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Polaris and Victory Motorcycles 3Q Sales Up

Wednesday, October 20, 2010
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Polaris Industries posted a 51% increase in third quarter earnings compared to the same quarter in 2009.
Fueled by sales increases in the side-by-side vehicle market, Polaris Industries bucked the trend by posting a 51% increase in third-quarter earnings compared to the same period last year. Overall sales grew 33% to $580.1 million while the Medina, Minnesota-based company posted earnings of $47.2 million, or a record $1.37 per diluted share. The results beat estimates by analysts, who had forecasted earnings per share of $1.14 and sales of $522.1 million.

"We gained market share in every product line in North America and in our international markets," said Polaris Chief Executive Officer Scott Wine during a conference call.

Sales from Polaris’ On-Road division, predominantly Victory Motorcycles, did its share to boost sales figures by more than doubling to $20.1 million, a gain of 116% in comparison to year-ago totals. It was the fourth consecutive quarter Victory has enjoyed market share gains. Sales of Victory Motorcycles in markets outside of North America also increased, with sales up over 100% for the 2010 third quarter compared to the same quarter in 2009. Sales of parts, garments and accessories were also up 12% to $93.3 million.

Side-by-side vehicles like the Polaris Ranger were responsible for most of the 49% increase in sales of off-road vehicles during the third quarter, compensating for otherwise soft sales of standard ATVs. The segment is Polaris' largest and accounts for approximately two-thirds of total sales.

Polaris Defense also announced it landed a $67 million, five-year contract yesterday to build Ultra-Light Utility Vehicles for the Army National Guard. Polaris intends to build the Army-spec Ranger Crew 800s and Ranger 6x6 Side-by-Side vehicles at its Spirit Lake, Iowa facility, and recently added over 270 full-time and seasonal jobs to meet the increase in production.

Full Disclosure Courtesy of Polaris Industries Press Release:
The 2011 Victory Cross Country can be ridden as aggressive as its styling.
Sales of motorcycles like the 2011 Cross Country, seen here in its Cory Ness version, have helped Victory more than double its sales over the same period last year.

Polaris Industries 2010 Business Outlook
As a result of its continued strong retail sales growth, Polaris now expects full year 2010 earnings per diluted share to be in the range of $4.17 to $4.20, which represents an increase of 37 to 38 percent when compared to earnings of $3.05 per diluted share for the full year 2009. Sales for the full year 2010 are now expected to grow in the range of 24 to 25 percent over full year 2009 sales of $1.57 billion. During the fourth quarter of 2010, the Company expects total sales to increase in the range of 22 to 24 percent over the fourth quarter 2009. The fourth quarter 2010 expectations include incremental costs related to the manufacturing realignment and higher incentive compensation expenses compared to the 2009 fourth quarter. Fourth quarter 2010 earnings are expected to be in the range of $1.45 to $1.48 per diluted share, up 11 to 13 percent compared to earnings of $1.31 per diluted share for the fourth quarter of 2009.

Wine commented, “The positive feedback on our product introductions from our July dealer meeting, coupled with our continued margin expansion and encouraging results from our recently expanded Max Velocity Program (“MVP”) go-to-market process, gives us confidence in our ability to finish the year with strong operating results. While we remain focused on extending the momentum experienced in the first nine months through the end of the year, our initial thoughts on 2011 are also quite positive. Our new product pipeline is strong and operational excellence continues to be a priority. I am confident we can continue to drive profitability with the goal of generating industry leading returns for our shareholders in 2011 and beyond.”

Off-Road vehicles (“ORV") sales, which include sales of both ATVs (all-terrain vehicles) and RANGER side-by-side vehicles, increased 49 percent during the third quarter 2010 from the third quarter 2009. This increase reflects significant 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. The MVP program was expanded and made available to all North American ORV dealers beginning in the 2010 third quarter. During the third quarter, the Company began shipping several new model year 2011 ORV products including a mid-sized RANGER side-by-side with increased power, a 4-person mid-sized RANGER Crew and a RANGER with the Company’s first 24 horsepower diesel engine. In addition, shipments to Bobcat of the differentiated utility vehicle, which began shipping in the second quarter, accelerated in the 2010 third quarter. Polaris’ North American ORV unit retail sales to consumers increased approximately 20 percent for the 2010 third quarter from the third quarter last year, with side-by-side vehicle retail sales increasing significantly and ATV retail sales up in the mid-single digit percent range. North American dealer inventories of ORVs declined 30 percent during the third quarter compared to 2009 third quarter levels. During the third quarter of 2010 the number of ORV units shipped to dealers approximated the number of units retailed from dealers to consumers in North America. As the Company had done for the past four years, during the 2009 third quarter Polaris shipped significantly fewer ORV units to dealers than what was retailed from dealers to consumers in North America.

Sales of the On-Road division, which primarily consists of Victory motorcycles, increased 116 percent during the third quarter of 2010 when compared to the same period in 2009. The North American heavyweight cruiser and touring motorcycle industry remained weak during the quarter, but Victory continued to benefit from the actions implemented over the past year to accelerate growth. Victory unit retail sales were very strong during the third quarter, increasing more than 50 percent in North America compared to the third quarter of 2009, resulting in market share gains and retail sales growth for the fourth consecutive quarter. Demand increased across the Victory product line-up, particularly the new Cross Country and Cross Roads touring models. North American dealer inventory of Victory motorcycles declined 32 percent in the 2010 third quarter compared to 2009 third quarter levels. The sale of Victory motorcycles in markets outside of North America also continues to increase, with sales up over 100 percent for the 2010 third quarter compared to the same period last year.

