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 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.
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
2016
,
2015
and
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, 2016
|
Asset (Liability)
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Non-qualified deferred compensation assets
|
$
|
49,330
|
|
|
$
|
49,330
|
|
|
—
|
|
|
—
|
|
Foreign exchange contracts, net
|
298
|
|
|
—
|
|
|
$
|
298
|
|
|
—
|
|
Total assets at fair value
|
$
|
49,628
|
|
|
$
|
49,330
|
|
|
$
|
298
|
|
|
—
|
|
Non-qualified deferred compensation liabilities
|
$
|
(49,330
|
)
|
|
$
|
(49,330
|
)
|
|
—
|
|
|
—
|
|
Total liabilities at fair value
|
$
|
(49,330
|
)
|
|
$
|
(49,330
|
)
|
|
$
|
—
|
|
|
—
|
|
|
Fair Value Measurements as of December 31, 2015
|
Asset (Liability)
|
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
|
$
|
(354
|
)
|
|
—
|
|
|
$
|
(354
|
)
|
|
—
|
|
Non-qualified deferred compensation liabilities
|
(48,238
|
)
|
|
$
|
(48,238
|
)
|
|
—
|
|
|
—
|
|
Total liabilities at fair value
|
$
|
(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 Notes 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 10 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’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, 2016
|
|
December 31, 2015
|
Raw materials and purchased components
|
$
|
141,566
|
|
|
$
|
167,569
|
|
Service parts, garments and accessories
|
316,383
|
|
|
189,731
|
|
Finished goods
|
333,760
|
|
|
388,970
|
|
Less: reserves
|
(45,175
|
)
|
|
(36,269
|
)
|
Inventories
|
$
|
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 Wells Fargo Commercial Distribution Finance Corporation 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 9 for additional information regarding Polaris’ investment in Polaris Acceptance.
Investment in other affiliates.
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 10 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 6 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, 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’s customer financing program (see Note 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, 2016
,
2015
and
2014
, Polaris incurred
$85,199,000
,
$80,090,000
and
$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 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’ limited 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,
|
|
2016
|
|
2015
|
|
2014
|
Balance at beginning of year
|
$
|
56,474
|
|
|
$
|
53,104
|
|
|
$
|
52,818
|
|
Additions to reserve through acquisitions
|
147
|
|
|
250
|
|
|
160
|
|
Additions charged to expense
|
194,996
|
|
|
73,716
|
|
|
61,888
|
|
Less: warranty claims paid
|
(132,343
|
)
|
|
(70,596
|
)
|
|
(61,762
|
)
|
Balance at end of year
|
$
|
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 3 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 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 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 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 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
2015
, the Company entered into derivative contracts to hedge a portion of the exposure for diesel fuel and aluminum. The Company 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 12 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 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 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. The new standard is effective 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 guidance using the modified retrospective approach.
There are no other new accounting pronouncements that are expected to have a significant impact on 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 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
21,000,000
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
157,000
deferred stock units to its non-employee directors under the Omnibus Plan (
11,000
,
8,000
and
9,000
in
2016
,
2015
and
2014
, respectively) which will be converted into common stock when the director’s board service ends or upon a change in control. Restricted units and performance-based restricted units (collectively restricted stock) awarded under the Omnibus Plan generally vests after a one to four year period. 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.
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
73,000
equivalents have been earned and
427,000
shares have been issued to retired directors as of
December 31, 2016
. As of
December 31, 2016
and
2015
, Polaris’ liability under the plan totaled
$6,111,000
and
$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. Long term incentive program awards are granted in restricted stock units and stock options and therefore treated as equity awards.
