NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Significant Accounting Policies
Basis of presentation.
The accompanying unaudited consolidated financial statements of Polaris Industries 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, 2018
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.
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.
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, interest rate, and commodity transactions.
Assets and liabilities measured at fair value on a recurring basis are summarized below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements as of June 30, 2019
|
Asset (Liability)
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Non-qualified deferred compensation assets
|
$
|
48,548
|
|
|
$
|
48,548
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Foreign exchange contracts, net
|
602
|
|
|
—
|
|
|
602
|
|
|
—
|
|
Total assets at fair value
|
$
|
49,150
|
|
|
$
|
48,548
|
|
|
$
|
602
|
|
|
$
|
—
|
|
Non-qualified deferred compensation liabilities
|
$
|
(48,548
|
)
|
|
$
|
(48,548
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
Interest rate contracts, net
|
(8,648
|
)
|
|
—
|
|
|
(8,648
|
)
|
|
—
|
|
Total liabilities at fair value
|
$
|
(57,196
|
)
|
|
$
|
(48,548
|
)
|
|
$
|
(8,648
|
)
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
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
June 30, 2019
and
December 31, 2018
, the fair value of the Company’s long-term debt, finance lease obligations and notes payable was approximately $
1,972,473,000
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
$1,898,068,000
and
$1,962,570,000
as of
June 30, 2019
and
December 31, 2018
, 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 (first-in, first-out method) or net realizable value. The major components of inventories are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
June 30, 2019
|
|
December 31, 2018
|
Raw materials and purchased components
|
$
|
281,934
|
|
|
$
|
233,258
|
|
Service parts, garments and accessories
|
341,076
|
|
|
342,593
|
|
Finished goods
|
562,252
|
|
|
442,003
|
|
Less: reserves
|
(54,998
|
)
|
|
(48,343
|
)
|
Inventories
|
$
|
1,130,264
|
|
|
$
|
969,511
|
|
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 or its dealers to repair or replace defective products during such warranty periods at no cost to the consumer. The warranty reserve is established at the time of sale to the dealer or distributor based on management’s best estimate using historical rates and trends. 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. Factors that could have an impact on the warranty reserve include the following: change 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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
Six months ended June 30,
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Balance at beginning of period
|
$
|
116,217
|
|
|
$
|
116,286
|
|
|
$
|
121,824
|
|
|
$
|
123,840
|
|
Additions to reserve related to acquisitions
|
8,809
|
|
|
—
|
|
|
8,809
|
|
|
—
|
|
Additions charged to expense
|
36,854
|
|
|
26,141
|
|
|
62,873
|
|
|
42,172
|
|
Warranty claims paid, net
|
(29,122
|
)
|
|
(36,272
|
)
|
|
(60,748
|
)
|
|
(59,857
|
)
|
Balance at end of period
|
$
|
132,758
|
|
|
$
|
106,155
|
|
|
$
|
132,758
|
|
|
$
|
106,155
|
|
New accounting pronouncements.
