NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Significant Accounting Policies
Basis of presentation. The accompanying unaudited consolidated financial statements of Polaris Inc. (“Polaris” or the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States for interim financial statements and, therefore, do not include all information and disclosures of results of operations, financial position, and changes in cash flow in conformity with accounting principles generally accepted in the United States for complete financial statements. Accordingly, such statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 previously filed with the Securities and Exchange Commission (“SEC”). In the opinion of management, such statements reflect all adjustments (which include only normal recurring adjustments) necessary for a fair presentation of the financial position, results of operations, equity, and cash flows for the periods presented. Due to the seasonality trends for certain products and to certain changes in production and shipping cycles, results of such periods are not necessarily indicative of the results to be expected for the complete year.
Reclassifications. Reclassifications of certain prior year segment results and account balances have been made to conform to the current-year presentation. The reclassifications had no impact on the consolidated balance sheets, statements of income (loss), comprehensive income (loss), equity, or cash flows, as previously reported. See further information in Note 10.
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 millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| | Fair Value Measurements as of March 31, 2022 |
| Asset (Liability) | Total | | Level 1 | | Level 2 | | Level 3 |
| Non-qualified deferred compensation assets | $ | 49.4 | | | $ | 49.4 | | | $ | — | | | $ | — | |
| Foreign exchange contracts, net | 4.3 | | | — | | | 4.3 | | | — | |
| Interest rate contracts, net | 0.9 | | | — | | | 0.9 | | | — | |
| Total assets at fair value | $ | 54.6 | | | $ | 49.4 | | | $ | 5.2 | | | $ | — | |
| Non-qualified deferred compensation liabilities | $ | (49.4) | | | $ | (49.4) | | | $ | — | | | $ | — | |
| | | | | | | |
| | | | | | | |
| Total liabilities at fair value | $ | (49.4) | | | $ | (49.4) | | | $ | — | | | $ | — | |
| | | | | | | |
| | Fair Value Measurements as of December 31, 2021 |
| Asset (Liability) | Total | | Level 1 | | Level 2 | | Level 3 |
| Non-qualified deferred compensation assets | $ | 52.4 | | | $ | 52.4 | | | $ | — | | | $ | — | |
| Foreign exchange contracts, net | 2.1 | | | — | | | 2.1 | | | — | |
| Total assets at fair value | $ | 54.5 | | | $ | 52.4 | | | $ | 2.1 | | | $ | — | |
| Non-qualified deferred compensation liabilities | $ | (52.4) | | | $ | (52.4) | | | $ | — | | | $ | — | |
| | | | | | | |
| Interest rate contracts, net | (7.8) | | | — | | | (7.8) | | | — | |
| Total liabilities at fair value | $ | (60.2) | | | $ | (52.4) | | | $ | (7.8) | | | $ | — | |
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. As of March 31, 2022 and December 31, 2021, the fair value of the Company’s long-term debt, finance lease obligations and notes payable was approximately $1,987.6 million and $1,870.0 million, 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 $1,947.3 million and $1,800.7 million as of March 31, 2022 and December 31, 2021, respectively.
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 or net realizable value with substantially all inventories recorded using the first-in, first-out method. Finished goods include products that are completed and ready for sale or substantially completed as the product has gone through the primary manufacturing and assembly process. The major components of inventories are as follows (in millions):
| | | | | | | | | | | |
| March 31, 2022 | | December 31, 2021 |
| Raw materials and purchased components | $ | 851.2 | | | $ | 720.2 | |
| Service parts, garments and accessories | 481.8 | | | 417.7 | |
| Finished goods | 627.9 | | | 588.2 | |
| Less: reserves | (81.2) | | | (81.3) | |
| Inventories, net | $ | 1,879.7 | | | $ | 1,644.8 | |
Property and equipment. Property and equipment is stated at cost. Depreciation is determined 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 within depreciation expense. Fully-depreciated tooling is eliminated from the accounting records annually. The Company recorded $54.4 million and $49.2 million of depreciation expense for the three months ended March 31, 2022 and 2021, respectively.
