sales were $6,782.5 million in 2019, a 12 percent increase from $6,078.5 million
in 2018. Boat Holdings added $621.3 million and $279.7 million of sales in 2019
and 2018, respectively. The components of the consolidated sales change were as
follows:
                                                        Percent change in 

total Company sales compared to the

                                                                              prior year
                                                               2019                              2018
Volume                                                               1  %                             4 %
Product mix and price                                                6                                3
Acquisitions                                                         6                                5
Currency                                                            (1 )                              -
                                                                    12  %                            12 %



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The volume increase in 2019 was primarily the result of increased side-by-side,
snowmobile, and Indian Motorcycle shipments. Product mix and price contributed a
six percent increase in 2019, primarily due to higher average selling prices for
ORVs, partially offset by increased promotions. Acquisitions contributed a six
percent increase for 2019, primarily due to the Boat Holdings acquisition in
July 2018.
Sales by geographic region were as follows:
                                                               For the Years Ended December 31,
                                                                                     Percent                                   Percent
                                                                                     Change                                    Change
                                       Percent of                    Percent of     2019 vs.                   Percent of     2018 vs.
($ in millions)            2019        Total Sales       2018       Total Sales       2018         2017       Total Sales       2017
United States           $ 5,551.7         82 %        $ 4,883.8         80 %           14 %     $ 4,327.6         80 %           13 %
Canada                      394.9          6 %            390.2          7 %            1 %         375.6          7 %            4 %
Other foreign countries     835.9         12 %            804.5         13 %            4 %         725.3         13 %           11 %
Total sales             $ 6,782.5        100 %        $ 6,078.5        100 %           12 %     $ 5,428.5        100 %           12 %


Sales in the United States for 2019 increased 14 percent compared to 2018,
primarily resulting from the acquisition of Boat Holdings in July 2018 and
increased ORV shipments. The United States represented 82 percent of total
company sales in 2019.
Canadian sales for 2019 increased one percent compared to 2018, driven by
increased snowmobile shipments. Currency rate movement had an unfavorable two
percent impact on sales for 2019 compared to 2018. Sales in Canada represented
six percent of total company sales in 2019.
Sales in other foreign countries, primarily in Europe, increased four percent in
2019 compared to 2018. This increase was primarily driven by higher sales of
Indian motorcycles. Currency rate movements had an unfavorable five percent
impact on sales for 2019 compared to 2018. Sales in other foreign countries
represented 12 percent of total company sales in 2019.
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                   Percent                                 Percent
                              of Total                  of Total                                of Total
                               Cost of                   Cost of    Change 2019                  Cost of    Change 2018
($ in millions)    2019        Sales         2018        Sales       vs. 2018        2017        Sales        vs. 2017
Purchased
materials and
services        $ 4,418.5          86 %   $ 3,978.1          87 %          11 %   $ 3,526.0          86 %          13  %
Labor and
benefits            433.3           9 %       358.5           8 %          21 %       292.6           7 %          23  %
Depreciation
and
amortization        159.0           3 %       135.7           3 %          17 %       139.5           3 %          (3 )%
Warranty costs      122.9           2 %       105.0           2 %          17 %       145.7           4 %         (28 )%
Total cost of
sales           $ 5,133.7         100 %   $ 4,577.3         100 %          12 %   $ 4,103.8         100 %          12  %
Percentage of        75.7 %                    75.3 %               +39 basis          75.6 %               -29 basis
sales                                                                  points                                  points


For 2019, cost of sales increased 12 percent to $5,133.7 million compared to
$4,577.3 million in 2018. The increase in cost of sales in 2019 is primarily
attributed to the acquisition of Boat Holdings which closed on July 2, 2018, as
well as increased purchased materials and services related to higher sales
volumes and tariff costs.
Gross profit:
Consolidated gross profit, as a percentage of sales, decreased in 2019 due to
higher tariff costs, the negative impact of foreign currency rates, and the
addition of Boats, which has lower gross profit margins, partially offset by
increased productivity and higher average selling prices.

