Polaris (PII) Q4 2005 earnings summary

Executive summary

• FY05 continuing sales reached a record $1.870B, up 5% YoY; continuing net income rose 5% to $144.3M and diluted EPS increased 8% to $3.29.

• Growth in ATVs, Victory motorcycles and PG&A offset lower snowmobile sales; gross margin fell amid higher commodity, financing, warranty and transportation costs.

Financial highlights

• Gross profit was $417.9M, down 2%; gross margin was 22.3%, down 160 bps from 23.9% in 2004.

• Operating income was $214.8M versus $211.6M; operating expenses declined 1% to $241.7M, or 12.9% of sales versus 13.8%.

• Financial services income rose 21% to $38.6M; net income from continuing operations was $144.3M, with diluted EPS of $3.29.

• Reported net income was $143.3M, or $3.27 diluted EPS, including a $1.0M after-tax marine loss; 2004 included a $23.9M after-tax disposal loss.

• Effective tax rate was 30.8% versus 33.0%, primarily reflecting favorable tax events, including settlement of prior-year state tax audits.

Outlook and guidance

• 2006 capital expenditures, including tooling and R&D equipment, were projected at $70M-$80M.

• Soft North American ATV retail demand, elevated commodity costs and higher-than-desired dealer and factory inventories were expected to persist into H1 2006.

• Existing cash, operating cash flow and borrowing capacity were expected to fund 2006 operations, regular dividends, repurchases and capital expenditures.