NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Organization and Significant Accounting Policies
Polaris 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, Global Adjacent Markets vehicles, and Boats. 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, retail stores and its subsidiaries. The primary markets for the Company’s 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 intercompany 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.
Reclassifications. Certain reclassifications of previously reported balance sheet amounts have been made to conform to the current year presentation. The reclassifications had no impact on the consolidated statements of income, cash flows, or total assets, total liabilities, or total equity in the consolidated balance sheets, as previously reported.
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 foreign currency contracts and interest rate 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 foreign currency and interest rate transactions.
Assets and liabilities measured at fair value on a recurring basis are summarized below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements as of December 31, 2019
|
Asset (Liability)
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Non-qualified deferred compensation assets
|
$
|
48,874
|
|
|
$
|
48,874
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Total assets at fair value
|
$
|
48,874
|
|
|
$
|
48,874
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Non-qualified deferred compensation liabilities
|
$
|
(48,874
|
)
|
|
$
|
(48,874
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
Foreign exchange contracts, net
|
(76
|
)
|
|
—
|
|
|
(76
|
)
|
|
—
|
|
Interest rate contracts, net
|
(8,000
|
)
|
|
—
|
|
|
(8,000
|
)
|
|
—
|
|
Total liabilities at fair value
|
$
|
(56,950
|
)
|
|
$
|
(48,874
|
)
|
|
$
|
(8,076
|
)
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements as of December 31, 2018
|
Asset (Liability)
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Non-qualified deferred compensation assets
|
$
|
48,545
|
|
|
$
|
48,545
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Foreign exchange contracts, net
|
3,128
|
|
|
—
|
|
|
3,128
|
|
|
—
|
|
Total assets at fair value
|
$
|
51,673
|
|
|
$
|
48,545
|
|
|
$
|
3,128
|
|
|
$
|
—
|
|
Non-qualified deferred compensation liabilities
|
$
|
(48,545
|
)
|
|
$
|
(48,545
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
Interest rate contracts, net
|
(2,665
|
)
|
|
—
|
|
|
(2,665
|
)
|
|
—
|
|
Total liabilities at fair value
|
$
|
(51,210
|
)
|
|
$
|
(48,545
|
)
|
|
$
|
(2,665
|
)
|
|
$
|
—
|
|
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, finance lease obligations and notes payable, approximate their fair values. At December 31, 2019 and December 31, 2018, the fair value of the Company’s long-term debt, finance lease obligations and notes payable was approximately $1,769,292,000 and $2,013,684,000, respectively, and was determined primarily 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, finance lease obligations and notes payable including current maturities was $1,693,509,000 and $1,962,570,000 as of December 31, 2019 and December 31, 2018, 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 3 and 7 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 11 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 net realizable value. The major components of inventories are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
December 31, 2018
|
Raw materials and purchased components
|
$
|
344,621
|
|
|
$
|
233,258
|
|
Service parts, garments and accessories
|
356,981
|
|
|
342,593
|
|
Finished goods
|
476,169
|
|
|
442,003
|
|
Less: reserves
|
(56,660
|
)
|
|
(48,343
|
)
|
Inventories
|
$
|
1,121,111
|
|
|
$
|
969,511
|
|
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 10 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 11 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 finance leases is included with depreciation expense. Fully depreciated tooling is eliminated from the accounting records annually.
Goodwill and other intangible assets. Goodwill represents the excess of the cost of acquired businesses over the net of the fair value of identifiable tangible net assets and identifiable intangible assets purchased and liabilities assumed. Goodwill is tested at least annually for impairment and is tested for impairment more frequently when events or changes in circumstances indicate that the asset might be impaired. The Company completes its annual goodwill impairment test as of the first day of the fourth quarter.
The Company may first perform a qualitative assessment to determine whether it is more likely than not that the fair value of each reporting unit is less than its carrying amount. A qualitative assessment requires that we consider events or circumstances including macroeconomic conditions, industry and market considerations, cost factors, overall financial performance, changes in management or key personnel, changes in strategy, changes in customers, changes in the composition or carrying amount of a reporting unit’s net assets, and changes in our stock price. If, after assessing the totality of events or circumstances, it is determined that it is more likely than not that the fair value of the reporting unit is less than its carrying amount, or if the Company elects to bypass the qualitative test and proceed to a quantitative test, then the quantitative goodwill impairment test is performed. A quantitative test includes comparing the fair value of each reporting unit to the carrying amount of the reporting unit, including goodwill. The fair value of each reporting unit is determined using a discounted cash flow analysis and a market approach. If the estimated fair value is less than the carrying amount of the reporting unit, an impairment is recognized in an amount equal to the difference, limited to the total amount of goodwill allocated to that reporting unit.
Under the quantitative goodwill impairment test, the fair value of each reporting unit is determined using a discounted cash flow analysis and market approach. In developing the Company’s discounted cash flow analysis, assumptions about future revenues and expenses, capital expenditures and changes in working capital are based on the Company’s annual operating plan and long-term business plan for each of the reporting units. These plans take into consideration numerous factors including historical experience, anticipated future economic conditions, changes in raw material prices and
growth expectations for the industries and end markets the Company participates in. The Company completed a qualitative assessment for the ORV, Snow, Motorcycles and Global Adjacent Markets reporting units and a quantitative goodwill test for the Aftermarket and Boats reporting units.
The Company’s primary identifiable intangible assets include: dealer/customer relationships, brand/trade names, developed technology, and non-compete agreements. Identifiable intangibles with finite lives are amortized and those identifiable intangibles with indefinite lives are not amortized. Identifiable intangible assets that are subject to amortization are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Identifiable intangible assets with indefinite lives are tested for impairment annually or more frequently when events or changes in circumstances indicate that the asset might be impaired. The Company’s identifiable intangible assets with indefinite lives include brand/trade names. The impairment test consists of a comparison of the fair value of the brand/trade name with its carrying value. The Company completes its annual impairment test as of the first day of the fourth quarter each year for identifiable intangible assets with indefinite lives.
The results of the impairment tests indicated that no goodwill or indefinite-lived intangible asset impairment existed as of the test date. Refer to Note 7 for additional information regarding goodwill and other intangible assets.
Revenue recognition. With respect to wholegood vehicles, boats, parts, garments and accessories, revenue is recognized when the Company transfers control of the product to the customer. With respect to services provided by the Company, revenue is recognized upon completion of the service or over the term of the service agreement in proportion to the costs expected to be incurred in satisfying the obligations over the term of the service period. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring goods or providing services. Historically, product returns, whether in the normal course of business or resulting from repurchases made under the floorplan financing program, have not been material. However, the Company has agreed to repurchase products repossessed by the finance companies up to certain limits. The Company’s financial exposure is limited to the difference between the amount paid to the finance companies and the amount received on the resale of the repossessed product. No material losses have been incurred under these agreements. The Company has not historically recorded any significant sales return allowances because the Company has not been required to repurchase a significant number of units. However, an adverse change in retail sales could cause this situation to change. Refer to Note 2 for additional information regarding revenue.
Sales promotions and incentives. Polaris provides for estimated sales promotion and incentive expenses, which are recognized as a component of sales in measuring the amount of consideration the Company expects to receive in exchange for transferring goods or providing services. 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. The Company records these amounts as a liability in the consolidated balance sheet until they are ultimately paid. 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. Adjustments to sales promotions and incentives accruals are made as actual usage becomes known in order to properly estimate the amounts necessary to generate consumer demand based on market conditions as of the balance sheet date.
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, 2019, 2018 and 2017, Polaris incurred $77,404,000, $65,001,000 and $75,307,000 of advertising expenses, respectively.
Product warranties. Polaris provides a limited warranty for its vehicles and boats for a period of six months to ten years, depending on the product. Polaris provides longer warranties in certain geographical markets as determined by local regulations and customary practice and may also provide longer warranties related to certain promotional programs. Polaris’ standard warranties require the Company, through its dealer network, to repair or replace defective products during such warranty periods. 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. The Company records these amounts as a liability in the consolidated balance sheet until they are ultimately paid. Adjustments to the warranty reserve are made based on actual claims experience in order to properly estimate the amounts necessary to settle future and existing claims on products sold as of the balance sheet date. The warranty reserve includes the estimated costs related to recalls, which are accrued when probable and estimable. Factors that could have an impact on the warranty reserve include the following: changes in manufacturing quality, shifts in product mix, changes in warranty coverage periods, weather and its impact on product usage, product recalls and changes in sales volume.
The activity in the warranty reserve during the periods presented was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
Balance at beginning of year
|
$
|
121,824
|
|
|
$
|
123,840
|
|
|
$
|
119,274
|
|
Additions to reserve related to acquisitions
|
8,809
|
|
|
19,468
|
|
|
—
|
|
Additions charged to expense
|
122,909
|
|
|
105,015
|
|
|
145,705
|
|
Warranty claims paid, net
|
(117,358
|
)
|
|
(126,499
|
)
|
|
(141,139
|
)
|
Balance at end of year
|
$
|
136,184
|
|
|
$
|
121,824
|
|
|
$
|
123,840
|
|
Share-based employee compensation. The Company recognizes in the financial statements the grant-date fair value of stock options and other equity-based compensation issued to employees. Determining the appropriate fair-value model and calculating the fair value of share-based awards at the date of grant requires judgment. The Company utilizes the Black-Scholes option pricing model to estimate the fair value of employee stock options, and the Monte Carlo model to estimate the fair value of employee performance restricted stock units that include a market condition. These pricing models also require the use of input assumptions, including expected volatility, expected life, expected dividend rate, and expected risk-free rate of return. The Company utilizes historical volatility as the Company believes this is reflective of market conditions. The expected life of the awards is based on historical exercise patterns. The risk-free interest rate assumption is based on observed interest rates appropriate for the terms of awards. The dividend yield assumption is based on the Company’s history of dividend payouts. The Company develops an estimate of the number of share-based awards that will be forfeited due to employee turnover. Changes in the estimated forfeiture rate can have a significant effect on reported share-based compensation, as the effect of adjusting the rate for all expense amortization is recognized in the period the forfeiture estimate is changed. If the actual forfeiture rate is higher or lower than the estimated forfeiture rate, then an adjustment is made to increase or decrease the estimated forfeiture rate, which will result in a decrease or increase to the expense recognized in the financial statements. If forfeiture adjustments are made, they would affect gross margin and operating expenses.
