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| UNITED STATES |
| SECURITIES AND EXCHANGE COMMISSION |
| | Washington, D.C. 20549 | |
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| | FORM 10-K | |
| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) |
| OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 20142016 |
| | Commission file number 001-11411 | |
POLARIS INDUSTRIES INC.
(Exact name of registrant as specified in its charter)
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| Minnesota | | 41-1790959 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
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| 2100 Highway 55, Medina MN | | 55340 |
| (Address of principal executive offices) | | (Zip Code) |
| | (763) 542-0500 (Registrant’s telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: | |
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| Title of Class | | Name of Each Exchange on Which Registered |
| Common Stock, $.01 par value | | New York Stock Exchange |
| | Securities registered pursuant to Section 12(g) of the Act: None | |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ¨ No x
Indicate by check mark whether the registrant (1) has filed all reports required 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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer x Accelerated filer ¨ Non-accelerated filer ¨ Smaller reporting company ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was approximately $8,590,586,000$5,240,113,000 as of June 30, 2014,2016, based upon the last sales price per share of the registrant’s Common Stock, as reported on the New York Stock Exchange on such date.
As of February 13, 201510, 2017, 66,317,12762,936,403 shares of Common Stock, $.01 par value, of the registrant were outstanding.
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| DOCUMENTS INCORPORATED BY REFERENCE: |
Portions of the registrant’s Annual Report to Shareholders for the year ended December 31, 20142016 (the “2014“2016 Annual Report” furnished to the Securities and Exchange Commission are incorporated by reference into Part II of this Form 10-K. Portions of the definitive Proxy Statement for the registrant’s Annual Meeting of Shareholders to be held on April 30, 201527, 2017 to be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this report (the “2015“2017 Proxy Statement”), are incorporated by reference into Part III of this Form 10-K.
POLARIS INDUSTRIES INC. 20142016 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS |
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| | PART I | |
| Item 1. | | |
| Item 1A. | | |
| Item 1B. | | |
| Item 2. | | |
| Item 3. | | |
| Item 4. | | |
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| | PART II | |
| Item 5. | | |
| Item 6. | | |
| Item 7. | | |
| Item 7A. | | |
| Item 8. | | |
| Item 9. | | |
| Item 9A. | | |
| Item 9B. | | |
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| | PART III | |
| Item 10. | | |
| Item 11. | | |
| Item 12. | | |
| Item 13. | | |
| Item 14. | | |
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| | PART IV | |
| Item 15. | | |
| Item 16. | | |
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PART I
Item 1. Business
Polaris Industries Inc., a Minnesota corporation, was formed in 1994 and is the successor to Polaris Industries Partners LP. The terms “Polaris,” the “Company,” “we,” “us,” and “our” as used herein refer to the business and operations of Polaris Industries Inc., its subsidiaries and its predecessors, which began doing business in the early 1950’s.1954. We design, engineer and manufacture powersports vehicles which include, Off-Road Vehicles (ORV), including All-Terrain Vehicles (ATV) and side-by-side vehicles for recreational and utility use, Snowmobiles, Motorcycles and Small Vehicles (SV),Global Adjacent Markets vehicles, including Work & Transportation and military vehicles. Polaris products, together with the related replacement Parts, Garments and Accessories (PG&A). These products, as well as aftermarket accessories and apparel are sold through dealers and distributors principally located in the United States, Canada, Western Europe, Australia and Europe.Mexico. Sales of ORVs, our ORV/Snowmobiles, Motorcycles SVs and PG&AGlobal Adjacent Markets reporting segments accounted for the following approximate percentages of our sales for the years ended December 31:
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| | ORVs | | Snowmobiles | | Motorcycles | | Small Vehicles | | PG&A |
| 2014 | 65% | | 7% | | 8% | | 3% | | 17% |
| 2013 | 67% | | 8% | | 6% | | 3% | | 16% |
| 2012 | 69% | | 9% | | 6% | | 2% | | 14% |
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| | ORV / Snowmobiles | | Motorcycles | | Global Adjacent Markets | | Other |
| 2016 | 74% | | 16% | | 8% | | 2% |
| 2015 | 78% | | 15% | | 7% | | — |
| 2014 | 84% | | 9% | | 7% | | — |
Industry Background
Off-Road Vehicles. Our ORVs include core ATVs and RANGER® and RZR® side-by-side vehicles. ATVs are four-wheel vehicles with balloon style tires designed for off-road use and traversing rough terrain, swamps and marshland. Side-by-sideThe vehicles arecan be multi-passenger off-road, all-terrain vehicles that can carry up to six passengers in addition to cargo. ORVsor single passenger, are used for recreation, in such sports as fishing and hunting and for trail and dune riding, and for utility purposes on farms, ranches, and construction sitessites. The off-road vehicle industry is comprised of ATVs and for certain military applications.
ATVs were introduced to the North American market in 1971 by Honda Motor Co., Ltd. (“Honda”). Other Japanese motorcycle manufacturers, including Yamaha Motor Corporation (“Yamaha”), Kawasaki Motors Corp. (“Kawasaki”), and Suzuki Motor Corporation (“Suzuki”), entered theside-by-side vehicles. The North American ATV marketindustry decreased mid single-digits percent in the late 1970’s and early 1980’s. We entered the ATV market in 1985, Arctic Cat Inc. (“Arctic Cat”) entered in 1995 and Bombardier Recreational Products Inc. ("BRP") entered in 1998 with their Can-Am product line. In addition, numerous Chinese and Taiwanese manufacturers of youth and small ATVs exist for which limited industry sales data is available. By 1985, the number of three- and four-wheel ATVs sold in North America had grown to approximately 650,000 units per year, then dropped dramatically to a low of 148,000 in 1989. The ATV industry then grew each year in North America from 1990 until 2005, but declined between 2005 and 2011, primarily due to weak overall economic conditions and a move to side-by-side vehicles, until returning to modest low single digit percentage growth in 2012 through 2014.2016. Internationally, ATVs are also sold primarily in Western European countries by similar manufacturers as in North America. We estimate that during 20142016 world-wide industry sales increased threedecreased low single-digits percent from 20132015 levels with an estimated 419,000approximately 400,000 ATVs sold worldwide.
We estimate that theworldwide side-by-side vehicle market sales increased approximately sevenhigh single-digits percent during 20142016 over 20132015 levels with an estimated 413,000480,000 side-by-side vehicles sold worldwide.sold. The side-by-side market has increased consistently over the past several years primarily due to continued innovation by existing and new manufacturers. The main competitors for our RANGER and RZR side-by-side vehicles are Deere & Company (“Deere”), Kawasaki, Yamaha, Arctic Cat, Kubota Tractor Corporation (“Kubota”), Honda and BRP's Can-Am product line.
We estimate that total worldwide off-road vehicle industry sales for 2014,2016, which includesinclude core ATVs and side-by-side vehicles, increased fivelow single-digits percent from 20132015 levels with an estimated 832,000approximately 880,000 units sold worldwide.sold.
Snowmobiles. In the early 1950’s, a predecessor to Polaris produced a “gas powered sled,” which became the forerunner of the Polaris snowmobile. Snowmobiles have been manufactured under the Polaris name since 1954. Originally conceived as a utility vehicle for northern, rural environments, over time the snowmobile gained popularity as a recreational vehicle. From the mid-1950’s through the late 1960’s, over 100 producers entered the snowmobile market and snowmobile sales reached a peak of approximately 495,000 units in 1971. The Polaris product survived the industry decline in which snowmobile sales fell to a low point of approximately 87,000 units in 1983 and the number of snowmobile manufacturers serving the North American market declined to four: Yamaha, BRP's Ski-Doo product line, Arctic Cat and Polaris. These four manufacturers also sell snowmobiles in certain overseas markets where the climate is conducive to snowmobile riding. From 1984 to 1997 the industry grew to approximately 260,000 units before gradually declining through the 2012 season, but grew again in 2013. We estimate that during the season ended March 31, 2014,
2016, world-wide industry sales of snowmobiles increased fourdecreased low teens percent from the previous season levels with an estimated 141,000approximately 130,000 units sold worldwide.
Motorcycles. Polaris’ Motorcycles division consists of Victory®, Indian® motorcycles, and the all-new three-wheel roadster motorcycle, Slingshot®. Heavyweight motorcycles are utilized as a mode of transportation as well as for recreational purposes. The industry is comprised of four segments: cruisers, touring, sport bikes and standard motorcycles. We entered the heavyweight motorcycle market in 1998 with an initial Victory product in the cruiser segment. We entered the touring segment in 2000. In 2011, we purchased the Indian Motorcycle brand to complement our Victory brand of motorcycles. In 2013, we re-launched the Indian brand by releasing the first three Indian Motorcycle models engineered by Polaris. In 2014, we introduced the Company's first three-wheeled, roadster motorcycle, Slingshot. The North America heavyweight industry retail cruiser and touring sales more than doubled from 1996 to 2006; however, the motorcycle industry declined in 2007 through 2010 due to weak overall economic conditions. The motorcycle industry has rebounded with growth beginning in 2011.1998. We estimate that the combined 1,400cc900cc and above cruiser and touring market segments increased one(including the moto-roadster Slingshot®) decreased low-single digits percent in 20142016 compared to 20132015 levels with an estimated 186,000233,000 heavyweight cruiser, touring, and touringmid-size motorcycles sold in the North American market. Other major heavyweightWe estimate that during 2016, worldwide combined 900cc and above cruiser and touring motorcycle manufacturers include BMW of North America, LLC (“BMW”), Triumph Motorcycles Ltd., Harley-Davidson, Inc., Honda, Yamaha, Kawasaki and Suzuki. We estimate that the worldwide target market for three-wheel motorcycles is approximately $1 billion.segments (including Slingshot) sales increased low single-digits percent from 2015 levels, with an estimated 350,000 units sold worldwide.
SGlobal Adjacent Markets. mall Vehicles. We introduced our initial SV product, the Polaris Breeze®, in 2009, which was an electric powered vehicle primarily used in master planned communities in the Sunbelt region of the United States. In 2011, we ceased production of the Breeze line of productsThese vehicles are designed to support people mobility as well as various commercial work applications, and made two SV acquisitions, Global Electric Motorcars LLC ("GEM") and Goupil Industries S.A. (“Goupil”). We expanded our SV portfolio in 2013 by acquiring A.M. Holding S.A.S., which operates under the name Aixam Mega S.A.S. ("Aixam"). Aixam is based in France and manufactures and sells enclosed on-road quadricycles and light duty commercial vehicles. Through these acquisitions, we now offerinclude products in the light-duty hauling, people mover, industrial and urban/suburban commuting sub-sectors of the small vehicles industry.Work and Transportation industry, as well as tactical defense vehicles. We estimate the worldwide target market for smallWork and Transportation vehicles at approximately $4.0 billion in 2014,2016, which includes master planned communities and golf courses, light duty hauling, people movers, industrial, urban/suburban commuting and related quadricycles. Other major small vehicle manufacturers include Textron Inc.’s “E-Z-GO,” Ingersoll-Rand Plc.’s “Club Car,” Yamaha and DrivePlanet's "Ligier."
Products
Off-Road Vehicles. We entered the ORV market in 1985 with an ATV. We currently produce four-wheel ATVs, which provide more stability for the rider than earlier three-wheel versions. In 2000, we introduced our first youth ATV models. In 1998, we introduced the Polaris RANGER, a six-wheeled off-road side-by-side utility vehicle and in 2000, we introduced a four-wheeled version of the RANGER utility vehicle. In 2004, we introduced a military version ATV and side-by-side vehicles with features specifically designed for ultra-light tactical military applications. In 2007, we introduced our first recreational side-by-side vehicle,Our Off-Road Vehicle lineup includes the RZR, and our first six-passenger® sport side-by-side, vehicle, the RANGERCrew® utility side-by-side, the GENERAL™crossover side-by-side, the Sportsman® ATV and the Polaris ACE®. Our standard line of military and government vehicles for model year 2015 consists of 6 models at suggested United States retail prices ranging from approximately $7,000 to $163,000. OurThe full line of ORVs beyond(excluding military vehicles consists of 49vehicles) spans 61 models, includingand includes two-, four- and six-wheel drive general purpose, commercial,
recreational and side-by-side models, with 2015models. 2017 model year suggested United States retail prices rangingrange from approximately $2,100 to $28,000.$27,500 in the United States.
Most of our ORVs feature the totally automatic Polaris variable transmission, which requires no manual shifting, and several have a MacPherson® strut front suspension, which enhances control and stability. Our “on demand” all-wheel drive provides industry leading traction performance and ride quality due to its patented on demand, easy shift-on-the-fly design. Our ORVs have four-cycle gas or diesel engines, and bothwith available shaft and concentric chain drive. Over the past 11 years, we have introduced the industry's first electronic fuel injected ATV, the first independent rear suspension on a sport ATV and helped create the recreational side-by-side segment through introduction of our RZR vehicles.drive systems. Our lineup of ORVs has continuedcontinues to expand overthrough the past years through introduction of electric ORVs and gas and diesel commercial focused ORVs. Our family of ORVs includes utility and recreational Sportsman® ATVs, sport-styled Scrambler® ATVs, utility and recreational RANGER side-by-side vehicles, commercial-utility BRUTUS® side-by-side vehicles and recreational RZR side-by-side vehicles. In many of theseour segments, we offer youth, value, mid-size, trail and high-performance vehicles, which come in both single passenger and multi-passenger seating arrangements. Our keyKey 2016 ORV product introductions in 2014 included the all-new RANGER XP® 1000, RZR XP®XP 900 trail, RANGER Turbo HO with 168 HP and the revolutionary RIDE COMMAND™570 with industry-exclusive PRO-FIT™, an integrated in-vehicle rider experience enhancement system, available on the limited edition Velocity Blue RZR XP® 1000 EPS, or as an accessory option.
We produce or supply a variety of replacement parts and Polaris Engineered Accessories® for our ORVs. ORV accessories include winches, bumper/brushguards, plows, racks, wheels and tires, pull-behinds, cab system,systems, lighting and audio systems, cargo box accessories, tracks and oil. We also market a full line of recreational apparel for our ORVs, including helmets, jackets, gloves, pants and hats. Aftermarket brands in our off-road category include Kolpin, a lifestyle brand specializing in purpose-built and universal-fit accessories for UTVs and outdoor enthusiasts, and Pro ArmorRANGER® Diesel
with hydrostatic transmission, several new value models, a lineup that specializes in accessories for performance side-by-side vehicles and two models in a newly defined category of single-seat, ride-in ATVs, the Polaris ACE™.all-terrain vehicles.
Snowmobiles. We produce a full line of snowmobiles consisting of approximately 3240 models, ranging from youth models to utility and economy models to performance and competition models. The 20152017 model year suggested United States retail prices range from approximately $2,800$3,000 to $14,000.$15,200 in the United States. Polaris snowmobiles are sold principally in the United States, Canada, Russia and western Europe. We believe our snowmobiles have a long-standing reputation for quality, dependability and performance. We believe that we were the first to develop several features for wide commercial use in snowmobiles, including independent front suspension, long travel rear suspension, hydraulic disc brakes, liquid cooling for brakes and a three cylinder engine. In 2009, we introduced the first true progressive-rate rear suspension snowmobile, the Polaris RUSH®. In 2014, we introduced the all-new AXYS™ chassis platform for the flatland rider, and in 2015, we introduced the AXYS chassis platform for the mountain rider. We also produce a snow bike conversion kit, under the Timbersled brand.
We produce or supply a variety of replacement parts and Polaris Engineered Accessories® for our snowmobiles and snow bike conversion kits. Snowmobile accessories include covers, traction products, reverse kits, electric starters, tracks, bags, windshields, oil and lubricants. We also market a full line of recreational apparel for our snowmobiles, including helmets, goggles, jackets, gloves, boots, bibs, pants and hats. Aftermarket brands in our snowmobile category include Klim, which primarily specializes in premium technical riding gear for the snowmobile industry, and 509, which is an aftermarket leader in snowmobile helmets and goggles. Apparel is designed to our specifications, purchased from independent vendors and sold by us through our dealers and distributors, and online under our brand names.
Motorcycles. In 1998, we began manufacturing V-twin cruiser motorcycles under the Victory brand name. In 2008, we introduced our first luxury touring model, the Victory Vision®. In 2009, we expanded our touring product line to include the Victory Cross Roads® and Cross Country® models.brand name. In 2011, we acquired Indian Motorcycle Company, America’s first motorcycle company, and in 2013 we re-launched the Indian brand by releasing the first three Indian Motorcycle models engineered by Polaris: Indian Chief® Classic, Indian Chief Vintage and Indian Chieftain™. In 2014, we added two new Indian models, including the Roadmaster®, a luxury touring motorcycle, and Scout™, Polaris' first mid-sized motorcycle. We also added a new bagger to the Victory motorcycle line in 2014, the Victory Magnum™.brand. The all-new three-wheel motorcycle, Slingshot, was introduced in 2014, and is the Company's first roadster motorcycle.2014. Our 20152017 model year line of motorcycles for Victory, Indian and Slingshot consists of approximately 1624 models with suggested U.S. retail prices ranging from approximately $11,000 to $28,500.
Small Vehicles. In 2009, we introduced our first SV, the Polaris Breeze. In 2011, we ceased production of the Breeze electric vehicles and acquired GEM and Goupil to expand and complement our small vehicle product line. In 2013, we further expanded our SV division by acquiring Aixam. GEM addresses the people mover segment of low emission vehicles, Goupil, a French company, addresses the light duty hauling segment and Aixam, also a French company, addresses both the passenger and light duty hauling segments. GEM has ten SV models, while Goupil and Aixam each have three base platforms that are modular and can be configured to meet numerous custom needs from park and garden maintenance to delivery and other commercial needs. Additionally, Aixam has four base models of passenger-based quadricycles that are sold primarily in Western Europe. Prices for SVs range from $8,000$9,000 to $30,000 depending onin the model and application.United States. In January 2017, we announced the wind down of Victory Motorcycles.
Parts, Garments and Accessories.We produce or supply a variety of replacement parts and accessories for our product lines. ORV accessories include winches, bumper/brushguards, plows, racks, mowers, tires, pull-behinds, cabs, cargo box accessories, tracks and oil. Snowmobile accessories include covers, traction products, reverse kits, electric starters, tracks, bags, windshields, oil and lubricants.motorcycles. Motorcycle accessories include saddle bags, handlebars, backrests, exhaust, windshields, seats, oil and various chrome accessories. We also market a full line of recreational apparel for our product lines,motorcycles, including helmets, jackets, bibs and pants, leathers and hats. In 2012, we acquired Teton Outfitters, LLC (d/b/a Klim), which specializesWe also market Klim as an aftermarket brand in premium technical riding gear for the snowmobile andour motorcycle industries.category. Apparel is designed to our specifications, purchased from independent vendors and sold by us through our dealers and distributors, and online under our brand names. In 2014,
Global Adjacent Markets - Work and Transportation. Our Work and Transportation brands include GEM, Goupil, Aixam and Taylor-Dunn. Our Global Adjacent Markets vehicles include low emission vehicles, light duty hauling, passenger vehicles and industrial vehicles. Across these brands we acquired Kolpin Outdoors, Inc. ("Kolpin"), an aftermarket brand delivering purpose-builtoffer approximately 60 models with suggested retail prices ranging from approximately $6,000 to $80,000. Work and universal-fit ORV accessories and lifestyle products. WeTransportation also acquired certain assets of LSI Products Inc. and Armor Holdings LLC (collectively "Pro Armor"), an aftermarket accessories company that specializes in accessories for performanceincludes all commercial vehicles, BRUTUS® side-by-side vehicles, and all-terrain vehicles. These two 2014 acquisitions added industry leading aftermarket accessory brands toall business-to-business (B2B) applications of ORV, Snowmobiles, and Motorcycles outside of our PG&A activities.traditional dealer channels.
Marine Products Division.Global Adjacent Markets - Military/Government. We offer a military version ATV and side-by-side vehicles with features specifically designed for ultra-light tactical military applications. These vehicles provide versatile mobility for
up to nine passengers, and include DAGOR™, Sportsman MV and MRZR®. Our standard line of military and government vehicles consists of seven models at suggested United States retail prices ranging from approximately $11,000 to $163,000.
SignificantAcquisition
On October 11, 2016, we entered into a definitive agreement with TAP Automotive Holdings, LLC
(“Transamerican Auto Parts” or “TAP”), to acquire the personal watercraft marketoutstanding equity interests in 1992. In September 2004, we announcedTransamerican Auto Parts, a privately held, vertically integrated manufacturer, distributor, retailer and installer of off-road Jeep and truck accessories, for an aggregate consideration of $668.8 million, net of cash acquired. The transaction closed on November 10, 2016. We funded the purchase price with borrowings under our decision to ceaseexisting credit facilities.
TAP is a leading participant in aftermarket parts and accessories for light trucks, Jeeps, sport-utility vehicles and other four-wheel drive vehicles. TAP sells through its retail stores, call center and e-commerce sites, while also supporting numerous independent accessory retailers/installers through their wholesale distribution network.
TAP conducts business through a three-pronged sales, service, and manufacturing marine products effective immediately. As technologyparadigm. TAP has 76 brick-and-mortar retail centers, staffed with experienced product and the distribution channel evolved, the marine products division’s lack of commonality with our other product lines created challenges for usinstallation specialists. TAP’s omni-channel retail strategy includes a significant e-commerce business including 4WheelParts.com and our dealer base.4WD.com. The marine products division continued to experience escalating costsTAP e-commerce network facilitates consumer sales, service and increasing competitive pressuressupport, including “pick-up-in-store.” TAP’s manufacturing system features a research and was never profitable.production facility that incorporates an in-house conceptualization, design, and development process. Industry-leading brands owned by TAP include Pro Comp, Smittybilt, Rubicon Express, Poison Spyder, Trail Master, LRG and G2 Axle & Gear.
Manufacturing and Distribution Operations
Our products are primarily assembled at our original18 global manufacturing facility in Roseau, Minnesota and at our facilities in Spirit Lake, Iowa, and its surrounding areas, Osceola, Wisconsin, Monterrey, Mexico, Opole, Poland and various locations across France. Since our product lines incorporate similar technology, substantially the same equipment and personnel are employed across production in North America.facilities. We are vertically integrated in several key components of
our manufacturing process, including plastic injection molding, welding, clutch assembly and balancing and painting. Fuel tanks, tracks, tires, seats and instruments, and certain other component parts are purchased from third-party vendors. Raw materials or standard parts are readily available from multiple sources for the components manufactured by us. Our work force is familiar with the use, operation and maintenance of the products since many employees own the products we manufacture. In 2010, we announced plans to realign our manufacturing operations. We have created manufacturing centers of excellence for our products by enhancing the existing Roseau and Spirit Lake production facilities and established a manufacturing facility in Monterrey, Mexico, which became operational in 2011, that assembles ORVs and certain engines. This realignment led to the sale of part of our Osceola, Wisconsin manufacturing operations, moving frame tube bending into Roseau and Monterrey, and outsourcing some operations including seat manufacturing and stamping. Several of the engines used in our vehicles continue to be manufactured in Osceola. Our plant in Opole, Poland facility manufactures ORVs to serve the European market. Goupil has its manufacturing operations in Bourran, France, while Aixam has its manufacturing operations in Aix-les-Bains and Chanas, France. Our Roseau facility primarily manufactures ORVs and snowmobiles and our Monterrey facility primarily manufactures ORVs. Our facilities in Spirit Lake, Iowa and its surrounding areas primarily manufacture ORVs, motorcycles and GEM vehicles. In January 2015, we announced plans to build a new production facility in Huntsville, Alabama to provide additional capacity and flexibility. The 600,000 square-foot facility will focus on off-road vehicle production. We will break ground on the facility in the first quarter of 2015 with completion expected in the first half of 2016.
Pursuant to informal agreements between us and Fuji Heavy Industries Ltd. (“Fuji”), Fuji was the sole manufacturer of our two-cycle snowmobile engines from 1968 to 1995. Fuji has manufactured engines for our ATV products since their introduction in 1985. We had entered into an agreement with Fuji to form Robin Manufacturing, U.S.A. (“Robin”) in 1995. Under the agreement, we made an investment for a 40 percent ownership position in Robin, which built engines in the United States for recreational and industrial products. The Robin facility was closed in 2011 as the production volume of engines made at the facility had declined significantly. Since 2011, our reliance on and use of Fuji manufactured engines in our products has steadily declined as our internal engine manufacturing capabilities have expanded. After decreasing from 2011 to 2014, we expect our use of Fuji engines in our vehicles to stabilize in 2015.
We have been designing and producing our own engines for select models of snowmobiles since 1995, for all Victory motorcycles since 1998, for select ORV models since 2001 and for Indian motorcycles since the re-launch in 2013. During 2014,2016, approximately 80 percent of the total vehicles we produced were powered by engines designed and assembled by us.
In 2000, we entered into an agreement with a Taiwanese manufacturer to co-design, develop and produce youth ATVs. We have since expanded the agreementus, with the Taiwanese manufacturer in 2004 to include the design, development and production of value-priced smaller adult ATV models and in 2008 to include a youth side-by-side vehicle, the RZR 170.
remainder purchased from other suppliers. We do not anticipate any significant difficulties in obtaining substitute supply arrangements for other raw materials or components that we generally obtain from limited sources.
Contract carriers ship our products from our manufacturing and distribution facilities to our customers. We maintain several leased wholegoods distribution centers where final set-up and up-fitting is completed for certain models before shipment to customers.
We maintain sales and administrationOur corporate headquarters facilities are in Medina and Plymouth, Minnesota; Rigby, Idaho; Winnipeg, Canada; Derrimut, Australia; Shanghai, China; Rolle, Switzerland; Sao Paulo, Brazil; New Delhi, India; Monterrey, MexicoMinnesota, and in most Western European countries.we maintain 25 other sales and administrative facilities across the world. Our primary wholegoods distribution facilitiesproducts are in St. Paul, Minnesota; Haviland, Ohio; Altona, Australia; Irving, Texas; and Milford, Iowa. Our primary North American dealer PG&A distribution facilities are in Vermillion, South Dakota; Wilmington, Ohio and Rigby, Idaho. We have various other locations around the world that distribute PG&Adistributed to our international dealers, distributors and distributors.customers through a network of 30 distribution centers, including third-party providers.
Production Scheduling
We produce and deliver our products throughout the year based on dealer, distributor and customer orders. Beginning in 2008, we began testing a new dealer ordering process called Maximum Velocity Program (MVP), where ORVSide-by-side orders are placed in approximately two-week intervals for the high volume dealers driven by retail sales trends at the individual dealership. Smaller dealers utilize a similar MVP process, but on a less frequent ordering cycle. Effective in 2010, the MVP process was being utilized by all North American ORV dealers. For MVP dealers, ORVSide-by-side retail sales activity at the dealer level drives orders which are incorporated into each product’s production scheduling. International distributor ORV orders are taken throughout the year. Orders for each year’s production of snowmobiles are placed by the dealers
and distributors in the spring. Non-refundable deposits made by consumers to dealers in the spring for pre-ordered snowmobiles assist in production planning. In 2012, we began utilizing
We utilize our Retail Flow Management (RFM) ordering system for Victory motorcycles,motorcycle and now also use it as the ordering system for Indian motorcycles. In late 2014, we began utilizing RFM for certain ATV dealers. The RFM system allows dealers to order daily, create a segment stocking order, and eventually reduce order fulfillment times to what we expect will be less than 18 days. Prior toWe are implementing the RFM Victory motorcycle dealers would place annual orderssystem for our side-by-side vehicles in the summer. 2017.
For non-MVP and RFM dealers and products, units are builtsnowmobiles, we offer a pre-order SnowCheck program for our customers. This program allows our customers to order each year, subject to fluctuations in market conditionsa true factory-customized snowmobile by selecting various options, including chassis, track, suspension, colors and supplier lead times. The anticipated volume of units to be produced is substantially committed to by dealers and distributors prior to production.
accessories. Manufacture of snowmobiles commences in late winter of the previous season and continues through late
autumn or early winter of the current season. We manufacture ORVs, motorcycles and SV’speople mobility vehicles year round. We have the ability to mix production of the various products on the existing manufacturing lines as demand dictates.
Sales and Marketing
Our powersports products are sold through a network of approximately 1,7501,800 independent dealers in North America, and approximately 1,700 independent international dealers through 2329 subsidiaries and approximately 8580 distributors in over 100 countries outside of North America.
We sell our snowmobiles directly to dealers in the snowbelt regions of the United States and Canada. Many dealers and distributors of our snowmobiles also distribute our ORVs. At the end of 2014, approximately 800 Polaris dealers were located in areas of the United States where snowmobiles are not regularly sold. Unlike our primary competitors, which market their ORV products principally through their affiliated motorcycle dealers, we also sell our ORVs through lawn and garden and farm implement dealers.
With the exception of France, the United Kingdom, Sweden, Norway, Australia, New Zealand, Germany, Spain, China, India, Mexico and Brazil, sales of our non-SV productsnon-Global Adjacent Markets vehicles in Europe and other offshore markets are handled through independent distributors. In 2011 through 2014, we acquired GEM, GoupilA majority of our dealers are multi-line dealers and Aixamalso carry competitor products.
ORV/Snowmobiles. We sell our ORVs directly to a network of over 1,500 dealers. Many of our ORV dealers and distributors are also authorized snowmobile dealers, and are located in the SV divisionsnowbelt regions of the United States and Canada. We sell our snowmobiles to a network of over 700 dealers. Klim, Kolpin, and Pro Armor, in PG&A, whichTimbersled and 509 each have their own dealer/distributor relationships established.networks.
Motorcycles. Victory and Indian motorcycles and Slingshot are distributed directly through independently owned dealers and distributors, except in Australia where we have threefour Company-owned retail stores. We haveVictory motorcycles are sold through a high quality dealer network for our other product lines from which many of the approximately 450 current400 dealers, while Indian motorcycles are sold through a network of approximately 200 North American Victory dealers were selected. Indian currently has approximately 175 North American dealers signed up, of which approximately 118 are retailing Indian motorcycles as of the end of 2014.dealers. We expect the number of Indian retailing dealerships to continue to increase over the coming years. In 2005, we began selling Victory motorcycles inSlingshot currently has approximately 500 North American dealers retailing as of the United Kingdom. Since 2005, we have been gradually expandingend of 2016.
Global Adjacent Markets. Within Global Adjacent Markets, our international sales of motorcycles, primarily in EuropeWork and Australia. We expect to further expand our motorcycle dealer network over the next few years in North America and internationally for Victory, Indian and Slingshot motorcycles.
The SV businessesTransportation vehicles each have their own distribution networks through which their respective vehicles are distributed. GEM has approximately 250200 dealers. Goupil and Aixam sell directly to customers in France, through subsidiaries in certain Western European countries and through several dealers and distributors for markets outside such countries. Taylor-Dunn has approximately 180 United States dealers and 50 international dealers.
In addition, we sell Polaris vehicles directly to military and government agencies and other national accounts and supply a highly differentiated side-by-side vehicle to Bobcat Company (“Bobcat”), to dealerships in North America. We have a partnership with Ariens Company (“Ariens”), a manufacturer of outdoor power equipment. Through the partnership, we leverage each other’s dealer networks, share certain technologies and research and development, and supply Ariens with a highly differentiated work vehicle to sell through its dealer network.
Dealer agreements. Dealers and distributors sell our products under contractual arrangements pursuant to which the dealer or distributor is authorized to market specified products and is required to carry certain replacement parts and perform certain warranty and other services. Changes in dealers and distributors take place from time to time. We believe a sufficient number of qualified dealers and distributors exist in all geographic areas to permit an orderly transition whenever necessary. In addition, we sell Polaris vehicles directly to military and government agencies and other national accounts and we supply a highly differentiated side-by-side vehicle branded Bobcat to their dealerships in North America. In 2013, we entered into a partnership with Ariens Company ("Ariens"), a Brillion, Wisconsin based manufacturer of outdoor power equipment. Through the partnership, we anticipate leveraging each other's dealer networks, sharing certain technologies, research and development and supplying Ariens with a highly differentiated work vehicle to sell through its dealer network. In 2014, we began shipping vehicles to Ariens under the terms of the partnership.
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 our dealers in the United States. Under theStates under our current partnership agreement wewith Wells Fargo. Wells Fargo acquired the business in the first quarter of 2016. We have a 50 percent equity interest in Polaris Acceptance. WeAcceptance, and do not guarantee the outstanding indebtedness of Polaris Acceptance. In 2004, TDF was merged with a subsidiaryAs part of General Electric Company (GE) and, as a result of that merger, TDF’s name was changed to GE Commercial Distribution Finance Corporation (GECDF). No significant change in the agreement, Polaris Acceptance relationship resulted from
the change of ownership from TDF. In November 2006, Polaris Acceptance sold a majoritysells portions of its receivable portfolio to a securitization facility arranged by General Electric Capital Corporation, a GECDF affiliate (“Securitization Facility”), and the partnership agreement was amended to provide that Polaris Acceptance would continue to sell portions of its receivable portfolio to the Securitization Facility from time to time on an ongoing basis. The partnership agreement is effective through February 2022. See Notes 45 and 89 of Notes to Consolidated Financial Statements for a discussion of this financial services arrangement.
We have arrangements with Polaris Acceptance (United States) and GEWells Fargo affiliates (Australia, Canada, France, Germany, the United Kingdom, Ireland, China and New Zealand) to provide floor plan financing for our dealers. A majority of our North American sales of snowmobiles, ORVs, motorcycles, SVsGlobal Adjacent Markets vehicles and related PG&A are financed under arrangements whereby we are paid within a few days of shipment of our product. We participate in the cost of dealer financing and have agreed to repurchase products from the finance companies under certain circumstances and subject to certain limitations. We have not historically been required to repurchase a significant number of units; however, there can be no assurance that this will continue to be the case. If necessary, we will adjust our sales return allowance at the time of sale should we anticipate material repurchases of units financed through the finance companies. See Note 89 of Notes to Consolidated Financial Statements for a discussion of these financial services arrangements.
In August 2005, aCustomer financing. We do not offer consumer financing directly to the end users of our products. Instead, we have agreements in place with various third party financing companies, to provide financing services to those end consumers.
A wholly-owned subsidiary of Polaris entered intohas a multi-year contract with HSBC Bank Nevada, National Association (“HSBC”), formerly known as Household Bank (SB), N.A., under which HSBC managed our private label credit card program under the StarCard label for the purchase of Polaris products. Since then, HSBC’s U.S. Credit Card and Retail Services business has been acquired by Capital One. Our current agreement with Capital One expires in October 2015.
In April 2006, a wholly-owned subsidiary of Polaris entered into a multi-year contract with GE Money Bank (“GE Bank”) under which GE Bank makes available closed-end installment consumer and commercial credit to customers of our dealers for both Polaris and non-Polaris products. In 2014, GE Bank changed its name to Synchrony Bank, as a result of a spin off and is part of the GE Capital Retail Finance business. The current installment credit agreement under which Synchrony Bank provides installment credit lending for motorcycles expires in April 2016.
In January 2009, a wholly-owned subsidiary of Polaris entered into a multi-year contract with Sheffield Financial (“Sheffield”) pursuant to which Sheffield agreed to make available closed-end installment consumer and commercial credit to customers of our dealers for Polaris products. The current installment credit agreement under which Sheffield provides exclusive installment credit lending for ORVs, as well as installment credit lending for snowmobiles motorcycles and certain other Polaris products expires in February 2016.2021.
In November 2014, aA wholly-owned subsidiary of Polaris entered into a multi-year agreement with Evergreen Bank Group in September 2016. The agreement established Performance Finance as a division of Evergreen Bank Group, and is exclusively focused on the financing of Polaris motorcycles. The agreement replaced our previous arrangement with Freedom Road. The current installment credit agreement under which Performance Finance provides installment credit lending for motorcycles expires in December 2021.
A wholly-owned subsidiary of Polaris has a multi-year contract with FreedomRoad Financial (“FreedomRoad”) pursuant toSynchrony Bank, under which FreedomRoad agreed to makeSynchrony Bank makes available closed-end installment consumer and commercial credit to customers of our dealers for both Polaris and non-Polaris products. The current installment credit agreement under which FreedomRoadSynchrony Bank provides installment credit lending for motorcyclesPolaris products expires in February 2016.December 2020.
In December 2014, a wholly-owned subsidiary of Polaris entered into a multi-year contract with Chrome Capital LLC (“Chrome”) pursuant to which Chrome agreed to make available leasing to customers of our dealers for Victory and Indian Motorcycles. The current leasing agreement under which Chrome provides exclusive leasing for motorcycles expires in January 2018.
We promote our brands among the riding and non-riding public and provide a wide range of products for enthusiasts by licensing the name Polaris. We currently license the production and sale of a range of items, including die cast toys, ride-on toys and numerous other products.
We sell clothing and accessories through our e-commerce sites polaris.com, indianmotorcycle.com, klim.com, kolpin.com, and proarmor.com.
Marketing.Our marketing activities are designed primarily to promote and communicate directly with consumers and secondarily to assist the selling and marketing efforts of our dealers and distributors. We make available and advertise discount or rebate programs, retail financing or other incentives for our dealers and distributors to remain price competitive in order to accelerate retail sales to consumers and gain market share.consumers. We advertise our products directly to consumers using print advertising in the industry press and in user group publications and on the internet, social media, billboards, television and radio. We also provide media advertising and partially underwrite dealer and distributor media advertising to a degree and on terms which vary by product and from year to year. From time to time, weWe produce promotional films for our products, which are available to dealers for use in the showroom or at special promotions. We also provide product brochures, leaflets, posters, dealer signs and miscellaneous other promotional items for use by dealers.
We expended $314.4$342.2 million, $270.3$316.7 million and $210.4$314.5 million for sales and marketing activities in 2014, 20132016, 2015 and 2012,2014, respectively.
Engineering, Research and Development, and New Product Introduction
We have approximately 700850 employees who are engaged in the development and testing of existing products and research and development of new products and improved production techniques, located primarily in our Roseau and Wyoming, Minnesota facilities and in Burgdorf, Switzerland. Our SV acquisitions of GEM, Goupil and Aixam included research and development resources for their respective product lines. We believe Polaris was the first to develop, for wide commercial use, independent front suspensions for snowmobiles, long travel rear suspensions for snowmobiles, liquid cooled snowmobile brakes, hydraulic brakes for snowmobiles, the three cylinder engine in snowmobiles, the adaptation of the MacPherson strut front suspension, “on demand” all-wheel drive systems and the Concentric Drive System for use in ORVs, the application of a forced air cooled variable power transmission system in ORVs and the use of electronic fuel injection for ORVs.
We utilize internal combustion engine testing facilities to design and optimize engine configurations for our products. We utilize specialized facilities for matching engine, exhaust system and clutch performance parameters in our products to achieve desired fuel consumption, power output, noise level and other objectives. Our engineering department is equipped to make small quantities of new product prototypes for testing and for the planning of manufacturing procedures. In addition, we maintain numerous facilities where each of the products is extensively tested under actual use conditions. We utilize our Wyoming, Minnesota facility for engineering, design and development personnel for our line of engines and powertrains, ORVs, Victory, Indian and Slingshot motorcycles, and SVs. In 2010, we acquiredcertain Global Adjacent Market vehicles, and our Roseau, Minnesota facility for our snowmobile and certain ATV research and development. We also own Swissauto Powersports Ltd., an engineering company that develops high performance and high efficiency engines and innovative vehicles.
We expended $148.5$185.1 million, $139.2$166.4 million and $127.4$148.5 million for research and development activities in 2014, 20132016, 2015 and 2012,2014, respectively.
Intellectual Property
We rely on a combination of patents, trademarks, copyrights, trade secrets, and nondisclosure and non-competition agreements to establish and protect our intellectual property and proprietary technology. We have filed and obtained numerous patents in the United States and abroad, and regularly file patent applications worldwide in our continuing effort to establish and protect our proprietary technology. Additionally, we have numerous registered trademarks, trade names and logos in the United States, Canada and other international locations.countries.
Competition
The off-road vehicle, snowmobile, motorcycle, people mobility and small vehiclework utility solutions, and aftermarket markets in the United States, Canada and other global markets are highly competitive. Our competition primarily comes from North American and Asian manufacturers. Competition in such markets is based upon a number of factors, including price,
quality, reliability, styling, product features and warranties. At the dealer level, competition is based on a number of factors, including sales and marketing support programs (such as financing and cooperative advertising). Certain of our competitors are more diversified and have financial and marketing resources that are substantially greater than those of Polaris.
We believe that our products are competitively priced and our sales and marketing support programs for dealers are comparable to those provided by our competitors. Our products compete with many other recreational products for the discretionary spending of consumers, and to a lesser extent, with other vehicles designed for utility applications.
Product Safety and Regulation
Safety regulation. The federal government and individual states have promulgated or are considering promulgating laws and regulations relating to the use and safety of certain of our products. The federal government is currently the primary regulator of product safety. The Consumer Product Safety Commission (CPSC) has federal oversight over product safety issues related to snowmobiles, snow-bikes and off-road vehicles. The National Highway Transportation Safety Administration (NHTSA) has federal oversight over product safety issues related to motorcycles (including Slingshot) and smallon-road people mobility vehicles.
In August 2008, the Consumer Product Safety Improvement Act (“Act”) was passed which, among other things, required ATV manufacturers and distributors to comply with previously voluntary American National Standards Institute (ANSI) safety standards developed by the Specialty Vehicle Institute of America (SVIA). We believe that our products comply with the ANSI/SVIA standards, and we have had an action plan on file with the CPSC since 1998 regarding safety
related issues. The Act also includes a provision whichthat requires the CPSC to complete an ATV rulemaking process it started in August 2006 regarding the need for safety standards or increased safety standards for ATVs, which has not yet resulted in the issuance of a final rule.
