Quarterly Report (10-q)

Date : 10/22/2019 @ 8:07PM
Source : Edgar (US Regulatory)
Stock : Polaris Inc (PII)
Quote : 95.5  1.09 (1.15%) @ 12:59AM
Polaris share price Chart
After Hours
Last Trade
Last $ 95.50 ◊ 0.00 (0.00%)

Quarterly Report (10-q)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
(Mark one)
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2019
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 1-11411
 
POLARIS INC.
(Exact name of registrant as specified in its charter)
Minnesota
 
 
41-1790959
(State or other jurisdiction of
incorporation or organization)
 
 
(I.R.S. Employer
Identification No.)
 
 
 
 
 
 
2100 Highway 55,
Medina
MN
 
 
55340
(Address of principal executive offices)
 
 
(Zip Code)
 
 
 
763
542-0500
 
 
 
 
(Registrant’s telephone number, including area code)
 
 
 
 
Polaris Industries Inc.
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
 
 
Securities registered pursuant to Section 12(b) of the Act:
 
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, $.01 par value
PII
New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
x
Accelerated filer
Non-accelerated filer
Smaller reporting company
 
 
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨ 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes      No   x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
As of October 15, 2019, 61,172,971 shares of Common Stock, $.01 par value, of the registrant were outstanding. 
 

1


 
  POLARIS INC.
FORM 10-Q
For Quarterly Period Ended September 30, 2019
 
 
 
Page
 
 
3
 
 
3
 
 
4
 
 
5
 
 
6
 
 
8
 
 
9
 
25
 
 
25
 
 
30
 
 
32
 
 
33
 
 
33
 
33
 
34
 
 
 
 
 
 
34
 
35
 
35
 
35
 
 
 
 
37

2


Part I FINANCIAL INFORMATION
Item 1 – FINANCIAL STATEMENTS
POLARIS INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
 
September 30, 2019
 
December 31, 2018
 
(Unaudited)
 
 
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
122,216

 
$
161,164

Trade receivables, net
217,231

 
197,082

Inventories, net
1,270,110

 
969,511

Prepaid expenses and other
118,623

 
121,472

Income taxes receivable
14,958

 
36,474

Total current assets
1,743,138

 
1,485,703

Property and equipment, net
887,644

 
843,122

Investment in finance affiliate
104,060

 
92,059

Deferred tax assets
95,189

 
87,474

Goodwill and other intangible assets, net
1,494,646

 
1,517,594

Operating lease assets
107,906

 

Other long-term assets
94,839

 
98,963

Total assets
$
4,527,422

 
$
4,124,915

Liabilities and Shareholders’ Equity
 
 
 
Current liabilities:
 
 
 
Current portion of debt, finance lease obligations and notes payable
$
66,664

 
$
66,543

Accounts payable
584,506

 
346,294

Accrued expenses:
 
 
 
Compensation
169,989

 
167,857

Warranties
137,114

 
121,824

Sales promotions and incentives
198,566

 
167,621

Dealer holdback
136,437

 
125,003

Other
214,038

 
197,687

Current operating lease liabilities
34,179

 

Income taxes payable
4,632

 
4,545

Total current liabilities
1,546,125

 
1,197,374

Long-term income taxes payable
26,639

 
28,602

Finance lease obligations
14,840

 
16,140

Long-term debt
1,702,119

 
1,879,887

Deferred tax liabilities
4,741

 
6,490

Long-term operating lease liabilities
76,390

 

Other long-term liabilities
131,731

 
122,570

Total liabilities
$
3,502,585

 
$
3,251,063

Deferred compensation
$
11,615

 
$
6,837

Shareholders’ equity:
 
 
 
Preferred stock $0.01 par value per share, 20,000 shares authorized, no shares issued and outstanding

 

Common stock $0.01 par value per share, 160,000 shares authorized, 61,169 and 60,890 shares issued and outstanding, respectively
$
612

 
$
609

Additional paid-in capital
867,185

 
807,986

Retained earnings
228,837

 
121,114

Accumulated other comprehensive loss, net
(83,591
)
 
(62,973
)
Total shareholders’ equity
1,013,043

 
866,736

Noncontrolling interest
179

 
279

Total equity
1,013,222

 
867,015

Total liabilities and equity
$
4,527,422

 
$
4,124,915

The accompanying footnotes are an integral part of these consolidated statements.