The Company estimates the likelihood and the rate of achievement for performance share-based awards, specifically long-term compensation grants of performance-based restricted stock unit awards. Changes in the estimated rate of achievement can have a significant effect on reported share-based compensation expenses as the effect of a change in the estimated achievement level is recognized in the period that the likelihood factor changes. If adjustments in the estimated rate of achievement are made, they would be reflected in gross margin and operating expenses. Fluctuations in the Company’s stock price can have a significant effect on reported share-based compensation expenses for liability-based awards. The impact from fluctuations in the Company’s stock price is recognized in the period of the change, and is reflected in gross profit and operating expenses. Refer to Note 4 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 profit 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 does not use any financial contracts for trading purposes.
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 its foreign subsidiaries. These contracts meet 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 (income) expense, net in the consolidated income statements, and gains and losses on the Mexican peso contracts at settlement are recorded in cost of sales in the consolidated statements of income. The contracts are recorded in other current assets or other current liabilities on the consolidated balance sheets. Unrealized gains and losses are recorded as a component of accumulated other comprehensive loss, net.
Polaris enters into interest rate swaps in order to maintain a balanced risk of fixed and floating interest rates associated with the Company’s long-term debt. These contracts meet the criteria for cash flow hedges. The contracts are recorded in other current assets or other current liabilities on the consolidated balance sheets. Unrealized gains and losses are recorded as a component of accumulated other comprehensive loss, net.
Refer to Note 14 for additional information regarding derivative instruments and hedging activities.
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 (income) expense, net in the consolidated statements of income.
Comprehensive income. Components of comprehensive income include net income, foreign currency translation adjustments, unrealized gains or losses on derivative instruments, retirement benefit plan activity, and other activity. The Company discloses comprehensive income in separate consolidated statements of comprehensive income.
New accounting pronouncements.
Revenue from contracts with customers. Effective January 1, 2018, the Company adopted ASU No. 2014-09, Revenue from Contracts with Customers, 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 using the modified retrospective approach. The adoption of these ASUs did not have a material impact on the Company’s consolidated financial position, results of operations, equity or cash flows as of the adoption date or for the year ended December 31, 2018. The Company has included the disclosures required by ASU 2014-09 in Note 2.
Leases. In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) and in July 2018, ASU No. 2018-10, Codification Improvements to Topic 842, Leases, and ASU 2018-11, Leases (Topic 842) - Targeted Improvements (collectively, “the new lease standard” or “ASC 842”). The new standard requires lessees to record assets and liabilities on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with the classification affecting the pattern of expense recognition in the income statement. The Company adopted the standard as of January 1, 2019 using the alternative transition method provided under ASC 842, which allowed the Company to initially apply the new lease standard at the adoption date. The Company elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed the Company to carry forward the historical lease classification. The Company did not elect the hindsight practical expedient permitted under the transition guidance within the new lease standard.
The Company made an accounting policy election to not record leases with an initial term of 12 months or less on the balance sheet. The Company also elected the practical expedient to not separate non-lease components from the lease components to which they relate, and instead account for each separate lease and non-lease component associated with
that lease component as a single lease component for all underlying asset classes. Accordingly, all costs associated with a lease contract are accounted for as lease cost.
The new standard resulted in the recognition of additional net lease assets and lease liabilities of approximately $115,681,000, as of January 1, 2019. The adoption of ASC 842 did not have a material impact on the Company’s consolidated results of operations, equity or cash flows as of the adoption date. Under the alternative method of adoption, comparative information was not restated, but will continue to be reported under the standards in effect for those periods. See Note 12 for further information regarding the Company’s leases.
Derivatives and hedging. Effective January 1, 2019, the Company adopted ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. The adoption of this ASU did not have a material impact on the Company’s financial position, results of operations, equity or cash flows.
Non-employee share-based payments. Effective January 1, 2019, the Company adopted ASU No. 2018-07, Compensation - Stock Compensation (Topic 718): Improvements to Non-employee Share-based Payment Accounting. The adoption of this ASU did not have a material impact on the Company’s financial position, results of operations, equity or cash flows.
Intangibles-Goodwill and Other. Effective January 1, 2019, the Company early adopted ASU 2017-04, Intangibles-Goodwill and Other (Topic 350). The new standard simplifies the subsequent measurement of goodwill by eliminating the second step of the goodwill impairment test.
Stranded Tax Effects. Effective January 1, 2019 the Company adopted ASU No. 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the reduction of the U.S. federal statutory income tax rate to 21% from 35% due to the enactment of the Tax Act. As a result of the adoption of ASU 2018-02, the Company recorded a $668,000 reclassification to decrease Accumulated Other Comprehensive Income and increase Retained Earnings.
Financial instruments. In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, and in November 2018 issued a subsequent amendment, ASU 2018-19, Codification Improvements to Topic 326, Financial Instruments - Credit Losses. ASU 2016-13 changes how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. ASU 2016-13 will replace today’s “incurred loss” approach with an “expected loss” model for instruments measured at amortized cost. ASU 2018-19 will affect loans, debt securities, trade receivables, net investments in leases, off balance sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope of this amendment that have the contractual right to receive cash. ASU 2016-13 is effective for fiscal years and interim periods beginning after December 15, 2019, and is effective for the Company’s fiscal year beginning January 1, 2020. The adoption of the ASU is not expected to have a material impact on the Company’s financial position, results of operations, equity or cash flows.
There are no other new accounting pronouncements that are expected to have a significant impact on Polaris’ consolidated financial statements.
Note 2. Revenue Recognition
The following tables disaggregate the Company’s revenue by major product type and geography (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2019
|
|
ORV / Snowmobiles
|
|
Motorcycles
|
|
Global Adj. Markets
|
|
Aftermarket
|
|
Boats
|
|
Total
|
Revenue by product type
|
|
|
|
|
|
|
|
|
|
|
|
Wholegoods
|
$
|
3,463,135
|
|
|
$
|
502,090
|
|
|
$
|
373,914
|
|
|
—
|
|
|
$
|
621,353
|
|
|
$
|
4,960,492
|
|
PG&A
|
745,928
|
|
|
82,006
|
|
|
87,341
|
|
|
$
|
906,751
|
|
|
—
|
|
|
1,822,026
|
|
Total revenue
|
$
|
4,209,063
|
|
|
$
|
584,096
|
|
|
$
|
461,255
|
|
|
$
|
906,751
|
|
|
$
|
621,353
|
|
|
$
|
6,782,518
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue by geography
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
$
|
3,470,141
|
|
|
$
|
375,977
|
|
|
$
|
232,626
|
|
|
$
|
867,052
|
|
|
$
|
605,910
|
|
|
$
|
5,551,706
|
|
Canada
|
304,020
|
|
|
31,129
|
|
|
4,612
|
|
|
39,699
|
|
|
15,443
|
|
|
394,903
|
|
EMEA
|
302,511
|
|
|
116,158
|
|
|
221,274
|
|
|
—
|
|
|
—
|
|
|
639,943
|
|
APLA
|
132,391
|
|
|
60,832
|
|
|
2,743
|
|
|
—
|
|
|
—
|
|
|
195,966
|
|
Total revenue
|
$
|
4,209,063
|
|
|
$
|
584,096
|
|
|
$
|
461,255
|
|
|
$
|
906,751
|
|
|
$
|
621,353
|
|
|
$
|
6,782,518
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2018
|
|
ORV / Snowmobiles
|
|
Motorcycles
|
|
Global Adj. Markets
|
|
Aftermarket
|
|
Boats
|
|
Total
|
Revenue by product type
|
|
|
|
|
|
|
|
|
|
|
|
Wholegoods
|
$
|
3,237,463
|
|
|
$
|
465,269
|
|
|
$
|
366,103
|
|
|
—
|
|
|
$
|
279,656
|
|
|
$
|
4,348,491
|
|
PG&A
|
681,954
|
|
|
80,377
|
|
|
78,541
|
|
|
$
|
889,177
|
|
|
—
|
|
|
1,730,049
|
|
Total revenue
|
$
|
3,919,417
|
|
|
$
|
545,646
|
|
|
$
|
444,644
|
|
|
$
|
889,177
|
|
|
$
|
279,656
|
|
|
$
|
6,078,540
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue by geography
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
$
|
3,178,104
|
|
|
$
|
371,483
|
|
|
$
|
212,653
|
|
|
$
|
847,293
|
|
|
$
|
274,274
|
|
|
$
|
4,883,807
|
|
Canada
|
293,269
|
|
|
31,150
|
|
|
18,539
|
|
|
41,884
|
|
|
5,382
|
|
|
390,224
|
|
EMEA
|
306,890
|
|
|
87,977
|
|
|
208,032
|
|
|
—
|
|
|
—
|
|
|
602,899
|
|
APLA
|
141,154
|
|
|
55,036
|
|
|
5,420
|
|
|
—
|
|
|
—
|
|
|
201,610
|
|
Total revenue
|
$
|
3,919,417
|
|
|
$
|
545,646
|
|
|
$
|
444,644
|
|
|
$
|
889,177
|
|
|
$
|
279,656
|
|
|
$
|
6,078,540
|
|
With respect to wholegood vehicles, boats, parts, garments and accessories, revenue is recognized when the Company transfers control of the product to the customer. With respect to services provided by the Company, revenue is recognized upon completion of the service or over the term of the service agreement in proportion to the costs expected to be incurred in satisfying the obligations over the term of the service period. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring goods or providing services. Sales, value add, and other taxes the Company collects concurrent with revenue-producing activities are excluded from revenue. Incidental items that are immaterial in the context of the contract are recognized as expense. The expected costs associated with the Company’s limited warranties and field service bulletin actions are recognized as expense when the products are sold. The Company recognizes revenue for vehicle service contracts that extend mechanical and maintenance coverage beyond the Company’s limited warranties over the life of the contract. Revenue from goods and services transferred to customers at a point-in-time accounts for the majority of the Company’s revenue. Revenue from products or services transferred over time is discussed in the deferred revenue section.