We are a member of the Recreational Off-Highway Vehicle Association (ROHVA), which was established to promote the safe and responsible use of side-by-side vehicles also known as Recreational Off-Highway Vehicles (ROVs), a category that includes our RANGER, and PolarisGENERAL,RZR, side-by-sideand Polaris ACE vehicles. Since early 2008, ROHVA has been engaged in a comprehensive process for developing and updating a voluntary standard for equipment, configuration and performance requirements of ROVs through ANSI. Comments on the draft standard werestandards have been actively solicited from the CPSC and other stakeholders as part of the ANSI process. The standard, which addresses stability, occupant retention and other safety performance criteria, was approved and published by ANSI in March 2010, and then revised in 2011, 2014 and revised again in 2014.2016.
In October 2009, the CPSC published an advance notice of proposed rulemaking regarding ROV safety under the Consumer Product Safety Act. In December 2014, the CPSC published a Notice of Proposed Rulemaking that includes proposed mandatory safety standards for ROVs in the areas of lateral stability, steering and handling, and occupant retention. Polaris, by itself and through ROHVA, has expressed concerns about the proposed mandatory standards, whether they would actually reduce ROV incident rates, whether the proposed tests are repeatable and appropriate for ROVs, and the unintended safety consequences that could result from them. As a result of those concerns, revisions to the standard were proposed. In 2015, CPSC expressed support for the proposed 2016 revisions to the ANSI standard, which may allow CPSC to terminate its rule-making process. We are unable to predict the outcome of the CPSC rule-making process or the ultimate impact of any resulting rules on our business and operating results.
We are a member of the International Snowmobile Manufacturers Association (ISMA), a trade association formed to promote safety in the manufacture and use of snowmobiles, among other things. ISMA members include all of the major snowmobile manufacturers. The ISMA members are also members of the Snowmobile Safety and Certification Committee, which promulgated voluntary sound and safety standards for snowmobiles that have been adopted as regulations in some states of the United States and in Canada. These standards require testing and evaluation by an independent testing laboratory. We believe that our snowmobiles have always complied with safety standards relevant to snowmobiles.
MotorcycleMotorcycles and SVscertain people mobility vehicles are subject to federal vehicle safety standards administered by the NHTSA and are also subject to various state vehicle equipment standards. Our Slingshot vehicle is classified as a motorcycle under U.S. federal law, but may be classified differently in other jurisdictions. We believe our motorcycles (including Slingshot) and SVspeople mobility vehicles comply with applicable federal and state safety standards.
Our products are also subject to international standards related to safety in places where we sell our products outside the United States. We believe that our motorcycles, SVs, ORVs, snowmobiles, snow-bikes and snowmobilespeople mobility vehicles have complied with applicable safety standards in the United States and other international locations.
Use regulation. Local, state and federal laws and regulations have been promulgated, and at various times, ordinances or legislation is introduced, relating to the use or manner of use of our products. Some states and municipalities have adopted, or are considering the adoption of, legislation and local ordinances that restrict the use of ORVs and snowmobiles to specified hours and locations. The federal government also has legislative and executive authority to restrict the use of ORVs and snowmobiles in some national parks and federal lands. In several instances, this restriction has been a ban on the recreational use of these vehicles.
Emissions. The federal Environmental Protection Agency (EPA) and the California Air Resources Board (CARB) have adopted emissions regulations applicable to our products.
The EPA's emission standards for off-road recreational engines and vehicles apply to our ORV's and snowmobiles. We have developed engine and emission technologies to meet these requirements, including the chassis-based ORV emission requirements that became effective in model year 2014. Snowmobiles comply using the fleet average provisions of the regulations. In 2008, the EPA announced its intention to issue a future rulemaking on snowmobiles with any new emission standards taking effect after model year 2012. No further EPA rulemaking activity has followed the 2008 announcement. The CARB also has emission regulations for ORVs that we meet. In 2014, CARB finalized additional evaporative emission regulations for ORVs that will take effect beginning in model year 2018.
Our Victory, Indian and Slingshot motorcycles are subject to EPA and CARB emission standards for on-highway motorcycles. We believe that these vehicles comply with the applicable standards. GEM electric vehicles are subject to CARB emissions certification requirements, which they meet.
Our products are also subject to international emission laws and regulations in places where we sell our products outside the United States. Canada’s emission regulations for motorcycles, ORVs and snowmobiles are similar to those in the United States, and Polaris complies with the applicable Canada requirements. Europe currently regulates emissions from our motorcycles and certain of our ATV-based products for which we obtain whole vehicle type approvals, and these products meet the applicable requirements. In 2014, the European Parliament and Council finalized the details of new regulations that will makemade these European emission requirements more stringent, beginning in 2016. The first motorcycle and ATV-based product certifications were successfully executed in 2016. Emissions from certain other Polaris off-road productsORV and snowmobile engines in the EU will be covered in the future by the non-road mobile machinery directive, which is currently being revised.finalized. Polaris is reviewing the technology requirements and developing compliance solutions for these future EU emissions regulations.
We believe that our products comply with applicable emission standards and related regulations in the United States and internationally. We are unable to predict the ultimate impact of the adopted or proposed new regulations on our business. We are currently developing and obtaining engine and emission technologies to meet the requirements of the future emission standards.
Employees
Due to the seasonality of our business and certain changes in production cycles, total employment levels vary throughout the year. Despite such variations in employment levels, employee turnover has not been high. During 2014,2016, on a worldwide basis, we employed an average of approximately 7,0008,600 full-time persons, a 30six percent increase from 2013.2015. Including our 2016 acquisitions, we employed approximately 10,000 full-time persons as of December 31, 2016. Approximately 2,9003,800 of our employees are salaried. We consider our relations with our employees to be excellent.
Available Information
Our Internet website is http://www.polaris.com. We make available free of charge, on or through our website, our annual, quarterly and current reports, and any amendments to those reports, as soon as reasonably practicable after electronically filing such reports with the Securities and Exchange Commission. We also make available through our website our corporate governance materials, including our Corporate Governance Guidelines, the charters of the Audit Committee, Compensation Committee, Corporate Governance and Nominating Committee and Technology Committee of our Board of Directors and our Code of Business Conduct and Ethics. Any shareholder or other interested party wishing to receive a copy of these corporate governance materials should write to Polaris Industries Inc., 2100 Highway 55, Medina, Minnesota 55340, Attention: Investor Relations. Information contained on our website is not part of this report.
Forward-Looking Statements
This 20142016 Annual Report contains not only historical information, but also “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 we or our management “believes,” “anticipates,” “expects,” “estimates” or words of similar import. Similarly, statements that describe our future plans, objectives or goals are also forward-looking. Forward-looking statements may also be made from time to time in oral presentations, including telephone conferences and/or webcasts open to the public. 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, including the risks and uncertainties described below under the heading entitled “Item 1A—1A
—Risk Factors” and elsewhere in this report. The risks and uncertainties discussed in this report are not exclusive and other factors that we may consider immaterial or do not anticipate may emerge as significant risks and uncertainties.
Any forward-looking statements made in this report or otherwise speak only as of the date of such statement, and we undertake no obligation to update such statements to reflect actual results or changes in factors or assumptions affecting such forward-looking statements. We advise you, however, to consult any further disclosures made on related subjects in future quarterly reports on Form 10-Q and current reports on Form 8-K that are filed with or furnished to the Securities and Exchange Commission.
Executive Officers of the Registrant
Set forth below are the names of our executive officers as of February 20, 2015,16, 2017, their ages, titles, the year first appointed as an executive officer, and employment for the past five years: |
| | | | |
| Name | | Age | | Title |
| Scott W. Wine | | 4749 | | Chairman of the Board of Directors and Chief Executive Officer |
Bennett J. Morgan | | 51 | | President and Chief Operating Officer |
| Kenneth J. Pucel | | 4850 | | Executive Vice President—Global Operations, Engineering and Lean |
Michael W. MaloneT. Speetzen | | 5647 | | Executive Vice President—Finance and Chief Financial Officer |
Todd-Michael BalanRobert P. Mack | | 4547 | | Senior Vice President—Corporate Development and Strategy, and President—Adjacent Markets |
| Stacy L. Bogart | | 5153 | | Senior Vice President—General Counsel, Compliance Officer and Secretary |
| Michael D. Dougherty | | 4749 | | Vice President—Asia Pacific and Latin AmericaInternational |
| Stephen L. Eastman | | 5052 | | Vice President—Parts, Garments and Accessories |
| Matthew J. Homan | | 4345 | | President—Global Adjacent Markets |
Michael P. Jonikas | | 54 | | Vice President—Snowmobiles and Slingshot |
Suresh Krishna | | 46 | | Vice President—Europe, Middle East and Africa |
David C. Longren | | 56 | | Vice President—Off-Road Vehicles and Off-Road Vehicles Engineering |
| James P. Williams | | 5254 | | Senior Vice President—Chief Human Resources Officer |
Executive officers of the Company are elected at the discretion of the Board of Directors with no fixed terms. There are no family relationships between or among any of the executive officers or directors of the Company.
Mr. Wine joined Polaris Industries Inc. as Chief Executive Officer on September 1, 2008, and was named Chairman of the Board of Directors in January 2013. Prior to joining Polaris, Mr. Wine was President of Fire Safety Americas, a division of United Technologies, a provider of high technology products and services to the building systems and aerospace industries, from 2007 to August 2008. Prior to that, Mr. Wine held senior leadership positions at Danaher Corp. in the United States and Europe from 2003 to 2007, including President of its Jacob Vehicle Systems and Veeder-Roots subsidiaries, and Vice President and General Manager, Manufacturing Programs in Europe. From 1996 to 2003, Mr. Wine held a number of operations and executive posts, both international and domestic with Allied Signal Corporation's Aerospace Division.
Mr. Morgan has been President and Chief Operating Officer of the Company since April 2005; prior to that he was Vice President and General Manager of the ATV division of Polaris. Prior to managing the ATV division, Mr. Morgan was General Manager of PG&A for Polaris from 1997 to 2001. He joined Polaris in 1987 and spent his early career in various product development, marketing and operations management positions of increasing responsibility.
Mr. Pucel joined Polaris in December 2014 as Executive Vice President—Global Operations, Engineering and Lean. Prior to joining Polaris, Mr. Pucel was with Boston Scientific Corporation (BSC), a global provider of medical solutions. Most recently,solutions, where Mr. Pucel held the position of Executive Vice President of Global Operations, Quality and Technology and was a member of BSC’s Executive Committee from 2004 to 2014. Since 2004, he managed BSC’s manufacturing facilities, supply chain and numerous distributions centers; in 2010, he added responsibility for enterprise-wide Lean and research and development activities.
Mr. MaloneSpeetzen has been Executive Vice President—Finance and Chief Financial Officer of the Company since January 1997. From January 1997 to January 2010, Mr. Malone also served as Corporate Secretary. Mr. Malone was Vice President and Treasurer of the Company from December 1994 to January 1997 and was Chief Financial Officer and Treasurer of a predecessor company of Polaris from January 1993 to December 1994. Prior thereto and since 1986, he was Assistant Treasurer of a predecessor company of Polaris. Mr. Malone joined Polaris in 1984 after four years with Arthur Andersen LLP.
Mr. Balan joined Polaris in July 2009 as Vice President—Corporate Development. August 2015. Prior to joining Polaris, Mr. BalanSpeetzen was DirectorSenior Vice President and Chief Financial Officer of MarketingXylem, Inc., a provider of fluid technology and equipment solutions for water issues, since 2011, when the company was formed from the spinoff of the water businesses of ITT Corporation.
Mr. Mack joined Polaris in April 2016 as Senior Vice President—Corporate Development and Strategy, for United Technologies Corporation's Fire & Security business from 2007 to June 2009.and President—Adjacent Markets. Prior to joining Polaris, Mr. Mack was Vice President, Corporate Development for Ingersoll Rand plc, a diversified industrial company. In that Mr. Balan held various marketing, general management, business development,role since July 2010, he had global responsibility for the company’s acquisition and strategy roles within Danaher Corp. from 2001 to 2007. Mr. Balan’s work history also includes various strategy, marketing, and sales management roles with Emerson Electric and Colfax Corporation.divestiture activities.
Ms. Bogart has been Senior Vice President—General Counsel, Compliance Officer and Secretary of Polaris since September 2015. Prior to her current role, she was Vice President—General Counsel and Compliance Officer of Polaris since November 2009 and Corporate Secretary since January 2010. From February 2009 to November 2009, Ms. Bogart was General Counsel of Liberty Diversified International. From October 1999 until February 2009, Ms. Bogart held several positions at The Toro Company, including Assistant General Counsel and Assistant Secretary. Before joining The Toro Company, Ms. Bogart was a Senior Attorney for Honeywell Inc.
Mr. Dougherty has been President—International since September 2015. Prior to his current role, he was Vice President—Asia Pacific and Latin America since August 2011. Mr. Dougherty joined the company in 1998 as International Sales Manager, and has held several positions, including Vice President of Global New Market Development and Vice President and General Manager of the ATV division during his tenure. Prior to Polaris, Mr. Dougherty was employed at Trident Medical International, a trading company.
Mr. Eastman has been President—Parts, Garments and Accessories since September 2015. Prior to his current role, he was Vice President—Parts, Garments and Accessories since February 2012. Prior to joining Polaris, Mr. Eastman was President of Target.com for Target Corporation, a general merchandise retailer, from July 2008 to October 2011. Prior to that, Mr. Eastman held several leadership positions at Target Corporation since 1982 in various areas, including General Merchandising, Consumer Electronics, Inventory Management and Merchandise Planning Operations.
Mr. Homan was promoted to President—Global Adjacent MarketsOff-Road Vehicles in July 2014.January 2016. Mr. Homan has held several key leadership positions at Polaris. Prior to his current role, most recently he was President—Global Adjacent Markets since September 2015, Vice President—Global Adjacent Markets since July 2014, Vice President—EMEA since August 2011,2011.
Mr. Williams was appointed Senior Vice President—Off-Road Vehicles since August 2008, and General Manager of Side-by-Sides since December 2005. Mr. Homan joined PolarisChief Human Resources Officer in 2002 as Director of Marketing for the ATV division. Prior to working at Polaris, Mr. Homan spent nearly seven years at General Mills, Inc. working in various marketing and brand management positions.
Mr. Jonikas is Vice President—Snowmobiles and Slingshot. Mr. Jonikas has been Vice President of Snowmobiles since August 2011. Mr. Jonikas was Vice President of Sales and Marketing beginning in November 2007 until January 2014 when he assumed the role of Vice President of Snowmobiles and Slingshot. Mr. Jonikas was also previously Vice President—On-Road Vehicles from May 2009 to August 2011. Mr. Jonikas joined Polaris in 2000, and has held several key roles including Director of Product and Marketing Management for the ATV division and General Manager of Side-by-Sides. Prior to joining Polaris, Mr. Jonikas spent 12 years at General Mills, Inc. in numerous general management positions.
Mr. Krishna became Vice President—Europe, Middle East and Africa in July 2014.September 2015. Prior to this Mr. KrishnaWilliams was Vice President—Global Operations and Integration since September 2010, and Vice President—Supply Chain and Integration since March 2010. Before Mr. Krishna joined Polaris, he was Vice President Global Operations, Supply Chain and IT for a division of United Technologies Corporation's Fire & Security business where he was responsible for significant operations in China, Mexico, the United States and Europe from August 2007 to March 2010. Prior to United Technologies Corporation, Mr. Krishna worked for Diageo, a global producer of famous drink brands as Vice President Supply Chain for its North American business from February 2002 to July 2007.
Mr. Longren was appointed Vice President—Off-Road Vehicles and Off-Road Vehicles Engineering in August 2011. Prior to this, Mr. Longren was Chief Technical Officer since May 2006. Mr. Longren joined Polaris in January 2003 as the Director of Engineering for the ATV Division. Prior to joining Polaris, Mr. Longren was a Vice President in the Weapons Systems Division of Alliant Techsystems and Vice President, Engineering and Marketing at Blount Sporting Equipment Group.
Mr. Williams joined Polaris as Vice President—Human Resources insince April 2011. Prior to joining Polaris, Mr. Williams was Vice President of Human Resources for Cooper Industries, a diversified manufacturing Company, since 2006. Between 2005 and 2006, Mr. Williams was Vice President of Human Resources for Danaher Corp. Previous to that, Mr. Williams held various executive positions of increasing responsibility with Honeywell Inc. from 1995 to 2005. Prior to that, Mr. Williams held a number of posts in Human Resources with Monsanto and General Motors Corporation.
Item 1A. Risk Factors
The following are significant factors known to us that could materially adversely affect our business, financial condition, or operating results, as well as adversely affect the value of an investment in our common stock.
A significant adverse determination in any material product liability claim against us could adversely affect our operating results or financial condition.
The manufacture, sale and usage of our products expose us to significant risks associated with product liability claims. If our products are defective or used incorrectly by our customers, bodily injury, property damage or other injury, including death, may result and this could give rise to product liability claims against us or adversely affect our brand image or reputation. Any losses that we may suffer from any product liability claims, and the effect that any product liability litigation may have upon the reputation and marketability of our products, may have a negative impact on our business and operating results.
Because of the high cost of product liability insurance premiums and the historically insignificant amount of product liability claims paid by us, we were self-insured from 1985 to 1996 and from 2002 to 2012. From 1996 to 2002, and beginning again in 2012, we purchased excess insurance coverage for catastrophic product liability claims for incidents occurring subsequent to the policy date that exceeded our self-insured retention levels. The estimated costs resulting from any losses are charged to expense when it is probable a loss has been incurred and the amount of the loss is reasonably determinable.
We had a product liability reserve accrued on our balance sheet of $45.1 million at December 31, 2016 for the probable payment of pending claims related to product liability litigation associated with our products. We believe such accrual is adequate. We do not believe the outcome of any pending product liability litigation will have a material adverse effect on our operations. However, no assurance can be given that our historical claims record, which did not include ATVs prior to 1985, motorcycles and side-by-side vehicles prior to 1998, and Global Adjacent Markets vehicles prior to 2011, will not change or that material product liability claims against us will not be made in the future. Adverse determination of material product liability claims made against us would have a material adverse effect on our financial condition.
Significant product repair and/or replacement due to product warranty claims or product recalls could have a material adverse impact on our results of operations.
We provide limited warranties for our vehicles. We may also provide longer warranties related to certain promotional programs, as well as longer warranties in certain geographical markets as determined by local regulations and market conditions. We also provide a limited emission warranty for certain emission-related parts in our ORVs, snowmobiles, and motorcycles as required by the EPA and CARB. Although we employ quality control procedures, sometimes a product is distributed that needs repair or replacement. Our standard warranties require us or our dealers to repair or replace defective products during such warranty periods at no cost to the consumer.
Historically, product recalls have been administered through our dealers and distributors. The repair and replacement costs we could incur in connection with a recall could adversely affect our business. For example, in April 2016, we issued a voluntary recall for certain RZR 900 and 1000 off-road vehicles manufactured since model year 2013 due to reports of thermal-related incidents, including fire, and in September 2016, we issued a voluntary recall for certain RZR XP Turbo off-road vehicles due to similar thermal-related incidents. In addition, product recalls could harm our reputation and cause us to lose customers, particularly if recalls cause consumers to question the safety or reliability of our products.
Our business may be sensitive to economic conditions that impact consumer spending.
Our results of operations may be sensitive to changes in overall economic conditions, primarily in North America and Europe, that impact consumer spending, including discretionary spending. Weakening of, and fluctuations in, economic conditions affecting disposable consumer income such as employment levels, business conditions, changes in housing market conditions, capital markets, tax rates, savings rates, interest rates, fuel and energy costs, the impacts of natural disasters and acts of terrorism and other matters, including the availability of consumer credit, could reduce overall consumer spending or reduce consumer spending on powersports and aftermarket products. A general reduction in consumer spending or a reduction in consumer spending on powersports and aftermarket products could adversely affect our sales growth and profitability. Overall demand for products sold in the Jeep and truck aftermarket is dependent upon
many factors including the total number of vehicle miles driven in the United States, the total number of registered vehicles in the United States, the age and quality of these registered vehicles and the level of unemployment in the United States. Adverse changes in these factors could lead to a decreased level of demand for our products, which could negatively impact our business, results of operations, financial condition and cash flows.
In addition, we have a financial services partnership arrangement with a subsidiary of Wells Fargo Bank, N.A. that requires us to repurchase products financed and repossessed by the partnership, subject to certain limitations. For calendar year 2016, our maximum aggregate repurchase obligation was approximately $182.8 million. If adverse changes to economic conditions result in increased defaults on the loans made by this financial services partnership, our repurchase obligation under the partnership arrangement could adversely affect our liquidity and harm our business.
Termination or interruption of informal supply arrangements could have a material adverse effect on our business or results of operations.
We have informal supply arrangements with many of our suppliers. In the event of a termination of the supply arrangement, there can be no assurance that alternate supply arrangements will be made on satisfactory terms. If we need to enter into supply arrangements on unsatisfactory terms, or if there are any delays to our supply arrangements, it could adversely affect our business and operating results.
Increases in the cost of raw material, commodity and transportation costs and shortages of certain raw materials could negatively impact our business.
The primary commodities used in manufacturing our products are aluminum, steel, petroleum-based resins and certain rare earth metals used in our charging systems, as well as diesel fuel to transport the products. Our profitability is affected by significant fluctuations in the prices of the raw materials and commodities we use in our products. We may not be able to pass along any price increases in our raw materials to our customers. As a result, an increase in the cost of raw materials, commodities, labor or other costs associated with the manufacturing of our products could increase our costs of sales and reduce our profitability.
Fluctuations in foreign currency exchange rates could result in declines in our reported sales and net earnings.
The changing relationships of the United States dollar to the Canadian dollar, Australian dollar, the Euro, the Swiss franc, the Mexican peso, the Japanese yen and certain other foreign currencies have from time to time had a negative impact on our results of operations. Fluctuations in the value of the United States dollar relative to these foreign currencies can adversely affect the price of our products in foreign markets, the costs we incur to import certain components for our products, and the translation of our foreign balance sheets. While we actively manage our exposure to fluctuating foreign currency exchange rates by entering into foreign exchange hedging contracts from time to time, these contracts hedge foreign currency denominated transactions, and any change in the fair value of the contracts would be offset by changes in the underlying value of the transactions being hedged.
We face intense competition in all product lines, including from some competitors that have greater financial and marketing resources. Failure to compete effectively against competitors would negatively impact our business and operating results.
The markets we operate in are highly competitive. Competition in such markets is based upon a number of factors, including price, quality, reliability, styling, product features and warranties. At the dealer level, competition is based on a number of factors, including sales and marketing support programs (such as financing and cooperative advertising). Certain of our competitors are more diversified and have financial and marketing resources that are substantially greater than ours, which allow these competitors to invest more heavily in intellectual property, product development and advertising. If we are not able to compete with new products or models of our competitors, our future business performance may be materially and adversely affected. Internationally, our products typically face more competition where certain foreign competitors manufacture and market products in their respective countries. This allows those competitors to sell products at lower prices, which could adversely affect our competitiveness. In addition, our products compete with many other recreational products for the discretionary spending of consumers and, to a lesser extent, with other vehicles designed for utility applications. A failure to effectively compete with these other competitors could have a material adverse effect on our performance.
We manufacture our products at, and distribute our products from, several locations in North America and internationally. Any disruption at any of these facilities or manufacturing delays could adversely affect our business and operating results.
We manufacture most of our products at 18 locations, including North American and international facilities. We also have several locations that serve as wholegoods and PG&A distribution centers, warehouses and office facilities. In addition, we have agreements with other third-party manufacturers to manufacture products on our behalf. These facilities may be affected by natural or man-made disasters and other external events. In the event that one of our manufacturing facilities was affected by a disaster or other event, we could be forced to shift production to one of our other manufacturing facilities. Although we maintain insurance for damage to our property and disruption of our business from casualties, such insurance may not be sufficient to cover all of our potential losses. Any disruption in our manufacturing capacity could have an adverse impact on our ability to produce sufficient inventory of our products or may require us to incur additional expenses in order to produce sufficient inventory, and therefore, may adversely affect our net sales and operating results. Any disruption or delay at our manufacturing facilities could impair our ability to meet the demands of our customers, and our customers may cancel orders or purchase products from our competitors, which could adversely affect our business and operating results.
If we are unable to continue to enhance existing products and develop and market new products that respond to customer needs and preferences, we may experience a decrease in demand for our products and our business could suffer.
One of our growth strategies is to develop innovative, customer-valued products to generate revenue growth. Our sales from new products in the past have represented a significant component of our sales and are expected to continue to represent a significant component of our future sales. We may not be able to compete as effectively with our competitors, and ultimately satisfy the needs and preferences of our customers, unless we can continue to enhance existing products and develop new innovative products in the global markets in which we compete. Product development requires significant financial, technological and other resources. While we expended $185.1 million, $166.4 million and $148.5 million for research and development efforts in 2016, 2015 and 2014, respectively, there can be no assurance that this level of investment in research and development will be sufficient to maintain our competitive advantage in product innovation, which could cause our business to suffer. Product improvements and new product introductions also require significant planning, design, development, and testing at the technological, product, and manufacturing process levels and we may not be able to timely develop product improvements or new products. Our competitors’ new products may beat our products to market and be more attractive with more features and/or less expensive than our products.
We depend on suppliers, financing sources and other strategic partners who may be sensitive to economic conditions that could affect their businesses in a manner that adversely affects their relationship with us.
We source component parts and raw materials through numerous suppliers and have relationships with a limited number of product financing sources for our dealers and consumers. Our sales growth and profitability could be adversely affected if deterioration of economic or business conditions results in a weakening of the financial condition of a material number of our suppliers or financing sources, or if uncertainty about the economy or the demand for our products causes these business partners to voluntarily or involuntarily reduce or terminate their relationship with us.
We intend to grow our business through potential acquisitions, non-consolidating investments, alliances and new joint ventures and partnerships, which could be risky and could harm our business.
One of our growth strategies is to drive growth in our businesses and accelerate opportunities to expand our global presence through targeted acquisitions, non-consolidating investments, alliances, and new joint ventures and partnerships that add value while considering our existing brands and product portfolio. The benefits of an acquisition, non-consolidating investment, new joint venture or partnership may take more time than expected to develop or integrate into our operations, and we cannot guarantee that acquisitions, non-consolidating investments, alliances, joint ventures or partnerships will ultimately produce any benefits.
There can be no assurance that acquisitions will be consummated or that, if consummated, they will be successful. Acquisitions pose risks with respect to our ability to project and evaluate market demand, potential synergies and cost savings, make correct accounting estimates and achieve anticipated business goals and objectives. As we continue to grow, in part, through acquisitions, our success depends on our ability to anticipate and effectively manage these risks. If acquired businesses do not achieve forecasted results or otherwise fail to meet projections, it could affect our results of operations.
Acquisitions present a number of integration risks. For example, the acquisition may: disrupt operations in core, adjacent or acquired businesses; require more time than anticipated to be fully integrated into our operations and systems; create more costs than projected; divert management attention; create the potential of losing customer, supplier or other critical
business relationships; and pose difficulties retaining employees. The inability to successfully integrate new businesses may result in higher production costs, lost sales or otherwise negatively affect earnings and financial results.
Our products are subject to extensive United States federal and state and international safety, environmental and other government regulation that may require us to incur expenses or modify product offerings in order to maintain compliance with the actions of regulators and could decrease the demand for our products.
Our products are subject to extensive laws and regulations relating to safety, environmental and other regulations promulgated by the United States federal government and individual states as well as international regulatory authorities. Failure to comply with applicable regulations could result in fines, increased expenses to modify our products and harm to our reputation, all of which could have an adverse effect on our operations. In addition, future regulations could require additional safety standards or emission reductions that would require additional expenses and/or modification of product offerings in order to maintain compliance with applicable regulations. Our products are also subject to laws and regulations that restrict the use or manner of use during certain hours and locations, and these laws and regulations could decrease the popularity and sales of our products. We continue to monitor regulatory activities in conjunction with industry associations and support balanced and appropriate programs that educate the product user on safe use of our products and how to protect the environment.
A significant adverse determination in any material product liability claim against us could adversely affect our operating results or financial condition.
The manufacture, sale and usage of our products expose us to significant risks associated with product liability claims. If our products are defective or used incorrectly by our customers, bodily injury, property damage or other injury, including death, may result and this could give rise to product liability claims against us or adversely affect our brand image or reputation. Any losses that we may suffer from any liability claims, and the effect that any product liability litigation may have upon the reputation and marketability of our products, may have a negative impact on our business and operating results.
Because of the high cost of product liability insurance premiums and the historically insignificant amount of product liability claims paid by us, we were self-insured from 1985 to 1996 and from 2002 to 2012. From 1996 to 2002, and beginning again in 2012, we purchased excess insurance coverage for catastrophic product liability claims for incidents occurring subsequent to the policy date that exceeded our self-insured retention levels. The estimated costs resulting from any losses are charged to expense when it is probable a loss has been incurred and the amount of the loss is reasonably determinable.
We had a product liability reserve accrued on our balance sheet of $17.3 million at December 31, 2014 for the probable payment of pending claims related to product liability litigation associated with our products. We believe such accrual is adequate. We do not believe the outcome of any pending product liability litigation will have a material adverse effect on our operations. However, no assurance can be given that our historical claims record, which did not include ATVs prior to 1985, motorcycles and side-by-side vehicles prior to 1998, and SVs prior to 2011, will not change or that material product liability claims against us will not be made in the future. Adverse determination of material product liability claims made against us would have a material adverse effect on our financial condition.
Significant product repair and/or replacement due to product warranty claims or product recalls could have a material adverse impact on our results of operations.
We provide a limited warranty for ORVs for a period of six months, for a period of one year for our snowmobiles, for a period of one or two years for our motorcycles depending on brand and model year, and for a two year period for SVs. We may provide longer warranties related to certain promotional programs, as well as longer warranties in certain geographical markets as determined by local regulations and market conditions. We also provide a limited emission warranty for certain emission-related parts in our ORVs, snowmobiles, and motorcycles as required by the EPA and CARB. Although we employ quality control procedures, sometimes a product is distributed that needs repair or replacement. Our standard warranties require us or our dealers to repair or replace defective products during such warranty periods at no cost to the consumer. Historically, product recalls have been administered through our dealers and distributors. The repair and replacement costs we could incur in connection with a recall could adversely affect our
business. In addition, product recalls could harm our reputation and cause us to lose customers, particularly if recalls cause consumers to question the safety or reliability of our products.
Changing weather conditions may reduce demand and negatively impact net sales and production of certain of our products.
Lack of snowfall in any year in any particular geographic region may adversely affect snowmobile retail sales and related PG&A sales in that region. Additionally, to the extent that unfavorable weather conditions are exacerbated by global climate change or otherwise, our sales may be affected to a greater degree than we have previously experienced. There is no assurance that weather conditions or natural disasters could not have a material effect on our sales, production capability or component supply continuity for any of our products.
We face intense competition in all product lines, including from some competitors that have greater financial and marketing resources. Failure to compete effectively against competitors would negatively impact our business and operating results.
The snowmobile, off-road vehicle, motorcycle and small vehicle markets are highly competitive. Competition in such markets is based upon a number of factors, including price, quality, reliability, styling, product features and warranties. At the dealer level, competition is based on a number of factors, including sales and marketing support programs (such as financing and cooperative advertising). Certain of our competitors are more diversified and have financial and marketing resources that are substantially greater than ours, which allow these competitors to invest more heavily in intellectual property, product development and advertising. If we are not able to compete with new products or models of our competitors, our future business performance may be materially and adversely affected. Internationally, our products typically face more competition where certain foreign competitors manufacture and market products in their respective countries. This allows those competitors to sell products at lower prices, which could adversely affect our competitiveness. In addition, our products compete with many other recreational products for the discretionary spending of consumers and, to a lesser extent, with other vehicles designed for utility applications. A failure to effectively compete with these other competitors could have a material adverse effect on our performance.
Termination or interruption of informal supply arrangements could have a material adverse effect on our business or results of operations.
We have informal supply arrangements with many of our suppliers. In the event of a termination of the supply arrangement, there can be no assurance that alternate supply arrangements will be made on satisfactory terms. If we need to enter into supply arrangements on unsatisfactory terms, or if there are any delays to our supply arrangements, it could adversely affect our business and operating results.
Fluctuations in foreign currency exchange rates could result in declines in our reported sales and net earnings.
The changing relationships of primarily the United States dollar to the Canadian dollar, Australian dollar, the Euro, the Swiss Franc, the Mexican peso, the Japanese yen and certain other foreign currencies have from time to time had a negative impact on our results of operations. Fluctuations in the value of the United States dollar relative to these foreign currencies can adversely affect the price of our products in foreign markets, the costs we incur to import certain components for our products, and the translation of our foreign balance sheets. While we actively manage our exposure to fluctuating foreign currency exchange rates by entering into foreign exchange hedging contracts from time to time, these contracts hedge foreign currency denominated transactions and any change in the fair value of the contracts would be offset by changes in the underlying value of the transactions being hedged.
Our business may be sensitive to economic conditions that impact consumer spending.
Our results of operations may be sensitive to changes in overall economic conditions, primarily in North America and Europe, that impact consumer spending, including discretionary spending. Weakening of, and fluctuations in, economic conditions affecting disposable consumer income such as employment levels, business conditions, changes in housing market conditions, capital markets, tax rates, savings rates, interest rates, fuel and energy costs, the impacts of natural disasters and acts of terrorism and other matters, including the availability of consumer credit could reduce consumer spending or reduce consumer spending on powersports products. A general reduction in consumer spending or a reduction in consumer spending on powersports products could adversely affect our sales growth and profitability. In addition, we have a financial services partnership arrangement with a subsidiary of General Electric Company that requires us to repurchase products financed and repossessed by the partnership, subject to certain limitations. For calendar year 2014, our maximum aggregate repurchase obligation was approximately $120.8 million. If adverse
changes to economic conditions result in increased defaults on the loans made by this financial services partnership, our repurchase obligation under the partnership arrangement could adversely affect our liquidity and harm our business.
Failure to establish and maintain the appropriate level of dealers and distributor relationships or weak economic conditions impacting those relationships may negatively impact our business and operating results.
We distribute our products through numerous dealers and distributors and rely on them to retail our products to the end customers. Our sales growth and profitability could be adversely affected if deterioration of economic or business conditions results in a weakening of the financial condition of a material number of our dealers and distributors. Additionally, weak demand for, or quality issues with, our products may cause dealers and distributors to voluntarily or involuntarily reduce or terminate their relationship with us. Further, if we fail to establish and maintain an appropriate level of dealers and distributors for each of our products, we may not obtain adequate market coverage for the desired level of retail sales of our products.
We depend on suppliers, financing sources and other strategic partners who may be sensitive to economic conditions that could affect their businesses in a manner that adversely affects their relationship with us.
We source component parts and raw materials through numerous suppliers and have relationships with a limited number of sources of product financing for our dealers and consumers. Our sales growth and profitability could be adversely affected if deterioration of economic or business conditions results in a weakening of the financial condition of a material number of our suppliers or financing sources, or if uncertainty about the economy or the demand for our products causes these business partners to voluntarily or involuntarily reduce or terminate their relationship with us.
Increases in the cost of raw material, commodity and transportation costs and shortages of certain raw materials could negatively impact our business.
The primary commodities used in manufacturing our products are aluminum, steel, petroleum-based resins and certain rare earth metals used in our charging systems, as well as diesel fuel to transport the products. Our profitability is affected by significant fluctuations in the prices of the raw materials and commodities we use in our products. We may not be able to pass along any price increases in our raw materials to our customers. As a result, an increase in the cost of raw materials, commodities, labor or other costs associated with the manufacturing of our products could increase our costs of sales and reduce our profitability.
Retail credit market deterioration and volatility may restrict the ability of our retail customers to finance the purchase of our products and adversely affect our income from financial services.
We have arrangements with each of Capital One,Performance Finance, Sheffield Financial and Synchrony Bank and FreedomRoad to make retail financing available to consumers who purchase our products in the United States. During 2014,2016, consumers financed approximately 3233 percent of the vehicles we sold in the United States through the Capital One revolving retail credit and Sheffield, Synchrony Bank, and FreedomRoadthese installment retail credit programs. Furthermore, some customers use financing from lenders who do not partner with us, such as local banks and credit unions. There can be no assurance that retail financing will continue to be available in the same amounts and under the same terms that had been previously available to our customers. If retail financing is not available to customers on satisfactory terms, it is possible that our sales and profitability could be adversely affected. Our income from financial services is also affected by changes in interest rates.
We intend to grow our business through potential acquisitions, non-consolidating investments, alliances and new joint ventures and partnerships, which could be risky and could harm our business.
One of our growth strategies is to drive growth in our businesses and accelerate opportunities to expand our global presence through targeted acquisitions, non-consolidating investments, alliances, and new joint ventures and partnerships that add value while considering our existing brands and product portfolio. The benefits of an acquisition, non-consolidating investment, new joint venture or partnership may take more time than expected to develop or integrate into our operations, and we cannot guarantee that acquisitions, non-consolidating investments, alliances, joint ventures or partnerships will ultimately produce any benefits. In addition, acquisitions, non-consolidating investments, alliances, joint ventures and partnerships involve a number of risks, including:
diversion of management’s attention;
difficulties in integrating and assimilating the operations and products of an acquired business or in realizing projected efficiencies, cost savings, and synergies;
potential loss of key employees or customers of the acquired businesses or adverse effects on existing business relationships with suppliers and customers;
adverse impact on overall profitability if acquired businesses or affiliates do not achieve the financial results projected in our valuation models;
reallocation of amounts of capital from other operating initiatives and/or an increase in our leverage and debt service requirements to pay the acquisition purchase prices, which could in turn restrict our ability to access additional capital when needed or to pursue other important elements of our business strategy;
inaccurate assessment of undisclosed, contingent or other liabilities or problems, unanticipated costs associated with an acquisition, and an inability to recover or manage such liabilities and costs;
incorrect estimates made in the accounting for acquisitions, incurrence of non-recurring charges and impairment of significant amounts of goodwill, investments or other related assets that could adversely affect our operating results;
dilution to existing shareholders if our securities are issued as part of transaction consideration or to fund transaction consideration; and
inability to direct the management and policies of a joint venture, alliance, or partnership, where other participants may be able to take action contrary to our instructions or requests and against our policies and objectives.
Our ability to grow through acquisitions will depend, in part, on the availability of suitable acquisition targets at acceptable prices, terms, and conditions, our ability to compete effectively for these acquisition candidates, and the availability of capital and personnel to complete such acquisitions and run the acquired business effectively. These risks could be heightened if we complete a large acquisition or multiple acquisitions within a relatively short period of time. Any potential acquisition could impair our operating results, and any large acquisition could impair our financial condition, among other things.
( Our reliance upon patents, trademark laws, and contractual provisions to protect our proprietary rights may not be sufficient to protect our intellectual property from others who may sell similar products and may lead to costly litigation.
We hold patents and trademarks relating to various aspects of our products, such as our patented “on demand” all-wheel drive, and believe that proprietary technical know-how is important to our business. Proprietary rights relating to our products are protected from unauthorized use by third parties only to the extent that they are covered by valid and enforceable patents or trademarks or are maintained in confidence as trade secrets. We cannot be certain that we will be issued any patents from any pending or future patent applications owned by or licensed to us or that the claims allowed under any issued patents will be sufficiently broad to protect our technology. In the absence of enforceable patent or trademark protection, we may be vulnerable to competitors who attempt to copy our products, gain access to our trade secrets and know-how or diminish our brand through unauthorized use of our trademarks, all of which could adversely affect our business. Others may initiate litigation to challenge the validity of our patents, or allege that we infringe their patents, or they may use their resources to design comparable products that do not infringe our patents. We may incur substantial costs if our competitors initiate litigation to challenge the validity of our patents, or allege that we infringe their patents, or if we initiate any proceedings to protect our proprietary rights. If the outcome of any such litigation is unfavorable to us, our business, operating results, and financial condition could be adversely affected. Regardless of whether litigation relating to our intellectual property rights is successful, the litigation could significantly increase our
costs and divert management’s attention from operation of our business, which could adversely affect our results of operations and financial condition. We also cannot be certain that our products or technologies have not infringed or will not infringe the proprietary rights of others. Any such infringement could cause third parties, including our competitors, to bring claims against us, resulting in significant costs, possible damages and substantial uncertainty.
Fifteen percent of our total sales are generated outside of North America, and we intend to continue to expand our international operations. Our international operations require significant management attention and financial resources, expose us to difficulties presented by international economic, political, legal, accounting, and business factors, and may not be successful or produce desired levels of sales and profitability.
We currently manufacture our products in the United States, Mexico, Poland and France. We sell our products throughout the world and maintain sales and administration facilities in the United States, Canada, Switzerland and
several other Western European countries, Australia, China, Brazil, Mexico and India. Our primary distribution facilities are in Vermillion, South Dakota, Wilmington, Ohio, and Rigby, Idaho, which distribute PG&A products to our North American dealers and we have various other locations around the world that distribute PG&A to our international dealers and distributors. Our total sales outside North America were 15 percent, 16 percent, and 14Approximately fourteen percent of our total sales for fiscal 2014, 2013,are generated outside of North America, and 2012, respectively. International markets have, and willwe intend to continue to be, a focus for sales growth. We believe many opportunities exist in theexpand our international markets, and over time we intend foroperations. Expanding international sales to compriseand operations is a larger percentagepart of our total sales. Several factors,long-term strategic objectives. To support that strategy, we must increase our presence outside of North America, including weakened internationaladditional employees and investment in business infrastructure and operations. International operations and sales are subject to various risks, including political and economic instability, local labor market conditions, could adversely affect such growth. In 2014, we completed constructionthe imposition of a manufacturing facility in Poland. The expansionforeign tariffs and other trade barriers, the impact of our existingforeign government laws and regulations and United States laws and regulations that apply to international operations, and entry into additionalthe effects of income and withholding taxes, governmental expropriation and differences in business practices. We may incur increased costs and experience delays or disruptions in product deliveries and payments in connection with international markets require significant management attentionoperations and sales that could cause loss of revenues and earnings. Unfavorable changes in the political, regulatory and business climate could have a material adverse effect on our total sales, financial resources. Somecondition, profitability or cash flows. Violations of laws that apply to our foreign operations, such as the United States Foreign Corrupt Practices Act, could result in severe criminal or civil sanctions, could disrupt our business and result in an adverse effect on our reputation, business and results of operations.