3


POLARIS INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)
 
Three months ended September 30,
 
Nine months ended September 30,
 
2019
 
2018
 
2019
 
2018
Sales
$
1,771,647

 
$
1,651,415

 
$
5,046,652

 
$
4,451,420

Cost of sales
1,335,105

 
1,250,145

 
3,821,214

 
3,341,493

Gross profit
436,542

 
401,270

 
1,225,438

 
1,109,927

Operating expenses:
 
 
 
 
 
 
 
Selling and marketing
149,759

 
128,929

 
419,621

 
369,495

Research and development
77,337

 
64,181

 
220,836

 
197,741

General and administrative
100,794

 
90,639

 
297,822

 
262,206

Total operating expenses
327,890

 
283,749

 
938,279

 
829,442

Income from financial services
21,602

 
21,348

 
60,153

 
64,117

Operating income
130,254

 
138,869

 
347,312

 
344,602

Non-operating expense:
 
 
 
 
 
 
 
Interest expense
19,733

 
19,823

 
60,772

 
37,087

Equity in loss of other affiliates
4,072

 
111

 
5,133

 
25,576

Other income, net
(1,711
)
 
(4,124
)
 
(5,483
)
 
(27,660
)
Income before income taxes
108,160

 
123,059

 
286,890

 
309,599

Provision for income taxes
19,772

 
27,530

 
61,961

 
65,816

Net income
88,388

 
95,529

 
224,929

 
243,783

Net loss attributable to noncontrolling interest

 

 
100

 

Net income attributable to Polaris Inc.
$
88,388

 
$
95,529

 
$
225,029

 
$
243,783

Net income per share attributable to Polaris Inc. common shareholders:
 
 
 
 
 
 
 
Basic
$
1.44

 
$
1.54

 
$
3.67

 
$
3.88

Diluted
$
1.42

 
$
1.50

 
$
3.62

 
$
3.78

Weighted average shares outstanding:
 
 
 
 
 
 
 
Basic
61,480

 
62,207

 
61,394

 
62,894

Diluted
62,265

 
63,546

 
62,152

 
64,550


The accompanying footnotes are an integral part of these consolidated statements.

4


POLARIS INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
 
 
Three months ended September 30,
 
Nine months ended September 30,
 
2019
 
2018
 
2019
 
2018
Net income
$
88,388

 
$
95,529

 
$
224,929

 
$
243,783

Other comprehensive income, net of tax:
 
 
 
 
 
 
 
Foreign currency translation adjustments
(12,385
)
 
1,804

 
(13,189
)
 
(12,099
)
Unrealized gain (loss) on derivative instruments
(449
)
 
(2,111
)
 
(6,948
)
 
2,998

Retirement plan and other activity
63

 
66

 
(481
)
 
196

Comprehensive income
75,617

 
95,288

 
204,311

 
234,878

Comprehensive loss attributable to noncontrolling interest

 

 
100

 

Comprehensive income attributable to Polaris Inc.
$
75,617

 
$
95,288

 
$
204,411

 
$
234,878

The accompanying footnotes are an integral part of these consolidated statements.

5


POLARIS INC.
CONSOLIDATED STATEMENTS OF EQUITY
(In thousands)
(Unaudited)
 
 
Number
of Shares
 
Common
Stock
 
Additional
Paid-
In Capital
 
Retained
Earnings
 
Accumulated Other
Comprehensive
Income (loss)
 
Non Controlling Interest
 
Total Equity
Balance, December 31, 2018
60,890

 
$
609

 
$
807,986

 
$
121,114

 
$
(62,973
)
 
$
279

 
$
867,015

Employee stock compensation
214

 
2

 
12,089

 

 

 

 
12,091

Deferred compensation

 

 
(1,541
)
 
(346
)
 

 

 
(1,887
)
Proceeds from stock issuances under employee plans
18

 

 
3,207

 

 

 

 
3,207

Cash dividends declared

 

 

 
(37,144
)
 

 

 
(37,144
)
Repurchase and retirement of common shares
(71
)
 

 
(953
)
 
(5,157
)
 

 

 
(6,110
)
Cumulative effect of adoption of accounting standards (ASU 2018-02)

 

 

 
668

 
(668
)
 

 

Net income

 

 

 
48,378

 

 
18

 
48,396

Other comprehensive loss

 

 

 

 
(6,069
)
 

 
(6,069
)
Balance, March 31, 2019
61,051

 
611

 
820,788

 
127,513

 
(69,710
)
 
297

 
879,499

Employee stock compensation
14

 