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 10 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 consolidated 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 consolidated 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 Cuts and Jobs Act of 2017 (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 significantly 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 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 following tables disaggregate the Company’s revenue by major product type and geography (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, 2019
|
|
ORV / Snowmobiles
|
|
Motorcycles
|
|
Global Adj. Markets
|
|
Aftermarket
|
|
Boats
|
|
Consolidated
|
Revenue by product type
|
|
|
|
|
|
|
|
|
|
|
|
Wholegoods
|
$
|
864,261
|
|
|
$
|
169,421
|
|
|
$
|
98,652
|
|
|
—
|
|
|
$
|
182,425
|
|
|
$
|
1,314,759
|
|
PG&A
|
185,060
|
|
|
27,352
|
|
|
23,272
|
|
|
$
|
228,872
|
|
|
—
|
|
|
464,556
|
|
Total revenue
|
$
|
1,049,321
|
|
|
$
|
196,773
|
|
|
$
|
121,924
|
|
|
$
|
228,872
|
|
|
$
|
182,425
|
|
|
$
|
1,779,315
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue by geography
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
$
|
871,854
|
|
|
$
|
120,183
|
|
|
$
|
58,146
|
|
|
$
|
219,174
|
|
|
$
|
177,203
|
|
|
$
|
1,446,560
|
|
Canada
|
74,223
|
|
|
10,414
|
|
|
2,150
|
|
|
9,698
|
|
|
5,222
|
|
|
101,707
|
|
EMEA
|
65,757
|
|
|
48,707
|
|
|
60,867
|
|
|
—
|
|
|
—
|
|
|
175,331
|
|
APLA
|
37,487
|
|
|
17,469
|
|
|
761
|
|
|
—
|
|
|
—
|
|
|
55,717
|
|
Total revenue
|
$
|
1,049,321
|
|
|
$
|
196,773
|
|
|
$
|
121,924
|
|
|
$
|
228,872
|
|
|
$
|
182,425
|
|
|
$
|
1,779,315
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, 2018
|
|
ORV / Snowmobiles
|
|
Motorcycles
|
|
Global Adj. Markets
|
|
Aftermarket
|
|
Boats
|
|
Consolidated
|
Revenue by product type
|
|
|
|
|
|
|
|
|
|
|
|
Wholegoods
|
$
|
820,850
|
|
|
$
|
146,671
|
|
|
$
|
93,550
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
1,061,071
|
|
PG&A
|
169,991
|
|
|
24,741
|
|
|
19,868
|
|
|
$
|
226,861
|
|
|
—
|
|
|
441,461
|
|
Total revenue
|
$
|
990,841
|
|
|
$
|
171,412
|
|
|
$
|
113,418
|
|
|
$
|
226,861
|
|
|
$
|
—
|
|
|
$
|
1,502,532
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue by geography
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
$
|
818,318
|
|
|
$
|
113,561
|
|
|
$
|
49,740
|
|
|
$
|
215,572
|
|
|
$
|
—
|
|
|
$
|
1,197,191
|
|
Canada
|
68,576
|
|
|
10,769
|
|
|
10,216
|
|
|
11,289
|
|
|
—
|
|
|
100,850
|
|
EMEA
|
64,632
|
|
|
31,667
|
|
|
52,169
|
|
|
—
|
|
|
—
|
|
|
148,468
|
|
APLA
|
39,315
|
|
|
15,415
|
|
|
1,293
|
|
|
—
|
|
|
—
|
|
|
56,023
|
|
Total revenue
|
$
|
990,841
|
|
|
$
|
171,412
|
|
|
$
|
113,418
|
|
|
$
|
226,861
|
|
|
$
|
—
|
|
|
$
|
1,502,532
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30, 2019
|
|
ORV / Snowmobiles
|
|
Motorcycles
|
|
Global Adj. Markets
|
|
Aftermarket
|
|
Boats
|
|
Consolidated
|
Revenue by product type
|
|
|
|
|
|
|
|
|
|
|
|
Wholegoods
|
$
|
1,565,123
|
|
|
$
|
271,770
|
|
|
$
|
183,321
|
|
|
—
|
|
|
$
|
367,235
|
|
|
$
|
2,387,449
|
|
PG&A
|
351,645
|
|
|
42,945
|
|
|
43,559
|
|
|
$
|
449,407
|
|
|
—
|
|
|
887,556
|
|
Total revenue
|
$
|
1,916,768
|
|
|
$
|
314,715
|
|
|
$
|
226,880
|
|
|
$
|
449,407
|
|
|
$
|
367,235
|
|
|
$
|
3,275,005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue by geography
