Polaris Industries Looks Ahead After a Tough Year

Polaris Industries Inc. (PII -1.93%) reported fourth-quarter 2016 results Tuesday morning, and after falling as much as 4.6% early in the day, shares have largely recovered as of this writing as the market mulled what the off-road-vehicle (ORV) specialist had to say. Let's take a closer look at what drove Polaris' business as it capped its latest fiscal year. 

Polaris' new Ranger XP 1000 off-road vehicle, Image source: Polaris Industries.

Polaris Industries results: The raw numbers

Data source: Polaris Industries. 

What happened with Polaris this quarter?

• Revenue included $108.7 million in sales from Polaris' acquisition of Transamerican Auto Parts (TAP), which closed on Nov. 10.
• On an adjusted basis, which excludes purchase accounting adjustments and acquisition costs, net income was $76.1 million, or $1.18 per diluted share, roughly in line with expectations.
• That brought full-year 2016 adjusted earnings to $3.48 per share, in line with guidance provided last quarter for adjusted EPS in the range of $3.40 to $3.60. 
• International revenue (including parts, garments, and accessories sales) declined 2% year over year as reported, to $178.2 million, and was flat on a constant-currency basis.
• Consolidated gross profit declined 1% year over year, to $312.8 million, and gross profit percentage fell 238 basis points, to 25.7% of sales.
• ORV and snowmobile segment revenue increased 5% year over year, to $905 million.
• Within that total, ORV sales rose 3% year over year, as Polaris completed model-year 2017 vehicle revalidations, and shipments resumed following recalls earlier in the year.
• North American ORV unit retail sales were down overall by mid-single-digit percentages, including a low-single-digit percent decline in side-by-side vehicles and a 10% drop in ATV retail sales.
• By comparison, the overall North American ORV industry was flat on a year-over-year basis. 
• Snowmobile sales grew 13% year over year, thanks to a combination of shipment timing and favorable pricing mix.
• ORV dealer inventory declined 11% year over year, while total inventory was down 8%.
• Motorcycle segment revenue fell 35% year over year, to $105.7 million.
• Both Indian and Victory Motorcycles saw declines against difficult comparisons with the same year-ago period, and as Polaris reduced motorcycle production in Q4 to complete a final paint system upgrade in its Spirit Lake, Iowa, plant.
• Slingshot sales fell because of low product availability amid recalls.
• Motorcycle segment gross profit fell 94% year over year, to $1.6 million.
• Earlier this month, Polaris announced it is winding down its Victory Motorcycles brand and related operations, with the aim of both improving long-term profitability and solidifying Polaris' competitive position in the power-sports industry.
• Revenue in global adjacent markets (which includes government/military, and work and transportation vehicles) climbed 21% year over year, to $98.4 million.
• Global adjacent markets gross profit also climbed 30%, to $29 million, driven by a 95% increase in sales to military customers.
• Parts, garments, and accessories sales -- which are included in each of the mentioned segments -- grew 9% year over year, excluding TAP sales.
• Cash from operations increased 30% year over year in 2016, to $571.8 million.
• Debt, including capital lease obligations and notes payable, was $1.1419 billion the end of the year, for a debt-to-total-capital ratio of 57%, up from 32% at the end of 2016.
• Cash and equivalents at the end of the year were $127.3 million, down from $155.3 at the end of 2015.
• The company repurchased and retired 1,105,500 shares of common stock for $91.4 million in 2016, leaving 7.5 million shares remaining under the company's current repurchase authorization.

What management had to say

Polaris CEO Scott Wine stated:

2016 was a difficult and challenging year for Polaris, but our culture is geared to deal head on with adversity and learn from it, and that's what we did in 2016. In response to a series of recalls, we took the necessary steps to ensure that Polaris vehicles deliver the quality, safety, and performance that our customers expect. We are relying on these enhanced improvements, consistent execution, and aggressive innovation to regain our footing as the "best in power sports."

Looking forward

Finally, for the full year 2017, Polaris anticipates revenue to climb 10% to 13% year over year, or to a range of $4.968 billion to $5.104 billion. That should translate to 2017 adjusted net income in the range of $4.25 to $4.50 per diluted share, representing year-over-year growth of roughly 22.1% to 29.3%. Investors should also keep in mind that this adjusted (non-GAAP) outlook excludes costs related to the wind-down of Victory Motorcycles, which will be recorded in Polaris' 2017 income statement starting in the current quarter. 

In the end, while the market understandably isn't too pleased about this in-line quarter, you can bet Polaris is happy to put a tough 2016 behind it. And with shares still up around 5% over the past year as of this writing, I think Polaris investors should be excited for the road ahead.