10-K 1 pii-12312014x10xk.htm FORM 10-K PII - 12.31.2014 - 10-K

 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 
Washington, D.C. 20549
 
 
FORM 10-K
 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2014
 
Commission file number 001-11411
 
POLARIS INDUSTRIES 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)
Securities registered pursuant to Section 12(b) of the Act:
 
Title of Class
 
Name of Each Exchange on Which Registered 
Common Stock, $.01 par value
 
New York Stock Exchange
 
Securities registered pursuant to Section 12(g) of the Act:
None
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  x    No  ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.    Yes  ¨    No  x
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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).    Yes  x    No  ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer x Accelerated filer ¨ Non-accelerated filer ¨ Smaller reporting company ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No   x
The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was approximately $8,590,586,000 as of June 30, 2014, based upon the last sales price per share of the registrant’s Common Stock, as reported on the New York Stock Exchange on such date.
As of February 13, 2015, 66,317,127 shares of Common Stock, $.01 par value, of the registrant were outstanding.
 
 
 
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the registrant’s Annual Report to Shareholders for the year ended December 31, 2014 (the “2014 Annual Report” furnished to the Securities and Exchange Commission are incorporated by reference into Part II of this Form 10-K. Portions of the definitive Proxy Statement for the registrant’s Annual Meeting of Shareholders to be held on April 30, 2015 to be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this report (the “2015 Proxy Statement”), are incorporated by reference into Part III of this Form 10-K.
 



 
  POLARIS INDUSTRIES INC.
2014 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
 
 
Page
 
PART I
 
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
 
 
 
 
PART II
 
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
 
 
 
 
PART III
 
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
 
 
 
 
PART IV
 
Item 15.
 
 

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PART I
Item 1. Business
Polaris Industries Inc., a Minnesota corporation, was formed in 1994 and is the successor to Polaris Industries Partners LP. The terms “Polaris,” the “Company,” “we,” “us,” and “our” as used herein refer to the business and operations of Polaris Industries Inc., its subsidiaries and its predecessors, which began doing business in the early 1950’s. We design, engineer and manufacture Off-Road Vehicles (ORV), including All-Terrain Vehicles (ATV) and side-by-side vehicles for recreational and utility use, Snowmobiles, Motorcycles and Small Vehicles (SV), together with the related replacement Parts, Garments and Accessories (PG&A). These products are sold through dealers and distributors principally located in the United States, Canada and Europe. Sales of ORVs, Snowmobiles, Motorcycles, SVs and PG&A accounted for the following approximate percentages of our sales for the years ended December 31:
 
ORVs
 
Snowmobiles
 
Motorcycles
 
Small Vehicles
 
PG&A
2014
65%
 
7%
 
8%
 
3%
 
17%
2013
67%
 
8%
 
6%
 
3%
 
16%
2012
69%
 
9%
 
6%
 
2%
 
14%
Industry Background
Off-Road Vehicles. Our ORVs include core ATVs and RANGER® and RZR® side-by-side vehicles. ATVs are four-wheel vehicles with balloon style tires designed for off-road use and traversing rough terrain, swamps and marshland. Side-by-side vehicles are multi-passenger off-road, all-terrain vehicles that can carry up to six passengers in addition to cargo. ORVs are used for recreation, in such sports as fishing and hunting and for trail and dune riding, for utility purposes on farms, ranches, construction sites and for certain military applications.
ATVs were introduced to the North American market in 1971 by Honda Motor Co., Ltd. (“Honda”). Other Japanese motorcycle manufacturers, including Yamaha Motor Corporation (“Yamaha”), Kawasaki Motors Corp. (“Kawasaki”), and Suzuki Motor Corporation (“Suzuki”), entered the North American ATV market in the late 1970’s and early 1980’s. We entered the ATV market in 1985, Arctic Cat Inc. (“Arctic Cat”) entered in 1995 and Bombardier Recreational Products Inc. ("BRP") entered in 1998 with their Can-Am product line. In addition, numerous Chinese and Taiwanese manufacturers of youth and small ATVs exist for which limited industry sales data is available. 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 ATV industry then grew each year in North America from 1990 until 2005, but declined between 2005 and 2011, primarily due to weak overall economic conditions and a move to side-by-side vehicles, until returning to modest low single digit percentage growth in 2012 through 2014. Internationally, ATVs are also sold primarily in Western European countries by similar manufacturers as in North America. We estimate that during 2014 world-wide industry sales increased three percent from 2013 levels with an estimated 419,000 ATVs sold worldwide.
We estimate that the side-by-side vehicle market sales increased approximately seven percent during 2014 over 2013 levels with an estimated 413,000 side-by-side vehicles sold worldwide. The side-by-side market has increased consistently over the past several years primarily due to continued innovation by existing and new manufacturers. The main competitors for our RANGER and RZR side-by-side vehicles are Deere & Company (“Deere”), Kawasaki, Yamaha, Arctic Cat, Kubota Tractor Corporation (“Kubota”), Honda and BRP's Can-Am product line.
We estimate that total off-road vehicle industry sales for 2014, which includes core ATVs and side-by-side vehicles, increased five percent from 2013 levels with an estimated 832,000 units sold worldwide.
Snowmobiles. In the early 1950’s, a predecessor to Polaris produced a “gas powered sled,” 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, over time the snowmobile gained popularity as a recreational vehicle. From the mid-1950’s through the late 1960’s, 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, BRP's Ski-Doo product line, Arctic Cat and Polaris. These four manufacturers also sell snowmobiles in certain overseas markets where the climate is conducive to snowmobile riding. From 1984 to 1997 the industry grew to approximately 260,000 units before gradually declining through the 2012 season, but grew again in 2013. We estimate that during the season ended March 31, 2014,

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world-wide industry sales of snowmobiles increased four percent from the previous season levels with an estimated 141,000 units sold worldwide.
Motorcycles. Polaris’ Motorcycles division consists of Victory®, Indian® motorcycles, and the all-new three-wheel roadster motorcycle, Slingshot®. Heavyweight motorcycles are utilized as a mode of transportation as well as for recreational purposes. The industry is comprised of four segments: cruisers, touring, sport bikes and standard motorcycles. We entered the heavyweight motorcycle market in 1998 with an initial Victory product in the cruiser segment. We entered the touring segment in 2000. In 2011, we purchased the Indian Motorcycle brand to complement our Victory brand of motorcycles. In 2013, we re-launched the Indian brand by releasing the first three Indian Motorcycle models engineered by Polaris. In 2014, we introduced the Company's first three-wheeled, roadster motorcycle, Slingshot. The North America heavyweight industry retail cruiser and touring sales more than doubled from 1996 to 2006; however, the motorcycle industry declined in 2007 through 2010 due to weak overall economic conditions. The motorcycle industry has rebounded with growth beginning in 2011. We estimate that the combined 1,400cc and above cruiser and touring market segments increased one percent in 2014 compared to 2013 levels with an estimated 186,000 heavyweight cruiser and touring motorcycles sold in the North American market. Other major heavyweight cruiser and touring motorcycle manufacturers include BMW of North America, LLC (“BMW”), Triumph Motorcycles Ltd., Harley-Davidson, Inc., Honda, Yamaha, Kawasaki and Suzuki. We estimate that the worldwide target market for three-wheel motorcycles is approximately $1 billion.
Small Vehicles. We introduced our initial SV product, the Polaris Breeze®, in 2009, which was an electric powered vehicle primarily used in master planned communities in the Sunbelt region of the United States. In 2011, we ceased production of the Breeze line of products and made two SV acquisitions, Global Electric Motorcars LLC ("GEM") and Goupil Industries S.A. (“Goupil”). We expanded our SV portfolio in 2013 by acquiring A.M. Holding S.A.S., which operates under the name Aixam Mega S.A.S. ("Aixam"). Aixam is based in France and manufactures and sells enclosed on-road quadricycles and light duty commercial vehicles. Through these acquisitions, we now offer products in the light-duty hauling, people mover and urban/suburban commuting sub-sectors of the small vehicles industry. We estimate the worldwide target market for small vehicles at approximately $4.0 billion in 2014, which includes master planned communities and golf courses, light duty hauling, people movers, urban/suburban commuting and related quadricycles. Other major small vehicle manufacturers include Textron Inc.’s “E-Z-GO,” Ingersoll-Rand Plc.’s “Club Car,” Yamaha and DrivePlanet's "Ligier."
Products
Off-Road Vehicles. We entered the ORV market in 1985 with an ATV. We currently produce four-wheel ATVs, which provide more stability for the rider than earlier three-wheel versions. In 2000, we introduced our first youth ATV models. In 1998, we introduced the Polaris RANGER, a six-wheeled off-road side-by-side utility vehicle and in 2000, we introduced a four-wheeled version of the RANGER utility vehicle. In 2004, we introduced a military version ATV and side-by-side vehicles with features specifically designed for ultra-light tactical military applications. In 2007, we introduced our first recreational side-by-side vehicle, the RZR, and our first six-passenger side-by-side vehicle, the RANGER Crew®. Our standard line of military and government vehicles for model year 2015 consists of 6 models at suggested United States retail prices ranging from approximately $7,000 to $163,000. Our full line of ORVs beyond military vehicles consists of 49 models, including two-, four- and six-wheel drive general purpose, commercial, recreational and side-by-side models, with 2015 model year suggested United States retail prices ranging from approximately $2,100 to $28,000.
Most of our ORVs feature the totally automatic Polaris variable transmission, which requires no manual shifting, and several have a MacPherson® strut front suspension, which enhances control and stability. Our “on demand” all-wheel drive provides industry leading traction performance and ride quality due to its patented on demand, easy shift-on-the-fly design. Our ORVs have four-cycle engines and both shaft and concentric chain drive. Over the past 11 years, we have introduced the industry's first electronic fuel injected ATV, the first independent rear suspension on a sport ATV and helped create the recreational side-by-side segment through introduction of our RZR vehicles. Our lineup of ORVs has continued to expand over the past years through introduction of electric ORVs and commercial focused ORVs. Our family of ORVs includes utility and recreational Sportsman® ATVs, sport-styled Scrambler® ATVs, utility and recreational RANGER side-by-side vehicles, commercial-utility BRUTUS® side-by-side vehicles and recreational RZR side-by-side vehicles. In many of these segments, we offer youth, value, mid-size, trail and high-performance vehicles, which come in both single passenger and multi-passenger seating arrangements. Our key ORV product introductions in 2014 included the RZR XP 900 trail, RANGER 570 with industry-exclusive PRO-FIT™ cab system, and RANGER Diesel