The results of the countriesNovember 2016 United States elections have introduced greater uncertainty with respect to tax and trade policies, tariffs and government regulations affecting trade between the United States and other countries. We have sourcing and manufacturing operations in whichinternational locations. Major developments in tax policy or trade relations, such as the disallowance of tax deductions for imported products or the imposition of unilateral tariffs on imported products, could have a material adverse effect on our business and results of operations.
Changing weather conditions may reduce demand and negatively impact net sales and production of certain of our products.
Lack of snowfall in any year in any particular geographic region may adversely affect snowmobile retail sales and related PG&A sales in that region. Additionally, to the extent that unfavorable weather conditions are exacerbated by global climate change or other factors, our sales may be affected to a greater degree than we manufacturehave previously experienced. There is no assurance that weather conditions or natural disasters could not have a material effect on our sales, production capability or component supply continuity for any of our products.
An impairment in the carrying value of goodwill and trade names could negatively impact our consolidated results of operations and net worth.
Goodwill and indefinite-lived intangible assets, such as our trade names, are recorded at fair value at the time of acquisition and are not amortized, but are reviewed for impairment at least annually or more frequently if impairment indicators arise. Our determination of whether goodwill impairment has occurred is based on a comparison of each of our reporting units’ fair market value with its carrying value. Significant and unanticipated changes in circumstances, such as significant and long-term adverse changes in business climate, unanticipated competition, and/or sellchanges in technology or markets, could require a provision for impairment in a future period that could negatively impact our products,reported earnings and reduce our consolidated net worth and shareholders’ equity.
We have a significant amount of debt outstanding and must comply with restrictive covenants in our debt agreements.
Our credit agreement and other debt agreements contain financial and restrictive covenants that may limit our ability to, among other things, borrow additional funds or take advantage of business opportunities. While we are currently in compliance with the financial covenants, increases in our debt or decreases in our earnings could cause us to fail to comply with these financial covenants. Failing to comply with such covenants could result in an event of default that, if not cured or waived, could result in the acceleration of all our indebtedness or otherwise have an international presence, area material adverse effect on our financial position, results of operation and debt service capability.
Our level of debt and the financial and restrictive covenants contained in our credit agreement could have important consequences on our financial position and results of operations, including increasing our vulnerability to some degree subject to political, economic and/or social instability. Our international operations expose us and our representatives, agents and distributors to risks inherent in operating in foreign jurisdictions. These risks include:
increased costs of customizing products for foreign countries;
difficulties in managing and staffing international operations and increases in infrastructure costs including legal, tax, accounting, and information technology;
the imposition of additional United States and foreign governmental controls or regulations;
new or enhanced trade restrictions and restrictions on the activities of foreign agents, representatives, and distributors; and the imposition of increases in costly and lengthy import and export licensing and other compliance requirements, customs duties and tariffs, license obligations, and other non-tariff barriers to trade;
the imposition of United States and/or international sanctions against a country, company, person, or entity with whom we do business that would restrict or prohibitinterest rates because debt under our continued business with the sanctioned country, company, person, or entity;
international pricing pressures;
laws and business practices favoring local companies;
adverse currency exchange rate fluctuations;
longer payment cycles and difficulties in enforcing agreements and collecting receivables through certain foreign legal systems;
difficulties in enforcing or defending intellectual property rights; and
multiple, changing, and often inconsistent enforcement of laws, rules, and regulations, including rules relating to environmental, health, taxes, and safety matters.
Our international operations may not produce desired levels of total sales or one or more of the factors listed above may harm our business and operating results. Any material decrease in our international sales or profitability could also adversely impact our operating results.credit agreement bears interest at variable rates.
Additional tax expense or tax exposure could impact our financial performance.
We are subject to income taxes and other business taxes in various jurisdictions in which we operate. Our tax liabilities are dependent upon the earnings generated in these different jurisdictions. Our provision for income taxes and cash tax liability could be adversely affected by numerous factors, including income before taxes being lower than anticipated in jurisdictions with lower statutory tax rates and higher than anticipated in jurisdictions with higher statutory tax rates, changes in the valuation of deferred tax assets and liabilities, a change in our assertion regarding the permanent reinvestment of the undistributed earnings of international affiliates and changes in tax laws and regulations in various jurisdictions. We are also subject to the continuous examination of our income tax returns by various tax authorities. The results of audits and examinations of previously filed tax returns and continuing assessments of our tax exposures may have an adverse effect on the Company’s provision for income taxes and cash tax liability.
If we are unable to continue to enhance existing products and develop and market new products that respond to customer needs and preferences and achieve market acceptance, we may experience a decrease in demand for our products and our business could suffer.
One of our growth strategies is to develop innovative, customer-valued products to generate revenue growth. Our sales from new products in the past have represented a significant component of our sales and are expected to continue to represent a significant component of our future sales. We may not be able to compete as effectively with our competitors, and ultimately satisfy the needs and preferences of our customers, unless we can continue to enhance existing products and develop new innovative products in the global markets in which we compete. Product development requires significant financial, technological, and other resources. While we expended $148.5 million, $139.2 million, and $127.4 million for research and development efforts in 2014, 2013 and 2012, respectively, there can be no assurance that this level of investment in research and development will be sufficient to maintain our competitive advantage in product innovation, which could cause our business to suffer. Product improvements and new product introductions also require significant planning, design, development, and testing at the technological, product, and manufacturing process levels and we may not be able to timely develop product improvements or new products. Our competitors’ new products may beat our products to market, be more effective with more features and/or less expensive than our products, obtain better market acceptance, or render our products obsolete. Any new products that we develop may not receive market acceptance or otherwise generate any meaningful sales or profits for us relative to our expectations based on, among other things, existing and anticipated investments in manufacturing capacity and commitments to fund advertising, marketing, promotional programs, and research and development.
Our operations are dependent upon attracting and retaining skilled employees, including skilled labor. Our future success depends on our continuing ability to identify, hire, develop, motivate, retain and promote skilled personnel for all areas of our organization.
Our success depends on attracting and retaining qualified personnel. Our ability to sustain and grow our business requires us to hire, retain and develop a highly skilled and diverse management team and workforce. Failure to ensure that we have the leadership capacity with the necessary skill set and experience could impede our ability to deliver our growth objectives and execute our strategic plan. In addition, any unplanned turnover or inability to attract and retain key employees, including managers, could have a negative effect on our business, financial condition and/or results of operations.
We may be subject to information technology system failures, network disruptions and breaches in data security.
We use many information technology systems and their underlying infrastructure to operate our business. The size and complexity of our computer systems make them potentially vulnerable to breakdown, malicious intrusion and random attack. Recent acquisitions have resulted in additional decentralized systems whichthat add to the complexity of our information technology infrastructure. Likewise, data privacy breaches by employees or others with permitted access to our systems may pose a risk that sensitive data may be exposed to unauthorized persons or to the public. While we have invested in layers of data and information technology protection, and continually monitor cybersecurity threats, there can be no assurance that our efforts will prevent disruptions or breaches in our systems that could adversely affect our business.
Item 1B. Unresolved Staff Comments
Not Applicable.
Item 2. Properties
The following sets forth the Company’s materialprincipal and materially important facilities as of December 31, 2014:2016:
|
| | | | | | |
| Location | | Facility Type/Use | | Owned or Leased | | Square
Footage |
| Medina, Minnesota | | Headquarters | | Owned | | 130,000 |
| Plymouth, Minnesota | | Headquarters | | Primarily owned | | 175,000 |
| Roseau, Minnesota | | Wholegoods manufacturing and R&D | | Owned | | 733,200733,000 |
Monterrey, MexicoHuntsville, Alabama | | Wholegoods manufacturing | | Owned | | 425,000725,000 |
| Milford, Iowa | | Wholegoods manufacturing | | Primarily owned | | 460,400460,000 |
| Monterrey, Mexico | | Wholegoods manufacturing | | Owned | | 440,000 |
| Opole, Poland | | Wholegoods manufacturing | | Leased | | 300,000 |
Spirit Lake, Iowa | | Wholegoods manufacturing | | Owned | | 298,400 |
| Osceola, Wisconsin | | Component parts & engine manufacturing | | Owned | | 285,800286,000 |
| Spirit Lake, Iowa | | Wholegoods manufacturing | | Owned | | 273,000 |
| Chanas, France | | Wholegoods manufacturing | | Owned | | 196,000 |
| Shanghai, China | | Wholegoods manufacturing | | Leased | | 158,000 |
| Anaheim, California | | Wholegoods manufacturing | | Leased | | 151,000 |
| Bourran, France | | Wholegoods manufacturing and R&D | | Leased | | 100,000 |
| Aix-les-Bains, France | | Wholegoods manufacturing and R&D | | Owned | | 97,80098,000 |
| Spearfish, South Dakota | | Component parts manufacturing | | Owned | | 51,000 |
| Wyoming, Minnesota | | Research and development facility | | Owned | | 272,000 |
| Burgdorf, Switzerland | | Research and development facility | | Leased | | 13,60017,000 |
| Wilmington, Ohio | | Distribution center | | Leased | | 429,000 |
| Vermillion, South Dakota | | Distribution center | | Primarily owned | | 418,000643,000 |
| Coppell, Texas | | Distribution center | | Leased | | 165,000 |
| Jacksonville, Florida | | Distribution center | | Leased | | 144,000 |
| Columbiana, Ohio | | Distribution center | | Owned | | 102,000 |
| Compton, California | | Distribution center and office facility | | Leased | | 254,000 |
| Rigby, Idaho | | Distribution center and office facility | | Owned | | 54,60055,000 |
| Shakopee, Minnesota | | Wholegoods distribution | | Leased | | 870,000 |
| Altona, Australia | | Wholegoods distribution | | Leased | | 215,000 |
St. Paul, Minnesota | | Wholegoods distribution | | Leased | | 160,000 |
Irving, Texas | | Wholegoods distribution | | Leased | | 157,000 |
| Milford, Iowa | | Wholegoods distribution | | Leased | | 100,000 |
Haviland, Ohio | | Wholegoods distribution | | Leased | | 100,000 |
| Winnipeg, Canada | | Office facility | | Leased | | 15,000 |
| Rolle, Switzerland | | Office facility | | Leased | | 8,000 |
Including the material properties listed above and those properties not listed, we have over 3.34.4 million square feet of global manufacturing and research and development space located in North America and Europe. Wespace. Additionally, we have over 2.34.2 million square feet of global warehouse and distribution center space inspace. In the United States and countries occupied by our subsidiaries that is owned or leased.Canada, we lease 76 retail stores with approximately 900,000 square feet of space, and in Australia, we own four retail stores with approximately 30,000 square feet of space. We also have approximately 140,000150,000 square feet of international office facility square footage in Canada, Western Europe, Australia, Brazil, India, China and Mexico. In Australia, we own three retail stores with approximately 25,000 square feet of space.
We own substantially all tooling and machinery (including heavy presses, conventional and computer-controlled welding facilities for steel and aluminum, assembly lines and paint lines) used in the manufacture of our products. We make ongoing capital investments in our facilities. These investments have increased production capacity for our products. We believe our current manufacturing and distribution facilities are adequate in size and suitable for our present manufacturing and distribution needs. However, we expect a significant amount of capital expenditures in 2015, which will expand our current manufacturing facilities in anticipation of the capacity and capability requirements of expected future growth. In January 2015, we announced plans to build a new production facility in Huntsville, Alabama to provide additional capacity and flexibility. The 600,000 square-foot facility will focus on ORV production. We will break ground on the facility in the first quarter of 2015 with completion expected in the first half of 2016.
Item 3. Legal Proceedings
We are involved in a number of other legal proceedings incidental to our business, none of which are expected to have a material effect on the financial results of our business.
Class action lawsuit. Since September 16, 2016, three investors have filed two purported class action complaints in the United States District Court for the District of Minnesota naming the Company and two of its executive officers as defendants. On December 12, 2016, the District Court consolidated the two actions and appointed a lead plaintiff and lead counsel. In a later order, the court set a date of March 14, 2017, for plaintiff to file a consolidated amended complaint or to designate one of the filed complaints as the operative pleading. One of the complaints on file seeks to represent a class of persons who purchased or acquired Polaris securities during the time period from January 26 to September 11, 2016; the other seeks to represent a class of persons who purchased or acquired Polaris securities during the time period from February 20, 2015 through September 11, 2016. Both complaints allege that, during the respective time period, defendants made materially false or misleading public statements about the Company’s business, operations, and compliance policies relating to RZR products and product recalls. Each complaint alleges claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and seeks damages in an unspecified amount, pre-judgment and post-judgment interest, and an award of attorneys’ fees and expenses. The Company intends to vigorously defend the action.
Item 4. Mine Safety Disclosures
Not applicable.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
The information under the caption “Other Investor Information” appearing on the inside back cover of the Company’s 20142016 Annual Report is incorporated herein by reference. On February 18, 2015,14, 2017, the last reported sale price for shares of our common stock on the New York Stock Exchange was $155.63$87.71 per share.
STOCK PERFORMANCE GRAPH
The graph below compares the five-year cumulative total return to shareholders (stock price appreciation plus reinvested dividends) for the Company’s common stock with the comparable cumulative return of two indexes: S&P Midcap 400 Index and Morningstar’s Recreational Vehicles Industry Group Index. The graph assumes the investment of $100 at the close on December 31, 20092011 in common stock of the Company and in each of the indexes, and the reinvestment of all dividends. Points on the graph represent the performance as of the last business day of each of the years indicated.
Assumes $100 Invested at the close on December 31, 20092011
Assumes Dividend Reinvestment
Fiscal Year Ended December 31, 20142016
| | | | 2009 | | 2010 | | 2011 | | 2012 | | 2013 | | 2014 | 2011 | | 2012 | | 2013 | | 2014 | | 2015 | | 2016 |
| Polaris Industries Inc. | $ | 100.00 |
| | $ | 183.78 |
| | $ | 268.42 |
| | $ | 411.47 |
| | $ | 723.73 |
| | $ | 761.88 |
| $ | 100.00 |
| | $ | 153.29 |
| | $ | 269.62 |
| | $ | 283.83 |
| | $ | 163.91 |
| | $ | 161.08 |
|
| S&P Midcap 400 Index | 100.00 |
| | 126.64 |
| | 124.45 |
| | 146.70 |
| | 195.84 |
| | 214.97 |
| 100.00 |
| | 117.88 |
| | 157.37 |
| | 172.74 |
| | 168.98 |
| | 204.03 |
|
| Recreational Vehicles Industry Group Index—Morningstar Group | 100.00 |
| | 136.37 |
| | 149.24 |
| | 205.27 |
| | 318.26 |
| | 313.83 |
| 100.00 |
| | 137.54 |
| | 213.25 |
| | 210.28 |
| | 153.46 |
| | 213.95 |
|
Comparison of 5-Year Cumulative Total Return Among Polaris Industries Inc., S&P Midcap 400 Index and Morningstar’s Recreational Vehicles Group Index
The table below sets forth the information with respect to purchases made by or on behalf of Polaris of its own stock during the fourth quarter of the fiscal year ended December 31, 2014.2016.
Issuer Purchases of Equity Securities
| Issuer Purchases of Equity Securities
| Issuer Purchases of Equity Securities
|
| | Period | Total Number of
Shares Purchased | | Average Price Paid
per Share | | Total Number of Shares Purchased as Part of Publicly Announced Program | | Maximum Number of Shares That May Yet Be Purchased Under the Program(1) | Total Number of
Shares Purchased | | Average Price Paid
per Share | | Total Number of Shares Purchased as Part of Publicly Announced Program | | Maximum Number of Shares That May Yet Be Purchased Under the Program(1) |
| October 1–31, 2014 | 1,000 |
| | $ | 148.46 |
| | 1,000 |
| | 1,573,000 | |
| November 1–30, 2014 | — |
| | — |
| | — |
| | 1,573,000 | |
| December 1–31, 2014 | 523,000 |
| | 148.64 |
| | 523,000 |
| | 1,050,000 | |
| October 1–31, 2016 | | 150,000 |
| | $ | 75.51 |
| | 150,000 |
| | 8,418,000 |
| November 1–30, 2016 | | 950,000 |
| | 83.80 |
| | 950,000 |
| | 7,468,000 |
| December 1–31, 2016 | | 5,000 |
| | 90.72 |
| | 5,000 |
| | 7,463,000 |
| Total | 524,000 |
| | $ | 148.64 |
| | 524,000 |
| | 1,050,000 | 1,105,000 |
| | $ | 82.71 |
| | 1,105,000 |
| | 7,463,000 |
| |
| (1) | The Board of Directors previouslyhas authorized a sharethe cumulative repurchase program to repurchaseof up to an aggregate of 75.086.5 million shares of the Company’s common stock (the “Program”). Of that total, 73.979.0 million shares have been repurchased cumulatively from 1996 through December 31, 2014.2016. This Program does not have an expiration date. |
On January 29, 2015, the Board of Directors approved an increase in the Company’s common stock repurchase authorization by 4.0 million shares. The additional share repurchase authorization, together with the 1.1 million shares remaining available for repurchase under the prior authorization, represents approximately eight percent of the shares of Polaris common stock currently outstanding.
Item 6. Selected Financial Data
The following table presents our selected financial data. The table should be read in conjunction with Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, and Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K. All periodsThe data presented reflectfor 2013 reflects the classification of the marine products division’s financial results, including the loss from discontinued operations and the loss on disposal of the division, as discontinued operations. Per share data has been adjusted to give effect of all stock splits through 2014.
| | | | For the Years Ended December 31, | For the Years Ended December 31, |
(Dollars in millions, except per-share data) | 2014 | 2013 | 2012 | 2011 | 2010 | 2016 | 2015 | 2014 | 2013 | 2012 |
| Statement of Operations Data | | |
| Sales Data: | | |
| Total sales | $ | 4,479.6 |
| $ | 3,777.1 |
| $ | 3,209.8 |
| $ | 2,656.9 |
| $ | 1,991.1 |
| $ | 4,516.6 |
| $ | 4,719.3 |
| $ | 4,479.6 |
| $ | 3,777.1 |
| $ | 3,209.8 |
|
| Percent change from prior year | 19 | % | 18 | % | 21 | % | 33 | % | 27 | % | (4 | )% | 5 | % | 19 | % | 18 | % | 21 | % |
| Sales components: | | |
| Off-Road Vehicles | 65 | % | 67 | % | 69 | % | 69 | % | 69 | % | |
| Snowmobiles | 7 | % | 8 | % | 9 | % | 11 | % | 10 | % | |
| Motorcycles | 8 | % | 6 | % | 6 | % | 5 | % | 4 | % | |
| Small Vehicles | 3 | % | 3 | % | 2 | % | — | % | — | % | |
| Parts, Garments and Accessories | 17 | % | 16 | % | 14 | % | 15 | % | 17 | % | |
| Gross Profit Data: | | |
| Total gross profit | $ | 1,319.2 |
| $ | 1,120.9 |
| $ | 925.3 |
| $ | 740.6 |
| $ | 530.2 |
| $ | 1,105.6 |
| $ | 1,339.0 |
| $ | 1,319.2 |
| $ | 1,120.9 |
| $ | 925.3 |
|
| Percent of sales | 29.4 | % | 29.7 | % | 28.8 | % | 27.9 | % | 26.6 | % | 24.5 | % | 28.4 | % | 29.4 | % | 29.7 | % | 28.8 | % |
| Operating Expense Data: | | |
| Total operating expenses | $ | 666.2 |
| $ | 588.9 |
| $ | 480.8 |
| $ | 414.7 |
| $ | 326.3 |
| $ | 833.8 |
| $ | 692.2 |
| $ | 666.2 |
| $ | 588.9 |
| $ | 480.8 |
|
| Percent of sales | 14.9 | % | 15.6 | % | 15.0 | % | 15.6 | % | 16.4 | % | 18.5 | % | 14.7 | % | 14.9 | % | 15.6 | % | 15.0 | % |
| Operating Income Data: | | |
| Total operating income | $ | 714.7 |
| $ | 577.9 |
| $ | 478.4 |
| $ | 349.9 |
| $ | 220.7 |
| $ | 350.3 |
| $ | 716.1 |
| $ | 714.7 |
| $ | 577.9 |
| $ | 478.4 |
|
| Percent of sales | 16.0 | % | 15.3 | % | 14.9 | % | 13.2 | % | 11.1 | % | 7.8 | % | 15.2 | % | 16.0 | % | 15.3 | % | 14.9 | % |
| Net Income Data: | | |
| Net income from continuing operations | $ | 454.0 |
| $ | 381.1 |
| $ | 312.3 |
| $ | 227.6 |
| $ | 147.1 |
| $ | 212.9 |
| $ | 455.4 |
| $ | 454.0 |
| $ | 381.1 |
| $ | 312.3 |
|
| Percent of sales | 10.1 | % | 10.1 | % | 9.7 | % | 8.6 | % | 7.4 | % | 4.7 | % | 9.6 | % | 10.1 | % | 10.1 | % | 9.7 | % |
| Diluted net income per share from continuing operations | $ | 6.65 |
| $ | 5.40 |
| $ | 4.40 |
| $ | 3.20 |
| $ | 2.14 |
| $ | 3.27 |
| $ | 6.75 |
| $ | 6.65 |
| $ | 5.40 |
| $ | 4.40 |
|
| Net income | $ | 454.0 |
| $ | 377.3 |
| $ | 312.3 |
| $ | 227.6 |
| $ | 147.1 |
| $ | 212.9 |
| $ | 455.4 |
| $ | 454.0 |
| $ | 377.3 |
| $ | 312.3 |
|
| Diluted net income per share | $ | 6.65 |
| $ | 5.35 |
| $ | 4.40 |
| $ | 3.20 |
| $ | 2.14 |
| $ | 3.27 |
| $ | 6.75 |
| $ | 6.65 |
| $ | 5.35 |
| $ | 4.40 |
|
| Cash Flow Data: | | |
| Cash flow provided by continuing operations | $ | 529.3 |
| $ | 499.2 |
| $ | 416.1 |
| $ | 302.5 |
| $ | 297.9 |
| $ | 571.8 |
| $ | 440.2 |
| $ | 529.3 |
| $ | 499.2 |
| $ | 416.1 |
|
| Purchase of property and equipment | 205.1 |
| 251.4 |
| 103.1 |
| 84.5 |
| 55.7 |
| 209.1 |
| 249.5 |
| 205.1 |
| 251.4 |
| 103.1 |
|
| Repurchase and retirement of common stock | 81.8 |
| 530.0 |
| 127.5 |
| 132.4 |
| 27.5 |
| 245.8 |
| 293.6 |
| 81.8 |
| 530.0 |
| 127.5 |
|
| Cash dividends to shareholders | 126.9 |
| 113.7 |
| 101.5 |
| 61.6 |
| 53.0 |
| 140.3 |
| 139.3 |
| 126.9 |
| 113.7 |
| 101.5 |
|
| Cash dividends per share | $ | 1.92 |
| $ | 1.68 |
| $ | 1.48 |
| $ | 0.90 |
| $ | 0.80 |
| $ | 2.20 |
| $ | 2.12 |
| $ | 1.92 |
| $ | 1.68 |
| $ | 1.48 |
|
| Balance Sheet Data (at end of year): | | |
| Cash and cash equivalents | $ | 137.6 |
| $ | 92.2 |
| $ | 417.0 |
| $ | 325.3 |
| $ | 393.9 |
| $ | 127.3 |
| $ | 155.3 |
| $ | 137.6 |
| $ | 92.2 |
| $ | 417.0 |
|
| Current assets | 1,096.6 |
| 865.7 |
| 1,017.8 |
| 875.0 |
| 808.1 |
| 1,191.0 |
| 1,152.9 |
| 1,096.6 |
| 865.7 |
| 1,017.8 |
|
| Total assets | 2,074.9 |
| 1,685.5 |
| 1,488.5 |
| 1,228.0 |
| 1,061.6 |
| 3,099.6 |
| 2,385.7 |
| 2,074.9 |
| 1,685.5 |
| 1,488.5 |
|
| Current liabilities | 850.8 |
| 748.1 |
| 631.0 |
| 586.3 |
| 584.2 |
| 959.8 |
| 826.8 |
| 850.8 |
| 748.1 |
| 631.0 |
|
| Long-term debt and capital lease obligations | 223.6 |
| 284.3 |
| 104.3 |
| 104.6 |
| 100.0 |
| 1,138.1 |
| 456.4 |
| 223.6 |
| 284.3 |
| 104.3 |
|
| Shareholders’ equity | 861.3 |
| 535.6 |
| 690.5 |
| 500.1 |
| 371.0 |
| 867.0 |
| 981.5 |
| 861.3 |
| 535.6 |
| 690.5 |
|
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion pertains to the results of operations and financial position of the Company for each of the three years in the period ended December 31, 2014,2016, and should be read in conjunction with the Consolidated Financial Statements and the Notes thereto included elsewhere in this report.
Overview
In 2014, we had record2016 was a difficult and challenging year, as sales decreased, and net income, with our fifth straight year of double digit growth in both sales and net income. This growth is fueled by award-winning innovative new products leading to continued market share leadership in side-by-side vehicles and ATVs. In 2014, we also experienced growth in our snowmobiles, motorcycles, international and small vehicles businesses. Thethe overall North American powersports industry continued its positive trend with mid-single digit percentage growth in 2014.was down slightly. Our North America retail sales to consumers increased 12decreased five percent in 2014, helping to drive2016, which drove total full year Company sales up 19down four percent to a record $4.48$4.52 billion. DespiteOur 2016 results included approximately two months of activity related to our acquisition of TAP. With the global economy remaining difficult,challenged, and the U.S. dollar strengthening, our international sales increased 16 percent duewere flat compared to continued market share growth in all product categories and strong results by our recent European acquisitions.2015.
Full year earnings reflect the success of our ongoing product innovation, as 19 percent sales growth, partially offset by a decrease in the gross profit percentage of 23 basis points, drove net income of $212.9 million was a 53 percent decrease from continuing operations up 19 percent to $454.0 million,2015, with diluted earnings per share from continuing operations increasing 23decreasing 52 percent to a record $6.65$3.27 per share. These increases came while2016 results were below expectations, as we continuedresponded to investa series of vehicle recalls, and took the necessary steps to ensure that Polaris vehicles deliver the quality, safety and performance that our customers expect. We worked hard to serve our Off-Road Vehicle customers and dealers in numerous longer-term diversification2016, and are accelerating that work into 2017.
In 2016, significant progress was made across our businesses, including mid-twenty percent growth opportunities.
In 2014,in Indian Motorcycle retail sales, an eight percent reduction in dealer inventories year-over-year and improving operating cash flow by 30 percent. Further, we began to receive benefits from prior investments while continuing to invest in both product development and strategic initiatives. We introduced over twenty new ORV models in 2014, includingcompleted the all-new RZR® XP 900 trail and RZR XP4 900 trail, several new value models, and two models in a newly defined categoryacquisition of single-seat, ride-in ATVs, the Polaris ACE™. We also introduced nine new snowmobilesTaylor-Dunn Manufacturing Company (“Taylor-Dunn”) in the all-new AXYS™ chassis platform. In our motorcycles line, we added two new models to the iconic Indian Motorcycle® brand—the 2015 Roadmaster®, a luxury touring motorcycle,work and transportation space and the Scout™, Polaris' first mid-sized motorcycle. Additionally, we introducedacquisition of TAP in the revolutionary all-new three-wheel motorcycle, Slingshot®, our first roadster motorcycle. We also acquired Kolpin and Pro Armor, adding two industry leading accessory companies to Polaris' PG&A activities.aftermarket space. Operationally, we expanded production capacity and capabilities at all manufacturing facilities in the U.S. and Mexico, and completed the construction of the manufacturing plantand started production in Opole, Poland, our first manufacturing operation outside of North America, where production began in late 2014.
In January 2015, we announced plans to build a new production facility in Huntsville, Alabama to provide additional capacity and flexibility. The 600,000 square-foot facility will focus on off-road vehicle production. We will break ground on the facility in the first quarter of 2015 with completion expected in the first half of 2016.Alabama.
On January 29, 2015,26, 2017, we announced that our Board of Directors approved a 10five percent increase in the regular quarterly cash dividend to $0.53$0.58 per share for the first quarter of 2015,2017, representing the 20th22nd consecutive year of increased dividends to shareholders. This increase reflectsshareholders effective with the continued momentum and potential of our business and the strength of our balance sheet.2017 first quarter dividend.
Results of Operations
Sales:
Sales were $4,479.64,516.6 million in 2014,2016, a 19four percent increasedecrease from $3,777.14,719.3 million in 2013.2015. The following table is an analysis of the percentage change in total Company sales for 20142016 compared to 20132015 and 20132015 compared to 2012:2014:
| | | | Percent change in total Company sales compared to the prior year | Percent change in total Company sales compared to the prior year |
| | 2014 | | 2013 | 2016 | | 2015 |
| Volume | 14 | % | | 12 | % | (5 | )% | | 3 | % |
| Product mix and price | 6 |
| | 7 |
| (1 | ) | | 6 |
|
| Acquisitions | | 3 |
| | — |
|
| Currency | (1 | ) | | (1 | ) | (1 | ) | | (4 | ) |
| | 19 | % | | 18 | % | (4 | )% | | 5 | % |
The volume increasesdecrease in 20142016 is primarily the result of lower ORV and 2013 aresnowmobile shipments, primarily due to our decision to delay model year 2017 ORV shipments, as well as lower retail driven by a weak powersports market and a weak end to the 2016 snow season. The volume increase in 2015 was primarily the result of shipping more ORVs, snowmobiles, motorcycles smalland Global Adjacent Markets vehicles, and related PG&A items to dealers given increased consumer retail demand for our products worldwide.those products. Product mix and price contributed sixa one percent decrease for 2016, primarily due to negative impact of a lower number of higher priced ORVs sold to dealers relative to our other businesses. Product mix and sevenprice contributed to a six percent increase to the growth for 2014 and 2013, respectively,2015, primarily due to the positive benefit of a greater number of higher priced ORVs sold to dealers relative to our other businesses. Acquisitions contributed a three percent increase for 2016, primarily due to the TAP acquisition. The impact from currency rates on our Canadian and other foreign subsidiaries'subsidiaries’ sales, when translated to U.S. dollars, decreased sales by one percent in both 20142016 and four percent in 20132015 compared to the respective prior years. Specifically, the U.S. dollar to Canadian dollar exchange rate, and overall strength of the U.S. dollar compared to other international currencies negatively impacted our 2016 sales by approximately $27.0 million and our 2015 sales by approximately $160.0 million when compared to the prior year period exchange rates.
Our components of sales by reporting segment, which includes the respective PG&A, were as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Years Ended December 31, |
($ in millions) | 2014 | | Percent
of Total
Sales | | 2013 | | Percent
of Total
Sales | | Percent
Change
2014 vs.
2013 | | 2012 | | Percent
of Total
Sales | | Percent
Change
2013 vs.
2012 |
| Off-Road Vehicles | $ | 2,909.0 |
| | 65 | % | | $ | 2,521.5 |
| | 67 | % | | 15 | % | | $ | 2,225.8 |
| | 69 | % | | 13 | % |
| Snowmobiles | 322.4 |
| | 7 | % | | 301.7 |
| | 8 | % | | 7 | % | | 283.0 |
| | 9 | % | | 7 | % |
| Motorcycles | 348.7 |
| | 8 | % | | 219.8 |
| | 6 | % | | 59 | % | | 195.8 |
| | 6 | % | | 12 | % |
| Small Vehicles | 157.4 |
| | 3 | % | | 122.8 |
| | 3 | % | | 28 | % | | 44.4 |
| | 2 | % | | 177 | % |
| PG&A | 742.1 |
| | 17 | % | | 611.3 |
| | 16 | % | | 21 | % | | 460.8 |
| | 14 | % | | 33 | % |
| Total Sales | $ | 4,479.6 |
| | 100 | % | | $ | 3,777.1 |
| | 100 | % | | 19 | % | | $ | 3,209.8 |
| | 100 | % | | 18 | % |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Years Ended December 31, |
($ in millions) | 2016 | | Percent of
Sales | | 2015 | | Percent of
Sales | | Percent
Change
2016 vs.
2015 | | 2014 | | Percent of
Sales | | Percent
Change
2015 vs.
2014 |
| ORV/Snowmobiles | $ | 3,357.5 |
| | 74 | % | | $ | 3,708.9 |
| | 78 | % | | (9 | )% | | $ | 3,741.2 |
| | 84 | % | | (1 | )% |
| Motorcycles | 708.5 |
| | 16 | % | | 698.3 |
| | 15 | % | | 1 | % | | 418.5 |
| | 9 | % | | 67 | % |
| Global Adjacent Markets | 341.9 |
| | 8 | % | | 312.1 |
| | 7 | % | | 10 | % | | 319.9 |
| | 7 | % | | (2 | )% |
| Other | 108.7 |
| | 2 | % | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Total Sales | $ | 4,516.6 |
| | 100 | % | | $ | 4,719.3 |
| | 100 | % | | (4 | )% | | $ | 4,479.6 |
| | 100 | % | | 5 | % |
ORV/Snowmobiles
Off-Road Vehicles
ORV sales, inclusive of $2,909.0PG&A sales, of $3,015.3 million in 2014,2016, which include core ATV, RANGER and RZR side-by-side vehicles, and the Company's new ACE category, increased 15decreased nine percent from 2013.2015. This increasedecrease reflects internal challenges such as delayed model year 2017 shipments, as well as external challenges such as currency pressures, heightened competitive product offerings, market share declines and slower retail sales, including in oil and gas producing regions of North America. Polaris’ North American ORV unit retail sales to consumers decreased mid-single digits percent for 2016 compared to 2015, with ATV unit retail sales decreasing high-single digits percent and side-by-side vehicles unit retail sales decreasing mid-single digits percent over the prior year. North American dealer inventories of ORVs decreased 11 percent from 2015. ORV sales outside of North America decreased approximately three percent in 2016 compared to 2015. For 2016, the average ORV per unit sales price decreased approximately four percent compared to 2015’s per unit sales price.
ORV sales, inclusive of PG&A sales, of $3,304.4 million in 2015, which include core ATV, RANGER and RZR side-by-side vehicles, decreased one percent from 2014. This decrease reflects external challenges such as currency pressures, heightened competitive product offerings and slower retail sales, particularly in oil and gas producing regions of North America. Despite the external challenges, we continued North American market share gains for both ATVs and side-by-side vehicles driven by strong consumer enthusiasm for our ORV offerings, including an expanded line-up of innovative new models and the introduction of the new ACE category.models. Polaris’ North American ORV unit retail sales to consumers increased low-doublelow-single digits percent for 20142015 compared to 2013,2014, with both ATV and side-by-side vehicles unit retail sales growing mid-singlelow-single digits percent and side-by-side vehicle unit retail sales increasing double-digits percent over the prior year. The Company's new ACE category, introduced early in 2014, accelerated its retail sales sequentially throughout 2014. North American dealer inventories of ORVs increased high-teens percent from 2013, in support of dealer stocking levels for premium and value segments for ATV RFM and new ACE categories. ORV sales outside of North America increased mid-teens percent in 2014 compared to 2013 resulting from market share gains. For 2014, the average ORV per unit sales price increased four percent over 2013's per unit sales price, primarily as a result of the increased sales of higher priced side-by-side vehicle models.
ORV sales of $2,521.5 million in 2013, which include core ATV and RANGER and RZR side-by-side vehicles, increased 13 percent from 2012. This increase reflects continued market share gains for both ATVs and side-by-side vehicles driven by strong consumer enthusiasm for our ORV offerings, including an expanded line-up of innovative new ATVs and side-by-side vehicles introduced in the 2013 third and fourth quarters. Polaris’ North American ORV unit retail sales to consumers increased high-single digits percent for 2013 compared to 2012, with ATV unit retail sales growing mid-single digits percent and side-by-side vehicle unit retail sales increasing more than ten percent over the prior year. North American dealer inventories of ORVs increased mid-teensdecreased mid-single digits percent from 2012, in support of continued strong retail demand for side-by-side vehicles and incremental new market segments.2014. ORV sales outside of North America increased
ninedecreased approximately 10 percent in 20132015 compared to 2012 resulting in market share gains.2014, primarily due to decreased ATV sales and negative currencies. For 2013,2015, the average ORV per unit sales price increased seven percent over 2012'swas approximately flat compared to 2014’s per unit sales price, primarily as a resultprice.
Snowmobiles
Snowmobiles sales, inclusive of the increasedPG&A sales, of higher priced side-by-side vehicle models.
Snowmobile sales increased sevendecreased 15 percent to $322.4$342.2 million for 20142016 compared to 2013.2015. This increasedecrease is primarily due to the earlylower wholegoods and PG&A sales, due to low snowfall and colder weatherlevels in North America, currency pressures and the success of the new AXYS chassis platform models introduced in 2014.market share declines. Retail sales to consumers for the 2014-20152016-2017 season-to-date period through December 31, 2014, increased high-teens2016, decreased low double-digits percent. Sales of snowmobiles to customers outside of North America, principally within the Scandinavian region and Russia, decreased 28approximately 12 percent in 20142016 as compared to 20132015 due primarily to economic weakness in the region. The average unit sales price in 2014 was approximately flat when2016 increased three percent over 2015’s per unit sales price, primarily due to a favorable mix of premium snowmobiles.
Snowmobiles sales, inclusive of PG&A sales, decreased three percent to $404.5 million for 2015 compared to 2013.
Snowmobile sales increased seven percent to $301.7 million for 2013 compared to 2012.2014. This increasedecrease is primarily due to lower dealer inventory coming outwholegoods and PG&A sales, partially offset by the acquisition of Timbersled in early 2015. Low snowfall levels in North America and currency pressures, were the primary drivers of the 2012-2013 snowmobile season and success of the model year 2014 new product introductions.decreased sales for 2015. Retail sales to consumers for the 2013-20142015-2016 season-to-date period through December 31, 2013, increased nearly ten percent.2015, decreased mid-teens percent; however, we realized North American market share gains for the same season-to-date period. Sales of snowmobiles to customers outside of North America, principally within the Scandinavian region and Russia, increased 18decreased over 20 percent in 20132015 as compared to 2012.2014 due primarily to economic weakness in the region. The average unit sales price in 2013 decreased2015 increased two percent when comparedover 2014’s per unit sales price, primarily due to 2012, resulting primarily from increased salesa favorable mix of our value-pricedpremium snowmobiles.
Motorcycles
Sales of Motorcycles, inclusive of PG&A sales, which is comprised of VictoryIndian and IndianVictory motorcycles, and the all-new roadster,moto-roadster Slingshot, increased 59one percent to $348.7708.5 million for 20142016 compared to 20132015. The increase in 20142016 sales is due to the continued high demandincreased shipments for Indian and Victory motorcycles, includingpartially offset by lower Slingshot shipments, which were negatively impacted by a recall during the new 2015 Roadmaster and the Company's first mid-sized motorcycle, Scout, and initial shipments of the Slingshot.fourth quarter. North American industry heavyweight cruiser and touring motorcycle retail sales, (which excludes900cc and above (including Slingshot) increased low-single, decreased mid-single digits percent in 20142016 compared to 20132015. Over the same period, Polaris North American unit retail sales to consumers increased almost 40approximately ten percent, driven primarily by strong retail sales for Indian motorcycles. North American Polaris motorcycle dealer inventory increased approximately 30 percent in 2016 versus 2015 levels primarily due to stocking at appropriate RFM levels. Sales of motorcycles to customers outside of North America increased approximately eight percent in 2016 compared to 2015. The average per unit sales price for the Motorcycles segment in 2016 decreased four percent compared to 2015 due to the increased sales of our mid-sized motorcycles.
Sales of Motorcycles, inclusive of PG&A sales, which is comprised of Indian and Victory motorcycles, and the moto-roadster Slingshot, increased 67 percent to $698.3 million for 2015 compared to 2014. The increase in 2015 sales is due to the continued high demand for Indian motorcycles and Slingshot, but was negatively impacted by constrained product availability during the first three quarters of 2015 at our Spirit Lake, Iowa production facility. North American industry retail sales, 900cc and above (including Slingshot), increased low-single digits percent in 2015 compared to 2014. Over the same period, Polaris North American unit retail sales to consumers increased approximately 60 percent, driven primarily by continued strong retail sales for Indian motorcycles and initial retail sales of Slingshot. North American Polaris motorcycle dealer inventory increased mid-teens digitsover 50 percent in 20142015 versus 20132014 levels primarily due to stocking of the Indian motorcycles and Slingshot. Sales of motorcycles to customers outside of North America increased over 70approximately 40 percent in 20142015 compared to 2013.2014. The average per unit sales price for the Motorcycles divisionsegment in 2014 increased nine2015 decreased two percent compared to 20132014 due to the increased sales of higher priced Indian motorcycles and initialour mid-sized motorcycles.
Global Adjacent Markets
Global Adjacent Markets sales, inclusive of Slingshot.
Sales of Motorcycles, which was comprised of Victory and Indian motorcycles in 2013,PG&A sales, increased 12ten percent to $219.8$341.9 million for 20132016 compared to 2012.2015. The increase in 2013 sales is primarily due to the initial shipmentsacquisition of the new model year 2014 Indian motorcycles. North American industry heavyweight cruiser and touring motorcycle retail sales increased mid-single digits percent in 2013 compared to 2012. Over the same period, Polaris North American unit retail sales to consumers increased over 20 percent, driven by an unprecedented number of new product introductions in 2013, which includes three new Indian Motorcycle models. North American Polaris motorcycle dealer inventory increased high-single digits percent in 2013 versus 2012 levels due to stocking of the new Indian motorcycles.Taylor-Dunn. Sales of motorcycles to customers outside of North America increased approximately three percent in 20132016 compared to 2012.2015. The average per unit sales price for the Motorcycles divisionGlobal Adjacent Markets segment in 2013 increased five percent2016 was approximately flat compared to 2012 due2015.
Global Adjacent Markets sales, inclusive of PG&A sales, decreased two percent to the increased sales of higher priced Indian motorcycles.