 
22,142

 

 

 

 
22,142

Deferred compensation

 

 
(1,303
)
 
(578
)
 

 

 
(1,881
)
Proceeds from stock issuances under employee plans
59

 

 
3,006

 

 

 

 
3,006

Cash dividends declared

 

 

 
(37,286
)
 

 

 
(37,286
)
Repurchase and retirement of common shares
(5
)
 

 
(55
)
 
(372
)
 

 

 
(427
)
Net income (loss)

 

 

 
88,263

 

 
(118
)
 
88,145

Other comprehensive loss

 

 

 

 
(1,110
)
 

 
(1,110
)
Balance, June 30, 2019
61,119

 
611

 
844,578

 
177,540

 
(70,820
)
 
179

 
952,088

Employee stock compensation
27

 
1

 
22,325

 

 

 

 
22,326

Deferred compensation

 

 
(1,599
)
 
590

 

 

 
(1,009
)
Proceeds from stock issuances under employee plans
28

 
1

 
1,951

 

 

 

 
1,952

Cash dividends declared

 

 

 
(37,292
)
 

 

 
(37,292
)
Repurchase and retirement of common shares
(5
)
 
(1
)
 
(70
)
 
(389
)
 

 

 
(460
)
Net income

 

 

 
88,388

 

 

 
88,388

Other comprehensive loss

 

 

 

 
(12,771
)
 

 
(12,771
)
Balance, September 30, 2019
61,169

 
612

 
867,185

 
228,837

 
(83,591
)
 
179

 
1,013,222


6


 
 
Number
of Shares
 
Common
Stock
 
Additional
Paid-
In Capital
 
Retained
Earnings
 
Accumulated Other
Comprehensive
Income (loss)
 
Non Controlling Interest
 
Total Equity
Balance, December 31, 2017
63,075

 
$
631

 
$
733,894

 
$
242,763

 
$
(45,629
)
 
$

 
$
931,659

Employee stock compensation
(5
)
 

 
12,032

 

 

 

 
12,032

Deferred compensation

 

 
(392
)
 
812

 

 

 
420

Proceeds from stock issuances under employee plans
161

 
2

 
11,903

 

 

 

 
11,905

Cash dividends declared

 

 

 
(37,796
)
 

 

 
(37,796
)
Repurchase and retirement of common shares
(133
)
 
(2
)
 
(1,549
)
 
(13,436
)
 

 

 
(14,987
)
Cumulative effect of adoption of accounting standards (ASU 2016-16)

 

 

 
(1,077
)
 

 

 
(1,077
)
Net income

 

 

 
55,714

 

 

 
55,714

Other comprehensive income

 

 

 

 
15,592

 

 
15,592

Balance, March 31, 2018
63,098

 
631

 
755,888

 
246,980

 
(30,037
)
 

 
973,462

Employee stock compensation
12

 

 
20,969

 

 

 

 
20,969

Deferred compensation

 

 
(617
)
 
(853
)
 

 

 
(1,470
)
Proceeds from stock issuances under employee plans
533

 
5

 
31,538

 

 

 

 
31,543

Cash dividends declared

 

 

 
(37,898
)
 

 

 
(37,898
)
Repurchase and retirement of common shares
(1,429
)
 
(14
)
 
(16,630
)
 
(160,736
)
 

 

 
(177,380
)
Net income

 

 

 
92,540

 

 

 
92,540

Other comprehensive loss

 

 

 

 
(24,256
)
 

 
(24,256
)
Balance June 30, 2018
62,214

 
622

 
791,148

 
140,033

 
(54,293
)
 

 
877,510

Employee stock compensation
17

 

 
10,218

 

 

 

 
10,218

Deferred compensation

 

 
714

 
2,430

 

 

 
3,144

Proceeds from stock issuances under employee plans
49

 
1

 
3,430

 

 

 

 
3,431

Cash dividends declared

 

 

 
(37,054
)
 

 

 
(37,054
)
Repurchase and retirement of common shares
(507
)
 
(5
)
 
(5,903
)
 
(48,656
)
 

 

 
(54,564
)
Noncontrolling interest

 

 

 

 

 
279

 
279

Net income

 

 

 
95,529

 

 

 
95,529

Other comprehensive loss

 

 

 

 
(241
)
 

 
(241
)
Balance September 30, 2018
61,773

 
$
618

 
$
799,607

 
$
152,282

 
$
(54,534
)
 
$
279

 
$
898,252


The accompanying footnotes are an integral part of these consolidated statements.


