Victory Sales Up in Polaris’ Record Setting 4Q

January 27, 2011
Bryan Harley
Bryan Harley
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Our resident road warrior has earned his stripes covering the rally circuit, from riding the Black Hills of Sturgis to cruising Main Street in Daytona Beach. Whether it's chopped, bobbed, or bored, metric to 'Merican, he rides 'em all.

Victory Motorcycles
Victory Motorcycles has gained in market share and sales for five consecutive quarters while other manufacturers have been suffering from a decline.

Victory Motorcycles bucked the trend this year, selling more motorcycles in 2010 than ever before. Powered by demand for its popular Cross Country and Cross Roads cruiser touring motorcycles, sales of Victory Motorcycles and parent company Polaris’ on-road vehicles increased eight percent during the fourth quarter of 2010 when compared to the same 2009 timeframe. It is the fifth consecutive quarter where Victory sales have gained in market shares and growth in retail sales. This accomplishment is even more impressive considering that industry-wide U.S. heavyweight motorcycle (651cc+) retail unit sales decreased 14.8 percent in the fourth quarter compared to 2009 figures.

In Polaris Fourth Quarter and Full Year Results press release, CEO Scott Wine stated, “We also expanded our leadership position in the side-by-side industry, and grew sales and market share in our Victory motorcycles and snowmobile businesses.”

Polaris’ Off-Road Vehicles sales, including both ATVs and side-by-side vehicles like the RANGER, increased 40 percent during the fourth quarter 2010 in comparison to the 2009 fourth quarter. Overall, all Polaris product lines experienced increased sales and market share during the 2010 fourth quarter and for the full year.

Polaris Industries Inc. reported record net income for the fourth quarter of 2010 at $54.5 million, an increase of 24 percent from 2009. Shareholders will be glad to see costs per diluted shares up 18 percent to a record $1.55 per diluted share for the fourth quarter of 2010. Sales in the 2010 fourth quarter were at a record level of $618.4 million, a 31 percent increase over 2009 fourth quarter sales of $471.8 million.

Here’s full details courtesy of the official Polaris press release:

Fourth Quarter and Full Year Highlights:
• Fourth quarter 2010 earnings per diluted share increased 18% to a record $1.55 with sales increasing 31 percent from the 2009 fourth quarter to a record $618.4 million

• All product lines experienced increased sales and market share during the 2010 fourth quarter and full year

• Full year 2010 earnings per diluted share increased 40% to a record $4.28 with record sales of $1,991.1 million, an increase of 27% from the 2009 full year

• Full year 2010 gross profit margins improved 150 basis points over 2009, primarily due to higher production volumes and cost reduction efforts, though partially offset by manufacturing realignment costs. Gross profit margins improved 40 basis points for the fourth quarter

• Cash and cash equivalents totaled $393.9 million at year-end 2010, an increase of 181% over 2009

Polaris Industries Inc. (NYSE:PII) today reported record net income of $1.55 per diluted share for the fourth quarter of 2010, up 18 percent over the 2009 fourth quarter. Net income for the fourth quarter 2010 was a record $54.5 million, an increase of 24 percent over the same period in 2009. Record sales of $618.4 million for the fourth quarter 2010 increased 31 percent over 2009 fourth quarter sales of $471.8 million.

Full Year Results
For the full year ended December 31, 2010, Polaris reported record net income of $147.1 million, or a record $4.28 per diluted share, compared to $101.0 million, or $3.05 per diluted share for the year ended December 31, 2009. This represents a 40 percent increase on a per diluted share basis and a 46 percent increase in net income. Sales for the full year 2010 totaled a record $1,991.1 million, an increase of 27 percent compared to sales of $1,565.9 million for the full year 2009.