ORV/Snowmobiles, Motorcycles and Global Adjacent Markets segments
Wholegood vehicles and parts, garments and accessories. For the majority of wholegood vehicles, parts, garments and accessories (PG&A), the Company transfers control and recognizes a sale when it ships the product from its manufacturing facility, distribution center, or vehicle holding center to its customer (primarily dealers and distributors). The amount of consideration the Company receives and revenue it recognizes varies with changes in marketing incentives and rebates it offers to its dealers and their customers. Sales returns are not material. The Company adjusts its
estimate of revenue at the earlier of when the most likely amount of consideration it expects to receive changes or when the consideration becomes fixed.
Depending on the terms of the arrangement, the Company may also defer the recognition of a portion of the consideration received because it has to satisfy a future obligation (e.g., free extended service contracts). The Company uses an observable price to determine the stand-alone selling price for separate performance obligations. The Company has elected to recognize the cost for freight and shipping when control over vehicles, parts, garments or accessories has transferred to the customer as an expense in cost of sales.
Extended Service Contracts. The Company sells separately-priced service contracts that extend mechanical and maintenance coverages beyond its base limited warranty agreements to vehicle owners. The separately priced service contracts range from 12 months to 84 months. The Company primarily receives payment at the inception of the contract and recognizes revenue over the term of the agreement in proportion to the costs expected to be incurred in satisfying the obligations under the contract.
Aftermarket segment
The Company’s Aftermarket products are sold through dealer, distributor, retail, and e-commerce channels. The Company transfers control and recognizes a sale when products are shipped or delivered to its customer. The amount of consideration the Company receives and revenue it recognizes varies with changes in marketing incentives and rebates rights it offers to its customers and their customers. When the Company gives its customers the right to return eligible parts and accessories, it estimates the expected returns based on an analysis of historical experience. The Company adjusts its estimate of revenue at the earlier of when the most likely amount of consideration it expects to receive changes or when the consideration becomes fixed.
Service revenue. The Company offers installation services for parts that it sells. Service revenues are recognized upon completion of the service.
Depending on the terms of the arrangement, the Company may also defer the recognition of a portion of the consideration received because it has to satisfy a future obligation (e.g., extended service contracts). The Company uses an observable price to determine the stand-alone selling price for separate performance obligations. The Company has elected to recognize the cost for freight and shipping when control over parts, garments or accessories has transferred to the customer as an expense in cost of sales.
Boats segment
Boats. The Company transfers control and recognizes a sale when it ships the product from its manufacturing facility or distribution center to its customer (primarily dealers). The amount of consideration the Company receives and revenue it recognizes varies with changes in marketing incentives and rebates it offers to its dealers and their customers. Sales returns are not material. The Company adjusts its estimate of revenue at the earlier of when the most likely amount of consideration it expects to receive changes or when the consideration becomes fixed. The Company has elected to recognize the cost for freight and shipping when control over boats has transferred to the customer as an expense in cost of sales.
Deferred revenue
The Company finances 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. Warranty costs are recognized as incurred.
The Company expects to recognize approximately $34,254,000 of the unearned amount over the next 12 months and $47,301,000 thereafter. The activity in the deferred revenue reserve during the periods presented was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
Balance at beginning of year
|
$
|
59,915
|
|
|
$
|
45,760
|
|
|
$
|
26,157
|
|
New contracts sold
|
49,565
|
|
|
35,610
|
|
|
31,617
|
|
Less: reductions for revenue recognized
|
(27,925
|
)
|
|
(21,455
|
)
|
|
(12,014
|
)
|
Balance at end of year (1)
|
$
|
81,555
|
|
|
$
|
59,915
|
|
|
$
|
45,760
|
|
(1) The unamortized ESC premiums (deferred revenue) recorded in other current liabilities totaled $34,254,000 and $25,777,000 at December 31, 2019 and 2018, respectively, while the amount recorded in other long-term liabilities totaled $47,301,000 and $34,138,000 at December 31, 2019 and 2018, respectively.
Note 3. Acquisitions
2019 Acquisitions.
The Company did not complete any material acquisitions in 2019.
2018 Acquisitions.
Boat Holdings, LLC
On July 2, 2018, pursuant to the Agreement and Plan of Merger dated May 29, 2018, the Company completed the acquisition of Boat Holdings, LLC, a privately held Delaware limited liability company, headquartered in Elkhart, Indiana which manufactures boats (“Boat Holdings”).
The transaction was structured as an acquisition of 100% of the outstanding equity interests in Boat Holdings for aggregate consideration of $806,658,000, net of cash acquired, subject to customary adjustments based on, among other things, the amount of cash, debt and working capital in the business of Boat Holdings at the closing date. A portion of the aggregate consideration equal to $100,000,000 will be paid in the form of a series of deferred annual payments over 12 years following the closing date.
The Company funded the purchase price for the acquisition by amending, extending, and up-sizing the Credit Facility and with the proceeds of the issuance of 4.23% Senior Notes, Series 2018, due July 3, 2028, described in Note 6.
The consolidated statements of income for the years ended December 31, 2019 and 2018 include $621,353,000 and $279,656,000 of net sales and $124,613,000 and $46,252,000 of gross profit, respectively, related to Boats.
The following table summarizes the final fair values assigned to the Boat Holdings net assets acquired and the determination of net assets (in thousands):
|
|
|
|
|
Cash and cash equivalents
|
$
|
16,534
|
|
Trade receivables
|
17,528
|
|
Inventory
|
39,948
|
|
Other current assets
|
4,451
|
|
Property, plant and equipment
|
35,299
|
|
Customer relationships
|
341,080
|
|
Trademarks / trade names
|
210,680
|
|
Non-compete agreements
|
2,630
|
|
Goodwill
|
222,372
|
|
Accounts payable
|
(30,064
|
)
|
Other liabilities assumed
|
(37,266
|
)
|
Total fair value of net assets acquired
|
823,192
|
|
Less cash acquired
|
(16,534
|
)
|
Total consideration for acquisition, less cash acquired
|
$
|
806,658
|
|
On the acquisition date, amortizable intangible assets had a weighted-average useful life of approximately 19 years. The customer relationships were valued based on the Discounted Cash Flow Method and are amortized over 15-20 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 2018 acquisition of Boat Holdings had occurred at the beginning of fiscal 2017 (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
Net sales
|
$
|
6,782,518
|
|
|
$
|
6,429,700
|
|
|
$
|
5,980,741
|
|
Net income attributable to Polaris Inc.
|
328,800
|
|
|
360,690
|
|
|
182,749
|
|
|
|
|
|
|
|
Basic earnings per share
|
$
|
5.35
|
|
|
$
|
5.77
|
|
|
$
|
2.90
|
|
Diluted earnings per common share
|
$
|
5.28
|
|
|
$
|
5.64
|
|
|
$
|
2.85
|
|
The results for the years ended December 31, 2019 and 2018 have been adjusted to exclude the impact of approximately $6,352,000 and $9,646,000 of integration and acquisition-related costs (pre-tax) incurred by the Company that are directly attributable to the transaction.
The results for the years ended December 31, 2019, 2018, and 2017 have been adjusted to include the pro forma impact of amortization of intangible assets and the depreciation of property, plant, and equipment, based on purchase price allocations; the pro forma impact of additional interest expense relating to the acquisition; and the pro forma tax effect of both income before taxes and the pro forma adjustments. These performance results may not be indicative of the actual results that would have occurred under the ownership and management of the Company.
The pro forma 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 Boat Holdings acquisition.
2017 Acquisitions.
The Company did not complete any material acquisitions in 2017.
Note 4. Share-Based Compensation
Share-based plans. The Company grants long-term equity-based incentives and awards for the benefit of its employees and directors under the shareholder approved Polaris 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 24,325,000 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 one to four years from the award date and expire after ten years. In addition, since 2007, the Company has granted a total of 196,000 deferred stock units to its non-employee directors under the Omnibus Plan (15,000, 12,000 and 11,000 in 2019, 2018 and 2017, 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.