7


POLARIS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
Nine months ended September 30,
 
2019
 
2018
Operating Activities:
 
 
 
Net income
$
224,929


$
243,783

Adjustments to reconcile net income to net cash used for operating activities:



Depreciation and amortization
173,003


155,910

Noncash compensation
56,559


43,219

Noncash income from financial services
(23,704
)

(22,232
)
Deferred income taxes
(9,134
)

(4,171
)
Impairment charges
3,558


21,716

Other, net
1,575


(9,618
)
Changes in operating assets and liabilities:



Trade receivables
(23,613
)

(991
)
Inventories
(304,261
)

(201,229
)
Accounts payable
239,226


90,842

Accrued expenses
75,293


1,620

Income taxes payable/receivable
19,680


28,715

Prepaid expenses and others, net
3,020


6,574

Net cash provided by operating activities
436,131


354,138

Investing Activities:



Purchase of property and equipment
(189,336
)

(157,763
)
Investment in finance affiliate, net
11,703


22,207

Investment in other affiliates, net


7,366

Acquisition of businesses, net of cash acquired
(1,800
)

(729,925
)
Net cash used for investing activities
(179,433
)

(858,115
)
Financing Activities:



Borrowings under debt arrangements / finance lease obligations
2,654,218


2,845,688

Repayments under debt arrangements / finance lease obligations
(2,831,666
)

(1,970,701
)
Repurchase and retirement of common shares
(6,997
)

(246,931
)
Cash dividends to shareholders
(111,722
)

(112,748
)
Proceeds from stock issuances under employee plans
8,165


47,158

Net cash (used for) provided by financing activities
(288,002
)

562,466

Impact of currency exchange rates on cash balances
(3,092
)

(5,904
)
Net increase (decrease) in cash, cash equivalents and restricted cash
(34,396
)

52,585

Cash, cash equivalents and restricted cash at beginning of period
193,126


161,618

Cash, cash equivalents and restricted cash at end of period
$
158,730


$
214,203

 
 
 
 
Supplemental Cash Flow Information:
 
 
 
Interest paid on debt borrowings
$
63,733


$
33,218

Income taxes paid
$
48,914


$
40,178

 



The following presents the classification of cash, cash equivalents and restricted cash within the consolidated balance sheets:



Cash and cash equivalents
$
122,216


$
183,411

Other long-term assets
36,514


30,792

Total
$
158,730


$
214,203

The accompanying footnotes are an integral part of these consolidated statements.

8


POLARIS INC.
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, 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.

9


Assets and liabilities measured at fair value on a recurring basis are summarized below (in thousands):
 
Fair Value Measurements as of September 30, 2019
Asset (Liability)
Total
 
Level 1
 
Level 2
 
Level 3
Non-qualified deferred compensation assets
$
48,683

 
$
48,683

 
$

 
$

Foreign exchange contracts, net
964

 

 
964

 

Total assets at fair value
$
49,647

 
$
48,683

 
$
964

 
$

Non-qualified deferred compensation liabilities
$
(48,683
)
 
$
(48,683
)
 
$

 
$

Interest rate contracts, net
(9,589
)
 

 
(9,589
)
 

Total liabilities at fair value
$
(58,272
)
 
$
(48,683
)
 
$
(9,589
)
 
$

 
 
 
 
 
 
 
 
 
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 September 30, 2019 and December 31, 2018, the fair value of the Company’s long-term debt, finance lease obligations and notes payable was approximately $1,873,437,000 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 $1,783,623,000 and $1,962,570,000 as of September 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):
 
September 30, 2019
 
December 31, 2018
Raw materials and purchased components
$
385,735

 
$
233,258

Service parts, garments and accessories
375,709

 
342,593

Finished goods
566,021

 
442,003

Less: reserves
(57,355
)
 
(48,343
)
Inventories
$
1,270,110

 
$
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, 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. 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.