Sales of Small Vehicles, which is comprised of Aixam, GEM and Goupil vehicles, increased 28 percent to $157.4$312.1 million for 20142015 compared to 2013.2014. The increasedecrease in sales over the comparable prior year is due to the inclusion of Aixam in our consolidated financial statements for the full year in 2014, versus eight months in 2013, since it was acquired in April 2013. Also, GEM experienced an increase in sales during 2014 compared to 2013.
Small Vehicles sales of $122.8 million in 2013 represents an increase of 177 percent compared to 2012. The increase in sales over the comparable prior year periods is primarily due to ongoing currency pressures, as the inclusionnumber of Aixamunits sold in our consolidated financial statements since it was acquired in April 2013. Also, both GEM and Goupil experienced an increase in sales during 2013Global Adjacent Markets segment increased compared to 2012.
PG&A2014. However, sales increased 21 percent to $742.1 million for 2014our government/defense business decreased compared to 2013.2014. The average per unit sales increaseprice for the Global Adjacent Markets segment in 2014 was driven by double digit2015 decreased eight percent increases in ORV, Motorcycles, and Small Vehicles related PG&A, which was primarily driven by the addition of over 400 new model year 2015 accessories, including additions to the family of Lock & Ride® attachments that add comfort, style and utility to ORVs and motorcycles. PG&A sales also increased due to the inclusion of Kolpin and Pro Armor in our consolidated financial statements, which were both acquired in 2014. Sales of PG&A to customers outside of North America increased 13 percent during 2014 compared to 2013.2014 due primarily to currency pressures.
Other
26
PG&A sales increased 33 percent to $611.3 million for 2013 compared to 2012. The sales increase in 2013 was driven by double digit percent increases in all product lines and categories, which was primarily driven by the addition of over 300 new model year 2014 accessories, including additions to the family of Lock & Ride attachments that add comfort, style and utility to ORVs and motorcycles. Sales of PG&A to customers outside of North America increased 26 percent during 2013 compared to 2012. PG&A sales also increased over the prior year periods due to the inclusion of Klim in our consolidated financial statements since it was acquired in December 2012, and Aixam related PG&A since it was acquired in April 2013.2016.
Sales by geographic region were as follows:
| | | | For the Years Ended December 31, | For the Years Ended December 31, |
| ($ in millions) | 2014 | | Percent of Total Sales | | 2013 | | Percent of Total Sales | | Percent Change 2014 vs. 2013 | | 2012 | | Percent of Total Sales | | Percent Change 2013 vs. 2012 | 2016 | | Percent of Total Sales | | 2015 | | Percent of Total Sales | | Percent Change 2016 vs. 2015 | | 2014 | | Percent of Total Sales | | Percent Change 2015 vs. 2014 |
| United States | $ | 3,339.9 |
| | 75 | % | | $ | 2,721.3 |
| | 72 | % | | 23 | % | | $ | 2,311.0 |
| | 72 | % | | 18 | % | $ | 3,557.2 |
| | 79 | % | | $ | 3,689.0 |
| | 78 | % | | (4) | % | | $ | 3,339.9 |
| | 75 | % | | 10 | % |
| Canada | 454.6 |
| | 10 | % | | 463.3 |
| | 12 | % | | (2 | )% | | 438.2 |
| | 14 | % | | 6 | % | 307.1 |
| | 7 | % | | 378.7 |
| | 8 | % | | (19 | )% | | 454.6 |
| | 10 | % | | (17 | )% |
| Other foreign countries | 685.1 |
| | 15 | % | | 592.5 |
| | 16 | % | | 16 | % | | 460.6 |
| | 14 | % | | 29 | % | 652.3 |
| | 14 | % | | 651.6 |
| | 14 | % | | 0 | % | | 685.1 |
| | 15 | % | | (5 | )% |
| Total sales | $ | 4,479.6 |
| | 100 | % | | $ | 3,777.1 |
| | 100 | % | | 19 | % | | $ | 3,209.8 |
| | 100 | % | | 18 | % | $ | 4,516.6 |
| | 100 | % | | $ | 4,719.3 |
| | 100 | % | | (4) | % | | $ | 4,479.6 |
| | 100 | % | | 5 | % |
Significant regional trends were as follows:
United States:
Sales in the United States for 2014 increased 232016 decreased four percent compared to 2013,2015, primarily resulting from higherlower shipments in all product lines and related PG&A, improved pricing and more sales of higher priced side-by-side vehicles.ORVs. The United States represented 7579 percent, 7278 percent and 7275 percent of total company sales in 2016, 2015 and
2014, 2013 and 2012, respectively. Sales in the United States for 20132015 increased 1810 percent compared to 2012,2014, primarily resulting from higher shipments in all product linesmotorcycles and related PG&A, improved pricing and more sales of higher priced side-by-side vehicles.&A.
Canada:
Canadian sales decreased two19 percent in 20142016 compared to 2013. Negative currency rate movements was2015. A slower retail environment, driven by the primary contributor foroil and gas producing regions of Canada, contributed to the decrease in 2014, which had an unfavorable seven percent impact on sales for 2014 compared to 2013, partially offset by sales of higher priced side-by-side vehicles and motorcycles. Sales in Canada represented 10 percent, 12 percent and 14 percent of total company sales in 2014, 2013, and 2012, respectively. Canadian sales increased 6 percent in 2013 compared to 2012 due to increased shipments of ORVs and snowmobiles, partially offset by2016, as well as negative currency rate movements,movement, which had an unfavorable three percent impact on sales for 20132016 compared to 2012.2015. Sales in Canada represented seven percent, eight percent and ten percent of total company sales in 2016, 2015 and 2014, respectively. Canadian sales decreased seventeen percent in 2015 compared to 2014. Negative currency rate movement was the primary contributor for the decrease in 2015, which had an unfavorable 14 percent impact on sales for 2015 compared to 2014, along with a slower retail environment, particularly in the oil and gas producing regions.
Other Foreign Countries:
Sales in other foreign countries, primarily in Europe, increased 16 percentwere approximately flat for 20142016 compared to 2013. The increase was primarily driven2015. Sales of motorcycles and Global Adjacent Markets vehicles increased, but were offset by increaseddecreased sales of side-by-side vehiclessnowmobiles and motorcycles,ORVs, as well as the acquisition of Aixam in April 2013. This increase was partially offset bynegative currency rate movements, which had an unfavorable two percentthree percentage point impact on sales for 20142016 compared to 2013.2015. Sales in other foreign countries, primarily in Europe, increased 29decreased five percent for 20132015 compared to 2012.2014. The increasedecrease was primarily driven by the acquisition of Aixam in April 2013, along with increased sales of side-by-side vehicles and PG&A. This increase was partially offset bynegative currency rate movements, which had an unfavorable one percent15 percentage point impact on sales for 20132015 compared to 2012.
Table2014, as well as decreased sales of Contentsside-by-side vehicles, snowmobiles, and Global Adjacent Markets vehicles, partially offset by increased sales of motorcycles. The decrease in snowmobile sales was primarily due to poor economic conditions in Russia.
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, | For the Years Ended December 31, |
| ($ in millions) | 2014 | | Percent of Total Cost of Sales | | 2013 | | Percent of Total Cost of Sales | | Change 2014 vs. 2013 | | 2012 | | Percent of
Total
Cost of Sales | | Change 2013 vs. 2012 | 2016 | | Percent of Total Cost of Sales | | 2015 | | Percent of Total Cost of Sales | | Change 2016 vs. 2015 | | 2014 | | Percent of
Total
Cost of Sales | | Change 2015 vs. 2014 |
| Purchased materials and services | $ | 2,757.6 |
| | 87 | % | | $ | 2,336.1 |
| | 88 | % | | 18 | % | | $ | 2,008.9 |
| | 88 | % | | 16 | % | $ | 2,840.8 |
| | 83 | % | | $ | 2,929.9 |
| | 87 | % | | (3 | )% | | $ | 2,757.6 |
| | 87 | % | | 6 | % |
| Labor and benefits | 244.1 |
| | 8 | % | | 198.7 |
| | 8 | % | | 23 | % | | 177.7 |
| | 8 | % | | 12 | % | 250.7 |
| | 7 | % | | 258.7 |
| | 8 | % | | (3 | )% | | 244.1 |
| | 8 | % | | 6 | % |
| Depreciation and amortization | 96.9 |
| | 3 | % | | 64.5 |
| | 2 | % | | 50 | % | | 51.8 |
| | 2 | % | | 25 | % | 124.5 |
| | 4 | % | | 117.9 |
| | 3 | % | | 6 | % | | 96.9 |
| | 3 | % | | 22 | % |
| Warranty costs | 61.9 |
| | 2 | % | | 56.9 |
| | 2 | % | | 9 | % | | 46.1 |
| | 2 | % | | 23 | % | 195.0 |
| | 6 | % | | 73.7 |
| | 2 | % | | 165 | % | | 61.9 |
| | 2 | % | | 19 | % |
| Total cost of sales | $ | 3,160.5 |
| | 100 | % | | $ | 2,656.2 |
| | 100 | % | | 19 | % | | $ | 2,284.5 |
| | 100 | % | | 16 | % | $ | 3,411.0 |
| | 100 | % | | $ | 3,380.2 |
| | 100 | % | | 1 | % | | $ | 3,160.5 |
| | 100 | % | | 7 | % |
| Percentage of sales | 70.6 | % | | | | 70.3 | % | | | | +23 basis |
| | 71.2 | % | | | | -85 basis |
| 75.5 | % | | | | 71.6 | % | | | | +389 basis |
| | 70.6 | % | | | | +108 basis |
|
| | | | | | | | | | points |
| | | | | | points |
| | | | | | | | | points |
| | | | | | points |
|
For 2014,2016, cost of sales increased 19one percent to $3,160.5$3,411.0 million compared to $2,656.2$3,380.2 million in 2013.2015. The increase in cost of sales in 2016 is primarily attributed to higher warranty costs incurred related to product recalls, partially offset by decreased production. Additionally, depreciation and amortization increased due to higher capital expenditures to increase production capacity and capabilities.
2014For 2015, cost of sales increased seven percent to $3,380.2 million compared to $3,160.5 million in 2014. The increase in cost of sales in 2015 resulted primarily from the effect of a 14three percent increase in sales volume on purchased materials and services and labor and benefits. Additionally, depreciation and amortization increased due to increasedhigher capital expenditures to increase production capacity and capabilities.
For 2013, cost of sales increased 16 percent to $2,656.2 million compared to $2,284.5 million in 2012. The increase in cost of sales in 2013 resulted primarily from the effect of a 12 percent increase in sales volume on purchased materials and services and labor and benefits, and also includes an unfavorable resolution regarding a contract dispute resulting in an approximate $10.0 million charge for additional royalties in 2013.
Gross Profit:
The following table reflects our gross profit in dollars and as a percentage of sales:
| | | | For the Years Ended December 31, | For the Years Ended December 31, |
| ($ in millions) | 2014 | | 2013 | | Change
2014 vs. 2013 | | 2012 | | Change
2013 vs. 2012 | 2016 | | Percent of Sales | | 2015 | | Percent of Sales | | Change
2016 vs. 2015 | | 2014 | | Percent of Sales | | Change
2015 vs. 2014 |
| Gross profit dollars | $ | 1,319.2 |
| | $ | 1,120.9 |
| | 18 | % | | $ | 925.3 |
| | 21 | % | |
| ORV/Snowmobiles | | $ | 930.2 |
| | 27.7 | % | | $ | 1,190.6 |
| | 32.1 | % | | (22 | )% | | $ | 1,206.6 |
| | 32.3 | % | | (1 | )% |
| Motorcycles | | 91.4 |
| | 12.9 | % | | 97.3 |
| | 13.9 | % | | (6 | )% | | 54.4 |
| | 13.0 | % | | 79 | % |
| Global Adjacent Markets | | 95.1 |
| | 27.8 | % | | 84.2 |
| | 27.0 | % | | 13 | % | | 88.8 |
| | 27.8 | % | | (5 | )% |
| Other | | 19.8 |
| | 18.3 | % | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Corporate | | (30.9 | ) | | | | (33.1 | ) | | | | (7 | )% | | (30.6 | ) | | | | 8 | % |
| Total gross profit dollars | | $ | 1,105.6 |
| | | | $ | 1,339.0 |
| | | | (17 | )% | | $ | 1,319.2 |
| | | | 2 | % |
| Percentage of sales | 29.4 | % | | 29.7 | % | | -23 basis points |
| | 28.8 | % | | +85 basis points |
| 24.5 | % | | | | 28.4 | % | | | | -389 basis points |
| | 29.4 | % | | | | -108 basis points |
|
Consolidated. Consolidated gross profit, as a percentage of sales, decreased in 2016 due to increased warranty and promotional costs and negative currency impacts, partially offset by lower commodity costs and product cost reduction efforts. During 2016, we incurred additional warranty expense equating to approximately 250 basis points of negative impact to gross profit margins, related primarily to increased warranty costs associated with vehicle recalls, of which approximately 200 basis points is considered to be one-time in nature. Gross profit in absolute dollars decreased due to lower sales volume, unfavorable product mix, higher promotions and higher warranty costs, partially offset by lower commodity costs and cost savings from product cost reduction efforts. Foreign currencies had a negative impact to gross profit of approximately $43.0 million for 2016, when compared to the prior year period.
Consolidated gross profit, as a percentage of sales, was 29.428.4 percent for 2014,2015, a decrease of 23108 basis points from 2013.2014. Gross profit dollars increased 18two percent to $1,319.2$1,339.0 million in 20142015 compared to 2013.2014. The increase in gross profit dollars resulted from higher selling prices, mixlower commodity costs and product cost reduction efforts, partially offset by the negative impact of currency movements.movements and higher promotions. Foreign currencies had a negative impact to gross profit of approximately $70.0 million for 2015, when compared to the prior year period. The decrease in gross profit percentage resulted primarily from unfavorable foreign currency fluctuations, new plant start-up costs, higher promotional expenses and higher depreciation and amortization, partially offset by lower commodity costs, product cost reduction and higher selling prices.
ORV/Snowmobiles. Gross profit, as a percentage of sales, decreased from 2015 to 2016, primarily due to decreased volumes, higher warranty costs and higher promotions, partially offset by product cost reduction efforts. Included in warranty expense are costs related to recall activity, primarily for certain RZR vehicles. Gross profit, as a percentage of sales, was 29.7 percent for 2013, an increaseapproximately flat from 2014 to 2015, primarily due to the negative impact of 85 basis points from 2012. Gross profit dollars increased 21 percent to $1,120.9 million in 2013 compared to 2012. The increases in gross profit dollarscurrency movements, decreased volumes and the increase in gross profit margin percentage resulted primarily from continuedhigher promotions, offset by product cost reduction production efficiencies on increased volumes andefforts.
Motorcycles. Gross profit, as a percentage of sales, decreased from 2015 to 2016, primarily due to higher selling prices,warranty costs associated with Slingshot, partially offset by unfavorable foreign currency fluctuations, higher promotionalincreased sales volumes of Indian and Victory motorcycles, and the absence of costs incurred in 2015 related to additional manufacturing costs and royalty expensesinefficiencies associated with our Spirit Lake, Iowa motorcycle facility paint system. Gross profit, as a resultpercentage of sales, increased from 2014 to 2015, primarily due to increased sales volumes of Indian and Slingshot, partially offset by additional manufacturing costs and inefficiencies associated with our efforts to scale-up production and add capacity to the paint system at our Spirit Lake, Iowa motorcycle facility.
Global Adjacent Markets. Gross profit, as a contract dispute resolution.
Tablepercentage of Contentssales, increased from 2015 to 2016, primarily due to the acquisition of Taylor-Dunn and increased sales volumes of Aixam vehicles. Gross profit, as a percentage of sales, decreased from 2014 to 2015, primarily due to the negative impact of currency movements.Other. Gross profit was $19.8 million for 2016 due to the acquisition of TAP in November 2016, which includes approximately $9.0 million related to a purchase accounting inventory step-up adjustment.
Operating Expenses:
The following table reflects our operating expenses in dollars and as a percentage of sales:
| | | | For the Years Ended December 31, | For the Years Ended December 31, |
($ in millions) | 2014 | | 2013 | | Change
2014 vs. 2013 | | 2012 | | Change
2013 vs. 2012 | 2016 | | 2015 | | Change
2016 vs. 2015 | | 2014 | | Change
2015 vs. 2014 |
| Selling and marketing | $ | 314.5 |
| | $ | 270.3 |
| | 16 | % | | $ | 210.4 |
| | 28 | % | $ | 342.2 |
| | $ | 316.7 |
| | 8 | % | | $ | 314.5 |
| | 1 | % |
| Research and development | 148.5 |
| | 139.2 |
| | 7 | % | | 127.3 |
| | 9 | % | 185.1 |
| | 166.4 |
| | 11 | % | | 148.5 |
| | 12 | % |
| General and administrative | 203.2 |
| | 179.4 |
| | 13 | % | | 143.1 |
| | 25 | % | 306.5 |
| | 209.1 |
| | 47 | % | | 203.2 |
| | 3 | % |
| Total operating expenses | $ | 666.2 |
| | $ | 588.9 |
| | 13 | % | | $ | 480.8 |
| | 22 | % | $ | 833.8 |
| | $ | 692.2 |
| | 20 | % | | $ | 666.2 |
| | 4 | % |
| Percentage of sales | 14.9 | % | | 15.6 | % | | -72 basis points |
| | 15.0 | % | | +61 basis points |
| 18.5 | % | | 14.7 | % | | +379 basis points |
| | 14.9 | % | | -20 basis points |
|
Operating expenses for 20142016, as a percentage of sales and in absolute dollars, increased 13 percentprimarily due to $666.2 million, comparedhigher general and administrative expenses due to $588.9 million in 2013.increased legal expenses and other costs related to product recalls. Operating expenses also increased due to acquisitions and acquisition-related expenses, including approximately $13.0 million of acquisition-related expenses for the TAP acquisition, as well as increased research and development expenses for ongoing product refinement and innovation.
Operating expenses for 2015, as a percentage of sales decreased 7220 basis points in 2014 to 14.9 percentcompared to 15.6 percent in 2013.2014. Operating expenses in absolute dollars increased in 20142015 primarily due to higher selling, marketingresearch and advertisingdevelopment expenses, related to the launch of new model year 2015 products, including Slingshot, and the continued roll-out of Indian motorcycles, as well as increased general and administrative expenses, which includes infrastructure investments being made to support global growth initiatives. Operating expenses as a percent of sales declined primarily due to lower long-termoperating cost control measures and a reduction in incentive compensation plan expenses. Foreign currencies had a favorable impact to operating expenses partially offset by higher marketing and advertising expenses relatedof approximately $15.0 million for 2015, when compared to the launch of various new modelprior year 2015 products.
Operating expenses for 2013 increased 22 percent to $588.9 million, compared to $480.8 million in 2012. Operating expenses as a percentage of sales increased 61 basis points in 2013 to 15.6 percent compared to 15.0 percent in 2012. Operating expenses in absolute dollars and as a percentage of sales increased in 2013 primarily due to higher selling, marketing and advertising expenses related, in part, to the re-launch of Indian Motorcycle, increased general and administrative expenses, which includes infrastructure investments being made to support global growth initiatives and higher accrued incentive compensation due to a higher stock price. Operating expenses in absolute dollars also increased due to the inclusion of Klim and Aixam operating expenses in our consolidated financial statements since these companies were acquired in December 2012 and April 2013, respectively.period.
Income from Financial Services:
The following table reflects our income from financial services:
| | | | For the Years Ended December 31, | For the Years Ended December 31, |
| ($ in millions) | 2014 | | 2013 | | Change
2014 vs. 2013 | | 2012 | | Change
2013 vs. 2012 | 2016 | | 2015 | | Change
2016 vs. 2015 | | 2014 | | Change
2015 vs. 2014 |
| Income from Polaris Acceptance joint venture | $ | 30.5 |
| | $ | 20.2 |
| | 51 | % | | $ | 15.7 |
| | 29 | % | $ | 31.1 |
| | $ | 30.7 |
| | 1 | % | | $ | 30.5 |
| | 1 | % |
| Income from retail credit agreements | 27.6 |
| | 22.5 |
| | 23 | % | | 15.3 |
| | 47 | % | 41.8 |
| | 33.9 |
| | 23 | % | | 27.6 |
| | 23 | % |
| Income from other financial services activities | 3.6 |
| | 3.2 |
| | 13 | % | | 2.9 |
| | 10 | % | 5.6 |
| | 4.7 |
| | 19 | % | | 3.6 |
| | 31 | % |
| Total income from financial services | $ | 61.7 |
| | $ | 45.9 |
| | 34 | % | | $ | 33.9 |
| | 35 | % | $ | 78.5 |
| | $ | 69.3 |
| | 13 | % | | $ | 61.7 |
| | 12 | % |
| Percentage of sales | 1.4 | % | | 1.2 | % | | +16 basis points |
| | 1.1 | % | | +16 basis points |
| 1.7 | % | | 1.5 | % | | +27 basis points |
| | 1.4 | % | | +9 basis points |
|
Income from financial services increased 3413 percent to $61.7$78.5 million in 20142016 compared to $45.9$69.3 million in 2013.2015. The increase in 20142016 is primarily due to a 1610 percent increase in retail credit contract volume and increased profitability generated from the retail credit portfolios with Performance Finance, Sheffield Financial and Synchrony Bank and higher income from the sale of extended service contracts.
Income from financial services increased 12 percent to $69.3 million in 2015 compared to $61.7 million in 2014. The increase in 2015 is primarily due to a 15 percent increase in retail credit contract volume and increased profitability generated from the retail credit portfolios with Sheffield Financial, Synchrony Bank, Capital One, Chrome Capital and FreedomRoad, and slightly higher income from dealer inventory financing through Polaris Acceptance, due primarily to increased profitability and a 2314 percent increase in financed receivables as of December 31, 2014.2015.
Income from financial services increased 35 percent to $45.9 million in 2013 compared to $33.9 million in 2012. The increase in 2013 is primarily due to a nine percent increase in retail credit contract volume and increased profitability generated from the retail credit portfolios with Sheffield, GE and Capital One, and higher income from dealer inventory financing through Polaris Acceptance.
Remainder of the Income Statement:
| | | | For the Years Ended December 31, | For the Years Ended December 31, |
| ($ in millions except per share data) | 2014 | | 2013 | | Change
2014 vs. 2013 | | 2012 | | Change
2013 vs. 2012 | 2016 | | 2015 | | Change
2016 vs. 2015 | | 2014 | | Change
2015 vs. 2014 |
| Interest expense | $ | 11.2 |
| | $ | 6.2 |
| | 81 | % | | $ | 5.9 |
| | 5 | % | $ | 16.3 |
| | $ | 11.5 |
| | 42 | % | | $ | 11.2 |
| | 2 | % |
| Equity in loss of other affiliates | $ | 4.1 |
| | $ | 2.4 |
| | 71 | % | | $ | 0.2 |
| | NM |
| $ | 6.9 |
| | $ | 6.8 |
| | 1 | % | | $ | 4.1 |
| | 65 | % |
| Other expense (income), net | $ | 0.0 |
| | $ | (5.1 | ) | | NM |
| | $ | (7.5 | ) | | (32 | )% | |
| Other expense, net | | $ | 13.8 |
| | $ | 12.1 |
| | 14 | % | | $ | 0.0 |
| | NM |
|
| | | | | | | | | | | | | | | | | | | |
| Income before income taxes | $ | 699.3 |
| | $ | 574.4 |
| | 22 | % | | $ | 479.8 |
| | 20 | % | $ | 313.3 |
| | $ | 685.7 |
| | (54 | )% | | $ | 699.3 |
| | (2 | )% |
| Provision for income taxes | $ | 245.3 |
| | $ | 193.4 |
| | 27 | % | | $ | 167.5 |
| | 15 | % | $ | 100.3 |
| | $ | 230.4 |
| | (56 | )% | | $ | 245.3 |
| | (6 | )% |
| Percentage of income before income taxes | 35.1% | | 33.7% | | +141 basis points |
| | 34.9% | | -125 basis points |
| 32.0% | | 33.6% | | -158 basis points |
| | 35.1% | | -148 basis points |
|
| | | | | | | | | | | | | | | | | | | |
| Net income from continuing operations | $ | 454.0 |
| | $ | 381.1 |
| | 19 | % | | $ | 312.3 |
| | 22 | % | |
| Net income | $ | 454.0 |
| | $ | 377.3 |
| | 20 | % | | $ | 312.3 |
| | 21 | % | $ | 212.9 |
| | $ | 455.4 |
| | (53 | )% | | $ | 454.0 |
| | 0 | % |
| Diluted net income per share: | | | | | | | | | | |
| Continuing operations | $ | 6.65 |
| | $ | 5.40 |
| | 23 | % | | $ | 4.40 |
| | 23 | % | |
| Diluted net income | $ | 6.65 |
| | $ | 5.35 |
| | 24 | % | | $ | 4.40 |
| | 22 | % | |
| Diluted net income per share | | $ | 3.27 |
| | $ | 6.75 |
| | (52 | )% | | $ | 6.65 |
| | 2 | % |
| Weighted average diluted shares outstanding | 68.2 |
| | 70.5 |
| | (3 | )% | | 71.0 |
| | (1 | )% | 65.2 |
| | 67.5 |
| | (3 | )% | | 68.2 |
| | (1 | )% |
| NM = not meaningful | | | | | | | | | | | | | | | | | | |
Interest Expense. The increase in 20142016 compared to 20132015 is primarily due to increased debt levels through borrowings on our term loan facility and revolving credit facility, primarily to finance acquisitions. The increase in 2015 compared to 2014 is primarily due to increased debt levels through borrowings on our existing revolving credit facility and the additional borrowing of $100.0 million through our amended Master Note Purchase Agreement in December 2013. The increase in 2013 compared to 2012, is primarily related to the increased debt levels through borrowings in the 2013 fourth quarter on our existing revolving credit facility and additional borrowings of $100.0 million through our amended Master Note Purchases Agreement in November 2013 used to partially fund the $497.5 million buyback of outstanding Polaris shares held by Fuji.facility.
Equity in loss of other affiliates. Increased losses at Eicher-Polaris Private Limited (EPPL) wererelated to continued operating activities related to the resultproduction of an increasethe jointly-developed Multix™ personal vehicle, which is specifically designed to satisfy the varied transportation needs of consumers in India. During 2015, EPPL began production of the joint venture's pre-production activities.Multix vehicle. We recordhave recorded our proportionate 50 percent share of EPPL gains and losses.
Other expense, (income),net. The change 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.
Provision for income taxes. The higher income tax rate for 2016 was 32.0% as compared with 33.6% and 35.1% in 2015 and 2014, respectively. The lower income tax rate for 2016, compared with 2015 was primarily due to the decrease in 2016 pretax income, as the beneficial impact of discrete items increases with lower pretax earnings.The lower income tax rate for 2015 as compared to 2014 was primarily due to lower income generatedtax benefits recorded related to research and development credits from the filing of our international operations which generally have lower2014 federal income tax rates.return and other amended returns. The favorable impact, net of related tax reserves in 2015, totaled approximately $10.0 million. For 20142016, 2015 and 2013,2014, the income tax provision was positively impacted by the United States Congress extending and permanently enacting the research and development income tax credit. However, in 2013 the research and development credit extension was retroactive to 2012, resulting in two years of benefit in 2013. In addition, we also had a favorable impact in 2013 from the release of certain income tax reserves due to favorable conclusions of federal income tax audits. The favorable impact from these items totaled $8.2 million and was recorded as a reduction to income tax expense in the first quarter of 2013.
Net income.The 2013 loss from discontinued operations is a result of a 2013 unfavorable jury verdict in a previously disclosed lawsuit involving a collision between a 2001 Polaris Virage personal watercraft and a boat. The jury awarded approximately $21.0 million in damages of which our liability was $10.0 million. We reported a loss from discontinued operations, net of tax, of $3.8 million in 2013 for an additional provision for our portion of the jury award and legal fees. The liability was fully paid by the end of 2013. There was no income or loss from discontinued operations in 2014 or 2012. In September 2004, we announced our decision to cease manufacturing marine products. Since then, any material financial results of that division have been recorded in discontinued operations. No additional charges are expected from this lawsuit.
Weighted average shares outstanding. The decreasechange in the weighted average diluted shares outstanding from 2015 to 2016 and from 2014 to 2015 is primarily due to the Company's November 2013 purchase of 3.96 million shares of Polarisshare repurchases under our stock previously held by FHI Heavy Industries Ltd ("Fuji") under a Share Repurchase Agreement with Fuji. This buyback more than offset the issuance of shares under employee compensation plans and resulted in a decrease to the 2014, and to a lesser extent due to the timing of the transaction, the 2013 weighted average diluted shares outstanding.repurchase program.
Critical Accounting Policies
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, dealer holdback programs, share-based employee compensation, product warranties and product liability.
Revenue recognition. Revenues are recognized at the time of shipment to the dealer, distributor or other customers. 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. Polaris sponsors certain sales incentive programs and accrues liabilities for estimated sales
promotion expenses and estimated holdback amounts that are recognized as reductions to sales when products are sold to the dealer or distributor customer.
Sales promotions and incentives. We provide for estimated sales promotion and incentive expenses, which are recognized as a reduction to sales at the time of sale to the dealer or distributor. 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, 20142016 and 2013,2015, accrued sales promotions and incentives were $138.6$158.6 million and $123.1$141.1 million, respectively, resulting primarily from an increaseincreased competitive environment in the volume of units sold and an increase in the level of dealer inventories in 2014.2016. 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 from time to time 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. Historically, actual sales promotion and incentive expenses have been within our expectations and differences have not been material.
Dealer holdback programs. Dealer holdback represents a portion of the invoiced sales price that is expected to be subsequently returned to the dealer or distributor as a sales incentive upon the ultimate retail sale of the product. Holdback amounts reduce the ultimate net price of the products purchased by our dealers or distributors and, therefore, reduce the amount of sales we recognize at the time of shipment. The portion of the invoiced sales price estimated as the holdback is recognized as “dealer holdback” liability on our balance sheet until paid or forfeited. The minimal holdback adjustments in the estimated holdback liability due to forfeitures are recognized in net sales. Payments are made to dealers or distributors at various times during the year subject to previously established criteria. Polaris recorded accrued liabilities of $120.1$117.6 million and $100.6$123.3 million for dealer holdback programs in the consolidated balance sheets as of December 31, 20142016 and 2013,2015, respectively.
Share-based employee compensation. We recognize in the financial statements the grant-date fair value of stock options and other equity-based compensation issued to employees. Determining the appropriate fair-value model and calculating
the fair value of share-based awards at the date of grant requires judgment. The Company utilizesWe utilize the Black-Scholes option pricing model to estimate the fair value of employee stock options. Option pricing models, including the Black-Scholes model, also require the use of input assumptions, including expected volatility, expected life, expected dividend rate, and expected risk-free rate of return. The Company utilizesWe utilize historical volatility as it believeswe believe this is reflective of market conditions. The expected life of the awards is based on historical exercise patterns. The risk-free interest rate assumption is based on observed interest rates appropriate for the terms of awards. The dividend yield assumption is based on our history of dividend payouts. We develop an estimate of the number of share-based awards that will be forfeited due to employee turnover. Changes in the estimated forfeiture rate can have a significant effect on reported share-based compensation, as the effect of adjusting the rate for all expense amortization is recognized in the period the forfeiture estimate is changed. If the actual forfeiture rate is higher or lower than the estimated forfeiture rate, then an adjustment is made to increase or decrease the estimated forfeiture rate, which will result in a decrease or increase to the expense recognized in the financial statements. If forfeiture adjustments are made, they would affect our gross margin and operating expenses. We estimate the likelihood and the rate of achievement for performance share-based awards, specifically long-term compensation grants of performance-based restricted stock awards. Changes in the estimated rate of achievement can have a significant effect on reported share-based compensation expenses as the effect of a change in the estimated achievement level is recognized in the period that the likelihood factor changes. If adjustments in the estimated rate of achievement are made, they would be reflected in our gross margin and operating expenses. At the end of 2014,2016, if all long-term incentive program performance based awards were expected to achieve the maximum payout, we would have recorded an additional $7.5$46.9 million of expense in 2014.2016. Fluctuations in our stock price can have a significant effect on reported share-based compensation expenses for liability-based awards. The impact from fluctuations in our stock price is recognized in the period of the change, and is reflected in our gross margin and operating expenses. At December 31, 2014,2016, the accrual for liability-based awards outstanding was $15.2$6.1 million, and is included in accrued compensation in the consolidated balance sheets.
Product warranties. We provide a limited warranty for ORVs for a period of six months, for a period of one year for our snowmobiles, for a period of one or two years for our motorcycles depending on brand and model year, for a period of one year for our Taylor-Dunn vehicles, and for a two yearsyear period for SVs.GEM, Goupil and Aixam vehicles. We provide longer warranties in certain geographical markets as determined by local regulations and market conditions and may provide longer warranties related to certain promotional programs. Our standard warranties require us or our dealers to
repair or replace defective products during such warranty periods at no cost to the consumers. 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, 20142016 and 2013,2015, the accrued warranty liability was $53.1$119.3 million and $52.8$56.5 million, respectively. Adjustments to the warranty reserve are made from time to time 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. 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.
Product liability. We are subject to product liability claims in the normal course of business. In late 2012, we purchased excess insurance coverage for catastrophic product liability claims for incidents occurring after the policy date. We self-insure product liability claims up to the purchased catastrophic insurance coverage. 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 determinable. We utilize historical trends and actuarial analysis tools, along with an analysis of current claims, to assist in determining the appropriate loss reserve levels. At December 31, 20142016 and 2013,2015, we had accruals of $17.3$45.1 million and $17.1$19.7 million, respectively, for the probable payment of pending claims related to continuing operations product liability litigation associated with our products. These accruals are included in other accrued expenses in the consolidated balance sheets. While management believes the product liability reserves are adequate, adverse determination of material product liability claims made against us could have a material adverse effect on our financial condition.
New Accounting Pronouncements
See Item 8 of Part II, “Financial Statements and Supplementary Data—Note 1—Organization and Significant Accounting Policies—New Accounting Pronouncementsaccounting pronouncements.”
Liquidity and Capital Resources
Our primary source of funds has been cash provided by operating activities. Our primary uses of funds have been for acquisitions, repurchase and retirement of common stock, capital investment, new product development and cash dividends to shareholders.
The following table summarizes the cash flows from operating, investing and financing activities for the years ended December 31, 20142016 and 20132015: | | | ($ in millions) | For the Years Ended December 31, | For the Years Ended December 31, |
| 2014 | | 2013 | | Change | 2016 | | 2015 | | Change |
| Total cash provided by (used for): | | | | | | | | | | |
| Operating activities | $ | 529.3 |
| | $ | 492.2 |
| | $ | 37.1 |
| $ | 571.8 |
| | $ | 440.2 |
| | $ | 131.6 |
|
| Investing activities | (246.8 | ) | | (406.7 | ) | | 159.9 |
| (909.3 | ) | | (289.1 | ) | | (620.2 | ) |
| Financing activities | (222.6 | ) | | (409.0 | ) | | 186.4 |
| 314.5 |
| | (120.1 | ) | | 434.6 |
|
| Impact of currency exchange rates on cash balances | (14.5 | ) | | (1.3 | ) | | (13.2 | ) | (5.0 | ) | | (13.3 | ) | | 8.3 |
|
| Increase (decrease) in cash and cash equivalents | $ | 45.4 |
| | $ | (324.8 | ) | | $ | 370.2 |
| $ | (28.0 | ) | | $ | 17.7 |
| | $ | (45.7 | ) |
Operating Activities:
Net cash provided by operating activities totaled $529.3571.8 million and $492.2$440.2 million in 20142016 and 20132015, respectively. The $37.1131.6 million increase in net cash provided by operating activities in 20142016 is primarily the result of highera $335.3 million decrease in net income compared to 2013, which includes a $35.4 million increase in depreciation and amortization,working capital, partially offset by a $44.5 million increase in deferred income taxes and a $15.8 million increase indecreased net working capital.income. Changes in working capital (as reflected in our statements of cash flows) for the year ended 20142016 was an increasea decrease of $15.6$179.7 million, compared to an increase of $0.2$155.6 million in 2013.2015. This was primarily due to an increasea decrease in net cash used of $106.4$260.7 million related to higher inventory required to support the growth in the business, offset by an increasepurchases, and a decrease in net cash providedused of $136.1 million related to timing of payments made for accounts payable of $54.3 million andaccrued expenses due to our focused efforts on working capital required, partially offset by the timing of collections of trade receivables of $29.9$46.8 million.
Investing Activities:
Net cash used for investing activities was $246.8$909.3 million in 20142016 compared to $406.7$289.1 million in 2013.2015. The primary uses of cash in 20142016 were the acquisitions of KolpinTAP and Pro Armor and capital expenditures for the purchase of property and equipment.Taylor-Dunn. In 2014,2016, we made large capital expenditures related to thecontinued capacity and capability expansion ofat many of our North America locations,facilities, including our manufacturing facilities in Spirit Lake, Iowa; Milford, Iowa; Roseau, Minnesota; and Monterrey, Mexico, as well as the constructioncompletion of our newour manufacturing facility in Opole, Poland. We expect that capital expenditures for 2015 will be in excess of $250 million.Huntsville, Alabama.
Financing Activities:
Net cash used forprovided by financing activities was $222.6314.5 million in 20142016 compared to cash used of $409.0120.1 million in 20132015. We paid cash dividends of $126.9140.3 million and $113.7139.3 million in 20142016 and 20132015, respectively. Total common stock repurchased in 20142016 and 20132015 totaled $81.8245.8 million and $530.0293.6 million, respectively. In November 2013, Polaris repurchased the 3.96 million Polaris shares held by Fuji for $497.5 million. The repurchase of the Polaris shares held by Fuji was partially funded through additional debt borrowings. In 2014,2016, we had net repaymentsborrowings under our capital lease arrangements and debt arrangements of $82.1$679.4 million, compared to net borrowings of $179.2$245.6 million in 2013.2015. Proceeds from the issuance of stock under employee plans were $31.317.7 million and $26.932.5 million in 20142016 and 20132015, respectively.
The seasonality of production and shipments cause working capital requirements to fluctuate during the year. We are party to an unsecured $350$600 million variable interest rate bank lending agreement that expires in January 2018.May 2021. At December 31, 2016, there were borrowings of $172.1 million outstanding under this arrangement. We are also party to a $750 million term loan facility, of which $740 million is outstanding as of December 31, 2016. Interest is charged at rates based on LIBOR or "prime." At December 31, 2014, there were no borrowings under this arrangement.“prime.”
In December 2010, we entered into a Master Note Purchase Agreement to issue $25.0 million of 3.81 percent unsecured Senior Notes due May 2018 and $75.0 million of 4.60 percent unsecured Senior Notes due May 2021 (collectively, the "Senior Notes"“Senior Notes”). The Senior Notes were issued in May 2011. In December 2013, the Companywe entered into a First Supplement to Master Note Purchase Agreement, under which the Companywe issued $100.0 million of 3.13 percent
unsecured senior notes due December 2020. At December 31, 20142016 and 20132015, outstanding borrowings under the amended Master Note Purchase Agreement totaled $200.0 million for both periods.
At December 31, 20142016 and 20132015, we were in compliance with all debt covenants. Our debt to total capital ratio was 2157 percent and 3532 percent at December 31, 20142016 and 20132015, respectively.
The following table summarizes our significant future contractual obligations at December 31, 2014:2016:
| | | | | | | | | | | | | | | | | | | | | |
(In millions): | Total | | <1 Year | | 1-3 Years | | 3-5 Years | | >5 Years | Total | | <1 Year | | 1-3 Years | | 3-5 Years | | >5 Years |
| Senior notes | $ | 200.0 |
| | — |
| | — |
| | $ | 25.0 |
| | $ | 175.0 |
| $ | 200.0 |
| | — |
| | $ | 25.0 |
| | $ | 175.0 |
| | — |
|
| Borrowings under our credit facility | | 172.1 |
| | — |
| | — |
| | 172.1 |
| | — |
|
| Term loan facility | | 740.0 |
| | — |
| | — |
| | 740.0 |
| | — |
|
| Notes Payable | | 13.6 |
| | $ | 1.2 |
| | 2.7 |
| | 2.4 |
| | $ | 7.3 |
|
| Interest expense | 44.4 |
| | $ | 7.6 |
| | $ | 15.1 |
| | 13.6 |
| | 8.1 |
| 102.9 |
| | 25.0 |
| | 48.6 |
| | 29.3 |
| | — |
|
| Capital leases | 38.3 |
| | 3.9 |
| | 6.2 |
| | 4.6 |
| | 23.6 |
| 26.0 |
| | 2.9 |
| | 4.3 |
| | 3.9 |
| | 14.9 |
|
| Operating leases | 22.5 |
| | 9.6 |
| | 8.4 |
| | 3.1 |
| | 1.4 |
| 112.6 |
| | 30.9 |
| | 43.6 |
| | 25.0 |
| | 13.1 |
|
| Total | $ | 305.2 |
| | $ | 21.1 |
| | $ | 29.7 |
| | $ | 46.3 |
| | $ | 208.1 |
| $ | 1,367.2 |
| | $ | 60.0 |
| | $ | 124.2 |
| | $ | 1,147.7 |
| | $ | 35.3 |
|
In the table above, we assumed our December 31, 2014,2016, outstanding borrowings under the Senior Notes will be paid at their respective due dates. Additionally, at December 31, 2014,2016, we had letters of credit outstanding of $24.9$13.4 million related to purchase obligations for raw materials. Not included in the above table isare unrecognized tax benefits of $10.6 million and the estimated future payments of contingent purchase price related to acquisitions which have a fair value of $27.9 million at December 31, 2014, and are expected to be paid at various times in 2015 through 2017.$26.4 million.
