Market Overview

Polaris Reports 2018 Second Quarter Results

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Q2 2018 Highlights

Reported sales for
the second quarter of 2018 increased 10% to $1,503 million; adjusted
sales increased 11% to 1,505 million

Reported net income was
$1.43 per diluted share, up 47% over the prior year; adjusted net income
for the same period was $1.77 per diluted share, up 45% over the prior
year

North American retail sales
increased 6% for the quarter; ORV N.A. retail sales were up
mid-single digits % with both side-by-side and ATV vehicles up
mid-single digits percent.
Gained market share in side-by-side's
and ATVs during the quarter along with ongoing market share gains in
Indian motorcycles

Dealer inventory was
up 6% year-over-year, excluding Snowmobiles, for the second quarter
2018; ORV dealer inventory was up high single digits % due to new
product shipments; motorcycle dealer inventory was down low single
digits %

Increased full year 2018 sales guidance
to up 11% to 12% taking into account improved volume expectations and
the acquisition of Boat Holdings, LLC (Boat Holdings).

Adjusting full year earnings per share expectations

by raising the lower end of the Company's earnings per share range and
now expect adjusted net income to be in the range of $6.48 to $6.58 per
diluted share which includes the absorption of an estimated additional
$40 million of tariff and related commodity cost increases anticipated
in 2018 and the adjustment to exclude intangible amortization for all
prior acquisitions.

Polaris Industries Inc. (NYSE:PII):

This press release features multimedia. View the full release here:
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Key Financial Data
(in thousands, except per share data)              
INCOME STATEMENT - Q2 June 30, 2018 Reported YOY % Chg. Adjusted* YOY % Chg.
Sales $ 1,502,532 10 % $ 1,504,989 11 %
Net income $ 92,540 49 % $ 114,614 47 %
Diluted EPS $ 1.43 47 % $ 1.77 45 %
 
BALANCE SHEET - Q2 June 30, 2018 Reported YOY % Chg.
Cash and cash equivalents $ 181,753 43 %
Inventories, net $ 925,243 13 %
Total debt, capital lease obligations and notes payable $ 1,112,622 4 %
Shareholders' equity $ 877,510 3 %
 
CASH FLOW - YTD June 30, 2018 Reported YOY % Chg.
Cash flow from operations $ 165,149 (37 %)
Purchase of property & equipment $ 104,569 28 %
Repurchase and retirement of common shares $ 192,367 193 %
Cash dividends to shareholders $ 75,694 4 %
 
Note: the results and guidance in this release, including the
highlights above, include references to non-GAAP operating measures,
which are identified by the word "adjusted" preceding the measure.
*A reconciliation of GAAP / non-GAAP measures can be found at the
end of this release.

CEO Commentary

"I am very pleased with the Polaris team and the strong execution they
delivered across the business during the 2nd Quarter. With
solid retail growth and market share gains in both our Off-Road Vehicle
business and Indian Motorcycles, we are clearly reaping the benefits of
our safety and quality investments, new product innovations and improved
delivery performance. Consumer sentiment and dealer traffic improved
throughout the Quarter, building momentum which will help offset the
rising risk of tariffs in the 2nd half. During the Quarter we
were excited to announce another expansion of the Polaris powersports
portfolio with the acquisition of Boat Holdings, the largest
manufacturer of pontoon boats in the U.S. Between organic growth and
considered acquisitions, Polaris' underlying performance has
significantly improved, but much of our success is being masked by
substantial cost escalation driven by tariffs and commodities. As we
navigate through increasingly dynamic markets, our efforts to enhance
product quality and innovation, boost productivity and become a more
customer centric Company are paying off, and Polaris is well-positioned
for further success."

-- Scott Wine, Chairman and Chief Executive Officer of Polaris
Industries Inc.