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Operating expenses:
Operating expenses for 2019, in absolute dollars, increased primarily due to the
Boat Holdings acquisition, which closed on July 2, 2018, ongoing investments in
research and development, and investments in strategic projects. Operating
expenses, as a percentage of sales, increased primarily due to ongoing
investments in research and development and investments in strategic projects,
partially offset by Boat Holdings, which has a lower operating expense to sales
ratio.
Income from financial services:
The following table reflects our income from financial services:
                                                           For the Years Ended December 31,
                                                                  Change                           Change
($ in millions)                         2019        2018       2019 vs. 2018      2017         2018 vs. 2017
Income from Polaris Acceptance joint  $  32.5$  30.4              7  %     $  27.3                  11  %

venture

Income from retail credit agreements     45.6        46.3             (2 )%        37.5                  23  %
Income from other financial services      2.8        10.7            (74 )%        11.5                  (7 )%

activities

Total income from financial services  $  80.9$  87.4             (7 )%     $  76.3                  15  %
Percentage of sales                       1.2 %       1.4 %    -25 basis    

1.4 % +3 basis points

                                                                  points


Income from financial services decreased 7 percent to $80.9 million in 2019
compared to $87.4 million in 2018. The decrease in 2019 was primarily due to
lower retail sales and lower penetration rates, partially offset by higher
wholesale credit income due to higher dealer inventory levels.
Interest expense:
The increase in 2019 compared to 2018, was primarily due to increased debt
levels to finance the Boat Holdings acquisition.
Equity in loss of other affiliates:
As a result of the decision by the Eicher-Polaris Private Limited (EPPL) Board
of Directors to shut down the operations of the EPPL joint venture, we impaired
our investment in EPPL and incurred additional wind-down related costs in 2018.
Such costs did not occur in 2019.
Other (income) expense, net:
The change in Other (income) expense, net primarily relates to foreign currency
exchange rate movements and the corresponding effects on foreign currency
transactions, currency hedging positions and balance sheet positions related to
our foreign subsidiaries from period to period. 2018 includes a $13.5 million
gain on the Company's investment in Brammo Inc.
Provision for income taxes:
The income tax rate for 2019 was 20.6% as compared with 21.9% in 2018. The lower
income tax rate for 2019, compared with 2018 was primarily due to additional
domestic manufacturing benefits realized from the filing of amended returns and
favorable adjustments in 2019 for prior year tax filings related to
international tax provisions, as well as, favorable adjustments related to state
attributes, partially offset by a decrease in excess tax benefits related to
share based compensation as compared to 2018.
Weighted average shares outstanding:
The change in the weighted average diluted shares outstanding from 2018 to 2019
was primarily due to share repurchases under our stock repurchase program at the
end of 2018.

Segment Results of Operations
The summary that follows provides a discussion of the results of operations of
each of our five reportable segments. Each of these segments is comprised of
various product offerings that serve multiple end markets. We evaluate
performance based on sales and gross profit.

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Until July 2018, the Company reported under four segments, however, as a result
of the Boat Holdings acquisition, the Company established a fifth reporting
segment, Boats, which includes the results of Boat Holdings. The comparative
2018 and 2017 results were not required to be reclassified as the new reporting
segment structure did not impact historical segments.
Our sales and gross profit by reporting segment, which includes the respective
PG&A, were as follows:
                                                                  For the 

Years Ended December 31,

                                                                                       Percent                                      Percent
                                                                                        Change                                       Change
                                        Percent of                       Percent       2019 vs.                       Percent       2018 vs.
($ in millions)             2019          Sales           2018          of Sales         2018          2017          of Sales         2017
Sales
ORV/Snowmobiles         $   4,209.1         62 %      $   3,919.4           64 %          7  %     $   3,570.8           66 %         10  %
Motorcycles                   584.1          9 %            545.6            9 %          7  %           576.0           11 %         (5 )%
Global Adjacent Markets       461.3          7 %            444.6            7 %          4  %           396.8            7 %         12  %
Aftermarket                   906.7         13 %            889.2           15 %          2  %           884.9           16 %          0  %
Boats                         621.3          9 %            279.7            5 %         NM                0.0            - %         NM
Total sales             $   6,782.5        100 %      $   6,078.5          100 %         12  %     $   5,428.5          100 %         12  %

                                                                  For the Years Ended December 31,
                                                                                       Percent                                      Percent
                                                                                        Change                                       Change
                                        Percent of                     Percent of      2019 vs.                     Percent of      2018 vs.
($ in millions)             2019           Sales          2018            Sales          2018          2017            Sales          2017
Gross profit
ORV/Snowmobiles         $   1,204.3       28.6 %      $   1,113.9         28.4 %          8  %     $   1,054.6         29.5 %          6  %
Motorcycles                    44.1        7.5 %             63.0         11.6 %        (30 )%            16.7          2.9 %        277  %
Global Adjacent Markets       129.9       28.2 %            116.6         26.2 %         11  %            94.9         23.9 %         23  %
Aftermarket                   222.7       24.6 %            234.4         26.4 %         (5 )%           225.5         25.5 %          4  %
Boats                         124.6       20.1 %             46.3         16.5 %         NM                  -            - %         NM
Corporate                     (76.8 )                       (73.0 )                       5  %           (67.0 )                       9  %
Total gross profit      $   1,648.8$   1,501.2                        10  %     $   1,324.7                        13  %