The major components of property and equipment are as follows (in millions):
| | | | | | | | | | | |
| March 31, 2022 | | December 31, 2021 |
| Land, buildings and improvements | $ | 535.2 | | | $ | 532.2 | |
| Equipment and tooling | 1,720.9 | | | 1,672.2 | |
| 2,256.1 | | | 2,204.4 | |
| Less: accumulated depreciation | (1,277.9) | | | (1,229.0) | |
| Property and equipment, net | $ | 978.2 | | | $ | 975.4 | |
Substantially all of the Company’s property and equipment is located in North America.
Product warranties. The Company typically provides a limited warranty for its vehicles and boats for a period of six months to ten years, depending on the product. The Company 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. The Company’s standard warranties require the Company, generally 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, impacts on product usage (including weather), product recalls, and changes in sales volume.
The activity in the warranty reserve during the periods presented was as follows (in millions):
| | | | | | | | | | | | | | | | | |
| | | Three months ended March 31, |
| | | | | 2022 | | 2021 |
| Balance at beginning of period | | | | | $ | 135.1 | | | $ | 140.8 | |
| | | | | | | |
| Additions charged to expense | | | | | 27.1 | | | 34.6 | |
| Warranty claims paid, net | | | | | (33.9) | | | (35.5) | |
| Balance at end of period | | | | | $ | 128.3 | | | $ | 139.9 | |
Divestitures.
On October 26, 2021, the Company announced plans to divest its Global Electric Motorcar (GEM) and Taylor-Dunn businesses in an effort to more strategically allocate the Company’s resources. The Company completed the sale on December 31, 2021. The sale resulted in a loss of $36.8 million. The 2021 financial results of these businesses are reflected in the Corporate segment.
New accounting pronouncements.
Reference Rate Reform. In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This ASU provides practical expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met. The FASB also issued ASU 2021-01, Reference Rate Reform (Topic 848): Scope in January 2021, which adds implementation guidance to clarify which optional expedients in Topic 848 may be applied to derivative instruments that do not reference LIBOR or a reference rate that is expected to be discontinued, but that are being modified as a result of the discounting transition. The Company adopted ASU 2020-04 and ASU 2021-01 on January 1, 2022. The adoption of the ASUs did not have a material impact on the Company’s consolidated 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 the Company’s consolidated financial statements.
Note 2. Revenue Recognition
The Company recognizes revenue when it satisfies a performance obligation by transferring control of a good or service to a customer (primarily dealers and distributors). Revenue is measured based on the amount of consideration that the Company
expects to be entitled to in exchange for the goods or services transferred. Sales, value add, and other taxes that are collected from a customer concurrent with revenue-producing activities are excluded from revenue. 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 contract liabilities section.
The following tables disaggregate the Company's revenue by major product type and geography (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended March 31, 2022 |
| Off-Road | | On-Road | | Marine | | Aftermarket | | Corporate | | Total |
| Revenue by product type | | | | | | | | | | | |
| Wholegoods | $ | 1,000.5 |
| $ | 180.5 | | $ | 211.5 |
| $ | — |
| $ | — | | $ | 1,392.5 |
| PG&A | 308.2 |
| 38.6 | | — | | 217.5 |
| — | | 564.3 |
| Total revenue | $ | 1,308.7 |
| $ | 219.1 | | $ | 211.5 |
| $ | 217.5 |
| $ | — | | $ | 1,956.8 |
|
| | | | | | | | | | |
| Revenue by geography |
| | | | | | | | | | |
| United States | $ | 1,002.6 | | $ | 96.4 | | $ | 207.1 | | $ | 208.0 | | $ | — | | $ | 1,514.1 |
| Canada | 133.7 | | 4.9 | | 4.4 | | 9.5 | | — | | 152.5 |
| EMEA | 122.7 | | 99.6 | | — | | — | | — | | 222.3 |
| APLA | 49.7 | | 18.2 | | — | | — | | — | | 67.9 |
| Total revenue | $ | 1,308.7 | | $ | 219.1 | | $ | 211.5 | | $ | 217.5 | | $ | — | | $ | 1,956.8 |
| | | | | | | | | | | |
| Three months ended March 31, 2021 |
