The Daily Magic Formula Stock for 02/08/2009 is Polaris Industries Inc. According to the Magic Formula Investing Web Site, the ebit yield is 17% and the EBIT ROIC is 75-100%.
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Polaris Industries Inc. (the â€śCompanyâ€ť or â€śPolarisâ€ť), a Minnesota corporation, was formed in 1994 and is the successor to Polaris Industries Partners LP. The term â€śPolarisâ€ť as used herein refers to the business and operations of the Company, its subsidiaries and its predecessors which began doing business in the early 1950â€™s. Polaris designs, engineers and manufactures all terrain recreational, utility and side-by-side vehicles (â€śATVsâ€ť), snowmobiles, and motorcycles and markets them, together with related replacement parts, garments and accessories (â€śPG&Aâ€ť) through dealers and distributors principally located in the United States, Canada and Europe. Sales of ATVs, snowmobiles, motorcycles, and PG&A accounted for the following approximate percentages of Polarisâ€™ sales for the years ended December 31:
The Company discontinued the manufacture of marine products effective September 2, 2004. The marine products divisionâ€™s financial results are reported separately as discontinued operations for all periods presented. See Note 9 of Notes to Consolidated Financial Statements for a discussion of the discontinuation of marine products.
All Terrain Vehicles. ATVs are four-wheel vehicles with balloon style tires designed for off-road use and traversing rough terrain, swamps and marshland. ATVs are used for recreation, in such sports as fishing and hunting, as well as for utility purposes on farms, ranches and construction sites.
ATVs were introduced to the North American market in 1971 by Honda. Other Japanese motorcycle manufacturers including Yamaha, Kawasaki and Suzuki entered the North American ATV market in the late 1970s and early 1980s. Polaris entered the ATV market in 1985, Arctic Cat entered in 1995 and Bombardier Recreational Products Inc. (â€śBombardierâ€ť) entered in 1998. KTM Power Sports AG (â€śKTMâ€ť) entered the market in 2007. By 1985, the number of three- and four-wheel ATVs sold in North America had grown to approximately 650,000 units per year, then dropped dramatically to a low of 148,000 in 1989. The industry grew each year in North America from 1990 until 2005. The market declined in 2006 and 2007, partly due to weak overall economic conditions. Internationally, similar ATVs are also sold primarily in Western European countries by similar manufacturers as in North America in addition to several Taiwanese and Chinese manufacturers. Polaris estimates that during the calendar year 2007 the world-wide industry sales declined 11 percent from 2006 levels with approximately 970,000 ATVs sold worldwide.
Polaris also competes in the side-by-side vehicle market with its RANGER tm off-road side-by-side vehicle products. Side-by-side vehicles are multi-passenger off-road, all terrain vehicles that can carry up to six passengers in addition to cargo. Polaris estimates that the side-by-side vehicle market sales grew approximately 15 percent during the calendar year 2007 over 2006 levels with an estimated 280,000 side-by-side vehicles sold worldwide. The main competitors for the RANGER tm are John Deere, Kawasaki, Yamaha, Arctic Cat and Kubota.
Polaris estimates that during the calendar year 2007 the combined ATV and side-by-side vehicle industry sales decreased six percent from 2006 levels with approximately 1,250,000 units sold worldwide.
Snowmobiles. In the early 1950s, a predecessor to Polaris produced a â€śgas powered sledâ€ť which became the forerunner of the Polaris snowmobile. Snowmobiles have been manufactured under the Polaris name since 1954.
Originally conceived as a utility vehicle for northern, rural environments, the snowmobile gained popularity as a recreational vehicle. From the mid-1950s through the late 1960s, over 100 producers entered the snowmobile market and snowmobile sales reached a peak of approximately 495,000 units in 1971. The Polaris product survived the industry decline in which snowmobile sales fell to a low point of approximately 87,000 units in 1983 and the number of snowmobile manufacturers serving the North American market declined to four: Yamaha, Bombardier,
Arctic Cat and Polaris. These four manufactures also sell snowmobiles in certain overseas markets where the climate is conducive to snowmobile riding. Polaris estimates that during the season ended March 31, 2007, industry sales of snowmobiles on a worldwide basis were approximately 165,000 units, relatively unchanged with the previous season.
Motorcycles. Heavyweight motorcycles are over the road vehicles utilized as a mode of transportation as well as for recreational purposes. There are four segments: cruisers, touring, sport bikes, and standard motorcycles.
Polaris entered the motorcycle market in 1998 with an initial entry product in the cruiser segment. U.S. industry retail cruiser sales more than doubled from 1996 to 2006, however the motorcycle industry declined in 2007 due to weak overall economic conditions. Polaris entered the touring segment in 2000. Polaris estimates that the cruiser and touring market segments combined declined five percent in 2007 compared to 2006 levels with approximately 454,000 cruiser and touring motorcycles sold in the U.S. market. Other major cruiser and touring motorcycle manufacturers include BMW, Harley Davidson, Honda, Yamaha, Kawasaki and Suzuki.
All Terrain Vehicles. Polaris entered the ATV market in the spring of 1985. Polaris currently produces four-wheel ATVs, which provide more stability for the rider than earlier three-wheel versions. Polarisâ€™ line of ATVs, consisting of thirty models, includes two and four-wheel drive general purpose, sport and side-by-side models, with 2008 model year suggested United States retail prices ranging from approximately $2,000 to $12,300. In 2000, Polaris introduced its first youth ATV models. In addition, Polaris also introduced a six-wheel off-road ATV utility vehicle and the Polaris RANGER tm , an off-road side-by-side utility vehicle. In 2001, Polaris expanded its side-by-side line, the Polaris Professional Series (â€śPPSâ€ť), with a third party sourced all surface loader product as well as a 4X4 and 6X6 ATV (ATV Pro), which were modifications of existing products. In 2004, the PPS line was phased out and the RANGER tm line expanded to meet both the commercial and recreational customer. In 2007, Polaris introduced its first recreational side-by-side vehicle, the RANGER RZR tm and the Companyâ€™s first six-passenger side-by-side vehicle, the RANGER Crew tm . Additionally, in 2007, the Company introduced military version ATV and side-by-side vehicles with features specifically designed for ultra-light tactical military applications.
Most of Polarisâ€™ ATVs feature the totally automatic Polaris variable transmission, which requires no manual shifting, and a MacPherson strut front suspension, which enhances control and stability. Polarisâ€™ on demand all-wheel drive provides industry leading traction performance and ride quality thanks to its patented on demand, easy shift on-the-fly design. Polarisâ€™ ATVs have four-cycle engines and both shaft and concentric chain drive. In 1999, Polaris introduced its first manual transmission ATV models. In 2003, Polaris introduced the industryâ€™s first electronic fuel injected ATV, the Sportsman 700 EFI. In 2005, Polaris introduced the industryâ€™s first independent rear suspension on a sport ATV named the Outlaw tm. In 2007, Polaris introduced the RANGER RZR tm , a big bore recreational side-by-side model and two military vehicles equipped with engines that operate on JP8 militarized fuel.
Snowmobiles. Polaris produces a full line of snowmobiles, consisting of thirty-three models, ranging from youth models to utility and economy models to performance and competition models. The 2008 model year suggested United States retail prices range from approximately $2,200 to $11,000. Polaris snowmobiles are sold principally in the United States, Canada and Europe. Polaris believes its snowmobiles have a long-standing reputation for quality, dependability and performance. Polaris believes that it and its predecessors were the first to develop several features for wide commercial use in snowmobiles, including independent front suspension, long travel rear suspension, hydraulic disc brakes, liquid cooling for brakes and a three cylinder engine. In 2001, Polaris introduced a new, more environmentally-friendly snowmobile featuring a four-stroke engine designed specifically for snowmobiles.