10


The activity in the warranty reserve during the periods presented was as follows (in thousands):
 
Three months ended September 30,
 
Nine months ended September 30,
 
2019
 
2018
 
2019
 
2018
Balance at beginning of period
$
132,758

 
$
106,155

 
$
121,824

 
$
123,840

Additions to reserve related to acquisitions

 
13,799

 
8,809

 
13,799

Additions charged to expense
31,359

 
37,741

 
94,232

 
79,913

Warranty claims paid, net
(27,003
)
 
(35,151
)
 
(87,751
)
 
(95,008
)
Balance at end of period
$
137,114

 
$
122,544

 
$
137,114

 
$
122,544



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 a 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

11


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 September 30, 2019
 
ORV / Snowmobiles
 
Motorcycles
 
Global Adj. Markets
 
Aftermarket
 
Boats
 
Consolidated
Revenue by product type
 
 
 
 
 
 
 
 
 
 
 
Wholegoods
$
950,024

 
$
127,419

 
$
92,268

 

 
$
119,078

 
$
1,288,789

PG&A
202,381

 
22,481

 
21,735

 
$
236,261

 

 
482,858

Total revenue
$
1,152,405

 
$
149,900

 
$
114,003

 
$
236,261

 
$
119,078

 
$
1,771,647

 
 
 
 
 
 
 
 
 
 
 
 
Revenue by geography
 
 
 
 
 
 
 
 
 
 
 
United States
$
964,052

 
$
105,566

 
$
60,900

 
$
224,090

 
$
117,239

 
$
1,471,847

Canada
91,078

 
7,865

 
380

 
12,171

 
1,839

 
113,333

EMEA
63,436

 
21,668

 
52,294

 

 

 
137,398

APLA
33,839

 
14,801

 
429

 

 

 
49,069

Total revenue
$
1,152,405

 
$
149,900

 
$
114,003

 
$
236,261

 
$
119,078

 
$
1,771,647

 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended September 30, 2018
 
ORV / Snowmobiles
 
Motorcycles
 
Global Adj. Markets
 
Aftermarket
 
Boats
 
Consolidated
Revenue by product type
 
 
 
 
 
 
 
 
 
 
 
Wholegoods
$
851,733

 
$
134,410

 
$
78,312

 

 
$
134,321

 
$
1,198,776

PG&A
183,821

 
20,906

 
17,939

 
$
229,973

 

 
452,639

Total revenue
$
1,035,554

 
$
155,316

 
$
96,251

 
$
229,973

 
$
134,321

 
$
1,651,415

 
 
 
 
 
 
 
 
 
 
 
 
Revenue by geography
 
 
 
 
 
 
 
 
 
 
 
United States
$
866,289

 
$
116,072

 
$
51,363

 
$
217,816

 
$
132,139

 
$
1,383,679

Canada
70,765

 
9,712

 
837

 
12,157

 
2,182

 
95,653

EMEA
64,218

 
15,706

 
42,893

 

 

 
122,817

APLA
34,282

 
13,826

 
1,158

 

 

 
49,266

Total revenue
$
1,035,554

 
$
155,316

 
$
96,251

 
$
229,973

 
$
134,321

 
$
1,651,415



12


 
Nine months ended September 30, 2019
 
ORV / Snowmobiles
 
Motorcycles
 
Global Adj. Markets
 
Aftermarket
 
Boats
 
Consolidated
Revenue by product type
 
 
 
 
 
 
 
 
 
 
 
Wholegoods
$
2,515,147

 
$
399,189

 
$
275,589

 

 
$
486,313

 
$
3,676,238

PG&A
554,026

 
65,426

 
65,294

 
$
685,668

 

 
1,370,414

Total revenue
$
3,069,173

 
$
464,615

 
$
340,883

 
$
685,668

 
$
486,313

 
$
5,046,652

 
 
 
 
 
 
 
 
 
 
 
 
Revenue by geography
 
 
 
 
 
 
 
 
 
 
 
United States
$
2,544,776

 
$
293,646

 
$
170,729

 
$
654,880

 
$
475,302

 
$
4,139,333

Canada
216,932

 
24,300

 
3,583

 
30,788

 
11,011

 
286,614

EMEA
207,919

 
101,091

 
164,564

 

 

 
473,574

APLA
99,546

 
45,578

 
2,007

 

 

 
147,131

Total revenue
$
3,069,173

 
$
464,615

 
$
340,883

 
$
685,668

 
$
486,313

 
$
5,046,652

 
 
 
 
 
 
 
 
 
 
 
 
 
Nine months ended September 30, 2018
 
ORV / Snowmobiles
 
Motorcycles
 
Global Adj. Markets
 
Aftermarket
 
Boats
 
Consolidated
Revenue by product type
 
 
 
 
 
 
 
 
 
 
 
Wholegoods
$
2,356,086

 
$
395,189

 
$
263,874

 

 
$
134,321

 
$
3,149,470

PG&A
502,873

 
63,096

 
59,122

 
$
676,859

 