| Off-Road | | On-Road | | Marine | | Aftermarket | | Corporate | | Total |
| Revenue by product type | | | | | | | | | | | |
| Wholegoods | $ | 992.1 | | $ | 196.9 | | $ | 198.7 | | $ | — | | $ | 11.5 | | $ | 1,399.2 |
| PG&A | 286.2 | | 32.4 | | — | | 229.8 | | 3.5 | | 551.9 |
| Total revenue | $ | 1,278.3 | | $ | 229.3 | | $ | 198.7 | | $ | 229.8 | | $ | 15.0 | | $ | 1,951.1 |
| | | | | | | | | | | |
| Revenue by geography | | | | | | | | | | | |
| United States | $ | 1,002.2 | | $ | 99.2 | | $ | 193.4 | | $ | 219.8 | | $ | 14.3 | | $ | 1,528.9 |
| Canada | 113.0 | | 5.8 | | 5.3 | | 10.0 | | — | | 134.1 |
| EMEA | 112.6 | | 105.8 | | — | | — | | 0.2 | | 218.6 |
| APLA | 50.5 | | 18.5 | | — | | — | | 0.5 | | 69.5 |
| Total revenue | $ | 1,278.3 | | $ | 229.3 | | $ | 198.7 | | $ | 229.8 | | $ | 15.0 | | $ | 1,951.1 |
Off-Road, On-Road, and Marine segments
Wholegood vehicles, boats, and parts, garments and accessories. For the majority of wholegood vehicles, boats, and 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. 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. Payment terms vary by customer and most of the Company’s sales are financed by the customer under floorplan financing arrangements whereby the Company receives payment within a few days of shipment of the product.
When the right of return exists, the Company adjusts the consideration for the estimated effect of returns. The Company estimates expected returns based on historical sales levels, the timing and magnitude of historical sales return levels as a percent of sales, type of product, type of customer, and a projection of this experience into the future. 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. 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, boats, parts, garments or accessories has transferred to the customer as an expense in cost of sales.
Financial Products. The Company sells separately-priced service contracts (“ESCs”) that extend mechanical coverages beyond the base limited warranty as well as prepaid maintenance agreements to vehicle owners. Each of these separately priced service contracts range from 12 months to 84 months. The Company typically 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 it offers to its customers and their customers. Payment terms vary by customer but typically range from due upon delivery (or point-of-sale) to 180 days after delivery.
When the right of return exists, the Company adjusts the consideration for the estimated effect of returns. The Company estimates expected returns based on historical sales levels, the timing and magnitude of historical sales return levels as a percent of sales, type of product, type of customer and a projection of this experience into the future. 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. 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.
Contract Liabilities
Contract liabilities relate to deferred revenue recognized for cash consideration received at contract inception in advance of the Company's performance under the respective contract and generally relate to the sale of separately priced ESCs. The Company finances its self-insured risks related to 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 $46.0 million of the unearned amount over the next 12 months and $86.8 million thereafter. The activity in the deferred revenue reserve during the periods presented was as follows (in millions):
| | | | | | | | | | | | | | | | | |
| | | Three months ended March 31, |
| | | | | 2022 | | 2021 |
| Balance at beginning of period | | | | | $ | 126.4 | | | $ | 107.1 | |
| New contracts sold | | | | | 18.2 | | | 20.6 | |
| Less: reductions for revenue recognized | | | | | (11.8) | | | (11.1) | |
Balance at end of period (1) | | | | | $ | 132.8 | | | $ | 116.6 | |
(1) The unamortized ESC premiums recorded in other current liabilities totaled $46.0 million and $40.8 million as of March 31, 2022 and 2021, respectively, while the amount recorded in other long-term liabilities totaled $86.8 million and $75.8 million as of March 31, 2022 and 2021, respectively.
Note 3. Share-Based Compensation
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-based compensation expense for those awards expected to vest.
