Polaris Industries has reported second quarter 2017 sales of $1,364.9 million, up +21 percent, from $1,130.8 million for the second quarter of 2016.
Adjusted sales, which excludes the impact from Victory Motorcycles net sales for the second quarter of 2017, were $1,358.8 million compared to $1,130.8 million in the prior year period.
Motorcycle segment sales, including its PG&A related sales in the second quarter of 2017, was $198.0 million, a decrease of -13 percent compared to $228.4 million reported in the second quarter of 2016, which included $6.2 million of Victory motorcycle unit, accessory and apparel sales versus $54.0 million of Victory sales reported in the second quarter of 2016 - driven by new product introductions and increased awareness of the brand.
This increase was more than offset by significantly lower Slingshot sales. Motorcycle gross profit for the second quarter of 2017 was $21.1 million compared to $38.9 million in the second quarter of 2016. Adjusted for the Victory wind-down costs of $8.9 million, motorcycle gross profit was $30.0 million, down from the second quarter last year due primarily to lower Slingshot volume.
North American consumer retail demand for the Polaris motorcycle segment, including Indian Motorcycle and Slingshot, was down low-single digits percent during the 2017 second quarter, while the overall motorcycle industry retail sales, 900cc and above, was down mid-single digits percent in the 2017 second quarter. Indian Motorcycles’ retail sales increased +17 percent and continued to gain market share, driven by new model introductions and continued strong demand for the company's new, highly customizable, split-screen ‘Ride Command’ touchscreen infotainment system available on certain models.
Slingshot retail sales were down significantly, due in part to tough comparables versus the prior year period, driven by increased shipments in the second quarter of 2016 ahead of their production move from Iowa to Huntsville and the cadence of several limited edition models introduced in the second quarter last year.
“Performance improved in many parts of our business during the quarter, particularly within our international and PG&A businesses,” says Polaris CEO Scott Wine. “The powersports industry remained very competitive and headwinds persist, but we were encouraged by the return to growth in our Side-by-Side business and continued strength and aggressive share gains for Indian Motorcycles.
“In a weak motorcycle industry, Indian continues to demonstrate how a complementary combination of exciting new bikes, strong dealer execution and overall brand momentum can prevail. Dealer engagement is a corporate priority and from profitability to delivery and communications, the consistent progress we are making is augmenting our retail results. We still have a lot of work to do, but we are seeing results from the strong and sustainable improvements we are making to the fundamentals of our business, as we establish the foundation of a renewed growth platform.”
Off-Road Vehicle (“ORV”) and Snowmobile segment sales, including their respective PG&A related sales, were $845.5 million for the second quarter of 2017, compared with $799.3 million for the second quarter of the prior year, representing a six percent increase, year-over-year, driven primarily by improved ORV shipments of Side-by-Sides.
ORV unit sales for the second quarter of 2017 increased six percent as the company began shipping RZR vehicles at a more normalized rate. Polaris North American ORV unit retail sales for the second quarter of 2017 were down low-single digits percent from the 2016 second quarter, which included consumer purchases for Side-by-Side vehicles up low-single digits percent and ATV retail sales down high-single digits percent. The North American ORV industry was up mid-single digits percent compared to the second quarter last year. ORV dealer inventory was down six percent in the 2017 second quarter compared to the same period last year.
Snowmobile unit sales in the second quarter of 2017 decreased 22 percent to $6.7 million. Snowmobile sales in the company’s second quarter are routinely low as it is the off-season for snowmobile retail sales and shipments.
Wine continued: “I am proud of the hard work and progress our Polaris team made in the first half of 2017, and our commitment to regaining our winning momentum in powersports is deep and strong. From significant new innovations in performance, reliability and rider safety to upgrading our plants and supply chain, we have made substantial investments both in enhancing our safety and quality practices, and in research and development to accelerate the cadence of our new product introductions.
“The fruits of this labor will be on display when we unveil our exciting new model year ORVs and motorcycles. These vehicles will demonstrate our capability to deliver the innovation and quality expected from the leader in powersports, as well as improved results and enhanced shareholder value.”
The company will record costs, anticipated to be in the range of $80.0 million to $90.0 million, 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.