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
$
|
1,580,724
|
|
|
$
|
188,080
|
|
|
$
|
109,829
|
|
|
$
|
430,790
|
|
|
$
|
358,063
|
|
|
$
|
2,667,486
|
|
Canada
|
125,854
|
|
|
16,435
|
|
|
3,203
|
|
|
18,617
|
|
|
9,172
|
|
|
173,281
|
|
EMEA
|
144,483
|
|
|
79,423
|
|
|
112,270
|
|
|
—
|
|
|
—
|
|
|
336,176
|
|
APLA
|
65,707
|
|
|
30,777
|
|
|
1,578
|
|
|
—
|
|
|
—
|
|
|
98,062
|
|
Total revenue
|
$
|
1,916,768
|
|
|
$
|
314,715
|
|
|
$
|
226,880
|
|
|
$
|
449,407
|
|
|
$
|
367,235
|
|
|
$
|
3,275,005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30, 2018
|
|
ORV / Snowmobiles
|
|
Motorcycles
|
|
Global Adj. Markets
|
|
Aftermarket
|
|
Boats
|
|
Consolidated
|
Revenue by product type
|
|
|
|
|
|
|
|
|
|
|
|
Wholegoods
|
$
|
1,504,353
|
|
|
$
|
260,779
|
|
|
$
|
185,562
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
1,950,694
|
|
PG&A
|
319,052
|
|
|
42,190
|
|
|
41,183
|
|
|
$
|
446,886
|
|
|
—
|
|
|
849,311
|
|
Total revenue
|
$
|
1,823,405
|
|
|
$
|
302,969
|
|
|
$
|
226,745
|
|
|
$
|
446,886
|
|
|
$
|
—
|
|
|
$
|
2,800,005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue by geography
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
$
|
1,480,913
|
|
|
$
|
197,458
|
|
|
$
|
99,794
|
|
|
$
|
426,566
|
|
|
$
|
—
|
|
|
$
|
2,204,731
|
|
Canada
|
126,331
|
|
|
17,709
|
|
|
15,585
|
|
|
20,320
|
|
|
—
|
|
|
179,945
|
|
EMEA
|
143,561
|
|
|
58,338
|
|
|
109,089
|
|
|
—
|
|
|
—
|
|
|
310,988
|
|
APLA
|
72,600
|
|
|
29,464
|
|
|
2,277
|
|
|
—
|
|
|
—
|
|
|
104,341
|
|
Total revenue
|
$
|
1,823,405
|
|
|
$
|
302,969
|
|
|
$
|
226,745
|
|
|
$
|
446,886
|
|
|
$
|
—
|
|
|
$
|
2,800,005
|
|
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 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. Extended service contract revenue is recorded within PG&A.
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. 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.
For the majority of 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
In 2016, the Company began financing its self-insured risks related to extended service contracts (“ESCs”). The premiums for ESCs are primarily recognized in income in proportion to the costs expected to be incurred over the contract period. Warranty costs are recognized as incurred.
The Company expects to recognize approximately
$28,795,000
of the unearned amount over the next 12 months and
$38,886,000
thereafter. The activity in the deferred revenue reserve during the periods presented was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
Six months ended June 30,
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Balance at beginning of period
|
$
|
63,500
|
|
|
$
|
49,345
|
|
|
$
|
59,915
|
|
|
$
|
45,760
|
|
New contracts sold
|
11,496
|
|
|
8,848
|
|
|
21,385
|
|
|
17,172
|
|
Less: reductions for revenue recognized
|
(7,315
|
)
|
|
(5,573
|
)
|
|
(13,619
|
)
|
|
(10,312
|
)
|
Balance at end of period
(1)
|
$
|
67,681
|
|
|
$
|
52,620
|
|
|
$
|
67,681
|
|
|
$
|
52,620
|
|
(1) The unamortized ESC premiums (deferred revenue) recorded in other current liabilities totaled
$28,795,000
and
$22,265,000
at
June 30, 2019
and
2018
, respectively, while the amount recorded in other long-term liabilities totaled
$38,886,000
and
$30,355,000
at
June 30, 2019
and
2018
, respectively.