Total share-based compensation expenses were comprised as follows (in millions):
| | | | | | | | | | | | | | | | | |
| | | Three months ended March 31, |
| | | | | 2022 | | 2021 |
| Option awards | | | | | $ | 5.1 | | | $ | 3.0 | |
| Other share-based awards | | | | | 5.5 | | | 6.6 | |
| Total share-based compensation before tax | | | | | 10.6 | | | 9.6 | |
| Tax benefit | | | | | 2.6 | | | 2.3 | |
| Total share-based compensation expense included in net income | | | | | $ | 8.0 | | | $ | 7.3 | |
In addition to the above share-based compensation expenses, the Company sponsors a qualified non-leveraged employee stock ownership plan (ESOP). Shares allocated to eligible participants’ accounts vest at various percentage rates based on years of service and require no cash payments from the recipient.
As of March 31, 2022, there was $84.0 million 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 1.8 years. Included in unrecognized share-based compensation expense was approximately $11.1 million related to stock options and $72.9 million related to restricted stock.
Note 4. Financing Agreements
The carrying value of debt, finance lease obligations, and notes payable and the average related interest rates were as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| Average interest rate as of March 31, 2022 | | Maturity | | March 31, 2022 | | December 31, 2021 |
| Revolving loan facility | 1.46% | | June 2026 | | $ | 160.0 | | | $ | — | |
| Term loan facility | 1.58% | | June 2026 | | 864.0 | | | 876.0 | |
| Incremental term loan | 1.33% | | December 2022 | | 500.0 | | | 500.0 | |
| Senior notes—fixed rate | 4.23% | | July 2028 | | 350.0 | | | 350.0 | |
| Finance lease obligations | 5.21% | | Various through 2029 | | 12.9 | | | 13.5 | |
| Notes payable and other | 4.25% | | Various through 2030 | | 67.1 | | | 68.3 | |
| Debt issuance costs | | | | | (6.7) | | | (7.1) | |
| Total debt, finance lease obligations, and notes payable | | $ | 1,947.3 | | | $ | 1,800.7 | |
| Less: current maturities | | 553.3 | | | 553.3 | |
| Total long-term debt, finance lease obligations, and notes payable | | $ | 1,394.0 | | | $ | 1,247.4 | |
In December 2010, the Company entered an unsecured Master Note Purchase Agreement, which has been amended and supplemented, under which it has issued senior notes. In July 2018, the Company issued $350 million of unsecured senior notes due July 2028 which remain outstanding.
The Company maintains an unsecured credit facility which consists of a term loan facility (the “Term Loan Facility”) and a revolving loan facility (the “Revolving Loan Facility”). In July 2018, the Company amended its unsecured credit facility to increase its Term Loan Facility to $1,180 million, of which $864 million was outstanding as of March 31, 2022. In June 2021, the Company further amended its unsecured credit facility to increase its Revolving Loan Facility to $1.0 billion and extend the maturity date to June 2026. Interest is charged at rates based on a LIBOR or “prime” base rate.
On December 17, 2021, the Company amended the credit facility to provide an incremental 364-day term loan (the “Incremental Term Loan”) in the amount of $500.0 million. The incremental term loan, which was fully drawn on closing, is unsecured and matures on December 16, 2022. There are no required principal payments prior to the maturity date. In addition to the payment of the $500.0 million Incremental Term Loan, the Company is required to make principal payments under the Term Loan Facility totaling $45 million over the next 12 months. These payments are classified as current maturities in the consolidated balance sheets.
The credit facility and the Master Note Purchase Agreement contain covenants that require the Company to maintain certain financial ratios, including minimum interest coverage and maximum leverage ratios. The agreements also require the Company to maintain an interest coverage ratio of not less than 3.00 to 1.00 and a leverage ratio of not more than 3.50 to 1.00 on a rolling four quarter basis. The Company was in compliance with all such covenants as of March 31, 2022.
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, the Company 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 $76.7 million, of which $61.0 million was outstanding as of March 31, 2022. The outstanding balance is included in long-term debt and current portion of long-term debt in the consolidated balance sheets.