Our Board of Directors has authorized the cumulative repurchase of up to 75.086.5 million shares of our common stock through an authorized stock repurchase program. Of that total, approximately 73.979.0 million shares have been repurchased cumulatively from 1996 through December 31, 20142016. In addition to this stock repurchase authorization, in 2013 the Polaris Board of Directors authorized the one-time repurchase of all the shares of Polaris stock owned by Fuji. On November 12, 2013, Polaris entered into and executed a Share Repurchase Agreement with Fuji pursuant to which Polaris purchased 3.96 million shares of Polaris stock held by Fuji. We repurchased a total of 0.62.9 million shares of our common stock for $81.8245.8 million during 2014,2016, which increased earnings per share by one cent.seven cents. We have authorization from our Board of Directors to repurchase up to an additional 1.17.5 million shares of our common stock as of December 31, 20142016. On January 29, 2015, the Board of Directors approved an increase in the Company’s common stock repurchase authorization by an additional 4.0 million shares. The repurchase of any or all such shares authorized remaining for repurchase will be governed by applicable SEC rules.
We have arrangements with certain finance companies (including Polaris Acceptance) 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 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 at December 31, 20142016 and 2013,2015, was approximately $1,337.2$1,438.8 million and $1,163.5$1,562.0 million, respectively. We participate in the cost of dealer financing up to certain limits. We have agreed to repurchase products repossessed by the finance companies up to an annual maximum of no more than 15 percent of the average month-end balances outstanding during the prior calendar year. Our financial exposure under these agreements 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 these agreements. 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.
In 1996, a wholly owned subsidiaryOn March 1, 2016, Wells Fargo announced that it completed the purchase of Polaris entered into a partnership agreement with an entity that is now a subsidiarythe North American portion of GE Capital’s Commercial Distribution Finance Corporation (GECDF) to form Polaris Acceptance.business, including GECDF’s ownership interests in Polaris Acceptance, and adopted the tradename Wells Fargo Commercial Distribution Finance (WFCDF).
Polaris Acceptance, a joint venture with Wells Fargo, provides floor plan financing to our dealers in the United States. Our subsidiary has a 50 percent equity interest in Polaris Acceptance. In November 2006,As part of the agreement, Polaris Acceptance sold a majoritysells portions of its receivable portfolio (the “Securitized(“Securitized Receivables”) to a securitization facility (“Securitization Facility”) arranged by General Electric Capital Corporation, a GECDF affiliate, and the partnership agreement was amended to provide that Polaris Acceptance would continue to sell portions of its receivable portfolio to the Securitization Facility from time to time on an ongoing basis. 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 GECDFWFCDF and through equity contributions from both partners.
We have not guaranteed the outstanding indebtedness of Polaris Acceptance. In addition, the two partners of Polaris Acceptance share equally a variable equity cash investment based on the sum of the portfolio balance in Polaris Acceptance. Our total investment in Polaris Acceptance at December 31, 20142016 was $89.194.0 million. Substantially all of our U.S. sales are financed through Polaris Acceptance whereby Polaris receives payment within a few days of shipment of the product. 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 GECDF’sWells Fargo’s subsidiary. Our exposure to losses associated with respect to the Polaris Acceptance is limited to our equity in Polaris Acceptance. We have agreed to repurchase products repossessed by Polaris Acceptance up to an annual maximum of 15 percent of the aggregate average month-end balances outstanding during the prior calendar year with respect to receivables retained by Polaris Acceptance and the Securitized Receivables. For calendar year 2015,2017, the potential 15 percent aggregate repurchase obligation is approximately $146.4 million.$184.0 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. During 2011,2016, Wells Fargo & Company purchased the ownership interests in Polaris and GECDF amended the Polaris AcceptanceAccepttance from GE. The partnership agreement to extend itis effective through February 2017 with similar terms to the previous agreement.2022.
Our investment in Polaris Acceptance is accounted for under the equity method and is recorded as investment in finance affiliate in the accompanying consolidated balance sheets. Our 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. At December 31, 20142016, Polaris Acceptance’s wholesale portfolio receivables from dealers in the United States (including the Securitized Receivables) was $1,141.11,206.6 million, aan 23eight percent increasedecrease from $928.5$1,305.1 million at December 31, 20132015. Credit losses in the Polaris Acceptance portfolio have been modest, averaging less than one percent of the portfolio.
We have agreements with Capital One,Performance Finance, Sheffield FreedomRoad,Financial and Synchrony Bank, and Chrome under which these financial institutions provide financing to end consumers of our products. The agreements expire in October 2015, February 2016, February 2016, April 2016, and January 2018, respectively. The income generated from these agreements has been included as a component of income from financial services in the accompanying consolidated statements of income. In September 2016, our Performance Finance agreement became effective, which replaced our previous agreement with Freedom Road. In September 2016, we also terminated our agreement with Chrome Capital. At December 31, 2016, the agreements in place were as follows:
|
| |
| Financial institution | Agreement expiration date |
| Performance Finance | December 2021 |
| Sheffield Financial | February 2021 |
| Synchrony Bank | December 2020 |
During 2014,2016, consumers financed 3233 percent of our vehicles sold in the United States through the combined Capital One revolving retail credit and Sheffield Financial, Synchrony Bank and FreedomRoadPerformance Finance installment retail credit arrangement.arrangements. The volume of revolving and installment credit contracts written in calendar year 20142016 was $903.7$1,145.0 million, a 16ten percent increase from 2013.2015.
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 warranty, insurance or financial risk under any of thesethe other arrangements. The service fee income generated from these arrangements has been included as a component of income from financial services in the accompanying consolidated statements of income.
The balance of restricted cash and cash equivalents as of December 31, 2016 was $17.8 million. There was no restricted cash as of December 31, 2015. 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.
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.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Inflation, Foreign Exchange Rates, Equity Prices and Interest Rates
The changing relationships of the U.S. dollar to the Japanese yen, the Mexican Peso,peso, the Canadian dollar, the Australian dollar, the Euro, the Swiss Francfranc and other foreign currencies have had a material impact from time to time. We actively manage our exposure to fluctuating foreign currency exchange rates by entering into foreign exchange hedging contracts.
Japanese Yen: During 2014,2016, purchases totaling approximately two percent of our cost of sales were from yen-denominated suppliers. Fluctuations in the yen to U.S. dollar exchange rate primarily impacts cost of sales and net income.
Mexican Peso: With increased production at our Monterrey, Mexico facility, our costs in the Mexican peso have continued to increase. We also market and sell to customers in Mexico through a wholly owned subsidiary. Fluctuations in the peso to U.S. dollar exchange rate primarily impacts sales, cost of sales, and net income.
Canadian Dollar: We operate in Canada through a wholly owned subsidiary. The relationship of the U.S. dollar in relation to the Canadian dollar impacts both sales and net income.
Other currencies: We operate in various countries, principally in Europe and Australia, through wholly owned subsidiaries and also sell to certain distributors in other countries. We also purchase components from certain suppliers directly for our U.S. operations in transactions denominated in Euros and other foreign currencies. The relationship of the U.S. dollar in relation to these other currencies impacts each of sales, cost of sales and net income.
At December 31, 20142016, we had the following open foreign currency hedging contracts for 2015,2016, and expect the following currency impact on gross profitnet income, after consideration of the existing foreign currency hedging contracts, when compared to the respective prior year periods:
| | Foreign Currency | | Foreign currency hedging contracts | | Currency impact compared to the prior year period | | Foreign currency hedging contracts | | Currency impact compared to the prior year period |
| | Currency Position | | Notional amounts (in thousands of U.S. dollars) | | Average exchange rate of open contracts | | 2014 | | 2015 | | Currency Position | | Notional amounts (in thousands of U.S. dollars) | | Average exchange rate of open contracts | | 2016 | | 2017 |
| Australian Dollar | | Long | | $ | 3,491 |
| | $0.91 to 1 AUD | | Negative | | Negative | |
| Australian Dollar (AUD) | | | Long | | $ | 22,498 |
| | $0.74 to 1 AUD | | Neutral | | Neutral |
| Canadian Dollar (CAD) | | Long | | 40,550 |
| | $0.85 to 1 CAD | | Negative | | Negative | | Long | | 65,154 |
| | $0.76 to 1 CAD | | Negative | | Negative |
| Euro | | Long | | — |
| | — | | Negative | | Negative | | Long | | — |
| | — | | Slightly negative | | Negative |
| Japanese Yen | | Short | | 22,201 |
| | 109.37 Yen to $1 | | Positive | | Positive | | Short | | 1,371 |
| | 107.93 Yen to $1 | | Negative | | Slightly positive |
| Mexican Peso | | Short | | 34,060 |
| | 14.01 Peso to $1 | | Slightly positive | | Positive | | Short | | 17,942 |
| | 19.18 Peso to $1 | | Positive | | Positive |
| Norwegian Kroner | | Long | | — |
| | — | | Negative | | Negative | | Long | | — |
| | — | | Slightly negative | | Slightly negative |
| Swedish Krona | | Long | | — |
| | — | | Negative | | Negative | | Long | | — |
| | — | | Slightly negative | | Slightly negative |
| Swiss Franc | | Short | | — |
| | — | | Negative | | Positive | | Short | | — |
| | — | | Slightly positive | | Slightly positive |
The assets and liabilities in all our 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 accumulated other comprehensive income (loss),loss, net in the shareholders’ equity section of the accompanying consolidated balance sheets. Revenues and expenses in all of our foreign entities are translated at the average foreign exchange rate in effect for each month of the quarter. Certain assets and liabilities related to intercompany positions reported on our consolidated balance sheet that are denominated in a currency other than the entity’s functional currency are translated at the foreign exchange rates at the balance sheet date and the associated gains and losses are included in net income.
We are subject to market risk from fluctuating market prices of certain purchased commodities and raw materials including steel, aluminum, petroleum-based resins, certain rare earth metals and diesel fuel. In addition, we are a purchaser of components and parts containing various commodities, including steel, aluminum, rubber and others, which are integrated into the Company’s end products. While such materials are typically available from numerous suppliers, commodity raw materials are subject to price fluctuations. We generally buy these commodities and components based upon market prices that are established with the vendor as part of the purchase process and from time to time will enter into derivative contracts to hedge a portion of the exposure to commodity risk. At December 31, 20142016, we did not have any outstanding commodity derivative contracts were in place to hedge approximately 50% of our diesel fuel exposures for 2015. These contracts did not meet the criteria for hedge accounting and the resulting unrealized loss as of December 31, 2014 was $4.8 million pretax,
which was included in the consolidated statements of income as a component of cost of sales.place. Based on our current outlook for commodity prices, the total impact of commodities is expected to have a positiveslightly negative impact on our gross margins for 20152017 when compared to 2014.2016.
We are a party to a credit agreement with various lenders consisting of a $350$600 million revolving loan facility and a $750 million term loan facility. Interest accrues on the revolving loan at variable rates based on LIBOR or “prime” plus the applicable add-on percentage as defined. At December 31, 2014, there was no2016, we had an outstanding balance of $172.1 million on the revolving loan, and an outstanding balance of $740.0 million on the term loan. Assuming no additional borrowings or payments on the debt, a one-percent fluctuation in interest rates would have a $1.6an approximate $4.0 million impact to interest expense in 2014.2016.
INDEX TO FINANCIAL STATEMENTS
Item 8. Financial Statements and Supplementary Data
Management’s Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining an adequate system of internal control over financial reporting of the Company. This system is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with United States generally accepted accounting principles.
Our internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management conducted an evaluation of the effectiveness of the system of internal control over financial reporting as of December 31, 2014.2016. In making this evaluation, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—2013 Integrated Framework. Based on management’s evaluation and those criteria, management concluded that the Company’s system of internal control over financial reporting was effective as of December 31, 2014.2016.
Management has excluded from its assessment the internal control over financial reporting at Transamerican Auto Parts, which was acquired on November 10, 2016, and the other 2016 acquisitions, whose collective financial statements constitute 26 percent of total assets, three percent of revenues and less than one percent of operating income on the consolidated financial statement amounts as of and for the year ended December 31, 2016.
Management’s internal control over financial reporting as of December 31, 20142016 has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in their report appearing on the following page, in which they expressed an unqualified opinion.opinion thereon.
|
|
| |
/S/ SCOTT W. WINE |
| |
| Scott W. Wine |
| Chairman and Chief Executive Officer |
| |
/S/ MICHAEL W. MT. SALONEPEETZEN |
| |
Michael W. MaloneT. Speetzen |
| Executive Vice President—Finance and |
| Chief Financial Officer |
February 20, 201516, 2017
Further discussion of our internal controls and procedures is included in Item 9A of this report, under the caption “Controls and Procedures.”
Report Ofof Independent Registered Public Accounting Firm
on Internal Control over Financial Reporting
The Board of Directors and Shareholders of
Polaris Industries Inc.
We have audited Polaris Industries Inc.’s (the Company) internal control over financial reporting as of December 31, 2014,2016, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). Polaris Industries Inc.’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
As indicated in the accompanying Management’s Report on Internal Control over Financial Reporting, management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of Transamerican Auto Parts, acquired by the Company on November 10, 2016, and the other 2016 acquisitions, the results of which are included in the 2016 consolidated financial statements of the Company. The collective financial statements constitute 26 percent of total assets as of December 31, 2016, and three percent and less than one percent of revenues and operating income, respectively, for the year then ended. Our audit of internal control over financial reporting of Polaris Industries Inc. also did not include an evaluation of the internal control over financial reporting of Transamerican Auto Parts and the other acquisitions.
In our opinion, Polaris Industries Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2014,2016, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Polaris Industries Inc. as of December 31, 20142016 and 2013,2015, and the related consolidated statements of income, comprehensive income, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 20142016 of Polaris Industries Inc., and our report, dated February 20, 2015,16, 2017, expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
February 20, 201516, 2017
Report of Independent Registered Public Accounting Firm
on Consolidated Financial Statements
The Board of Directors and Shareholders of
Polaris Industries Inc.
We have audited the accompanying consolidated balance sheets of Polaris Industries Inc. (the Company) as of December 31, 20142016 and 2013,2015, and the related consolidated statements of income, comprehensive income, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2014.2016. Our audits also included the financial statement schedule listed in the Index at Item 15. These financial statements and the schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Polaris Industries Inc. at December 31, 20142016 and 2013,2015, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2014,2016, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Polaris Industries Inc.’s internal control over financial reporting as of December 31, 2014,2016, based on criteria established in Internal Control-Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission 2013 framework(2013 framework) and our report, dated February 20, 201516, 2017, expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
February 20, 201516, 2017
POLARIS INDUSTRIES INC. CONSOLIDATED BALANCE SHEETS (In thousands, except per share data) | POLARIS INDUSTRIES INC. CONSOLIDATED BALANCE SHEETS (In thousands, except per share data) | POLARIS INDUSTRIES INC. CONSOLIDATED BALANCE SHEETS (In thousands, except per share data) |
| | Assets | December 31, 2014 | | December 31, 2013 | December 31, 2016 | | December 31, 2015 |
| Current Assets: | | | | | | |
| Cash and cash equivalents | $ | 137,600 |
| | $ | 92,248 |
| $ | 127,325 |
| | $ | 155,349 |
|
| Trade receivables, net | 204,876 |
| | 186,213 |
| 174,832 |
| | 150,778 |
|
| Inventories, net | 565,685 |
| | 417,948 |
| 746,534 |
| | 710,001 |
|
| Prepaid expenses and other | 71,526 |
| | 63,716 |
| 91,636 |
| | 90,619 |
|
| Income taxes receivable | 2,691 |
| | 12,217 |
| 50,662 |
| | 46,175 |
|
| Deferred tax assets | 114,177 |
| | 93,356 |
| |
| Total current assets | 1,096,555 |
| | 865,698 |
| 1,190,989 |
| | 1,152,922 |
|
| Property and equipment: | | | | | | |
| Land, buildings and improvements | 272,802 |
| | 228,916 |
| 386,366 |
| | 301,874 |
|
| Equipment and tooling | 826,997 |
| | 701,101 |
| 1,080,239 |
| | 995,449 |
|
| | 1,099,799 |
| | 930,017 |
| 1,466,605 |
| | 1,297,323 |
|
| Less: accumulated depreciation | (544,371 | ) | | (474,850 | ) | (739,009 | ) | | (646,645 | ) |
| Property and equipment, net | 555,428 |
| | 455,167 |
| 727,596 |
| | 650,678 |
|
| Investment in finance affiliate | 89,107 |
| | 69,217 |
| 94,009 |
| | 99,073 |
|
| Deferred tax assets | 41,201 |
| | 18,616 |
| 188,471 |
| | 166,538 |
|
| Goodwill and other intangible assets, net | 223,966 |
| | 229,708 |
| 792,979 |
| | 236,117 |
|
| Other long-term assets | 68,678 |
| | 47,082 |
| 105,553 |
| | 80,331 |
|
| Total assets | $ | 2,074,935 |
| | $ | 1,685,488 |
| $ | 3,099,597 |
| | $ | 2,385,659 |
|
| Liabilities and Shareholders' Equity | | | | |
| Liabilities and Shareholders’ Equity | | | | |
| Current liabilities: | | | | | | |
| Current portion of capital lease obligations | $ | 2,528 |
| | $ | 3,281 |
| |
| Current portion of debt, capital lease obligations, and notes payable | | $ | 3,847 |
| | $ | 5,059 |
|
| Accounts payable | 343,470 |
| | 238,044 |
| 273,742 |
| | 299,660 |
|
| Accrued expenses: | | | | | | |
| Compensation | 102,379 |
| | 143,504 |
| 122,214 |
| | 106,486 |
|
| Warranties | 53,104 |
| | 52,818 |
| 119,274 |
| | 56,474 |
|
| Sales promotions and incentives | 138,630 |
| | 123,089 |
| 158,562 |
| | 141,057 |
|
| Dealer holdback | 120,093 |
| | 100,600 |
| 117,574 |
| | 123,276 |
|
| Other | 79,262 |
| | 77,480 |
| 162,432 |
| | 88,030 |
|
| Income taxes payable | 11,344 |
| | 9,254 |
| 2,106 |
| | 6,741 |
|
| Total current liabilities | 850,810 |
| | 748,070 |
| 959,751 |
| | 826,783 |
|
| Long-term income taxes payable | 10,568 |
| | 14,292 |
| 26,391 |
| | 23,416 |
|
| Capital lease obligations | 23,620 |
| | 3,842 |
| 17,538 |
| | 19,660 |
|
| Long-term debt | 200,000 |
| | 280,500 |
| 1,120,525 |
| | 436,757 |
|
| Deferred tax liabilities | 18,191 |
| | 25,028 |
| 9,127 |
| | 13,733 |
|
| Other long-term liabilities | 96,951 |
| | 69,730 |
| 90,497 |
| | 74,188 |
|
| Total liabilities | $ | 1,200,140 |
| | $ | 1,141,462 |
| $ | 2,223,829 |
| | $ | 1,394,537 |
|
| Deferred compensation | 13,528 |
| | 8,421 |
| 8,728 |
| | 9,645 |
|
| Shareholders’ equity: | | | | | | |
| Preferred stock $0.01 par value, 20,000 shares authorized, no shares issued and outstanding | — |
| | — |
| — |
| | — |
|
| Common stock $0.01 par value, 160,000 shares authorized, 66,307 and 65,623 shares issued and outstanding, respectively | $ | 663 |
| | $ | 656 |
| |
| Common stock $0.01 par value, 160,000 shares authorized, 63,109 and 65,309 shares issued and outstanding, respectively | | $ | 631 |
| | $ | 653 |
|
| Additional paid-in capital | 486,005 |
| | 360,616 |
| 650,162 |
| | 596,143 |
|
| Retained earnings | 401,840 |
| | 155,572 |
| 300,084 |
| | 447,173 |
|
| Accumulated other comprehensive income (loss), net | (27,241 | ) | | 18,761 |
| |
| Accumulated other comprehensive loss, net | | (83,837 | ) | | (62,492 | ) |
| Total shareholders’ equity | 861,267 |
| | 535,605 |
| 867,040 |
| | 981,477 |
|
| Total liabilities and shareholders’ equity | $ | 2,074,935 |
| | $ | 1,685,488 |
| $ | 3,099,597 |
| | $ | 2,385,659 |
|
The accompanying footnotes are an integral part of these consolidated statements.
POLARIS INDUSTRIES INC. CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share data) | POLARIS INDUSTRIES INC. CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share data) | POLARIS INDUSTRIES INC. CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share data) |
| | | For the Years Ended December 31, | For the Years Ended December 31, |
| | 2014 | | 2013 | | 2012 | 2016 | | 2015 | | 2014 |
| Sales | $ | 4,479,648 |
| | $ | 3,777,068 |
| | $ | 3,209,782 |
| $ | 4,516,629 |
| | $ | 4,719,290 |
| | $ | 4,479,648 |
|
| Cost of sales | 3,160,470 |
| | 2,656,189 |
| | 2,284,485 |
| 3,411,006 |
| | 3,380,248 |
| | 3,160,470 |
|
| Gross profit | 1,319,178 |
| | 1,120,879 |
| | 925,297 |
| 1,105,623 |
| | 1,339,042 |
| | 1,319,178 |
|
| Operating expenses: | | | | | | | | | | |
| Selling and marketing | 314,449 |
| | 270,266 |
| | 210,367 |
| 342,235 |
| | 316,669 |
| | 314,449 |
|
| Research and development | 148,458 |
| | 139,193 |
| | 127,361 |
| 185,126 |
| | 166,460 |
| | 148,458 |
|
| General and administrative | 203,248 |
| | 179,407 |
| | 143,064 |
| 306,442 |
| | 209,077 |
| | 203,248 |
|
| Total operating expenses | 666,155 |
| | 588,866 |
| | 480,792 |
| 833,803 |
| | 692,206 |
| | 666,155 |
|
| Income from financial services | 61,667 |
| | 45,901 |
| | 33,920 |
| 78,458 |
| | 69,303 |
| | 61,667 |
|
| Operating income | 714,690 |
| | 577,914 |
| | 478,425 |
| 350,278 |
| | 716,139 |
| | 714,690 |
|
| Non-operating expense (income): | | | | | | |
| Non-operating expense: | | | | | | |
| Interest expense | 11,239 |
| | 6,210 |
| | 5,932 |
| 16,319 |
| | 11,456 |
| | 11,239 |
|
| Equity in loss of other affiliates | 4,124 |
| | 2,414 |
| | 179 |
| 6,873 |
| | 6,802 |
| | 4,124 |
|
| Other expense (income), net | 10 |
| | (5,139 | ) | | (7,529 | ) | |
| Other expense, net | | 13,835 |
| | 12,144 |
| | 10 |
|
| Income before income taxes | 699,317 |
| | 574,429 |
| | 479,843 |
| 313,251 |
| | 685,737 |
| | 699,317 |
|
| Provision for income taxes | 245,288 |
| | 193,360 |
| | 167,533 |
| 100,303 |
| | 230,376 |
| | 245,288 |
|
| Net income from continuing operations | 454,029 |
| | 381,069 |
| | 312,310 |
| |
| Loss from discontinued operations, net of tax | — |
| | (3,777 | ) | | — |
| |
| Net income | $ | 454,029 |
| | $ | 377,292 |
| | $ | 312,310 |
| $ | 212,948 |
| | $ | 455,361 |
| | $ | 454,029 |
|
| Basic net income per share: | | | | | | |
| Continuing operations | $ | 6.86 |
| | $ | 5.56 |
| | $ | 4.54 |
| |
| Loss from discontinued operations | — |
| | (0.05 | ) | | — |
| |
| Basic net income per share | $ | 6.86 |
| | $ | 5.51 |
| | $ | 4.54 |
| |
| Diluted net income per share: | | | | | | |
| Continuing operations | $ | 6.65 |
| | $ | 5.40 |
| | $ | 4.40 |
| |
| Loss from discontinued operations | — |
| | (0.05 | ) | | — |
| |
| Diluted net income per share | $ | 6.65 |
| | $ | 5.35 |
| | $ | 4.40 |
| |
| Net income per share: | | | | | | |
| Basic | | $ | 3.31 |
| | $ | 6.90 |
| | $ | 6.86 |
|
| Diluted | | $ | 3.27 |
| | $ | 6.75 |
| | $ | 6.65 |
|
| Weighted average shares outstanding: | | | | | | | | | | |
| Basic | 66,175 |
| | 68,535 |
| | 68,849 |
| 64,296 |
| | 66,020 |
| | 66,175 |
|
| Diluted | 68,229 |
| | 70,546 |
| | 71,005 |
| 65,158 |
| | 67,484 |
| | 68,229 |
|
The accompanying footnotes are an integral part of these consolidated statements.
POLARIS INDUSTRIES INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
| | | | For the Years Ended December 31, | For the Years Ended December 31, |
| | 2014 | | 2013 | | 2012 | 2016 | | 2015 | | 2014 |
| Net income | $ | 454,029 |
| | $ | 377,292 |
| | $ | 312,310 |
| $ | 212,948 |
| | $ | 455,361 |
| | $ | 454,029 |
|
| Other comprehensive income (loss), net of tax: | | | | | | | | | | |
| Foreign currency translation adjustments, net of tax benefit (expense) of $65, $1,841, and ($182) | (44,371 | ) | | 4,913 |
| | 4,124 |
| |
| Unrealized gain (loss) on derivative instruments, net of tax benefit (expense) of $970, ($950), and $2,325 | (1,631 | ) | | 1,610 |
| | (3,909 | ) | |
| Foreign currency translation adjustments, net of tax benefit of $195, $643 and $65 | | (19,773 | ) | | (38,571 | ) | | (44,371 | ) |
| Unrealized gain (loss) on derivative instruments, net of tax benefit (expense) of $936, ($1,975) and $970 | | (1,572 | ) | | 3,320 |
| | (1,631 | ) |
| Comprehensive income | $ | 408,027 |
| | $ | 383,815 |
| | $ | 312,525 |
| $ | 191,603 |
| | $ | 420,110 |
| | $ | 408,027 |
|
The accompanying footnotes are an integral part of these consolidated statements.
POLARIS INDUSTRIES INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (In thousands, except per share data)
| POLARIS INDUSTRIES INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (In thousands, except per share data)
| POLARIS INDUSTRIES INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (In thousands, except per share data)
|
| | | Number
of Shares | | Common
Stock | | Additional
Paid-
In Capital | | Retained
Earnings | | Accumulated Other
Comprehensive
Income (loss) | | Total | Number
of Shares | | Common
Stock | | Additional
Paid-
In Capital | | Retained
Earnings | | Accumulated Other
Comprehensive
Income (loss) | | Total |
| Balance, December 31, 2011 | 68,430 |
| | $ | 684 |
| | $ | 165,518 |
| | $ | 321,831 |
| | $ | 12,023 |
| | $ | 500,056 |
| |
| Employee stock compensation | 174 |
| | 2 |
| | 35,418 |
| | — |
| | — |
| | 35,420 |
| |
| Proceeds from stock issuances under employee plans | 1,692 |
| | 17 |
| | 41,679 |
| | — |
| | — |
| | 41,696 |
| |
| Tax effect of exercise of stock options | — |
| | — |
| | 29,892 |
| | — |
| | — |
| | 29,892 |
| |
| Cash dividends declared ($1.48 per share) | — |
| | — |
| | — |
| | (101,534 | ) | | — |
| | (101,534 | ) | |
| Repurchase and retirement of common shares | (1,649 | ) | | (17 | ) | | (3,992 | ) | | (123,516 | ) | | — |
| | (127,525 | ) | |
| Net income | — |
| | — |
| | — |
| | 312,310 |
| | — |
| | 312,310 |
| |
| Other comprehensive income | — |
| | — |
| | — |
| | — |
| | 215 |
| | 215 |
| |
| Balance, December 31, 2012 | 68,647 |
| | 686 |
| | 268,515 |
| | 409,091 |
| | 12,238 |
| | 690,530 |
| |
| Employee stock compensation | 264 |
| | 3 |
| | 57,890 |
| | — |
| | — |
| | 57,893 |
| |
| Deferred compensation | — |
| | — |
| | (4,358 | ) | | (4,063 | ) | | — |
| | (8,421 | ) | |
| Proceeds from stock issuances under employee plans | 1,049 |
| | 10 |
| | 26,912 |
| | — |
| | — |
| | 26,922 |
| |
| Tax effect of exercise of stock options | — |
| | — |
| | 28,621 |
| | — |
| | — |
| | 28,621 |
| |
| Cash dividends declared ($1.68 per share) | — |
| | — |
| | — |
| | (113,722 | ) | | — |
| | (113,722 | ) | |
| Repurchase and retirement of common shares | (4,337 | ) | | (43 | ) | | (16,964 | ) | | (513,026 | ) | | — |
| | (530,033 | ) | |
| Net income | — |
| | — |
| | — |
| | 377,292 |
| | — |
| | 377,292 |
| |
| Other comprehensive income | — |
| | — |
| | — |
| | — |
| | 6,523 |
| | 6,523 |
| |
| Balance, December 31, 2013 | 65,623 |
| | 656 |
| | 360,616 |
| | 155,572 |
| | 18,761 |
| | 535,605 |
| 65,623 |
| | $ | 656 |
| | $ | 360,616 |
| | $ | 155,572 |
| | $ | 18,761 |
| | $ | 535,605 |
|
| Employee stock compensation | 254 |
| | 3 |
| | 63,180 |
| | — |
| | — |
| | 63,183 |
| 254 |
| | 3 |
| | 63,180 |
| | — |
| | — |
| | 63,183 |
|
| Deferred compensation | — |
| | — |
| | (3,020 | ) | | (2,087 | ) | | — |
| | (5,107 | ) | — |
| | — |
| | (3,020 | ) | | (2,087 | ) | | — |
| | (5,107 | ) |
| Proceeds from stock issuances under employee plans | 984 |
| | 10 |
| | 31,303 |
| | — |
| | — |
| | 31,313 |
| 984 |
| | 10 |
| | 31,303 |
| | — |
| | — |
| | 31,313 |
|
| Tax effect of exercise of stock options | — |
| | — |
| | 36,966 |
| | — |
| | — |
| | 36,966 |
| — |
| | — |
| | 36,966 |
| | — |
| | — |
| | 36,966 |
|
| Cash dividends declared ($1.92 per share) | — |
| | — |
| | — |
| | (126,908 | ) | | — |
| | (126,908 | ) | — |
| | — |
| | — |
| | (126,908 | ) | | — |
| | (126,908 | ) |
| Repurchase and retirement of common shares | (554 | ) | | (6 | ) | | (3,040 | ) | | (78,766 | ) | | — |
| | (81,812 | ) | (554 | ) | | (6 | ) | | (3,040 | ) | | (78,766 | ) | | — |
| | (81,812 | ) |
| Net income | | | | | | | 454,029 |
| | — |
| | 454,029 |
| — |
| | — |
| | — |
| | 454,029 |
| | — |
| | 454,029 |
|
| Other comprehensive income (loss) | — |
| | — |
| | — |
| | — |
| | (46,002 | ) | | (46,002 | ) | |
| Other comprehensive income | | — |
| | — |
| | — |
| | — |
| | (46,002 | ) | | (46,002 | ) |
| Balance, December 31, 2014 | 66,307 |
| | $ | 663 |
| | $ | 486,005 |
| | $ | 401,840 |
| | $ | (27,241 | ) | | $ | 861,267 |
| 66,307 |
| | 663 |
| | 486,005 |
| | 401,840 |
| | (27,241 | ) | | 861,267 |
|
| Employee stock compensation | | 144 |
| | 2 |
| | 61,927 |
| | — |
| | — |
| | 61,929 |
|
| Deferred compensation | | — |
| | — |
| | (2,994 | ) | | 6,877 |
| | — |
| | 3,883 |
|
| Proceeds from stock issuances under employee plans | | 1,037 |
| | 10 |
| | 32,525 |
| | — |
| | — |
| | 32,535 |
|
| Tax effect of exercise of stock options | | — |
| | — |
| | 34,654 |
| | — |
| | — |
| | 34,654 |
|
| Cash dividends declared ($2.12 per share) | | — |
| | — |
| | — |
| | (139,285 | ) | | — |
| | (139,285 | ) |
| Repurchase and retirement of common shares | | (2,179 | ) | | (22 | ) | | (15,974 | ) | | (277,620 | ) | | — |
| | (293,616 | ) |
| Net income | | — |
| | — |
| | — |
| | 455,361 |
| | — |
| | 455,361 |
|
| Other comprehensive loss | | — |
| | — |
| | — |
| | — |
| | (35,251 | ) | | (35,251 | ) |
| Balance, December 31, 2015 | | 65,309 |
| | 653 |
| | 596,143 |
| | 447,173 |
| | (62,492 | ) | | 981,477 |
|
| Employee stock compensation | | 303 |
| | 3 |
| | 57,924 |
| | — |
| | — |
| | 57,927 |
|
| Deferred compensation | | — |
| | — |
| | 1,379 |
| | (462 | ) | | — |
| | 917 |
|
| Proceeds from stock issuances under employee plans | | 405 |
| | 4 |
| | 17,686 |
| | — |
| | — |
| | 17,690 |
|
| Tax effect of exercise of stock options | | — |
| | — |
| | 3,578 |
| | — |
| | — |
| | 3,578 |
|
| Cash dividends declared ($2.20 per share) | | — |
| | — |
| | — |
| | (140,336 | ) | | — |
| | (140,336 | ) |
| Repurchase and retirement of common shares | | (2,908 | ) | | (29 | ) | | (26,548 | ) | | (219,239 | ) | | — |
| | (245,816 | ) |
| Net income | | — |
| | — |
| | — |
| | 212,948 |
| | — |
| | 212,948 |
|
| Other comprehensive loss | | — |
| | — |
| | — |
| | — |
| | (21,345 | ) | | (21,345 | ) |
| Balance, December 31, 2016 | | 63,109 |
| | $ | 631 |
| | $ | 650,162 |
| | $ | 300,084 |
| | $ | (83,837 | ) | | $ | 867,040 |
|
The accompanying footnotes are an integral part of these consolidated statements.
POLARIS INDUSTRIES INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) | POLARIS INDUSTRIES INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) | POLARIS INDUSTRIES INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) |
| | | For the Year Ended December 31, | For the Years Ended December 31, |
| | 2014 | | 2013 | | 2012 | 2016 | | 2015 | | 2014 |
| Operating Activities: | | | | | | | | | | |
| Net income | $ | 454,029 |
| | $ | 377,292 |
| | $ | 312,310 |
| $ | 212,948 |
| | $ | 455,361 |
| | $ | 454,029 |
|
| Loss from discontinued operations | — |
| | 3,777 |
| | — |
| |
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | | |
| Depreciation and amortization | 127,507 |
| | 92,100 |
| | 70,580 |
| 167,512 |
| | 152,138 |
| | 127,507 |
|
| Noncash compensation | 63,183 |
| | 57,893 |
| | 35,420 |
| 57,927 |
| | 61,929 |
| | 63,183 |
|
| Noncash income from financial services | (18,645 | ) | | (4,983 | ) | | (3,899 | ) | (30,116 | ) | | (29,405 | ) | | (18,645 | ) |
| Deferred income taxes | (50,388 | ) | | (5,892 | ) | | (28,901 | ) | (26,056 | ) | | (16,343 | ) | | (50,388 | ) |
| Tax effect of share-based compensation exercises | (36,966 | ) | | (28,621 | ) | | (29,892 | ) | |
| Excess tax benefits from share-based compensation | | (3,578 | ) | | (34,654 | ) | | (36,966 | ) |
| Other, net | 6,124 |
| | 7,414 |
| | 179 |
| 13,462 |
| | 6,802 |
| | 6,124 |
|
| Changes in operating assets and liabilities: | | | | | | | | | | |
| Trade receivables | (24,174 | ) | | (54,055 | ) | | 2,413 |
| 2,030 |
| | 48,798 |
| | (24,174 | ) |
| Inventories | (158,476 | ) | | (52,049 | ) | | (36,029 | ) | 111,999 |
| | (148,725 | ) | | (158,476 | ) |
| Accounts payable | 105,783 |
| | 51,519 |
| | 21,371 |
| (62,693 | ) | | (46,095 | ) | | 105,783 |
|
| Accrued expenses | 30,664 |
| | 53,278 |
| | 39,269 |
| 145,261 |
| | 9,182 |
| | 30,664 |
|
| Income taxes payable/receivable | 45,324 |
| | 33,398 |
| | 51,120 |
| (1,997 | ) | | (247 | ) | | 45,324 |
|
| Prepaid expenses and others, net | (14,695 | ) | | (31,919 | ) | | (17,831 | ) | (14,916 | ) | | (18,510 | ) | | (14,695 | ) |
| Cash provided by continuing operations | 529,270 |
| | 499,152 |
| | 416,110 |
| |
| Cash used for discontinued operations | — |
| | (6,912 | ) | | — |
| |
| Net cash provided by operating activities | 529,270 |
| | 492,240 |
| | 416,110 |
| 571,783 |
| | 440,231 |
| | 529,270 |
|
| Investing Activities: | | | | | | | | | | |
| Purchase of property and equipment | (205,079 | ) | | (251,401 | ) | | (103,083 | ) | (209,137 | ) | | (249,485 | ) | | (205,079 | ) |
| Investment in finance affiliate | (32,582 | ) | | (19,251 | ) | | (18,400 | ) | (8,641 | ) | | (23,087 | ) | | (32,582 | ) |
| Distributions from finance affiliate | 31,337 |
| | 12,005 |
| | 7,562 |
| 43,820 |
| | 42,527 |
| | 31,337 |
|
| Investment in other affiliates | (12,445 | ) | | (10,934 | ) | | (7,996 | ) | (11,595 | ) | | (17,848 | ) | | (12,445 | ) |
| Acquisition of businesses, net of cash acquired | (28,013 | ) | | (137,104 | ) | | (41,135 | ) | (723,705 | ) | | (41,195 | ) | | (28,013 | ) |
| Net cash used for investing activities | (246,782 | ) | | (406,685 | ) | | (163,052 | ) | (909,258 | ) | | (289,088 | ) | | (246,782 | ) |
| Financing Activities: | | | | | | | | | | |
| Borrowings under debt arrangements / capital lease obligations | 2,146,457 |
| | 776,669 |
| | 2,437 |
| 3,232,137 |
| | 2,631,067 |
| | 2,146,457 |
|
| Repayments under debt arrangements / capital lease obligations | (2,228,587 | ) | | (597,492 | ) | | (7,478 | ) | (2,552,760 | ) | | (2,385,480 | ) | | (2,228,587 | ) |
| Repurchase and retirement of common shares | (81,812 | ) | | (530,033 | ) | | (127,525 | ) | (245,816 | ) | | (293,616 | ) | | (81,812 | ) |
| Cash dividends to shareholders | (126,908 | ) | | (113,722 | ) | | (101,534 | ) | (140,336 | ) | | (139,285 | ) | | (126,908 | ) |
| Proceeds from stock issuances under employee plans | 31,313 |
| | 26,922 |
| | 41,696 |
| 17,690 |
| | 32,535 |
| | 31,313 |
|
| Tax effect of proceeds from share-based compensation exercises | 36,966 |
| | 28,621 |
| | 29,892 |
| |
| Net cash used for financing activities | (222,571 | ) | | (409,035 | ) | | (162,512 | ) | |
| Excess tax benefits from share-based compensation | | 3,578 |
| | 34,654 |
| | 36,966 |
|
| Net cash provided by (used for) financing activities | | 314,493 |
| | (120,125 | ) | | (222,571 | ) |
| Impact of currency exchange rates on cash balances | (14,565 | ) | | (1,287 | ) | | 1,133 |
| (5,042 | ) | | (13,269 | ) | | (14,565 | ) |
| Net increase (decrease) in cash and cash equivalents | 45,352 |
| | (324,767 | ) | | 91,679 |
| (28,024 | ) | | 17,749 |
| | 45,352 |
|
| Cash and cash equivalents at beginning of period | 92,248 |
| | 417,015 |
| | 325,336 |
| 155,349 |
| | 137,600 |
| | 92,248 |
|
| Cash and cash equivalents at end of period | $ | 137,600 |
| | $ | 92,248 |
| | $ | 417,015 |
| $ | 127,325 |
| | $ | 155,349 |
| | $ | 137,600 |
|
| | | | | | | | | | | |
| Noncash Activity: | | | | | | | | | | |
| Property and equipment obtained through capital leases | $ | 24,908 |
| | $ | — |
| | $ | — |
| |
| Property and equipment obtained through capital leases and notes payable | | — |
| | $ | 14,500 |
| | $ | 24,908 |
|
| Supplemental Cash Flow Information: | | | | | | | | | | |
| Interest paid on debt borrowings | $ | 11,259 |
| | $ | 6,076 |
| | $ | 5,932 |
| $ | 15,833 |
| | $ | 11,451 |
| | $ | 11,259 |
|
| Income taxes paid | $ | 261,550 |
| | $ | 162,647 |
| | $ | 143,510 |
| $ | 126,799 |
| | $ | 244,328 |
| | $ | 261,550 |
|
The accompanying footnotes are an integral part of these consolidated statements.
POLARIS INDUSTRIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Organization and Significant Accounting Policies
Polaris Industries Inc. (“Polaris” or the “Company”), a Minnesota corporation, and its subsidiaries are engaged in the design, engineering, manufacturing and marketing of innovative, high-quality, high-performance Off-Road Vehicles (ORV), Snowmobiles, Motorcycles and Small Vehicles (SV).Global Adjacent Markets vehicles. Polaris products, together with related parts, garments and accessories, as well as aftermarket accessories and apparel, are sold worldwide through a network of independent dealers and distributors and its subsidiaries. The primary markets for our products are the United States, Canada, Western Europe, Australia and Mexico.
Basis of presentation. The accompanying consolidated financial statements include the accounts of Polaris and its wholly-owned subsidiaries. All inter-company transactions and balances have been eliminated in consolidation. Income from financial services is reported as a component of operating income to better reflect income from ongoing operations, of which financial services has a significant impact.
On September 2, 2004, the Company announced its decision to discontinue the manufacture of marine products effective immediately. Material financial results for the marine products division are reported separately as discontinued operations for all periods presented.