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with hydrostatic transmission, several new value models and two models in a newly defined category of single-seat, ride-in ATVs, the Polaris ACE.
Snowmobiles. We produce a full line of snowmobiles consisting of approximately 32 models, ranging from youth models to utility and economy models to performance and competition models. The 2015 model year suggested United States retail prices range from approximately $2,800 to $14,000. Polaris snowmobiles are sold principally in the United States, Canada and Europe. We believe our snowmobiles have a long-standing reputation for quality, dependability and performance. We believe that we 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 2009, we introduced the first true progressive-rate rear suspension snowmobile, the Polaris RUSH®. In 2014, we introduced the all-new AXYS chassis platform for the flatland rider.
Motorcycles. In 1998, we began manufacturing V-twin cruiser motorcycles under the Victory brand name. In 2008, we introduced our first luxury touring model, the Victory Vision®. In 2009, we expanded our touring product line to include the Victory Cross Roads® and Cross Country® models. In 2011, we acquired Indian Motorcycle Company, America’s first motorcycle company, and in 2013 we re-launched the Indian brand by releasing the first three Indian Motorcycle models engineered by Polaris: Indian Chief® Classic, Indian Chief Vintage and Indian Chieftain. In 2014, we added two new Indian models, including the Roadmaster®, a luxury touring motorcycle, and Scout, Polaris' first mid-sized motorcycle. We also added a new bagger to the Victory motorcycle line in 2014, the Victory Magnum. The all-new three-wheel motorcycle, Slingshot was introduced in 2014, and is the Company's first roadster motorcycle. Our 2015 model year line of motorcycles for Victory, Indian and Slingshot consists of approximately 16 models with suggested U.S. retail prices ranging from approximately $11,000 to $28,500.
Small Vehicles. In 2009, we introduced our first SV, the Polaris Breeze. In 2011, we ceased production of the Breeze electric vehicles and acquired GEM and Goupil to expand and complement our small vehicle product line. In 2013, we further expanded our SV division by acquiring Aixam. GEM addresses the people mover segment of low emission vehicles, Goupil, a French company, addresses the light duty hauling segment and Aixam, also a French company, addresses both the passenger and light duty hauling segments. GEM has ten SV models, while Goupil and Aixam each have three base platforms that are modular and can be configured to meet numerous custom needs from park and garden maintenance to delivery and other commercial needs. Additionally, Aixam has four base models of passenger-based quadricycles that are sold primarily in Western Europe. Prices for SVs range from $8,000 to $30,000, depending on the model and application.
Parts, Garments and Accessories. We produce or supply a variety of replacement parts and accessories for our product lines. ORV accessories include winches, bumper/brushguards, plows, racks, mowers, tires, pull-behinds, cabs, cargo box accessories, tracks and oil. Snowmobile accessories include 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. We also market a full line of recreational apparel for our product lines, including helmets, jackets, bibs and pants, leathers and hats. In 2012, we acquired Teton Outfitters, LLC (d/b/a Klim), which specializes in premium technical riding gear for the snowmobile and motorcycle industries. Apparel is designed to our specifications, purchased from independent vendors and sold by us through our dealers and distributors, and online under our brand names. In 2014, we acquired Kolpin Outdoors, Inc. ("Kolpin"), an aftermarket brand delivering purpose-built and universal-fit ORV accessories and lifestyle products. We also acquired certain assets of LSI Products Inc. and Armor Holdings LLC (collectively "Pro Armor"), an aftermarket accessories company that specializes in accessories for performance side-by-side vehicles and all-terrain vehicles. These two 2014 acquisitions added industry leading aftermarket accessory brands to our PG&A activities.
Marine Products Division. We entered the personal watercraft market in 1992. In September 2004, we announced our decision to cease manufacturing marine products effective immediately. As technology and the distribution channel evolved, the marine products division’s lack of commonality with our other product lines created challenges for us and our dealer base. The marine products division continued to experience escalating costs and increasing competitive pressures and was never profitable.
Manufacturing and Distribution Operations
Our products are primarily assembled at our original manufacturing facility in Roseau, Minnesota and at our facilities in Spirit Lake, Iowa, and its surrounding areas, Osceola, Wisconsin, Monterrey, Mexico, Opole, Poland and various locations across France. Since our product lines incorporate similar technology, substantially the same equipment and personnel are employed across production in North America. We are vertically integrated in several key components of

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our manufacturing process, including plastic injection molding, welding, clutch assembly and balancing and painting. Fuel tanks, tracks, tires, seats and instruments, and certain other component parts are purchased from third-party vendors. Raw materials or standard parts are readily available from multiple sources for the components manufactured by us. Our work force is familiar with the use, operation and maintenance of the products since many employees own the products we manufacture. In 2010, we announced plans to realign our manufacturing operations. We have created manufacturing centers of excellence for our products by enhancing the existing Roseau and Spirit Lake production facilities and established a manufacturing facility in Monterrey, Mexico, which became operational in 2011, that assembles ORVs and certain engines. This realignment led to the sale of part of our Osceola, Wisconsin manufacturing operations, moving frame tube bending into Roseau and Monterrey, and outsourcing some operations including seat manufacturing and stamping. Several of the engines used in our vehicles continue to be manufactured in Osceola. Our plant in Opole, Poland facility manufactures ORVs to serve the European market. Goupil has its manufacturing operations in Bourran, France, while Aixam has its manufacturing operations in Aix-les-Bains and Chanas, France. Our Roseau facility primarily manufactures ORVs and snowmobiles and our Monterrey facility primarily manufactures ORVs. Our facilities in Spirit Lake, Iowa and its surrounding areas primarily manufacture ORVs, motorcycles and GEM vehicles. In January 2015, we announced plans to build a new production facility in Huntsville, Alabama to provide additional capacity and flexibility. The 600,000 square-foot facility will focus on off-road vehicle production. We will break ground on the facility in the first quarter of 2015 with completion expected in the first half of 2016.
Pursuant to informal agreements between us and Fuji Heavy Industries Ltd. (“Fuji”), Fuji was the sole manufacturer of our two-cycle snowmobile engines from 1968 to 1995. Fuji has manufactured engines for our ATV products since their introduction in 1985. We had entered into an agreement with Fuji to form Robin Manufacturing, U.S.A. (“Robin”) in 1995. Under the agreement, we made an investment for a 40 percent ownership position in Robin, which built engines in the United States for recreational and industrial products. The Robin facility was closed in 2011 as the production volume of engines made at the facility had declined significantly. Since 2011, our reliance on and use of Fuji manufactured engines in our products has steadily declined as our internal engine manufacturing capabilities have expanded. After decreasing from 2011 to 2014, we expect our use of Fuji engines in our vehicles to stabilize in 2015.
We have been designing and producing our own engines for select models of snowmobiles since 1995, for all Victory motorcycles since 1998, for select ORV models since 2001 and for Indian motorcycles since the re-launch in 2013. During 2014, approximately 80 percent of the total vehicles we produced were powered by engines designed and assembled by us.
In 2000, we entered into an agreement with a Taiwanese manufacturer to co-design, develop and produce youth ATVs. We have since expanded the agreement with the Taiwanese manufacturer in 2004 to include the design, development and production of value-priced smaller adult ATV models and in 2008 to include a youth side-by-side vehicle, the RZR 170.
We do not anticipate any significant difficulties in obtaining substitute supply arrangements for other raw materials or components that we generally obtain from limited sources.
Contract carriers ship our products from our manufacturing and distribution facilities to our customers. We maintain several leased wholegoods distribution centers where final set-up and up-fitting is completed for certain models before shipment to customers.
 We maintain sales and administration facilities in Medina and Plymouth, Minnesota; Rigby, Idaho; Winnipeg, Canada; Derrimut, Australia; Shanghai, China; Rolle, Switzerland; Sao Paulo, Brazil; New Delhi, India; Monterrey, Mexico and in most Western European countries. Our primary wholegoods distribution facilities are in St. Paul, Minnesota; Haviland, Ohio; Altona, Australia; Irving, Texas; and Milford, Iowa. Our primary North American dealer PG&A distribution facilities are in Vermillion, South Dakota; Wilmington, Ohio and Rigby, Idaho. We have various other locations around the world that distribute PG&A to our international dealers and distributors.
Production Scheduling
We produce and deliver our products throughout the year based on dealer, distributor and customer orders. Beginning in 2008, we began testing a new dealer ordering process called Maximum Velocity Program (MVP), where ORV orders are placed in approximately two-week intervals for the high volume dealers driven by retail sales trends at the individual dealership. Smaller dealers utilize a similar MVP process, but on a less frequent ordering cycle. Effective in 2010, the MVP process was being utilized by all North American ORV dealers. For MVP dealers, ORV retail sales activity at the dealer level drives orders which are incorporated into each product’s production scheduling. International distributor ORV orders are taken throughout the year. Orders for each year’s production of snowmobiles are placed by the dealers

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and distributors in the spring. Non-refundable deposits made by consumers to dealers in the spring for pre-ordered snowmobiles assist in production planning. In 2012, we began utilizing our Retail Flow Management (RFM) ordering system for Victory motorcycles, and now also use it as the ordering system for Indian motorcycles. In late 2014, we began utilizing RFM for certain ATV dealers. The RFM system allows dealers to order daily, create a segment stocking order, and eventually reduce order fulfillment times to what we expect will be less than 18 days. Prior to RFM, Victory motorcycle dealers would place annual orders in the summer. For non-MVP and RFM dealers and products, units are built to order each year, subject to fluctuations in market conditions and supplier lead times. The anticipated volume of units to be produced is substantially committed to by dealers and distributors prior to production.
Manufacture of snowmobiles commences in late winter of the previous season and continues through late autumn or early winter of the current season. We manufacture ORVs, motorcycles and SV’s year round. We have the ability to mix production of the various products on the existing manufacturing lines as demand dictates.
Sales and Marketing
Our products are sold through a network of approximately 1,750 independent dealers in North America, through 23 subsidiaries and approximately 85 distributors in over 100 countries outside of North America.
We sell our snowmobiles directly to dealers in the snowbelt regions of the United States and Canada. Many dealers and distributors of our snowmobiles also distribute our ORVs. At the end of 2014, approximately 800 Polaris dealers were located in areas of the United States where snowmobiles are not regularly sold. Unlike our primary competitors, which market their ORV products principally through their affiliated motorcycle dealers, we also sell our ORVs through lawn and garden and farm implement dealers.
With the exception of France, the United Kingdom, Sweden, Norway, Australia, New Zealand, Germany, Spain, China, India, Mexico and Brazil, sales of our non-SV products in Europe and other offshore markets are handled through independent distributors. In 2011 through 2014, we acquired GEM, Goupil and Aixam in the SV division and Klim, Kolpin and Pro Armor in PG&A, which each have their own dealer/distributor relationships established.
Victory and Indian motorcycles are distributed directly through independently owned dealers and distributors, except in Australia where we have three Company-owned retail stores. We have a high quality dealer network for our other product lines from which many of the approximately 450 current North American Victory dealers were selected. Indian currently has approximately 175 North American dealers signed up, of which approximately 118 are retailing Indian motorcycles as of the end of 2014. We expect the number of Indian retailing dealerships to continue to increase over the coming years. In 2005, we began selling Victory motorcycles in the United Kingdom. Since 2005, we have been gradually expanding our international sales of motorcycles, primarily in Europe and Australia. We expect to further expand our motorcycle dealer network over the next few years in North America and internationally for Victory, Indian and Slingshot motorcycles.
The SV businesses each have their own distribution networks through which their respective vehicles are distributed. GEM has approximately 250 dealers. Goupil and Aixam sell directly to customers in France, through subsidiaries in certain Western European countries and through several dealers and distributors for markets outside such countries.
Dealers and distributors sell our products under contractual arrangements pursuant to which the dealer or distributor is authorized to market specified products and is required to carry certain replacement parts and perform certain warranty and other services. Changes in dealers and distributors take place from time to time. We believe a sufficient number of qualified dealers and distributors exist in all geographic areas to permit an orderly transition whenever necessary. In addition, we sell Polaris vehicles directly to military and government agencies and other national accounts and we supply a highly differentiated side-by-side vehicle branded Bobcat to their dealerships in North America. In 2013, we entered into a partnership with Ariens Company ("Ariens"), a Brillion, Wisconsin based manufacturer of outdoor power equipment. Through the partnership, we anticipate leveraging each other's dealer networks, sharing certain technologies, research and development and supplying Ariens with a highly differentiated work vehicle to sell through its dealer network. In 2014, we began shipping vehicles to Ariens under the terms of the partnership.
In 1996, a wholly-owned subsidiary of Polaris entered into a partnership agreement with a subsidiary of Transamerica Distribution Finance (TDF) to form Polaris Acceptance. Polaris Acceptance provides floor plan financing to our dealers in the United States. Under the partnership agreement, we have a 50 percent equity interest in Polaris Acceptance. We do not guarantee the outstanding indebtedness of Polaris Acceptance. In 2004, TDF was merged with a subsidiary of General Electric Company (GE) and, as a result of that merger, TDF’s name was changed to GE Commercial Distribution Finance Corporation (GECDF). No significant change in the Polaris Acceptance relationship resulted from