Note 5. Goodwill and Other Intangible Assets
Goodwill and other intangible assets, net of accumulated amortization, as of March 31, 2022 and December 31, 2021 are as follows (in millions):
| | | | | | | | | | | |
| March 31, 2022 | | December 31, 2021 |
| Goodwill | $ | 390.3 | | | $ | 391.3 | |
| Other intangible assets, net | 639.1 | | | 646.2 | |
| Total goodwill and other intangible assets, net | $ | 1,029.4 | | | $ | 1,037.5 | |
The changes in the carrying amount of goodwill by reportable segment for the three months ended March 31, 2022 and 2021 are as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Off-Road | | On-Road | | Marine | | Aftermarket | | Total |
| Goodwill | 111.7 | | | 52.5 | | | 227.1 | | | 270.3 | | | $ | 661.6 | |
| Accumulated goodwill impairment losses | — | | | — | | | — | | | (270.3) | | | (270.3) | |
| Balance as of December 31, 2021 | $ | 111.7 | | | $ | 52.5 | | | $ | 227.1 | | | $ | — | | | $ | 391.3 | |
| | | | | | | | | |
| Currency translation effect on foreign goodwill balances | 0.2 | | | (1.2) | | | — | | | — | | | (1.0) | |
| | | | | | | | | |
| Goodwill | 111.9 | | | 51.3 | | | 227.1 | | | 270.3 | | | 660.6 | |
| Accumulated goodwill impairment losses | — | | | — | | | — | | | (270.3) | | | (270.3) | |
| Balance as of March 31, 2022 | $ | 111.9 | | | $ | 51.3 | | | $ | 227.1 | | | $ | — | | | $ | 390.3 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Off-Road | | On-Road | | Marine | | Aftermarket | | Total |
| Goodwill | 111.6 | | | 58.6 | | | 227.1 | | | 270.3 | | | $ | 667.6 | |
| Accumulated goodwill impairment losses | — | | | — | | | — | | | (270.3) | | | (270.3) | |
| Balance as of December 31, 2020 | $ | 111.6 | | | $ | 58.6 | | | $ | 227.1 | | | $ | — | | | $ | 397.3 | |
| | | | | | | | | |
| Currency translation effect on foreign goodwill balances | (0.1) | | | (3.5) | | | — | | | — | | | (3.6) | |
| | | | | | | | | |
| Goodwill | 111.5 | | | 55.1 | | | 227.1 | | | 270.3 | | | 664.0 | |
| Accumulated goodwill impairment losses | — | | | — | | | — | | | (270.3) | | | (270.3) | |
| Balance as of March 31, 2021 | $ | 111.5 | | | $ | 55.1 | | | $ | 227.1 | | | $ | — | | | $ | 393.7 | |
The components of other intangible assets were as follows ($ in millions):
| | | | | | | | | | | | | | | | | |
| Weighted-average useful life (years) | | March 31, 2022 | | December 31, 2021 |
| Non-amortizable—indefinite lived: | | | | | |
| Brand/trade names | | | $ | 329.8 | | | $ | 330.1 | |
| Amortizable: | | | | | |
| Non-compete agreements | 4 | | 2.6 | | | 2.6 | |
| Dealer/customer related | 18 | | 424.1 | | | 437.6 | |
| Developed technology | 7 | | 2.9 | | | 9.9 | |
| Total amortizable | 17 | | 429.6 | | | 450.1 | |
| Less: Accumulated amortization | | | (120.3) | | | (134.0) | |
| Net amortized other intangible assets | | | 309.3 | | | 316.1 | |
| Total other intangible assets, net | | | $ | 639.1 | | | $ | 646.2 | |
Amortization expense for intangible assets was $6.9 million and $8.7 million for the three months ended March 31, 2022 and 2021, respectively. Estimated amortization expense for the remainder of 2022 through 2027 is as follows: 2022 (remainder), $19.4 million; 2023, $25.1 million; 2024, $25.0 million; 2025, $25.0 million; 2026, $23.8 million; 2027, $17.7 million; and after 2027, $173.3 million. 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 impairments of intangible assets.