 

Second Quarter Performance Summary (Reported)

   
(in thousands, except per share data) Three months ended June 30,
2018     2017     Change
Sales $ 1,502,532   $ 1,364,920   10 %
Gross profit   385,176     350,386   10 %
% of Sales 25.6 % 25.7 % -4 bpts
Total operating expenses   284,063     270,347   5 %
% of Sales 18.9 % 19.8 % -90 bpts
Income from financial services   21,344     19,143   11 %
% of Sales 1.4 % 1.4 % +2 bpts
Operating income   122,457     99,182   23 %
% of Sales 8.2 % 7.3 % +88 bpts
Net income   92,540     62,041   49 %
% of Sales 6.2 % 4.5 % +161 bpts
Diluted net income per share $ 1.43   $ 0.97   47 %
 

Polaris Industries Inc. (NYSE:PII) today reported second quarter 2018
sales of $1,503 million, up 10 percent from $1,365 million for the
second quarter of 2017. Adjusted sales for the second quarter of 2018
were $1,505 million, up 11 percent from the prior year period. The
Company reported second quarter 2018 net income of $93 million, or $1.43
per diluted share, compared with net income of $62 million, or $0.97 per
diluted share, for the 2017 second quarter. Adjusted net income for the
quarter ended June 30, 2018 was $115 million, or $1.77 per diluted
share, up 45 percent compared to $78 million, or $1.22 per diluted share
in the 2017 second quarter.

Gross profit increased 10 percent to $385 million for the second
quarter of 2018 from $350 million in the second quarter of 2017.
Reported gross profit margin was 26 percent of sales for the second
quarter of 2018 compared to 26 percent of sales for the second quarter
of 2017. Gross profit for the second quarter of 2018 includes the
negative impact of $5 million of Victory Motorcycles wind-down costs and
realignment and restructuring costs. Excluding these items, second
quarter 2018 adjusted gross profit was $390 million, or 26 percent of
adjusted sales. For the second quarter of 2017 adjusted gross profit of
$364 million, or 27 percent of adjusted sales, excludes the negative
impact of $13 million in Victory Motorcycles® wind down costs
and restructuring and realignment costs. Gross profit margins on an
adjusted basis were down slightly due to unfavorable product mix, the
impact of tariff, commodity and freight cost pressure during the
quarter, offset by improvements in warranty expense, VIP savings and
favorable exchange rates.

Operating expenses increased five percent for the second quarter
of 2018 to $284 million, or 19 percent of sales, from $270 million, or
20 percent of sales, in the same period in 2017. Operating expenses as a
percentage of sales, improved as the Company realized efficiencies
through its selling, marketing and general and administrative spend.

Income from financial services was $21 million for the second
quarter of 2018, up 11 percent compared with $19 million for the second
quarter of 2017. The increase is attributable to improved retail
penetration and higher income from Polaris Acceptance due to higher
dealer inventory levels.

 

Non-Operating Expenses (Reported)

   
(in thousands) Three months ended June 30,
2018     2017     Change
Interest expense $ 9,216 $ 8,032 15 %
Equity in loss of other affiliates $ 3,954 $ 1,336 196 %
Other expense (income), net $ (3,561 ) $ (2,152 ) 65 %
Provision for income taxes $ 20,308 $ 29,925
 

Equity in loss of other affiliates was $4 million for the second
quarter of 2018 compared to $1 million last year's second quarter
resulting from losses associated with the wind-down of the
Eicher-Polaris joint venture in India.

Other expense (income), net, was $4 million of income for the
second quarter of 2018, versus $2 million of income in the second
quarter of 2017 resulting from foreign currency exchange rate movements
and the corresponding effects on foreign currency transactions related
to the Company's foreign subsidiaries.

The provision for income taxes for the second quarter of 2018 was
$20 million, or 18.0 percent, of pretax income compared with $30
million, or 32.5 percent of pretax income for the second quarter of
2017. The decrease in the effective income tax rates is primarily due to
the reduction in the federal statutory tax rate to 21 percent as a
result of U.S. Tax Reform and an increase in excess tax benefits related
to stock based compensation.

 

Product Segment Highlights (Reported)

       
(in thousands) Sales Gross Profit
Q2 2018     Q2 2017     Change Q2 2018     Q2 2017     Change
Off-Road Vehicles / Snowmobiles $ 990,841 $ 845,508 17 % $ 297,221 $ 266,150 12 %
Motorcycles $ 171,412 $ 197,997 (13 )% $ 24,672 $ 21,116 17 %
Global Adjacent Markets $ 113,418 $ 97,022 17 % $ 28,107 $ 21,216 32 %
Aftermarket $ 226,861 $ 224,393 1 % $ 57,747 $ 59,918 (4 )%
 

Off-Road Vehicle ("ORV") and Snowmobile
segment sales, including PG&A, totaled $991 million for the second
quarter of 2018, up 17 percent over $846 million for the second quarter
of 2017 driven by growth across most categories. PG&A sales for ORV and
Snowmobiles combined, increased 13 percent in the 2018 second quarter
compared to the second quarter last year. Gross profit increased 12
percent to $297 million, in the second quarter of 2018, compared to $266
million in the second quarter of 2017.