Note 3. Acquisitions
2019 Acquisitions.
To date, 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 5.
The consolidated statements of income for the three and six months ended June 30, 2019 include
$182,425,000
and
$367,235,000
of net sales, and
$40,477,000
and
$76,641,000
of gross profit, respectively, related to Boat Holdings.
The following table summarizes the preliminary 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 2018 (in thousands, except per share data).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
Six months ended June 30,
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Sales
|
$
|
1,779,315
|
|
|
$
|
1,689,050
|
|
|
$
|
3,275,005
|
|
|
$
|
3,151,165
|
|
Net income
|
89,346
|
|
|
104,446
|
|
|
138,526
|
|
|
166,336
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
$
|
1.45
|
|
|
$
|
1.65
|
|
|
$
|
2.26
|
|
|
$
|
2.63
|
|
Diluted earnings per common share
|
$
|
1.44
|
|
|
$
|
1.61
|
|
|
$
|
2.23
|
|
|
$
|
2.56
|
|
The results for the three and six month periods ended June 30, 2019 have been adjusted to exclude the impact of approximately
$1,421,000
and
$2,474,000
of transaction related costs (pre-tax) incurred by the Company that are directly attributable to the transaction, respectively.
The results for the three and six month periods ended June 30, 2018 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.
Note 4. 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 thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
Six months ended June 30,
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Option awards
|
$
|
6,801
|
|
|
$
|
6,758
|
|
|
$
|
8,113
|
|
|
$
|
9,815
|
|
Other share-based awards
|
14,839
|
|
|
13,847
|
|
|
24,457
|
|
|
19,736
|
|
Total share-based compensation before tax
|
21,640
|
|
|
20,605
|
|
|
32,570
|
|
|
29,551
|
|
Tax benefit
|
5,151
|
|
|
4,904
|
|
|
7,752
|
|
|
7,033
|
|
Total share-based compensation expense included in net income
|
$
|
16,489
|
|
|
$
|
15,701
|
|
|
$
|
24,818
|
|
|
$
|
22,518
|
|
In addition to the above share-based compensation expenses, Polaris 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.
At
June 30, 2019
, there was
$131,363,000
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
1.67
years. Included in unrecognized share-based compensation expense is approximately
$36,651,000
related to stock options and
$94,712,000
for restricted stock.
Note 5. Financing Agreements
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 June 30, 2019
|
|
Maturity
|
|
June 30, 2019
|
|
December 31, 2018
|
Revolving loan facility
|
2.97%
|
|
July 2023
|
|
$
|
154,299
|
|
|
$
|
187,631
|
|
Term loan facility
|
3.90%
|
|
July 2023
|
|
1,120,000
|
|
|
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
|
5.11%
|
|
Various through 2029
|
|
17,066
|
|
|
17,587
|
|
Notes payable and other
|
4.24%
|
|
Various through 2030
|
|
86,399
|
|
|
87,608
|
|
Debt issuance costs
|
|
|
|
|
(4,696
|
)
|
|
(5,256
|
)
|
Total debt, finance lease obligations, and notes payable
|
|
|
|
|
$
|
1,898,068
|
|
|
$
|
1,962,570
|
|
Less: current maturities
|
|
|
|
|
66,505
|
|
|
66,543
|
|
Total long-term debt, finance lease obligations, and notes payable
|
|
|
|
|
$
|
1,831,563
|
|
|
$
|
1,896,027
|
|
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
$1,120,000,000
is outstanding as of
June 30, 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 at
June 30, 2019
.
The 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.
A property lease agreement for a manufacturing facility which Polaris began occupying in Opole, Poland commenced in February 2014. The Poland property lease is accounted for as a finance lease. The outstanding balance is included in long-term debt and current portion of long-term debt in the consolidated balance sheets.
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 of the merger through July 2030. The original discounted payable was for
$76,733,000
, all of which is outstanding as of
June 30, 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
June 30, 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.