Note 6. Shareholders’ Equity
During the three months ended March 31, 2022, the Company paid $172.3 million to repurchase approximately 1.5 million shares of its common stock. As of March 31, 2022, the Board of Directors has authorized the Company to repurchase up to an additional $681.7 million of the Company’s common stock. The repurchase of any or all such shares authorized for repurchase will be governed by applicable SEC rules and dependent on management’s assessment of market conditions and subject to the restrictions on share repurchases set forth in the incremental amendment.
The Company paid a regular cash dividend of $0.64 per share on March 15, 2022 to holders of record at the close of business on March 1, 2022. Cash dividends declared and paid per common share for the three months ended March 31, 2022 and 2021, were as follows:
| | | | | | | | | | | | | | | | | | |
| | | | | Three months ended March 31, |
| | | | | | | 2022 | | 2021 |
| Cash dividends declared and paid per common share | | | | | | $ | 0.64 | | | $ | 0.63 | |
Net income per share
Basic income 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 income per share is computed under the treasury stock method and is calculated to compute the dilutive effect of outstanding stock options and certain share-based awards issued under the Omnibus Plan. A reconciliation of these amounts is as follows (in millions):
| | | | | | | | | | | | | | | | | |
| | | Three months ended March 31, |
| | | | | 2022 | | 2021 |
| Weighted average number of common shares outstanding | | | | | 59.9 | | | 61.6 | |
| Director Plan and deferred stock units | | | | | 0.2 | | | 0.3 | |
| ESOP | | | | | 0.2 | | | 0.1 | |
| Common shares outstanding—basic | | | | | 60.3 | | | 62.0 | |
| Dilutive effect of restricted stock units | | | | | 0.5 | | | 0.6 | |
| Dilutive effect of stock option awards | | | | | 0.4 | | | 0.8 | |
| Common and potential common shares outstanding—diluted | | | | | 61.2 | | | 63.4 | |
During the three months ended March 31, 2022, the number of options that were not included in the computation of diluted income per share because the option exercise price was greater than the market price, and therefore, the effect would have been anti-dilutive was 1.3 million compared to 1.0 million for the same period in 2021.
Accumulated other comprehensive loss
Changes in the accumulated other comprehensive loss balance were as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| Foreign Currency Translation | | Cash Flow
Hedging Derivatives | | Retirement Plan and Other Activity | | Accumulated Other
Comprehensive Loss |
| Balance as of December 31, 2021 | $ | (69.5) | | | $ | (4.4) | | | $ | (3.5) | | | $ | (77.4) | |
| Reclassification to the statement of income | — | | | 0.7 | | | 0.1 | | | 0.8 | |
| Change in fair value | (0.8) | | | 7.6 | | | — | | | 6.8 | |
| Balance as of March 31, 2022 | $ | (70.3) | | | $ | 3.9 | | | $ | (3.4) | | | $ | (69.8) | |
The table below provides the amount of gains and losses, net of tax, reclassified from accumulated other comprehensive loss into the statements of income for cash flow derivatives designated as hedging instruments and retirement plan activity for the three months ended March 31, 2022 and 2021 (in millions):
| | | | | | | | | | | | | | | | | | | | | |
| Derivatives in Cash Flow Hedging Relationships and Other Activity | Location of Gain (Loss) Reclassified from Accumulated Other Comprehensive Loss into Income | | | | Three months ended March 31, |
| | | | | 2022 | | 2021 |
| Foreign currency contracts | Other (income) expense, net | | | | | | $ | 0.9 | | | $ | (0.7) | |
| Foreign currency contracts | Cost of sales | | | | | | 0.3 | | | 0.6 | |
| Interest rate contracts | Interest expense | | | | | | (1.9) | | | (2.0) | |
| Retirement plan activity | Operating expenses | | | | | | (0.1) | | | (0.1) | |
| Total | | | | | | | $ | (0.8) | | | $ | (2.2) | |
The net amount of the existing gains or losses as of March 31, 2022 that is expected to be reclassified into the statements of income within the next 12 months is not expected to be material. See Note 9 for further information regarding derivative activities.