NM = not meaningful


ORV/Snowmobiles:
ORV sales, inclusive of PG&A, of $3,825.5 million in 2019, which includes ATV,
Polaris GENERAL, RANGER, and RZR vehicles, increased seven percent compared to
2018. This increase was driven by RZR and RANGER shipments. Polaris' North
American ORV unit retail sales to consumers decreased low-single digits percent
for 2019 compared to 2018, with ATV unit retail sales down mid-single digits
percent and side-by-side vehicles unit retail sales increasing low-single digits
percent over the prior year, as consumers continue to shift from ATVs to
side-by-sides. The Company estimates that North American industry ORV retail
sales were up mid single-digits percent over the prior year. North American
dealer inventories of ORVs increased high-single digits percent from 2018. ORV
sales outside of North America was approximately flat in 2019 compared to 2018.
For 2019, the average ORV per unit sales price increased approximately 10
percent compared to 2018's per unit sales price.
Snowmobiles sales, inclusive of PG&A sales, increased 12 percent to $383.5
million for 2019 compared to 2018. Retail sales to consumers for the 2019-2020
season-to-date period through December 31, 2019, increased mid-single digits
percent. Sales of snowmobiles to customers outside of North America, principally
within the Scandinavian region and Russia, decreased approximately 19 percent in
2019 as compared to 2018. North American dealer inventories of snowmobiles
decreased mid-single digits percent from 2018. The average unit sales price in
2019 increased approximately one percent over 2018's per unit sales price.
For the ORV/Snowmobiles segment, gross profit, as a percentage of sales,
increased from 2018 to 2019, primarily due to higher average selling prices
partially offset by higher tariff costs.

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Motorcycles:

Sales of Motorcycles, inclusive of PG&A sales, increased seven percent to $584.1
million for 2019 compared to 2018. The increase in 2019 sales was primarily due
to increased sales of Indian motorcycles of 14 percent, partially offset by a
decrease in sales of Slingshot of approximately 22 percent. The Company
estimates North American industry retail sales, 900cc and above cruiser,
touring, and standard market segments (including Slingshot), decreased
mid-single digits percent in 2019 compared to 2018. Over the same period,
Polaris North American unit retail sales to consumers decreased approximately 10
percent. North American Polaris motorcycle dealer inventory increased mid-teens
percent in 2019 versus 2018 levels. Sales of motorcycles to customers outside of
North America increased approximately 24 percent in 2019 compared to 2018, due
primarily to an increase in Indian motorcycle shipments. The average per unit
sales price for the Motorcycles segment in 2019 was approximately flat compared
to 2018's per unit sales price.
Gross profit, as a percentage of sales, decreased from 2018 to 2019, primarily
due to higher tariffs, higher warranty expense, and the negative impact of
foreign currency rates.
Global Adjacent Markets:
Global Adjacent Markets sales, inclusive of PG&A sales, increased four percent
to $461.3 million for 2019 compared to 2018. The increase in sales was primarily
due to growth in Polaris Adventures as well as the government and defense
business. Sales to customers outside of North America increased approximately
five percent in 2019 compared to 2018 primarily due to higher sales in the
commercial, government and defense business.
Gross profit, as a percentage of sales, increased from 2018 to 2019, primarily
due to improved sales mix, increased productivity and lower warranty expense.
Aftermarket:
Aftermarket sales, which includes Transamerican Auto Parts (TAP), along with our
other aftermarket brands of Klim, Kolpin, ProArmor, Trail Tech and 509, of
$906.7 million for 2019 were up two percent compared to 2018, primarily due to
growth in the other aftermarket brands, which increased 14%. TAP's sales were
approximately flat.
Gross profit, as a percentage of sales, decreased from 2018 to 2019, primarily
due to tariffs and sales mix.
Boats:
Boat sales, which primarily relate to the Boat Holdings acquisition which closed
on July 2, 2018, were $621.3 million in 2019 compared to $279.7 million in 2018.
We estimate that U.S. pontoon industry unit sales decreased low single-digits
percent during 2019. Polaris U.S. pontoon unit retail sales to consumers
outperformed the market, and is estimated to be down slightly compared to 2018.
Gross profit, as a percentage of sales, increased from 2018 to 2019, primarily
due to purchase accounting adjustments in 2018, as well as increased pricing and
improved productivity.