Under the Polaris Inc. Deferred Compensation Plan for Directors (“Director Plan”) and the Omnibus 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. Alternatively, these common stock equivalents may be diversified into other investments until board service ends, pursuant to the terms of the Director Plan. A maximum of 500,000 shares of common stock has been authorized under the Director Plan of which 73,000 common stock equivalents have been earned and 427,000 shares have been issued to retired directors as of December 31, 2019. Authorized shares under the Director Plan were exhausted in 2017. Since 2017, the Company has granted a total of 35,000 common stock equivalents to its non-employee directors under the Omnibus Plan (14,000 in 2019, 10,000 in 2018, and11,000 in 2017), which will be converted into common stock when their board service ends. As of December 31, 2019 and 2018, Polaris’ liability under the plans for the common stock equivalents totaled $11,035,000 and $7,253,000, 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 recognized during a period is based on the portion of the awards that are ultimately expected to vest. The Company estimates 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,
|
|
2019
|
|
2018
|
|
2017
|
Option awards
|
$
|
21,847
|
|
|
$
|
23,393
|
|
|
$
|
18,423
|
|
Other share-based awards
|
48,002
|
|
|
28,513
|
|
|
28,844
|
|
Total share-based compensation before tax
|
69,849
|
|
|
51,906
|
|
|
47,267
|
|
Tax benefit
|
16,624
|
|
|
12,354
|
|
|
17,555
|
|
Total share-based compensation expense included in net income
|
$
|
53,225
|
|
|
$
|
39,552
|
|
|
$
|
29,712
|
|
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 awards on the date of grant under ASC Topic 718, Polaris has used the Black-Scholes model for stock options, and the Monte Carlo simulation model for employee performance restricted stock units that include a market condition. Assumptions utilized in the model are evaluated and revised, as necessary, to reflect market conditions and experience.
At December 31, 2019, there was $91,538,000 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 1.37 years. Included in unrecognized share-based compensation expense is approximately $22,841,000 related to stock options and $68,697,000 for restricted stock.
General stock option and restricted stock information. The following summarizes stock option activity and the weighted average exercise price for the Omnibus Plan for the year ended December 31, 2019:
|
|
|
|
|
|
|
|
|
Omnibus Plan
(Active)
|
|
Options
Outstanding
|
|
Weighted
Average
Exercise
Price
|
Balance as of December 31, 2018
|
4,575,926
|
|
|
$
|
99.53
|
|
Granted
|
1,460,602
|
|
|
86.21
|
|
Exercised
|
(166,008
|
)
|
|
65.90
|
|
Forfeited
|
(216,262
|
)
|
|
105.95
|
|
Balance as of December 31, 2019
|
5,654,258
|
|
|
$
|
96.83
|
|
|
|
|
|
Vested or expected to vest as of December 31, 2019
|
5,654,258
|
|
|
$
|
96.83
|
|
Options exercisable as of December 31, 2019
|
2,802,466
|
|
|
$
|
103.08
|
|
The weighted average remaining contractual life of options outstanding and of options outstanding and exercisable as of December 31, 2019 was 6.61 years and 5.07 years, respectively.
The following assumptions were used to estimate the weighted average fair value of options of $19.54, $26.50 and $18.45 granted during the years ended December 31, 2019, 2018 and 2017, respectively:
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
Weighted-average volatility
|
32
|
%
|
|
30
|
%
|
|
29
|
%
|
Expected dividend yield
|
2.9
|
%
|
|
2.1
|
%
|
|
2.6
|
%
|
Expected term (in years)
|
4.5
|
|
|
4.4
|
|
|
4.7
|
|
Weighted average risk free interest rate
|
2.5
|
%
|
|
2.6
|
%
|
|
1.9
|
%
|
The total intrinsic value of options exercised during the year ended December 31, 2019 was $5,136,000. The total intrinsic value of options outstanding and of options outstanding and exercisable at December 31, 2019, was $73,730,000 and $35,503,000, 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 grant date fair value for performance awards with a total shareholder return (TSR) market condition were estimated using a Monte Carlo simulation model utilizing the following weighted-average assumptions:
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
Weighted-average volatility
|
34
|
%
|
|
33
|
%
|
|
31
|
%
|
Expected dividend yield
|
2.7
|
%
|
|
2.1
|
%
|
|
2.5
|
%
|
Expected term (in years)
|
3.0
|
|
|
3.0
|
|
|
3.0
|
|
Weighted average risk free interest rate
|
2.4
|
%
|
|
2.3
|
%
|
|
1.5
|
%
|
The Company used its historical stock price as the basis for the Company’s volatility assumption. The assumed risk-free interest rates were based on U.S. Treasury rates in effect at the time of grant. The expected term was based on the vesting period. The weighted-average fair value used to record compensation expense for TSR performance share awards granted during 2019, 2018, and 2017 was $96.38, $106.43, and $82.14 per award, respectively.
The following table summarizes restricted stock activity for the year ended December 31, 2019:
|
|
|
|
|
|
|
|
|
Shares
Outstanding
|
|
Weighted
Average
Grant Price
|
Balance as of December 31, 2018
|
1,641,197
|
|
|
$
|
92.19
|
|
Granted
|
545,365
|
|
|
89.75
|
|
Vested
|
(314,555
|
)
|
|
90.39
|
|
Canceled/Forfeited
|
(485,998
|
)
|
|
76.36
|
|
Balance as of December 31, 2019
|
1,386,009
|
|
|
$
|
96.92
|
|
Expected to vest as of December 31, 2019
|
1,397,750
|
|
|
$
|
96.79
|
|
The shares granted above include 125,000 performance restricted stock unit awards. These performance grants are the number of shares that would be earned at the target level of performance. The number of shares of Polaris common stock that could actually be delivered at the end of the three-year performance period for performance restricted stock units may be anywhere from 0% to 200% of target for each performance share, depending on the performance of the Company during such performance period.
The total intrinsic value of restricted stock expected to vest as of December 31, 2019 was $142,151,000. 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, 2019, 2018 and 2017 were $89.75, $114.42 and $85.97, respectively.
Note 5. 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 $10,335,000, $10,037,000 and $8,241,000, in 2019, 2018 and 2017, respectively. As of December 31, 2019 there were 3,282,000 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 $26,185,000, $24,458,000, and $22,101,000, in 2019, 2018 and 2017, 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 $48,874,000 and $48,545,000 at December 31, 2019, and 2018, 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, 2019, 133,706 shares are recorded at a fair value of $13,598,000 in temporary equity, which includes $11,834,000 of compensation cost and $1,764,000 of cumulative fair value adjustment recorded through retained earnings.
Note 6. Financing Agreement
The carrying value of debt, finance lease obligations, and notes payable and the average related interest rates were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average interest rate at December 31, 2019
|
|
Maturity
|
|
December 31, 2019
|
|
December 31, 2018
|
Revolving loan facility
|
1.10%
|
|
July 2023
|
|
$
|
75,183
|
|
|
$
|
187,631
|
|
Term loan facility
|
3.05%
|
|
July 2023
|
|
1,000,000
|
|
|
1,150,000
|
|
Senior notes—fixed rate
|
4.60%
|
|
May 2021
|
|
75,000
|
|
|
75,000
|
|
Senior notes—fixed rate
|
3.13%
|
|
December 2020
|
|
100,000
|
|
|
100,000
|
|
Senior notes—fixed rate
|
4.23%
|
|
July 2028
|
|
350,000
|
|
|
350,000
|
|
Finance lease obligations
|
5.18%
|
|
Various through 2029
|
|
16,073
|
|
|
17,587
|
|
Notes payable and other
|
4.23%
|
|
Various through 2030
|
|
81,388
|
|
|
87,608
|
|
Debt issuance costs
|
|
|
|
|
(4,135
|
)
|
|
(5,256
|
)
|
Total debt, finance lease obligations, and notes payable
|
|
|
|
|
$
|
1,693,509
|
|
|
$
|
1,962,570
|
|
Less: current maturities
|
|
|
|
|
166,695
|
|
|
66,543
|
|
Total long-term debt, finance lease obligations, and notes payable
|
|
|
|
|
$
|
1,526,814
|
|
|
$
|
1,896,027
|
|
Bank financing. In July 2018, Polaris amended its unsecured revolving loan facility to increase the facility to $700,000,000 and increase its term loan facility to $1,180,000,000, of which $1,000,000,000 is outstanding as of December 31, 2019. The expiration date of the facility was extended to July 2023, and interest will continue to be charged at rates based on a LIBOR or “prime” base rate. Under the facility, the Company is required to make principal
payments totaling $59,000,000 over the next 12 months, which are classified as current maturities in the consolidated balance sheets.
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. In July 2018, the Company entered into a Master Note Purchase Agreement to issue $350,000,000 of unsecured senior notes due July 2028.
The unsecured revolving 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, 2019.
Debt issuance costs are recognized as a reduction in the carrying value of the related long-term debt in the consolidated balance sheets and are being amortized to interest expense in the consolidated statements of income over the expected remaining terms of the related debt.
As a component of the Boat Holdings merger agreement, Polaris has committed to make a series of deferred payments to the former owners following the closing date of the merger through July 2030. The original discounted payable was for $76,733,000, of which $71,722,000 is outstanding as of December 31, 2019. The outstanding balance is included in long-term debt and current portion of long-term debt in the consolidated balance sheets.