ORV wholegood sales for the second quarter of 2018
increased 18 percent primarily driven by strong RANGER, RZR, and
ATV shipments. Polaris North American ORV retail sales increased in the
mid-single digits percent range with side-by-side and ATV vehicles
growing retail sales in the mid-single digit percent range.
Side-by-Sides and ATVs again gained market share during the quarter in
their respective categories. The North American ORV industry was flat
compared to the second quarter last year. ORV dealer inventory was up
high-single digits in the 2018 second quarter compared to the same
period last year due to increased shipments of newly introduced products.

Snowmobile wholegood sales in the second quarter of 2018 was $4
million compared to $7 million in the second quarter last year.
Snowmobile sales in the Company's second quarter are routinely low as it
is the off-season for snowmobile retail sales and shipments.

Motorcycle segment sales,
including PG&A, totaled $171 million, a decrease of 13 percent compared
to $198 million reported in the second quarter of 2017 due to a weak
motorcycle industry and timing of shipments for Indian motorcycles
year-over-year. Slingshot sales were also down due to the weak
motorcycle industry. Gross profit for the second quarter of 2018 was $25
million compared to $21 million in the second quarter of 2017. Adjusted
for the Victory wind down costs recorded in both the 2018 and 2017
second quarters, and restructuring and realignment costs, motorcycle
gross profit was $25 million in the 2018 second quarter compared to $30
million for the 2017 second quarter.

North American consumer retail demand for the Polaris motorcycle
segment, including Indian Motorcycle and Slingshot, increased low-single
digit percent during the 2018 second quarter. Indian Motorcycle retail
sales increased mid-single digits percent. Slingshot's retail sales were
down mid-single digits percent during the quarter. Motorcycle industry
retail sales, 900cc and above, were down mid-single digit percent in the
2018 second quarter. Indian Motorcycle gained market share for the 2018
second quarter on a year-over-year basis, in spite of an overall weak
N.A. industry motorcycle market in the second quarter. Motorcycle dealer
inventory was down low-single digits percent in the 2018 second quarter
compared to the same period last year due to moderated shipments in an
overall weak motorcycle market.

Global Adjacent Markets segment
sales, including PG&A, increased 17 percent to $113 million in the 2018
second quarter compared to $97 million in the 2017 second quarter. Sales
of Goupil and the Commercial, Government, Defense businesses drove most
of the increase. Reported gross profit increased 32 percent to $28
million in the second quarter of 2018, compared to $21 million in the
second quarter of 2017.

Aftermarket segment sales
increased one percent to $227 million in the 2018 second quarter
compared to $224 million in the 2017 second quarter. TAP sales in the
second quarter of 2018 were $210 million, which was up slightly compared
to the second quarter of 2017. Growth at TAP's retail stores and online
platforms were largely offset by lower accessory sales for the new Jeep
Wrangler which was available for sale later than anticipated. Gross
profit decreased to $58 million in the second quarter of 2018, compared
to $60 million in the second quarter of 2017.

Supplemental Data:

Parts, Garments, and Accessories ("PG&A") sales,
excluding Aftermarket segment sales, increased eleven percent for
the 2018 second quarter driven by growth across all segments, regions
and product lines during the quarter.

International sales to customers outside of North America,
including PG&A, totaled $204 million for the second quarter of 2018, up
7 percent, from the same period in 2017. Foreign exchange movements
represented four percent of the sales increase for the quarter. The
remaining increase was driven by strong sales in the Company's EMEA
business for ORV and motorcycles.