Motorcycles. In 1998, Polaris began manufacturing V-twin cruiser motorcycles under the Victory Â® brand name. Polarisâ€™ 2008 model year line of motorcycles consists of eleven models including its first luxury touring models, the Victory Vision Street tm and Victory Vision Tour tm . Suggested United States retail prices for the 2008 model year Victory motorcycles ranged from approximately $13,600 to $23,700.
Parts, Garments and Accessories. Polaris produces or supplies a variety of replacement parts and accessories for its ATVs, snowmobiles, motorcycles and personal watercraft. ATV and side-by-side accessories include winches, bumper/brushguards, plows, racks, mowers, tires, pull-behinds, cabs, cargo box accessories, tracks and oil. Snowmobile accessories include products such as covers, traction products, reverse kits, electric starters, tracks, bags, windshields, oil and lubricants. Motorcycle accessories include saddle bags, handlebars, backrests, exhaust, windshields, seats, oil and various chrome accessories. Polaris also markets a full line of recreational apparel including helmets, jackets, bibs and pants, leathers and hats for its snowmobile, ATV, and motorcycle lines. The apparel is designed to Polarisâ€™ specifications, purchased from independent vendors and sold by Polaris through its dealers and distributors, and online through its e-commerce subsidiary under the Polaris brand name.
Discontinued Operations â€” Marine Products. Polaris entered the personal watercraft (â€śPWCâ€ť) market in 1992. On September 2, 2004, the Company announced that it had decided to cease to manufacture marine products effective immediately. As technology and the distribution channel evolved, the marine divisionâ€™s lack of commonality with other Polaris product lines created challenges for Polaris and its dealer base. The marine division continued to experience escalating costs and increasing competitive pressures and was never profitable for Polaris. See Note 9 of Notes to Consolidated Financial Statements for a discussion of the discontinuation of marine products.
Manufacturing and Distribution Operations
Polarisâ€™ products are assembled at its original manufacturing facility in Roseau, Minnesota and at its facilities in Spirit Lake, Iowa and Osceola, Wisconsin. Since snowmobiles, ATVs and motorcycles incorporate similar technology, substantially the same equipment and personnel are employed in their production. Polaris is vertically integrated in several key components of its manufacturing process, including plastic injection molding, stamping, welding, clutch assembly and balancing, painting, cutting and sewing, and manufacture of foam seats. Fuel tanks, tracks, tires and instruments, and certain other component parts are purchased from third party vendors. Polaris manufactures a number of other components for its snowmobiles, ATVs, and motorcycles. Raw materials or standard parts are readily available from multiple sources for the components manufactured by Polaris. Polarisâ€™ work force is familiar with the use, operation and maintenance of the products, since many employees own snowmobiles, ATVs, and motorcycles. In 1991, Polaris acquired a manufacturing facility in Osceola, Wisconsin to manufacture component parts previously produced by third party suppliers. In 1994, Polaris acquired a manufacturing facility in Spirit Lake, Iowa in order to expand the assembly capacity of the Company. Certain operations, including engine assembly and the bending of frame tubes, seat manufacturing, drivetrain and exhaust assembly and stamping are conducted at the Osceola, Wisconsin facility. In 1998, Victory motorcycle production began at Polarisâ€™ Spirit Lake, Iowa facility. The production process in Spirit Lake includes welding, finish painting, and final assembly. In early 2002, Polaris completed the expansion and renovation of its Roseau manufacturing facility, which resulted in increased capacity and enhanced production flexibility.
Pursuant to informal agreements between Polaris and Fuji Heavy Industries Ltd. (â€śFujiâ€ť), Fuji was the exclusive manufacturer of Polarisâ€™ two-cycle snowmobile engines from 1968 to 1995. Fuji has manufactured engines for Polarisâ€™ ATV products since their introduction in the spring of 1985. Fuji develops such engines to the specific requirements of Polaris. Polaris believes its relationship with Fuji to be excellent. If, however, Fuji terminated its relationship, interruption in the supply of engines would adversely affect Polarisâ€™ production pending the continued development of substitute supply arrangements.
In addition, Polaris entered into an agreement with Fuji to form Robin Manufacturing, U.S.A. (â€śRobinâ€ť) in 1995. Under the agreement, Polaris made an investment for a 40% ownership position in Robin, which builds engines in the United States for recreational and industrial products. See Note 7 of Notes to Consolidated Financial Statements for a discussion of the Robin agreement.
Polaris has been designing and producing its own engines for select models of snowmobiles since 1995 and for all Victory motorcycles since 1998, and for select ATV models since 2001.
In 2000, Polaris entered into an agreement with a Taiwan manufacturer to co-design, develop and produce youth ATVs. Polaris expanded the agreement with the Taiwan manufacturer in 2004 to include the design, development and production of value-priced smaller adult ATV models. In 2002, Polaris entered into an agreement with a German manufacturer to co-design, develop and produce four-stroke engines for PWC and snowmobiles. In 2006, Polaris entered into a long term supply agreement with KTM Power Sports AG (â€śKTMâ€ť) whereby KTM supplies four-stroke engines for use in certain Polaris ATVs.
Polaris anticipates no significant difficulties in obtaining substitute supply arrangements for other raw materials or components that it generally obtains from limited sources.
Contract carriers ship Polarisâ€™ products from its manufacturing and distribution facilities to its customers.
Polaris maintains distribution facilities in Vermillion, South Dakota; Winnipeg, Manitoba; Passy, France; Askim, Norway; Ostersund, Sweden; Gloucester, United Kingdom and Ballarat, Victoria, Australia. These facilities distribute PG&A products to our North American dealers and international dealers and distributors.
Polarisâ€™ products are produced and delivered throughout the year. Orders for ATVs are placed by the dealers and distributors periodically throughout the year. Delivery of snowmobiles to consumers begins in autumn and continues during the winter season. Orders for each yearâ€™s production of snowmobiles are placed by the dealers and distributors in the spring. Orders for Victory motorcycles are placed by the dealers in the summer after meetings with dealers. Units are built to order each year subject to fluctuations in market conditions and supplier lead times. In addition, non-refundable deposits made by consumers to dealers in the spring for pre-ordered snowmobiles assist in production planning. The anticipated volume of units to be produced is substantially committed to by dealers and distributors prior to production. Retail sales activity at the dealer level is monitored by Polaris for snowmobiles, ATVs, and motorcycles and incorporated into each productâ€™s production scheduling.
Manufacture of snowmobiles commences in late winter of the previous season and continues through late autumn or early winter of the current season. Since 1993, Polaris has manufactured ATVs year round. Victory motorcycle manufacturing began in 1998 and continues year round. Polaris has the ability to alternate production of the various products on the existing manufacturing lines as demand dictates.
Sales and Marketing
Polaris products are sold through a network of 1,600 independent dealers in North America, and through six subsidiaries and 43 distributors in approximately 130 countries outside of North America.
Polaris sells its snowmobiles directly to dealers in the snowbelt regions of the United States and Canada. Many dealers and distributors of Polaris snowmobiles also distribute Polarisâ€™ ATVs. At the end of 2007, approximately 825 Polaris dealers were located in areas of the United States where snowmobiles are not regularly sold. Unlike its primary competitors, which market their ATV products principally through their affiliated motorcycle dealers, Polaris also sells its ATVs through lawn and garden and farm implement dealers.
With the exception of France, Great Britain, Sweden, Norway, Australia, New Zealand and Germany, sales of Polarisâ€™ products in Europe and other offshore markets are handled through independent distributors. In 1999, Polaris acquired certain assets of its distributor in Australia and New Zealand and now distributes its products to its dealer network in those countries through a wholly-owned subsidiary. During 2000, Polaris acquired its distributor in France and now distributes its products to its dealer network in France through a wholly-owned subsidiary. In 2002, Polaris acquired certain assets of its distributors in Great Britain, Sweden and Norway and now distributes its products to its dealer networks in Great Britain, Sweden and Norway through wholly-owned subsidiaries. During 2007, Polaris established a wholly-owned subsidiary in Germany and now distributes its products directly to its dealer network in Germany. See Notes 1 and 10 of Notes to Consolidated Financial Statements for a discussion of international operations.