The Company has a mortgage note payable agreement for land, on which Polaris built the Huntsville, Alabama manufacturing facility in 2016. The original mortgage note payable was for $14,500,000, of which $9,666,000 is outstanding as of December 31, 2019. The outstanding balance is included in notes payable and other. 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. The Company has met the required commitments to date.
The following summarizes activity under Polaris’ credit arrangements (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Total borrowings at December 31
|
$
|
1,600,183
|
|
|
$
|
1,862,631
|
|
|
$
|
883,000
|
|
Average outstanding borrowings during year
|
$
|
1,911,982
|
|
|
$
|
1,474,485
|
|
|
$
|
1,133,641
|
|
Maximum outstanding borrowings during year
|
$
|
2,127,940
|
|
|
$
|
1,999,731
|
|
|
$
|
1,319,105
|
|
Interest rate at December 31
|
3.29
|
%
|
|
3.64
|
%
|
|
2.91
|
%
|
Letters of credit. At December 31, 2019, Polaris had open letters of credit totaling $21,637,000. 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, and TCF Financial Corporation (see Note 10), provide floor plan financing to dealers on the purchase of Polaris products. The amount financed by worldwide dealers under these arrangements at December 31, 2019, was approximately $1,884,131,000. 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 for Polaris Acceptance, and 100 percent of the balances outstanding for TCF Financial Corporation. At December 31, 2019, the potential aggregate repurchase obligation was approximately $180,557,000 and $221,500,000 for Polaris Acceptance and TCF Financial Corporation, respectively. 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 7. Goodwill and Other Intangible Assets
Goodwill and other intangible assets, net of accumulated amortization, as of December 31, 2019 and 2018 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
Goodwill
|
$
|
659,937
|
|
|
$
|
647,077
|
|
Other intangible assets, net
|
830,298
|
|
|
870,517
|
|
Total goodwill and other intangible assets, net
|
$
|
1,490,235
|
|
|
$
|
1,517,594
|
|
There were no material additions to goodwill and other intangible assets in 2019. Additions to goodwill and other intangible assets in 2018 primarily relate to the acquisition of Boat Holdings in July 2018. The aggregate purchase price was allocated to the assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition. Boat Holding’s financial results are included in the Company’s consolidated results from the date of acquisition. The pro forma financial results and the purchase price allocation are included in Note 3.
The changes in the carrying amount of goodwill for the years ended December 31, 2019 and 2018 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
Balance as of beginning of year
|
$
|
647,077
|
|
|
$
|
433,374
|
|
Goodwill acquired and related adjustments
|
14,157
|
|
|
218,191
|
|
Currency translation effect on foreign goodwill balances
|
(1,297
|
)
|
|
(4,488
|
)
|
Balance as of end of year
|
$
|
659,937
|
|
|
$
|
647,077
|
|
For other intangible assets, the changes in the net carrying amount for the years ended December 31, 2019 and 2018 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
Gross
Amount
|
|
Accumulated
Amortization
|
|
Gross
Amount
|
|
Accumulated
Amortization
|
Other intangible assets, beginning
|
$
|
964,653
|
|
|
$
|
(94,136
|
)
|
|
$
|
423,846
|
|
|
$
|
(76,634
|
)
|
Intangible assets acquired during the period
|
1,077
|
|
|
—
|
|
|
557,390
|
|
|
—
|
|
Intangible assets disposed of during the period
|
(7,114
|
)
|
|
7,114
|
|
|
(13,659
|
)
|
|
13,659
|
|
Amortization expense
|
—
|
|
|
(40,882
|
)
|
|
—
|
|
|
(32,927
|
)
|
Currency translation effect on foreign balances
|
(1,788
|
)
|
|
1,374
|
|
|
(2,924
|
)
|
|
1,766
|
|
Other intangible assets, ending
|
$
|
956,828
|
|
|
$
|
(126,530
|
)
|
|
$
|
964,653
|
|
|
$
|
(94,136
|
)
|
The components of other intangible assets were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
Estimated Life
(Years)
|
|
Gross Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
|
Non-compete agreements
|
4
|
|
$
|
2,630
|
|
|
$
|
(986
|
)
|
|
$
|
1,644
|
|
Dealer/customer related
|
5-20
|
|
499,513
|
|
|
(116,142
|
)
|
|
383,371
|
|
Developed technology
|
5-7
|
|
12,655
|
|
|
(9,402
|
)
|
|
3,253
|
|
Total amortizable
|
|
|
514,798
|
|
|
(126,530
|
)
|
|
388,268
|
|
Non-amortizable—brand/trade names
|
|
|
442,030
|
|
|
—
|
|
|
442,030
|
|
Total other intangible assets, net
|
|
|
$
|
956,828
|
|
|
$
|
(126,530
|
)
|
|
$
|
830,298
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
Estimated Life
(Years)
|
|
Gross Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
|
Non-compete agreements
|
4
|
|
$
|
2,630
|
|
|
$
|
(329
|
)
|
|
$
|
2,301
|
|
Dealer/customer related
|
5-20
|
|
506,401
|
|
|
(85,614
|
)
|
|
420,787
|
|
Developed technology
|
5-7
|
|
13,323
|
|
|
(8,193
|
)
|
|
5,130
|
|
Total amortizable
|
|
|
522,354
|
|
|
(94,136
|
)
|
|
428,218
|
|
Non-amortizable—brand/trade names
|
|
|
442,299
|
|
|
—
|
|
|
442,299
|
|
Total other intangible assets, net
|
|
|
$
|
964,653
|
|
|
$
|
(94,136
|
)
|
|
$
|
870,517
|
|
Amortization expense for intangible assets for the year ended December 31, 2019 and 2018 was $40,882,000 and $32,927,000, respectively. Estimated amortization expense for 2020 through 2024 is as follows: 2020, $36,056,000; 2021, $33,288,000; 2022, $28,323,000; 2023, $25,791,000; 2024, $25,023,000; and after 2024, $239,787,000. 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 8. Income Taxes
The Tax Cuts and Jobs Act (the “Tax Act”) was enacted on December 22, 2017. The Tax Act reduced the U.S. federal corporate tax rate from 35% to 21%, required companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and created new taxes on certain foreign-sourced earnings.
The Company has applied the guidance in ASU 2018-05, Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118, when accounting for the enactment-date effects of the Tax Act. During the fourth quarter of 2018, the Company elected the period cost method related to the Global Intangible Low-Taxed Income (GILTI) and completed its accounting for the tax effects of the Tax Act which resulted in an immaterial change to the provisional amounts described above.
Polaris’ income before income taxes was generated from its United States and foreign operations as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
United States
|
$
|
344,346
|
|
|
$
|
344,728
|
|
|
$
|
264,207
|
|
Foreign
|
63,454
|
|
|
84,521
|
|
|
54,584
|
|
Income before income taxes
|
$
|
407,800
|
|
|
$
|
429,249
|
|
|
$
|
318,791
|
|
Components of Polaris’ provision for income taxes are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
Current:
|
|
|
|
|
|
Federal
|
$
|
46,441
|
|
|
$
|
39,051
|
|
|
$
|
41,134
|
|
State
|
18,199
|
|
|
3,759
|
|
|
7,264
|
|
Foreign
|
26,798
|
|
|
27,539
|
|
|
22,267
|
|
Deferred
|
(7,522
|
)
|
|
23,643
|
|
|
75,634
|
|
Total provision for income taxes
|
$
|
83,916
|
|
|
$
|
93,992
|
|
|
$
|
146,299
|
|
Reconciliation of the Federal statutory income tax rate to the effective tax rate is as follows:
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
Federal statutory rate
|
21.0
|
%
|
|
21.0
|
%
|
|
35.0
|
%
|
State income taxes, net of federal benefit
|
2.3
|
|
|
1.9
|
|
|
1.4
|
|
Domestic manufacturing deduction
|
(2.1
|
)
|
|
(1.4
|
)
|
|
(0.5
|
)
|
Research and development tax credit
|
(4.0
|
)
|
|
(3.1
|
)
|
|
(5.6
|
)
|
Stock based compensation
|
0.2
|
|
|
(1.4
|
)
|
|
(4.4
|
)
|
Valuation allowance
|
0.5
|
|
|
0.2
|
|
|
1.2
|
|
Tax Reform impact
|
—
|
|
|
0.4
|
|
|
17.4
|
|
Non-deductible expenses
|
—
|
|
|
—
|
|
|
2.0
|
|
Foreign tax rate differential
|
1.7
|
|
|
1.3
|
|
|
(0.3
|
)
|
Other permanent differences
|
1.0
|
|
|
3.0
|
|
|
(0.3
|
)
|
Effective income tax rate for continuing operations
|
20.6
|
%
|
|
21.9
|
%
|
|
45.9
|
%
|
Undistributed earnings relating to certain non-U.S. subsidiaries of approximately $188,033,000 and $186,679,000 at December 31, 2019 and 2018, respectively, are considered to be permanently reinvested. While these earnings would no longer be subject to incremental U.S. tax, if the Company were to actually distribute these earnings, they could be subject to additional foreign income taxes and/or withholding taxes payable to non-U.S. countries. Determination of the unrecognized deferred foreign 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. The net deferred income taxes consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2019
|
|
2018
|
Deferred income taxes:
|
|
|
|
Inventories
|
$
|
18,550
|
|
|
$
|
11,171
|
|
Accrued expenses
|
126,593
|
|
|
105,218
|
|
Cost in excess of net assets of businesses acquired
|
(35,203
|
)
|
|
(22,916
|
)
|
Property and equipment
|
(88,145
|
)
|
|
(72,252
|
)
|
Operating lease assets
|
(26,480
|
)
|
|
—
|
|
Operating lease liabilities
|
27,115
|
|
|
—
|
|
Employee compensation and benefits
|
61,441
|
|
|
56,286
|
|
Net operating loss and other loss carryforwards
|