Liquidity and Capital Resources
Our primary source of funds has been cash provided by operating and financing
activities. Our primary uses of funds have been for acquisitions, repurchase and
retirement of common stock, capital investment, new product development and cash
dividends to shareholders. The seasonality of production and shipments cause
working capital requirements to fluctuate during the year.
We believe that existing cash balances, cash flow to be generated from operating
activities and available borrowing capacity under the line of credit arrangement
will be sufficient to fund operations, new product development, cash dividends,
share repurchases, acquisitions and capital requirements for the foreseeable
future. At this time, we are not aware of any factors that would have a material
adverse impact on cash flow.

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The following table summarizes the cash flows from operating, investing and financing activities for the years ended December 31, 2019, 2018 and 2017:

                                                      For the Years Ended December 31,
                                                                Change                         Change
($ in millions)                      2019         2018       2019 vs. 2018       2017       2018 vs. 2017
Total cash provided by (used
for):
Operating activities              $  655.0$  477.1$       177.9$  585.4$      (108.3 )
Investing activities                (239.3 )     (959.5 )           720.2       (151.1 )          (808.4 )
Financing activities                (411.8 )      523.4            (935.2 )     (427.7 )           951.1
Impact of currency exchange rates
on cash balances                      (0.7 )       (9.5 )             8.8          9.8             (19.3 )
Increase (decrease) in cash and
cash equivalents                  $    3.2$   31.5$       (28.3 )$   16.4$        15.1


Operating Activities:
Net cash provided by operating activities totaled $655.0 million and $477.1
million in 2019 and 2018, respectively. The $177.9 million increase is primarily
the result of a decrease in net working capital, partially offset by lower net
income. The primary driver of lower net working capital is the result of timing
of payments for accounts payable and higher accrued expenses, including sales
promotions and incentives and dealer holdback. Higher accrued expenses is driven
largely by higher dealer inventory.
Investing Activities:
Net cash used for investing activities was $239.3 million in 2019 compared to
$959.5 million in 2018. The primary uses of cash in 2019 were for the purchase
of property and equipment and tooling for continued capacity and capability at
our manufacturing and distribution facilities and for product development. The
primary use of cash in the prior year comparable period was for the acquisition
of Boat Holdings.
Financing Activities:
Net cash used for financing activities was $411.8 million in 2019 compared to
net cash provided by financing activities of $523.4 million in 2018. We paid
cash dividends of $149.1 million and $149.0 million in 2019 and 2018,
respectively. Total common stock repurchased in 2019 and 2018 totaled $8.4
million and $348.7 million, respectively. In 2019, we had net repayments under
debt arrangements, finance lease obligations and notes payable of $270.0
million, compared to net borrowings of $973.7 million in 2018 to fund the Boat
Holdings acquisition. Proceeds from the issuance of stock under employee plans
were $15.7 million and $47.4 million in 2019 and 2018, respectively.
Financing Arrangements:
We are party to an unsecured $700.0 million variable interest rate revolving
loan facility that expires in July 2023, under which we have unsecured
borrowings. At December 31, 2019, there were borrowings of $75.2 million
outstanding under this arrangement. We are also party to a $1,180.0 million term
loan facility, of which $1,000.0 million is outstanding as of December 31, 2019.
Interest is charged at rates based on LIBOR or "prime."
In December 2010, the Company entered into a Master Note Purchase Agreement to
issue $25.0 million of unsecured senior notes due May 2018 and $75.0 million of
unsecured senior notes due May 2021 (collectively, the "Senior Notes"). The
Senior Notes were issued in May 2011. In December 2013, the Company entered into
a First Supplement to Master Note Purchase Agreement, under which the Company
issued $100.0 million of unsecured senior notes due December 2020. In July 2018,
the Company entered into a Master Note Purchase Agreement to issue $350.0
million of unsecured senior notes due July 2028. At December 31, 2019 and 2018,
outstanding borrowings under the amended Master Note Purchase Agreement totaled
$525.0 million and $525.0 million, respectively.
As a component of the Boat Holdings merger agreement, Polaris has committed to
make a series of deferred payments to the former owners following the closing
date of of the merger through July 2030. The original discounted payable was for
$76.7 million, of which $71.7 million is outstanding as of December 31, 2019.
The outstanding balance is included in long-term debt and current portion of
long-term debt in the consolidated balance sheets.
At December 31, 2019 and 2018, we were in compliance with all debt covenants.
Our debt to total capital ratio was 60 percent and 69 percent at December 31,
2019 and 2018, respectively.