7


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 (“Securitization Facility”), 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 4 and 8 of Notes to Consolidated Financial Statements for a discussion of this financial services arrangement.
We have arrangements with Polaris Acceptance (United States) and GE affiliates (Australia, Canada, France, Germany, the United Kingdom, Ireland, China and New Zealand) to provide floor plan financing for our dealers. A majority of our North American sales of snowmobiles, ORVs, motorcycles, SVs and related PG&A are financed under arrangements whereby we are paid within a few days of shipment of our product. We participate in the cost of dealer financing and have agreed to repurchase products from the finance companies under certain circumstances and subject to certain limitations. We have 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, we will adjust our sales return allowance at the time of sale should we anticipate material repurchases of units financed through the finance companies. See Note 8 of Notes to Consolidated Financial Statements for a discussion of these financial services arrangements.
In August 2005, a wholly-owned subsidiary of Polaris entered into a multi-year contract with HSBC Bank Nevada, National Association (“HSBC”), formerly known as Household Bank (SB), N.A., under which HSBC managed our private label credit card program under the StarCard label for the purchase of Polaris products. Since then, HSBC’s U.S. Credit Card and Retail Services business has been acquired by Capital One. Our current agreement with Capital One expires in October 2015.
In April 2006, a wholly-owned subsidiary of Polaris entered into a multi-year contract with GE Money Bank (“GE Bank”) under which GE Bank makes available closed-end installment consumer and commercial credit to customers of our dealers for both Polaris and non-Polaris products. In 2014, GE Bank changed its name to Synchrony Bank, as a result of a spin off and is part of the GE Capital Retail Finance business. The current installment credit agreement under which Synchrony Bank provides installment credit lending for motorcycles expires in April 2016.
In January 2009, a wholly-owned subsidiary of Polaris entered into a multi-year contract with Sheffield Financial (“Sheffield”) pursuant to which Sheffield agreed to make available closed-end installment consumer and commercial credit to customers of our dealers for Polaris products. The current installment credit agreement under which Sheffield provides exclusive installment credit lending for ORVs, as well as installment credit lending for snowmobiles, motorcycles and certain other Polaris products expires in February 2016.
In November 2014, a wholly-owned subsidiary of Polaris entered into a multi-year contract with FreedomRoad Financial (“FreedomRoad”) pursuant to which FreedomRoad agreed to make available closed-end installment consumer and commercial credit to customers of our dealers for Polaris products. The current installment credit agreement under which FreedomRoad provides installment credit lending for motorcycles expires in February 2016.
In December 2014, a wholly-owned subsidiary of Polaris entered into a multi-year contract with Chrome Capital LLC (“Chrome”) pursuant to which Chrome agreed to make available leasing to customers of our dealers for Victory and Indian Motorcycles. The current leasing agreement under which Chrome provides exclusive leasing for motorcycles expires in January 2018.
We promote our brands among the riding and non-riding public and provide a wide range of products for enthusiasts by licensing the name Polaris. We currently license the production and sale of a range of items, including die cast toys, ride-on toys and numerous other products.
We sell clothing and accessories through our e-commerce sites polaris.com, indianmotorcycle.com, klim.com, kolpin.com, and proarmor.com.
Our marketing activities are designed primarily to promote and communicate directly with consumers and secondarily to assist the selling and marketing efforts of our dealers and distributors. We make available and advertise discount or rebate programs, retail financing or other incentives for our dealers and distributors to remain price competitive in order to accelerate retail sales to consumers and gain market share. We advertise our products directly to consumers using print advertising in the industry press and in user group publications and on the internet, billboards, television and radio. We also provide media advertising and partially underwrite dealer and distributor media advertising to a degree and on terms which vary by product and from year to year. From time to time, we produce promotional films for our products, which are available to dealers for use in the showroom or at special promotions. We also provide product brochures, leaflets, posters, dealer signs, and miscellaneous other promotional items for use by dealers.

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We expended $314.4 million, $270.3 million and $210.4 million for sales and marketing activities in 2014, 2013 and 2012, respectively.
Engineering, Research and Development, and New Product Introduction
We have approximately 700 employees who are engaged in the development and testing of existing products and research and development of new products and improved production techniques, located primarily in our Roseau and Wyoming, Minnesota facilities and in Burgdorf, Switzerland. Our SV acquisitions of GEM, Goupil and Aixam included research and development resources for their respective product lines. We believe Polaris was the first to develop, for wide commercial use, independent front suspensions for snowmobiles, long travel rear suspensions for snowmobiles, liquid cooled snowmobile brakes, hydraulic brakes for snowmobiles, the three cylinder engine in snowmobiles, the adaptation of the MacPherson strut front suspension, “on demand” all-wheel drive systems and the Concentric Drive System for use in ORVs, the application of a forced air cooled variable power transmission system in ORVs and the use of electronic fuel injection for ORVs.
We utilize internal combustion engine testing facilities to design and optimize engine configurations for our products. We utilize specialized facilities for matching engine, exhaust system and clutch performance parameters in our products to achieve desired fuel consumption, power output, noise level and other objectives. Our engineering department is equipped to make small quantities of new product prototypes for testing and for the planning of manufacturing procedures. In addition, we maintain numerous facilities where each of the products is extensively tested under actual use conditions. We utilize our Wyoming, Minnesota facility for engineering, design and development personnel for our line of engines and powertrains, ORVs, Victory, Indian and Slingshot motorcycles, and SVs. In 2010, we acquired Swissauto Powersports Ltd., an engineering company that develops high performance and high efficiency engines and innovative vehicles.
We expended $148.5 million, $139.2 million, and $127.4 million for research and development activities in 2014, 2013 and 2012, respectively.
Intellectual Property
We rely on a combination of patents, trademarks, copyrights, trade secrets, and nondisclosure and non-competition agreements to establish and protect our intellectual property and proprietary technology. We have filed and obtained numerous patents in the United States and abroad, and regularly file patent applications worldwide in our continuing effort to establish and protect our proprietary technology. Additionally, we have numerous registered trademarks, trade names and logos in the United States, Canada and international locations.
Competition
The off-road vehicle, snowmobile, motorcycle and small vehicle markets in the United States, Canada and other global markets are highly competitive. Competition in such markets is based upon a number of factors, including price, quality, reliability, styling, product features and warranties. At the dealer level, competition is based on a number of factors, including sales and marketing support programs (such as financing and cooperative advertising). Certain of our competitors are more diversified and have financial and marketing resources that are substantially greater than those of Polaris.
 We believe that our products are competitively priced and our sales and marketing support programs for dealers are comparable to those provided by our competitors. Our products compete with many other recreational products for the discretionary spending of consumers, and to a lesser extent, with other vehicles designed for utility applications.
Product Safety and Regulation
Safety regulation. The federal government and individual states have promulgated or are considering promulgating laws and regulations relating to the use and safety of certain of our products. The federal government is currently the primary regulator of product safety. The Consumer Product Safety Commission (CPSC) has federal oversight over product safety issues related to snowmobiles and off-road vehicles. The National Highway Transportation Safety Administration (NHTSA) has federal oversight over product safety issues related to motorcycles and small vehicles.
In August 2008, the Consumer Product Safety Improvement Act (“Act”) was passed which, among other things, required ATV manufacturers and distributors to comply with previously voluntary American National Standards Institute (ANSI) safety standards developed by the Specialty Vehicle Institute of America (SVIA). We believe that our products comply with the ANSI/SVIA standards, and we have had an action plan on file with the CPSC since 1998 regarding safety

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related issues. The Act also includes a provision which requires the CPSC to complete an ATV rulemaking process it started in August 2006 regarding the need for safety standards or increased safety standards for ATVs, which has not yet resulted in the issuance of a final rule.
We are a member of the Recreational Off-Highway Vehicle Association (ROHVA), which was established to promote the safe and responsible use of side-by-side vehicles also known as Recreational Off-Highway Vehicles (ROVs), a category that includes our RANGER and RZR side-by-side vehicles. Since early 2008, ROHVA has been engaged in a comprehensive process for developing a voluntary standard for equipment, configuration and performance requirements of ROVs through ANSI. Comments on the draft standard were actively solicited from the CPSC and other stakeholders as part of the ANSI process. The standard, which addresses stability, occupant retention, and other safety performance criteria, was approved and published by ANSI in March 2010, revised in 2011, and revised again in 2014.
In October 2009, the CPSC published an advance notice of proposed rulemaking regarding ROV safety under the Consumer Product Safety Act. In December 2014, the CPSC published a Notice of Proposed Rulemaking that includes proposed mandatory safety standards for ROVs in the areas of lateral stability, steering and handling, and occupant retention. Polaris, by itself and through ROHVA, has expressed concerns about the proposed mandatory standards, whether they would actually reduce ROV incident rates, whether the proposed tests are repeatable and appropriate for ROVs, and the unintended safety consequences that could result from them. We are unable to predict the outcome of the CPSC rule-making process or the ultimate impact of any resulting rules on our business and operating results.
We are a member of the International Snowmobile Manufacturers Association (ISMA), a trade association formed to promote safety in the manufacture and use of snowmobiles, among other things. ISMA members include all of the major snowmobile manufacturers. The ISMA members are also members of the Snowmobile Safety and Certification Committee, which promulgated voluntary sound and safety standards for snowmobiles that have been adopted as regulations in some states of the United States and in Canada. These standards require testing and evaluation by an independent testing laboratory. We believe that our snowmobiles have always complied with safety standards relevant to snowmobiles.
Motorcycle and SVs are subject to federal vehicle safety standards administered by the NHTSA and are also subject to various state vehicle equipment standards. Our Slingshot vehicle is classified as a motorcycle under federal law, but may be classified differently in other jurisdictions. We believe our motorcycles (including Slingshot) and SVs comply with applicable federal and state safety standards.
Our products are also subject to international standards related to safety in places where we sell our products outside the United States. We believe that our motorcycles, SVs, ORVs and snowmobiles have complied with applicable safety standards in the United States and other international locations.
Use regulation. Local, state and federal laws and regulations have been promulgated, and at various times, ordinances or legislation is introduced, relating to the use or manner of use of our products. Some states and municipalities have adopted, or are considering the adoption of, legislation and local ordinances that restrict the use of ORVs and snowmobiles to specified hours and locations. The federal government also has legislative and executive authority to restrict the use of ORVs and snowmobiles in some national parks and federal lands. In several instances, this restriction has been a ban on the recreational use of these vehicles.
Emissions. The federal Environmental Protection Agency (EPA) and the California Air Resources Board (CARB) have adopted emissions regulations applicable to our products.
The EPA's emission standards for off-road recreational engines and vehicles apply to our ORV's and snowmobiles. We have developed engine and emission technologies to meet these requirements, including the chassis-based ORV emission requirements that became effective in model year 2014. Snowmobiles comply using the fleet average provisions of the regulations. In 2008, the EPA announced its intention to issue a future rulemaking on snowmobiles with any new emission standards taking effect after model year 2012. No further EPA rulemaking activity has followed the 2008 announcement. The CARB also has emission regulations for ORVs that we meet. In 2014, CARB finalized additional evaporative emission regulations for ORVs that will take effect beginning in model year 2018.
Our Victory, Indian and Slingshot motorcycles are subject to EPA and CARB emission standards for on-highway motorcycles. We believe that these vehicles comply with the applicable standards. GEM electric vehicles are subject to CARB emissions certification requirements, which they meet.