The Company evaluates consolidation of entities under Accounting Standards Codification (ASC) Topic 810. This Topic requires management to evaluate whether an entity or interest is a variable interest entity and whether the company is the primary beneficiary. Polaris used the guidelines to analyze the Company’s relationships, including its relationship with Polaris Acceptance, and concluded that there were no variable interest entities requiring consolidation by the Company in 2014, 20132016, 2015 and 2012.
In April 2014, the Company completed an acquisition of Kolpin Outdoors, Inc. ("Kolpin"), and in November 2014, completed the acquisition of certain assets of LSI Products Inc. and Armor Holdings, LLC. ("Pro Armor"). Kolpin is a leading aftermarket brand delivering purpose-built and universal-fit ORV accessories and lifestyle products. Pro Armor is an industry-leading brand in performance side-by-side accessories, that operates under the Pro Armor brand. The Company has included the financial results of the acquisitions in its consolidated results of operations beginning on the respective acquisition dates; however, the acquisitions did not have a material impact on Polaris’ consolidated financial position or results of operations. Refer to Note 5 for additional information regarding the acquisitions of Kolpin and Pro Armor.
In April 2013, the Company completed an acquisition of A.M. Holding S.A.S., which operates under the name Aixam Mega S.A.S. ("Aixam"). The Company has included the financial results of the acquisition in its consolidated results of operations beginning on the acquisition date; however, the acquisition did not have a material impact on Polaris’ consolidated financial position or results of operations.
Reclassifications. Certain reclassifications of previously reported balance sheet amounts have been made to conform to the current year presentation. The reclassifications had no impact on the consolidated statements of income, current assets or current liabilities in the consolidated balance sheets, as previously reported.2014.
Use of estimates. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Ultimate results could differ from those estimates.
Fair value measurements. Fair value is the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Assets and liabilities measured at fair value are classified using the following hierarchy, which is based upon the transparency of inputs to the valuation as of the measurement date:
Level 1 — Quoted prices in active markets for identical assets or liabilities.
Level 2 — Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
In making fair value measurements, observable market data must be used when available. When inputs used to measure fair value fall within different levels of the hierarchy, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement. The Company utilizes the market approach to measure fair value for its non-qualified deferred compensation assets and liabilities, and the income approach for the foreign currency contracts and commodity contracts. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities, and for the income approach the Company uses significant other observable inputs to value its derivative instruments used to hedge interest rate volatility, foreign currency and commodity transactions.
Assets and liabilities measured at fair value on a recurring basis are summarized below (in thousands):
| | | | Fair Value Measurements as of December 31, 2014 | Fair Value Measurements as of December 31, 2016 |
| Asset (Liability) | Total | | Level 1 | | Level 2 | | Level 3 | Total | | Level 1 | | Level 2 | | Level 3 |
| Non-qualified deferred compensation assets | $ | 41,797 |
| | $ | 41,797 |
| | — |
| | — |
| $ | 49,330 |
| | $ | 49,330 |
| | — |
| | — |
|
| Foreign exchange contracts, net | | 298 |
| | — |
| | $ | 298 |
| | — |
|
| Total assets at fair value | $ | 41,797 |
| | $ | 41,797 |
| | — |
| | — |
| $ | 49,628 |
| | $ | 49,330 |
| | $ | 298 |
| | — |
|
| Commodity contracts, net | $ | (4,609 | ) | | — |
| | $ | (4,609 | ) | | | |
| Foreign exchange contracts, net | (2,570 | ) | | — |
| | (2,570 | ) | | — |
| |
| Non-qualified deferred compensation liabilities | (41,797 | ) | | $ | (41,797 | ) | | — |
| | — |
| $ | (49,330 | ) | | $ | (49,330 | ) | | — |
| | — |
|
| Total liabilities at fair value | $ | (48,976 | ) | | $ | (41,797 | ) | | $ | (7,179 | ) | | — |
| $ | (49,330 | ) | | $ | (49,330 | ) | | $ | — |
| | — |
|
| | Fair Value Measurements as of December 31, 2013 | Fair Value Measurements as of December 31, 2015 |
| Asset (Liability) | Total | | Level 1 | | Level 2 | | Level 3 | Total | | Level 1 | | Level 2 | | Level 3 |
| Non-qualified deferred compensation assets | | $ | 48,238 |
| | $ | 48,238 |
| | — |
| | — |
|
| Foreign exchange contracts, net | | 2,767 |
| | — |
| | $ | 2,767 |
| | — |
|
| Interest rate swap contracts | | 186 |
| | — |
| | 186 |
| | — |
|
| Total assets at fair value | | $ | 51,191 |
| | $ | 48,238 |
| | $ | 2,953 |
| | — |
|
| Commodity contracts, net | $ | 30 |
| | — |
| | $ | 30 |
| | — |
| $ | (354 | ) | | — |
| | $ | (354 | ) | | — |
|
| Non-qualified deferred compensation assets | 24,711 |
| | $ | 24,711 |
| | — |
| | — |
| |
| Total assets at fair value | $ | 24,741 |
| | $ | 24,711 |
| | $ | 30 |
| | — |
| |
| Foreign exchange contracts, net | $ | (9 | ) | | — |
| | $ | (9 | ) | | — |
| |
| Non-qualified deferred compensation liabilities | (24,711 | ) | | $ | (24,711 | ) | | — |
| | — |
| (48,238 | ) | | $ | (48,238 | ) | | — |
| | — |
|
| Total liabilities at fair value | $ | (24,720 | ) | | $ | (24,711 | ) | | $ | (9 | ) | | — |
| $ | (48,592 | ) | | $ | (48,238 | ) | | $ | (354 | ) | | — |
|
Fair value of other financial instruments. The carrying values of the Company’s short-term financial instruments, including cash and cash equivalents, trade receivables and short-term debt, including current maturities of long-term debt, capital lease obligations and notes payable, approximate their fair values. At December 31, 2016 and December 31, 2015, the fair value of the Company’s long-term debt was approximately $1,156,181,000 and $477,936,000, respectively, and was determined using Level 2 inputs, including quoted market prices or discounted cash flows based on quoted market rates for similar types of debt. The carrying value of long-term debt, including current maturities, was $1,141,910,000 and $461,476,000 as of December 31, 2016 and December 31, 2015, respectively.
Polaris measures certain assets and liabilities at fair value on a nonrecurring basis. Assets acquired and liabilities assumed as part of acquisitions are measured at fair value. Refer to Note 5Notes 2 and 6 for additional information. Polaris will impair or write off an investment and recognize a loss when events or circumstances indicate there is impairment in the investment that is other-than-temporary. The amount of loss is determined by measuring the investment at fair value. Refer to Note 910 for additional information.
Cash equivalents. Polaris considers all highly liquid investments purchased with an original maturity of 90 days or less to be cash equivalents. Cash equivalents are stated at cost, which approximates fair value. Such investments consist principally of money market mutual funds.
Restricted Cash and Cash Equivalents. The Company classifies amounts of cash and cash equivalents that are restricted in terms of their use and withdrawal separately within Other long-term assets on the Consolidated Balance Sheets.
Allowance for doubtful accounts. Polaris’ financial exposure to collection of accounts receivable is limited due to its agreements with certain finance companies. For receivables not serviced through these finance companies, the Company provides a reserve for doubtful accounts based on historical rates and trends. This reserve is adjusted periodically as information about specific accounts becomes available.
Inventories. Inventory costs include material, labor, and manufacturing overhead costs, including depreciation expense associated with the manufacture and distribution of the Company'sCompany’s products. Inventories are stated at the lower of cost (first-in, first-out method) or market. The major components of inventories are as follows (in thousands):
| | | | December 31, 2014 | | December 31, 2013 | December 31, 2016 | | December 31, 2015 |
| Raw materials and purchased components | $ | 165,823 |
| | $ | 107,496 |
| $ | 141,566 |
| | $ | 167,569 |
|
| Service parts, garments and accessories | 163,455 |
| | 125,765 |
| 316,383 |
| | 189,731 |
|
| Finished goods | 262,578 |
| | 206,290 |
| 333,760 |
| | 388,970 |
|
| Less: reserves | (26,171 | ) | | (21,603 | ) | (45,175 | ) | | (36,269 | ) |
| Inventories | $ | 565,685 |
| | $ | 417,948 |
| $ | 746,534 |
| | $ | 710,001 |
|
Investment in finance affiliate. The caption investment in finance affiliate in the consolidated balance sheets represents Polaris’ fifty percent equity interest in Polaris Acceptance, a partnership agreement between GEWells Fargo Commercial Distribution Finance Corporation (“GECDF”) and one of Polaris’ wholly-owned subsidiaries. Polaris Acceptance provides floor plan financing to Polaris dealers in the United States. Polaris’ investment in Polaris Acceptance is accounted for under the equity method, and is recorded as investment in finance affiliate in the consolidated balance sheets. Polaris’ allocable share of the income of Polaris Acceptance has been included as a component of income from financial services in the consolidated statements of income. Refer to Note 89 for additional information regarding Polaris’ investment in Polaris Acceptance.
Investment in other affiliates. Polaris'Polaris’ investment in other affiliates is included within other long-term assets in the consolidated balance sheets, and represents the Company’s investment in nonmarketable securities of strategic companies. For each investment, Polaris assesses the level of influence in determining whether to account for the investment under the cost method or equity method. For equity method investments, Polaris’ proportionate share of income or losses is recorded in the consolidated statements of income. Polaris will write down or write off an investment and recognize a loss if and when events or circumstances indicate there is impairment in the investment that is other-than-temporary. Refer to Note 910 for additional information regarding Polaris’ investment in other affiliates.
Property and equipment. Property and equipment is stated at cost. Depreciation is provided using the straight-line method over the estimated useful life of the respective assets, ranging from 10-40 years for buildings and improvements and from 1-7 years for equipment and tooling. Depreciation of assets recorded under capital leases is included with depreciation expense. Fully depreciated tooling is eliminated from the accounting records annually.
Goodwill and other intangible assets. ASC Topic 350 prohibits the amortization of goodwill and intangible assets with indefinite useful lives. Topic 350 requires that these assets be reviewed for impairment at least annually. An impairment charge for goodwill is recognized only when the estimated fair value of a reporting unit, including goodwill, is less than its carrying amount. Refer to Note 56 for additional information regarding goodwill and other intangible assets.
Revenue recognition. Revenues are recognized at the time of shipment to the dealer or distributor or other customers.customers, or at the time of delivery for our retail aftermarket locations. Service revenues are recognized upon completion of the service. Product returns, whether in the normal course of business or resulting from repossession under the Company'sCompany’s customer financing program (see Note 8)9), have not been material. Polaris sponsors certain sales incentive programs and accrues liabilities for estimated sales promotion expenses and estimated holdback amounts that are recognized as reductions to sales when products are sold to the dealer or distributor customer.
Sales promotions and incentives. Polaris provides for estimated sales promotion and incentive expenses, which are recognized as a reduction to sales, at the time of sale to the dealer or distributor. 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. 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. Historically, sales promotion and incentive expenses have been within the Company’s expectations and differences have not been material.
Dealer holdback programs. Dealer holdback represents a portion of the invoiced sales price that is expected to be subsequently returned to the dealer or distributor as a sales incentive upon the ultimate retail sale of the product. Holdback amounts reduce the ultimate net price of the products purchased by Polaris’ dealers or distributors and, therefore, reduce the amount of sales Polaris recognizes at the time of shipment. The portion of the invoiced sales price
estimated as the holdback is recognized as “dealer holdback” liability on the Company’s balance sheet until paid or forfeited. The minimal holdback adjustments in the estimated holdback liability due to forfeitures are recognized in net sales. Payments are made to dealers or distributors at various times during the year subject to previously established criteria.
Shipping and handling costs. Polaris records shipping and handling costs as a component of cost of sales at the time the product is shipped.
Research and development expenses. Polaris records research and development expenses in the period in which they are incurred as a component of operating expenses.
Advertising expenses. Polaris records advertising expenses as a component of selling and marketing expenses in the period in which they are incurred. In the years ended December 31, 2014, 2013,2016, 2015 and 2012,2014, Polaris incurred $82,600,000, $73,945,000,$85,199,000, $80,090,000 and $58,752,000,$82,600,000, respectively.
Product warranties - Limited warranties.Polaris provides a limited warranty for its ORVs for a period of six months, for a period of one year for its snowmobiles, for a period of one or two years for its motorcycles depending on brand and model year, for a period of one year for its Taylor-Dunn vehicles, and for a two year period for SVs.GEM, Goupil and Aixam vehicles. Polaris provides longer warranties in certain geographical markets as determined by local regulations and market conditions and may also provide longer warranties related to certain promotional programs. Polaris’ standardlimited warranties require the Company or its dealers to repair or replace defective products during such warranty periods at no cost to the consumer. 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. Adjustments to the warranty reserve are made from time to time as actual claims become known in order to properly estimate the amounts necessary to settle future and existing claims on products sold as of the balance sheet date. Factors that could have an impact on the warranty accrual in any given period include the following: improved manufacturing quality, shifts in product mix, changes in warranty coverage periods, snowfall and its impact on snowmobile usage, product recalls and any significant changes in sales volume.
The activity in the limited warranty reserve during the periods presented was as follows (in thousands):
| | | | For the Years Ended December 31, | For the Years Ended December 31, |
| | 2014 | | 2013 | | 2012 | 2016 | | 2015 | | 2014 |
| Balance at beginning of year | $ | 52,818 |
| | $ | 47,723 |
| | $ | 44,355 |
| $ | 56,474 |
| | $ | 53,104 |
| | $ | 52,818 |
|
| Additions to warranty reserve through acquisitions | 160 |
| | 1,602 |
| | 900 |
| |
| Additions to reserve through acquisitions | | 147 |
| | 250 |
| | 160 |
|
| Additions charged to expense | 61,888 |
| | 56,857 |
| | 46,088 |
| 194,996 |
| | 73,716 |
| | 61,888 |
|
| Warranty claims paid | (61,762 | ) | | (53,364 | ) | | (43,620 | ) | |
| Less: warranty claims paid | | (132,343 | ) | | (70,596 | ) | | (61,762 | ) |
| Balance at end of year | $ | 53,104 |
| | $ | 52,818 |
| | $ | 47,723 |
| $ | 119,274 |
| | $ | 56,474 |
| | $ | 53,104 |
|
During 2016, the Company has incurred significant additions to the warranty reserve, primarily associated with recall activity for certain RZR vehicles. In April 2016, the Company issued a voluntary recall for certain RZR 900 and 1000 off-road vehicles manufactured since model year 2013 due to reports of thermal-related incidents, including fire, and in September 2016, the Company issued a voluntary recall for certain RZR XP Turbo off-road vehicles due to similar thermal-related incidents.
Deferred revenue. In 2016, Polaris began financing its self-insured risks related to extended service contracts (“ESCs”). The premiums for ESCs are primarily recognized in income in proportion to the costs expected to be incurred over the contract period. Additionally, in 2016, the Company acquired Transamerican Auto Parts (“TAP”), which recognizes revenues related to sales of its extended warranty programs for tires and other products over the term of the warranty period which vary from two to five years. Warranty costs are recognized as incurred. Revenues related to sales of its extended warranty program for powertrains and related accrued costs for claims are deferred and amortized over the warranty period, generally five years, while warranty administrative costs are recognized as incurred. The activity in the deferred revenue reserve during the periods presented was as follows (in thousands):
|
| | | | | | | | | |
| | For the Years Ended December 31, |
| 2016 | | 2015 | | 2014 |
| Balance at beginning of year | — |
| | — |
| | — |
|
| Additions to deferred revenue through acquisitions | $ | 7,944 |
| | | | |
| New contracts sold | 20,569 |
| | — |
| | — |
|
| Less: reductions for revenue recognized | (2,356 | ) | | — |
| | — |
|
| Balance at end of year | $ | 26,157 |
| | — |
| | — |
|
(1) The unamortized extended service contract premiums (deferred revenue) recorded in other current liabilities, totaled $11,012,000 and $15,145,000 in other long-term liabilities as of December 31, 2016.
Share-based employee compensation. For purposes of determining the estimated fair value of share-based payment awards on the date of grant under ASC Topic 718, Polaris uses the Black-Scholes Model. The Black-Scholes Model requires the input of certain assumptions that require judgment. Because employee stock options and restricted stock awards have characteristics significantly different from those of traded options, and because changes in the input assumptions can materially affect the fair value estimate, the existing models may not provide a reliable single measure of the fair value of the employee stock options or restricted stock awards. Management will continue to assess the assumptions and methodologies used to calculate estimated fair value of share-based compensation. Circumstances may change and additional data may become available over time, which could result in changes to these assumptions and methodologies and thereby materially impact the fair value determination. If factors change and the Company employs different assumptions in the application of Topic 718 in future periods, the compensation expense that was recorded under Topic 718 may differ significantly from what was recorded in the current period. Refer to Note 23 for additional information regarding share-based compensation.
The Company estimates the likelihood and the rate of achievement for performance share-based awards. Changes in the estimated rate of achievement and fluctuation in the market based stock price can have a significant effect on reported share-based compensation expenses as the effect of a change in the estimated achievement level and fluctuation in the market based stock price is recognized in the period that the likelihood factor and stock price changes. If adjustments in the estimated rate of achievement and fluctuation in the market based stock price are made, they would be reflected in our gross margin and operating expenses.
Derivative instruments and hedging activities. Changes in the fair value of a derivative are recognized in earnings unless the derivative qualifies as a hedge. To qualify as a hedge, the Company must formally document, designate and assess the effectiveness of transactions that receive hedge accounting.
Polaris enters into foreign exchange contracts to manage currency exposures from certain of its purchase commitments denominated in foreign currencies and transfers of funds from time to time from its foreign subsidiaries. Polaris does not use any financial contracts for trading purposes. These contracts met the criteria for cash flow hedges. Gains and losses on the Canadian dollar Norwegian Krone, Swedish Krona and Australian dollar contracts at settlement are recorded in non-operating other expense (income), net in the consolidated income statements, and gains and losses on the Japanese yen and Mexican peso and Euro contracts at settlement are recorded in cost of sales in the consolidated income statements. Unrealized gains and losses are recorded as a component of accumulated other comprehensive income (loss).loss, net.
Polaris is subject to market risk from fluctuating market prices of certain purchased commodity raw materials, including steel, aluminum, diesel fuel, and petroleum-based resins. In addition, the Company purchases components and parts containing various commodities, including steel, aluminum, rubber, rare earth metals and others which are integrated into the Company’s end products. While such materials are typically available from numerous suppliers, commodity raw materials are subject to price fluctuations. The Company generally buys these commodities and components based upon market prices that are established with the vendor as part of the purchase process. From time to time, Polaris utilizes derivative contracts to hedge a portion of the exposure to commodity risks. During 2014 and 2013,2015, the Company entered into derivative contracts to hedge a portion of the exposure for diesel fuel and aluminum. The Company'sCompany did not enter into any such derivative contracts during 2016. The Company’s diesel fuel and aluminum hedging contracts do not meet the criteria for hedge accounting and therefore, the resulting unrealized gains and losses from those contracts are included in the consolidated statements of income in cost of sales. Refer to Note 1112 for additional information regarding derivative instruments and hedging activities.
The gross unrealized gains and losses of these contracts are recorded in the accompanying balance sheets as other current assets or other current liabilities.
Foreign currency translation. The functional currency for each of the Polaris foreign subsidiaries is their respective local currencies. 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 accumulated other comprehensive income (loss)loss in the shareholders’ equity section of the accompanying consolidated balance sheets. Revenues and expenses in all of Polaris’ foreign entities are translated at the average foreign exchange rate in effect for each month of the quarter. Transaction gains and losses including intercompany transactions denominated in a currency other than the functional currency of the entity involved are included in other expense (income), net in our consolidated statements of income.
Comprehensive income. Components of comprehensive income include net income, foreign currency translation adjustments, and unrealized gains or losses on derivative instruments. The Company has chosen to disclose comprehensive income in separate consolidated statements of comprehensive income.
New accounting pronouncements.
Debt issuance costs.In May 2014,April 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2015-03, Interest - Imputation of Interest (Subtopic 835-230) - Simplifying the Presentation of Debt Issuance Costs. The amendment requires that debt issuance costs be presented on the balance sheet as a direct reduction from the carrying amount of the related debt liability rather than as an asset. The amendment is to be applied retrospectively and is effective for fiscal years beginning after December 15, 2015. The Company adopted this amendment during the first quarter of 2016, which caused the Company to reclassify $1,803,000 of debt issuance costs as a reduction from long-term debt rather than as a component of prepaid expenses and other assets, as of December 31, 2015.
Share-based payment accounting. In March 2016, the FASB issued ASU No. 2016-09, which simplifies several aspects of the accounting for share-based payment transactions, including the accounting for income taxes, forfeitures, statutory tax withholding requirements, and statement of cash flow classification. The ASU is effective for annual reporting periods beginning after December 15, 2016, and is effective for the Company’s fiscal year beginning January 1, 2017. Early adoption is permitted, but the Company will adopt this ASU for the fiscal year beginning January 1, 2017. The impact of this ASU on the Company’s financial statements will be dependent on the volume of stock option exercises and restricted share vestings that occur. When the Company adopts this ASU for the fiscal year beginning January 1, 2017, the excess tax benefits will be classified as cash flows from operating activities rather than cash flows from financing activities on a prospective basis. In addition, the Company will continue to estimate the number of awards expected to vest, rather than electing to account for forfeitures as they occur.
Leases. In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). This ASU requires most lessees to recognize right of use assets and lease liabilities, but recognize expenses in a manner similar with current accounting standards. The new standard is effective for fiscal years and interim periods beginning after December 15, 2018 and is effective for the Company’s fiscal year beginning January 1, 2019. Entities are required to use a modified retrospective approach, with early adoption permitted. The Company is evaluating the impact of this new standard on the financial statements.
Revenue from contracts with customers. In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers. This ASU is a comprehensive new revenue recognition model that requires a company to recognize revenue from the transfer of goods or services to customers in an amount that reflects the consideration that the entity expects to receive in exchange for those goods or services. PolarisThe new standard is requiredeffective for fiscal years and interim periods beginning after December 15, 2017 and is effective for the Company’s fiscal year beginning January 1, 2018. Subsequent to the issuance of ASU 2014-09, the FASB has issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net), and ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients. These ASUs do not change the core principle of the guidance stated in ASU 2014-09, instead these amendments are intended to clarify and improve operability of certain topics included within the revenue standard. These ASUs will have the same effective date and transition requirements as ASU 2014-09.
The Company has completed a preliminary assessment of the impact of ASU No. 2014-09 and other related ASUs, and does not anticipate the impact will be significant to the Company’s financial statements, accounting policies or processes. The Company expects to adopt ASU No. 2014-09 for the Company’s fiscal year beginning January 1, 2018, and expects to adopt the new pronouncement on January 1, 2017guidance using one of twothe modified retrospective application methods. The Company is evaluating the application method and the impact of this new standard on the financial statements.approach.
There are no other new accounting pronouncements that are expected to have a significant impact on Polaris'Polaris’ consolidated financial statements.
Note 2. Acquisitions
2016 Acquisitions.
Taylor-Dunn Manufacturing Company
In March 2016, the Company acquired Taylor-Dunn Manufacturing Company (“Taylor-Dunn”), a leading provider of industrial vehicles serving a broad range of commercial, manufacturing, warehouse and ground-support customers. Taylor-Dunn is based in Anaheim, California, and is included in the Global Adjacent Markets reporting segment. Pro forma financial results for the Taylor-Dunn acquisition are not presented as the acquisition is not material to the consolidated financial statements. As of December 31, 2016, the purchase price allocations for the acquisition remain preliminary. Refer to Note 6 for additional information regarding the acquisition of Taylor-Dunn.
Transamerican Auto Parts
On October 11, 2016, the Company entered into a definitive agreement with TAP Automotive Holdings, LLC
(“Transamerican Auto Parts” or “TAP”), to acquire the outstanding equity interests in Transamerican Auto Parts, a privately held, vertically integrated manufacturer, distributor, retailer and installer of off-road Jeep and truck accessories, for an aggregate consideration of $668,848,000, net of cash acquired. TAP’s products and services for customers in the off-road four-wheel-drive market correspond closely to our ORV business. The transaction closed on November 10, 2016. The Company funded the purchase price with borrowings under its existing credit facilities.
As of December 31, 2016, the purchase price allocation for the acquisition is preliminary. The following table summarizes the preliminary fair values assigned to the TAP net assets acquired and the determination of final net assets (in thousands):
|
| | | |
| Cash and cash equivalents | $ | 3,017 |
|
| Trade receivables | 18,212 |
|
| Inventory | 144,912 |
|
| Property, plant and equipment | 32,814 |
|
| Customer relationships | 87,500 |
|
| Trademarks / trade names | 175,500 |
|
| Goodwill | 264,333 |
|
| Other assets | 18,434 |
|
| Deferred revenue | (7,944 | ) |
| Other liabilities assumed | (64,913 | ) |
| Total fair value of net assets acquired | 671,865 |
|
| Less cash acquired | (3,017 | ) |
| Total consideration for acquisition, less cash acquired | $ | 668,848 |
|
On the acquisition date, amortizable intangible assets had a weighted-average useful life of 8.9 years. The customer relationships were valued based on the Discounted Cash Flow Method and are amortized over 5-10 years, depending on the customer class. The trademarks and trade names were valued on the Relief from Royalty Method and have indefinite remaining useful lives. Goodwill is deductible for tax purposes.
The following unaudited pro forma information represents the Company’s results of operations as if the fiscal 2016 acquisition of TAP had occurred at the beginning of fiscal 2015 (in thousands, except per share data). These performance results may not be indicative of the actual results that would have occurred under the ownership and management of the Company.
|
| | | | | | | |
| | For the Years Ended December 31, |
| | 2016 | | 2015 |
| Net sales | $ | 5,161,688 |
| | $ | 5,389,173 |
|
| Net income | 240,400 |
| | 431,991 |
|
| Basic earnings per share | $ | 3.74 |
| | $ | 6.54 |
|
| Diluted earnings per common share | $ | 3.69 |
| | $ | 6.40 |
|
The unaudited pro forma net income for the year ended December 31, 2015 excludes the impact of approximately $21.0 million (pre-tax) in non-recurring items related to acquisition date fair value adjustments to inventory. The unaudited pro forma net income for the year ended December 31, 2016 excludes the impact of transaction costs incurred by TAP and approximately $13.0 million of non-recurring transaction related costs incurred by the Company. The pro forma condensed consolidated financial information has been prepared for comparative purposes only and includes certain adjustments, as noted above. The adjustments are estimates based on currently available information and actual amounts may differ materially from these estimates. They do not reflect the effect of costs or synergies that would have been expected to result from the integration of the TAP acquisition. The pro forma information does not purport to be indicative of the results of operations that actually would have resulted had the TAP acquisition occurred on January 1, 2015. The Company’s 2016 consolidated statements of income include $108,699,000 of net sales and $19,842,000 of gross profit related to TAP.
2015 acquisitions. In January 2015, the Company acquired the electric motorcycle business of Brammo, Inc. In April 2015, the Company completed the acquisitions of Timbersled Products, Inc. (“Timbersled”) and HH Investment Limited (“Hammerhead”). Timbersled is based in Idaho and is an innovator and market leader in the burgeoning snow bike industry. Hammerhead is based in Shanghai, China and manufactures gasoline powered go-karts, light utility vehicles, and electric utility vehicles. Hammerhead markets its products globally under the Hammerhead Off-Road brand, along with maintaining key private label relationships with other original equipment manufacturers.
At the end of December 2015, the Company completed the acquisition of certain assets of 509, Inc. (“509”). 509 is based in Washington and is an aftermarket leader in snowmobile helmets and goggles.
The Company has included the financial results of the acquisitions in its consolidated results of operations beginning on the respective acquisition dates; however, the acquisitions did not have a material impact on Polaris’ consolidated financial position or results of operations.
Note 2.3. Share-Based Compensation
Share-based plans. The Company grants long-term equity-based incentives and rewards for the benefit of its employees and directors under the shareholder approved Polaris Industries Inc. 2007 Omnibus Incentive Plan (as amended) (the “Omnibus Plan”), which were previously provided under several separate incentive and compensatory plans. Upon approval by the shareholders of the Omnibus Plan in April 2007, the Polaris Industries Inc. 1995 Stock Option Plan (“Option Plan”), the 1999 Broad Based Stock Option Plan, the Restricted Stock Plan and the 2003 Non-Employee Director Stock Option Plan (“Director Stock Option Plan” and collectively the “Prior Plans”) were frozen and no further grants or awards have since been or will be made under such plans. A maximum of 13,500,00021,000,000 shares of common stock
are available for issuance under the Omnibus Plan, together with additional shares canceled or forfeited under the Prior Plans.
Stock option awards granted to date under the Omnibus Plan generally vest two to four years from the award date and expire after ten years. In addition, since 2007, the Company has granted a total of 138,000157,000 deferred stock units to its non-employee directors under the Omnibus Plan (9,000, 12,000(11,000, 8,000 and 12,0009,000 in 2014, 20132016, 2015 and 2012,2014, respectively) which will be converted into common stock when the director’s board service ends or upon a change in control. Restricted sharesunits and performance-based restricted units (collectively restricted stock) awarded under the Omnibus Plan to date generally contain restrictions, which lapsevests after a twoone to four year period if Polaris achievesperiod. The final number of shares issued under performance-based awards are dependent on achievement of certain performance measures.
The Option Plan, which is frozen, was used to issue incentive and nonqualified stock options to certain employees. Options granted to date generally vest three years from the award date and expire after ten years. The Director Stock Option Plan, which is frozen and contains no unexercised awards as of December 31, 2014, was used to issue nonqualified stock options to non-employee directors.
Under the Polaris Industries Inc. Deferred Compensation Plan for Directors (“Director Plan”), members of the Board of Directors who are not Polaris officers or employees may annually elect to receive common stock equivalents in lieu of director fees, which will be converted into common stock when board service ends. A maximum of 500,000 shares of common stock has been authorized under this plan of which 101,00073,000 equivalents have been earned and an additional 381,000427,000 shares have been issued to retired directors as of December 31, 2014.2016. As of December 31, 20142016 and 2013,2015, Polaris’ liability under the plan totaled $15,217,000$6,111,000 and $17,031,000,$9,167,000, respectively.
Polaris maintains a long term incentive program under which awards are issued to provide incentives for certain employees to attain and maintain the highest standards of performance and to attract and retain employees of outstanding competence and ability with no cash payments required from the recipient. Awards granted through 2011 were paid in cash and were based on certain Company performance measures that are measured over a period of three consecutive calendar years. At the beginning of the plan cycle, participants had the option to receive a cash value at the time of awards or a cash value tied to Polaris stock price movement over the three year plan cycle. At December 31, 2013, Polaris’ liability under the plan totaled $57,166,000, and the final cash payout was made in 2014. Beginning in 2012, longLong term incentive program awards are granted in restricted stock units and stock options and therefore treated as equity awards. All remaining conditions of the long term incentive program remained the same as prior to 2012.
Share-based compensation expense. The amount of compensation cost for share-based awards to be recognized during a period is based on the portion of the awards that are ultimately expected to vest. The Company estimates stock option forfeitures at the time of grant and revises those estimates in subsequent periods if actual forfeitures differ from those estimates. The Company analyzes historical data to estimate pre-vesting forfeitures and records share compensation expense for those awards expected to vest.
Total share-based compensation expenses were as follows (in thousands):
| | | | For the Years Ended December 31, | For the Years Ended December 31, |
| | 2014 | | 2013 | | 2012 | 2016 | | 2015 | | 2014 |
| Option plan | $ | 24,428 |
| | $ | 22,245 |
| | $ | 16,497 |
| $ | 23,876 |
| | $ | 26,191 |
| | $ | 24,428 |
|
| Other share-based awards | 26,574 |
| | 57,640 |
| | 56,770 |
| 23,368 |
| | 23,275 |
| | 26,574 |
|
| Total share-based compensation before tax | 51,002 |
| | 79,885 |
| | 73,267 |
| 47,244 |
| | 49,466 |
| | 51,002 |
|
| Tax benefit | 19,039 |
| | 29,835 |
| | 27,401 |
| 17,546 |
| | 18,451 |
| | 19,039 |
|
| Total share-based compensation expense included in net income | $ | 31,963 |
| | $ | 50,050 |
| | $ | 45,866 |
| $ | 29,698 |
| | $ | 31,015 |
| | $ | 31,963 |
|
These share-based compensation expenses are reflected in cost of sales and operating expenses in the accompanying consolidated statements of income. For purposes of determining the estimated fair value of option awards on the date of grant under ASC Topic 718, Polaris has used the Black-Scholes option-pricing model. Assumptions utilized in the model are evaluated and revised, as necessary, to reflect market conditions and experience.
At December 31, 2014,2016, there was $82,778,000$97,831,000 of total unrecognized share-based compensation expense related to unvested share-based equity awards. Unrecognized share-based compensation expense is expected to be recognized over a weighted-average period of 1.501.72 years. Included in unrecognized share-based compensation is approximately $36,746,000$32,997,000 related to stock options and $46,032,000$64,834,000 for restricted stock.
General stock option and restricted stock information. The following summarizes stock option activity and the weighted average exercise price for the following plans for the each of the three years ended December 31, 2014, 20132016, 2015 and 2012:2014:
| | | | Omnibus Plan
(Active) | | Option Plan
(Frozen) | | Director Stock Option Plan
(Frozen) | Omnibus Plan
(Active) | | Option Plan
(Frozen) |
| | Outstanding
Shares | | Weighted
Average
Exercise
Price | | Outstanding
Shares | | Weighted
Average
Exercise
Price | | Outstanding
Shares | | Weighted
Average
Exercise
Price | Outstanding
Shares | | Weighted
Average
Exercise
Price | | Outstanding
Shares | | Weighted
Average
Exercise
Price |
| Balance as of December 31, 2011 | 4,682,737 |
| | $ | 29.45 |
| | 1,098,546 |
| | $ | 25.08 |
| | 80,000 |
| | $ | 23.52 |
| |
| Granted | 570,700 |
| | 66.19 |
| | — |
| | — |
| | — |
| | — |
| |
| Exercised | (861,397 | ) | | 22.54 |
| | (744,974 | ) | | 25.84 |
| | (64,000 | ) | | 22.62 |
| |
| Forfeited | (61,630 | ) | | 40.95 |
| | — |
| | — |
| | — |
| | — |
| |
| Balance as of December 31, 2012 | 4,330,410 |
| | $ | 35.50 |
| | 353,572 |
| | $ | 23.47 |
| | 16,000 |
| | $ | 27.10 |
| |
| Granted | 1,037,729 |
| | 87.06 |
| | — |
| | — |
| | — |
| | — |
| |
| Exercised | (821,679 | ) | | 24.45 |
| | (191,141 | ) | | 23.23 |
| | (16,000 | ) | | 27.10 |
| |
| Forfeited | (80,380 | ) | | 47.55 |
| | — |
| | — |
| | — |
| | — |
| |
| Balance as of December 31, 2013 | 4,466,080 |
| | $ | 49.29 |
| | 162,431 |
| | $ | 23.74 |
| | — |
| | — |
| 4,466,080 |
| | $ | 49.29 |
| | 162,431 |
| | $ | 23.74 |
|
| Granted | 705,564 |
| | 130.10 |
| | — |
| | — |
| | — |
| | — |
| 705,564 |
| | 130.10 |
| | — |
| | — |
|
| Exercised | (866,917 | ) | | 30.33 |
| | (96,398 | ) | | 23.77 |
| | — |
| | — |
| (866,917 | ) | | 30.33 |
| | (96,398 | ) | | 23.77 |
|
| Forfeited | (98,215 | ) | | 65.14 |
| | (2,800 | ) | | 22.43 |
| | — |
| | — |
| (98,215 | ) | | 65.14 |
| | (2,800 | ) | | 22.43 |
|
| Balance as of December 31, 2014 | 4,206,512 |
| | $ | 66.38 |
| | 63,233 |
| | $ | 23.76 |
| | — |
| | — |
| 4,206,512 |
| | $ | 66.38 |
| | 63,233 |
| | $ | 23.76 |
|
| Vested or expected to vest as of December 31, 2014 | 4,206,512 |
| | $ | 66.38 |
| | 63,233 |
| | $ | 23.76 |
| | — |
| | — |
| |
| Options exercisable as of December 31, 2014 | 1,640,169 |
| | $ | 32.52 |
| | 63,233 |
| | $ | 23.76 |
| | — |
| | — |
| |
| Granted | | 743,062 |
| | 150.81 |
| | — |
| | — |
|
| Exercised | | (706,750 | ) | | 40.21 |
| | (44,283 | ) | | 23.92 |
|
| Forfeited | | (137,285 | ) | | 112.95 |
| | — |
| | — |
|
| Balance as of December 31, 2015 | | 4,105,539 |
| | $ | 84.61 |
| | 18,950 |
| | $ | 23.37 |
|
| Granted | | 1,326,430 |
| | 78.72 |
| | — |
| | — |
|
| Exercised | | (348,206 | ) | | 40.51 |
| | (18,950 | ) | | 23.37 |
|
| Forfeited | | (366,702 | ) | | 108.90 |
| | — |
| | — |
|
| Balance as of December 31, 2016 | | 4,717,061 |
| | $ | 84.32 |
| | — |
| | — |
|
| Vested or expected to vest as of December 31, 2016 | | 4,717,061 |
| | $ | 84.32 |
| | — |
| | — |
|
| Options exercisable as of December 31, 2016 | | 2,199,084 |
| | $ | 62.60 |
| | — |
| | — |
|
The weighted average remaining contractual life of options outstanding and of options outstanding and exercisable as of December 31, 20142016 was 6.836.45 years and 5.174.47 years, respectively.
The following assumptions were used to estimate the weighted average fair value of options of $39.97, $30.43,$16.81, $37.64 and $23.40$39.97 granted during the years ended December 31, 2014, 2013,2016, 2015 and 2012,2014, respectively:
| | | | For the Years Ended December 31, | For the Years Ended December 31, |
| | 2014 | | 2013 | | 2012 | 2016 | | 2015 | | 2014 |
| Weighted-average volatility | 40 | % | | 49 | % | | 50 | % | 32 | % | | 32 | % | | 40 | % |
| Expected dividend yield | 1.5 | % | | 1.9 | % | | 2.2 | % | 2.8 | % | | 1.4 | % | | 1.5 | % |
| Expected term (in years) | 4.5 |
| | 4.4 |
| | 4.6 |
| 4.5 |
| | 4.5 |
| | 4.5 |
|
| Weighted average risk free interest rate | 1.6 | % | | 0.9 | % | | 0.7 | % | 1.4 | % | | 1.5 | % | | 1.6 | % |
The total intrinsic value of options exercised during the year ended December 31, 20142016 was $108,584,000.$17,522,000. The total intrinsic value of options outstanding and of options outstanding and exercisable at December 31, 2014,2016, was $365,160,000$68,311,000 and $202,788,000,$59,612,000, respectively. The total intrinsic values are based on the Company’s closing stock price on the last trading day of the applicable year for in-the-money options.
The following table summarizes restricted stock activity for the year ended December 31, 2014:2016:
| | | | Shares
Outstanding | | Weighted
Average
Grant Price | Shares
Outstanding | | Weighted
Average
Grant Price |
| Balance as of December 31, 2013 | 770,967 |
| | $ | 74.47 |
| |
| Balance as of December 31, 2015 | | 1,130,767 |
| | $ | 122.08 |
|
| Granted | 407,626 |
| | 134.34 |
| 909,161 |
| | 77.53 |
|
| Vested | (65,020 | ) | | 50.29 |
| (233,841 | ) | | 89.72 |
|
| Canceled/Forfeited | (35,842 | ) | | 87.12 |
| (284,885 | ) | | 108.08 |
|
| Balance as of December 31, 2014 | 1,077,731 |
| | $ | 98.15 |
| |
| Expected to vest as of December 31, 2014 | 895,243 |
| | $ | 94.80 |
| |
| Balance as of December 31, 2016 | | 1,521,202 |
| | $ | 103.05 |
|
| Expected to vest as of December 31, 2016 | | 955,106 |
| | $ | 101.57 |
|
The total intrinsic value of restricted stock expected to vest as of December 31, 20142016 was $135,396,000.$78,691,000. The total intrinsic value is based on the Company’s closing stock price on the last trading day of the year. The weighted average
fair values at the grant dates of grants awarded under the Omnibus Plan for the years ended December 31, 2016, 2015 and 2014 2013,were $77.53, $139.50 and 2012 were $134.34, $88.84, and $70.12, respectively.
Note 3.4. Employee Savings Plans
Employee Stock Ownership Plan (ESOP). Polaris sponsors a qualified non-leveraged ESOP under which a maximum of 7,200,000 shares of common stock can be awarded. The shares are allocated to eligible participantsparticipants’ accounts based on total cash compensation earned during the calendar year. An employee'semployee’s ESOP account vests equally after two and three years of service and requires no cash payments from the recipient. Participants may instruct Polaris to pay respective dividends directly to the participant in cash or reinvest the dividends into the participants ESOP accounts. Substantially all employees are eligible toEmployees who meet eligibility requirements can participate in the ESOP, with the exception of Company officers.ESOP. Total expense related to the ESOP was $7,849,000, $7,455,000 and $10,789,000, $9,224,000,in 2016, 2015 and $7,380,000, in 2014, 2013 and 2012, respectively. As of December 31, 20142016 there were 3,925,0003,811,000 shares held in the plan.
Defined contribution plans. Polaris sponsors variousa 401(k) defined contribution retirement plansplan covering substantially all U.S. employees. For the 401(k) defined contribution retirement plan which covers the majority of U.S. employees, theThe Company matches 100 percent of employee contributions up to a maximum of five percent of eligible compensation. All contributions vest immediately. The cost of thesethe defined contribution retirement plansplan was $15,456,000, $14,178,000, and $12,486,000, $10,651,000,in 2016, 2015 and $9,318,000, in 2014, 2013 and 2012, respectively.