Victory motorcycles are distributed directly through authorized Victory dealers. Polaris has a high quality dealer network in North America for its other product lines from which many of the approximately 340 current Victory dealers were selected. Polaris expects to continue to expand its Victory dealer network over the next few years.
Dealers and distributors sell Polarisâ€™ products under contractual arrangements pursuant to which the dealer or distributor is authorized to market specified products, required to carry certain replacement parts and perform certain warranty and other services. Changes in dealers and distributors take place from time to time. Polaris believes a sufficient number of qualified dealers and distributors exist in all geographic areas to permit an orderly transition whenever necessary.
In 1996, a wholly-owned subsidiary of Polaris entered into a partnership agreement with a subsidiary of Transamerica Distribution Finance (â€śTDFâ€ť) to form Polaris Acceptance. Polaris Acceptance provides floor plan financing to Polarisâ€™ dealers in the United States. Under the partnership agreement, Polaris has a 50% equity interest in Polaris Acceptance. Polaris does not guarantee the outstanding indebtedness of Polaris Acceptance. In 2004, TDF was merged with a subsidiary of General Electric Company and, as a result of that merger, TDFâ€™s name was changed to GE Commercial Distribution Finance Corporation (â€śGECDFâ€ť). No significant change in the Polaris Acceptance relationship resulted from the change of ownership from TDF. In November 2006, Polaris Acceptance sold a majority of its receivable portfolio to a securitization facility arranged by General Electric Capital Corporation, a GECDF affiliate (â€śSecuritization Facilityâ€ť), and the partnership agreement was amended to provide that Polaris Acceptance would continue to sell portions of its receivable portfolio to the Securitization Facility from time to time on an ongoing basis. See Notes 3 and 6 of Notes to Consolidated Financial Statements for a discussion of the financial services arrangement.
Polaris has arrangements with Polaris Acceptance (United States) and GE affiliates (Australia, Canada, France, Germany, Great Britain, Ireland, New Zealand, Norway and Sweden) to provide floor plan financing for its dealers. Substantially all of Polarisâ€™ North American sales of snowmobiles, ATVs, motorcycles and related PG&A are financed under arrangements whereby Polaris is paid within a few days of shipment of its product. Polaris participates in the cost of dealer financing and has agreed to repurchase products from the finance companies under certain circumstances and subject to certain limitations. Polaris has not historically been required to repurchase a significant number of units. However, there can be no assurance that this will continue to be the case. If necessary, Polaris will adjust its sales return allowance at the time of sale should management anticipate material repurchases of units financed through the finance companies. See Note 6 of Notes to Consolidated Financial Statements for a discussion of this financial services arrangement.
In October 2001 Household Bank (SB), N.A. (â€śHouseholdâ€ť) and a wholly-owned subsidiary of Polaris entered into a Revolving Program Agreement to provide retail financing to consumers who buy Polaris products in the United States. In August 2005, the wholly-owned subsidiary of Polaris entered into a multi-year contract with HSBC Bank Nevada, National Association (â€śHSBCâ€ť), formerly known as Household Bank (SB), N.A. under which HSBC is continuing to manage the Polaris private label credit card program under the StarCard label, which until July 2007 included providing retail credit for non-Polaris products. The 2005 agreement provides for income to be paid to Polaris based on a percentage of the volume of retail credit business generated. The previous agreement provided for equal sharing of all income and losses with respect to the retail credit portfolio, subject to certain limitations. The 2005 contract removed all credit, interest rate and funding risk to Polaris and also eliminated the need for Polaris to maintain a retail credit cash deposit with HSBC, which was $50.0 million at August 1, 2005. HSBC ceased financing non-Polaris products under its arrangement with Polaris effective July 1, 2007. During the first quarter of 2008, HSBC informed Polaris for the first time that it was suddenly no longer satisfied with its profitability from the 2005 contractual arrangement currently in place to provide revolving retail credit financing for Polaris products. HSBC claims this dissatisfaction is due to the deterioration of the general overall revolving retail credit market and the volatility of consumer loan loss rates and delinquency trends in the United States. HSBC informed Polaris that it plans to significantly tighten the underwriting standards that it uses in its revolving retail credit approval process effective March 1, 2008, unless Polaris agrees to forgo volume-based fee income Polaris has a right to receive under the 2005 contractual arrangement and/or absorb more promotional costs. This proposed tightening of underwriting standards would reduce the availability of this form of financing to Polarisâ€™ retail customers. Polaris desires to continue to facilitate the availability of revolving retail credit to Polaris consumers by third parties without assuming retail credit risk, which in the current credit market environment, will likely result in less favorable economic terms for Polaris. Although not obligated to do so under the terms of the 2005 agreement with HSBC, and while reserving all of its legal rights, Polaris will likely agree to forgo the volume-based fee income due to Polaris and/or absorb increased promotional support costs after March 1, 2008 rather than allow HSBC to significantly tighten the underwriting standards for Polaris customers. See Note 6 of Notes to Consolidated Financial Statements for a discussion of this financial services arrangement.
Information Concerning Nominees and Directors
The principal occupation and certain other information about the nominees and other directors whose terms of office continue after the Annual Meeting are set forth on the following pages.
Director Nominee â€” Class III (Term Ending 2009)
ohn P. Wiehoff Director since 2007
Mr. Wiehoff, 46, has been Chief Executive Officer of C.H. Robinson since May 2002, following a three-year succession process during which he was named President in December 1999. He has been a director of C.H. Robinson since December 2001. He was Vice President and Chief Financial Officer from June 1998 to December 1999. Previous positions with C.H. Robinson include Treasurer and Corporate Controller. Prior to joining C.H. Robinson in 1992, he was employed by Arthur Andersen LLP. Mr. Wiehoff also serves on the Board of Directors of Donaldson Company, Inc. Mr. Wiehoff is a member of our Audit Committee.
Director Nominees â€” Class II (Term Ending 2011)
John R. Menard, Jr. Director since 2001
Mr. Menard, 68, has been the President and a director of Menard, Inc., a building materials and home improvement retailing business, since February 1960. Mr. Menard serves as a member of our Corporate Governance and Nominating Committee and our Technology Committee.
R. M. (Mark) Schreck Director since 2000
Mr. Schreck, 63, is a registered professional engineer and retired Vice President, Technology, General Electric Company. He is currently on the staff of the University of Louisville Speed School of Engineering, and consults through his business, RMS Engineering, LLC. Mr. Schreck also serves as a director of the Kentucky Science and Technology Corporation, a private, nonprofit organization. Mr. Schreck serves as the Chair of our Technology Committee and is also a member of our Corporate Governance and Nominating Committee.
MANAGEMENT DISCUSSION FROM LATEST 10K
The following discussion pertains to the results of operations and financial position of the Company for each of the three years in the period ended December 31, 2007, and should be read in conjunction with the Consolidated Financial Statements and the Notes thereto included elsewhere in this report. On September 2, 2004, the Company announced its decision to discontinue the manufacture of marine products effective immediately. The marine products divisionâ€™s financial results are reported separately as discontinued operations for all periods presented.
2007 was a good year for Polaris. The Companyâ€™s overall goal was to get the Company back on track following a disappointing 2006 and that was accomplished. The Company gained market share in every product line both domestically and internationally. The execution of the new operational excellence initiative began to take hold and during 2007 the Company saw significant improvements in system-wide cost, quality, and speed. Inventory levels were lower at both the dealer and the factory level. Despite a very challenging economy, especially for consumer durables, Polaris grew sales and earnings per share, propelled by great new product introductions such as the RANGER RZR tm and Victory Vision tm . Polaris had a clear plan for 2007 and achieved it.