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Contractual Obligations:
The following table summarizes our significant future contractual obligations at
December 31, 2019:

(In millions):                         Total         <1 Year       1-3 Years       4-5 Years       >5 Years
Senior notes                         $   525.0$   100.0$      75.0               -     $    350.0
Borrowings under our credit facility      75.2             -               -     $      75.2              -
Term loan facility                     1,000.0          59.0           118.0           823.0              -
Notes payable and other                   81.3           6.4            13.6            14.5           46.8
Interest expense                         192.8          53.0            94.2            45.6              -
Finance leases                            20.4           2.1             4.2             4.2            9.9
Operating leases                         121.3          38.1            47.3            22.9           13.0
Total                                $ 2,016.0$   258.6$     352.3$     985.4$    419.7


In the table above, we assumed our December 31, 2019, outstanding borrowings
under the Senior Notes will be paid at their respective due dates. Interest
expense has not been estimated beyond year five. Additionally, at December 31,
2019, we had letters of credit outstanding of $21.6 million related to purchase
obligations for raw materials. Not included in the above table are unrecognized
tax benefits of $28.1 million, including interest, as the timing of payment is
uncertain.
We administer and provide extended service contracts to consumers and certain
insurance contracts to dealers and consumers through various third-party
suppliers. We finance our self-insured risks related to extended service
contracts, but do not retain any insurance or financial risk under any of the
other arrangements.
The balance of restricted cash as of December 31, 2019, 2018, and 2017 was $39.2
million, $32.0 million, and $23.3 million, respectively. Restricted cash
represents cash equivalents held in trust, as well as amounts held on deposit
with regulatory agencies in the various jurisdictions in which our insurance
entity does business.
Share Repurchases:
Our Board of Directors has authorized the cumulative repurchase of up to 90.5
million shares of our common stock through an authorized stock repurchase
program. Of that total, approximately 87.3 million shares have been repurchased
cumulatively from 1996 through December 31, 2019. We repurchased a total of 0.1
million shares of our common stock for $8.4 million during 2019, which had an
immaterial impact on earnings per share. We have authorization from our Board of
Directors to repurchase up to an additional 3.2 million shares of our common
stock as of December 31, 2019. The repurchase of any or all such shares
authorized remaining for repurchase will be governed by applicable SEC rules.
Wholesale Customer Financing Arrangements:
We have arrangements with certain finance companies to provide secured floor
plan financing for our dealers. These arrangements provide liquidity by
financing dealer purchases of our products without the use of our working
capital. A majority of the worldwide sales of snowmobiles, ORVs, motorcycles,
boats and related PG&A are financed under similar arrangements whereby we
receive payment within a few days of shipment of the product. The amount
financed by worldwide dealers under these arrangements related to snowmobiles,
ORVs, motorcycles, boats and related PG&A as of December 31, 2019 and 2018, was
approximately $1,884.1 million and $1,643.8 million, respectively. We
participate in the cost of dealer financing up to certain limits.
Polaris Acceptance, a joint venture between Polaris and Wells Fargo Commercial
Distribution Finance Corporation ("WFCDF"), a direct subsidiary of Wells Fargo
Bank, N.A. ("Wells Fargo"), which is supported by a partnership agreement
between their respective wholly owned subsidiaries, finances substantially all
of our U.S. sales of snowmobiles, ORVs, motorcycles, and related PG&A, whereby
we receive payment within a few days of shipment of the product. The partnership
agreement is effective through February 2027.
Polaris Acceptance sells a majority of its receivables portfolio (the
"Securitized Receivables") to a securitization facility ("Securitization
Facility") arranged by Wells Fargo, a WFCDF affiliate. The sale of receivables
from Polaris Acceptance to the Securitization Facility is accounted for in
Polaris Acceptance's financial statements as a "true-sale" under ASC Topic 860.
Polaris Acceptance is not responsible for any continuing servicing costs or
obligations with respect to the Securitized Receivables. The remaining portion
of the receivable portfolio is recorded on Polaris Acceptance's books, and is
funded through a loan from an affiliate of WFCDF and through equity
contributions from both partners. At