Supplemental Executive Retirement Plan (SERP). Polaris sponsors a SERP that provides executive officers of the Company an alternative to defer portions of their salary, cash incentive compensation, and Polaris matching contributions. The deferrals and contributions are held in a rabbi trust and are in funds to match the liabilities of the plan. The assets are recorded as trading assets. The assets of the rabbi trust are included in other long-term assets on the consolidated balance sheets and the SERP liability is included in other long-term liabilities on the consolidated balance sheets. The asset and liability balancebalances are both $41,797,000$49,330,000 and $24,711,000$48,238,000 at December 31, 2014,2016, and 2013,2015, respectively.
In November 2013, Polaris amended the SERP to allow executiveExecutive officers of the Company have the opportunity to defer certain restricted stock awards beginning with the annual performance-based award, which is scheduled to vest in February 2015 if certain performance metrics are achieved.units. After a holding period, the executive officer has the option to diversify the vested award into other funds available under the SERP. The deferrals will beare held in a rabbi trust and will beare invested in funds to match the liabilities of the SERP. The awards are redeemable in
Polaris stock or in cash based upon the occurrence of events not solely within the control of Polaris; therefore, awards probable of vesting, for which the executive has not yet made an election to defer, or awards that have been deferred but have not yet vested and are probable of vesting or have been diversified into other funds, are reported as deferred compensation in the temporary equity section of the consolidated balance sheets. The awards recorded in temporary equity are recognized at fair value as though the reporting date is also the redemption date, with any difference from stock-based compensation recorded in retained earnings. At December 31, 20142016, 89,444105,931 shares are recorded at a fair value of $13,528,0008,728,000 in temporary equity, which includes $7,378,0008,993,000 of compensation cost and $6,150,000(266,000) of cumulative fair value adjustment recorded through retained earnings.
Note 4.5. Financing Agreement
Debt, and capital lease obligations, notes payable and the average related interest rates were as follows (in thousands):
| | | | Average interest rate at December 31, 2014 | | Maturity | | December 31, 2014 | | December 31, 2013 | Average interest rate at December 31, 2016 | | Maturity | | December 31, 2016 | | December 31, 2015 |
| Revolving loan facility | — | | January 2018 | | — |
| | $ | 80,500 |
| 1.66% | | May 2021 | | $ | 172,142 |
| | $ | 225,707 |
|
| Term loan facility | | 1.98% | | May 2021 | | 740,000 |
| | — |
|
| Senior notes—fixed rate | 3.81% | | May 2018 | | $ | 25,000 |
| | 25,000 |
| 3.81% | | May 2018 | | 25,000 |
| | 25,000 |
|
| Senior notes—fixed rate | 4.60% | | May 2021 | | 75,000 |
| | 75,000 |
| 4.60% | | May 2021 | | 75,000 |
| | 75,000 |
|
| Senior notes—fixed rate | 3.13% | | December 2020 | | 100,000 |
| | 100,000 |
| 3.13% | | December 2020 | | 100,000 |
| | 100,000 |
|
| Capital lease obligations | 5.02% | | Various through 2029 | | 26,148 |
| | 7,123 |
| 5.06% | | Various through 2029 | | 19,306 |
| | 21,874 |
|
| Total debt and capital lease obligations | | $ | 226,148 |
| | $ | 287,623 |
| |
| Notes payable and other | | 3.40% | | June 2027 | | 13,618 |
| | 15,698 |
|
| Debt issuance costs | | | (3,156 | ) | | (1,803 | ) |
| Total debt, capital lease obligations, and notes payable | | | $ | 1,141,910 |
| | $ | 461,476 |
|
| Less: current maturities | | 2,528 |
| | 3,281 |
| | 3,847 |
| | 5,059 |
|
| Total long-term debt and capital lease obligations | | $ | 223,620 |
| | $ | 284,342 |
| |
| Total long-term debt, capital lease obligations, and notes payable | | | $ | 1,138,063 |
| | $ | 456,417 |
|
Bank financing. In August 2011, Polaris entered into a $350,000,000 unsecured revolving loan facility. In January 2013,March 2015, Polaris amended the loan facility to increase the facility to $500,000,000 and to provide more beneficial covenant and interest rate terms. The amended terms and extendalso extended the expiration date from August 2016 to January 2018.March 2020. Interest is charged at rates based on a LIBOR or “prime.”“prime” base rate. In May 2016, Polaris amended the revolving loan facility to increase the facility to $600,000,000 and extend the expiration date to May 2021. The amended terms also established a $500,000,000 term loan facility. In November 2016, Polaris amended the revolving loan facility to increase the loan facility to $750,000,000, of which $740,000,000 is outstanding as of December 31, 2016.
In December 2010, the Company entered into a Master Note Purchase Agreement to issue $25,000,000$25,000,000 of unsecured senior notes due May 2018 and $75,000,000$75,000,000 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 $100,000,000 of unsecured senior notes due December 2020.
The unsecured revolving loan facility and the amended Master Note Purchase Agreement contain covenants that require Polaris to maintain certain financial ratios, including minimum interest coverage and maximum leverage ratios. Polaris was in compliance with all such covenants as of December 31, 20142016.
A property lease agreement for a manufacturing facility which Polaris began occupying in Opole, Poland commenced in February 2014. The Poland property lease is accounted for as a capital lease.
In January 2015, the Company announced plans to build a new production facility in Huntsville, Alabama to provide additional capacity and flexibility. Construction of the 725,000 square-foot facility square-foot facility was completed during the second quarter of 2016, with start-of-production also occurring during the second quarter. A mortgage note payable agreement of $14,500,000 for land, on which Polaris is building the facility, commenced in February 2015. The payment of principal and interest for the note payable is forgivable if the Company satisfies certain job commitments over the term of the note. Forgivable loans related to other Company facilities are also included within notes payable.
The following summarizes activity under Polaris’ credit arrangements (dollars in thousands):
|
| | | | | | | | | | | |
| | 2014 | | 2013 | | 2012 |
| Total borrowings at December 31 | $ | 200,000 |
| | $ | 280,500 |
| | $ | 100,000 |
|
| Average outstanding borrowings during year | $ | 361,715 |
| | $ | 138,400 |
| | $ | 100,000 |
|
| Maximum outstanding borrowings during year | $ | 500,000 |
| | $ | 411,000 |
| | $ | 100,000 |
|
| Interest rate at December 31 | 3.77 | % | | 2.98 | % | | 4.40 | % |
The carrying amount of the Company’s long-term debt approximates its fair value as December 31, 2014 and 2013. |
| | | | | | | | | | | |
| | 2016 | | 2015 | | 2014 |
| Total borrowings at December 31 | $ | 1,112,142 |
| | $ | 425,707 |
| | $ | 200,000 |
|
| Average outstanding borrowings during year | $ | 638,614 |
| | $ | 403,097 |
| | $ | 361,715 |
|
| Maximum outstanding borrowings during year | $ | 1,234,337 |
| | $ | 523,097 |
| | $ | 500,000 |
|
| Interest rate at December 31 | 2.25 | % | | 2.33 | % | | 3.77 | % |
Letters of credit. At December 31, 2014,2016, Polaris had open letters of credit totaling $24,894,000.$13,368,000. The amounts are primarily related to inventory purchases and are reduced as the purchases are received.
Dealer financing programs. Certain finance companies, including Polaris Acceptance, an affiliate (see Note 8)9), provide floor plan financing to dealers on the purchase of Polaris products. The amount financed by worldwide dealers under these arrangements at December 31, 2014,2016, was approximately $1,337,214,000.$1,438,845,000. Polaris has agreed to repurchase products repossessed by the finance companies up to an annual maximum of no more than 15 percent of the average month-end balances outstanding during the prior calendar year. Polaris’ financial exposure under these arrangements is limited to the difference between the amount paid to the finance companies for repurchases and the amount received on the resale of the repossessed product. No material losses have been incurred under these agreements during the periods presented. As a part of its marketing program, Polaris contributes to the cost of dealer financing up to certain limits and subject to certain conditions. Such expenditures are included as an offset to sales in the accompanying consolidated statements of income.
Note 5.6. Goodwill and Other Intangible Assets
ASC Topic 350 prohibits the amortization of goodwill and intangible assets with indefinite useful lives. Topic 350 requires that these assets be reviewed for impairment at least annually. An impairment charge for goodwill is recognized only when the estimated fair value of a reporting unit, including goodwill, is less than its carrying amount. The Company performed the annual impairment test as of December 31, 20142016 and 2013.2015. The results of the impairment test indicated
that no goodwill or intangible impairment existed as of the test date. The Company has had no historical impairments of goodwill. In accordance with Topic 350, the Company will continue to complete an impairment analysis on an annual basis or more frequently if an event or circumstance that would more likely than not reduce the fair value of a reporting unit below its carrying amount occurs. Goodwill and other intangible assets, net consist of $123,031,000 and $126,697,000 of goodwill and $100,935,000 and $103,011,000 of intangible assets, net of accumulated amortization, for the periods ended December 31, 20142016 and 2013, respectively.2015 are as follows (in thousands):
|
| | | | | | | |
| | 2016 | | 2015 |
| Goodwill | $ | 421,563 |
| | $ | 131,014 |
|
| Other intangible assets, net | 371,416 |
| | 105,103 |
|
| Total goodwill and other intangible assets, net | $ | 792,979 |
| | $ | 236,117 |
|
Additions to goodwill and other intangible assets in 20142016 relate primarily to the acquisitionacquisitions of Kolpin Outdoors, Inc. ("Kolpin") in April 2014, and the acquisition of certain assets of LSI Products Inc. and Armor Holdings, LLC. (collectively, "Pro Armor")TAP in November 2014. Kolpin is a leading aftermarket brand delivering purpose-built2016 and universal-fit ORV accessories and lifestyle products. Pro Armor is an industry-leading brandTaylor-Dunn in performance side-by-side accessories.
March 2016. For boththese acquisitions, the respective aggregate purchase price was allocated on a preliminary basis to the assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition. KolpinTAP and Pro Armor'sTaylor-Dunn’s financial results are included in the Company’s consolidated results from the respective dates of acquisition. Pro forma financial results are not presented as the acquisitions are not material to the consolidated financial statements. As of December 31, 2014,2016, the purchase price allocations for these acquisitions remain preliminary. For TAP, the pro forma financial results and the preliminary purchase price allocation for Pro Armor remains preliminary.are included in Note 2.
The changes in the carrying amount of goodwill for the years ended December 31, 20142016 and 20132015 are as follows (in thousands):
| | | | 2014 | | 2013 | 2016 | | 2015 |
| Balance as of beginning of year | $ | 126,697 |
| | $ | 56,324 |
| $ | 131,014 |
| | $ | 123,031 |
|
| Goodwill acquired during the period | 7,456 |
| | 66,085 |
| |
| Goodwill from businesses acquired | | 293,390 |
| | 17,010 |
|
| Currency translation effect on foreign goodwill balances | (11,122 | ) | | 4,288 |
| (2,841 | ) | | (9,027 | ) |
| Balance as of end of year | $ | 123,031 |
| | $ | 126,697 |
| $ | 421,563 |
| | $ | 131,014 |
|
For other intangible assets, the changes in the net carrying amount for the years ended December 31, 20142016 and 20132015 are as follows (in thousands):
| | | | 2014 | | 2013 | 2016 | | 2015 |
| | Gross
Amount | | Accumulated
Amortization | | Gross
Amount | | Accumulated
Amortization | Gross
Amount | | Accumulated
Amortization | | Gross
Amount | | Accumulated
Amortization |
| Other intangible assets, beginning | $ | 116,279 |
| | $ | (13,268 | ) | | $ | 54,907 |
| | $ | (4,015 | ) | $ | 138,831 |
| | $ | (33,728 | ) | | $ | 124,093 |
| | $ | (23,158 | ) |
| Intangible assets acquired during the period | 16,050 |
| | — |
| | 57,388 |
| | — |
| 284,000 |
| | — |
| | 20,779 |
| | — |
|
| Amortization expense | — |
| | (11,599 | ) | | — |
| | (9,178 | ) | — |
| | (16,549 | ) | | — |
| | (12,136 | ) |
| Currency translation effect on foreign balances | (8,236 | ) | | 1,709 |
| | 3,984 |
| | (75 | ) | (2,285 | ) | | 1,147 |
| | (6,041 | ) | | 1,566 |
|
| Other intangible assets, ending | $ | 124,093 |
| | $ | (23,158 | ) | | $ | 116,279 |
| | $ | (13,268 | ) | $ | 420,546 |
| | $ | (49,130 | ) | | $ | 138,831 |
| | $ | (33,728 | ) |
The components of other intangible assets were as follows (in thousands):
| | | December 31, 2014 | Estimated Life
(Years) | | Gross Carrying
Amount | | Accumulated
Amortization | | Net | |
| December 31, 2016 | | Estimated Life
(Years) | | Gross Carrying
Amount | | Accumulated
Amortization | | Net |
| Non-compete agreements | 5 | | $ | 540 |
| | $ | (293 | ) | | $ | 247 |
| 5 | | $ | 540 |
| | $ | (485 | ) | | $ | 55 |
|
| Dealer/customer related | 7 | | 62,758 |
| | (16,361 | ) | | 46,397 |
| 5-10 | | 164,837 |
| | (35,907 | ) | | 128,930 |
|
| Developed technology | 5-7 | | 14,571 |
| | (6,504 | ) | | 8,067 |
| 5-7 | | 26,048 |
| | (12,738 | ) | | 13,310 |
|
| Total amortizable | | 77,869 |
| | (23,158 | ) | | 54,711 |
| | 191,425 |
| | (49,130 | ) | | 142,295 |
|
| Non-amortizable—brand/trade names | | 46,224 |
| | — |
| | 46,224 |
| | 229,121 |
| | — |
| | 229,121 |
|
| Total other intangible assets, net | | $ | 124,093 |
| | $ | (23,158 | ) | | $ | 100,935 |
| | $ | 420,546 |
| | $ | (49,130 | ) | | $ | 371,416 |
|
| | | | | | | | | | | | | |
| December 31, 2013 | Estimated Life
(Years) | | Gross Carrying
Amount | | Accumulated
Amortization | | Net | |
| December 31, 2015 | | Estimated Life
(Years) | | Gross Carrying
Amount | | Accumulated
Amortization | | Net |
| Non-compete agreements | 5 | | $ | 540 |
| | $ | (185 | ) | | $ | 355 |
| 5 | | $ | 540 |
| | $ | (401 | ) | | $ | 139 |
|
| Dealer/customer related | 7 | | 59,244 |
| | (8,608 | ) | | 50,636 |
| 7 | | 67,079 |
| | (24,069 | ) | | 43,010 |
|
| Developed technology | 5-7 | | 15,307 |
| | (4,475 | ) | | 10,832 |
| 5-7 | | 19,261 |
| | (9,258 | ) | | 10,003 |
|
| Total amortizable | | 75,091 |
| | (13,268 | ) | | 61,823 |
| | 86,880 |
| | (33,728 | ) | | 53,152 |
|
| Non-amortizable—brand/trade names | | 41,188 |
| | — |
| | 41,188 |
| | 51,951 |
| | — |
| | 51,951 |
|
| Total other intangible assets, net | | $ | 116,279 |
| | $ | (13,268 | ) | | $ | 103,011 |
| | $ | 138,831 |
| | $ | (33,728 | ) | | $ | 105,103 |
|
Amortization expense for intangible assets for the year ended December 31, 20142016 and 20132015 was $11,599,000$16,549,000 and $9,178,000.$12,136,000. Estimated amortization expense for 20152017 through 20192021 is as follows:2015, $11,300,000; 2016, $11,300,000; 2017, $11,000,00027,600,000; 2018, $9,500,00026,000,000; 2019, $8,200,00024,100,000; 2020, $19,400,000; 2021, $17,200,000; and after 20192021, $3,400,00028,000,000. The preceding expected amortization expense is an estimate and actual amounts could differ due to additional intangible asset acquisitions, changes in foreign currency rates or impairment of intangible assets.
Note 6.7. Income Taxes
Polaris’ income from continuing operations before income taxes was generated from its United States and foreign operations as follows (in thousands):
| | | | For the Years Ended December 31, | For the Years Ended December 31, |
| | 2014 | | 2013 | | 2012 | 2016 | | 2015 | | 2014 |
| United States | $ | 666,323 |
| | $ | 535,265 |
| | $ | 458,635 |
| $ | 262,403 |
| | $ | 640,604 |
| | $ | 666,323 |
|
| Foreign | 32,994 |
| | 39,164 |
| | 21,208 |
| 50,848 |
| | 45,133 |
| | 32,994 |
|
| Income from continuing operations before income taxes | $ | 699,317 |
| | $ | 574,429 |
| | $ | 479,843 |
| $ | 313,251 |
| | $ | 685,737 |
| | $ | 699,317 |
|
Components of Polaris’ provision for income taxes for continuing operations are as follows (in thousands):
| | | | For the Years Ended December 31, | For the Years Ended December 31, |
| | 2014 | | 2013 | | 2012 | 2016 | | 2015 | | 2014 |
| Current: | | | | | | | | | | |
| Federal | $ | 255,299 |
| | $ | 167,690 |
| | $ | 169,833 |
| $ | 103,717 |
| | $ | 211,017 |
| | $ | 255,299 |
|
| State | 20,438 |
| | 12,942 |
| | 15,366 |
| 4,780 |
| | 16,609 |
| | 20,438 |
|
| Foreign | 21,584 |
| | 15,457 |
| | 8,593 |
| 17,367 |
| | 20,733 |
| | 21,584 |
|
| Deferred | (52,033 | ) | | (2,729 | ) | | (26,259 | ) | (25,561 | ) | | (17,983 | ) | | (52,033 | ) |
| Total provision for income taxes for continuing operations | $ | 245,288 |
| | $ | 193,360 |
| | $ | 167,533 |
| $ | 100,303 |
| | $ | 230,376 |
| | $ | 245,288 |
|
Reconciliation of the Federal statutory income tax rate to the effective tax rate is as follows:
| | | | For the Years Ended December 31, | For the Years Ended December 31, |
| | 2014 | | 2013 | | 2012 | 2016 | | 2015 | | 2014 |
| Federal statutory rate | 35.0 | % | | 35.0 | % | | 35.0 | % | 35.0 | % | | 35.0 | % | | 35.0 | % |
| State income taxes, net of federal benefit | 1.5 |
| | 1.5 |
| | 1.8 |
| 1.4 |
| | 1.5 |
| | 1.5 |
|
| Domestic manufacturing deduction | (1.1 | ) | | (1.0 | ) | | (1.5 | ) | (2.1 | ) | | (0.8 | ) | | (1.1 | ) |
| Research and development tax credit | (1.1 | ) | | (2.2 | ) | | — |
| (4.3 | ) | | (3.1 | ) | | (1.1 | ) |
| Valuation allowance for foreign subsidiaries net operating losses | — |
| | 0.3 |
| | — |
| — |
| | 0.2 |
| | — |
|
| Non-deductible expenses | | 2.4 |
| | 0.4 |
| | 0.3 |
|
| Other permanent differences | 0.8 |
| | 0.1 |
| | (0.4 | ) | (0.4 | ) | | 0.4 |
| | 0.5 |
|
| Effective income tax rate for continuing operations | 35.1 | % | | 33.7 | % | | 34.9 | % | 32.0 | % | | 33.6 | % | | 35.1 | % |
The income tax rate for 2016 was 32.0% as compared with 33.6% and 35.1% in 2015 and 2014, respectively. The lower income tax rate for 2016, compared with 2015 was primarily due to the decrease in 2016 pretax income, as the beneficial impact of discrete items increases with lower pretax earnings. In December 2014,2015, the President of the United States signed the Tax Increase PreventionConsolidated Appropriations Act, 2016, which retroactively reinstated the research and development tax credit for 2014. In January 2013, the President of the United States signed the American Taxpayers Relief Act of 2012, which reinstated2015, and also made the research and development tax credit. As a result,credit permanent. In addition to the impact of both the 2012 and 20132015 research and development tax credits, were recordedthe Company filed amended returns in the 2013 tax provision.2015 to claim additional credits related to qualified research expenditures incurred in prior years.
Undistributed earnings relating to certain non-U.S. subsidiaries of approximately $105,782,000$155,386,000 and $75,487,000$143,284,000 at December 31, 20142016 and 2013,2015, respectively, are considered to be permanently reinvested; accordingly, no provision for U.S. federal income taxes has been provided thereon. If the Company were to distribute these earnings, it would be subject to both U.S. income taxes (subject to an adjustment for foreign tax credits reflecting the amounts paid to non-U.S. taxing authorities) and withholding taxes payable to the non-U.S. countries. Determination of the unrecognized deferred U.S. income tax liability related to these undistributed earnings is not practicable due to the complexities associated with this hypothetical calculation.
Polaris utilizes the liability method of accounting for income taxes whereby deferred taxes are determined based on the estimated future tax effects of differences between the financial statement and tax bases of assets and liabilities given the provisions of enacted tax laws.
In November 2015, the FASB issued ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes. This ASU requires entities to present deferred tax assets and deferred tax liabilities as noncurrent in the consolidated balance sheet. The Company has early adopted the requirements of ASU No. 2015-17, and applied the amended provisions prospectively. The net deferred income taxes consist of the following (in thousands):
| | | | December 31, | December 31, |
| | 2014 | | 2013 | 2016 | | 2015 |
| Current deferred income taxes: | | | | |
| Deferred income taxes: | | | | |
| Inventories | $ | 9,034 |
| | $ | 6,306 |
| $ | 13,252 |
| | $ | 10,047 |
|
| Accrued expenses | 104,279 |
| | 87,157 |
| 152,798 |
| | 107,767 |
|
| Derivative instruments | 864 |
| | (107 | ) | (175 | ) | | (1,112 | ) |
| Total current | 114,177 |
| | 93,356 |
| |
| Noncurrent deferred income taxes: | | | | |
| Cost in excess of net assets of business acquired | (13,111 | ) | | (13,594 | ) | (10,257 | ) | | (7,956 | ) |
| Property and equipment | (28,921 | ) | | (36,069 | ) | (56,240 | ) | | (28,853 | ) |
| Compensation payable in common stock | 58,446 |
| | 42,528 |
| 73,297 |
| | 67,222 |
|
| Net operating loss carryforwards and impairments | 12,693 |
| | 5,782 |
| 13,650 |
| | 12,374 |
|
| Valuation allowance | (6,097 | ) | | (5,059 | ) | (6,981 | ) | | (6,684 | ) |
| Total noncurrent | 23,010 |
| | (6,412 | ) | |
| Total net deferred income tax asset | $ | 137,187 |
| | $ | 86,944 |
| $ | 179,344 |
| | $ | 152,805 |
|
At December 31, 2014,2016, the Company had available unused international and acquired federal net operating loss carryforwards of $32,640,000.$42,776,000. The net operating loss carryforwards will expire at various dates from 20152017 to 2033,2034, with certain jurisdictions having indefinite carryforward terms.
Polaris classified liabilities related to unrecognized tax benefits as long-term income taxes payable in the accompanying consolidated balance sheets in accordance with ASC Topic 740. Polaris recognizes potential interest and penalties related to income tax positions as a component of the provision for income taxes on the consolidated statements of income. Reserves related to potential interest are recorded as a component of long-term income taxes payable. The entire balance of unrecognized tax benefits at December 31, 2014,2016, if recognized, would affect the Company’s effective tax rate. The Company does not anticipate that total unrecognized tax benefits will materially change in the next twelve months. Tax years 20102011 through 20142016 remain open to examination by certain tax jurisdictions to which the Company is subject. A reconciliation of the beginning and ending amounts of unrecognized tax benefits is as follows (in thousands):
| | | | For the Years Ended December 31, | For the Years Ended December 31, |
| | 2014 | | 2013 | 2016 | | 2015 |
| Balance at January 1, | $ | 13,199 |
| | $ | 6,704 |
| $ | 22,509 |
| | $ | 9,836 |
|
| Increases due to acquisition opening balance sheet positions | — |
| | 6,420 |
| |
| Gross increases for tax positions of prior years | 55 |
| | 561 |
| 3,065 |
| | 9,683 |
|
| Gross increases for tax positions of current year | 1,456 |
| | 3,755 |
| 4,672 |
| | 4,961 |
|
| Decreases due to settlements and other prior year tax positions | (2,346 | ) | | (3,310 | ) | (3,424 | ) | | (178 | ) |
| Decreases for lapse of statute of limitations | (1,586 | ) | | (1,344 | ) | (1,782 | ) | | (1,364 | ) |
| Currency translation effect on foreign balances | (942 | ) | | 413 |
| (39 | ) | | (429 | ) |
| Balance at December 31, | 9,836 |
| | 13,199 |
| 25,001 |
| | 22,509 |
|
| Reserves related to potential interest at December 31, | 732 |
| | 1,093 |
| 1,389 |
| | 907 |
|
| Unrecognized tax benefits at December 31, | $ | 10,568 |
| | $ | 14,292 |
| $ | 26,390 |
| | $ | 23,416 |
|
Note 7.8. Shareholders’ Equity
Stock repurchase program. The Polaris Board of Directors has authorized the cumulative repurchase of up to 75,000,00086,500,000 shares of the Company’s common stock. In addition, in 2013 the Polaris Board of Directors authorized the one-time repurchase of all the shares of Polaris stock owned by Fuji Heavy Industries Ltd. ("Fuji"). On November 12, 2013, Polaris entered into and executed a Share Repurchase Agreement with Fuji under which Polaris purchased 3,960,000 shares of Polaris stock held by Fuji for an aggregate purchase price of $497,474,000.
As of December 31, 2014, 1,050,0002016, 7,463,000 shares remain available for repurchases under the Board’s authorization. During 2014, Polaris paid $81,812,000 to repurchase and retire approximately 554,000 shares. During 2013, Polaris paid $530,033,000 to repurchase and retire approximately 4,337,000 shares, and in 2012 Polaris paid $127,525,000 to repurchase and retire approximately 1,649,000 shares.The Company has made the following share repurchases (in thousands):
|
| | | | | | | | | | | | |
| | | For the Years Ended December 31, |
| | | 2016 | | 2015 | | 2014 |
| Total number of shares repurchased and retired | | 2,908 |
| | 2,179 |
| | 554 |
|
| Total investment | | $ | 245,816 |
| | $ | 293,616 |
| | $ | 81,812 |
|
Shareholder rights plan. During 2000, the Polaris Board of Directors adopted a shareholder rights plan. Under the plan, a dividend of preferred stock purchase rights will become exercisable if a person or group should acquire 15 percent or more of the Company’s stock. The dividend will consist of one purchase right for each outstanding share of the Company’s common stock held by shareholders of record on June 1, 2000. The shareholder rights plan was amended and restated in April 2010. The amended and restated rights agreement extended the final expiration date of the rights from May 2010 to April 2020, expanded the definition of “Beneficial Owner” to include certain derivative securities relating to the common stock of the Company and increased the purchase price for the rights from $75 to $125 per share. The Board of Directors may redeem the rights earlier for $0.01 per right.
Stock purchase plan. Polaris maintains an employee stock purchase plan (“Purchase Plan”). A total of 3,000,000 shares of common stock are reserved for this plan. The Purchase Plan permits eligible employees to purchase common stock monthly at 95 percent of the average of the beginning and end of month stock prices. As of December 31, 2014,2016, approximately 1,261,0001,324,000 shares had been purchased under the Purchase Plan.
Dividends. Quarterly and total year cash dividends declared per common share for the year ended December 31, 20142016 and 20132015 were as follows:
| | | | | For the Years Ended December 31, | | For the Years Ended December 31, |
| | | 2014 | | 2013 | | 2016 | | 2015 |
| Quarterly dividend declared and paid per common share | | $ | 0.48 |
| | $ | 0.42 |
| | $ | 0.55 |
| | $ | 0.53 |
|
| Total dividends declared and paid per common share | | $ | 1.92 |
| | $ | 1.68 |
| | $ | 2.20 |
| | $ | 2.12 |
|
On January 29, 201526, 2017, the Polaris Board of Directors declared a regular cash dividend of $0.53$0.58 per share payable on March 16, 201515, 2017 to holders of record of such shares at the close of business on March 2, 20151, 2017.
Net income per share. Basic earnings per share is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding during each period, including shares earned under The Deferred Compensation Plan for Directors (“Director Plan”), the ESOP and deferred stock units under the 2007 Omnibus Incentive Plan (“Omnibus Plan”). Diluted earnings per share is computed under the treasury stock method and is calculated to compute the dilutive effect of outstanding stock options issued under the 1995 Stock Option Plan and the 2003 Non-Employee Director Stock Option Plan (collectively, the “Option Plans”) and certain shares issued under the Omnibus Plan. A reconciliation of these amounts is as follows (in thousands):
| | | | For the Years Ended December 31, | For the Years Ended December 31, |
| | 2014 | | 2013 | | 2012 | 2016 | | 2015 | | 2014 |
| Weighted average number of common shares outstanding | 65,904 | | 68,209 | | 68,409 |
| 64,033 | | 65,719 | | 65,904 |
|
| Director Plan and deferred stock units | 196 | | 242 | | 341 |
| 162 | | 210 | | 196 |
|
| ESOP | 75 | | 84 | | 99 |
| 101 | | 91 | | 75 |
|
| Common shares outstanding—basic | 66,175 | | 68,535 | | 68,849 |
| 64,296 | | 66,020 | | 66,175 |
|
| Dilutive effect of restricted stock awards | 359 | | 228 | | 181 |
| 150 | | 255 | | 359 |
|
| Dilutive effect of stock option awards | 1,695 | | 1,783 | | 1,975 |
| 712 | | 1,209 | | 1,695 |
|
| Common and potential common shares outstanding—diluted | 68,229 | | 70,546 | | 71,005 |
| 65,158 | | 67,484 | | 68,229 |
|
During the2016, 2015 and 2014, 2013 and 2012 the number of options that could potentially dilute earnings per share on a fully diluted basis that were not included in the computation of diluted earnings per share because to do so would have been anti-dilutive were 581,0002,463,000, 23,0001,001,000 and 872,000,581,000, respectively.
Accumulated other comprehensive income (loss).loss. Changes in the accumulated other comprehensive income (loss)loss balance is as follows (in thousands):
| | | | Foreign
Currency
Items | | Cash Flow
Hedging Derivatives | | Accumulated Other
Comprehensive
Income (loss) | Foreign
Currency
Items | | Cash Flow
Hedging Derivatives | | Accumulated Other
Comprehensive
Loss |
| Balance as of December 31, 2013 | $ | 18,582 |
| | $ | 179 |
| | $ | 18,761 |
| |
| Balance as of December 31, 2015 | | $ | (64,360 | ) | | $ | 1,868 |
| | $ | (62,492 | ) |
| Reclassification to the income statement | — |
| | (5,469 | ) | | (5,469 | ) | — |
| | 4,643 |
| | 4,643 |
|
| Change in fair value | (44,371 | ) | | 3,838 |
| | (40,533 | ) | (19,773 | ) | | (6,215 | ) | | (25,988 | ) |
| Balance as of December 31, 2014 | $ | (25,789 | ) | | $ | (1,452 | ) | | $ | (27,241 | ) | |
| Balance as of December 31, 2016 | | $ | (84,133 | ) | | $ | 296 |
| | $ | (83,837 | ) |
The table below provides data about the amount of gains and losses, net of tax, reclassified from accumulated other comprehensive income (loss)loss into the income statement for cash flow derivatives designated as hedging instruments for the year ended December 31, 20142016 and 20132015 (in thousands):
| | Derivatives in Cash Flow Hedging Relationships | Location of Gain (Loss) Reclassified from Accumulated OCI into Income | | For the Years Ended December 31, | Location of Gain (Loss) Reclassified from Accumulated OCI into Income | | For the Years Ended December 31, |
| | 2014 | | 2013 | | 2016 | | 2015 |
| Foreign currency contracts | Other (income), net | | $ | (5,641 | ) | | $ | (1,671 | ) | Other expense, net | | $ | 1,325 |
| | $ | (8,399 | ) |
| Foreign currency contracts | Cost of sales | | 172 |
| | 977 |
| Cost of sales | | 3,318 |
| | 4,549 |
|
| Total | | $ | (5,469 | ) | | $ | (694 | ) | | $ | 4,643 |
| | $ | (3,850 | ) |
The net amount of the existing gains or losses at December 31, 20142016 that is expected to be reclassified into the income statement within the next 12 months is expected to not be material. See Note 1112 for further information regarding Polaris'Polaris’ derivative activities.
Note 8.9. Financial Services Arrangements
Polaris Acceptance, a joint venture between Polaris and GEWells Fargo Commercial Distribution Finance Corporation, an indirecta direct subsidiary of General Electric Capital Corporation,Wells Fargo Bank, N.A. (“Wells Fargo”), which is supported by a partnership agreement between their respective wholly owned subsidiaries, finances substantially all of Polaris'Polaris’ United States sales whereby Polaris receives payment within a few days of shipment of the product. On March 1, 2016, Wells Fargo announced that it completed the purchase of the North American portion of GE Capital’s Commercial Distribution Finance (GECDF) business, including GECDF’s ownership interests in Polaris Acceptance. Effective March 1, 2016, GECDF adopted the tradename Wells Fargo Commercial Distribution Finance.
Polaris’ subsidiary has a 50 percent equity interest in Polaris Acceptance. Polaris Acceptance sells a majority of its receivable portfolio to a securitization facility (the "Securitization Facility"“Securitization Facility”) arranged by General Electric Capital Corporation.Wells Fargo. 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 Accounting Standards Codification Topic 860. 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. The partnership agreement is effective through February 2017.2022.
Polaris’ total investment in Polaris Acceptance of $89,107,000$94,009,000 at December 31, 20142016 is accounted for under the equity method, and is recorded in investment in finance affiliate in the accompanying consolidated balance sheets. At December 31, 20142016, the outstanding amount of net receivables financed for dealers under this arrangement was $1,141,068,000,$1,206,641,000, which included $337,088,000$479,944,000 in the Polaris Acceptance portfolio and $803,980,000726,697,000 of receivables within the Securitization Facility ("(“Securitized Receivables"Receivables”).
Polaris has 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 2014,2016, the potential 15 percent aggregate repurchase obligation was approximately $120,815,000.$182,814,000. Polaris’ 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.
Summarized financial information for Polaris Acceptance reflecting the effects of the Securitization Facility is presented as follows (in thousands):
| | | | For the Years Ended December 31, | For the Years Ended December 31, |
| | 2014 | | 2013 | | 2012 | 2016 | | 2015 | | 2014 |
| Revenues | $ | 40,968 |
| | $ | 13,010 |
| | $ | 8,811 |
| $ | 66,414 |
| | $ | 63,548 |
| | $ | 40,968 |
|
| Interest and operating expenses | 3,678 |
| | 3,044 |
| | 1,013 |
| 6,182 |
| | 4,738 |
| | 3,678 |
|
| Net income | $ | 37,290 |
| | $ | 9,966 |
| | $ | 7,798 |
| $ | 60,232 |
| | $ | 58,810 |
| | $ | 37,290 |
|
| | | | As of December 31, | As of December 31, |
| | 2014 | | 2013 | 2016 | | 2015 |
| Finance receivables, net | $ | 337,088 |
| | $ | 226,742 |
| $ | 479,944 |
| | $ | 472,029 |
|
| Other assets | 122 |
| | 172 |
| 200 |
| | 124 |
|
| Total Assets | $ | 337,210 |
| | $ | 226,914 |
| $ | 480,144 |
| | $ | 472,153 |
|
| Notes payable | $ | 155,436 |
| | $ | 85,096 |
| $ | 288,275 |
| | $ | 269,881 |
|
| Other liabilities | 3,560 |
| | 3,384 |
| 3,851 |
| | 4,126 |
|
| Partners’ capital | 178,214 |
| | 138,434 |
| 188,018 |
| | 198,146 |
|
| Total Liabilities and Partners’ Capital | $ | 337,210 |
| | $ | 226,914 |
| $ | 480,144 |
| | $ | 472,153 |
|
Polaris has agreements with Capital One,Performance Finance, Sheffield Financial and Synchrony Bank, and FreedomRoad under which these financial institutions provide financing to end consumers of Polaris products. Polaris'Polaris’ income generated from these agreements has been included as a component of income from financial services in the accompanying consolidated statements of income.
Polaris also administers and provides extended service contracts to consumers and certain insurance contracts to dealers and consumers through various third-party suppliers. Polaris finances its self-insured risks related to extended service contracts, but does not retain any warranty, insurance or financial risk under any of thesethe other arrangements. Polaris’ service fee income generated from these arrangements has been included as a component of income from financial services in the accompanying consolidated statements of income.
Note 9.10. Investment in Other Affiliates
The Company has certain investments in nonmarketable securities of strategic companies. As of December 31, 20142016 and 2013,2015, these investments are primarily comprised of investments in Eicher-Polaris Private Limited (EPPL) and Brammo, Inc. ("Brammo"(“Brammo”), and are recorded as components of other long-term assets in the accompanying consolidated balance sheets.
EPPL is a joint venture established in 2012 with Eicher Motors Limited ("Eicher"(“Eicher”). Polaris and Eicher each control 50 percent of the joint venture, which is intended to design, develop and manufacture a full range of new vehicles for India and other emerging markets. The investment in EPPL is accounted for under the equity method, with Polaris’ proportionate share of income or loss recorded within the consolidated financial statements on a one month lag due to financial information not being available timely. The overall investment is expected to be approximately $50,000,000, shared equally with Eicher over a three year period. As of December 31, 20142016 and 2013,2015, the carrying value of the Company'sCompany’s investment in EPPL was $14,601,000$20,182,000 and $6,456,000,$18,884,000, respectively. Through December 31, 20142016, Polaris has invested $21,878,000$43,321,000 in the joint venture. Polaris'Polaris’ share of EPPL loss for the years ended December 31, 20142016 and 20132015 was $4,124,000$7,175,000 and $2,414,000,$6,802,000, respectively, and is included in equity in loss of other affiliates on the consolidated statements of income.
Brammo is a privately held designer and developer of electric vehicles, which Polaris has invested in since 2011. The investment in Brammo is accounted for under the cost method. Brammo is in the early stages of designing, developing, and selling electric vehicle powertrains. As such, a risk exists that Brammo may not be able to secure sufficient financing to reach viability through cash flow from operations. In January 2015, Polaris acquired the electric motorcycle business from Brammo. Brammo will continue to be a designer and developer of electric vehicle powertrains.
Polaris will impair or write off an investment and recognize a loss if and when events or circumstances indicate there is impairment in the investment that is other-than-temporary. When necessary, Polaris evaluates investments in nonmarketable securities for impairment, utilizing level 3 fair value inputs. During 2014, and 2013, Polaris recorded an immaterial
impairment expense within other expense (income), net in the consolidated statements of income, and reduced the Brammo investment. There were no impairments recorded during 2015 or 2016 related to these investments.
Note 10.11. Commitments and Contingencies
Product liability. Polaris is subject to product liability claims in the normal course of business. In 2012, Polaris purchased excess insurance coverage for catastrophic product liability claims for incidents occurring after the policy date. Polaris self-insures product liability claims before the policy date and up to the purchased catastrophic insurance coverage after the policy date. The estimated costs resulting from any losses are charged to operating expenses when it is probable a loss has been incurred and the amount of the loss is reasonably determinable. The Company utilizes historical trends and actuarial analysis tools, along with an analysis of current claims, to assist in determining the appropriate loss reserve levels. At December 31, 20142016, the Company had an accrual of $17,327,00045,075,000 for the probable payment of pending claims related to continuing operations product liability litigation associated with Polaris products. This accrual is included as a component of other accrued expenses in the accompanying consolidated balance sheets.
As previously disclosed, the Company was party to a lawsuit in which the plaintiff was seriously injured in a 2008 accident involving a collision between a 2001 Polaris Virage personal watercraft and a boat. On July 23, 2013, a Los Angeles County jury returned an unfavorable verdict against the Company. The jury returned a verdict finding that the accident was caused by multiple actions, the majority of which was attributed to the negligence of the other boat driver, with the balance attributed to the reckless behavior of the driver of the Virage and the design of the Virage. The jury awarded approximately $21,000,000 in damages, of which Polaris' liability was $10,000,000. In the third quarter of 2013, the Company reported a loss from discontinued operations, net of tax, of $3,777,000 for an additional provision to accrue Polaris' portion of the jury award and legal fees. The amount was fully paid in 2013. In September 2004, the Company announced its decision to cease manufacturing marine products. Since then, any material financial results of that division have been recorded in discontinued operations.
Litigation. Polaris is a defendant in lawsuits and subject to other claims arising in the normal course of business. In the opinion of management, it is unlikely that any legal proceedings pending against or involving Polaris will have a material adverse effect on Polaris'Polaris’ financial position or results of operations.
Contingent purchase price. As a component of certain past acquisition agreements, Polaris has committed to make additional payments to certain sellers contingent upon either the passage of time or certain financial performance criteria. Polaris initially records the fair value of each commitment as of the respective opening balance sheet, and each reporting period the fair value is evaluated, using level 3 inputs, with the change in value reflected in the consolidated statements of income. As of December 31, 20142016 and 20132015 the fair value of contingent purchase price commitments was $27,908,000 and $18,249,000, respectively, recorded in other long-term liabilities in the consolidated balance sheets.are immaterial.
Leases. Polaris leases buildings and equipment under non-cancelable operating leases. Total rent expense under all operating lease agreements was $22,534,000, $16,823,000 and $13,734,000 $10,656,000,for 2016, 2015 and $10,349,000 for 2014, 2013 and 2012, respectively.
A property lease agreement signed in 2013 for a manufacturing facility which Polaris began occupying in Opole, Poland commenced in February 2014. The Poland property lease is accounted for as a capital lease.