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,
|
|
2016
|
|
2015
|
|
2014
|
Option plan
|
$
|
23,876
|
|
|
$
|
26,191
|
|
|
$
|
24,428
|
|
Other share-based awards
|
23,368
|
|
|
23,275
|
|
|
26,574
|
|
Total share-based compensation before tax
|
47,244
|
|
|
49,466
|
|
|
51,002
|
|
Tax benefit
|
17,546
|
|
|
18,451
|
|
|
19,039
|
|
Total share-based compensation expense included in net income
|
$
|
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, 2016
, there was
$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
1.72
years. Included in unrecognized share-based compensation is approximately
$32,997,000
related to stock options and
$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, 2016
,
2015
and
2014
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Omnibus Plan
(Active)
|
|
Option Plan
(Frozen)
|
|
Outstanding
Shares
|
|
Weighted
Average
Exercise
Price
|
|
Outstanding
Shares
|
|
Weighted
Average
Exercise
Price
|
Balance as of December 31, 2013
|
4,466,080
|
|
|
$
|
49.29
|
|
|
162,431
|
|
|
$
|
23.74
|
|
Granted
|
705,564
|
|
|
130.10
|
|
|
—
|
|
|
—
|
|
Exercised
|
(866,917
|
)
|
|
30.33
|
|
|
(96,398
|
)
|
|
23.77
|
|
Forfeited
|
(98,215
|
)
|
|
65.14
|
|
|
(2,800
|
)
|
|
22.43
|
|
Balance as of December 31, 2014
|
4,206,512
|
|
|
$
|
66.38
|
|
|
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, 2016
was
6.45
years and
4.47
years, respectively.
The following assumptions were used to estimate the weighted average fair value of options of
$16.81
,
$37.64
and
$39.97
granted during the years ended
December 31, 2016
,
2015
and
2014
, respectively:
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
Weighted-average volatility
|
32
|
%
|
|
32
|
%
|
|
40
|
%
|
Expected dividend yield
|
2.8
|
%
|
|
1.4
|
%
|
|
1.5
|
%
|
Expected term (in years)
|
4.5
|
|
|
4.5
|
|
|
4.5
|
|
Weighted average risk free interest rate
|
1.4
|
%
|
|
1.5
|
%
|
|
1.6
|
%
|
The total intrinsic value of options exercised during the year ended
December 31, 2016
was
$17,522,000
. The total intrinsic value of options outstanding and of options outstanding and exercisable at
December 31, 2016
, was
$68,311,000
and
$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, 2016
:
|
|
|
|
|
|
|
|
|
Shares
Outstanding
|
|
Weighted
Average
Grant Price
|
Balance as of December 31, 2015
|
1,130,767
|
|
|
$
|
122.08
|
|
Granted
|
909,161
|
|
|
77.53
|
|
Vested
|
(233,841
|
)
|
|
89.72
|
|
Canceled/Forfeited
|
(284,885
|
)
|
|
108.08
|
|
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, 2016
was
$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
were
$77.53
,
$139.50
and
$134.34
, respectively.
Note 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 participants’ accounts based on total cash compensation earned during the calendar year. An employee’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. Employees who meet eligibility requirements can participate in the ESOP. Total expense related to the ESOP was
$7,849,000
,
$7,455,000
and
$10,789,000
, in
2016
,
2015
and
2014
, respectively. As of
December 31, 2016
there were
3,811,000
shares held in the plan.
Defined contribution plans.
Polaris sponsors a 401(k) defined contribution retirement plan covering substantially all U.S. employees. The Company matches
100 percent
of employee contributions up to a maximum of five percent of eligible compensation. All contributions vest immediately. The cost of the defined contribution retirement plan was
$15,456,000
,
$14,178,000
, and
$12,486,000
, in
2016
,
2015
and
2014
, 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 balances are both
$49,330,000
and
$48,238,000
at
December 31, 2016
, and
2015
, respectively.
Executive officers of the Company have the opportunity to defer certain restricted stock 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 are held in a rabbi trust and are 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, 2016
,
105,931
shares are recorded at a fair value of
$8,728,000
in temporary equity, which includes
$8,993,000
of compensation cost and
$(266,000)
of cumulative fair value adjustment recorded through retained earnings.
Note 5. Financing Agreement
Debt, capital lease obligations, notes payable and the average related interest rates were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average interest rate at December 31, 2016
|
|
Maturity
|
|
December 31, 2016
|
|
December 31, 2015
|
Revolving loan facility
|
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
|
|
Senior notes—fixed rate
|
4.60%
|
|
May 2021
|
|
75,000
|
|
|
75,000
|
|
Senior notes—fixed rate
|
3.13%
|
|
December 2020
|
|
100,000
|
|
|
100,000
|
|
Capital lease obligations
|
5.06%
|
|
Various through 2029
|
|
19,306
|
|
|
21,874
|
|
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
|
|
|
|
|
3,847
|
|
|
5,059
|
|
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 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 also extended the expiration date to March 2020. Interest is charged at rates based on a LIBOR or “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
of unsecured senior notes due
May 2018
and
$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 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, 2016
.