However, as in any year, though, there were some disappointments in 2007. Several end markets, especially the core North American ATV market, were weaker than the Company expected. The significant decline in financial services income in the second half of 2007 was not anticipated at the beginning of 2007. And while factory inventory decreased five percent in 2007 from 2006 levels, it was still higher than deemed desirable by the Company. In the end, however, the positives significantly outweighed the negatives in 2007.
For the full year ended December 31, 2007, net income from continuing operations was $3.10 per diluted share, a 14 percent increase from earnings of $2.72 per diluted share for the year ended December 31, 2006. Net income from continuing operations was $112.6 million for the year ended December 31, 2007 compared to $112.8 million for the prior year. Sales for the full year ended December 31, 2007 totaled $1.780 billion, an increase of seven percent compared to sales of $1.657 billion for the full year 2006. The Companyâ€™s product lines consist of ATVs including side-by-side vehicles, snowmobiles, motorcycles and their related parts, garments and accessories (PG&A). ATVs is the largest product line representing 67 percent of Polarisâ€™ sales in 2007. The increase in total Company sales in 2007 was due to a seven percent increase in ATV sales, a nine percent increase in PG&A sales and a 14 percent increase in snowmobile sales in 2007. The increase in ATVs is attributable to continued strong sales growth in the Companyâ€™s RANGER tm side-by-side vehicles, particularly the RANGER RZR tm . Snowmobiles grew 14 percent in 2007 due to better snowfall and significantly reduced beginning snowmobile dealer inventory levels in 2007 compared to the prior year. Victory motorcycles sales in 2007 were flat with 2006 as the overall motorcycle market in the United States declined in 2007. The Company sells its products through a network of 1,600 dealers in North America and six subsidiaries and 43 distributors in approximately 130 countries outside of North America. International sales also grew 11 percent in 2007 compared to 2006. The Companyâ€™s gross profit in 2007 increased nine percent from 2006 and the gross margin as a percentage of sales, increased 40 basis points to 22.1 percent in 2007 compared to 21.7 percent in 2006. The increase was primarily due to a favorable product mix change as the Company sold more side-by-side vehicles which typically have higher margins as well as favorable foreign currency fluctuations offset somewhat by increased promotional and warranty costs during 2007. Income from financial services for 2007 decreased four percent to $45.3 million compared to $47.1 million in 2006, a result of the Companyâ€™s revolving retail credit provider, HSBC, discontinuing the financing of non-Polaris products at Polaris dealerships during the second half of 2007. The Company generated a gain of $6.2 million in 2007 resulting from the sale of a majority of its investment in KTM.
During 2007, the Company repurchased and retired 1.9 million shares of its common stock for a total of $103.1 million. Together with the accelerated share repurchase transaction executed in December 2006, these share repurchases have resulted in a 12 percent reduction in the average diluted shares outstanding for the year ended December 31, 2007 compared to 2006. Since inception of the share repurchase program in 1996, approximately 31.1 million shares have been repurchased at an average price of $31.88 per share. On January 24, 2008, the Board of Directors authorized an additional 3.5 million shares for repurchase. The additional share repurchase authorization, together with the 2.9 million shares remaining available for repurchase under the prior authorization, represents approximately 19 percent of the shares of Polaris common stock currently outstanding.
Results of Operations
2007 vs. 2006
Sales increased to $1.780 billion in 2007, representing a seven percent increase from $1.657 billion in 2006. The increase in sales was due to higher ATV sales, primarily growth from side-by-side vehicles, and increased snowmobile and PG&A sales compared to 2006.
Sales of ATVs of $1,194.6 million in 2007 increased seven percent from $1,117.3 million in 2006. This increase reflects the success of the new RANGER RZR tm side-by-side vehicle and the initial success of the new RANGER Crew tm six passenger side-by-side utility vehicle which began shipping late in the fourth quarter 2007. Additionally, the Company continued to experience growth in demand for its base RANGER tm side-by-side utility vehicles during 2007 in an overall side-by-side industry that continues to expand. Core ATV shipments to dealers decreased in 2007, resulting in dealer inventories at year-end finishing at much lower levels than year-end 2006. The Company gained a modest amount of market share in core ATVs despite a declining overall core North American ATV market during 2007. The average per unit sales price of ATVs increased seven percent in 2007 due to the mix impact of increased sales of RANGER tm vehicles and favorable currency rates. Sales of ATVs comprised 67 percent of total Company sales in 2007 and 2006.
Sales of snowmobiles of $179.2 million in 2007 were 14 percent higher than $156.9 million in 2006. The increase reflects the impact of significantly reduced beginning snowmobile dealer inventory levels in 2007 compared to the prior year and a return of more normal snowfall levels in North America in the 2007-2008 riding season. The average per unit sales price increased nine percent due to product mix change and favorable currency rates. Sales of snowmobiles comprised 10 percent of total Company sales in 2007 and 2006.
Sales of Victory motorcycles were $113.2 million in 2007 as compared to $112.8 million in 2006. Victory motorcycle sales to dealers grew less than one percent during 2007 compared to 2006 primarily due to the impact of the slowing overall motorcycle industry during 2007. Although overall motorcycle industry retail sales in North America declined during 2007, Victory continued to increase retail sales to consumers, expand market share and maintain its industry-leading quality position while entering the luxury touring segment of motorcycles in 2007 with the new introduction of the Victory Vision tm . The average per unit sales price in 2007 was flat with 2006. Sales of Victory motorcycles comprised six percent of total Company sales in 2007 compared to seven percent in 2006.
Sales of PG&A of $293.0 million in 2007 increased nine percent compared to $269.5 million in 2006. The increase was primarily due to increased shipments of Victory motorcycle and RANGER side-by-side related PG&A. Victory and RANGER related PG&A increased due to the increased sales of these vehicles during 2007 and the introduction of new products, particularly for the new Victory Vision tm and the RANGER RZR tm models. PG&A sales comprised 17 percent of total Company sales in 2007 compared to 16 percent in 2006.
Gross profit was $393.0 million in 2007, representing a nine percent increase compared to $359.4 million gross profit in 2006. The gross profit margin percentage was 22.1 percent in 2007, an increase of 40 basis points from 21.7 percent for the full year 2006. The increase is due to a favorable product mix change as the Company sold more side-by-side vehicles, which typically have higher margins, as well as favorable foreign currency fluctuations, offset somewhat by increased promotional and warranty costs.
Operating expenses in 2007 increased ten percent to $262.3 million from $238.4 million in 2006. Expressed as a percentage of sales, operating expenses increased to 14.7 percent in 2007 from 14.4 percent in 2006. Research and development expenses for 2007 were approximately flat with 2006. Sales and marketing expenses increased 14 percent in 2007 primarily due to increased advertising costs. General and administrative expenses increased 17 percent in 2007 primarily due to more normalized incentive compensation plan expenses resulting from improved financial performance during 2007 compared to 2006.
Income from financial services decreased four percent in 2007 to $45.3 million compared to $47.1 million in 2006 resulting from the Companyâ€™s revolving retail credit provider, HSBC, discontinuing the financing of non-Polaris products at Polaris dealerships during the second half of 2007.
Interest expense increased to $15.1 million for 2007 compared to $9.8 million in 2006 due to higher debt levels maintained during the year related to the accelerated share repurchase transaction completed in December 2006.
Income from manufacturing affiliates (which historically has primarily represented the Companyâ€™s portion of income from its investment in KTM, net of tax), was $0.5 million for the year ended December 31, 2007 compared to $3.6 million for the same period in 2006. During the first half of 2007, the Company sold 80 percent of its investment in KTM. The income generated in 2007 represents cash dividends received on the KTM common stock investment during the year and Polarisâ€™ share of income from its equity investment in Robin Manufacturing, U.S.A.