Costs associated with the previously announced manufacturing realignment initiatives it is undertaking are anticipated to be in the range of $10.0 million to $15.0 million.
Polaris’ new Aftermarket segment sales, which includes Transamerican Auto Parts ("TAP"), along with the company's other aftermarket brands of Klim, Kolpin, Pro Armor, Trail Tech and 509, increased significantly to $224.4 million in the 2017 second quarter compared to $12.1 million in the 2016 second quarter. TAP added $209.1 million of sales in the second quarter of 2017, growing six percent in the second quarter 2017 compared to last year on a proforma basis, had Polaris owned TAP for the full year 2016.
Their Global Adjacent Markets segment sales along with its PG&A related sales, increased seven percent to $97.0 million in the 2017 second quarter compared to $91.0 million in the 2016 second quarter. Work and Transportation group unit sales were up 13 percent during the second quarter of 2017 primarily due to an increase in direct sales to commercial customers and our higher sales in the company's Aixam quadricycles and Goupil light-utility businesses.
International sales to customers outside of North America, including PG&A, totaled $191.2 million for the second quarter of 2017, up twelve percent, from the same period in 2016. All regions increased sales double digits percent in the second quarter, with all segments showing sales growth during the quarter.
The company reported second quarter 2017 net income of $62.0 million, or $0.97 per diluted share, compared with net income of $71.2 million, or $1.09 per diluted share, for the 2016 second quarter. The reported net income included costs related to the wind-down of Victory Motorcycles, certain Transamerican Auto Parts ("TAP") integration and inventory step-up costs and manufacturing network realignment costs. Adjusted net income for the quarter ended June 30, 2017, excluding these costs, was $73.9 million, or $1.16 per diluted share.
Gross profit increased 23 percent to $350.4 million for the second quarter of 2017 from $284.5 million in the second quarter of 2016. As a percentage of sales, reported gross profit margin was 25.7 percent compared with 25.2 percent of sales for the second quarter of 2016. Gross profit for the second quarter of 2017 includes the negative impact of $8.9 million of Victory Motorcycles wind- down costs, $0.1 million in purchase accounting adjustments related to the TAP acquisition and manufacturing network realignment costs of $4.3 million. Excluding these items, adjusted gross profit was $363.6 million, or 26.8 percent of sales. Gross margins on an adjusted basis improved due to significant gross VIP cost savings and positive product mix, somewhat offset by higher promotional costs.
Operating expenses increased 44 percent for the second quarter of 2017 to $270.3 million from $188.0 million in the same period in 2016, which included $2.0 million in Victory wind down costs and $3.7 million of TAP integration expenses. Excluding these costs, operating expenses increased primarily due to the addition of operating expenses from TAP, as well as increased research and development expenses for ongoing product refinement and innovation and legal related costs.
Net cash provided by operating activities was $264.0 million for the six months ended June 30, 2017, compared to $348.3 million for the same period in 2016. The decrease in net cash provided by operating activities for the 2017 period was due to the lower net income and the timing of warranty and other accrued expense payments and higher factory inventory. Total debt at June 30, 2017, including capital lease obligations and notes payable, was $1,067.8 million. The company’s debt-to-total capital ratio was 56 percent at June 30, 2017, compared to 34 percent a year ago due primarily to the financing of the TAP acquisition. Cash and cash equivalents were $127.4 million at June 30, 2017, down from $146.6 million for the same period in 2016.
During the second quarter of 2017, the company repurchased and retired 502,000 shares of its common stock for $43.8 million. Year-to-date through June 30, 2017, the company has repurchased and retired 758,000 shares of its common stock for $65.6 million. As of June 30, 2017, the company has authorization from its Board of Directors to repurchase up to an additional 6.7 million shares of Polaris common stock.
The company has increased its sales guidance and narrowed its earnings per share expected range for the full year 2017 from previously issued guidance and now expects adjusted net income to be in the range of $4.35 to $4.50 per diluted share, compared with adjusted net income of $3.48 per diluted share for 2016. Full year 2017 adjusted sales are anticipated to increase in the range of 12 percent to 14 percent over 2016 sales of $4,516.6 million.
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