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Our products are also subject to international emission laws and regulations in places where we sell our products outside the United States. Canada’s emission regulations for motorcycles, ORVs and snowmobiles are similar to those in the United States, and Polaris complies with the applicable Canada requirements. Europe currently regulates emissions from our motorcycles and certain of our ATV-based products for which we obtain whole vehicle type approvals, and these products meet the applicable requirements. In 2014, the European Parliament and Council finalized the details of new regulations that will make these European emission requirements more stringent beginning in 2016. Emissions from other Polaris off-road products in the EU will be covered in the future by the non-road mobile machinery directive, which is currently being revised. Polaris is reviewing the technology requirements and developing compliance solutions for these future EU regulations.
We believe that our products comply with applicable emission standards and related regulations in the United States and internationally. We are unable to predict the ultimate impact of the adopted or proposed new regulations on our business. We are currently developing and obtaining engine and emission technologies to meet the requirements of the future emission standards.
Employees
Due to the seasonality of our business and certain changes in production cycles, total employment levels vary throughout the year. Despite such variations in employment levels, employee turnover has not been high. During 2014, on a worldwide basis, we employed an average of approximately 7,000 full-time persons, a 30 percent increase from 2013. Approximately 2,900 of our employees are salaried. We consider our relations with our employees to be excellent.
 Available Information
Our Internet website is http://www.polaris.com. We make available free of charge, on or through our website, our annual, quarterly and current reports, and any amendments to those reports, as soon as reasonably practicable after electronically filing such reports with the Securities and Exchange Commission. We also make available through our website our corporate governance materials, including our Corporate Governance Guidelines, the charters of the Audit Committee, Compensation Committee, Corporate Governance and Nominating Committee and Technology Committee of our Board of Directors and our Code of Business Conduct and Ethics. Any shareholder or other interested party wishing to receive a copy of these corporate governance materials should write to Polaris Industries Inc., 2100 Highway 55, Medina, Minnesota 55340, Attention: Investor Relations. Information contained on our website is not part of this report.
Forward-Looking Statements
This 2014 Annual Report contains not only historical information, but also “forward-looking statements” intended to qualify for the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These “forward-looking statements” can generally be identified as such because the context of the statement will include words such as we or our management “believes,” “anticipates,” “expects,” “estimates” or words of similar import. Similarly, statements that describe our future plans, objectives or goals are also forward-looking. Forward-looking statements may also be made from time to time in oral presentations, including telephone conferences and/or webcasts open to the public. Shareholders, potential investors and others are cautioned that all forward-looking statements involve risks and uncertainties that could cause results in future periods to differ materially from those anticipated by some of the statements made in this report, including the risks and uncertainties described below under the heading entitled “Item 1A—Risk Factors” and elsewhere in this report. The risks and uncertainties discussed in this report are not exclusive and other factors that we may consider immaterial or do not anticipate may emerge as significant risks and uncertainties.
Any forward-looking statements made in this report or otherwise speak only as of the date of such statement, and we undertake no obligation to update such statements to reflect actual results or changes in factors or assumptions affecting such forward-looking statements. We advise you, however, to consult any further disclosures made on related subjects in future quarterly reports on Form 10-Q and current reports on Form 8-K that are filed with or furnished to the Securities and Exchange Commission.

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Executive Officers of the Registrant
Set forth below are the names of our executive officers as of February 20, 2015, their ages, titles, the year first appointed as an executive officer, and employment for the past five years:
Name
 
Age
 
Title 
Scott W. Wine
 
47
 
Chairman of the Board of Directors and Chief Executive Officer
Bennett J. Morgan
 
51
 
President and Chief Operating Officer
Kenneth J. Pucel
 
48
 
Executive Vice President—Global Operations, Engineering and Lean
Michael W. Malone
 
56
 
Vice President—Finance and Chief Financial Officer
Todd-Michael Balan
 
45
 
Vice President—Corporate Development
Stacy L. Bogart
 
51
 
Vice President—General Counsel, Compliance Officer and Secretary
Michael D. Dougherty
 
47
 
Vice President—Asia Pacific and Latin America
Stephen L. Eastman
 
50
 
Vice President—Parts, Garments and Accessories
Matthew J. Homan
 
43
 
President—Global Adjacent Markets
Michael P. Jonikas
 
54
 
Vice President—Snowmobiles and Slingshot
Suresh Krishna
 
46
 
Vice President—Europe, Middle East and Africa
David C. Longren
 
56
 
Vice President—Off-Road Vehicles and Off-Road Vehicles Engineering
James P. Williams
 
52
 
Vice President—Human Resources
 Executive officers of the Company are elected at the discretion of the Board of Directors with no fixed terms. There are no family relationships between or among any of the executive officers or directors of the Company.
Mr. Wine joined Polaris Industries Inc. as Chief Executive Officer on September 1, 2008, and was named Chairman of the Board of Directors in January 2013. Prior to joining Polaris, Mr. Wine was President of Fire Safety Americas, a division of United Technologies, a provider of high technology products and services to the building systems and aerospace industries, from 2007 to August 2008. Prior to that, Mr. Wine held senior leadership positions at Danaher Corp. in the United States and Europe from 2003 to 2007, including President of its Jacob Vehicle Systems and Veeder-Roots subsidiaries, and Vice President and General Manager, Manufacturing Programs in Europe. From 1996 to 2003, Mr. Wine held a number of operations and executive posts, both international and domestic with Allied Signal Corporation's Aerospace Division.
Mr. Morgan has been President and Chief Operating Officer of the Company since April 2005; prior to that he was Vice President and General Manager of the ATV division of Polaris. Prior to managing the ATV division, Mr. Morgan was General Manager of PG&A for Polaris from 1997 to 2001. He joined Polaris in 1987 and spent his early career in various product development, marketing and operations management positions of increasing responsibility.
Mr. Pucel joined Polaris in December 2014 as Executive Vice President—Global Operations, Engineering and Lean. Prior to joining Polaris, Mr. Pucel was with Boston Scientific Corporation (BSC), a global provider of medical solutions. Most recently, Mr. Pucel held the position of Executive Vice President of Global Operations, Quality and Technology and was a member of BSC’s Executive Committee from 2004 to 2014. Since 2004, he managed BSC’s manufacturing facilities, supply chain and numerous distributions centers; in 2010, he added responsibility for enterprise-wide Lean and research and development activities.
Mr. Malone has been Vice President—Finance and Chief Financial Officer of the Company since January 1997. From January 1997 to January 2010, Mr. Malone also served as Corporate Secretary. Mr. Malone was Vice President and Treasurer of the Company from December 1994 to January 1997 and was Chief Financial Officer and Treasurer of a predecessor company of Polaris from January 1993 to December 1994. Prior thereto and since 1986, he was Assistant Treasurer of a predecessor company of Polaris. Mr. Malone joined Polaris in 1984 after four years with Arthur Andersen LLP.
Mr. Balan joined Polaris in July 2009 as Vice President—Corporate Development. Prior to joining Polaris, Mr. Balan was Director of Marketing and Strategy for United Technologies Corporation's Fire & Security business from 2007 to June 2009. Prior to that, Mr. Balan held various marketing, general management, business development, and strategy roles within Danaher Corp. from 2001 to 2007. Mr. Balan’s work history also includes various strategy, marketing, and sales management roles with Emerson Electric and Colfax Corporation.

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Ms. Bogart has been Vice President—General Counsel and Compliance Officer of Polaris since November 2009 and Corporate Secretary since January 2010. From February 2009 to November 2009, Ms. Bogart was General Counsel of Liberty Diversified International. From October 1999 until February 2009, Ms. Bogart held several positions at The Toro Company, including Assistant General Counsel and Assistant Secretary. Before joining The Toro Company, Ms. Bogart was a Senior Attorney for Honeywell Inc.
Mr. Dougherty has been Vice President—Asia Pacific and Latin America since August 2011. Mr. Dougherty joined the company in 1998 as International Sales Manager, and has held several positions, including Vice President of Global New Market Development and Vice President and General Manager of the ATV division during his tenure. Prior to Polaris, Mr. Dougherty was employed at Trident Medical International, a trading company.
Mr. Eastman has been Vice President—Parts, Garments and Accessories since February 2012. Prior to joining Polaris, Mr. Eastman was President of Target.com for Target Corporation, a general merchandise retailer, from July 2008 to October 2011. Prior to that, Mr. Eastman held several leadership positions at Target Corporation since 1982 in various areas, including General Merchandising, Consumer Electronics, Inventory Management and Merchandise Planning Operations.
Mr. Homan was promoted to President—Global Adjacent Markets in July 2014. Mr. Homan has held several key leadership positions at Polaris. Prior to his current role, most recently he was Vice President—EMEA since August 2011, Vice President—Off-Road Vehicles since August 2008, and General Manager of Side-by-Sides since December 2005. Mr. Homan joined Polaris in 2002 as Director of Marketing for the ATV division. Prior to working at Polaris, Mr. Homan spent nearly seven years at General Mills, Inc. working in various marketing and brand management positions.
Mr. Jonikas is Vice President—Snowmobiles and Slingshot. Mr. Jonikas has been Vice President of Snowmobiles since August 2011. Mr. Jonikas was Vice President of Sales and Marketing beginning in November 2007 until January 2014 when he assumed the role of Vice President of Snowmobiles and Slingshot. Mr. Jonikas was also previously Vice President—On-Road Vehicles from May 2009 to August 2011. Mr. Jonikas joined Polaris in 2000, and has held several key roles including Director of Product and Marketing Management for the ATV division and General Manager of Side-by-Sides. Prior to joining Polaris, Mr. Jonikas spent 12 years at General Mills, Inc. in numerous general management positions.
Mr. Krishna became Vice President—Europe, Middle East and Africa in July 2014. Prior to this, Mr. Krishna was Vice President—Global Operations and Integration since September 2010, and Vice President—Supply Chain and Integration since March 2010. Before Mr. Krishna joined Polaris, he was Vice President Global Operations, Supply Chain and IT for a division of United Technologies Corporation's Fire & Security business where he was responsible for significant operations in China, Mexico, the United States and Europe from August 2007 to March 2010. Prior to United Technologies Corporation, Mr. Krishna worked for Diageo, a global producer of famous drink brands as Vice President Supply Chain for its North American business from February 2002 to July 2007.
Mr. Longren was appointed Vice President—Off-Road Vehicles and Off-Road Vehicles Engineering in August 2011. Prior to this, Mr. Longren was Chief Technical Officer since May 2006. Mr. Longren joined Polaris in January 2003 as the Director of Engineering for the ATV Division. Prior to joining Polaris, Mr. Longren was a Vice President in the Weapons Systems Division of Alliant Techsystems and Vice President, Engineering and Marketing at Blount Sporting Equipment Group.
Mr. Williams joined Polaris as Vice President—Human Resources in April 2011. Prior to joining Polaris, Mr. Williams was Vice President of Human Resources for Cooper Industries, a diversified manufacturing Company, since 2006. Between 2005 and 2006, Mr. Williams was Vice President of Human Resources for Danaher Corp. Previous to that, Mr. Williams held various executive positions of increasing responsibility with Honeywell Inc. from 1995 to 2005. Prior to that, Mr. Williams held a number of posts in Human Resources with Monsanto and General Motors Corporation.

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Item 1A. Risk Factors
The following are significant factors known to us that could materially adversely affect our business, financial condition, or operating results, as well as adversely affect the value of an investment in our common stock.
Our products are subject to extensive United States federal and state and international safety, environmental and other government regulation that may require us to incur expenses or modify product offerings in order to maintain compliance with the actions of regulators and could decrease the demand for our products.
Our products are subject to extensive laws and regulations relating to safety, environmental and other regulations promulgated by the United States federal government and individual states as well as international regulatory authorities. Failure to comply with applicable regulations could result in fines, increased expenses to modify our products and harm to our reputation, all of which could have an adverse effect on our operations. In addition, future regulations could require additional safety standards or emission reductions that would require additional expenses and/or modification of product offerings in order to maintain compliance with applicable regulations. Our products are also subject to laws and regulations that restrict the use or manner of use during certain hours and locations, and these laws and regulations could decrease the popularity and sales of our products. We continue to monitor regulatory activities in conjunction with industry associations and support balanced and appropriate programs that educate the product user on safe use of our products and how to protect the environment.
A significant adverse determination in any material product liability claim against us could adversely affect our operating results or financial condition.
The manufacture, sale and usage of our products expose us to significant risks associated with product liability claims. If our products are defective or used incorrectly by our customers, bodily injury, property damage or other injury, including death, may result and this could give rise to product liability claims against us or adversely affect our brand image or reputation. Any losses that we may suffer from any liability claims, and the effect that any product liability litigation may have upon the reputation and marketability of our products, may have a negative impact on our business and operating results.
Because of the high cost of product liability insurance premiums and the historically insignificant amount of product liability claims paid by us, we were self-insured from 1985 to 1996 and from 2002 to 2012. From 1996 to 2002, and beginning again in 2012, we purchased excess insurance coverage for catastrophic product liability claims for incidents occurring subsequent to the policy date that exceeded our self-insured retention levels. The estimated costs resulting from any losses are charged to expense when it is probable a loss has been incurred and the amount of the loss is reasonably determinable.
We had a product liability reserve accrued on our balance sheet of $17.3 million at December 31, 2014 for the probable payment of pending claims related to product liability litigation associated with our products. We believe such accrual is adequate. We do not believe the outcome of any pending product liability litigation will have a material adverse effect on our operations. However, no assurance can be given that our historical claims record, which did not include ATVs prior to 1985, motorcycles and side-by-side vehicles prior to 1998, and SVs prior to 2011, will not change or that material product liability claims against us will not be made in the future. Adverse determination of material product liability claims made against us would have a material adverse effect on our financial condition.
Significant product repair and/or replacement due to product warranty claims or product recalls could have a material adverse impact on our results of operations.
We provide a limited warranty for ORVs for a period of six months, for a period of one year for our snowmobiles, for a period of one or two years for our motorcycles depending on brand and model year, and for a two year period for SVs. We may provide longer warranties related to certain promotional programs, as well as longer warranties in certain geographical markets as determined by local regulations and market conditions. We also provide a limited emission warranty for certain emission-related parts in our ORVs, snowmobiles, and motorcycles as required by the EPA and CARB. Although we employ quality control procedures, sometimes a product is distributed that needs repair or replacement. Our standard warranties require us or our dealers to repair or replace defective products during such warranty periods at no cost to the consumer. Historically, product recalls have been administered through our dealers and distributors. The repair and replacement costs we could incur in connection with a recall could adversely affect our