The Gain on sale of manufacturing affiliates shares for the 2007 year was $6.2 million in 2007 generated from the Companyâ€™s sale of 80 percent of its KTM investment during the first half of 2007.
Non-operating other (income) expense was income of $2.7 million in 2007 compared to income of $1.9 million in 2006, primarily due to the weakening of the U.S. dollar and the resulting effects of foreign currency transactions related to the international subsidiaries.
The Income tax provision for the full year 2007 was recorded at a rate of 33.9 percent of pretax income, compared to 31.1 percent for 2006. The higher income tax provision rate is primarily due to the resolution of certain tax issues in 2007 compared to more favorable tax events in 2006.
Net income from continuing operations in 2007 was $112.6 million, compared to 2006 net income from continuing operations of $112.8 million. Net income from continuing operations was 6.3 percent of sales in 2007, compared to 6.8 percent of sales in 2006. Net income from continuing operations per diluted share increased 14 percent to $3.10 in 2007 from $2.72 in 2006, primarily due to a 12 percent decline in the number of diluted shares outstanding in 2007 compared to 2006 resulting primarily from the accelerated share repurchase transaction completed in December 2006. Reported net income for the full year ended December 31, 2007, including each of continuing and discontinued operations was $111.7 million or $3.07 per diluted share, compared to $107.0 million, or $2.58 per diluted share for the year ended December 31, 2006, which included a $5.4 million loss, after tax, on disposal of discontinued operations and a $0.4 million gain from the cumulative effect of the SFAS 123(R) accounting change.
Effective September 2, 2004 the Company ceased to manufacture marine products. The marine products divisionâ€™s financial results are being reported separately as discontinued operations for all periods presented. For the full year ended December 31, 2007, the loss from discontinued operations was $0.9 million, after tax, or $0.03 per diluted share, compared to a loss of $0.8 million, after tax, or $0.02 per diluted share in 2006.
Results of Operations
2006 vs. 2005
Sales from continuing operations decreased to $1.657 billion in 2006, representing an eleven percent decrease from $1.870 billion in 2005. The decrease in sales was primarily due to lower snowmobile and core ATV sales volume offset somewhat by increases in Victory motorcycle and side-by-side vehicle sales in 2006 compared to 2005.
Sales of ATVs of $1,117.3 million in 2006 were down ten percent from $1,239.5 million in 2005. The decrease in sales in 2006 was largely attributable to North American dealers scaling back orders in an effort to further reduce dealer inventory levels due to soft industry retail sales. As a result, dealer inventory levels in North America were lower at the end of 2006 than at the end of 2005. During the year the overall side-by-side vehicle market continued to perform well and Polaris experienced continued strong sales growth in the RANGER tm product line. The average per unit sales price increased eight percent in 2006 due to the mix impact of the new products introduced during 2006, increased sales of RANGER tm and favorable currency rates. Sales of ATVs comprised 67 percent of total Company sales in 2006 and 66 percent in 2005.
Sales of snowmobiles of $156.9 million in 2006 were 39 percent lower than $256.7 million in 2005. The decrease was due to lower dealer orders in 2006 following a disappointing selling season. The average per unit sales price decreased five percent due to higher promotional costs incurred in 2006 versus 2005, the result of the lack of snow and resulting high dealer inventory levels. Sales of snowmobiles comprised 10 percent of total Company sales in 2006 compared to 14 percent in 2005.
Sales of Victory motorcycles of $112.8 million in 2006 were 13 percent higher than $99.5 million in 2005. The increase was attributable to improved brand recognition, the introduction of new products and improvements in the dealer network. Sales of Victory motorcycles comprised seven percent of total Company sales in 2006 compared to five percent in 2005.
Sales of PG&A of $269.5 million in 2006 were two percent lower than $274.2 million in 2005. The decline was primarily due to lower ATV and snowmobile vehicle sales. PG&A sales comprised 16 percent of total Company sales in 2006 compared to 15 percent in 2005.
Gross profit decreased to $359.4 million in 2006, representing a 13 percent decrease compared to $411.0 million gross profit in 2005. The gross profit margin percentage was 21.7 percent in 2006, a decrease of 30 basis points from 22.0 percent for the full year 2005. The decrease in gross profit dollars and margin percentage was primarily due to lower sales volume for ATVs and snowmobiles, higher promotional costs and floor plan financing costs. These higher costs were partially offset by savings from various cost reduction initiatives, favorable currency rates and a refund of certain European import duties. In addition, warranty expenses decreased nine percent to $33.2 million for the year ending December 31, 2006 compared to $36.3 million in the prior year. The decrease in warranty expense in 2006 was the result of lower warranty claim experience, primarily for ATVs.
Operating expenses in 2006 decreased three percent to $238.4 million from $244.7 million in 2005. Expressed as a percentage of sales, operating expenses increased to 14.4 percent in 2006 from 13.1 percent in 2005. Research and development expenses for 2006 increased four percent due to continued emphasis on new product development. Sales and marketing expenses were flat with 2005. General and administrative expenses decreased 15 percent in 2006 primarily due to lower compensation plan expenses resulting from lower profitability for the year as well as operating cost control measures taken by the Company.
Good morning and thank you for joining us for our third quarter 2008 earnings conference call. The speakers today are Scott Wine, our new Chief Executive Officer; Bennett Morgan, our President and Chief Operating Officer; and Michael Malone, our Chief Financial Officer.
During the call this morning we will be discussing certain topics, including product demand and shipments, sales and margin trends, income and profitability levels and other matters including more specific guidance on our expectations for future periods which should be considered forward-looking for the purposes of the Private Securities Litigation Reform Act of 1995. Actual results could differ from those projected in any forward-looking statements, which by their nature involve risks and uncertainties.
There are a number of important factors that could cause results to differ materially from those anticipated. Additional information concerning those factors can be found in our 2007 Annual Report and 2007 Form 10-K which are on file with the SEC.
Before Scott Wine gives his remarks, Tom Tiller our former CEO will lead off with a few comments.
Thanks Richard, good morning everyone. Before we get to the meat of the program, the actual earnings announcement, Iâ€™d like to begin by doing two quick things. First I wanted to let you all know that the management transition is going well.
Scott began work on September 2 and is rapidly coming up to speed. He, Bennett and the rest of the management team are running the business well amid a very turbulent environment and Iâ€™m assisting whenever needed.
Secondly, I wanted to say thanks to all the Polaris shareholders. This will be my final earnings announcement and wanted to say how much I have enjoyed your support over the last 10 years.
With that, Iâ€™d like to turn it over to Scott Wine, our new CEO to comment on a terrific third quarter.
Thank you Tom and good morning everyone. Tom, first Iâ€™d like to thank you for the introduction but more importantly thank you for handing over such a strong, Polaris business which is run by such a dedicated and experienced team.
Thereâ€™s no better testament to the state of the business youâ€™ve handed over then the record sales and earnings per share that Polaris delivered in the third quarter. Earnings for the quarter were $1.13 per share, up 6% from $1.07 per share in the prior year period.
Sales were a record $580 million in the quarter, up a solid 7% from the third quarter of 2007. Despite a difficult and declining external environment Polaris continues to outperform. I have gained an appreciation for the strength of the team and their passion to win in my first six weeks on the job.
Our success is clearly the result of the strong execution of the strategy that Bennett and the team have led; to win in the core, drive operational excellence and target key growth opportunities.
I met with several dealers recently and they confirmed that our strategy is working. Like us they are concerned about the macroeconomic environment and specifically the credit markets and Michael Malone and I will speak to that today.