 

Financial Position and Cash Flow

   
(in thousands) Six Months ended June 30,
2018     2017     Change
Cash and cash equivalents $ 181,753 $ 127,378 43 %
Net cash provided by operating activities $ 165,149 $ 263,043 (37 )%
Repurchase and retirement of common shares $ 192,367 $ 65,662 193 %
Cash dividends to shareholders $ 75,694 $ 72,612 4 %
Total debt, capital lease obligations and notes payable $ 1,112,622 $ 1,067,797 4 %
Debt to Total Capital Ratio 56 % 56 %
 

Net cash provided by operating activities was $165 million for
the six months ended June 30, 2018, compared to $263 million for the
same period in 2017. The decrease in net cash provided by operating
activities for the 2018 period was due to higher factory inventory
related to the higher sales and the model year changeover. Total debt at
June 30, 2018, including capital lease obligations and notes payable,
was $1,113 million. The Company's debt-to-total capital ratio was 56
percent at June 30, 2018 and 2017. Cash and cash equivalents were $182
million at June 30, 2018, up from $127 million for the same period in
2017.

Share Buyback Activity: During the second quarter of 2018, the
Company repurchased and retired 1,429,000 shares of its common stock for
$177 million. Year-to-date through June 30, 2018, the Company has
repurchased and retired 1,562,000 shares of its common stock for $192
million. As of June 30, 2018, the Company has authorization from its
Board of Directors to repurchase up to an additional 4.9 million shares
of Polaris common stock.

2018 Business Outlook

The Company is raising its full year sales guidance and now expects
sales to be in the range of 11 percent to 12 percent over 2017 adjusted
sales of $5,428 million and narrowing and adjusting its earnings
guidance range for the full year 2018 to account for Boat Holdings
income and elimination of intangible amortization of previously acquired
companies to better reflect the true underlying performance of Polaris'
core businesses. Adjusted net income is now expected to be in the range
of $6.48 to $6.58 per diluted share, compared with adjusted net income
of $5.10 per diluted share for 2017. The revised guidance takes into
account approximately $40 million of escalating tariff and related
commodity cost increases as the Company understands them today.

Non-GAAP Financial Measures

This press release and our related earnings call contain certain
non-GAAP financial measures, consisting of "adjusted" sales, gross
profit, income before taxes, net income and net income per diluted share
as measures of our operating performance. Management believes these
measures may be useful in performing meaningful comparisons of past and
present operating results, to understand the performance of its ongoing
operations and how management views the business. Reconciliations of
adjusted non-GAAP measures to reported GAAP measures are included in the
financial schedules contained in this press release. These measures,
however, should not be construed as an alternative to any other measure
of performance determined in accordance with GAAP.

Investor Conference Call

Second Quarter 2018 Earnings Conference Call and Webcast Presentation
Today
at 8:00 AM (CDT) Polaris Industries Inc. will host a conference call and
webcast to discuss the 2018 second quarter results released this
morning. The call will be hosted by Scott Wine, Chairman and CEO; and
Mike Speetzen, Executive Vice President - Finance and CFO. A slide
presentation and link to the webcast will be posted on the Polaris
Investor Relations website at ir.polaris.com.
To listen to the conference call by phone, dial 1-877-883-0383 in the
U.S., or 1-412-902-6506 internationally. The Conference ID is 8402413. A
replay of the conference call will be available by accessing the same
link on our website.

About Polaris

Polaris Industries Inc. (NYSE:PII) is a global powersports leader that
has been fueling the passion of riders, workers and outdoor enthusiasts
for more than 60 years. With annual 2017 sales of $5.4 billion, Polaris'
innovative, high-quality product line-up includes the RANGER®,
RZR® and Polaris GENERAL™ side-by-side off-road
vehicles; the Sportsman® and Polaris ACE®
all-terrain off-road vehicles; Indian Motorcycle® mid-size
and heavyweight motorcycles; Slingshot® moto-roadsters;
snowmobiles; and pontoon, deck and cruiser boats. Polaris enhances the
riding experience with parts, garments and accessories, along with a
growing aftermarket portfolio, including Transamerican Auto Parts.
Polaris' presence in adjacent markets globally includes military and
commercial off-road vehicles, quadricycles, and electric vehicles.
Proudly headquartered in Minnesota, Polaris serves more than 100
countries across the globe. Visit www.polaris.com
for more information.