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2016
, Polaris had open letters of credit totaling
$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 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, 2016
, was approximately
$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 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, 2016
and
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 of accumulated amortization, for the periods ended
December 31, 2016
and
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 2016 relate primarily to the acquisitions of TAP in November 2016 and Taylor-Dunn in March 2016. For these 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. TAP and Taylor-Dunn’s financial results are included in the Company’s consolidated results from the respective dates of acquisition. As of
December 31, 2016
, the purchase price allocations for these acquisitions remain preliminary. For TAP, the pro forma financial results and the preliminary purchase price allocation are included in Note 2.
The changes in the carrying amount of goodwill for the years ended
December 31, 2016
and
2015
are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
Balance as of beginning of year
|
$
|
131,014
|
|
|
$
|
123,031
|
|
Goodwill from businesses acquired
|
293,390
|
|
|
17,010
|
|
Currency translation effect on foreign goodwill balances
|
(2,841
|
)
|
|
(9,027
|
)
|
Balance as of end of year
|
$
|
421,563
|
|
|
$
|
131,014
|
|
For other intangible assets, the changes in the net carrying amount for the years ended
December 31, 2016
and
2015
are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
Gross
Amount
|
|
Accumulated
Amortization
|
|
Gross
Amount
|
|
Accumulated
Amortization
|
Other intangible assets, beginning
|
$
|
138,831
|
|
|
$
|
(33,728
|
)
|
|
$
|
124,093
|
|
|
$
|
(23,158
|
)
|
Intangible assets acquired during the period
|
284,000
|
|
|
—
|
|
|
20,779
|
|
|
—
|
|
Amortization expense
|
—
|
|
|
(16,549
|
)
|
|
—
|
|
|
(12,136
|
)
|
Currency translation effect on foreign balances
|
(2,285
|
)
|
|
1,147
|
|
|
(6,041
|
)
|
|
1,566
|
|
Other intangible assets, ending
|
$
|
420,546
|
|
|
$
|
(49,130
|
)
|
|
$
|
138,831
|
|
|
$
|
(33,728
|
)
|
The components of other intangible assets were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
Estimated Life
(Years)
|
|
Gross Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
|
Non-compete agreements
|
5
|
|
$
|
540
|
|
|
$
|
(485
|
)
|
|
$
|
55
|
|
Dealer/customer related
|
5-10
|
|
164,837
|
|
|
(35,907
|
)
|
|
128,930
|
|
Developed technology
|
5-7
|
|
26,048
|
|
|
(12,738
|
)
|
|
13,310
|
|
Total amortizable
|
|
|
191,425
|
|
|
(49,130
|
)
|
|
142,295
|
|
Non-amortizable—brand/trade names
|
|
|
229,121
|
|
|
—
|
|
|
229,121
|
|
Total other intangible assets, net
|
|
|
$
|
420,546
|
|
|
$
|
(49,130
|
)
|
|
$
|
371,416
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
Estimated Life
(Years)
|
|
Gross Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
|
Non-compete agreements
|
5
|
|
$
|
540
|
|
|
$
|
(401
|
)
|
|
$
|
139
|
|
Dealer/customer related
|
7
|
|
67,079
|
|
|
(24,069
|
)
|
|
43,010
|
|
Developed technology
|
5-7
|
|
19,261
|
|
|
(9,258
|
)
|
|
10,003
|
|
Total amortizable
|
|
|
86,880
|
|
|
(33,728
|
)
|
|
53,152
|
|
Non-amortizable—brand/trade names
|
|
|
51,951
|
|
|
—
|
|
|
51,951
|
|
Total other intangible assets, net
|
|
|
$
|
138,831
|
|
|
$
|
(33,728
|
)
|
|
$
|
105,103
|
|
Amortization expense for intangible assets
for the year ended December 31, 2016
and
2015
was
$16,549,000
and
$12,136,000
. Estimated amortization expense for
2017
through
2021
is as follows:
2017
,
$27,600,000
;
2018
,
$26,000,000
;