But they also remain positive on our improved order management system and our aggressive new product introduction. We are leveraging our operational excellence initiative to respond to the changes in the market faster and more efficiently then our competitors and are being rewarded for it by our customers.
Dealers and many other customers participated in our Annual Dealer Show in Vegas in July. It was certainly one of the highlights for Polaris. We launched more than 14 new products including the all new Sportsman XP lineup and more than five new upgraded RANGER models.
The Limited Edition Tenth Anniversary Victory Vision was also launched at the show, selling out in record time and setting the stage for dealer orders that exceeded our expectations in all product categories.
Both our international business and our parts, garments and accessories business were up nicely in the third quarter; more than 31% and 20% respectively. Side-by-side sales continue to be very strong for Polaris and we are proud to maintain our market share lead in this increasingly competitive segment.
The success of the RANGER business is in contrast to the core ATV market which posted weaker then projected retail sales in the quarter; down nearly 28%.
In response we quickly reduced ATV production which enabled us to drive dealer inventory down from the prior year period despite the lower retail demand.
When I started with Polaris in early September, it seemed that the declining ATV market would be the primary concern for the remainder of 2008. While we are still working to manage that appropriately the credit crisis is clearly a key focus for us now.
As most of you know we have a very strong and experienced CFO in Michael Malone, and it is comforting to know that he is guiding our corporate finances through this period.
Polaris has always operated with a conservative approach and our balance sheet is strong. We are also comfortable with our retail credit positions, both revolving and installment although we are maintaining a close watch on rates and approvals.
In the past few weeks we have worked closely with GE and HSBC and look forward to maintaining our relationships with them through the contract terms in 2011 and 2010 respectively. They have both confirmed their commitment to Polaris and we will continue to work with them to ensure our dealers and customers have access to credit.
As Michael will detail later our data from the third quarter shows penetration and approvals running better then the third quarter of 2007.
Our input suggests the biggest impact on dealers right now is that they are getting approvals, just not as the lower rates the customers expect.
We are closely monitoring the direct and indirect impacts of this unprecedented financial crisis and are prepared to act as necessary to ensure that Polaris continues to perform well ahead of our peers. We will use our strong business positions and productivity gains to continue to invest in product development and innovation which will strengthen our competitive position.
These are uncertain economic times and we will be appropriately cautious but we will continue to play offence in places where it makes sense, while also strengthening our defense.
In this dynamic market it is important to balance the news with the facts. Despite the disappointing economic news that is prevalent, the facts are that Polaris continues outperform. As a result we are again raising and narrowing our earnings guidance for the full year to $3.47 to $3.50 per share.
This represents a $0.07 increase in the lower end of our range and an increase of $0.02 in the upper end. With that, Iâ€™ll hand it over to Bennett for a more detailed review of our operating performance in the quarter.
Before I turn it over though, I would like to address a question that Iâ€™ve been asked by many Polaris employees and also discussed with several shareholders and that is, how will Bennett and I operate together?
I can assure everyone that this relationship is good for both of us and good for Polaris. I can say this with confidence, because in the first six weeks we have spent significant time working through some fairly difficult issues.
It has been both natural and easy. Our styles are similar and our skill sets are largely complimentary. Most importantly we are aligned on what needs to be done and will partner together to lead Polaris efficiently and effectively into the future.
Thanks Scott, I wanted to formally thank Tom from the entire Polaris team for all heâ€™s done for Polaris over the past 10 years. Thereâ€™s no question weâ€™re a much stronger company and team thanks to his vision and his leadership and I would concur with what Scott said as he takes the helm.
Scott and I and the team have already developed some very, very nice traction and we are looking forward to working with Scott to take Polaris to the next level.
So let me begin with operational excellence, we continue to make substantial progress in improving our quality, cost and speed. This has become essential as the external world has become more challenging and unpredictable.
We continue to work relentlessly on our speed to market. In the last call we discussed supply chain lead time reductions of 25%. We have further reduced supply chain lead times in our ATV and side-by-side businesses by another 25% this past quarter and we have now reduced our lead times by half in just under a year; thatâ€™s fantastic progress.
Our product development process has been further leaned out to be 25% quicker then where it was just a year ago. At our recent Las Vegas dealer meeting we were again able to bring key new products to market a full year earlier then what was just possible 18 months ago.
And we successfully rolled out the large regional test of our max velocity program, our new business model with our dealer network which enables the retail and order management process to be done two times a month, versus two times a year in the past.
We will evaluate and learn from this regional test quickly over the upcoming months with the goal of having the right product, at the right time for our customers with less system wide inventory.
As we gain experience and become smarter, we would expect to expand this initiative more broadly across our dealer network.
Factory inventory was down 4% from the previous quarter but up 4% from September, 2007 on sales growth year-to-date of 15%. We remain on track to reduce factory inventory by year end.
Dealer inventories remain down year-over-year even with the weak third quarter ATV industry. With that said, inventory remains a cost and speed opportunity particularly in ATVs and Victory. We can and we will run this company effectively with less system wide inventory.
The cost environment remains challenging. Our gross margin percentages were off of our plan and flat with the prior year period due primarily to continued commodity cost pressure. The Polaris team and our supply chain have done an admiral job of driving out waste and offsetting much of the commodity cost increases.
Commodity prices have recently begun to moderate but they still remain elevated, especially when compared to a year ago levels and we still expect some pressure on product costs in the upcoming months.
Operational excellence and our focus on quality cost and speed is transforming Polaris and improving our competitive position just as we said it would over a year ago. Competing and coming to market the old way is no longer sufficient in this tougher, faster, more unpredictable world.
Operational excellence is touching every aspect of Polaris; our supply chain, our product development process, our manufacturing operations, and even the dealer network and it is driving much of our competitive successes.
But there is much more progress to be made and the outside world and our customers are demanding it. Speed and waste reduction provides Polaris the ability to adapt and respond to changing market and customer conditions faster and more effectively then our competitors.
So expect us to stay on the gas in this critical area to drive our current and future success at Polaris.
Letâ€™s move to all-terrain vehicles, our ATV business had another solid quarter with sales up 5% despite a weak domestic core ATV industry driven by continued demand for our industry leading side-by-side products.
The core ATV industry has weakened further over the past 90 days. Third quarter sales were down 28% hurt by the macroeconomic uncertainty. The 2008 year-to-date North American industry sales are now down 22% versus 2007.
We expect that the ATV environment to remain weak for the foreseeable future and have proactively further reduced our build and ship expectations in the third quarter for the remainder of 2008 and into 2009.
Polaris retail results are similar to the industry and year-to-date our share is essentially flat. The Canadian core ATV market is much stronger then the US, down low single-digits with Polaris winning share.
Dealer inventories remain down year-over-year in ATVs as weâ€™ve continued to aggressively assist our dealers with reduced shipments. So overall, we believe Polaris and our dealers are relatively well positioned as we continue to work through this challenging core ATV environment.
Its important to remember that US core ATVs represent only about 20% of our total ATV business gross margin. The dealer meeting in Las Vegas exceeded both our and our dealer networksâ€™ expectations.
Despite dealer concern about the power sports industry in general and the overall economy they came into the meeting in a good frame of mind as a result of the consistent efforts and improvements weâ€™ve made to the order process and their inventory levels.
We unveiled compelling model year 2009 product news. After 13 years of industry recognized leadership with the original Sportsman, we introduced two all new Sportsman XPs, representing extreme performance in both 550 and 850 engine displacements.
The new 850 twin is the most powerful production ATV in the world. And both models come with available power steering options. The Sportsman has defined the ATV since its introduction in 1995 and the all new Sportsman XPs are without a doubt the most advanced and capable ATVs ever built.
We expect to grow market share in the segments they compete in the upcoming quarters. Overall ATV orders received from the dealers for the six month order cycle slightly exceeded our grounded expectations.