Forward-looking Statements

Except for historical information contained herein, the matters set
forth in this news release, including management's expectations
regarding 2018 future sales, shipments, net income, and net income per
share, operational initiatives and impact of tax reform, and tariffs and
commodity costs, are forward-looking statements that involve certain
risks and uncertainties that could cause actual results to differ
materially from those forward-looking statements.
Potential risks
and uncertainties include such factors as the Company's ability to
successfully implement its manufacturing operations expansion
initiatives, product offerings, promotional activities and pricing
strategies by competitors; economic conditions that impact consumer
spending; acquisition integration costs; product recalls, warranty
expenses; impact of changes in Polaris stock price on incentive
compensation plan costs; foreign currency exchange rate fluctuations;
environmental and product safety regulatory activity; effects of
weather; commodity costs; freight and tariff costs; changes to
international trade agreements; uninsured product liability claims;
uncertainty in the retail and wholesale credit markets; performance of
affiliate partners; changes in tax policy and overall economic
conditions, including inflation, consumer confidence and spending and
relationships with dealers and suppliers.
Investors are also
directed to consider other risks and uncertainties discussed in
documents filed by the Company with the Securities and Exchange
Commission.
The Company does not undertake any duty to any person
to provide updates to its forward-looking statements.

 
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except Per Share Data) (Unaudited)
       
Three months ended June 30, Six months ended June 30,
2018     2017 2018     2017
Sales $ 1,502,532 $ 1,364,920 $ 2,800,005 $ 2,518,702
Cost of sales   1,117,356     1,014,534     2,091,348     1,925,825
Gross profit 385,176 350,386 708,657 592,877
Operating expenses:
Selling and marketing 122,859 118,531 240,566 232,844
Research and development 68,330 60,753 133,560 112,758
General and administrative   92,874     91,063     171,567     166,577
Total operating expenses 284,063 270,347 545,693 512,179
Income from financial services   21,344     19,143     42,769     39,573
Operating income 122,457 99,182 205,733 120,271
Non-operating expense:
Interest expense 9,216 8,032 17,264 15,946
Equity in loss of other affiliates 3,954 1,336 25,465 3,236
Other expense (income), net   (3,561 )   (2,152 )   (23,536 )   9,456
Income before income taxes 112,848 91,966 186,540 91,633
Provision for income taxes   20,308     29,925     38,286     32,503
Net income $ 92,540   $ 62,041   $ 148,254   $ 59,130
 
Net income per share:
Basic $ 1.46   $ 0.99   $ 2.34   $ 0.94
Diluted $ 1.43   $ 0.97   $ 2.28   $ 0.92
Weighted average shares outstanding:
Basic 63,172 62,895 63,238 63,012
Diluted 64,886 63,807 65,052 63,970
 

 
CONSOLIDATED BALANCE SHEETS
(In Thousands), (Unaudited)
       
June 30, 2018 June 30, 2017
 
Assets
Current Assets:
Cash and cash equivalents $ 181,753 $ 127,378
Trade receivables, net 190,343 169,314
Inventories, net 925,243 815,990
Prepaid expenses and other 106,586 85,221
Income taxes receivable   10,269   18,976
Total current assets 1,414,194 1,216,879
Property and equipment, net 762,268 736,866
Investment in finance affiliate 92,954 86,552
Deferred tax assets 115,399 192,167
Goodwill and other intangible assets, net 765,050 786,935
Other long-term assets   89,613   95,573
Total assets $ 3,239,478 $ 3,114,972
Liabilities and Shareholders' Equity
Current Liabilities:
Current portion of debt, capital lease obligations and notes payable $ 40,120 $ 2,831
Accounts payable 361,717 352,538
Accrued expenses:
Compensation 129,719 116,341
Warranties 106,155 108,403
Sales promotions and incentives 184,811 176,978
Dealer holdback 125,016 116,804
Other 161,659 164,486
Income taxes payable   5,973   9,725
Total current liabilities 1,115,170 1,048,106
Long term income taxes payable 25,332 27,764
Capital lease obligations 17,135 18,245
Long-term debt 1,055,367 1,046,721
Deferred tax liabilities 8,667 9,009
Other long-term liabilities   127,529   100,625
Total liabilities $ 2,349,200 $ 2,250,470
Deferred compensation 12,768 10,725
Shareholders' equity:
Total shareholders' equity   877,510   853,777
Total liabilities and shareholders' equity $ 3,239,478 $ 3,114,972
 