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business. In addition, product recalls could harm our reputation and cause us to lose customers, particularly if recalls cause consumers to question the safety or reliability of our products.
Changing weather conditions may reduce demand and negatively impact net sales and production of certain of our products.
Lack of snowfall in any year in any particular geographic region may adversely affect snowmobile retail sales and related PG&A sales in that region. Additionally, to the extent that unfavorable weather conditions are exacerbated by global climate change or otherwise, our sales may be affected to a greater degree than we have previously experienced. There is no assurance that weather conditions or natural disasters could not have a material effect on our sales, production capability or component supply continuity for any of our products.
We face intense competition in all product lines, including from some competitors that have greater financial and marketing resources. Failure to compete effectively against competitors would negatively impact our business and operating results.
The snowmobile, off-road vehicle, motorcycle and small vehicle markets are highly competitive. Competition in such markets is based upon a number of factors, including price, quality, reliability, styling, product features and warranties. At the dealer level, competition is based on a number of factors, including sales and marketing support programs (such as financing and cooperative advertising). Certain of our competitors are more diversified and have financial and marketing resources that are substantially greater than ours, which allow these competitors to invest more heavily in intellectual property, product development and advertising. If we are not able to compete with new products or models of our competitors, our future business performance may be materially and adversely affected. Internationally, our products typically face more competition where certain foreign competitors manufacture and market products in their respective countries. This allows those competitors to sell products at lower prices, which could adversely affect our competitiveness. In addition, our products compete with many other recreational products for the discretionary spending of consumers and, to a lesser extent, with other vehicles designed for utility applications. A failure to effectively compete with these other competitors could have a material adverse effect on our performance.
Termination or interruption of informal supply arrangements could have a material adverse effect on our business or results of operations.
We have informal supply arrangements with many of our suppliers. In the event of a termination of the supply arrangement, there can be no assurance that alternate supply arrangements will be made on satisfactory terms. If we need to enter into supply arrangements on unsatisfactory terms, or if there are any delays to our supply arrangements, it could adversely affect our business and operating results.
Fluctuations in foreign currency exchange rates could result in declines in our reported sales and net earnings.
The changing relationships of primarily the United States dollar to the Canadian dollar, Australian dollar, the Euro, the Swiss Franc, the Mexican peso, the Japanese yen and certain other foreign currencies have from time to time had a negative impact on our results of operations. Fluctuations in the value of the United States dollar relative to these foreign currencies can adversely affect the price of our products in foreign markets, the costs we incur to import certain components for our products, and the translation of our foreign balance sheets. While we actively manage our exposure to fluctuating foreign currency exchange rates by entering into foreign exchange hedging contracts from time to time, these contracts hedge foreign currency denominated transactions and any change in the fair value of the contracts would be offset by changes in the underlying value of the transactions being hedged.
Our business may be sensitive to economic conditions that impact consumer spending.
Our results of operations may be sensitive to changes in overall economic conditions, primarily in North America and Europe, that impact consumer spending, including discretionary spending. Weakening of, and fluctuations in, economic conditions affecting disposable consumer income such as employment levels, business conditions, changes in housing market conditions, capital markets, tax rates, savings rates, interest rates, fuel and energy costs, the impacts of natural disasters and acts of terrorism and other matters, including the availability of consumer credit could reduce consumer spending or reduce consumer spending on powersports products. A general reduction in consumer spending or a reduction in consumer spending on powersports products could adversely affect our sales growth and profitability. In addition, we have a financial services partnership arrangement with a subsidiary of General Electric Company that requires us to repurchase products financed and repossessed by the partnership, subject to certain limitations. For calendar year 2014, our maximum aggregate repurchase obligation was approximately $120.8 million. If adverse

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changes to economic conditions result in increased defaults on the loans made by this financial services partnership, our repurchase obligation under the partnership arrangement could adversely affect our liquidity and harm our business.
Failure to establish and maintain the appropriate level of dealers and distributor relationships or weak economic conditions impacting those relationships may negatively impact our business and operating results.
We distribute our products through numerous dealers and distributors and rely on them to retail our products to the end customers. Our sales growth and profitability could be adversely affected if deterioration of economic or business conditions results in a weakening of the financial condition of a material number of our dealers and distributors. Additionally, weak demand for, or quality issues with, our products may cause dealers and distributors to voluntarily or involuntarily reduce or terminate their relationship with us. Further, if we fail to establish and maintain an appropriate level of dealers and distributors for each of our products, we may not obtain adequate market coverage for the desired level of retail sales of our products.
We depend on suppliers, financing sources and other strategic partners who may be sensitive to economic conditions that could affect their businesses in a manner that adversely affects their relationship with us.
We source component parts and raw materials through numerous suppliers and have relationships with a limited number of sources of product financing for our dealers and consumers. Our sales growth and profitability could be adversely affected if deterioration of economic or business conditions results in a weakening of the financial condition of a material number of our suppliers or financing sources, or if uncertainty about the economy or the demand for our products causes these business partners to voluntarily or involuntarily reduce or terminate their relationship with us.
Increases in the cost of raw material, commodity and transportation costs and shortages of certain raw materials could negatively impact our business.
The primary commodities used in manufacturing our products are aluminum, steel, petroleum-based resins and certain rare earth metals used in our charging systems, as well as diesel fuel to transport the products. Our profitability is affected by significant fluctuations in the prices of the raw materials and commodities we use in our products. We may not be able to pass along any price increases in our raw materials to our customers. As a result, an increase in the cost of raw materials, commodities, labor or other costs associated with the manufacturing of our products could increase our costs of sales and reduce our profitability.
Retail credit market deterioration and volatility may restrict the ability of our retail customers to finance the purchase of our products and adversely affect our income from financial services.
We have arrangements with each of Capital One, Sheffield, Synchrony Bank and FreedomRoad to make retail financing available to consumers who purchase our products in the United States. During 2014, consumers financed approximately 32 percent of the vehicles we sold in the United States through the Capital One revolving retail credit and Sheffield, Synchrony Bank, and FreedomRoad installment retail credit programs. Furthermore, some customers use financing from lenders who do not partner with us, such as local banks and credit unions. There can be no assurance that retail financing will continue to be available in the same amounts and under the same terms that had been previously available to our customers. If retail financing is not available to customers on satisfactory terms, it is possible that our sales and profitability could be adversely affected. Our income from financial services is affected by changes in interest rates.
We intend to grow our business through potential acquisitions, non-consolidating investments, alliances and new joint ventures and partnerships, which could be risky and could harm our business.
One of our growth strategies is to drive growth in our businesses and accelerate opportunities to expand our global presence through targeted acquisitions, non-consolidating investments, alliances, and new joint ventures and partnerships that add value while considering our existing brands and product portfolio. The benefits of an acquisition, non-consolidating investment, new joint venture or partnership may take more time than expected to develop or integrate into our operations, and we cannot guarantee that acquisitions, non-consolidating investments, alliances, joint ventures or partnerships will ultimately produce any benefits. In addition, acquisitions, non-consolidating investments, alliances, joint ventures and partnerships involve a number of risks, including:
diversion of management’s attention;
difficulties in integrating and assimilating the operations and products of an acquired business or in realizing projected efficiencies, cost savings, and synergies;

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potential loss of key employees or customers of the acquired businesses or adverse effects on existing business relationships with suppliers and customers;
adverse impact on overall profitability if acquired businesses or affiliates do not achieve the financial results projected in our valuation models;
reallocation of amounts of capital from other operating initiatives and/or an increase in our leverage and debt service requirements to pay the acquisition purchase prices, which could in turn restrict our ability to access additional capital when needed or to pursue other important elements of our business strategy;
inaccurate assessment of undisclosed, contingent or other liabilities or problems, unanticipated costs associated with an acquisition, and an inability to recover or manage such liabilities and costs;
incorrect estimates made in the accounting for acquisitions, incurrence of non-recurring charges and impairment of significant amounts of goodwill, investments or other related assets that could adversely affect our operating results;
dilution to existing shareholders if our securities are issued as part of transaction consideration or to fund transaction consideration; and
inability to direct the management and policies of a joint venture, alliance, or partnership, where other participants may be able to take action contrary to our instructions or requests and against our policies and objectives.
Our ability to grow through acquisitions will depend, in part, on the availability of suitable acquisition targets at acceptable prices, terms, and conditions, our ability to compete effectively for these acquisition candidates, and the availability of capital and personnel to complete such acquisitions and run the acquired business effectively. These risks could be heightened if we complete a large acquisition or multiple acquisitions within a relatively short period of time. Any potential acquisition could impair our operating results, and any large acquisition could impair our financial condition, among other things.
 Our reliance upon patents, trademark laws, and contractual provisions to protect our proprietary rights may not be sufficient to protect our intellectual property from others who may sell similar products and may lead to costly litigation.
We hold patents and trademarks relating to various aspects of our products, such as our patented “on demand” all-wheel drive, and believe that proprietary technical know-how is important to our business. Proprietary rights relating to our products are protected from unauthorized use by third parties only to the extent that they are covered by valid and enforceable patents or trademarks or are maintained in confidence as trade secrets. We cannot be certain that we will be issued any patents from any pending or future patent applications owned by or licensed to us or that the claims allowed under any issued patents will be sufficiently broad to protect our technology. In the absence of enforceable patent or trademark protection, we may be vulnerable to competitors who attempt to copy our products, gain access to our trade secrets and know-how or diminish our brand through unauthorized use of our trademarks, all of which could adversely affect our business. Others may initiate litigation to challenge the validity of our patents, or allege that we infringe their patents, or they may use their resources to design comparable products that do not infringe our patents. We may incur substantial costs if our competitors initiate litigation to challenge the validity of our patents, or allege that we infringe their patents, or if we initiate any proceedings to protect our proprietary rights. If the outcome of any such litigation is unfavorable to us, our business, operating results, and financial condition could be adversely affected. Regardless of whether litigation relating to our intellectual property rights is successful, the litigation could significantly increase our costs and divert management’s attention from operation of our business, which could adversely affect our results of operations and financial condition. We also cannot be certain that our products or technologies have not infringed or will not infringe the proprietary rights of others. Any such infringement could cause third parties, including our competitors, to bring claims against us, resulting in significant costs, possible damages and substantial uncertainty.
Fifteen percent of our total sales are generated outside of North America, and we intend to continue to expand our international operations. Our international operations require significant management attention and financial resources, expose us to difficulties presented by international economic, political, legal, accounting, and business factors, and may not be successful or produce desired levels of sales and profitability.
We currently manufacture our products in the United States, Mexico, Poland and France. We sell our products throughout the world and maintain sales and administration facilities in the United States, Canada, Switzerland and