Parts, Garments, and Accessories (“PG&A”) sales increased 12 percent during the third quarter 2010 compared to the same period last year primarily due to increased RANGER™ side-by-side vehicle and Victory motorcycle related PG&A sales.

Snowmobile sales decreased six percent during the 2010 third quarter compared to the third quarter of 2009. The third quarter 2010 decrease reflects the impact of a modest delay in shipments of snowmobiles closer to expected consumer demand in the winter season compared to the same period last year.

Gross profit as a percentage of sales was 26.0 percent for the third quarter of 2010, an increase of 190 basis points from 24.1 percent for the third quarter of 2009. Gross profit dollars increased 44 percent to $150.7 million for the third quarter of 2010 compared to $104.9 million for the third quarter of 2009. The increase in gross profit dollars and the 190 basis points increase in the gross profit margin percentage in the third quarter 2010 resulted primarily from continued product cost reduction efforts, production volume increases, and favorable pricing and foreign currency movements compared to the third quarter of last year. These increases were partially offset by manufacturing realignment costs, an increase in commodity costs and higher sales promotion costs.

Operating expenses for the third quarter 2010 increased 38 percent to $87.1 million, or 15.0 percent of sales, compared to $63.2 million, or 14.5 percent of sales, for the third quarter of 2009. Operating expenses in absolute dollars for the third quarter 2010 increased primarily due to higher incentive compensation plan expenses driven by the higher expected profitability for 2010 and the recent higher stock price. Incremental investments in growth initiatives also contributed to higher operating expenses.

Income from financial services was $4.1 million during the third quarter 2010 compared to $3.9 million in the third quarter of 2009.

Gain on securities held for sale was $1.6 million for the third quarter of 2010 resulting from the sale of the Company’s remaining investment in KTM Power Sports AG during the quarter.
 
Non-operating other income was $1.5 million in the third quarter of 2010 compared to $1.3 million in the third 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 international subsidiaries.

Manufacturing Realignment
Execution of the previously announced manufacturing realignment is underway and remains on schedule. The 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 income statement in the range of $22 million to $25 million and incur capital expenditures of approximately $35 million over the next few years 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. The exit costs and startup costs pertaining to the realignment for the full year 2010 have increased slightly and are now expected to be in the range of a total of $11 to $12 million. During the 2010 third quarter, $2.4 million of exit costs and $1.3 million of startup costs were incurred, which are reflected principally in cost of sales on the income statement.

Financial position and cash flow
Cash and cash equivalents increased significantly to $264.5 million at September 30, 2010 compared to $72.8 million at September 30, 2009. Borrowings under the credit agreement were $200 million at September 30, 2010 and 2009. The Company’s debt-to-total-capital ratio was 40 percent at September 30, 2010, compared to 53 percent at the same time last year. Net cash provided by operating activities for the year-to-date period ended September 30, 2010, totaled $156.9 million, a 53 percent increase compared to $102.5 million for the same period last year. Higher net income and lower working capital investments for the 2010 year-to-date period compared to the same period last year are the primary reasons for the increased cash provided by operating activities. The Company paid dividends during the first nine months of 2010 totaling $39.5 million, compared to $37.6 million in the first nine months of 2009, at a rate per share in 2010 that is slightly higher than last year’s per share rate.
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Comments
Colorado Mike -Title  October 29, 2010 09:39 AM
You better just hope that your Polaris bike or ATV doesn't break down or has a recalled part. My Polaris Sportsman ATV has been sitting in pieces at the dealer for 3 months, waiting on a recalled kit sure power module. Glad I won't have my 4 wheeler for elk hunting in the Rockies next week. Thanks Polaris, keep pumping out your product.
Mike in WV -M. Mike is a moron  October 21, 2010 07:00 AM
Sales were up 116% over the last years quarter and it said that the dealer "inventory" had declined 32%. What this equates to Milwaukee Moron is that they are selling bikes and operating "lean"...not flooding the dealers. Sales are up...profits are up. Victory is moving forward very intelligently and very cautiously in this economy. Victory also made it's 106 Freedom motor ctock on every new 2011 model. Yes, HD finally came out with a 103, but it's a bored out 96 and it's not available as stock on all it's models. Oh well...HD does have a great assortment of T-shirts, belt buckles and ashtrays made in China. I'm surprised you didn't make your usual idiotic remark about metric bikes...at least you're showing some improvement.
Mitch -M.Mike  October 20, 2010 08:44 PM
If they are practically giving away new bikes (And I certainly wish this were the case) and still increasing profits then I would think Scott Wine deserves Keith Wandell's salary =)
snail -Meanwhile  October 20, 2010 05:24 PM
HD sales declines 7.7%...
That's what happens when you (practicaly)never update the technology on you bike. Like Evolution vs. Revolution. I will buy the bike with better technology and it's a bonus if they are more reasonably priced.
milwaukee mike -3rd Quarter  October 20, 2010 04:02 PM
"North American dealer inventory of Victory motorcycles declined 32 percent in the 2010 third quarter compared to 2009 third quarter levels."

Thats what happens when you (practicaly) give your bikes away.