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December 31, 2019, the outstanding amount of net receivables financed for
dealers under this arrangement, including Securitized Receivables, was $1,423.4
million, a 16 percent increase from $1,226.4 million at December 31, 2018.
We account for our investment in Polaris Acceptance under the equity method.
Polaris Acceptance is funded through equal equity cash investments from the
partners and a loan from an affiliate of WFCDF. We do not guarantee the
outstanding indebtedness of Polaris Acceptance. The partnership agreement
provides that all income and losses of Polaris Acceptance are shared 50 percent
by our wholly owned subsidiary and 50 percent by WFCDF's subsidiary. Our total
investment in Polaris Acceptance at December 31, 2019 was $110.6 million. Our
exposure to losses of Polaris Acceptance is limited to our equity in Polaris
Acceptance. Credit losses in the Polaris Acceptance portfolio have been modest,
averaging less than one percent of the portfolio.
We have agreed to repurchase products repossessed by Polaris Acceptance up to an
annual maximum of 15 percent of the aggregate average month-end outstanding
Polaris Acceptance receivables and Securitized Receivables during the prior
calendar year. For calendar year 2019, the potential 15 percent aggregate
repurchase obligation was approximately $180.6 million. For calendar year 2020,
the potential 15 percent aggregate repurchase obligation is approximately $198.3
million. Our financial exposure under this arrangement is limited to the
difference between the amount paid to the finance company for repurchases and
the amount received on the resale of the repossessed product. No material losses
have been incurred under this agreement. However, an adverse change in retail
sales could cause this situation to change and thereby require us to repurchase
repossessed units subject to the annual limitation referred to above. We have
not guaranteed the outstanding indebtedness of Polaris Acceptance.
A subsidiary of TCF Financial Corporation ("TCF") finances a portion of our
United States sales of boats whereby we receive payment within a few days of
shipment of the product. We have agreed to repurchase products repossessed by
TCF up to a maximum of 100 percent of the aggregate outstanding TCF receivables
balance. At December 31, 2019, the potential aggregate repurchase obligation was
approximately $221.5 million. Our financial exposure under this arrangement is
limited to the difference between the amounts unpaid by the dealer with respect
to the repossessed product plus costs of repossession and the amount received on
the resale of the repossessed product. No material losses have been incurred
under this agreement during the periods presented.
Retail Customer Financing Arrangements:
We have agreements with Performance Finance, Sheffield Financial and Synchrony
Bank, under which these financial institutions provide financing to end
consumers of our products. The income generated from these agreements has been
included as a component of income from financial services in the accompanying
consolidated statements of income. At December 31, 2019, the agreements in place
were as follows:
Financial institution Agreement expiration date
Performance Finance         December 2026
Sheffield Financial         December 2024Synchrony BankDecember 2025


During 2019, consumers financed 32 percent of our vehicles sold in the United
States through the Performance Finance, Sheffield Financial and Synchrony Bank
installment retail credit arrangements. The volume of installment credit
contracts written in calendar year 2019 with these institutions was $1,249.0
million, a six percent decrease from 2018.

Critical Accounting Policies
We have adopted various accounting policies to prepare the consolidated
financial statements in accordance with U.S. GAAP. Our significant accounting
policies are described in Note 1 of the Notes to Consolidated Financial
Statements. Some of those significant accounting policies require us to make
difficult, subjective, or complex judgments or estimates. An accounting estimate
is considered to be critical if it meets both of the following criteria: (i) the
estimate requires assumptions about matters that are highly uncertain at the
time the accounting estimate is made, and (ii) different estimates reasonably
could have been used, or changes in the estimate that are reasonably likely to
occur may have a material impact on our financial condition or results of
operations. The significant accounting policies that management believes are the
most critical to aid in fully understanding and evaluating our reported
financial results include the following: revenue recognition, sales promotions
and incentives, product warranties, product liability, and goodwill and
indefinite-lived intangibles.