2019
,
$24,100,000
;
2020
,
$19,400,000
;
2021
,
$17,200,000
; and after
2021
,
$28,000,000
. 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 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,
|
|
2016
|
|
2015
|
|
2014
|
United States
|
$
|
262,403
|
|
|
$
|
640,604
|
|
|
$
|
666,323
|
|
Foreign
|
50,848
|
|
|
45,133
|
|
|
32,994
|
|
Income from continuing operations before income taxes
|
$
|
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,
|
|
2016
|
|
2015
|
|
2014
|
Current:
|
|
|
|
|
|
Federal
|
$
|
103,717
|
|
|
$
|
211,017
|
|
|
$
|
255,299
|
|
State
|
4,780
|
|
|
16,609
|
|
|
20,438
|
|
Foreign
|
17,367
|
|
|
20,733
|
|
|
21,584
|
|
Deferred
|
(25,561
|
)
|
|
(17,983
|
)
|
|
(52,033
|
)
|
Total provision for income taxes for continuing operations
|
$
|
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,
|
|
2016
|
|
2015
|
|
2014
|
Federal statutory rate
|
35.0
|
%
|
|
35.0
|
%
|
|
35.0
|
%
|
State income taxes, net of federal benefit
|
1.4
|
|
|
1.5
|
|
|
1.5
|
|
Domestic manufacturing deduction
|
(2.1
|
)
|
|
(0.8
|
)
|
|
(1.1
|
)
|
Research and development tax credit
|
(4.3
|
)
|
|
(3.1
|
)
|
|
(1.1
|
)
|
Valuation allowance for foreign subsidiaries net operating losses
|
—
|
|
|
0.2
|
|
|
—
|
|
Non-deductible expenses
|
2.4
|
|
|
0.4
|
|
|
0.3
|
|
Other permanent differences
|
(0.4
|
)
|
|
0.4
|
|
|
0.5
|
|
Effective income tax rate for continuing operations
|
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 2015, the President of the United States signed the Consolidated Appropriations Act, 2016, which retroactively reinstated the research and development tax credit for 2015, and also made the research and development tax credit permanent. In addition to the 2015 research and development credits, the Company filed amended returns in 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
$155,386,000
and
$143,284,000
at
December 31, 2016
and
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,
|
|
2016
|
|
2015
|
Deferred income taxes:
|
|
|
|
Inventories
|
$
|
13,252
|
|
|
$
|
10,047
|
|
Accrued expenses
|
152,798
|
|
|
107,767
|
|
Derivative instruments
|
(175
|
)
|
|
(1,112
|
)
|
Cost in excess of net assets of business acquired
|
(10,257
|
)
|
|
(7,956
|
)
|
Property and equipment
|
(56,240
|
)
|
|
(28,853
|
)
|
Compensation payable in common stock
|
73,297
|
|
|
67,222
|
|
Net operating loss carryforwards and impairments
|
13,650
|
|
|
12,374
|
|
Valuation allowance
|
(6,981
|
)
|
|
(6,684
|
)
|
Total net deferred income tax asset
|
$
|
179,344
|
|
|
$
|
152,805
|
|
At
December 31, 2016
, the Company had available unused international and acquired federal net operating loss carryforwards of
$42,776,000
. The net operating loss carryforwards will expire at various dates from
2017
to
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, 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
2011
through
2016
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,
|
|
2016
|
|
2015
|
Balance at January 1,
|
$
|
22,509
|
|
|
$
|
9,836
|
|
Gross increases for tax positions of prior years
|
3,065
|
|
|
9,683
|
|
Gross increases for tax positions of current year
|
4,672
|
|
|
4,961
|
|
Decreases due to settlements and other prior year tax positions
|
(3,424
|
)
|
|
(178
|
)
|
Decreases for lapse of statute of limitations
|
(1,782
|
)
|
|
(1,364
|
)
|
Currency translation effect on foreign balances
|
(39
|
)
|
|
(429
|
)
|
Balance at December 31,
|
25,001
|
|
|
22,509
|
|
Reserves related to potential interest at December 31,
|
1,389
|
|
|
907
|
|
Unrecognized tax benefits at December 31,
|
$
|
26,390
|
|
|
$
|
23,416
|
|
Note 8. Shareholders’ Equity
Stock repurchase program.