 
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands), (Unaudited)
   
Six months ended June 30,
2018     2017
Operating Activities:
Net income $ 148,254 $ 59,130
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 98,584 91,124
Noncash compensation 33,001 31,416
Noncash income from financial services (14,626 ) (13,328 )
Deferred income taxes (1,704 ) (4,083 )
Impairment charges 20,249 18,760
Other, net (8,262 ) 3,236
Changes in operating assets and liabilities:
Trade receivables 5,326 12,370
Inventories (146,661 ) (59,421 )
Accounts payable 45,835 75,576
Accrued expenses (35,693 ) 6,406
Income taxes payable/receivable 19,828 40,727
Prepaid expenses and others, net   1,018     1,130  
Net cash provided by operating activities 165,149 263,043
 
Investing Activities:
Purchase of property and equipment (104,569 ) (81,803 )
Investment in finance affiliate, net 10,436 20,785
Investment in other affiliates, net 7,366 (1,814 )
Acquisition and disposal of businesses, net of cash acquired       1,645  
Net cash used for investing activities (86,767 ) (61,187 )
 
Financing Activities:
Borrowings under debt arrangements / capital lease obligations 1,511,810 932,317
Repayments under debt arrangements / capital lease obligations (1,310,863 ) (1,010,870 )
Repurchase and retirement of common shares (192,367 ) (65,622 )
Cash dividends to shareholders (75,694 ) (72,612 )
Proceeds from stock issuances under employee plans   43,448     7,027  
Net cash used for financing activities (23,666 ) (209,760 )
Impact of currency exchange rates on cash balances   (6,370 )   6,951  
 
Net increase (decrease) in cash, cash equivalents and restricted
cash
48,346 (953 )
Cash, cash equivalents and restricted cash at beginning of period   161,618     145,170  
Cash, cash equivalents and restricted cash at end of period $ 209,964   $ 144,217  
 
Cash, cash equivalents and restricted cash by category:
Cash and cash equivalents $ 181,753 $ 127,378
Other long-term assets   28,211     16,839  
Total $ 209,964   $ 144,217  
 

 
NON-GAAP RECONCILIATION OF RESULTS
(In Thousands, Except Per Share Data), (Unaudited)
       
Three months ended June 30, Six months ended June 30,
2018     2017 2018     2017
Sales $ 1,502,532 $ 1,364,920 $ 2,800,005 $ 2,518,702
Victory wind down (1) 798 (6,157 ) 249 (1,053 )
Restructuring & realignment (3)   1,659         2,129      
Adjusted sales 1,504,989 1,358,763 2,802,383 2,517,649
 
 
Gross profit 385,176 350,386 708,657 592,877
Victory wind down (1) (874 ) 8,852 (822 ) 47,415
Acquisition-related costs (2) 53 12,950
Restructuring & realignment (3)   6,045     4,303     11,837     4,303  
Adjusted gross profit 390,347 363,594 719,672 657,545
 
 
Income (loss) before taxes 112,848 91,966 186,540 91,633
Victory wind down (1) (426 ) 10,851 243 68,431
Acquisition-related costs (2) 5,729 3,767 7,809 19,967
Restructuring & realignment (3) 11,696 4,303 17,893 4,303
EPPL impairment (5) 3,817 23,447
Brammo (6) (13,478 )
Intangible Amortization (7) 6,058 6,238 12,188 12,449
Other expenses (4)   1,722         1,722      
Adjusted income before taxes 141,444 117,125 236,364 196,783
 
 
Net income 92,540 62,041 148,254 59,130
Victory wind down (1) (325 ) 6,820 185 47,841
Acquisition-related costs (2) 4,366 2,368 5,951 12,551
Restructuring & realignment (3) 8,912 2,705 13,633 2,705
EPPL impairment (5) 2,908 22,325
Brammo (6) (13,113 )
Intangible Amortization (7) 4,446 3,961 8,945 7,903
Other expenses (4)   1,767         2,037      
Adjusted net income (8) 114,614 77,895 188,217 130,130
 