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Revenue recognition. With respect to wholegood vehicles, boats, parts, garments
and accessories, revenue is recognized when we transfer control of the product
to the customer. With respect to services provided by us, revenue is recognized
upon completion of the service or over the term of the agreement in proportion
to the costs expected to be incurred in satisfying the obligations over the term
of the service period. Revenue is measured as the amount of consideration we
expect to receive in exchange for transferring goods or providing services.
Sales, value add, and other taxes we collect concurrent with revenue-producing
activities are excluded from revenue. Incidental items that are immaterial in
the context of the contract are recognized as expense. The expected costs
associated with our limited warranties and field service bulletin actions are
recognized as expense when the products are sold. We recognize revenue for
vehicle service contracts that extend mechanical and maintenance coverage beyond
our limited warranties over the life of the contract. Historically, product
returns, whether in the normal course of business or resulting from repurchases
made under the floorplan financing program, have not been material. However, we
have agreed to repurchase products repossessed by the finance companies up to
certain limits. Our financial exposure is limited to the difference between the
amount paid to the finance companies and the amount received on the resale of
the repossessed product. No material losses have been incurred under these
agreements. We have not historically recorded any significant sales return
allowances because we have not been required to repurchase a significant number
of units. However, an adverse change in retail sales could cause this situation
to change. Revenue from goods and services transferred to customers at a
point-in-time accounts for the majority of our revenue.
Sales promotions and incentives. We provide for estimated sales promotion and
incentive expenses, which are recognized as a component of sales in measuring
the amount of consideration we expect to receive in exchange for transferring
goods or providing services. Examples of sales promotion and incentive programs
include dealer and consumer rebates, volume incentives, retail financing
programs and sales associate incentives. Sales promotion and incentive expenses
are estimated based on current programs and historical rates for each product
line. We record these amounts as a liability in the consolidated balance sheet
until they are ultimately paid. At December 31, 2019 and 2018, accrued sales
promotions and incentives were $189.9 million and $167.6 million, respectively.
Actual results may differ from these estimates if market conditions dictate the
need to enhance or reduce sales promotion and incentive programs or if the
customer usage rate varies from historical trends. Adjustments to sales
promotions and incentives accruals are made as actual usage becomes known in
order to properly estimate the amounts necessary to generate consumer demand
based on market conditions as of the balance sheet date.
Product warranties. We provide a limited warranty for our vehicles and boats for
a period of six months to ten years, depending on the product. We provide longer
warranties in certain geographical markets as determined by local regulations
and customary practice and may provide longer warranties related to certain
promotional programs. Our standard warranties require us, through our dealer
network, to repair or replace defective products during such warranty periods.
The warranty reserve is established at the time of sale to the dealer or
distributor based on management's best estimate using historical rates and
trends. We record these amounts as a liability in the consolidated balance sheet
until they are ultimately paid. At December 31, 2019 and 2018, the accrued
warranty liability was $136.2 million and $121.8 million, respectively.
Adjustments to the warranty reserve are made based on actual claims experience
in order to properly estimate the amounts necessary to settle future and
existing claims on products sold as of the balance sheet date. The warranty
reserve includes the estimated costs related to recalls, which are accrued when
probable and estimable. Factors that could have an impact on the warranty
accrual include the following: changes in manufacturing quality, shifts in
product mix, changes in warranty coverage periods, weather and its impact on
product usage, product recalls and changes in sales volume. While management
believes that the warranty reserve is adequate and that the judgment applied is
appropriate, such amounts estimated to be due and payable could differ
materially from what will ultimately transpire in the future, and have a
material adverse effect on our financial condition.
Product liability. We are subject to product liability claims in the normal
course of business. We carry excess insurance coverage for product liability
claims. We self-insure product liability claims before the policy date and up to
the purchased insurance coverage after the policy date. The estimated costs
resulting from any uninsured losses are charged to operating expenses when it is
probable a loss has been incurred and the amount of the loss is reasonably
estimable. There is significant judgment and estimation required in evaluating
the possible outcomes and potential losses of product liability matters. We
utilize historical trends and actuarial analysis, along with an analysis of
current claims, to assist in determining the appropriate loss reserve levels. At
December 31, 2019 and 2018, we had accruals of $57.0 million and $52.8 million,
respectively, for the probable payment of pending and expected claims related to
product liability matters associated with our products. This accrual is included
as a component of other accrued expenses in the consolidated balance sheets.
While management believes the product liability reserves are adequate, adverse
determination of material product liability claims made against us could have a
material adverse effect on our financial condition.