Note 6. Goodwill and Other Intangible Assets
Goodwill and other intangible assets, net of accumulated amortization, at
June 30, 2019
and
December 31, 2018
are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
June 30, 2019
|
|
December 31, 2018
|
Goodwill
|
$
|
657,656
|
|
|
$
|
647,077
|
|
Other intangible assets, net
|
851,066
|
|
|
870,517
|
|
Total goodwill and other intangible assets, net
|
$
|
1,508,722
|
|
|
$
|
1,517,594
|
|
The changes in the carrying amount of goodwill for the
six months ended June 30, 2019
were as follows (in thousands):
|
|
|
|
|
|
Six months ended June 30, 2019
|
Goodwill, beginning of period
|
$
|
647,077
|
|
Goodwill adjustments related to businesses acquired
|
10,682
|
|
Currency translation effect on foreign goodwill balances
|
(103
|
)
|
Goodwill, end of period
|
$
|
657,656
|
|
The components of other intangible assets were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Total estimated life (years)
|
|
June 30, 2019
|
|
December 31, 2018
|
Non-amortizable—indefinite lived:
|
|
|
|
|
|
Brand/trade names
|
|
|
$
|
442,221
|
|
|
$
|
442,299
|
|
Amortizable:
|
|
|
|
|
|
Non-compete agreements
|
4
|
|
2,630
|
|
|
2,630
|
|
Dealer/customer related
|
5-20
|
|
506,780
|
|
|
506,401
|
|
Developed technology
|
5-7
|
|
13,311
|
|
|
13,323
|
|
Total amortizable
|
|
|
522,721
|
|
|
522,354
|
|
Less: Accumulated amortization
|
|
|
(113,876
|
)
|
|
(94,136
|
)
|
Net amortized other intangible assets
|
|
|
408,845
|
|
|
428,218
|
|
Total other intangible assets, net
|
|
|
$
|
851,066
|
|
|
$
|
870,517
|
|
Amortization expense for intangible assets for the three months ended June 30, 2019 and 2018 was
$10,250,000
and
$6,058,000
, respectively. Estimated amortization expense for the remainder of
2019
through
2024
is as follows:
2019
(remainder),
$20,563,000
;
2020
,
$35,991,000
;
2021
,
$33,204,000
;
2022
,
$28,233,000
;
2023
,
$25,703,000
;
2024
,
$25,157,000
; and after
2024
,
$239,994,000
. The preceding expected amortization expense is an estimate and actual amounts could differ due to additional intangible asset acquisitions, changes in foreign currency rates or impairment of intangible assets.
Note 7. Shareholders’ Equity
During the
six months ended June 30, 2019
, Polaris paid
$6,537,000
to repurchase approximately
76,000
shares of its common stock. As of
June 30, 2019
, the Board of Directors has authorized the Company to repurchase up to an additional
3,175,000
shares of Polaris 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. Polaris paid a regular cash dividend of
$0.61
per share on
June 17, 2019
to holders of record at the close of business on
June 3, 2019
.
Cash dividends declared and paid per common share for the
three and six
months ended
June 30, 2019
and
2018
, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
Six months ended June 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Cash dividends declared and paid per common share
|
|
$
|
0.61
|
|
|
$
|
0.60
|
|
|
$
|
1.22
|
|
|
$
|
1.20
|
|
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”) and 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 shares issued under the Omnibus Plan. A reconciliation of these amounts is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
Six months ended June 30,
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Weighted average number of common shares outstanding
|
61,089
|
|
62,913
|
|
|
61,025
|
|
62,982
|
|
Director Plan and deferred stock units
|
209
|
|
177
|
|
|
201
|
|
171
|
|
ESOP
|
121
|
|
82
|
|
|
126
|
|
85
|
|
Common shares outstanding—basic
|
61,419
|
|
63,172
|
|
|
61,352
|
|
63,238
|
|
Dilutive effect of Omnibus Plan
|
745
|
|
1,714
|
|
|
744
|
|
1,814
|
|
Common and potential common shares outstanding—diluted
|
62,164
|
|
64,886
|
|
|
62,096
|
|
65,052
|
|
During the
three and six
months ended
June 30, 2019
, 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
4,045,000
and
4,069,000
, respectively, compared to
1,812,000
and
1,677,000
for the same periods in
2018
.