Note 7. Financial Services Arrangements
Polaris Acceptance, a joint venture between the Company 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 the Company’s United States sales of snowmobiles, off-road vehicles (“ORV”), motorcycles, and related PG&A, whereby the Company receives payment within a few days of shipment of the product.
The Company’s 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 (“ASC”) Topic 860. The Company’s 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. The partnership agreement is effective through February 2027.
The Company’s total investment in Polaris Acceptance of $33.3 million as of March 31, 2022 is accounted for under the equity method and is recorded in investment in finance affiliate in the consolidated balance sheets. As of March 31, 2022, the outstanding amount of net receivables financed for dealers under this arrangement was $525.5 million, which included $412.8 million in the Polaris Acceptance portfolio and $112.7 million of receivables within the Securitization Facility (“Securitized Receivables”).
The Company 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 2022, the potential 15 percent aggregate repurchase obligation is approximately $69.2 million.
A subsidiary of Huntington Bancshares Incorporated (“Huntington”) finances a portion of the Company’s United States sales of boats whereby the Company receives payment within a few days of shipment of the product. The Company has agreed to repurchase products repossessed by Huntington up to a maximum of 100 percent of the aggregate outstanding Huntington receivables balance. As of March 31, 2022, the potential aggregate repurchase obligation was approximately $177.6 million.
The Company has other financing arrangements related to its foreign subsidiaries in which it has agreed to repurchase repossessed products. For calendar year 2022, the potential aggregate repurchase obligations are approximately $21.8 million.
The Company’s financial exposure under these repurchase agreements is limited to the difference between the amounts unpaid by the dealer or distributor 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 these agreements during the periods presented.
The Company has agreements with third-party financing companies to provide financing options to end consumers of the Company’s products. The Company has no material contingent liabilities for residual value or credit collection risk under these agreements. The Company’s income generated from these agreements has been included as a component of income from financial services in the consolidated statements of income.
Note 8. 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. As of March 31, 2022, the Company had an accrual of $74.9 million for the probable payment of pending claims related to product liability litigation associated with the Company’s 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, and product liability claims. In addition, as of March 31, 2022, the Company is party to two putative class actions pending against the Company in the United States. These class actions allege that the Company violated various California consumer protection laws related to rollover protection structure certification in California, Oregon, Nevada, and Texas. 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 on the putative class actions.
In the opinion of management, it is presently 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 of 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.
Regulatory. In the normal course of business, the Company’s products are subject to extensive laws and regulations relating to safety, environmental, and other regulations promulgated by the United States federal government and individual states, as well as international regulatory authorities. Failure to comply with applicable regulations could result in fines, penalties or other costs.
Note 9. 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 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. The decision of whether and when to execute derivative instruments, along with the duration of the instrument, may 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. The Company does not use any financial contracts for trading purposes.
As of March 31, 2022 and December 31, 2021, the Company had the following open foreign currency contracts (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2022 | | December 31, 2021 |
| Foreign Currency | | Notional Amounts
(in U.S. Dollars) | | Net Unrealized
Gain (Loss) | | Notional Amounts
(in U.S. Dollars) | | Net Unrealized
Gain (Loss) |
| Australian Dollar | | $ | 26.7 | | | $ | (0.3) | | | $ | 20.3 | | | $ | 0.4 | |
| Canadian Dollar | | 149.8 | | | (0.8) | | | 121.1 | | | 0.6 | |
| Mexican Peso | | 81.9 | | | 5.4 | | | 87.9 | | | 1.1 | |
| Total | | $ | 258.4 | | | $ | 4.3 | | | $ | 229.3 | | | $ | 2.1 | |
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 in 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.