 
Diluted EPS $ 1.43 $ 0.97 $ 2.28 $ 0.92
Victory wind down (1) (0.01 ) 0.11 0.75
Acquisition-related costs (2) 0.07 0.04 0.09 0.20
Restructuring & realignment (3) 0.14 0.04 0.21 0.04
EPPL impairment (5) 0.04 0.34
Brammo (6) (0.20 )
Intangible Amortization (7) 0.07 0.06 0.14 0.12
Other expenses (4)   0.03         0.03      
Adjusted EPS (8) $ 1.77   $ 1.22   $ 2.89   $ 2.03  
 
(1) Represents adjustments for the wind down of Victory
Motorcycles, including wholegoods, accessories and apparel
 
(2) Represents adjustments for integration and
acquisition-related expenses and purchase accounting adjustments
 
(3) Represents adjustments for corporate restructuring,
network realignment costs, and supply chain transformation
 
(4) Represents adjustments for the impacts of tax reform
and non-recurring litigation expenses
 
(5) Represents adjustments for the impairment of the
Company's equity investment in Eicher-Polaris Private Limited (EPPL)
 
(6) Represents a gain on the Company's investment in
Brammo, Inc.
 
(7) Represents amortization expense for
acquisition-related intangible assets
 
(8) The Company used its estimated statutory tax rate of
23.8% and 37.1% for the non-GAAP adjustments in 2018 and 2017,
respectively, except for the non-deductible items and the tax reform
related changes noted in Item 4
 

 
NON-GAAP RECONCILIATION OF SEGMENT RESULTS
(In Thousands), (Unaudited)
       
Three months ended June 30, Six months ended June 30,
2018     2017 2018     2017

SEGMENT SALES

ORV/Snow segment sales $ 990,841 $ 845,508 $ 1,823,405 $ 1,569,611
Restructuring & realignment (3)   1,659         2,129      
Adjusted ORV/Snow segment sales 992,500 845,508 1,825,534 1,569,611
 
Motorcycles segment sales 171,412 197,997 302,969 318,286
Victory wind down (1)   798     (6,157 )   249     (1,053 )
Adjusted Motorcycles segment sales 172,210 191,840 303,218 317,233
 
Global Adjacent Markets (GAM) segment sales 113,418 97,022 226,745 188,577
No adjustment                
Adjusted GAM segment sales 113,418 97,022 226,745 188,577
 
Aftermarket segment sales 226,861 224,393 446,886 442,228
No adjustment                
Adjusted Aftermarket sales 226,861 224,393 446,886 442,228
 
Total sales 1,502,532 1,364,920 2,800,005 2,518,702
Total adjustments   2,457     (6,157 )   2,378     (1,053 )
Adjusted total sales $ 1,504,989   $ 1,358,763   $ 2,802,383   $ 2,517,649  
 
 
Three months ended June 30, Six months ended June 30,
2018 2017 2018 2017

SEGMENT GROSS PROFIT

ORV/Snow segment gross profit $ 297,221 $ 266,150 $ 540,782 $ 479,109
Restructuring & realignment (3)   1,659         2,129      
Adjusted ORV/Snow segment gross profit 298,880 266,150 542,911 479,109
 
Motorcycles segment gross profit 24,672 21,116 41,240 1,235
Victory wind down (1) (874 ) 8,852 (822 ) 47,415
Restructuring & realignment (3)   1,185         1,185      
Adjusted Motorcycles segment gross profit 24,983 29,968 41,603 48,650
 
Global Adjacent Markets (GAM) segment gross profit 28,107 21,216 59,365 49,314
Restructuring & realignment (3)   (11 )   4,303     434     4,303  
Adjusted GAM segment gross profit 28,096 25,519 59,799 53,617
 
Aftermarket segment gross profit 57,747 59,918 116,199 101,482
Acquisition-related costs (2)       53         12,950  
Adjusted Aftermarket segment gross profit 57,747 59,971 116,199 114,432
 
Corporate segment gross profit (22,571 ) (18,014 ) (48,929 ) (38,263 )
Restructuring & realignment (3)   3,212         8,089      
Adjusted Corporate segment gross profit (19,359 ) (18,014 ) (40,840 ) (38,263 )
 