Accumulated other comprehensive loss
Changes in the accumulated other comprehensive loss balance are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
Currency
Items
|
|
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 statement of income
|
—
|
|
|
(2,313
|
)
|
|
124
|
|
|
(2,189
|
)
|
Reclassification to retained earnings
|
—
|
|
|
—
|
|
|
(668
|
)
|
|
(668
|
)
|
Change in fair value
|
(804
|
)
|
|
(4,186
|
)
|
|
—
|
|
|
(4,990
|
)
|
Balance as of June 30, 2019
|
$
|
(61,308
|
)
|
|
$
|
(6,076
|
)
|
|
$
|
(3,436
|
)
|
|
$
|
(70,820
|
)
|
The table below provides data about 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 for the
three and six
months ended
June 30, 2019
and
2018
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives in Cash Flow Hedging Relationships and Other Activity
|
Location of Gain (Loss) Reclassified from Accumulated Other Comprehensive Loss into Income
|
|
Three months ended June 30,
|
|
Six months ended June 30,
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Foreign currency contracts
|
Other expense, net
|
|
$
|
929
|
|
|
$
|
1,937
|
|
|
$
|
2,133
|
|
|
$
|
2,094
|
|
Foreign currency contracts
|
Cost of sales
|
|
231
|
|
|
554
|
|
|
286
|
|
|
522
|
|
Interest rate contracts
|
Interest expense
|
|
(74
|
)
|
|
—
|
|
|
(105
|
)
|
|
—
|
|
Retirement plan activity
|
Operating expenses
|
|
(64
|
)
|
|
(45
|
)
|
|
(126
|
)
|
|
(130
|
)
|
Total
|
|
|
$
|
1,022
|
|
|
$
|
2,446
|
|
|
$
|
2,188
|
|
|
$
|
2,486
|
|
The net amount of the existing gains or losses at
June 30, 2019
that is expected to be reclassified into the statements of income within the next 12 months is not expected to be material. See Note 12 for further information regarding derivative activities.
Note 8. 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 (“ASC”) Topic 860. Polaris’ allocable share of the income of Polaris Acceptance has been included as a component of income from financial services in the accompanying consolidated statements of income. The partnership agreement is effective through February 2022.
Polaris’ total investment in Polaris Acceptance of
$97,303,000
at
June 30, 2019
is accounted for under the equity method, and is recorded in investment in finance affiliate in the accompanying consolidated balance sheets. At
June 30, 2019
, the outstanding amount of net receivables financed for dealers under this arrangement was
$1,272,378,000
, which included
$606,157,000
in the Polaris Acceptance portfolio and
$666,221,000
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 is 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.
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
June 30, 2019
, the potential aggregate repurchase obligation was approximately
$201,500,000
. 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 9. Investment in Other Affiliates
The Company has certain investments in nonmarketable securities of strategic companies. The Company had
$5,072,000
and
$6,133,000
of such investments as of
June 30, 2019
, and December 31, 2018, respectively, and 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
$3,817,000
and
$23,447,000
of costs, including impairment, associated with the wind-down of EPPL for the three and six months ended
June 30, 2018
, respectively. No such costs were recorded in 2019. The investment was fully impaired as of
June 30, 2019
and
December 31, 2018
.
The Company impairs an investment and recognizes a loss if and when events or circumstances indicate there is impairment in the investment that is other-than-temporary. When necessary, the Company evaluates investments in nonmarketable securities for impairment, utilizing Level 3 fair value inputs.