20,079
|
|
|
13,847
|
|
Valuation allowance
|
(14,620
|
)
|
|
(10,370
|
)
|
Total net deferred income tax asset
|
$
|
89,330
|
|
|
$
|
80,984
|
|
At December 31, 2019, the Company had available unused international and acquired federal net operating loss carryforwards of $48,061,000. The net operating loss carryforwards will expire at various dates from 2021 to 2030, 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 federal benefit of state taxes and interest related to the reserves is recorded as a component of deferred taxes. The entire balance of unrecognized tax benefits at December 31, 2019, if recognized, would affect the Company’s effective tax rate. The Company anticipates that it is reasonably possible that gross unrecognized tax benefits as of December 31, 2019 may decrease by a range of zero to $12,000,000 during 2020, primarily as a result of ongoing U.S. federal examinations. Tax years 2013 through 2019 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,
|
|
2019
|
|
2018
|
Balance at January 1,
|
$
|
25,511
|
|
|
$
|
19,096
|
|
Gross increases for tax positions of prior years
|
1,237
|
|
|
6,586
|
|
Gross increases for tax positions of current year
|
3,969
|
|
|
2,522
|
|
Decreases due to settlements and other prior year tax positions
|
(5,629
|
)
|
|
(2,550
|
)
|
Decreases for lapse of statute of limitations
|
(752
|
)
|
|
—
|
|
Currency translation effect on foreign balances
|
42
|
|
|
(143
|
)
|
Balance at December 31,
|
24,378
|
|
|
25,511
|
|
Reserves related to potential interest and penalties at December 31,
|
3,714
|
|
|
3,090
|
|
Unrecognized tax benefits at December 31,
|
$
|
28,092
|
|
|
$
|
28,601
|
|
Note 9. Shareholders’ Equity
Stock repurchase program. The Polaris Board of Directors has authorized the cumulative repurchase of up to 90,460,000 shares of the Company’s common stock. As of December 31, 2019, 3,156,000 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,
|
|
2019
|
|
2018
|
|
2017
|
Total number of shares repurchased and retired
|
95
|
|
|
3,184
|
|
|
1,028
|
|
Total investment
|
$
|
8,378
|
|
|
$
|
348,663
|
|
|
$
|
90,461
|
|
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, 2019, approximately 1,427,000 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, 2019, 2018, and 2017 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
Quarterly dividend declared and paid per common share
|
$
|
0.61
|
|
|
$
|
0.60
|
|
|
$
|
0.58
|
|
Total dividends declared and paid per common share
|
$
|
2.44
|
|
|
$
|
2.40
|
|
|
$
|
2.32
|
|
On January 31, 2020, the Polaris Board of Directors declared a regular cash dividend of $0.62 per share payable on March 16, 2020 to holders of record of such shares at the close of business on March 2, 2020.
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,
|
|
2019
|
|
2018
|
|
2017
|
Weighted average number of common shares outstanding
|
61,109
|
|
62,236
|
|
62,668
|
|
Director Plan and deferred stock units
|
207
|
|
177
|
|
157
|
|
ESOP
|
121
|
|
100
|
|
91
|
|
Common shares outstanding—basic
|
61,437
|
|
62,513
|
|
62,916
|
|
Dilutive effect of restricted stock awards
|
581
|
|
679
|
|
384
|
|
Dilutive effect of stock option awards
|
274
|
|
757
|
|
880
|
|
Common and potential common shares outstanding—diluted
|
62,292
|
|
63,949
|
|
64,180
|
|
During 2019, 2018 and 2017, the number of options that were not included in the computation of diluted income per share because the option price was greater than the market price, and therefore, the effect would have been anti-dilutive, was 3,846,000, 1,723,000 and 2,768,000, respectively.
Accumulated other comprehensive loss. Changes in the accumulated other comprehensive loss balance is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Currency Translation
|
|
Cash Flow Hedging Derivatives
|
|
Retirement Plan and Other Activity
|
|
Accumulated Other Comprehensive Loss
|
Balance as of December 31, 2018
|
$
|
(60,504
|
)
|
|
$
|
423
|
|
|
(2,892
|
)
|
|
$
|
(62,973
|
)
|
Reclassification to the income statement
|
—
|
|
|
(3,219
|
)
|
|
250
|
|
|
(2,969
|
)
|
Reclassification to retained earnings
|
—
|
|
|
—
|
|
|
(668
|
)
|
|
(668
|
)
|
Change in fair value
|
(2,792
|
)
|
|
(3,318
|
)
|
|
—
|
|
|
(6,110
|
)
|
Balance as of December 31, 2019
|
$
|
(63,296
|
)
|
|
$
|
(6,114
|
)
|
|
$
|
(3,310
|
)
|
|
$
|
(72,720
|
)
|
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 and for actuarial losses related to retirement benefit plans the years ended December 31, 2019 and 2018 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Derivatives in Cash Flow Hedging Relationships and Other Activity
|
Location of Gain (Loss) Reclassified from Accumulated OCI into Income
|
|
For the Years Ended December 31,
|
|
2019
|
|
2018
|
Foreign currency contracts
|
Other expense, net
|
|
$
|
3,198
|
|
|
$
|
9,378
|
|
Foreign currency contracts
|
Cost of sales
|
|
920
|
|
|
686
|
|
Interest rate contracts
|
Interest expense
|
|
(899
|
)
|
|
(158
|
)
|
Retirement plan activity
|
Operating expenses
|
|
(250
|
)
|
|
(261
|
)
|
Total
|
|
$
|
2,969
|
|
|
$
|
9,645
|
|
The net amount of the existing gains or losses at December 31, 2019 that is expected to be reclassified into the income statement within the next 12 months is expected to not be material. See Note 14 for further information regarding Polaris’ derivative activities.
Note 10. 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 of snowmobiles, ORVs, motorcycles, and related PG&A, whereby Polaris receives payment within a few days of shipment of the product.
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, as amended and extended in August 2019, is effective through February 2027.
Polaris’ total investment in Polaris Acceptance of $110,641,000 at December 31, 2019 is accounted for under the equity method, and is recorded in investment in finance affiliate in the accompanying consolidated balance sheets. At December 31, 2019, the outstanding amount of net receivables financed for dealers under this arrangement was $1,423,428,000, which included $687,646,000 in the Polaris Acceptance portfolio and $735,782,000 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 2019, the potential 15 percent aggregate repurchase obligation was approximately $180,557,000. 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,
|
|
2019
|
|
2018
|
|
2017
|
Revenues
|
$
|
79,276
|
|
|
$
|
72,093
|
|
|
$
|
61,645
|
|
Interest and operating expenses
|
14,337
|
|
|
11,832
|
|
|
7,590
|
|
Net income
|
$
|
64,939
|
|
|
$
|
60,261
|
|
|
$
|
54,055
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2019
|
|
2018
|
Finance receivables, net
|
$
|
687,646
|
|
|
$
|
573,669
|
|
Other assets
|
105
|
|
|
102
|
|
Total Assets
|
$
|
687,751
|
|
|
$
|
573,771
|
|
Notes payable
|
$
|
463,055
|
|
|
$
|
386,438
|
|
Other liabilities
|
3,414
|
|
|
3,215
|
|
Partners’ capital
|
221,282
|
|
|
184,118
|
|
Total Liabilities and Partners’ Capital
|
$
|
687,751
|
|
|
$
|
573,771
|
|
A subsidiary of TCF Financial Corporation (“TCF”) finances a portion of Polaris’ United States sales of boats whereby Polaris receives payment within a few days of shipment of the product. Polaris has agreed to repurchase products repossessed by TCF up to a maximum of 100 percent of the aggregate outstanding TCF receivables balance. At December 31, 2019, the potential aggregate repurchase obligation was approximately $221,500,000. 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.
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 11. Investment in Other Affiliates
The Company has certain investments in nonmarketable securities of strategic companies. The Company had $0 and $6,133,000 of such investments as of December 31, 2019 and 2018, respectively, which are recorded as a component of other long-term assets in the accompanying consolidated balance sheets.
During 2018, the Company had an investment in Eicher-Polaris Private Limited (“EPPL”) a joint venture established in 2012 with Eicher Motors Limited (“Eicher”) intended to design, develop and manufacture a full range of new vehicles for India and other emerging markets. However, during the first quarter of 2018, the Board of Directors of EPPL approved a shut down of the operations of the EPPL joint venture. As a result of the closure, the Company recognized $27,048,000 of costs, including impairment, associated with the wind-down of EPPL for the year ended December 31, 2018. No such costs were recorded in 2019. The investment was fully impaired as of December 31, 2019 and 2018.
The Company impairs 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. As a result of the Victory® Motorcycles wind down, the Company recognized an impairment of substantially all of its cost-method investment in Brammo, Inc. in the first quarter of 2017. The impairment was recorded within other expense, net in the consolidated statements of income, and reduced the Brammo investment. See Note 16 for additional discussion related to charges incurred related to the Victory Motorcycles wind down.