“2010 was an exceptional year for Polaris. Not only did we deliver record sales and earnings, but the Polaris team made significant progress toward our long-term strategy and positioned the business for profitable growth in the future. We gained market share in all of our businesses and grew sales in every region of the world. Our persistent focus on margins paid dividends, as gross profit margins increased 150 basis points and net margins expanded by 90 basis points to 7.4 percent of sales. We also expanded our leadership position in the side-by-side industry, and grew sales and market share in our Victory motorcycles and snowmobile businesses,” stated Scott Wine, Chief Executive Officer. “In addition to our record financial performance, we made several strategic investments in the business during 2010 that position us for future growth, including investments in China, Brazil and India, and a small powertrain acquisition in Europe. Lastly, our manufacturing realignment project, announced in mid-2010, is on track to begin production in our new Monterrey facility by mid-2011.”

“Our efforts throughout 2010 have further positioned the Company for continued growth and profitability in 2011 and beyond. Importantly, dealer inventories for ORV and Victory continued to decline in 2010 and are at appropriate levels as we enter 2011. Additionally, we expanded the retail sales program called Max Velocity Program, or MVP, into the remaining 50 percent of our ORV dealers in North America during the second half of 2010. We expect MVP to continue to drive retail sales velocity and market share gains in 2011,” Wine continued.

“Ending 2010 with $394 million in cash and only $200 million in total debt, we have both the financial strength and flexibility to continue to make organic and acquisitive investments to support our long-term growth initiatives. We expect the investments made over the past two years, supported by continued product innovation, ever-increasing speed to market, productive lean manufacturing initiatives, and low-cost purchasing capabilities to continue to deliver net margin expansion in 2011, resulting in another record year of sales and earnings for the Company.”

2011 Business Outlook
Full year 2011 earnings are expected to be in the range of $4.65 to $4.85 per diluted share, which represents an increase of nine to 13 percent when compared to full year 2010 earnings. Net income for full year 2011 is expected to increase in the range of 14 to 20 percent over full year 2010. Sales for full year 2011 are expected to increase eight to 11 percent over full year 2010 sales, with sales increases projected in each product line and geographic region. The full year 2011 expectations include transition costs related to the manufacturing realignment in the range of $12.0 million to $14.0 million, with the majority of the costs impacting gross margins. Savings from the manufacturing realignment project are expected to begin in the second half of 2011 but will only partially offset project transition costs in 2011. 

Fourth Quarter Performance Summary (in thousands except per share data)
                                              Three Months ended December 31,          Twelve Months ended December 31,
Product line Sales             2010               2009               Change             2010                2009              Change
Off-Road Vehicles       $ 394,550        $ 282,816               40 %       $ 1,376,373   $ 1,021,128          35 %
Snowmobiles                104,073            81,441                   28 %           188,877         179,238               5 %
On-Road/Victory             20,640             19,139                     8 %              81,624           52,811              55 %
Parts, Garments & Accessories 
                                         99,179              88,374                   12 %            344,265          312,710            10 %
Total Sales                 $ 618,442       $ 471,770                  31 %        $ 1,991,139   $ 1,565,887          27 %
Gross profit                $ 171,516        $ 128,610                 33 %          $ 530,213        $ 393,219          35 %
Gross profit as a % of sales 
                                        27.7 %              27.3 %              +40 bpts            26.6 %            25.1 %          +150 bpts
Operating expenses $ 97,589       $ 63,926                     53 %           $ 326,348        $ 245,320          33 %
Operating expenses as a % of sales 
                                        15.8 %            13.6 %               +220 bpts          16.4 %             15.7 %            +70 bpts
Operating Income    $ 78,146        $ 69,463                     13 %           $ 220,721         $ 164,970          34 %
Operating Income as a % of sales 
                                        12.6 %           14.7 %                 -210 bpts          11.1 %              10.5 %            +60 bpts
Net income                $ 54,522       $ 43,910                      24 %          $ 147,138          $ 101,017          46 %
Net income as a % of sales 
                                        8.8 %              9.3 %                     -50 bpts           7.4 %                 6.5 %             +90 bpts
Diluted net income per share 
                                    $ 1.55               $ 1.31                        18 %             $ 4.28                $ 3.05               40 %