However we will be closely monitoring retail to make sure that in this challenging environment we continue to make progress on balanced core ATV supply and demand.
Our military business continues to deliver very nice year-over-year growth in both new customer accounts and orders. Year-to-date military sales are up 83% and we received new orders from 200 new customers in 2008 alone.
Our focus remains on business development through our unique products and the compelling solutions they provide are growing military customer base.
It is still early but this investment is clearly delivering.
Polaris side-by-side business remains very strong with Q3 retail sales and shipments both up well over 20% against stout comparables with the RZR volume anniversary. RZR and base RANGER retail sales both continued to grow nicely in Q3 and we believe we continue to gain market share.
Dealer inventories continued to be balance and I would characterize our dealer side-by-side businesses as very healthy.
The dealer meeting was a homerun for our side-by-side business and dealer orders exceeded our expectations. We unveiled an all new redesigned RANGER platform with improved handling and suspension, a new rider ergonomics package, and dramatic new design.
The flagship of the platform is our hardest working smoothest riding RANGER ever; the RANGER HD which stands for heavy duty that has power steering, self load level and shocks and new hydraulic heavy duty work accessories.
We also did not stand still with our industry leading recreation platform, the RZR. We introduced a complimentary RZR S that has higher horsepower performance, a much wider 60 inch stance and much longer suspension travelling [ground] clearance to better meet the needs for our riders in the dunes and the wide open spaces.
Initial dealer and customer response to the new RANGERs and RZRs has simply been fantastic.
Earlier I discussed the competitive weapon that speed is becoming for Polaris and no where is this more evident then in our side-by-side business where our new RZR S and RANGER HD were developed and brought to market about a year earlier to meet the emerging needs of our customers.
While our competitors are trying to develop a response to the RZR and our traditional RANGER, we have raised the bar and our lead. Expect more of this from Polaris in the future.
Snowmobiles, as we head into the fall the snowmobile season is off to a good start. Third quarter wholesale sales were up about 3% reflecting a slightly improved mix of models sold compared to the third quarter of 2007.
Season to date, North American industry sales are up mid single-digits with Polaris retail sales up more. So we are gaining some share early. Consumer interest and attendance at the fall shows has been strong, early season industry retail sales are good but remember they represent a small percentage of the overall season sales.
The next 120 days as they do every year, will be the critical retail months for the industry and Polaris. Dealer inventory of the industry and Polaris snowmobiles is lower then it was a year ago at this time and our hotly demanded 800 clean fire IQs and RMKs are now shipping.
We remain cautiously optimistic about the upcoming snowmobile season but as it does every year it will come down to in season weather and competition. Itâ€™s simply too early to call the 2009 snowmobile outlook.
We will know more at the end of the fourth quarter.
Victory motorcycles, the US heavyweight cruiser and touring motorcycle market segments that Victory compete in remain slow. Year-to-date 2008, the segments are down high single-digits. Victory retail sales are actually up modestly continuing to outperform the market, but remain well below our internal growth targets.
Third quarter wholesale shipments to dealers were down slightly consistent with our commitment to manage supply cautiously in light of the challenging external economic environment. The Las Vegas dealer meeting was also a success for Victory.
Dealer orders for model year 2009 met our more grounded order expectations and we expanded our 106 cubic inch Freedom B twin engine into our premium muscle cruisers while introducing a few key Limited Edition models highlighted by our Tenth Anniversary Victory Vision.
Weâ€™re clearly picking up momentum with Victory in the international marketplace. We introduced Victory in Australia during the third quarter and we announced at the Intermot International Motorcycle Show in Cologne, Germany earlier this month our intention to enter the German and other European union markets during 2009 with our EU compliant model year 2010 Victorys.
Victory remains a key strategic growth priority for Polaris and becoming more diversified and more on-road in the future. In the short-term through model year 2009 expect Victory wholesale sales growth to be muted to ensure that we manage supply and demand aggressively to protect our dealer network and the premium brand image we have worked so hard to attain with our customers in this tougher more uncertain market.
Longer term we expect to return to strong double-digit growth.
Parts, garments and accessories, the PG&A division had another very strong quarter. In fact the third quarter was a record sales quarter with sales up 20%. Perhaps the most encouraging aspect of our success is that sales growth remains strong across our entire PG&A product portfolio with growth contributions from every product line and every geographic region of the world.
We also had perhaps our best PG&A new product launch in our history at the dealer meeting with over 260 new accessory items introduced highlighted by several new side-by-side cab systems and a bunch of new winches.
Our investment and effort in PG&A the past several years is paying off. As the market has slowed Polaris dealers are more focused and capable of delivering on the entire customer experience and increased PG&A sales are a result.
Weâ€™ll wrap up with international; our international sales growth remained very strong in the third quarter with sales up 31% for the quarter and 33% year-to-date. European core ATV industry sales remain down but remain relatively better then the US market.
The key to continued Polaris success remains threefold, first its market share expansion in a more fragmented competitive marketplace. Year-to-date we have grown our core ATV market share to the number one position in Europe.
Secondly the expansion of our side-by-side business driven largely by the RZR, RZR demand remains strong internationally and we continue to make progress on balancing our international supply with demand.
And third geographic expansion in growth markets outside of Europe, such as Russia, The United Arab Emirates and Central Europe to name a couple.
We introduced some exciting new model year 2009 products specifically for our international customers; a Sportsman 800 6X6 with IRS, a Sportsman 500 designed specifically with required tractor-like features for the Northern European market and an on-road RZR S quadracycle.
We also officially opened our newest subsidiary in Spain, the fourth largest European market and we are excited about this new market opportunity.
Overall dealer and distributor inventories internationally are balanced and we are well positioned competitively in each of our businesses. We remain encouraged about our international opportunities even as the global economy has become more uncertain.
With that summary, Iâ€™ll hand it over to Michael.
Thanks Bennett and good morning to everyone. As Scott and Bennett have stated we are pleased with the record third quarter operating results that we have generated in a very challenging external environment.
As we stated in the press release although we are not immune to the deteriorating macroeconomic environment given the orders that we have in hand from our dealers for the fourth quarter and the continued strength in our side-by-side, international and PG&A businesses, we are increasing and narrowing our full year 2008 total company sales and earnings guidance.
Total company sales for the full year 2008 are now expected to increase in the 10% to 11% range over 2007. For full year 2008 we now expect diluted earnings per share from continuing operations to be in the range of between $3.47 and $3.50 which is an increase of 12% to 13% compared to the full year last year.
Updated expectations for sales growth for the full year 2008 by product line are as follows. For ATVs we now expect sales to grow in the 10% to 11% range for the full year 2008. The core ATV shipments to dealers in North America are expected to continue to be significantly lower then last year during the fourth quarter due to the continued weakness as the overall North American core ATV industry that Bennett talked about.
As it has throughout 2008 the fourth quarter decline in the core will be more then offset by increased shipments of core ATVs to the international and military market and continued double-digit increases in RANGER side-by-side vehicles.
For snowmobiles our guidance remains unchanged as we have the orders in hand from our dealers for model 2009 snowmobiles and continue shipping to those orders. Snowmobile sales for the full year 2008 are expected to increase in the mid teens percent range compared to last year.
Given a continued weak heavyweight cruisers and touring motorcycle segments in the US, sales for Victory motorcycles for the full year 2008 are now expected to decline in the mid teens percent range which is slightly lower then our previously issued guidance.
We will protect our premium brand that we have built over the past 10 years by closely monitoring dealer inventories and making adjustments to production and shipments accordingly.
And we continue to expect our PG&A business to grow at a faster percentage rate pace then the overall company sales for the full 2008 year.
For the fourth quarter of 2008 total company sales growth is expected to be in the range of flat to up 2% compared to the fourth quarter of last year driven primarily by increased side-by-side vehicles, snowmobiles and international sales offset by lower core ATVs and motorcycle sales.