The Polaris Board of Directors has authorized the cumulative repurchase of up to
86,500,000
shares of the Company’s common stock. As of
December 31, 2016
,
7,463,000
shares remain available for repurchases under the Board’s authorization. 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, 2016
, approximately
1,324,000
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, 2016
and
2015
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
2016
|
|
2015
|
Quarterly dividend declared and paid per common share
|
|
$
|
0.55
|
|
|
$
|
0.53
|
|
Total dividends declared and paid per common share
|
|
$
|
2.20
|
|
|
$
|
2.12
|
|
On
January 26, 2017
, the Polaris Board of Directors declared a regular cash dividend of
$0.58
per share payable on
March 15, 2017
to holders of record of such shares at the close of business on
March 1, 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 Option Plan and certain shares issued under the Omnibus Plan. A reconciliation of these amounts is as follows (in thousands):
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
Weighted average number of common shares outstanding
|
64,033
|
|
65,719
|
|
65,904
|
|
Director Plan and deferred stock units
|
162
|
|
210
|
|
196
|
|
ESOP
|
101
|
|
91
|
|
75
|
|
Common shares outstanding—basic
|
64,296
|
|
66,020
|
|
66,175
|
|
Dilutive effect of restricted stock awards
|
150
|
|
255
|
|
359
|
|
Dilutive effect of stock option awards
|
712
|
|
1,209
|
|
1,695
|
|
Common and potential common shares outstanding—diluted
|
65,158
|
|
67,484
|
|
68,229
|
|
During
2016
,
2015
and
2014
, 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
2,463,000
,
1,001,000
and
581,000
, respectively.
Accumulated other comprehensive loss.
Changes in the accumulated other comprehensive loss balance is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
Currency
Items
|
|
Cash Flow
Hedging Derivatives
|
|
Accumulated Other
Comprehensive
Loss
|
Balance as of December 31, 2015
|
$
|
(64,360
|
)
|
|
$
|
1,868
|
|
|
$
|
(62,492
|
)
|
Reclassification to the income statement
|
—
|
|
|
4,643
|
|
|
4,643
|
|
Change in fair value
|
(19,773
|
)
|
|
(6,215
|
)
|
|
(25,988
|
)
|
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 loss into the income statement for cash flow derivatives designated as hedging instruments
for the year ended December 31, 2016
and
2015
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
Derivatives in Cash
Flow Hedging Relationships
|
Location of Gain (Loss)
Reclassified from
Accumulated OCI
into Income
|
|
For the Years Ended December 31,
|
|
2016
|
|
2015
|
Foreign currency contracts
|
Other expense, net
|
|
$
|
1,325
|
|
|
$
|
(8,399
|
)
|
Foreign currency contracts
|
Cost of sales
|
|
3,318
|
|
|
4,549
|
|
Total
|
|
|
$
|
4,643
|
|
|
$
|
(3,850
|
)
|
The net amount of the existing gains or losses at
December 31, 2016
that is expected to be reclassified into the income statement within the next 12 months is expected to not be material. See Note 12 for further information regarding Polaris’ derivative activities.
Note 9. Financial Services Arrangements
Polaris Acceptance, a joint venture between Polaris and Wells Fargo Commercial Distribution Finance Corporation, a direct subsidiary of 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’ 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”) arranged by 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 2022.
Polaris’ total investment in Polaris Acceptance of
$94,009,000
at
December 31, 2016
is accounted for under the equity method, and is recorded in investment in finance affiliate in the accompanying consolidated balance sheets. At
December 31, 2016
, the outstanding amount of net receivables financed for dealers under this arrangement was
$1,206,641,000
, which included
$479,944,000
in the Polaris Acceptance portfolio and
$726,697,000
of receivables within the Securitization Facility (“Securitized 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
2016
, the potential
15 percent
aggregate repurchase obligation was approximately
$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,
|
|
2016
|
|
2015
|
|
2014
|
Revenues
|
$
|
66,414
|
|
|
$
|
63,548
|
|
|
$
|
40,968
|
|
Interest and operating expenses
|
6,182
|
|
|
4,738
|
|
|
3,678
|
|
Net income
|
$
|
60,232
|
|
|
$
|
58,810
|
|
|
$
|
37,290
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2016
|
|
2015
|
Finance receivables, net
|
$
|
479,944
|
|
|
$
|
472,029
|
|
Other assets
|
200
|
|
|
124
|
|
Total Assets
|
$
|
480,144
|
|
|
$
|
472,153
|
|
Notes payable
|
$
|
288,275
|
|
|
$
|
269,881
|
|
Other liabilities
|
3,851
|
|
|
4,126
|
|
Partners’ capital
|
188,018
|
|
|
198,146
|
|
Total Liabilities and Partners’ Capital
|
$
|
480,144
|
|
|
$
|
472,153
|
|
Polaris has agreements with Performance Finance, Sheffield Financial and Synchrony Bank, under which these financial institutions provide financing to end consumers of Polaris products. 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 insurance or financial risk under any of the 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 10. Investment in Other Affiliates
The Company has certain investments in nonmarketable securities of strategic companies. As of
December 31, 2016
and
2015
, these investments are primarily comprised of investments in Eicher-Polaris Private Limited (EPPL) and Brammo, Inc. (“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”). 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. As of
December 31, 2016
and
2015
, the carrying value of the Company’s investment in EPPL was
$20,182,000
and
$18,884,000
, respectively. Through
December 31, 2016
, Polaris has invested
$43,321,000
in the joint venture. Polaris’ share of EPPL loss for the years ended
December 31, 2016
and
2015
was
$7,175,000
and
$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, 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 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, 2016
, the Company had an accrual of
$45,075,000
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.