Off-road Vehicles (“ORV’) sales, which include sales of both ATVs (all-terrain vehicles) and RANGER side-by-side vehicles, increased 40 percent during the fourth quarter 2010 from the fourth quarter 2009. This increase reflects continued market share gains for both ATVs and side-by-side vehicles driven by industry leading product offerings and the success of the MVP retail go-to-market process. All North American ORV dealers are now utilizing the MVP order process as of the 2010 third quarter. North American dealer inventories of ATVs continued to decline, decreasing 33 percent from the 2009 fourth quarter and sequentially decreasing eight percent from the third quarter of 2010. Polaris’ North American ORV unit retail sales to consumers increased approximately 11 percent for the 2010 fourth quarter compared to a tougher 2009 fourth quarter comparable, with side-by-side vehicle retail sales increasing over 20 percent quarter over quarter and ATV retail sales about flat with the prior year. The Company’s newer products have been well received by consumers, including the new mid-sized RANGER side-by-side with increased power, a 4-person mid-sized RANGER Crew and the first RANGER with a diesel engine. The most recent example of the Company’s continued aggressive new product development is the introduction in January 2011 of the all-new high performance RANGER RZR XP 900 to Polaris’ recreational family of vehicles. The unique features of the RZR XP 900 include a new 88 horsepower electronic fuel injected twin cylinder engine and a new 3-link trailing arm independent rear suspension with 14-inches of travel. In addition, shipments to Bobcat of its differentiated utility vehicle continued to gain market share in the 2010 fourth quarter. Given the growth in the Company’s ORV business worldwide, Polaris has widened its market share leadership in off-road vehicles in both North America and Europe.

Snowmobile sales increased 28 percent during the 2010 fourth quarter compared to the prior year’s fourth quarter. The fourth quarter 2010 increase in sales reflects the impact of a shift in shipments of snowmobiles later in the year as the Company chose to ship its snowmobiles closer to expected consumer demand in the winter season compared to the same period last year. Polaris’ North American snowmobile retail sales to consumers increased over 40 percent for the 2010 fourth quarter compared to the 2009 fourth quarter primarily due to heavy amounts of early snowfall in many key riding areas in North America and the success of model year 2011 new product introductions. Sales of snowmobiles to customers outside of North America, principally the Scandinavian region, increased 43 percent in the fourth quarter of 2010 compared to a year ago. North American dealer inventories of snowmobiles at December 2010 are 22 percent lower than a year ago. For the full year 2010, snowmobile sales increased five percent compared to the prior year.

Sales of On-road Vehicles, which primarily consists of Victory motorcycles, increased eight percent during the fourth quarter of 2010 when compared to the same period in 2009. Victory North American unit retail sales to consumers increased 15 percent during the 2010 fourth quarter when compared to a strong 2009 fourth quarter, resulting in continued market share gains and retail sales growth for the fifth consecutive quarter. The North American heavyweight cruiser and touring motorcycle industry remained weak during the 2010 fourth quarter. However, consumer demand remains strong for Victory’s new touring models, the Cross Country and Cross Roads and the Company recently introduced the Victory High-Ball, a custom cruiser aimed at the younger rider looking for a classic factory custom motorcycle. North American dealer inventory of Victory motorcycles declined 30 percent in the 2010 fourth quarter compared to 2009 fourth quarter levels.

Parts, Garments, and Accessories (“PG&A”) sales increased 12 percent during the fourth quarter 2010 compared to the same period last year primarily due to increased ORV, Victory motorcycle and international related PG&A sales.
 