17


several other Western European countries, Australia, China, Brazil, Mexico and India. Our primary distribution facilities are in Vermillion, South Dakota, Wilmington, Ohio, and Rigby, Idaho, which distribute PG&A products to our North American dealers and we have various other locations around the world that distribute PG&A to our international dealers and distributors. Our total sales outside North America were 15 percent, 16 percent, and 14 percent of our total sales for fiscal 2014, 2013, and 2012, respectively. International markets have, and will continue to be, a focus for sales growth. We believe many opportunities exist in the international markets, and over time we intend for international sales to comprise a larger percentage of our total sales. Several factors, including weakened international economic conditions, could adversely affect such growth. In 2014, we completed construction of a manufacturing facility in Poland. The expansion of our existing international operations and entry into additional international markets require significant management attention and financial resources. Some of the countries in which we manufacture and/or sell our products, or otherwise have an international presence, are to some degree subject to political, economic and/or social instability. Our international operations expose us and our representatives, agents and distributors to risks inherent in operating in foreign jurisdictions. These risks include:
increased costs of customizing products for foreign countries;
difficulties in managing and staffing international operations and increases in infrastructure costs including legal, tax, accounting, and information technology;
the imposition of additional United States and foreign governmental controls or regulations;
new or enhanced trade restrictions and restrictions on the activities of foreign agents, representatives, and distributors; and the imposition of increases in costly and lengthy import and export licensing and other compliance requirements, customs duties and tariffs, license obligations, and other non-tariff barriers to trade;
the imposition of United States and/or international sanctions against a country, company, person, or entity with whom we do business that would restrict or prohibit our continued business with the sanctioned country, company, person, or entity;
international pricing pressures;
laws and business practices favoring local companies;
adverse currency exchange rate fluctuations;
longer payment cycles and difficulties in enforcing agreements and collecting receivables through certain foreign legal systems;
difficulties in enforcing or defending intellectual property rights; and
multiple, changing, and often inconsistent enforcement of laws, rules, and regulations, including rules relating to environmental, health, taxes, and safety matters.
Our international operations may not produce desired levels of total sales or one or more of the factors listed above may harm our business and operating results. Any material decrease in our international sales or profitability could also adversely impact our operating results.
Additional tax expense or tax exposure could impact our financial performance.
We are subject to income taxes and other business taxes in various jurisdictions in which we operate. Our tax liabilities are dependent upon the earnings generated in these different jurisdictions. Our provision for income taxes and cash tax liability could be adversely affected by numerous factors, including income before taxes being lower than anticipated in jurisdictions with lower statutory tax rates and higher than anticipated in jurisdictions with higher statutory tax rates, changes in the valuation of deferred tax assets and liabilities, a change in our assertion regarding the permanent reinvestment of the undistributed earnings of international affiliates and changes in tax laws and regulations in various jurisdictions. We are also subject to the continuous examination of our income tax returns by various tax authorities. The results of audits and examinations of previously filed tax returns and continuing assessments of our tax exposures may have an adverse effect on the Company’s provision for income taxes and cash tax liability.

18


If we are unable to continue to enhance existing products and develop and market new products that respond to customer needs and preferences and achieve market acceptance, we may experience a decrease in demand for our products and our business could suffer.
One of our growth strategies is to develop innovative, customer-valued products to generate revenue growth. Our sales from new products in the past have represented a significant component of our sales and are expected to continue to represent a significant component of our future sales. We may not be able to compete as effectively with our competitors, and ultimately satisfy the needs and preferences of our customers, unless we can continue to enhance existing products and develop new innovative products in the global markets in which we compete. Product development requires significant financial, technological, and other resources. While we expended $148.5 million, $139.2 million, and $127.4 million for research and development efforts in 2014, 2013 and 2012, respectively, there can be no assurance that this level of investment in research and development will be sufficient to maintain our competitive advantage in product innovation, which could cause our business to suffer. Product improvements and new product introductions also require significant planning, design, development, and testing at the technological, product, and manufacturing process levels and we may not be able to timely develop product improvements or new products. Our competitors’ new products may beat our products to market, be more effective with more features and/or less expensive than our products, obtain better market acceptance, or render our products obsolete. Any new products that we develop may not receive market acceptance or otherwise generate any meaningful sales or profits for us relative to our expectations based on, among other things, existing and anticipated investments in manufacturing capacity and commitments to fund advertising, marketing, promotional programs, and research and development.
Our operations are dependent upon attracting and retaining skilled employees, including skilled labor. Our future success depends on our continuing ability to identify, hire, develop, motivate, retain and promote skilled personnel for all areas of our organization. 
Our success depends on attracting and retaining qualified personnel. Our ability to sustain and grow our business requires us to hire, retain and develop a highly skilled and diverse management team and workforce. Failure to ensure that we have the leadership capacity with the necessary skill set and experience could impede our ability to deliver our growth objectives and execute our strategic plan. In addition, any unplanned turnover or inability to attract and retain key employees, including managers, could have a negative effect on our business, financial condition and/or results of operations.
We may be subject to information technology system failures, network disruptions and breaches in data security.
We use many information technology systems and their underlying infrastructure to operate our business. The size and complexity of our computer systems make them potentially vulnerable to breakdown, malicious intrusion and random attack. Recent acquisitions have resulted in additional decentralized systems which add to the complexity of our information technology infrastructure. Likewise, data privacy breaches by employees or others with permitted access to our systems may pose a risk that sensitive data may be exposed to unauthorized persons or to the public. While we have invested in layers of data and information technology protection, and continually monitor cybersecurity threats, there can be no assurance that our efforts will prevent disruptions or breaches in our systems that could adversely affect our business.

Item 1B. Unresolved Staff Comments
Not Applicable.

Item 2. Properties
The following sets forth the Company’s material facilities as of December 31, 2014:

19


Location
 
Facility Type/Use
 
Owned or Leased 
 
Square
Footage
Medina, Minnesota
 
Headquarters
 
Owned
 
130,000
Plymouth, Minnesota
 
Headquarters
 
Primarily owned
 
175,000
Roseau, Minnesota
 
Wholegoods manufacturing and R&D
 
Owned
 
733,200
Monterrey, Mexico
 
Wholegoods manufacturing
 
Owned
 
425,000
Milford, Iowa
 
Wholegoods manufacturing
 
Primarily owned
 
460,400
Opole, Poland
 
Wholegoods manufacturing
 
Leased
 
300,000
Spirit Lake, Iowa
 
Wholegoods manufacturing
 
Owned
 
298,400
Osceola, Wisconsin
 
Component parts & engine manufacturing
 
Owned
 
285,800
Chanas, France
 
Wholegoods manufacturing
 
Owned
 
196,000
Bourran, France
 
Wholegoods manufacturing and R&D
 
Leased
 
100,000
Aix-les-Bains, France
 
Wholegoods manufacturing and R&D
 
Owned
 
97,800
Wyoming, Minnesota
 
Research and development facility
 
Owned
 
272,000
Burgdorf, Switzerland
 
Research and development facility
 
Leased
 
13,600
Wilmington, Ohio
 
Distribution center
 
Leased
 
429,000
Vermillion, South Dakota
 
Distribution center
 
Primarily owned
 
418,000
Rigby, Idaho
 
Distribution center and office facility
 
Owned
 
54,600
Altona, Australia
 
Wholegoods distribution
 
Leased
 
215,000
St. Paul, Minnesota
 
Wholegoods distribution
 
Leased
 
160,000
Irving, Texas
 
Wholegoods distribution
 
Leased
 
157,000
Milford, Iowa
 
Wholegoods distribution
 
Leased
 
100,000
Haviland, Ohio
 
Wholegoods distribution
 
Leased
 
100,000
Winnipeg, Canada
 
Office facility
 
Leased
 
15,000
Rolle, Switzerland
 
Office facility
 
Leased
 
8,000
Including the material properties listed above and those properties not listed, we have over 3.3 million square feet of manufacturing and research and development space located in North America and Europe. We have over 2.3 million square feet of warehouse and distribution center space in the United States and countries occupied by our subsidiaries that is owned or leased. We also have approximately 140,000 square feet of international office facility square footage in Canada, Western Europe, Australia, Brazil, India, China and Mexico. In Australia, we own three retail stores with approximately 25,000 square feet of space.
We own substantially all tooling and machinery (including heavy presses, conventional and computer-controlled welding facilities for steel and aluminum, assembly lines and paint lines) used in the manufacture of our products. We make ongoing capital investments in our facilities. These investments have increased production capacity for our products. We believe our current manufacturing and distribution facilities are adequate in size and suitable for our present manufacturing and distribution needs. However, we expect a significant amount of capital expenditures in 2015, which will expand our current manufacturing facilities in anticipation of the capacity and capability requirements of expected future growth. In January 2015, we announced plans to build a new production facility in Huntsville, Alabama to provide additional capacity and flexibility. The 600,000 square-foot facility will focus on ORV production. We will break ground on the facility in the first quarter of 2015 with completion expected in the first half of 2016.

Item 3. Legal Proceedings
We are involved in a number of other legal proceedings incidental to our business, none of which are expected to have a material effect on the financial results of our business.

Item 4. Mine Safety Disclosures
Not applicable.

20



PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
The information under the caption “Other Investor Information” appearing on the inside back cover of the Company’s 2014 Annual Report is incorporated herein by reference. On February 18, 2015, the last reported sale price for shares of our common stock on the New York Stock Exchange was $155.63 per share.
STOCK PERFORMANCE GRAPH
The graph below compares the five-year cumulative total return to shareholders (stock price appreciation plus reinvested dividends) for the Company’s common stock with the comparable cumulative return of two indexes: S&P Midcap 400 Index and Morningstar’s Recreational Vehicles Industry Group Index. The graph assumes the investment of $100 at the close on December 31, 2009 in common stock of the Company and in each of the indexes, and the reinvestment of all dividends. Points on the graph represent the performance as of the last business day of each of the years indicated.
Assumes $100 Invested at the close on December 31, 2009
Assumes Dividend Reinvestment
Fiscal Year Ended December 31, 2014
 
2009
 
2010 
 
2011 
 
2012
 
2013
 
2014
Polaris Industries Inc.
$
100.00

 
$
183.78

 
$
268.42

 
$
411.47

 
$
723.73

 
$
761.88

S&P Midcap 400 Index
100.00

 
126.64

 
124.45

 
146.70

 
195.84

 
214.97

Recreational Vehicles Industry Group Index—Morningstar Group
100.00

 
136.37

 
149.24

 
205.27

 
318.26

 
313.83

Comparison of 5-Year Cumulative Total Return Among Polaris Industries Inc., S&P Midcap 400 Index and Recreational Vehicles Index

21


The table below sets forth the information with respect to purchases made by or on behalf of Polaris of its own stock during the fourth quarter of the fiscal year ended December 31, 2014.
Issuer Purchases of Equity Securities

Period
Total Number of
Shares Purchased
 
Average Price Paid
per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Program
 
Maximum Number of Shares That May Yet Be Purchased Under the Program(1)
October 1–31, 2014
1,000

 
$
148.46

 
1,000

 
1,573,000
November 1–30, 2014

 

 

 
1,573,000
December 1–31, 2014
523,000

 
148.64

 
523,000

 
1,050,000
Total
524,000

 
$
148.64

 
524,000

 
1,050,000
 
(1)
The Board of Directors previously authorized a share repurchase program to repurchase up to an aggregate of 75.0 million shares of the Company’s common stock (the “Program”). Of that total, 73.9 million shares have been repurchased cumulatively from 1996 through December 31, 2014. This Program does not have an expiration date.
On January 29, 2015, the Board of Directors approved an increase in the Company’s common stock repurchase authorization by 4.0 million shares. The additional share repurchase authorization, together with the 1.1 million shares remaining available for repurchase under the prior authorization, represents approximately eight percent of the shares of Polaris common stock currently outstanding.