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’ 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, 2016
and
2015
the fair value of contingent purchase price commitments 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
for
2016
,
2015
and
2014
, 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, 2016
, are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Capital
Leases
|
|
Operating
Leases
|
2017
|
$
|
2,852
|
|
|
$
|
30,924
|
|
2018
|
2,250
|
|
|
23,437
|
|
2019
|
2,080
|
|
|
20,147
|
|
2020
|
1,995
|
|
|
14,785
|
|
2021
|
1,925
|
|
|
10,225
|
|
Thereafter
|
14,938
|
|
|
13,111
|
|
Total future minimum lease obligation
|
$
|
26,040
|
|
|
$
|
112,629
|
|
Note 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 maintain a balanced risk of fixed and floating interest rates associated with the Company’s 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, 2016
, Polaris had the following open foreign currency contracts (in thousands):
|
|
|
|
|
|
|
|
|
|
Foreign Currency
|
|
Notional Amounts
(in U.S. dollars)
|
|
Net Unrealized Gain (Loss)
|
Australian Dollar
|
|
$
|
22,498
|
|
|
$
|
771
|
|
Canadian Dollar
|
|
65,154
|
|
|
1,357
|
|
Japanese Yen
|
|
1,371
|
|
|
(57
|
)
|
Mexican Peso
|
|
17,942
|
|
|
(1,773
|
)
|
Total
|
|
$
|
106,965
|
|
|
$
|
298
|
|
These contracts, with maturities through December 31, 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 loss in shareholders’ equity.
Polaris occasionally enters into derivative contracts to hedge a portion of the exposure related to diesel fuel and aluminum. As of
December 31, 2016
, there were no outstanding commodity derivative contracts in place. As of December 31, 2015, diesel fuel and aluminum derivative contracts did not meet the criteria for hedge accounting.
The table below summarizes the carrying values of derivative instruments as of
December 31, 2016
and
2015
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying Values of Derivative Instruments as of December 31, 2016
|
|
Fair Value—
Assets
|
|
Fair Value—
(Liabilities)
|
|
Derivative Net
Carrying Value
|
Derivatives designated as hedging instruments
|
|
|
|
|
|
Foreign exchange contracts(1)
|
$
|
2,128
|
|
|
$
|
(1,830
|
)
|
|
$
|
298
|
|
Total derivatives designated as hedging instruments
|
$
|
2,128
|
|
|
$
|
(1,830
|
)
|
|
$
|
298
|
|
Total derivatives
|
$
|
2,128
|
|
|
$
|
(1,830
|
)
|
|
$
|
298
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying Values of Derivative Instruments as of December 31, 2015
|
|
Fair Value—
Assets
|
|
Fair Value—
(Liabilities)
|
|
Derivative Net
Carrying Value
|
Derivatives designated as hedging instruments
|
|
|
|
|
|
Foreign exchange contracts(1)
|
$
|
5,218
|
|
|
$
|
(2,451
|
)
|
|
$
|
2,767
|
|
Interest rate swap contracts(1)
|
186
|
|
|
—
|
|
|
186
|
|
Total derivatives designated as hedging instruments
|
$
|
5,404
|
|
|
$
|
(2,451
|
)
|
|
$
|
2,953
|
|
Commodity contracts(1)
|
—
|
|
|
$
|
(354
|
)
|
|
$
|
(354
|
)
|
Total derivatives not designated as hedging instruments
|
—
|
|
|
$
|
(354
|
)
|
|
$
|
(354
|
)
|
Total derivatives
|
$
|
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 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 amount of gains (losses), net of tax, related to the effective portion of derivative instruments designated as cash flow hedges included in accumulated other comprehensive loss for the years ended
December 31, 2016
and
2015
was
$(1,572,000)
and
$3,320,000
, respectively.