Total gross profit 385,176 350,386 708,657 592,877
Total adjustments   5,171     13,208     11,015     64,668  
Adjusted total gross profit $ 390,347   $ 363,594   $ 719,672   $ 657,545  
 
(1) Represents adjustments for the wind down of Victory
Motorcycles, including wholegoods, accessories and apparel
 
(2) Represents adjustments for integration expenses and
purchase accounting adjustments
 
(3) Represents adjustments for corporate restructuring,
network realignment costs, and supply chain transformation
 

NON-GAAP ADJUSTMENTS

2018 Second Quarter Results & Full Year Guidance

Wind Down of Victory Motorcycles
In 2017, Polaris announced
its intention to wind down its Victory Motorcycles operations. The
decision is expected to improve the long-term profitability of Polaris
and its global motorcycle business, while materially improving the
Company's competitive position in the industry. The Company will record
costs, anticipated to be in the range of $80 million to $85 million
through 2018, associated with supporting Victory dealers in selling
their remaining inventory, the disposal of factory inventory, tooling,
and other physical assets, and the cancellation of various supplier
arrangements. In 2017, the Company recorded pretax costs of $77 million.
In the first and second quarter of 2018 these costs were immaterial.
These costs are excluded from Polaris' 2018 sales and earnings guidance
on a non-GAAP basis.

Restructuring, Realignment and Supply Chain Transformation
Polaris
announced in 2017 that it was making changes to its network to
consolidate production and distribution of like products and better
leverage plant capacity and embarked on a multi-phase supply chain
transformation initiative to continue to leverage its supply chain as a
strategic asset. Year-to-date ending June 30, 2018, the Company has
recorded costs totaling $18 million related to the manufacturing and
distribution network realignment and the supply chain transformation
projects. In addition, the Company has recorded TAP and Boat Holdings
integration and acquisition related costs of $8 million for the
year-to-date period ending June 30, 2018. The costs for these projects
are excluded from Polaris' 2018 sales and earnings guidance on a
non-GAAP basis.

Eicher-Polaris Joint Venture Impairment in India
Regulatory
changes have negatively impacted the likelihood of success of the joint
venture, and as a result, in late-February 2018, the Board of Directors
of the joint venture approved the wind-down of the joint venture.
Year-to-date ended June 30, 2018, Polaris has recorded charges totaling
$23 million, including the impairment of the Company's equity investment
in the Eicher-Polaris joint venture in India and wind down costs.

Intangible amortization related to acquisitions
As a result
of the Boat Holdings acquisition, Polaris' amortization of intangible
assets is expected to increase by approximately $25 million to $30
million on an annual basis. Given the significant increase in non-cash
amortization associated with this acquisition along with intangible
amortization from prior acquisitions, the Company will be moving to an
adjusted net income metric, excluding intangible amortization from all
acquisitions including prior year acquisitions of approximately $24
million for full year 2018. The Company believes this treatment will
provide additional transparency into the true, ongoing earnings
performance of its business.

2018 Adjusted Guidance
2018 guidance excludes the pre-tax
effect of acquisition integration costs of approximately $25 million to
$30 million, supply chain transformation and network realignment costs
of approximately $20 million to $25 million and the remaining impacts
associated with the Victory wind down which is estimated to be
approximately $5 million. Additionally, 2018 guidance excludes the
pre-tax gain of $13 million related to the Company's investment in
Brammo and charges of $23 million, including the impairment of the
Company's equity investment in the Eicher-Polaris joint venture in India
and related wind down costs, recorded in the first half of 2018.
Additional costs associated with the wind down of the joint venture, if
any, are expected to be immaterial for the remainder of 2018. Intangible
amortization related to all acquisitions has also been excluded. 2018
adjusted sales guidance excludes any Victory wholegood, accessories and
apparel sales and corresponding promotional costs as the Company is in
the process of exiting the brand. The Company has not provided
reconciliations of guidance for adjusted diluted net income per share,
in reliance on the unreasonable efforts exception provided under Item
10(e)(1)(i)(B) of Regulation S-K. The Company is unable, without
unreasonable efforts, to forecast certain items required to develop
meaningful comparable GAAP financial measures. These items include costs
associated with the Victory wind down and acquisition integration costs
that are difficult to predict in advance in order to include in a GAAP
estimate.

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