Gross profit as a percentage of sales was 27.7 percent for the fourth quarter of 2010, an increase of 40 basis points from 27.3 percent for the fourth quarter of 2009. Gross profit dollars increased 33 percent to $171.5 million for the fourth quarter 2010 compared to $128.6 million for the fourth quarter of 2009. The increase in gross profit dollars and the 40 basis points increase in the gross profit margin percentage in the fourth quarter 2010 resulted primarily from higher volume, continued product cost reduction efforts and higher selling prices. These increases were partially offset by manufacturing realignment costs as well as higher commodity and sales promotion costs.

Operating expenses for the fourth quarter 2010 increased 53 percent to $97.6 million, or 15.8 percent of sales, compared to $63.9 million, or 13.6 percent of sales, for the fourth quarter of 2009. Operating expenses in absolute dollars and as a percentage of sales for the fourth quarter 2010 increased primarily due to an increase in incentive compensation plan expenses of $19 million over the 2009 fourth quarter period driven by the higher profitability for 2010 and the recent higher stock price which reflects the Company’s pay for performance compensation philosophy. In addition, incremental investments made in global market expansion and new product development initiatives contributed to the increase in operating expenses in the fourth quarter.

Income from financial services decreased 12 percent to $4.2 million during fourth quarter 2010 from $4.8 million in the fourth quarter of 2009. The decrease was primarily due to lower interest income earned by Polaris Acceptance as a result of the lower dealer inventory levels.

Interest expense decreased to $0.5 million for the fourth quarter 2010, from $0.9 million for the fourth quarter 2009, due to lower interest rates on the Company’s credit facility during the 2010 fourth quarter as compared to the same period in 2009.

Non-operating other income was $0.7 million in the fourth quarter of 2010, as compared to $2.7 million of expense in the fourth quarter of 2009. The income is the result of foreign currency exchange rate movements and the resulting effects on foreign currency transactions related to the Company’s foreign subsidiaries.

The Income tax provision for the fourth quarter 2010 was recorded at a rate of 30.4 percent of pretax income compared to 33.3 percent of pretax income for the fourth quarter 2009. The lower income tax provision rate in the fourth quarter 2010 is primarily due to the extension of the research and development credit by the U.S. Congress in the 2010 fourth quarter.

Financial Position and Cash Flow
Net cash provided by operating activities increased 54 percent to $297.6 million for the year ended December 31, 2010 compared to $193.2 million for the full year 2009. The increase in net cash provided by operating activities for the full year 2010 was due to higher net income and lower investment in working capital, primarily resulting from higher accrued expenses, compared to the same period in 2009. Total debt was $200.0 million, of which $100.0 million was classified as current liabilities and $100.0 million was classified as long term liabilities at December 31, 2010. The Company’s debt-to-total capital ratio was 35 percent at December 31, 2010, compared to 49 percent at the end of 2009. Cash and cash equivalents were $393.9 million at December 31, 2010 compared to $140.2 million for the prior period.

Manufacturing Realignment
The previously announced manufacturing realignment will consolidate manufacturing operations into existing operations in Roseau, Minnesota and Spirit Lake, Iowa and a new facility in Monterrey, Mexico. Construction is underway on the new facility in Monterrey and the building is expected to be completed in the first half of 2011. The Company expects to record pretax transition charges to its statement of income in the range of $24 million to $26 million and incur capital expenditures of approximately $35 million in total related to the implementation of the manufacturing realignment. The Company expects to realize pretax savings in excess of $30 million annually when the transition is completed. During 2010, $5.4 million of exit costs and $5.5 million of startup costs were incurred from the realignment, which are primarily reflected in cost of sales on the statement of income. In addition, capital expenditures of $8.6 million were incurred in 2010 related to the manufacturing realignment.

Polaris’ Board of Directors Increases Dividend for 2011
On January 20, 2011, the Company announced that its Board of Directors approved a 13 percent increase in the regular quarterly cash dividend, representing the 16th consecutive year of increased dividends, effective with the 2011 first quarter dividend payment. The first quarter dividend of $0.45 per share will be payable on February 15, 2011 to shareholders of record at the close of business on February 1, 2011.

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