See Note 8 for information about the amount of gains and losses, net of tax, reclassified from accumulated other comprehensive income 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, 2016
and
2015
.
The Company recognized a loss of
$121,000
and
$2,994,000
in cost of sales on commodity contracts not designated as hedging instruments in
2016
and
2015
, respectively.
Note 13. Segment Reporting
The Company’s reportable segments are based on the Company’s method of internal reporting, which generally segregates the operating segments by product line, inclusive of wholegoods and PG&A. The internal reporting of these operating segments is defined based, in part, on the reporting and review process used by the Company’s Chief Executive Officer. The Company has
five
operating segments: 1) ORV, 2) Snowmobiles, 3) Motorcycles, 4) Global Adjacent Markets, and 5) Other, and
four
reportable segments: 1) ORV/Snowmobiles, 2) Motorcycles, 3) Global Adjacent Markets and 4) Other.
The ORV/Snowmobiles segment includes the aggregated results of our ORV and Snowmobiles operating segments. The Motorcycles, Global Adjacent Markets and Other segments include the results for those respective operating segments. Other includes our November 2016 acquisition of TAP. The Corporate amounts include costs that are not allocated to individual segments, which include incentive-based compensation and other unallocated manufacturing costs. Additionally, given the commonality of customers, manufacturing and asset management, the Company does not maintain separate balance sheets for each segment. Accordingly, the segment information presented below is limited to sales and gross profit data.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
($ 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,
|
|
2016
|
|
2015
|
|
2014
|
United States
|
$
|
3,557,228
|
|
|
$
|
3,688,980
|
|
|
$
|
3,339,905
|
|
Canada
|
307,094
|
|
|
378,725
|
|
|
454,608
|
|
Other foreign countries
|
652,307
|
|
|
651,585
|
|
|
685,135
|
|
Consolidated sales
|
$
|
4,516,629
|
|
|
$
|
4,719,290
|
|
|
$
|
4,479,648
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2016
|
|
2015
|
United States
|
$
|
637,632
|
|
|
$
|
548,410
|
|
Other foreign countries
|
89,964
|
|
|
102,268
|
|
Consolidated property and equipment, net
|
$
|
727,596
|
|
|
$
|
650,678
|
|
Note 14. Subsequent Event
On January 9, 2017, our Board of Directors approved a 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 near future. The Company estimates the total costs to wind down the brand could be in a range of
$50,000,000
to
$70,000,000
in 2017.
Note 15. Quarterly Financial Data (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
Gross profit
|
|
Net income
|
|
Diluted net income per share
|
|
(In thousands, except per share data)
|
2016
|
|
|
|
|
|
|
|
First Quarter
|
$
|
982,996
|
|
|
$
|
247,578
|
|
|
$
|
46,889
|
|
|
$
|
0.71
|
|
Second Quarter
|
1,130,777
|
|
|
284,503
|
|
|
71,166
|
|
|
1.09
|
|
Third Quarter
|
1,185,067
|
|
|
260,770
|
|
|
32,312
|
|
|
0.50
|
|
Fourth Quarter
|
1,217,789
|
|
|
312,772
|
|
|
62,581
|
|
|
0.97
|
|
Totals
|
$
|
4,516,629
|
|
|
$
|
1,105,623
|
|
|
$
|
212,948
|
|
|
$
|
3.27
|
|
2015
|
|
|
|
|
|
|
|
First Quarter
|
$
|
1,033,345
|
|
|
$
|
293,731
|
|
|
$
|
88,563
|
|
|
$
|
1.30
|
|
Second Quarter
|
1,124,327
|
|
|
319,414
|
|
|
100,943
|
|
|
1.49
|
|
Third Quarter
|
1,456,000
|
|
|
415,623
|
|
|
155,173
|
|
|
2.30
|
|
Fourth Quarter
|
1,105,618
|
|
|
310,274
|
|
|
110,682
|
|
|
1.66
|
|
Totals
|
$
|
4,719,290
|
|
|
$
|
1,339,042
|
|
|
$
|
455,361
|
|
|
$
|
6.75
|
|