The anticipated fourth quarter percentage sales increase is less then we have experienced in the first three quarters of this year as we have now anniversaried the initial shipments of the RZRs which makes the comparables more difficult and we continue to reduce shipments of core ATVs as the overall ATV market remains weak.
Earnings from continuing operations for the fourth quarter are expected to be in the range of $1.07 to $1.10 per diluted share compared to earnings per share of $1.07 in the fourth quarter last year.
If we are able to achieve our guidance for the fourth quarter which we feel very confident in achieving, the full year 2008 will be a record year in both sales and earnings per share for the company in a very tough external world.
The gross profit margin percentage for the full year 2008 is expected to improve up to 80 basis points for the full year 2008 unchanged from our prior guidance. Product mix change continues to benefit gross margins as we sell more side-by-side vehicles and growth continues in our international and PG&A businesses each of which enjoy higher then average gross margin percentages as well as the impact of selected price increases on many model year 2009 products.
These gross margin improvements are offset somewhat by increased commodity costs that we have been experiencing in each of our businesses, particularly related to input costs like steel, aluminum and plastic resins as well as diesel fuel transportation costs.
Although these commodity costs have moderated somewhat most recently it takes awhile for the benefit to be realized in our operating results given the contracts and price lock arrangements we currently have in place with many of our key suppliers.
In addition foreign currency impacts to sales and gross margins which have been favorable through the first nine months of this year are now expected to be slightly unfavorable in the fourth quarter compared to the fourth quarter last year.
We continue to expect operating expenses to increase in dollar terms and to be about flat as a percentage of sales for the full year 2008 compared to last year. Operating expenses in dollars have and will continue to increase primarily due to increases in research and development and advertising expenses to support the design and introduction of our new products.
Additionally general and administrative expenses are expected to be higher for the full year 2008 due to increases in performance based incentive compensation expenses as the companyâ€™s performance has improved in 2008 compared to last year.
Our guidance for financial services income for the full year 2008 remains unchanged and is expected to decline by more then one-half of the $45 million generated for the full year last year. As weâ€™ve discussed in previous calls, this decline is primarily driven by the impact of the changes made by HSBC of discontinuing the financing of non-Polaris products in Polaris dealerships a year ago, and eliminating the volume based fee income payment to Polaris earlier this year.
However the availability of revolving and installment retail credit to our consumers remains at acceptable levels as measured by approval and penetration rates. During the third quarter 2008 the approval rates for customers in the United States for GE and HSBC combined was above the 50% approval rate level, improved over the third quarter of 2007.
This improved overall approval rate is the result of a dramatically higher mix of secured fixed rate installment loans through GE during 2008 which usually generate higher approval rates then the unsecured variable rate revolving credit card loans.
During the third quarter of 2008 the penetration rate which is a percentage of our retail customers in the US that are financing their unit purchases through either HSBC or GE, that penetration rate was at 41%, better then the 37% penetration rate achieved in the third quarter of last year.
In fact for the month of September alone, the most recent data that we have, so for September alone each metric, both approval rates and penetration rates were stronger in 2008 then in the month of September of last year.
These measures are encouraging given the uncertainty in the credit markets to date. So in general our customers have found that retail credit has been available to purchase our products.
To summarize our position as it relates to retail credit financing for our customers in the US our strategy is to try to maximize the access to capital for our customers. As we move forward we will continue to use the combination of HSBC for revolving and GE for installment retail financing for our customers on a national basis, supplemented with local banks and credit unions.
However given the uncertain overall retail credit market we have been exploring contingency alternatives in order to maintain retail credit availability to our customers if the current situation were to change.
Turning to wholesale financing, at the end of the quarter our wholesale portfolio related to floor plan financing for dealers in the United States was approximately $673 million, down 3% from last year at the end of the third quarter 2007.
The total units outstanding in the portfolio are actually down quite a bit more then the 3% dollar decline. The dollar amount did not decline as much as the units financed due to the strength of our PG&A sales in the third quarter as well as the mix of products that are being financed as more higher priced RANGERs and Victory Vision models are included compared to last yearâ€™s third quarter.
Credit losses in this dealer portfolio remain very reasonable averaging well less then 1% of the portfolio with no material changes experienced lately.
Interest expense of $2.6 million for the third quarter 2008 is less then last year as a result of the lower interest rates on our bank borrowings during the third quarter. However our LIBOR based interest rates on our debt have increased in the past few weeks which will have an impact on the fourth quarter if these unusual LIBOR rate trends continue.
We do have those expected higher interest rates included in our current guidance. It is important to recognize that we do have plenty of borrowing capacity on our $450 million banking arrangement with debt of just $220 million recorded at the end of the third quarter.
The income tax provision was recorded at a rate of approximately 29.3% of pre-tax income for the third quarter of this year, compared to 30.8% in the third quarter of last year. The lower income tax rate in the third quarter of 2008 is primarily due to favorable tax events this year including a favorable settlement of certain income tax examinations.
For the full year 2008 our current expectation is for the income tax provision rate to be approximately 33% of pre-tax income slightly better then previously guided.
During the third quarter we repurchased 380,000 shares under our share repurchase program at a cost of $17 million bringing the year-to-date shares repurchased to 2.4 million shares at a cost of $103 million.
We expect to continue to be active in this repurchase program in the fourth quarter given the very weak stock price.
We currently have approximately 4 million shares remaining on The Board of Directors share repurchase authorization.
Full year 2008 capital expenditures are expected to be in the range of $68 million to $73 million as we continue to invest in new product development tooling and capital projects. We expect depreciation for the full year 2008 to be in the range of $63 million to $66 million.
So to recap, our full year 2008 revised guidance, total sales for the year are now expected to increase in the range of 10% to 11% over last year with EPS from continuing operations growing to $3.47 to a $3.50 per diluted share range for the full year, an increase of 12% to 13% over last year.
Fourth quarter 2008 sales are expected to be flat to up 2% with earnings per share expected to be in the $1.07 to $1.10 per diluted share range compared to the fourth quarter of last year.
At this time Iâ€™d like to turn it over to Scott for some final comments.
Thanks Michael, before we wrap up I want to offer some quick and early qualitative thoughts about 2009. As I stated earlier we will stay very close to the market to understand the implications for the year ahead and adjust our business as necessary.
We will not however fundamentally change our strategy. We will still be assertive in 2009. The three pronged approach of operational excellence, winning in the core and targeting new growth has guided Polaris and will continue.
Although it is fair to expect that I will throttle up in certain areas and tap the brakes in others. We will accelerate and expand our operational excellence efforts and use it as a competitive weapon in this rapidly changing retail environment.
I am confident that we can leverage this initiative to drive improvements in quality, speed, margin expansion and inventory reduction. We will not take short cuts to deliver dramatic short-term improvements, but we will do the hard work to deliver consistent, sustainable improvements year after year.
We will also continue to play to win in the core businesses. Our product lineup is strong and getting stronger and we will continue to work closely with our dealers to win the competitive battle. The market is weak for everyone but we are mindful that the share battle is not just for up markets; it can also be won in hard times.
Growth will remain a priority for Polaris with an increased focus on profitable growth. By the time we meet again in January, we expect to announce an exciting adjacency relationship to accelerate our growth outside of power sports.
We have new products in development that will allow us to enter new market segments and expand our on-road presence. Acquisitions will continue to be evaluated as we look for opportunities to accelerate growth and expand margins.
In summary we are very pleased with the record third quarter results and our ability to raise full year guidance. We are certainly balancing the current economic environment against the strength of Polaris business.
We will manage prudently in the months ahead and into 2009 to ensure that our customers, shareholders, employees, and others continue to benefit from our focus on results.
At this time weâ€™ll take any questions you may have.