 
1,301,950

Total revenue
$
2,858,959

 
$
458,285

 
$
322,996

 
$
676,859

 
$
134,321

 
$
4,451,420

 
 
 
 
 
 
 
 
 
 
 
 
Revenue by geography
 
 
 
 
 
 
 
 
 
 
 
United States
$
2,347,202

 
$
313,530

 
$
151,157

 
$
644,382

 
$
132,139

 
$
3,588,410

Canada
197,096

 
27,421

 
16,422

 
32,477

 
2,182

 
275,598

EMEA
207,779

 
74,044

 
151,982

 

 

 
433,805

APLA
106,882

 
43,290

 
3,435

 

 

 
153,607

Total revenue
$
2,858,959

 
$
458,285

 
$
322,996

 
$
676,859

 
$
134,321

 
$
4,451,420


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

13


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. The Company transfers control and recognizes a sale when it ships the product from its manufacturing facility or distribution center to its customer (primarily dealers). The amount of consideration the Company receives and revenue it recognizes varies with changes in marketing incentives and rebates it offers to its dealers and their customers. Sales returns are not material. The Company adjusts its estimate of revenue at the earlier of when the most likely amount of consideration it expects to receive changes or when the consideration becomes fixed. The Company has elected to recognize the cost for freight and shipping when control over boats has transferred to the customer as an expense in cost of sales.
Deferred revenue
The Company finances its self-insured risks related to extended service contracts (“ESCs”). The premiums for ESCs are primarily recognized in income in proportion to the costs expected to be incurred over the contract period. Warranty costs are recognized as incurred.
The Company expects to recognize approximately $30,703,000 of the unearned amount over the next 12 months and $41,688,000 thereafter. The activity in the deferred revenue reserve during the periods presented was as follows (in thousands):
 
Three months ended September 30,
 
Nine months ended September 30,
 
2019
 
2018
 
2019
 
2018
Balance at beginning of period
$
67,681

 
$
52,620

 
$
59,915

 
$
45,760

New contracts sold
11,119

 
8,054

 
32,504

 
25,226

Less: reductions for revenue recognized
(6,409
)
 
(5,088
)
 
(20,028
)
 
(15,400
)
Balance at end of period (1)
$
72,391

 
$
55,586

 
$
72,391

 
$
55,586


(1) The unamortized ESC premiums (deferred revenue) recorded in other current liabilities totaled $30,703,000 and $23,893,000 at September 30, 2019 and 2018, respectively, while the amount recorded in other long-term liabilities totaled $41,688,000 and $31,693,000 at September 30, 2019 and 2018, respectively.

Note 3. Acquisitions
2019 Acquisitions.
To date, the Company did not complete any material acquisitions in 2019.

14


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 nine months ended September 30, 2019 include $119,078,000 and $486,313,000 of net sales, and $22,335,000 and $98,976,000 of gross profit, respectively, related to Boat Holdings.
The following table summarizes the final fair values assigned to the Boat Holdings net assets acquired and the determination of net assets (in thousands):
Cash and cash equivalents
$
16,534

Trade receivables
17,528

Inventory
39,948

Other current assets
4,451

Property, plant and equipment
35,299

Customer relationships
341,080

Trademarks / trade names
210,680

Non-compete agreements
2,630

Goodwill
222,372

Accounts payable
(30,064
)
Other liabilities assumed
(37,266
)
Total fair value of net assets acquired
823,192

Less cash acquired
(16,534
)
Total consideration for acquisition, less cash acquired
$
806,658



On the acquisition date, amortizable intangible assets had a weighted-average useful life of approximately 19 years. The customer relationships were valued based on the Discounted Cash Flow Method and are amortized over 15-20 years, depending on the customer class. The trademarks and trade names were valued on the Relief from Royalty Method and have indefinite remaining useful lives. Goodwill is deductible for tax purposes.
The following unaudited pro forma information represents the Company’s results of operations as if the fiscal 2018 acquisition of Boat Holdings had occurred at the beginning of fiscal 2018 (in thousands, except per share data).
 
Three months ended September 30,
 
Nine months ended September 30,
 
2019
 
2018
 
2019
 
2018
Sales
$
1,771,647

 
$
1,651,415

 
$
5,046,652

 
$
4,802,580

Net income
89,478

 
99,224

 
228,004

 
268,660

 
 
 
 
 
 
 
 
Basic earnings per share
$
1.46

 
$
1.60