As of March 31, 2022 and December 31, 2021, the Company had the following open interest rate swap contracts (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | March 31, 2022 | | December 31, 2021 |
| Effective Date | | Termination Date | | Notional Amounts | | Net Unrealized
Gain (Loss) | | Notional Amounts | | Net Unrealized
Gain (Loss) |
| September 30, 2019 | | September 30, 2023 | | 150.0 | | | (1.8) | | | 150.0 | | | (5.8) | |
| March 3, 2020 | | February 28, 2023 | | 400.0 | | | 2.7 | | | 400.0 | | | (2.0) | |
| Total | | | | $ | 550.0 | | | $ | 0.9 | | | $ | 550.0 | | | $ | (7.8) | |
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 in 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 March 31, 2022 and December 31, 2021 (in millions):
| | | | | | | | | | | | | | | | | |
| | Carrying Values of Derivative Instruments as of March 31, 2022 |
| | Fair Value—
Assets | | Fair Value—
(Liabilities) | | Derivative Net
Carrying Value |
| Derivatives designated as hedging instruments | | | | | |
| Foreign exchange contracts | $ | 5.6 | | | $ | (1.3) | | | $ | 4.3 | |
| Interest rate contracts | 2.7 | | | (1.8) | | | 0.9 | |
| Total derivatives designated as hedging instruments | $ | 8.3 | | | $ | (3.1) | | | $ | 5.2 | |
| | | | | | | | | | | | | | | | | |
| | Carrying Values of Derivative Instruments as of December 31, 2021 |
| | Fair Value—
Assets | | Fair Value—
(Liabilities) | | Derivative Net
Carrying Value |
| Derivatives designated as hedging instruments | | | | | |
| Foreign exchange contracts | $ | 2.4 | | | $ | (0.3) | | | $ | 2.1 | |
| Interest rate contracts | — | | | (7.8) | | | (7.8) | |
| Total derivatives designated as hedging instruments | $ | 2.4 | | | $ | (8.1) | | | $ | (5.7) | |
Assets are included in prepaid expenses and other and liabilities are included in other accrued expenses in the consolidated balance sheets. Gains and losses on derivative instruments representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in the current statement of income.
The amount of gains (losses), net of tax, related to the effective portion of derivative instruments designated as cash flow hedges included in accumulated other comprehensive loss for the three months ended March 31, 2022 was $8.3 million compared to $1.4 million for the same respective period in 2021.
See Note 6 for information about the amount of gains and losses, net of tax, reclassified from accumulated other comprehensive loss into the statements of income for derivative instruments designated as hedging instruments. The ineffective portion of foreign currency contracts was not material for the three month period ended March 31, 2022.
Note 10. Segment Reporting
On January 1, 2022, the Company began management of its portfolio of businesses under a new basis, which is intended to create a simplified reporting structure to provide better focus and allow for resources to be best leveraged for future growth and profitability improvement. The comparative 2021 segment results were reclassified for comparability.
The Company’s reportable segments are based on the Company’s method of internal reporting and are comprised of various product offerings that serve multiple end markets. These results are not necessarily indicative of the results of operations that would have occurred had each segment been an independent, stand-alone entity during the periods presented. 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 four operating segments: 1) Off-Road, 2) On-Road, 3) Marine, and 4) Aftermarket which are all reportable segments. The Corporate amounts include revenues and costs of businesses that were divested in 2021, as well as costs that are not allocated to segments, including certain unallocated manufacturing costs.
Segment sales and gross profit data are summarized as follows (in millions):
| | | | | | | | | | | | | | | | | |
| | | Three months ended March 31, |
| | | | | 2022 | | 2021 |
| Sales | | | | | | | |
| Off-Road | | | | | $ | 1,308.7 | | | $ | 1,278.3 | |
| On-Road | | | | | 219.1 | | | 229.3 | |
| Marine | | | | | 211.5 | | | 198.7 | |
| Aftermarket | | | | | 217.5 | | | 229.8 | |
| Corporate | | | | | — | | | 15.0 | |
| Total sales | | | | | $ | 1,956.8 | | | $ | 1,951.1 | |
| Gross profit | | | | | | | |
| Off-Road | | | | | $ | 251.1 | | | $ | 337.5 | |
| On-Road | | | | | 37.6 | | | 30.0 | |
| Marine | | | | | 46.5 | | | 46.4 | |
| Aftermarket | | | | | 54.6 | | | 61.3 | |
| Corporate | | | | | 6.5 | | | 5.3 | |
| Total gross profit | | | | | $ | 396.3 | | | $ | 480.5 | |