The following discussion pertains to the results of operations and financial
position of
Overview
The global spread of the novel coronavirus (COVID-19) has negatively impacted the global economy, disrupted global supply chains and created significant volatility and disruption of financial markets. The impact of this pandemic has affected our business segments, employees, dealers, suppliers, and customers in a variety of ways. As a result of COVID-19, our sales and profitability during the first half of 2020 were negatively impacted by the temporary suspension of select plant operations, which reduced our manufacture and shipment of products, as well as the temporary closures of certain dealers. During this period, sales and profitability were also negatively impacted by a decline in economic activity related to certain of our end markets, such as those served by Global Adjacent Markets and Aftermarket. Going forward, we anticipate these end markets to be more negatively impacted by COVID-19 than our other markets due to the nature of their products and end customers.
22 -------------------------------------------------------------------------------- Table of Contents Beginning in the second quarter the Company began to see stronger than anticipated retail demand for our Powersports products as they provided an attractive social-distancing solution for new and existing Powersports customers. Our unit retail sales of ORVs, snowmobiles, and motorcycles to consumers inNorth America increased 57 percent and 15 percent in the second and third quarters of 2020, respectively. Further, retail sales for Polaris boats also increased significantly during the third quarter compared to the prior year. Polaris North American dealer inventory as ofSeptember 30, 2020 was down significantly as retail sales outpaced shipments. At this time, we expect continued positive retail demand for the remainder of the calendar year. During the third quarter we made significant progress managing operations as we seek to satisfy retail demand. However, due to the dynamics of the COVID-19 pandemic and other natural disasters, our supply chain and manufacturing operations experienced constraints caused by logistics and production-limiting disruptions. Because of the significant economic uncertainty, we are continuing to execute a cautionary approach to spending given the pandemic-generated economic uncertainty. As the impact of the COVID-19 pandemic on the economy and our operations evolves, we will continue to assess the impact on the Company and respond accordingly. Third quarter sales totaled$1,954.6 million , an increase of 10 percent from last year's third quarter sales of$1,771.6 million . Our third quarter sales to North American customers increased 11 percent and our sales to customers outside ofNorth America increased 9 percent. The increases were driven by increased ORV and boat shipments, as well as higher PG&A sales. Our gross profit of$534.6 million increased 22 percent from$436.5 million in the comparable prior year third quarter. The increase in gross profit was driven by higher sales and lower promotions, partially offset by increased costs resulting from supply chain disruption. We reported net income of$166.8 million , or$2.66 per diluted share, compared to 2019 third quarter net income of$88.4 million , or$1.42 per diluted share. Looking ahead, adverse impacts to the economy and certain of the Company's business segments, certain suppliers, dealers or customers as a result of COVID-19 may affect the Company's future valuation of certain assets and therefore may increase the likelihood of additional impairment charges, write-offs, or reserves associated with such assets, including goodwill, indefinite and finite-lived intangible assets, property and equipment, inventories, accounts receivable, tax assets, and other assets. We believe we are well positioned to mitigate the impacts of COVID-19. We will continue to adjust mitigation measures as needed related to health and safety. Those measures might include further suspensions of select plant operations, modifying workspaces, continuing social distancing policies, implementing new personal protective equipment or health screening policies at our facilities, or such other industry best practices needed to continue to maintain a healthy and safe environment for our employees amidst the pandemic. In addition, while we have and will continue to enhance functionality and security of technology for off-site functions, we are also planning for the eventual reintroduction of our on-site workforce to our facilities. The duration of these trends and the magnitude of such impacts cannot be precisely estimated at this time, as they are affected by a number of factors (some of which are outside management's control), including those presented in Item 1A. Risk Factors of this Quarterly Report. 23
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Table of Contents Consolidated Results of Operations The consolidated results of operations were as follows:
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