22


Item 6. Selected Financial Data
The following table presents our selected financial data. The table should be read in conjunction with Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, and Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K. All periods presented reflect the classification of the marine products division’s financial results, including the loss from discontinued operations and the loss on disposal of the division, as discontinued operations. Per share data has been adjusted to give effect of all stock splits through 2014.
Selected Financial Data
 
For the Years Ended December 31, 
(Dollars in millions, except per-share data) 
2014
2013
2012
2011
2010
Statement of Operations Data
 
 
 
 
 
Sales Data:
 
 
 
 
 
Total sales
$
4,479.6

$
3,777.1

$
3,209.8

$
2,656.9

$
1,991.1

Percent change from prior year
19
%
18
%
21
%
33
%
27
%
Sales components:
 
 
 
 
 
Off-Road Vehicles
65
%
67
%
69
%
69
%
69
%
Snowmobiles
7
%
8
%
9
%
11
%
10
%
Motorcycles
8
%
6
%
6
%
5
%
4
%
Small Vehicles
3
%
3
%
2
%
%
%
Parts, Garments and Accessories
17
%
16
%
14
%
15
%
17
%
Gross Profit Data:
 
 
 
 
 
Total gross profit
$
1,319.2

$
1,120.9

$
925.3

$
740.6

$
530.2

Percent of sales
29.4
%
29.7
%
28.8
%
27.9
%
26.6
%
Operating Expense Data:
 
 
 
 
 
Total operating expenses
$
666.2

$
588.9

$
480.8

$
414.7

$
326.3

Percent of sales
14.9
%
15.6
%
15.0
%
15.6
%
16.4
%
Operating Income Data:
 
 
 
 
 
Total operating income
$
714.7

$
577.9

$
478.4

$
349.9

$
220.7

Percent of sales
16.0
%
15.3
%
14.9
%
13.2
%
11.1
%
Net Income Data:
 
 
 
 
 
Net income from continuing operations
$
454.0

$
381.1

$
312.3

$
227.6

$
147.1

Percent of sales
10.1
%
10.1
%
9.7
%
8.6
%
7.4
%
Diluted net income per share from continuing operations
$
6.65

$
5.40

$
4.40

$
3.20

$
2.14

Net income
$
454.0

$
377.3

$
312.3

$
227.6

$
147.1

Diluted net income per share
$
6.65

$
5.35

$
4.40

$
3.20

$
2.14

Cash Flow Data:
 
 
 
 
 
Cash flow provided by continuing operations
$
529.3

$
499.2

$
416.1

$
302.5

$
297.9

Purchase of property and equipment
205.1

251.4

103.1

84.5

55.7

Repurchase and retirement of common stock
81.8

530.0

127.5

132.4

27.5

Cash dividends to shareholders
126.9

113.7

101.5

61.6

53.0

Cash dividends per share
$
1.92

$
1.68

$
1.48

$
0.90

$
0.80

Balance Sheet Data (at end of year):
 
 
 
 
 
Cash and cash equivalents
$
137.6

$
92.2

$
417.0

$
325.3

$
393.9

Current assets
1,096.6

865.7

1,017.8

875.0

808.1

Total assets
2,074.9

1,685.5

1,488.5

1,228.0

1,061.6

Current liabilities
850.8

748.1

631.0

586.3

584.2

Long-term debt and capital lease obligations
223.6

284.3

104.3

104.6

100.0

Shareholders’ equity
861.3

535.6

690.5

500.1

371.0

 

23


Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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, 2014, and should be read in conjunction with the Consolidated Financial Statements and the Notes thereto included elsewhere in this report.
 Overview
In 2014, we had record sales and net income, with our fifth straight year of double digit growth in both sales and net income. This growth is fueled by award-winning innovative new products leading to continued market share leadership in side-by-side vehicles and ATVs. In 2014, we also experienced growth in our snowmobiles, motorcycles, international and small vehicles businesses. The overall North American powersports industry continued its positive trend with mid-single digit percentage growth in 2014. Our North America retail sales to consumers increased 12 percent in 2014, helping to drive total full year Company sales up 19 percent to a record $4.48 billion. Despite the global economy remaining difficult, our international sales increased 16 percent due to continued market share growth in all product categories and strong results by our recent European acquisitions.
Full year earnings reflect the success of our ongoing product innovation, as 19 percent sales growth, partially offset by a decrease in the gross profit percentage of 23 basis points, drove net income from continuing operations up 19 percent to $454.0 million, with diluted earnings per share from continuing operations increasing 23 percent to a record $6.65 per share. These increases came while we continued to invest in numerous longer-term diversification and growth opportunities.
In 2014, we began to receive benefits from prior investments while continuing to invest in both product development and strategic initiatives. We introduced over twenty new ORV models in 2014, including the all-new RZR® XP 900 trail and RZR XP4 900 trail, several new value models, and two models in a newly defined category of single-seat, ride-in ATVs, the Polaris ACE. We also introduced nine new snowmobiles in the all-new AXYS chassis platform. In our motorcycles line, we added two new models to the iconic Indian Motorcycle® brand—the 2015 Roadmaster®, a luxury touring motorcycle, and the Scout, Polaris' first mid-sized motorcycle. Additionally, we introduced the revolutionary all-new three-wheel motorcycle, Slingshot®, our first roadster motorcycle. We also acquired Kolpin and Pro Armor, adding two industry leading accessory companies to Polaris' PG&A activities. Operationally, we expanded production capacity and capabilities at all manufacturing facilities in the U.S. and Mexico, and completed the construction of the manufacturing plant in Opole, Poland, our first manufacturing operation outside of North America, where production began in late 2014.
In January 2015, we announced plans to build a new production facility in Huntsville, Alabama to provide additional capacity and flexibility. The 600,000 square-foot facility will focus on off-road vehicle production. We will break ground on the facility in the first quarter of 2015 with completion expected in the first half of 2016.
On January 29, 2015, we announced that our Board of Directors approved a 10 percent increase in the regular quarterly cash dividend to $0.53 per share for the first quarter of 2015, representing the 20th consecutive year of increased dividends to shareholders. This increase reflects the continued momentum and potential of our business and the strength of our balance sheet.


24


Results of Operations
Sales:
Sales were $4,479.6 million in 2014, a 19 percent increase from $3,777.1 million in 2013. The following table is an analysis of the percentage change in total Company sales for 2014 compared to 2013 and 2013 compared to 2012:
 
 
Percent change in total Company sales compared to the prior year
 
2014
 
2013
Volume
14
 %
 
12
 %
Product mix and price
6

 
7

Currency
(1
)
 
(1
)
 
19
 %
 
18
 %
The volume increases in 2014 and 2013 are primarily the result of shipping more ORVs, snowmobiles, motorcycles, small vehicles and related PG&A items to dealers given increased consumer retail demand for our products worldwide. Product mix and price contributed six percent and seven percent to the growth for 2014 and 2013, respectively, primarily due to the positive benefit of a greater number of higher priced ORVs sold to dealers relative to our other businesses. The impact from currency rates on our Canadian and other foreign subsidiaries' sales, when translated to U.S. dollars, decreased sales by one percent in both 2014 and 2013 compared to the respective prior years.
Our components of sales were as follows:
 
For the Years Ended December 31,
($ in millions) 
2014
 
Percent
of Total
Sales 
 
2013
 
Percent
of Total
Sales 
 
Percent
Change
2014 vs.
2013
 
2012
 
Percent
of Total
Sales 
 
Percent
Change
2013 vs.
2012
Off-Road Vehicles
$
2,909.0

 
65
%
 
$
2,521.5

 
67
%
 
15
%
 
$
2,225.8

 
69
%
 
13
%
Snowmobiles
322.4

 
7
%
 
301.7

 
8
%
 
7
%
 
283.0

 
9
%
 
7
%
Motorcycles
348.7

 
8
%
 
219.8

 
6
%
 
59
%
 
195.8

 
6
%
 
12
%
Small Vehicles
157.4

 
3
%
 
122.8

 
3
%
 
28
%
 
44.4

 
2
%
 
177
%
PG&A
742.1

 
17
%
 
611.3

 
16
%
 
21
%
 
460.8

 
14
%
 
33
%
Total Sales
$
4,479.6

 
100
%
 
$
3,777.1

 
100
%
 
19
%
 
$
3,209.8

 
100
%
 
18
%
ORV sales of $2,909.0 million in 2014, which include core ATV, RANGER and RZR side-by-side vehicles, and the Company's new ACE category, increased 15 percent from 2013. This increase reflects continued market share gains for both ATVs and side-by-side vehicles driven by strong consumer enthusiasm for our ORV offerings, including an expanded line-up of innovative new models and the introduction of the new ACE category. Polaris’ North American ORV unit retail sales to consumers increased low-double digits percent for 2014 compared to 2013, with ATV unit retail sales growing mid-single digits percent and side-by-side vehicle unit retail sales increasing double-digits percent over the prior year. The Company's new ACE category, introduced early in 2014, accelerated its retail sales sequentially throughout 2014. North American dealer inventories of ORVs increased high-teens percent from 2013, in support of dealer stocking levels for premium and value segments for ATV RFM and new ACE categories. ORV sales outside of North America increased mid-teens percent in 2014 compared to 2013 resulting from market share gains. For 2014, the average ORV per unit sales price increased four percent over 2013's per unit sales price, primarily as a result of the increased sales of higher priced side-by-side vehicle models.
ORV sales of $2,521.5 million in 2013, which include core ATV and RANGER and RZR side-by-side vehicles, increased 13 percent from 2012. This increase reflects continued market share gains for both ATVs and side-by-side vehicles driven by strong consumer enthusiasm for our ORV offerings, including an expanded line-up of innovative new ATVs and side-by-side vehicles introduced in the 2013 third and fourth quarters. Polaris’ North American ORV unit retail sales to consumers increased high-single digits percent for 2013 compared to 2012, with ATV unit retail sales growing mid-single digits percent and side-by-side vehicle unit retail sales increasing more than ten percent over the prior year. North American dealer inventories of ORVs increased mid-teens percent from 2012, in support of continued strong retail demand for side-by-side vehicles and incremental new market segments. ORV sales outside of North America increased

25


nine percent in 2013 compared to 2012 resulting in market share gains. For 2013, the average ORV per unit sales price increased seven percent over 2012's per unit sales price, primarily as a result of the increased sales of higher priced side-by-side vehicle models.
Snowmobile sales increased seven percent to $322.4 million for 2014 compared to 2013. This increase is primarily due to the early snowfall and colder weather in North America and the success of the new AXYS chassis platform models introduced in 2014. Retail sales to consumers for the 2014-2015 season-to-date period through December 31, 2014, increased high-teens percent. Sales of snowmobiles to customers outside of North America, principally within the Scandinavian region and Russia, decreased 28 percent in 2014 as compared to 2013 due primarily to economic weakness in the region. The average unit sales price in 2014 was approximately flat when compared to 2013.
Snowmobile sales increased seven percent to $301.7 million for 2013 compared to 2012. This increase is primarily due to lower dealer inventory coming out of the 2012-2013 snowmobile season and success of the model year 2014 new product introductions. Retail sales to consumers for the 2013-2014 season-to-date period through December 31, 2013, increased nearly ten percent. Sales of snowmobiles to customers outside of North America, principally within the Scandinavian region and Russia, increased 18 percent in 2013 as compared to 2012. The average unit sales price in 2013 decreased two percent when compared to 2012, resulting primarily from increased sales of our value-priced snowmobiles.
Sales of Motorcycles, which is comprised of Victory and Indian motorcycles, and the all-new roadster, Slingshot, increased 59 percent to $348.7 million for 2014 compared to 2013. The increase in 2014 sales is due to the continued high demand for Indian motorcycles including the new 2015 Roadmaster and the Company's first mid-sized motorcycle, Scout, and initial shipments of the Slingshot. North American industry heavyweight cruiser and touring motorcycle retail sales (which excludes Slingshot) increased low-single digits percent in 2014 compared to 2013. Over the same period, Polaris North American unit retail sales to consumers increased almost 40 percent, driven primarily by continued strong retail sales for Indian motorcycles and initial retail sales of Slingshot. North American Polaris motorcycle dealer inventory increased mid-teens digits percent in 2014 versus 2013 levels primarily due to stocking of the Indian motorcycles and Slingshot. Sales of motorcycles to customers outside of North America increased over 70 percent in 2014 compared to 2013. The average per unit sales price for the Motorcycles division in 2014 increased nine percent compared to 2013 due to the increased sales of higher priced Indian motorcycles and initial sales of Slingshot.
Sales of Motorcycles, which was comprised of Victory and Indian motorcycles in 2013, increased 12 percent to $219.8 million for 2013 compared to 2012. The increase in 2013 sales is due to the initial shipments of the new model year 2014 Indian motorcycles. North American industry heavyweight cruiser and touring motorcycle retail sales increased mid-single digits percent in 2013 compared to 2012. Over the same period, Polaris North American unit retail sales to consumers increased over 20 percent, driven by an unprecedented number of new product introductions in 2013, which includes three new Indian Motorcycle models. North American Polaris motorcycle dealer inventory increased high-single digits percent in 2013 versus 2012 levels due to stocking of the new Indian motorcycles. Sales of motorcycles to customers outside of North America increased three percent in 2013 compared to 2012. The average per unit sales price for the Motorcycles division in 2013 increased five percent compared to 2012 due to the increased sales of higher priced Indian motorcycles.
Sales of Small Vehicles, which is comprised of Aixam, GEM and Goupil vehicles, increased 28 percent to $157.4 million for 2014 compared to 2013. The increase in sales over the comparable prior year is due to the inclusion of Aixam in our consolidated financial statements for the full year in 2014, versus eight months in 2013, since it was acquired in April 2013. Also, GEM experienced an increase in sales during 2014 compared to 2013.
Small Vehicles sales of $122.8 million in 2013 represents an increase of 177 percent compared to 2012. The increase in sales over the comparable prior year periods is primarily due to the inclusion of Aixam in our consolidated financial statements since it was acquired in April 2013. Also, both GEM and Goupil experienced an increase in sales during 2013 compared to 2012.
PG&A sales increased 21 percent to $742.1 million for 2014 compared to 2013. The sales increase in 2014 was driven by double digit percent increases in ORV, Motorcycles, and Small Vehicles related PG&A, which was primarily driven by the addition of over 400 new model year 2015 accessories, including additions to the family of Lock & Ride® attachments that add comfort, style and utility to ORVs and motorcycles. PG&A sales also increased due to the inclusion of Kolpin and Pro Armor in our consolidated financial statements, which were both acquired in 2014. Sales of PG&A to customers outside of North America increased 13 percent during 2014 compared to 2013.