In October 2017, an agreement was signed to sell the assets of Brammo, Inc. to a third party. During the first quarter of 2018, the Company received additional distributions from Brammo and recognized a gain of
$13,478,000
, which is included in Other income on the consolidated statements of income.
Note 10. 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
or more. The exercise of lease renewal options is at the Company’s sole discretion. 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
|
|
June 30, 2019
|
Assets
|
|
|
|
Operating lease assets
|
Operating lease assets
|
|
$
|
108,013
|
|
Finance lease assets
|
Property and equipment, net
(1)
|
|
13,689
|
|
Total leased assets
|
|
|
$
|
121,702
|
|
Liabilities
|
|
|
|
Current
|
|
|
|
Operating lease liabilities
|
Current operating lease liabilities
|
|
$
|
35,084
|
|
Finance lease liabilities
|
Current portion of debt, finance lease obligations and notes payable
|
|
1,286
|
|
Long-term
|
|
|
|
Operating lease liabilities
|
Long-term operating lease liabilities
|
|
75,479
|
|
Finance lease liabilities
|
Finance lease obligations
|
|
15,780
|
|
Total lease liabilities
|
|
|
$
|
127,629
|
|
(1)
Finance lease assets are recorded net of accumulated amortization of
$7,133,000
as of
June 30, 2019
.
|
|
|
|
|
|
|
|
|
|
|
Lease Cost
|
Classification
|
|
Three months ended June 30, 2019
|
|
Six months ended June 30, 2019
|
Operating lease cost
(1)
|
Operating expenses and cost of sales
|
|
$
|
10,506
|
|
|
$
|
20,594
|
|
Finance lease cost
|
|
|
|
|
|
Amortization of leased assets
|
Operating expenses and cost of sales
|
|
375
|
|
|
744
|
|
Interest on lease liabilities
|
Interest expense
|
|
226
|
|
|
453
|
|
Sublease income
|
Other (income) expense, net
|
|
(578
|
)
|
|
(1,156
|
)
|
Total lease cost
|
|
|
$
|
10,529
|
|
|
$
|
20,635
|
|
(1)
Includes short-term leases and variable lease costs, which are immaterial.
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturity of Lease Liabilities
|
Operating Leases
(1)
|
|
Finance Leases
|
|
Total
|
2019 (remainder)
|
$
|
20,019
|
|
|
$
|
1,074
|
|
|
$
|
21,093
|
|
2020
|
33,216
|
|
|
2,151
|
|
|
35,367
|
|
2021
|
23,589
|
|
|
2,139
|
|
|
25,728
|
|
2022
|
15,662
|
|
|
2,103
|
|
|
17,765
|
|
2023
|
11,110
|
|
|
2,103
|
|
|
13,213
|
|
Thereafter
|
15,029
|
|
|
12,111
|
|
|
27,140
|
|
Total lease payments
|
$
|
118,625
|
|
|
$
|
21,681
|
|
|
$
|
140,306
|
|
Less: interest
|
8,062
|
|
|
4,615
|
|
|
|
Present value of lease payments
|
$
|
110,563
|
|
|
$
|
17,066
|
|
|
|
|
(1)
Operating lease payments include
$4,211,000
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
|
|
June 30, 2019
|
Weighted-average remaining lease term (years)
|
|
|
Operating leases
|
|
4.27
|
|
Finance leases
|
|
9.98
|
|
Weighted-average discount rate
|
|
|
Operating leases
|
|
3.36
|
%
|
Finance leases
|
|
5.11
|
%
|
|
|
|
|
|
|
Other Information
|
|
Six months ended June 30, 2019
|
Cash paid for amounts included in the measurement of lease liabilities
|
|
|
Operating cash flows from operating leases
|
|
$
|
20,745
|
|
Operating cash flows from finance leases
|
|
321
|
|
Financing cash flows from finance leases
|
|
749
|
|
Leased assets obtained in exchange for new operating lease liabilities
|
|
8,105
|
|