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Goodwill. Goodwill represents the excess of the cost of acquired businesses over
the net of the fair value of identifiable tangible net assets and identifiable
intangible assets purchased and liabilities assumed. Goodwill is tested at least
annually for impairment and is tested for impairment more frequently when events
or changes in circumstances indicate that the asset might be impaired. The
Company completes its annual goodwill impairment test as of the first day of the
fourth quarter.
The Company may first perform a qualitative assessment to determine whether it
is more likely than not that the fair value of each reporting unit is less than
its carrying amount. A qualitative assessment requires that we consider events
or circumstances including macroeconomic conditions, industry and market
considerations, cost factors, overall financial performance, changes in
management or key personnel, changes in strategy, changes in customers, changes
in the composition or carrying amount of a reporting unit's net assets, and
changes in our stock price. If, after assessing the totality of events or
circumstances, it is determined that it is more likely than not that the fair
value of the reporting unit is less than its carrying amount, or if the Company
elects to bypass the qualitative test and proceed to a quantitative test, then
the quantitative goodwill impairment test is performed. A quantitative test
includes comparing the fair value of each reporting unit to the carrying amount
of the reporting unit, including goodwill. The fair value of each reporting unit
is determined using a discounted cash flow analysis and a market approach. If
the estimated fair value is less than the carrying amount of the reporting unit,
an impairment is recognized in an amount equal to the difference, limited to the
total amount of goodwill allocated to that reporting unit.
Under the quantitative goodwill impairment test, the fair value of each
reporting unit is determined using a discounted cash flow analysis and market
approach. In developing our discounted cash flow analysis, assumptions about
future revenues and expenses, capital expenditures and changes in working
capital are based on our annual operating plan and long-term business plan for
each of our reporting units. These plans take into consideration numerous
factors including historical experience, anticipated future economic conditions,
changes in raw material prices and growth expectations for the industries and
end markets we participate in. These assumptions are determined over a five year
long-term planning period. The five year growth rates for revenues and earnings
before interest, taxes, depreciation and amortization ("EBITDA") vary for each
reporting unit being evaluated. Revenues and EBITDA beyond five years are
projected to grow at a terminal growth rate consistent with industry
expectations. Actual results may significantly differ from those used in our
valuations. The forecasted future cash flows are discounted using a
weighted-average cost of capital developed for each reporting unit. The discount
rates were developed using market observable inputs, as well as our assessment
of risks inherent in the future cash flows of the respective reporting unit.
In estimating fair value using the market approach, we identify a group of
comparable publicly traded companies for each reporting unit that are similar in
terms of size and product offering. These groups of comparable companies are
used to develop multiples based on total market-based invested capital as a
multiple of EBITDA. We determine our estimated values by applying these
comparable EBITDA multiples to the operating results of our reporting units. The
ultimate fair value of each reporting unit is determined considering the results
of both valuation methods.
In the fourth quarter of 2019, we completed the annual impairment test. It was
determined that goodwill was not impaired as each reporting unit's fair value
exceeded its carrying value. We completed a qualitative assessment for the ORV,
Snow, Motorcycles and Global Adjacent Markets reporting units and a quantitative
goodwill test for the Aftermarket and Boats reporting units.
No reporting units had a difference between their fair value and carrying value
that is lower than 10%. However, the results of the Aftermarket reporting unit
test are sensitive to certain key inputs and assumptions. While management
believes the current projections, discount rate, and other assumptions are
reasonable, the estimated fair value of the reporting unit is particularly
dependent on Aftermarket's ability to execute the planned actions underlying the
forecasted improvement in its performance, including sales growth, gross profit
expansion, and cash flow growth. The Boats reporting unit was tested on a
quantitative basis for the first time following our acquisition of Boat
Holdings, LLC in July 2018. As such, the results of the Boats reporting unit
test are inherently sensitive due to the close proximity to the acquisition
date. While management believes the current projections, discount rate, and
other assumptions are reasonable, the estimated fair value of the reporting unit
is particularly dependent on the continued strength of the pontoon industry.
Fair value determinations require considerable judgment and are sensitive to
changes in underlying assumptions and factors. As a result, there can be no
assurance that the estimates and assumptions made for purposes of the impairment
test will prove to be an accurate prediction of the future. To the extent future
operating results differ from those in our current forecast, or if the
assumptions underlying the discount rate change significantly, it is possible
that an impairment

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charge could be recorded. As of December 31, 2019, the goodwill balances for the
Aftermarket and Boats reporting units were approximately $270.4 million and
$227.1 million, respectively.
Identifiable intangible assets. Our primary identifiable intangible assets
include: dealer/customer relationships, brand/trade names, developed technology,
and non-compete agreements. Identifiable intangibles with finite lives are
amortized and those identifiable intangibles with indefinite lives are not
amortized. Identifiable intangible assets that are subject to amortization are
evaluated for impairment whenever events or changes in circumstances indicate
that the carrying amount may not be recoverable. Identifiable intangible assets
with indefinite lives are tested for impairment annually or more frequently when
events or changes in circumstances indicate that the asset might be impaired. We
complete our annual impairment test as of the first day of the fourth quarter
each year for those identifiable assets not subject to amortization.
Our identifiable intangible assets with indefinite lives include brand/trade
names. The impairment test consists of a comparison of the fair value of the
brand/trade name with its carrying value. The fair value is determined using the
relief-from-royalty method. This method assumes the trade name has value to the
extent that the owner is relieved of the obligation to pay royalties for the
benefits received from them. This method requires us to estimate the future
revenue for the related brands, the appropriate royalty rate and the weighted
average cost of capital. Forecasted revenues were derived from our annual budget
and long-term business plan and royalty rates were based on brand profitability.
The discount rates were developed using the market observable inputs used in the
development of the reporting unit discount rates, as well as our assessment of
risks inherent in the future cash flows of the respective trade name.

New Accounting Pronouncements See Item 8 of Part II, "Financial Statements and Supplementary Data-Note 1-Organization and Significant Accounting Policies-New accounting pronouncements."

© Edgar Online, source Glimpses

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