In October 2017, an agreement was signed to sell the assets of Brammo, Inc. to a third party. The sale was completed in the fourth quarter of 2017, and as a result of the sale, Polaris recorded a gain, which is included in Other (income) expense, net on the 2017 consolidated statements of income. During the first quarter of 2018, Polaris received additional distributions from Brammo and recognized a gain of $13,478,000, which is included in Other (income) expense on the consolidated statements of income.
Note 12. Leases
The Company leases certain manufacturing facilities, retail stores, warehouses, distribution centers, office space, land, and equipment. Leases with an initial term of 12 months or less are not recorded on the balance sheet; the Company recognizes lease expense for these leases on a straight-line basis over the lease term. The Company does not separate non-lease components from the lease components to which they relate, and instead accounts for each separate lease and non-lease component associated with that lease component as a single lease component for all underlying asset classes. As most of the Company's leases do not provide an implicit rate, the Company uses its estimated incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments.
Some leases include one or more options to renew, with renewal terms that can extend the lease term from one to 20 years years or more. Such options are included in the lease term when it is reasonably certain that the option will be exercised. Certain leases also include options to purchase the leased property. The depreciable life of assets and leasehold improvements are limited by the expected lease term, unless there is a transfer of title or purchase option reasonably certain of exercise. Certain lease agreements include rental payments that are variable based on usage or are adjusted periodically for inflation. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants. Information on the Company’s leases is summarized as follows (in thousands):
|
|
|
|
|
|
|
|
Classification
|
|
December 31, 2019
|
Assets
|
|
|
|
Operating lease assets
|
Operating lease assets
|
|
$
|
110,153
|
|
Finance lease assets
|
Property and equipment, net (1)
|
|
12,721
|
|
Total leased assets
|
|
|
$
|
122,874
|
|
Liabilities
|
|
|
|
Current
|
|
|
|
Operating lease liabilities
|
Current operating lease liabilities
|
|
$
|
34,904
|
|
Finance lease liabilities
|
Current portion of debt, finance lease obligations and notes payable
|
|
1,259
|
|
Long-term
|
|
|
|
Operating lease liabilities
|
Long-term operating lease liabilities
|
|
77,926
|
|
Finance lease liabilities
|
Finance lease obligations
|
|
14,814
|
|
Total lease liabilities
|
|
|
$
|
128,903
|
|
(1) Finance lease assets are recorded net of accumulated amortization of $7,757,000 as of December 31, 2019.
|
|
|
|
|
|
|
Lease Cost
|
Classification
|
|
For the Year Ended December 31, 2019
|
Operating lease cost (1)
|
Operating expenses and cost of sales
|
|
$
|
42,477
|
|
Finance lease cost
|
|
|
|
Amortization of leased assets
|
Operating expenses and cost of sales
|
|
1,486
|
|
Interest on lease liabilities
|
Interest expense
|
|
875
|
|
Sublease income
|
Other (income) expense, net
|
|
(2,382
|
)
|
Total lease cost
|
|
|
$
|
42,456
|
|
(1) Includes short-term leases and variable lease costs, which are immaterial.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturity of Lease Liabilities
|
|
Operating Leases (1)
|
|
Finance Leases
|
|
Total
|
2020
|
|
$
|
38,095
|
|
|
$
|
2,119
|
|
|
$
|
40,214
|
|
2021
|
|
28,004
|
|
|
2,107
|
|
|
30,111
|
|
2022
|
|
19,289
|
|
|
2,070
|
|
|
21,359
|
|
2023
|
|
13,960
|
|
|
2,070
|
|
|
16,030
|
|
2024
|
|
8,913
|
|
|
2,085
|
|
|
10,998
|
|
Thereafter
|
|
12,967
|
|
|
9,940
|
|
|
22,907
|
|
Total lease payments
|
|
$
|
121,228
|
|
|
$
|
20,391
|
|
|
$
|
141,619
|
|
Less: interest
|
|
8,398
|
|
|
4,318
|
|
|
|
Present value of lease payments
|
|
$
|
112,830
|
|
|
$
|
16,073
|
|
|
|
(1) Operating lease payments include $3,429,000 related to options to extend lease terms that are reasonably certain of being exercised.
Leases that the Company has signed but have not yet commenced are immaterial.
|
|
|
|
|
Lease Term and Discount Rate
|
|
December 31, 2019
|
Weighted-average remaining lease term (years)
|
|
|
Operating leases
|
|
4.47
|
|
Finance leases
|
|
9.48
|
|
Weighted-average discount rate
|
|
|
Operating leases
|
|
3.29
|
%
|
Finance leases
|
|
5.18
|
%
|
|
|
|
|
|
|
Other Information
|
|
For the Year Ended December 31, 2019
|
Cash paid for amounts included in the measurement of lease liabilities
|
|
|
Operating cash flows from operating leases
|
|
$
|
42,687
|
|
Operating cash flows from finance leases
|
|
858
|
|
Financing cash flows from finance leases
|
|
1,254
|
|
Leased assets obtained in exchange for new operating lease liabilities
|
|
28,773
|
|
Note 13. Commitments and Contingencies
Product liability. The Company is subject to product liability claims in the normal course of business. The Company carries excess insurance coverage for product liability claims. The Company self-insures product liability claims before the policy date and up to the purchased 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 estimable. The Company utilizes historical trends and actuarial analysis, along with an analysis of current claims, to assist in determining the appropriate loss reserve levels. At December 31, 2019 and 2018, the Company had an accrual of $56,961,000 and $52,801,000, respectively, for the probable payment of pending and expected claims related to product liability matters associated with Polaris products. This accrual is included as a component of other accrued expenses in the consolidated balance sheets.
Litigation. The Company is a defendant in lawsuits and subject to other claims arising in the normal course of business, including matters related to intellectual property, commercial matters, product liability claims, and putative class action lawsuits. As of December 31, 2019, the Company is party to three putative class actions pending against the Company in the United States. Two class actions allege that certain Polaris products caused economic losses resulting from unresolved fire hazards and excessive heat hazards. The third class action alleges that the Company violated various California consumer protection laws. The Company is unable to provide an evaluation of the likelihood that a loss will be incurred or an estimate of the range of possible loss.
In the opinion of management, it is unlikely that any legal proceedings pending against or involving the Company will have a material adverse effect on the Company’s financial position, results of operations, or cash flows. However, in many of these matters, it is inherently difficult to determine whether a loss is probable or reasonably possible or to estimate the size or range of the possible loss given the variety and potential outcomes of actual and potential claims, the uncertainty of future rulings, the behavior or incentives of adverse parties, and other factors outside of the control of the Company. Accordingly, the Company’s loss reserve may change from time to time, and actual losses could exceed the amounts accrued by an amount that could be material to the Company’s consolidated financial position, results of operations, or cash flows in any particular reporting period.
Leases. The Company leases buildings and equipment under non-cancelable operating leases. Total rent expense under all operating lease agreements was $42,477,000, $38,179,000 and $36,537,000 for 2019, 2018 and 2017, respectively.
Note 14. Derivative Instruments and Hedging Activities
The Company is exposed to certain risks relating to its ongoing business operations. The primary risks managed by using derivative instruments are foreign currency risk and interest rate risk. 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 entered into in order to maintain a balanced risk of fixed and floating interest rates associated with the Company’s long-term debt.
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, 2019 and 2018, Polaris had the following open foreign currency contracts (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
December 31, 2018
|
Foreign Currency
|
|
Notional Amounts
(in U.S. dollars)
|
|
Net Unrealized
Gain (Loss)
|
|
Notional Amounts
(in U.S. dollars)
|
|
Net Unrealized
Gain (Loss)
|
Australian Dollar
|
|
$
|
15,971
|
|
|
$
|
(86
|
)
|
|
—
|
|
|
—
|
|
Canadian Dollar
|
|
101,397
|
|
|
(1,069
|
)
|
|
$
|
55,133
|
|
|
$
|
2,564
|
|
Mexican Peso
|
|
16,986
|
|
|
1,079
|
|
|
19,222
|
|
|
564
|
|
Total
|
|
$
|
134,354
|
|
|
$
|
(76
|
)
|
|
$
|
74,355
|
|
|
$
|
3,128
|
|
These contracts, with maturities through December 2020, met the criteria for cash flow hedges, and are recorded in other current assets or other current liabilities on the consolidated balance sheet. The unrealized gains or losses, after tax, are recorded as a component of accumulated other comprehensive loss in shareholders’ equity.
The Company enters into interest rate swap transactions to hedge the variable interest rate payments for the term loan facility. In connection with these transactions, the Company pays interest based upon a fixed rate and receives variable rate interest payments based on the one-month LIBOR.
At December 31, 2019 and 2018, Polaris had the following open interest rate swap contracts (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
December 31, 2018
|
Effective Date
|
|
Termination Date
|
|
Notional Amounts
|
|
Net Unrealized Gain (Loss)
|
|
Notional Amounts
|
|
Net Unrealized Gain (Loss)
|
May 2, 2018
|
|
May 4, 2021
|
|
$
|
25,000
|
|
|
$
|
(67
|
)
|
|
$
|
25,000
|
|
|
$
|
397
|
|
September 28, 2018
|
|
September 30, 2019
|
|
—
|
|
|
—
|
|
|
250,000
|
|
|
(163
|
)
|
September 30, 2019
|
|
September 30, 2023
|
|
150,000
|
|
|
(7,696
|
)
|
|
150,000
|
|
|
(2,899
|
)
|
May 3, 2019
|
|
May 3, 2020
|
|
100,000
|
|
|
(237
|
)
|
|
—
|
|
|
—
|
|
Total
|
|
$
|
275,000
|
|
|
$
|
(8,000
|
)
|
|
$
|
425,000
|
|
|
$
|
(2,665
|
)
|
These contracts, with maturities through September 2023, met the criteria for cash flow hedges, and are recorded in other current assets or other current liabilities on the consolidated balance sheet. Assets and liabilities are offset in the consolidated balance sheet if the right of offset exists. The unrealized gains or losses, after tax, are recorded as a component of accumulated other comprehensive loss in shareholders’ equity.