Future minimum annual lease payments under capital and operating leases with noncancelable terms in excess of one year as of December 31, 2014,2016, are as follows (in thousands):
| | | | Capital
Leases | | Operating
Leases | Capital
Leases | | Operating
Leases |
| 2015 | $ | 3,915 |
| | $ | 9,576 |
| |
| 2016 | 3,281 |
| | 5,098 |
| |
| 2017 | 2,903 |
| | 3,326 |
| $ | 2,852 |
| | $ | 30,924 |
|
| 2018 | 2,403 |
| | 1,945 |
| 2,250 |
| | 23,437 |
|
| 2019 | 2,203 |
| | 1,173 |
| 2,080 |
| | 20,147 |
|
| 2020 | | 1,995 |
| | 14,785 |
|
| 2021 | | 1,925 |
| | 10,225 |
|
| Thereafter | 23,639 |
| | 1,403 |
| 14,938 |
| | 13,111 |
|
| Total future minimum lease obligation | $ | 38,344 |
| | $ | 22,521 |
| $ | 26,040 |
| | $ | 112,629 |
|
Note 11.12. Derivative Instruments and Hedging Activities
The Company is exposed to certain risks relating to its ongoing business operations. From time to time, the primary risks managed by using derivative instruments are foreign currency risk, interest rate risk and commodity price fluctuations. Derivative contracts on various currencies are entered into in order to manage foreign currency exposures associated with certain product sourcing activities and intercompany cash flows. Interest rate swaps are occasionally entered into in order to managemaintain a balanced risk of fixed and floating interest rate riskrates associated with the Company’s variable-rate borrowings.long-term debt. Commodity hedging contracts are occasionally entered into in order to manage fluctuating market prices of certain purchased commodities and raw materials that are integrated into the Company’s end products.
The Company’s foreign currency management objective is to mitigate the potential impact of currency fluctuations on the value of its U.S. dollar cash flows and to reduce the variability of certain cash flows at the subsidiary level. The Company actively manages certain forecasted foreign currency exposures and uses a centralized currency management operation to take advantage of potential opportunities to naturally offset foreign currency exposures against each other.
The decision of whether and when to execute derivative instruments, along with the duration of the instrument, can vary from period to period depending on market conditions, the relative costs of the instruments and capacity to hedge. The duration is linked to the timing of the underlying exposure, with the connection between the two being regularly monitored. Polaris does not use any financial contracts for trading purposes.
At December 31, 20142016, Polaris had the following open foreign currency contracts (in thousands):
| | | Foreign Currency | | Notional Amounts (in U.S. dollars) | | Net Unrealized Gain (Loss) | | Notional Amounts (in U.S. dollars) | | Net Unrealized Gain (Loss) |
| Australian Dollar | | $ | 3,491 |
| | $ | 391 |
| | $ | 22,498 |
| | $ | 771 |
|
| Canadian Dollar | | 40,550 |
| | 38 |
| | 65,154 |
| | 1,357 |
|
| Japanese Yen | | 22,201 |
| | (1,008 | ) | | 1,371 |
| | (57 | ) |
| Mexican Peso | | 34,060 |
| | (1,991 | ) | | 17,942 |
| | (1,773 | ) |
| Total | | $ | 100,302 |
| | $ | (2,570 | ) | | $ | 106,965 |
| | $ | 298 |
|
These contracts, with maturities through December 31, 2015,2017, met the criteria for cash flow hedges and the unrealized gains or losses, after tax, are recorded as a component of accumulated other comprehensive income (loss)loss in shareholders’ equity.
Polaris occasionally enters into derivative contracts to hedge a portion of the exposure related to diesel fuel and aluminum. TheseAs of December 31, 2016, there were no outstanding commodity derivative contracts in place. As of December 31, 2015, diesel fuel and aluminum derivative contracts havedid not metmeet the criteria for hedge accounting.
The table below summarizes the carrying values of derivative instruments as of December 31, 20142016 and 20132015 (in thousands):
| | | | Carrying Values of Derivative Instruments as of December 31, 2014 | Carrying Values of Derivative Instruments as of December 31, 2016 |
| | Fair Value— Assets | | Fair Value— (Liabilities) | | Derivative Net Carrying Value | Fair Value— Assets | | Fair Value— (Liabilities) | | Derivative Net Carrying Value |
| Derivatives designated as hedging instruments | | | | | | | | | | |
| Foreign exchange contracts(1) | $ | 534 |
| | $ | (3,104 | ) | | $ | (2,570 | ) | $ | 2,128 |
| | $ | (1,830 | ) | | $ | 298 |
|
| Total derivatives designated as hedging instruments | $ | 534 |
| | $ | (3,104 | ) | | $ | (2,570 | ) | $ | 2,128 |
| | $ | (1,830 | ) | | $ | 298 |
|
| Commodity contracts(1) | $ | — |
| | $ | (4,609 | ) | | $ | (4,609 | ) | |
| Total derivatives not designated as hedging instruments | $ | — |
| | $ | (4,609 | ) | | $ | (4,609 | ) | |
| Total derivatives | $ | 534 |
| | $ | (7,713 | ) | | $ | (7,179 | ) | $ | 2,128 |
| | $ | (1,830 | ) | | $ | 298 |
|
| | | | Carrying Values of Derivative Instruments as of December 31, 2013 | Carrying Values of Derivative Instruments as of December 31, 2015 |
| | Fair Value— Assets | | Fair Value— (Liabilities) | | Derivative Net Carrying Value | Fair Value— Assets | | Fair Value— (Liabilities) | | Derivative Net Carrying Value |
| Derivatives designated as hedging instruments | | | | | | | | | | |
| Foreign exchange contracts(1) | $ | 1,194 |
| | $ | (1,203 | ) | | $ | (9 | ) | $ | 5,218 |
| | $ | (2,451 | ) | | $ | 2,767 |
|
| Interest rate swap contracts(1) | | 186 |
| | — |
| | 186 |
|
| Total derivatives designated as hedging instruments | $ | 1,194 |
| | $ | (1,203 | ) | | $ | (9 | ) | $ | 5,404 |
| | $ | (2,451 | ) | | $ | 2,953 |
|
| Commodity contracts(1) | $ | 46 |
| | $ | (16 | ) | | $ | 30 |
| — |
| | $ | (354 | ) | | $ | (354 | ) |
| Total derivatives not designated as hedging instruments | $ | 46 |
|
| $ | (16 | ) | | $ | 30 |
| — |
|
| $ | (354 | ) | | $ | (354 | ) |
| Total derivatives | $ | 1,240 |
| | $ | (1,219 | ) | | $ | 21 |
| $ | 5,404 |
| | $ | (2,805 | ) | | $ | 2,599 |
|
| |
| (1) | Assets are included in prepaid expenses and other and liabilities are included in other accrued expenses on the accompanying consolidated balance sheets. |
For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative is reported as a component of accumulated other comprehensive income (loss)loss and reclassified into the income statement in the same period or periods during which the hedged transaction affects the income statement. Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in the current income statement.
The table below provides data about the amount of gains and losses,(losses), net of tax, related to the effective portion of derivative instruments designated as cash flow hedges included in accumulated other comprehensive income (loss)loss for the years ended December 31, 20142016 and 20132015 (in thousands):was $(1,572,000) and $3,320,000, respectively.
|
| | | | | | | |
Derivatives in Cash Flow Hedging Relationships | For the Years Ended December 31, |
| 2014 | | 2013 |
| Interest rate contracts | — |
| | $ | (26 | ) |
| Foreign currency contracts | $ | (1,631 | ) | | 1,636 |
|
| Total | $ | (1,631 | ) | | $ | 1,610 |
|
See Note 78 for information about the amount of gains and losses, net of tax, reclassified from accumulated other comprehensive income (loss)loss into the income statement for derivative instruments designated as hedging instruments. The ineffective portion of foreign currency contracts was not material for the years ended December 31, 20142016 and 2013.2015.
The Company recognized a loss of $4,820,000$121,000 and $878,000$2,994,000 in cost of sales on commodity contracts not designated as hedging instruments in 20142016 and 2013,2015, respectively.
Note 12.13. Segment Reporting
PolarisThe Company’s reportable segments are based on the Company’s method of internal reporting, which generally segregates the operating segments by product line, inclusive of wholegoods and PG&A. The internal reporting of these operating segments is defined based, in part, on the reporting and review process used by the Company’s Chief Executive Officer. The Company has reviewed ASC Topic 280five operating segments: 1) ORV, 2) Snowmobiles, 3) Motorcycles, 4) Global Adjacent Markets, and determined5) Other, and four reportable segments: 1) ORV/Snowmobiles, 2) Motorcycles, 3) Global Adjacent Markets and 4) Other.
The ORV/Snowmobiles segment includes the aggregated results of our ORV and Snowmobiles operating segments. The Motorcycles, Global Adjacent Markets and Other segments include the results for those respective operating segments. Other includes our November 2016 acquisition of TAP. The Corporate amounts include costs that are not allocated to individual segments, which include incentive-based compensation and other unallocated manufacturing costs. Additionally, given the commonality of customers, manufacturing and asset management, the Company meetsdoes not maintain separate balance sheets for each segment. Accordingly, the aggregation criteria outlined since the Company’s segments have similar (1) economic characteristics, (2) productsegment information presented below is limited to sales and services, (3) production processes, (4) customers, (5) distribution channels, and (6) regulatory environments. Therefore, the Company reports as a single reportable business segment.gross profit data.
|
| | | | | | | | | | | |
| | For the Years Ended December 31, |
($ in thousands) | 2016 | | 2015 | | 2014 |
| Sales | | | | | |
| ORV/Snowmobiles | $ | 3,357,496 |
| | $ | 3,708,933 |
| | $ | 3,741,154 |
|
| Motorcycles | 708,497 |
| | 698,257 |
| | 418,546 |
|
| Global Adjacent Markets | 341,937 |
| | 312,100 |
| | 319,948 |
|
| Other | 108,699 |
| | — |
| | — |
|
| Total sales | 4,516,629 |
| | 4,719,290 |
| | 4,479,648 |
|
| Gross profit | | | | | |
| ORV/Snowmobiles | 930,181 |
| | 1,190,630 |
| | 1,206,553 |
|
| Motorcycles | 91,401 |
| | 97,261 |
| | 54,427 |
|
| Global Adjacent Markets | 95,149 |
| | 84,211 |
| | 88,797 |
|
| Other | 19,842 |
| | — |
| | — |
|
| Corporate | (30,950 | ) | | (33,060 | ) | | (30,599 | ) |
| Total gross profit | $ | 1,105,623 |
| | $ | 1,339,042 |
| | $ | 1,319,178 |
|
Sales to external customers based on the location of the customer and property and equipment, net, by geography are presented in the tables below (in thousands):
| | | | For the Years Ended December 31, | For the Years Ended December 31, |
| | 2014 | | 2013 | | 2012 | 2016 | | 2015 | | 2014 |
| United States | $ | 3,339,905 |
| | $ | 2,721,300 |
| | $ | 2,310,943 |
| $ | 3,557,228 |
| | $ | 3,688,980 |
| | $ | 3,339,905 |
|
| Canada | 454,608 |
| | 463,316 |
| | 438,208 |
| 307,094 |
| | 378,725 |
| | 454,608 |
|
| Other foreign countries | 685,135 |
| | 592,452 |
| | 460,631 |
| 652,307 |
| | 651,585 |
| | 685,135 |
|
| Consolidated sales | $ | 4,479,648 |
| | $ | 3,777,068 |
| | $ | 3,209,782 |
| $ | 4,516,629 |
| | $ | 4,719,290 |
| | $ | 4,479,648 |
|
| | | | As of December 31, | As of December 31, |
| | 2014 | | 2013 | 2016 | | 2015 |
| United States | $ | 432,614 |
| | $ | 349,224 |
| $ | 637,632 |
| | $ | 548,410 |
|
| Mexico | 49,064 |
| | 52,450 |
| |
| Other foreign countries | 73,750 |
| | 53,493 |
| 89,964 |
| | 102,268 |
|
| Consolidated property and equipment, net | $ | 555,428 |
| | $ | 455,167 |
| $ | 727,596 |
| | $ | 650,678 |
|
Note 13.14. Subsequent EventsEvent
On January 9, 2015, the Company announced plans to build a new production facility in Huntsville, Alabama to provide additional capacity and flexibility. The 600,000 square-foot facility will focus on off-road vehicle production. The Company will break ground on the facility in the first quarter of 2015 with completion expected in the first half of 2016.
On January 29, 2015, the2017, our Board of Directors approved an increasea strategic plan to wind down the Victory Motorcycles brand. The Company expects to commence the wind down activities and explore disposition options for the related assets in the Company’s common stock repurchase authorization by 4.0 million shares. The additional share repurchase authorization, together with the 1.1 million shares remaining available for repurchase under the prior authorization, represents approximately eight percent of the shares of Polaris common stock currently outstanding.
near future. The Company has evaluated events subsequentestimates the total costs to wind down the balance sheet date through the date the consolidated financial statements have been filed. There were no other subsequent events which required recognition or disclosurebrand could be in the consolidated financial statements.a range of $50,000,000 to $70,000,000 in 2017.
Note 14.15. Quarterly Financial Data (unaudited)
| | | | Sales | | Gross profit | | Net income from continuing operations | | Net income | | Diluted net income per share from continuing operations | | Diluted net income per share | Sales | | Gross profit | | Net income | | Diluted net income per share |
| | (In thousands, except per share data) | (In thousands, except per share data) |
| 2014 | | | | | | | | | | | | |
| 2016 | | | | | | | | |
| First Quarter | $ | 888,346 |
| | $ | 258,417 |
| | $ | 80,901 |
| | $ | 80,901 |
| | $ | 1.19 |
| | $ | 1.19 |
| $ | 982,996 |
| | $ | 247,578 |
| | $ | 46,889 |
| | $ | 0.71 |
|
| Second Quarter | 1,013,959 |
| | 304,914 |
| | 96,905 |
| | 96,905 |
| | 1.42 |
| | 1.42 |
| 1,130,777 |
| | 284,503 |
| | 71,166 |
| | 1.09 |
|
| Third Quarter | 1,302,343 |
| | 388,274 |
| | 140,826 |
| | 140,826 |
| | 2.06 |
| | 2.06 |
| 1,185,067 |
| | 260,770 |
| | 32,312 |
| | 0.50 |
|
| Fourth Quarter | 1,275,000 |
| | 367,573 |
| | 135,397 |
| | 135,397 |
| | 1.98 |
| | 1.98 |
| 1,217,789 |
| | 312,772 |
| | 62,581 |
| | 0.97 |
|
| Totals | $ | 4,479,648 |
| | $ | 1,319,178 |
| | $ | 454,029 |
| | $ | 454,029 |
| | $ | 6.65 |
| | $ | 6.65 |
| $ | 4,516,629 |
| | $ | 1,105,623 |
| | $ | 212,948 |
| | $ | 3.27 |
|
| 2013 | | | | | | | | | | | | |
| 2015 | | | | | | | | |
| First Quarter | $ | 745,909 |
| | $ | 216,648 |
| | $ | 75,464 |
| | $ | 75,464 |
| | $ | 1.07 |
| | $ | 1.07 |
| $ | 1,033,345 |
| | $ | 293,731 |
| | $ | 88,563 |
| | $ | 1.30 |
|
| Second Quarter | 844,800 |
| | 252,338 |
| | 80,004 |
| | 80,004 |
| | 1.13 |
| | 1.13 |
| 1,124,327 |
| | 319,414 |
| | 100,943 |
| | 1.49 |
|
| Third Quarter | 1,102,649 |
| | 334,785 |
| | 116,921 |
| | 113,144 |
| | 1.64 |
| | 1.59 |
| 1,456,000 |
| | 415,623 |
| | 155,173 |
| | 2.30 |
|
| Fourth Quarter | 1,083,710 |
| | 317,108 |
| | 108,680 |
| | 108,680 |
| | 1.56 |
| | 1.56 |
| 1,105,618 |
| | 310,274 |
| | 110,682 |
| | 1.66 |
|
| Totals | $ | 3,777,068 |
| | $ | 1,120,879 |
| | $ | 381,069 |
| | $ | 377,292 |
| | $ | 5.40 |
| | $ | 5.35 |
| $ | 4,719,290 |
| | $ | 1,339,042 |
| | $ | 455,361 |
| | $ | 6.75 |
|
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.
Item 9A. 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 Chief Executive Officer and its Executive 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 Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report. Based upon that evaluation, the Company’s Chief Executive Officer along with the Company’s Executive Vice President—Finance and Chief Financial Officer concluded that, as of the end of the period covered by this Annual Report on Form 10-K, the Company’s disclosure controls and procedures were effective to ensure that information required to be
disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934, as amended, is (1) recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (2) accumulated and communicated to the Company’s management including its Chief Executive Officer and Executive Vice President—Finance and Chief Financial Officer, in a manner that allows timely decisions regarding required disclosure. No changes have occurred during the period covered by this report or since the evaluation date that would have a material effect on the disclosure controls and procedures.
The Company’s internal control report is included in this report after Item 8, under the caption “Management’s Report on Company’s Internal Control over Financial Reporting.”
Item 9B. Other Information
Not applicable.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
The sections entitled "Proposal“Proposal 1 – Election of Directors—Information Concerning Nominees and Directors," "Corporate” “Corporate Governance—Committees of the Board and Meetings—Audit Committee"Committee,” “Corporate Governance—Code of Business Conduct and "SectionEthics” and “Section 16(a) Beneficial Ownership Reporting Compliance"Compliance” in the Polaris definitive Proxy Statement to be filed on or about March 13, 201510, 2017 (the "2015“2017 Proxy Statement"Statement”), are incorporated herein by reference. See also Item 1 "Executive“Executive Officers of the Registrant"Registrant” on page 1210 in Part I hereof.
We have adopted a Code of Business Conduct and Ethics applicable to all employees, including our Principal Executive Officer, Principal Financial Officer, all other executive officers and the Board of Directors. A copy of the Polaris Code of Business Conduct and Ethics is available on our website at www.polaris.com.
Any amendments to, or waivers for executive officers or directors of, these ethics codes will be disclosed on our website promptly following the date of such amendment or waiver.
Item 11. Executive Compensation
The sections entitled "Corporate“Corporate Governance—Compensation Committee Interlocks and Insider Participation," "Compensation” “Compensation Discussion and Analysis," "Compensation” “Compensation Committee Report," "Executive Compensation"” “Executive Compensation” and "Director Compensation"“Director Compensation” in the Company's 2015Company’s 2017 Proxy Statement are incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The sections entitled “Security Ownership of Certain Beneficial Owners and Management” and "Equity“Equity Compensation Plan Information"Information” in the Company’s 20152017 Proxy Statement are incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The sections entitled "Corporate“Corporate Governance—Corporate Governance Guidelines and Independence"Independence” and "Corporate“Corporate Governance—Certain Relationships and Related Transactions"Transactions” in the Company’s 20152017 Proxy Statement are incorporated herein by reference.
Item 14. Principal Accounting Fees and Services
The section entitled "Fees“Fees Paid to Independent Registered Public Accounting Firm"Firm” in the Company’s 20152017 Proxy Statement is incorporated herein by reference.
PART IV
Item 15. Exhibits, Financial Statement Schedules
(a) The following documents are filed as part of this report:
(1) Financial Statements
The financial statements listed in the Index to Financial Statements on page 3835 are included in Part II of this Form 10-K.
(2) Financial Statement Schedules
Schedule II—Valuation and Qualifying Accounts is included on page 7069 of this report.
All other supplemental financial statement schedules have been omitted because they are not applicable or are not required or the information required to be set forth therein is included in the Consolidated Financial Statements or Notes thereto.
(3) Exhibits
The Exhibits to this report are listed in the Exhibit Index to Annual Report on Form 10-K on pages 7170 to 74.73.
A copy of any of these Exhibits will be furnished at a reasonable cost to any person who was a shareholder of the Company as of February 20, 2015,16, 2017, upon receipt from any such person of a written request for any such exhibit. Such request should be sent to Polaris Industries Inc., 2100 Highway 55, Medina, Minnesota 55340, Attention: Investor Relations.
(b) Exhibits
Included in Item 15(a)(3) above.
(c) Financial Statement Schedules
Included in Item 15(a)(2) above.
Item 16. Form 10-K Summary
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, in the City of Minneapolis, State of Minnesota on February 20, 2015.16, 2017.
|
| | |
| POLARIS INDUSTRIES INC. |
| By: | | /S/ SCOTT W. WINE |
| | | Scott W. Wine |
| | | Chairman and Chief Executive Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated.
|
| | | |
Signature | Title | Date |
| | | |
/S/ SCOTT W. WINE | Chairman and Chief Executive Officer (Principal Executive Officer) | February 20, 201516, 2017 |
| Scott W. Wine | |
| | | |
/S/ MICHAEL W. MT. SALONEPEETZEN | Executive Vice President — Finance and Chief Financial Officer (Principal Financial and Accounting Officer) | February 20, 201516, 2017 |
Michael W. MaloneT. Speetzen | |
| | | |
* | Director | February 20, 201516, 2017 |
| Annette K. Clayton | | |
| | | |
* | Director | February 20, 201516, 2017 |
Brian C. CornellKevin M. Farr | | |
| | | |
* | Director | February 20, 2015 |
Kevin M. Farr | | |
| | |
* | Director | February 20, 201516, 2017 |
| Gary E. Hendrickson | | |
| | | |
* | Director | February 16, 2017 |
| Gwenne A. Henricks | | |
| | |
| * | Director | February 20, 201516, 2017 |
| Bernd F. Kessler | | |
| | | |
* | Director | February 20, 201516, 2017 |
R. M. SchreckLawrence D. Kingsley | | |
| | | |
| * | Lead Director | February 20, 201516, 2017 |
| John P. Wiehoff | | |
| | | |
| *By: | /s/ SCOTT W. WINE | | February 20, 201516, 2017 |
| | (Scott W. Wine Attorney-in-Fact) | | |
| |
| * | Scott W. Wine, pursuant to Powers of Attorney executed by each of the officers and directors listed above whose name is marked by an “*” and filed as an exhibit hereto, by signing his name hereto does hereby sign and execute this report of Polaris Industries Inc. on behalf of each of such officers and directors in the capacities in which the names of each appear above. |
POLARIS INDUSTRIES INC.
SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS
| | | Allowance for Doubtful Accounts | Balance at
Beginning of
Period | | Additions
Charged to
Costs and
Expenses | | Additions
Through
Acquisition | | Other Changes
Add (Deduct)(1) | | Balance at
End of Period | Balance at
Beginning of
Period | | Additions
Charged to
Costs and
Expenses | | Additions
Through
Acquisition | | Other Changes
Add (Deduct)(1) | | Balance at
End of Period |
| (In thousands) | | | | | | |
| 2012: Deducted from asset accounts—Allowance for doubtful accounts receivable | $ | 4,473 |
| | $ | 375 |
| | 365 |
| | $ | (945 | ) | | $ | 4,268 |
| |
| 2013: Deducted from asset accounts—Allowance for doubtful accounts receivable | $ | 4,268 |
| | $ | 75 |
| | $ | 2,192 |
| | $ | (640 | ) | | $ | 5,895 |
| |
| 2014: Deducted from asset accounts—Allowance for doubtful accounts receivable | $ | 5,895 |
| | $ | 2,347 |
| | $ | 265 |
| | $ | (1,083 | ) | | $ | 7,424 |
| $ | 5,895 |
| | $ | 2,347 |
| | $ | 265 |
| | $ | (1,083 | ) | | $ | 7,424 |
|
| 2015: Deducted from asset accounts—Allowance for doubtful accounts receivable | | $ | 7,424 |
| | $ | 2,169 |
| | $ | 59 |
| | $ | (1,008 | ) | | $ | 8,644 |
|
| 2016: Deducted from asset accounts—Allowance for doubtful accounts receivable | | $ | 8,644 |
| | $ | 7,085 |
| | $ | 4,644 |
| | $ | (934 | ) | | $ | 19,439 |
|
| |
| (1) | Uncollectible accounts receivable written off, net of recoveries. |
| | Inventory Reserve | Balance at
Beginning of
Period | | Additions
Charged to
Costs and
Expenses | | Additions
Through
Acquisition | | Other Changes
Add (Deduct)(2) | | Balance at
End of Period | Balance at
Beginning of
Period | | Additions
Charged to
Costs and
Expenses | | Additions
Through
Acquisition | | Other Changes
Add (Deduct)(2) | | Balance at
End of Period |
| (In thousands) | | | �� | | | |
| 2012: Deducted from asset accounts—Allowance for obsolete inventory | $ | 15,943 |
| | $ | 6,258 |
| | $ | 15 |
| | $ | (4,859 | ) | | $ | 17,357 |
| |
| 2013: Deducted from asset accounts—Allowance for obsolete inventory | $ | 17,357 |
| | $ | 9,966 |
| | $ | 2,423 |
| | $ | (8,143 | ) | | $ | 21,603 |
| |
| 2014: Deducted from asset accounts—Allowance for obsolete inventory | $ | 21,603 |
| | $ | 12,868 |
| | $ | 600 |
| | $ | (8,900 | ) | | $ | 26,171 |
| $ | 21,603 |
| | $ | 12,868 |
| | $ | 600 |
| | $ | (8,900 | ) | | $ | 26,171 |
|
| 2015: Deducted from asset accounts—Allowance for obsolete inventory | | $ | 26,171 |
| | $ | 21,648 |
| | $ | 1,942 |
| | $ | (13,492 | ) | | $ | 36,269 |
|
| 2016: Deducted from asset accounts—Allowance for obsolete inventory | | $ | 36,269 |
| | $ | 19,770 |
| | $ | 5,165 |
| | $ | (16,029 | ) | | $ | 45,175 |
|
| |
| (2) | Inventory disposals, net of recoveries. |
POLARIS INDUSTRIES INC. EXHIBIT INDEX TO ANNUAL REPORT ON FORM 10-K For Fiscal Year Ended December 31, 20142016 |
| |
| Exhibit Number | Description |
| 2.a | Purchase Agreement, dated as of October 11, 2016, by and among TAP Automotive Holdings, LLC, the members of TAP Automotive Holdings, LLC set forth in an annex to the Purchase Agreement, Polaris Industries Inc., a Delaware corporation, and ORIX Funds Corp., solely in its capacity as the seller’s representative (excluding schedules and exhibits, which the Company agrees to furnish supplementally to the Securities and Exchange Commission upon request), incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed October 12, 2016. |
| |
| 3.a | Restated Articles of Incorporation of Polaris Industries Inc. (the “Company”), effective October 24, 2011, incorporated by reference to Exhibit 3.a to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2011. |
| | |
| .b | Bylaws of the Company, as amended and restated on April 29, 2010, incorporated by reference to Exhibit 3 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2010. |
| | |
| 4.a | Specimen Stock Certificate of the Company, incorporated by reference to Exhibit 4 to the Company’s Registration Statement on Form S-4/A, filed November 21, 1994 (No. 033-55769). |
| | |
| .b | Amended and Restated Rights Agreement, dated as of April 29, 2010 by and between the Company and Wells Fargo Bank Minnesota, N.A., as Rights Agent, incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed April 30, 2010. |
| | |
| .c | Master Note Purchase Agreement by and among Polaris Industries Inc. and the purchasers party thereto, dated December 13, 2010, incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed December 15, 2010. |
| | |
| .d | First Amendment to Master Note Purchase Agreement effective as of August 18, 2011, incorporated by reference to Exhibit 4.c to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2011. |
| | |
| .e | First Supplement to Master Note Purchase Agreement effective as of December 19, 2013, incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K, filed December 20, 2013. |
| | |
10.a.f | AmendmentsSecond Amendment to Master Note Purchase Agreement, as Supplemented by the First Supplement to the Master Note Amendment effective as of December 28, 2016. |
| |
| 10.a | Polaris Industries Inc. Supplemental Retirement/Savings Plan, as amended and restated effective July 23, 2014, incorporated by reference to Exhibit 10.a to the Company’s Quarterly Report on Form 10-Q filed October 29, 2014.* |
| | |
| .b | Polaris Industries Inc. 1995 Stock Option Plan, as amended and restated, incorporated by reference to Exhibit 99.1 to the Company’s Registration Statement on Form S-8, filed October 31, 2005 (No. 333-129335).* |
| |
.c | Form of Nonqualified Stock Option Agreement and Notice of Exercise Form for options granted under the Polaris Industries Inc. 1995 Stock Option Plan, as amended and restated, incorporated by reference to Exhibit 99.2 to the Company’s Registration Statement on Form S-8, filed October 31, 2005 (No. 333-129335).* |
| |
.d | Amendment to the Polaris Industries Inc. Deferred Compensation Plan for Directors, as amended and restated, incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on May 12, 2009, subsequently amended on July 25, 2012, incorporated by reference to Exhibit 10.a to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2012.* |
| | |
.e | Form of Change of Control Agreement entered into with executive officers of Company, incorporated by reference to Exhibit 10(q) to the Company’s Annual Report on Form 10-K for the year ended December 31, 1996.* |
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.f | Form of Amendment to the Form of Change in Control Agreement entered into with executive officers of Company, incorporated by reference to Exhibit 10.f to the Company’s Current Report on Form 8-K filed October 31, 2007.* |
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.g.c | Polaris Industries Inc. Senior Executive Annual Incentive Compensation Plan, as amended and restated effective April 24, 2014, incorporated by reference to Annex A to the Company’s Proxy Statement for the 2014 Annual Meeting of Shareholders filed on March 7, 2014.* |
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.h | Polaris Industries Inc. Long Term Incentive Plan, as amended and restated effective January 22, 2009 and as further amended effective January 20, 2011, incorporated by reference to Annex B to the Company’s Proxy Statement for the 2011 Annual Meeting of Shareholders filed March 10, 2011.* |
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POLARIS INDUSTRIES INC.
EXHIBIT INDEX TO ANNUAL REPORT ON
FORM 10-K
For Fiscal Year Ended December 31, 2014 (cont.)
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.i.d | Polaris Industries Inc. 2007 Omnibus Incentive Plan (As Amended and Restated April 28, 2011)30, 2015), incorporated by reference to Annex A to the Company’s Proxy Statement for the 20112015 Annual Meeting of Shareholders filed March 10, 2011.13, 2015.* |
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.j.e | Form of Performance Based Restricted Share Award Agreement for performance based restricted shares awarded to named executive officers in 2008(Single Trigger) made under the Polaris Industries Inc. 2007 Omnibus Incentive Plan, as amended and restated, incorporated by reference to Exhibit 10.a to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2009.* |
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.k | Polaris Industries Inc. 2007 Omnibus Incentive Plan (As Amended and Restated April 28, 2011) Performance Based Restricted Share Award Agreement form (Single Trigger), incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed on May 3, 2011.* |
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.l.f | Form of Performance Based Restricted Share Award Agreement (Double Trigger) made under the Polaris Industries Inc. 2007 Omnibus Incentive Plan (As Amended and Restated April 28, 2011) Performance Based Restricted Share Award Agreement form (Double Trigger), incorporated by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K filed on May 3, 2011.* |
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POLARIS INDUSTRIES INC. EXHIBIT INDEX TO ANNUAL REPORT ON FORM 10-K For Fiscal Year Ended December 31, 2016 (cont.) |
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.m.g | Form of Stock Option Agreement and Notice of Exercise Form for options (cliff vesting) granted to executive officers under the Polaris Industries Inc. 2007 Omnibus Incentive Plan, incorporated by reference to Exhibit 10.ff to the Company’s Current Report on Form 8-K filed February 4, 2008.* |
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.n.h | Form of Stock Option Agreement and Notice of Exercise Form for options (installment vesting) granted to executive officers under the Polaris Industries Inc. 2007 Omnibus Incentive Plan, incorporated by reference to Exhibit 10.t to the Company’s Annual Report on Form 10-K for the year ended December 31, 2008.* |
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.o.i | Form of Nonqualified Stock Option Agreement (Single Trigger) made under the Polaris Industries Inc. 2007 Omnibus Incentive Plan (As Amended and Restated April 28, 2011) Nonqualified Stock Option Agreement form (Single Trigger), incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on May 3, 2011.* |
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.p.j | Form of Nonqualified Stock Option Agreement (Double Trigger) made under the Polaris Industries Inc. 2007 Omnibus Incentive Plan (As Amended and Restated April 28, 2011) Nonqualified Stock Option Agreement form (Double Trigger), incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on May 3, 2011.* |
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.q.k | Form of Restricted Stock Award Agreement made under the Polaris Industries Inc. 2007 Omnibus Incentive Plan (As Amended and Restated April 28, 2011) Restricted Stock Award Agreement,, incorporated by reference to Exhibit 10.6 to the Company’s Current Report on Form 8-K filed on May 3, 2011.* |
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.r.l | Form of Deferred Stock Award Agreement for shares of deferred stock granted to non-employee directors in 2007 under the Polaris Industries Inc. 2007 Omnibus Incentive Plan, incorporated by reference to Exhibit 10.t to the Company’s Annual Report on Form 10-K for the year ended December 31, 2007.* |
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.s.m | Form of the Deferred Stock Unit Award Agreement for units of deferred stock granted to non-employee directors under the Company’s Amended and Restated 2007 Omnibus Incentive Plan, incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed May 3, 2016.* |
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| .n | Form of Performance Restricted Stock Unit Award Agreement under the Polaris Industries Inc. 2007 Omnibus Incentive Plan, incorporated by reference to Exhibit 10.y to the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.* |
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.t.o | Employment Offer Letter dated April 4, 2005 by and between the Company and BennettForm of Nonqualified Stock Option Agreement entered into with Kenneth J. Morgan,Pucel, incorporated by reference to Exhibit 10.y10.gg to the Company’s Annual Report on Form 10-K for the year ended December 31, 2014 .* |
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| .p | Form of Performance Restricted Stock Unit Award Agreement entered into with Kenneth J. Pucel, incorporated by reference to Exhibit 10.hh to the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.* |
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| .q | Form of Restricted Stock Unit Award Agreement made under the Polaris Industries Inc. 2007 Omnibus Incentive Plan (As Amended and Restated April 30, 2015), incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K as filed April 18, 2005.July 13, 2015.* |
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.u.r | Form of Performance Restricted Stock Unit Award Agreement made under the Polaris Industries Inc. 2007 Omnibus Incentive Plan (As Amended and Restated April 30, 2015) , incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K as filed July 13, 2015.* |
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| .s | Form of Nonqualified Stock Option Award Agreement made under the Polaris Industries Inc. 2007 Omnibus Incentive Plan (As Amended and Restated April 30, 2015) , incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K as filed July 13, 2015.* |
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| .t | Employment Offer Letter dated July 28, 2008 by and between the Company and Scott W. Wine, incorporated by reference to Exhibit 10.a to the Company’s Current Report on Form 8-K filed August 4, 2008.* |
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.v.u | Employment Offer Letter dated January 12, 2011April 27, 2016 by and between the CompanySteve Eastman and James P. Williams,Polaris Industries Inc., incorporated by reference to Exhibit 10.cc10.b to the Company’s AnnualQuarterly Report on Form 10-K10-Q for the yearquarter ended December 31, 2011.June 30, 2016.* |
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.w.v | Employment Offer Letter dated September 15, 2014February 9, 2016 by and between the Company and Kenneth J. Pucel.* |
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.x | Form of Severance Agreement entered into with executive officers of the Company, incorporated by reference to Exhibit 10.dd to the Company’s Current Report on Form 8-K filed January 17, 2008.Robert Mack.* |
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POLARIS INDUSTRIES INC. EXHIBIT INDEX TO ANNUAL REPORT ON FORM 10-K For Fiscal Year Ended December 31, 20142016 (cont.) |
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| .w | Employment Offer Letter dated September 15, 2014 by and between the Company and Kenneth J. Pucel, incorporated by reference to Exhibit 10.w to the Company’s Annual Report on Form 10-K for the year ended December 31, 2014..* |
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| .x | Employment Offer Letter dated July 10, 2015 by and between the Company and Michael T. Speetzen, incorporated by reference to Exhibit 10.d to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2015.* |
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| .y | Severance, Proprietary Information and Noncompetition Agreement entered into with Scott W. Wine, incorporated by reference to Exhibit 10.b to the Company’s Current Report on Form 8-K filed August 4, 2008.* |
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| .z | Form of Severance Agreement dated February 6, 2012 entered into with Bennett J. Morgan,Stephen L. Eastman incorporated by reference to Exhibit 10.ee10.dd to the Company’s CurrentAnnual Report on Form 8-K filed January 17, 2008.10-K for the year ended December 31, 2015.* |
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| .aa | Severance Agreement entered into with Robert Mack.* |
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| .bb | Severance Agreement entered into with Kenneth J. Pucel, incorporated by reference to Exhibit 10.ii to the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.* |
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| .cc | Severance Agreement dated July 31, 2015 entered into with Michael T. Speetzen, incorporated by reference to Exhibit 10.ff to the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.* |
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| .dd | Amended and Restated Joint Venture Agreement dated as of February 28, 2011, by and between the Company and GE Commercial Distribution Finance Corporation, incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed March 1, 2011. |
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.bb | Credit Agreement, dated as of August 18, 2011, by and among the Company, one or more of its foreign subsidiaries designated thereafter as foreign borrowers, the lenders identified therein, U.S. Bank National Association, as Administrative Agent, Lead Arranger and Lead Book Runner, RBC Capital Markets and Wells Fargo Securities, LLC, as Joint Lead Arrangers and Joint Book Runners, RBC Capital Markets and Wells Fargo Bank National Association, as Syndication Agents, and The Bank of Tokyo-Mitsubishi UFJ, Ltd., as Documentation Agent, incorporated by reference to Exhibit 10.1 to the Company’s Report on Form 8-K filed on August 22, 2011. |
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.cc | First Amendment to the Credit Agreement, dated December 20, 2011, by and among the Company, and any designated Foreign Borrower, the lenders from time to time party to the Credit Agreement, and U.S. Bank National Association, as one of the lenders, lead arranger, lead book runner, and administrative agent for the lenders, incorporated by reference to Exhibit 10.nn to the Company’s Annual Report on Form 10-K for the year ended December 31, 2011. |
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.dd | Second Amendment to the Credit Agreement, dated January 31, 2013, by and among the Company, and any designated Foreign Borrower, the lenders from time to time party to the Credit Agreement, and U.S. Bank National Association, as one of the lenders, lead arranger, lead book runner, and administrative agent for the lenders, incorporated by reference to Exhibit 10.nn to the Company’s Annual Report on Form 10-K for the year ended December 31, 2012. |
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| .ee | Amended and Restated Manufacturer’s Repurchase Agreement dated as of February 28, 2011, by and among the Company, Polaris Industries Inc., a Delaware Corporation, Polaris Sales Inc., and Polaris Acceptance, incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed March 1, 2011. |
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| .ff | Share RepurchaseThird Amended and Restated Credit Agreement dated November 12, 2013,9, 2016 by and among Polaris Industries Inc., Polaris Sales Inc., any other Domestic Borrower (as defined therein) that thereafter becomes a party thereto, Polaris Sales Europe Sárl, any other Foreign Borrower (as defined therein) that hereafter becomes a party thereto, the CompanyLenders named therein, U.S. Bank National Association, as Administrative Agent, Left Lead Arranger and Fuji Heavy IndustriesLead Book Runner, Merrill Lynch, Pierce, Fenner & Smith Incorporated, Wells Fargo Securities, LLC, and The Bank of Tokyo-Mitsubishi UFJ, Ltd., as Joint Lead Arrangers, Joint Book Runners and Syndication Agents, and Bank of the West, Fifth Third Bank, JP Morgan Chase Bank, N.A., PNC Bank, National Association and BMO Harris Bank N.A., as Documentation Agents, incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed November 12, 2013.10, 2016. |
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| .gg | First Amendment dated December 7, 2015 to the Amended and Restated Joint Venture Agreement dated as of February 28, 2011, by and between the Company and GE Commercial Distribution Finance LLC f/k/a GE Commercial Distribution Corporation, incorporated by reference to Exhibit 10.nn to the Company’s Annual Report on Form of Nonqualified Stock Option Agreement entered into with Kenneth J. Pucel.*10-K for the year ended December 31, 2015. |
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| .hh | Second Amendment dated December 7, 2015 to the Second Amended and Restated Partnership Agreement, by and between Polaris Acceptance Inc. and CDF Joint Ventures, Inc. dated as of June 1, 2014, incorporated by reference to Exhibit 10.oo to the Company’s Annual Report on Form of Performance Restricted Stock Unit Award Agreement entered into with Kenneth J. Pucel.* |
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.ii | Form of Severance Agreement entered into with Kenneth J. Pucel.* |
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.jj | Form of Incentive Plan Acknowledgement10-K for David C. Longren.*the year ended December 31, 2015. |
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| 13 | Portions of the Annual Report to Security Holders for the Year Ended December 31, 20142016 included pursuant to Note 2 to General Instruction G. |
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| 21 | Subsidiaries of Registrant. |
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| 23 | Consent of Ernst & Young LLP. |
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| 24 | Power of Attorney. |
POLARIS INDUSTRIES INC. EXHIBIT INDEX TO ANNUAL REPORT ON FORM 10-K For Fiscal Year Ended December 31, 2016 (cont.) |
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| 31.a | Certification of Chief Executive Officer required by Exchange Act Rule 13a-14(a). |
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| 31.b | Certification of Chief Financial Officer required by Exchange Act Rule 13a-14(a). |
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| 32.a | Certification furnished pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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POLARIS INDUSTRIES INC.
EXHIBIT INDEX TO ANNUAL REPORT ON
FORM 10-K
For Fiscal Year Ended December 31, 2014 (cont.)
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| 32.b | Certification furnished pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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| 101 | The following financial information from Polaris Industries Inc.’s Annual Report on Form 10-K for the year ended December 31, 2014,2016, filed with the SEC on February 20, 2015,17, 2016, formatted in Extensible Business Reporting Language (XBRL): (i) the Consolidated Balance Sheets as of December 31, 20142016 and 2013,2015, (ii) the Consolidated Statements of Income for the years ended December 31, 2014, 20132016, 2015 and 20122014 (iii) the Consolidated Statements of Comprehensive Income for the years ended December 31, 2014, 20132016, 2015 and 2012,2014, (iv) the Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2014, 20132016, 2015 and 2012,2014, (v) the Consolidated Statements of Cash Flows for the years ended December 31, 20142016 and 2013,2015, and (vi) Notes to Consolidated Financial Statements |
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* Management contract or compensatory plan.