The table below summarizes the carrying values of derivative instruments as of December 31, 2019 and 2018 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying Values of Derivative Instruments as of December 31, 2019
|
|
Fair Value—
Assets
|
|
Fair Value—
(Liabilities)
|
|
Derivative Net
Carrying Value
|
Derivatives designated as hedging instruments
|
|
|
|
|
|
Foreign exchange contracts
|
$
|
1,079
|
|
|
$
|
(1,155
|
)
|
|
$
|
(76
|
)
|
Interest rate contracts
|
—
|
|
|
(8,000
|
)
|
|
(8,000
|
)
|
Total derivatives designated as hedging instruments
|
$
|
1,079
|
|
|
$
|
(9,155
|
)
|
|
$
|
(8,076
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying Values of Derivative Instruments as of December 31, 2018
|
|
Fair Value—
Assets
|
|
Fair Value—
(Liabilities)
|
|
Derivative Net
Carrying Value
|
Derivatives designated as hedging instruments
|
|
|
|
|
|
Foreign exchange contracts
|
$
|
3,128
|
|
|
—
|
|
|
$
|
3,128
|
|
Interest rate contracts
|
—
|
|
|
$
|
(2,665
|
)
|
|
(2,665
|
)
|
Total derivatives designated as hedging instruments
|
$
|
3,128
|
|
|
$
|
(2,665
|
)
|
|
$
|
463
|
|
Assets are included in prepaid expenses and other and liabilities are included in other accrued expenses on the accompanying consolidated balance sheets. 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 other comprehensive loss for the years ended December 31, 2019 and 2018 was $(6,537,000) and $457,000, respectively.
See Note 9 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, 2019 and 2018.
Note 15. 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 six operating segments: 1) ORV, 2) Snowmobiles, 3) Motorcycles, 4) Global Adjacent Markets, 5) Aftermarket, and 6) Boats, and five reportable segments: 1) ORV/Snowmobiles, 2) Motorcycles, 3) Global Adjacent Markets, 4) Aftermarket, and 5) Boats.
Through June 30, 2018, the Company reported under four segments for segment reporting. However, during the third quarter ended September 30, 2018, as a result of the Boat Holdings acquisition, the Company established a new reporting segment, Boats.
The ORV/Snowmobiles segment includes the aggregated results of the ORV and Snowmobiles operating segments. The Motorcycles, Global Adjacent Markets, Aftermarket, and Boats segments include the results for those respective operating segments. 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 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
Sales
|
|
|
|
|
|
ORV/Snowmobiles
|
$
|
4,209,063
|
|
|
$
|
3,919,417
|
|
|
$
|
3,570,753
|
|
Motorcycles
|
584,096
|
|
|
545,646
|
|
|
576,068
|
|
Global Adjacent Markets
|
461,255
|
|
|
444,644
|
|
|
396,764
|
|
Aftermarket
|
906,751
|
|
|
889,177
|
|
|
884,892
|
|
Boats
|
621,353
|
|
|
279,656
|
|
|
—
|
|
Total sales
|
$
|
6,782,518
|
|
|
$
|
6,078,540
|
|
|
$
|
5,428,477
|
|
Gross profit
|
|
|
|
|
|
ORV/Snowmobiles
|
1,204,288
|
|
|
1,113,908
|
|
|
1,054,557
|
|
Motorcycles
|
44,065
|
|
|
63,045
|
|
|
16,697
|
|
Global Adjacent Markets
|
129,939
|
|
|
116,583
|
|
|
94,920
|
|
Aftermarket
|
222,712
|
|
|
234,365
|
|
|
225,498
|
|
Boats
|
124,613
|
|
|
46,252
|
|
|
—
|
|
Corporate
|
(76,835
|
)
|
|
(72,953
|
)
|
|
(67,021
|
)
|
Total gross profit
|
$
|
1,648,782
|
|
|
$
|
1,501,200
|
|
|
$
|
1,324,651
|
|
Note 16. Victory Motorcycles Wind Down
In January 2017, the Company’s Board of Directors approved a strategic plan to wind down the Victory Motorcycles brand. The Company began wind down activities during the first quarter of 2017. As a result of the activities, the Company recognized total pretax charges of $5,063,000 and $59,792,000 for the years ended December 31, 2018 and 2017, respectively, that are within the scope of ASC 420, Exit or Disposal Cost Obligations (ASC 420). There were no such charges recognized in 2019. These totals exclude the positive pretax impact of $2,680,000 and the negative pretax impact of $21,184,000 incurred for other wind-down activities for the years ended December 31, 2018 and 2017, respectively, as well as the pretax impact of a $3,570,000 gain in 2017 resulting from the sale of a cost method investment that was previously impaired. The total impact of wind down activities in 2018 was $2,383,000, inclusive of promotional activity. The total impact of wind down activities in 2017 was $77,406,000, inclusive of promotional activity and a gain resulting from the sale of Brammo. All costs related to wind-down activities were recognized by the end of 2018.
As a result of the wind down activities, the Company has incurred expenses within the scope of ASC 420 consisting of dealer termination, supplier termination, dealer litigation, employee separation, asset impairment charges, including the impairment of a cost method investment, inventory write-down charges and other costs. The wind down expenses have been included as components of cost of sales, selling and administrative expenses, general and administrative expenses or other expense (income), net, in the consolidated statements of income. Charges related to the wind down plan for the years ended December 31, 2018 and 2017 within the scope of ASC 420 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
For the years ended December 31,
|
|
2018
|
|
2017
|
Contract termination charges
|
$
|
3,433
|
|
|
$
|
21,632
|
|
Asset impairment charges
|
—
|
|
|
18,760
|
|
Inventory charges
|
—
|
|
|
10,169
|
|
Other costs
|
1,630
|
|
|
9,231
|
|
Total
|
$
|
5,063
|
|
|
$
|
59,792
|
|
Total reserves related to the Victory Motorcycles wind down activities were $2,697,000 and $5,645,000 as of December 31, 2018 and 2017, respectively. Wind down activities in 2019 and the reserve balance at December 31, 2019 were immaterial. These reserves are included in other accrued expenses and inventory in the consolidated balance sheets. Changes to the reserves during the years ended December 31, 2018 and 2017 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract termination charges
|
|
Inventory charges
|
|
Other costs
|
|
Total
|
Reserves balance as of January 1, 2017
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Expenses
|
$
|
21,632
|
|
|
$
|
10,169
|
|
|
$
|
9,231
|
|
|
$
|
41,032
|
|
Cash payments / scrapped inventory
|
(18,445
|
)
|
|
(9,392
|
)
|
|
(7,550
|
)
|
|
(35,387
|
)
|
Reserves balance as of December 31, 2017
|
$
|
3,187
|
|
|
$
|
777
|
|
|
$
|
1,681
|
|
|
$
|
5,645
|
|
Expenses
|
3,433
|
|
|
—
|
|
|
1,630
|
|
|
5,063
|
|
Cash payments / scrapped inventory
|
(5,155
|
)
|
|
(399
|
)
|
|
(2,457
|
)
|
|
(8,011
|
)
|
Reserves balance as of December 31, 2018
|
$
|
1,465
|
|
|
$
|
378
|
|
|
$
|
854
|
|
|
$
|
2,697
|
|
Note 17. Quarterly Financial Data (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
Gross profit
|
|
Net income attributable to Polaris Inc.
|
|
Diluted net income per share attributable to Polaris Inc. common shareholders
|
|
(In thousands, except per share data)
|
2019
|
|
|
|
|
|
|
|
First Quarter
|
$
|
1,495,690
|
|
|
$
|
352,448
|
|
|
$
|
48,378
|
|
|
$
|
0.78
|
|
Second Quarter
|
1,779,315
|
|
|
436,448
|
|
|
88,263
|
|
|
1.42
|
|
Third Quarter
|
1,771,647
|
|
|
436,542
|
|
|
88,388
|
|
|
1.42
|
|
Fourth Quarter
|
1,735,866
|
|
|
423,344
|
|
|
98,931
|
|
|
1.58
|
|
Year
|
$
|
6,782,518
|
|
|
$
|
1,648,782
|
|
|
$
|
323,960
|
|
|
$
|
5.20
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
|
|
|
|
|
First Quarter
|
$
|
1,297,473
|
|
|
$
|
323,481
|
|
|
$
|
55,714
|
|
|
$
|
0.85
|
|
Second Quarter
|
1,502,532
|
|
|
385,176
|
|
|
92,540
|
|
|
1.43
|
|
Third Quarter
|
1,651,415
|
|
|
401,270
|
|
|
95,529
|
|
|
1.50
|
|
Fourth Quarter
|
1,627,120
|
|
|
391,273
|
|
|
91,474
|
|
|
1.47
|
|
Year
|
$
|
6,078,540
|
|
|
$
|
1,501,200
|
|
|
$
|
335,257
|
|
|
$
|
5.24
|
|