26


PG&A sales increased 33 percent to $611.3 million for 2013 compared to 2012. The sales increase in 2013 was driven by double digit percent increases in all product lines and categories, which was primarily driven by the addition of over 300 new model year 2014 accessories, including additions to the family of Lock & Ride attachments that add comfort, style and utility to ORVs and motorcycles. Sales of PG&A to customers outside of North America increased 26 percent during 2013 compared to 2012. PG&A sales also increased over the prior year periods due to the inclusion of Klim in our consolidated financial statements since it was acquired in December 2012, and Aixam related PG&A since it was acquired in April 2013.
Sales by geographic region were as follows:
 
For the Years Ended December 31,
($ in millions)
2014
 
Percent of Total Sales
 
2013
 
Percent of Total Sales 
 
Percent Change 2014 vs. 2013
 
2012
 
Percent of Total Sales 
 
Percent Change 2013 vs. 2012
United States
$
3,339.9

 
75
%
 
$
2,721.3

 
72
%
 
23
 %
 
$
2,311.0

 
72
%
 
18
%
Canada
454.6

 
10
%
 
463.3

 
12
%
 
(2
)%
 
438.2

 
14
%
 
6
%
Other foreign countries
685.1

 
15
%
 
592.5

 
16
%
 
16
 %
 
460.6

 
14
%
 
29
%
Total sales
$
4,479.6

 
100
%
 
$
3,777.1

 
100
%
 
19
 %
 
$
3,209.8

 
100
%
 
18
%
 Significant regional trends were as follows:
United States:
Sales in the United States for 2014 increased 23 percent compared to 2013, primarily resulting from higher shipments in all product lines and related PG&A, improved pricing and more sales of higher priced side-by-side vehicles. The United States represented 75 percent, 72 percent and 72 percent of total company sales in 2014, 2013 and 2012, respectively. Sales in the United States for 2013 increased 18 percent compared to 2012, primarily resulting from higher shipments in all product lines and related PG&A, improved pricing and more sales of higher priced side-by-side vehicles.
Canada:
Canadian sales decreased two percent in 2014 compared to 2013. Negative currency rate movements was the primary contributor for the decrease in 2014, which had an unfavorable seven percent impact on sales for 2014 compared to 2013, partially offset by sales of higher priced side-by-side vehicles and motorcycles. Sales in Canada represented 10 percent, 12 percent and 14 percent of total company sales in 2014, 2013, and 2012, respectively. Canadian sales increased 6 percent in 2013 compared to 2012 due to increased shipments of ORVs and snowmobiles, partially offset by currency rate movements, which had an unfavorable three percent impact on sales for 2013 compared to 2012.
Other Foreign Countries:
Sales in other foreign countries, primarily in Europe, increased 16 percent for 2014 compared to 2013. The increase was primarily driven by increased sales of side-by-side vehicles and motorcycles, as well as the acquisition of Aixam in April 2013. This increase was partially offset by currency rate movements, which had an unfavorable two percent impact on sales for 2014 compared to 2013. Sales in other foreign countries, primarily in Europe, increased 29 percent for 2013 compared to 2012. The increase was primarily driven by the acquisition of Aixam in April 2013, along with increased sales of side-by-side vehicles and PG&A. This increase was partially offset by currency rate movements, which had an unfavorable one percent impact on sales for 2013 compared to 2012.

27


Cost of Sales:  
The following table reflects our cost of sales in dollars and as a percentage of sales:
 
For the Years Ended December 31,
($ in millions)
2014
 
Percent of Total Cost of Sales
 
2013
 
Percent of Total Cost of Sales
 
Change 2014 vs. 2013
 
2012
 
Percent of
Total
Cost of Sales
 
Change 2013 vs. 2012
Purchased materials and services
$
2,757.6

 
87
%
 
$
2,336.1

 
88
%
 
18
%
 
$
2,008.9

 
88
%
 
16
%
Labor and benefits
244.1

 
8
%
 
198.7

 
8
%
 
23
%
 
177.7

 
8
%
 
12
%
Depreciation and amortization
96.9

 
3
%
 
64.5

 
2
%
 
50
%
 
51.8

 
2
%
 
25
%
Warranty costs
61.9

 
2
%
 
56.9

 
2
%
 
9
%
 
46.1

 
2
%
 
23
%
Total cost of sales
$
3,160.5

 
100
%
 
$
2,656.2

 
100
%
 
19
%
 
$
2,284.5

 
100
%
 
16
%
Percentage of sales
70.6
%
 
 
 
70.3
%
 
 
 
+23 basis

 
71.2
%
 
 
 
-85 basis

 
 
 
 
 
 
 
 
 
points

 
 
 
 
 
   points

For 2014, cost of sales increased 19 percent to $3,160.5 million compared to $2,656.2 million in 2013. The increase in cost of sales in 2014 resulted primarily from the effect of a 14 percent increase in sales volume on purchased materials and services and labor and benefits. Additionally, depreciation and amortization increased due to increased capital expenditures to increase production capacity and capabilities.
For 2013, cost of sales increased 16 percent to $2,656.2 million compared to $2,284.5 million in 2012. The increase in cost of sales in 2013 resulted primarily from the effect of a 12 percent increase in sales volume on purchased materials and services and labor and benefits, and also includes an unfavorable resolution regarding a contract dispute resulting in an approximate $10.0 million charge for additional royalties in 2013.
 Gross Profit:
The following table reflects our gross profit in dollars and as a percentage of sales:
 
For the Years Ended December 31,
($ in millions)
2014
 
2013
 
Change
2014 vs. 2013 
 
2012
 
Change
2013 vs. 2012 
Gross profit dollars
$
1,319.2

 
$
1,120.9

 
18
%
 
$
925.3

 
21
%
Percentage of sales
29.4
%
 
29.7
%
 
-23 basis points

 
28.8
%
 
+85 basis points

Gross profit, as a percentage of sales, was 29.4 percent for 2014, a decrease of 23 basis points from 2013. Gross profit dollars increased 18 percent to $1,319.2 million in 2014 compared to 2013. The increase in gross profit dollars resulted from higher selling prices, mix and product cost reduction efforts partially offset by the negative impact of currency movements. The decrease in gross profit percentage resulted primarily from unfavorable foreign currency fluctuations, new plant start-up costs and higher depreciation and amortization, partially offset by product cost reduction and higher selling prices.
Gross profit, as a percentage of sales, was 29.7 percent for 2013, an increase of 85 basis points from 2012. Gross profit dollars increased 21 percent to $1,120.9 million in 2013 compared to 2012. The increases in gross profit dollars and the increase in gross profit margin percentage resulted primarily from continued product cost reduction, production efficiencies on increased volumes and higher selling prices, partially offset by unfavorable foreign currency fluctuations, higher promotional costs and royalty expenses as a result of a contract dispute resolution.

28


Operating Expenses:
The following table reflects our operating expenses in dollars and as a percentage of sales:  
 
For the Years Ended December 31,
($ in millions) 
2014
 
2013
 
Change
2014 vs. 2013
 
2012
 
Change
2013 vs. 2012
Selling and marketing
$
314.5

 
$
270.3

 
16
%
 
$
210.4

 
28
%
Research and development
148.5

 
139.2

 
7
%
 
127.3

 
9
%
General and administrative
203.2

 
179.4

 
13
%
 
143.1

 
25
%
Total operating expenses
$
666.2

 
$
588.9

 
13
%
 
$
480.8

 
22
%
Percentage of sales
14.9
%
 
15.6
%
 
-72 basis points

 
15.0
%
 
+61 basis points

Operating expenses for 2014 increased 13 percent to $666.2 million, compared to $588.9 million in 2013. Operating expenses as a percentage of sales decreased 72 basis points in 2014 to 14.9 percent compared to 15.6 percent in 2013. Operating expenses in absolute dollars increased in 2014 primarily due to higher selling, marketing and advertising expenses related to the launch of new model year 2015 products, including Slingshot, and the continued roll-out of Indian motorcycles, as well as increased general and administrative expenses, which includes infrastructure investments being made to support global growth initiatives. Operating expenses as a percent of sales declined primarily due to lower long-term incentive compensation expenses, partially offset by higher marketing and advertising expenses related to the launch of various new model year 2015 products.
Operating expenses for 2013 increased 22 percent to $588.9 million, compared to $480.8 million in 2012. Operating expenses as a percentage of sales increased 61 basis points in 2013 to 15.6 percent compared to 15.0 percent in 2012. Operating expenses in absolute dollars and as a percentage of sales increased in 2013 primarily due to higher selling, marketing and advertising expenses related, in part, to the re-launch of Indian Motorcycle, increased general and administrative expenses, which includes infrastructure investments being made to support global growth initiatives and higher accrued incentive compensation due to a higher stock price. Operating expenses in absolute dollars also increased due to the inclusion of Klim and Aixam operating expenses in our consolidated financial statements since these companies were acquired in December 2012 and April 2013, respectively.
Income from Financial Services:
The following table reflects our income from financial services:
 
For the Years Ended December 31,
($ in millions)
2014
 
2013
 
Change
2014 vs. 2013
 
2012
 
Change
2013 vs. 2012
Income from Polaris Acceptance joint venture
$
30.5

 
$
20.2

 
51
%
 
$
15.7

 
29
%
Income from retail credit agreements
27.6

 
22.5

 
23
%
 
15.3

 
47
%
Income from other financial services activities
3.6

 
3.2

 
13
%
 
2.9

 
10
%
Total income from financial services
$
61.7

 
$
45.9

 
34
%
 
$
33.9

 
35
%
Percentage of sales
1.4
%
 
1.2
%
 
+16 basis points

 
1.1
%
 
+16 basis points

Income from financial services increased 34 percent to $61.7 million in 2014 compared to $45.9 million in 2013. The increase in 2014 is primarily due to a 16 percent increase in retail credit contract volume and increased profitability generated from the retail credit portfolios with Sheffield, Synchrony Bank, Capital One and FreedomRoad, and higher income from dealer inventory financing through Polaris Acceptance, due to increased profitability and a 23 percent increase in financed receivables as of December 31, 2014.
Income from financial services increased 35 percent to $45.9 million in 2013 compared to $33.9 million in 2012. The increase in 2013 is primarily due to a nine percent increase in retail credit contract volume and increased profitability generated from the retail credit portfolios with Sheffield, GE and Capital One, and higher income from dealer inventory financing through Polaris Acceptance.

29


Remainder of the Income Statement:
 
For the Years Ended December 31,
($ in millions except per share data)
2014
 
2013
 
Change
2014 vs. 2013
 
2012
 
Change
2013 vs. 2012
Interest expense
$
11.2

 
$
6.2

 
81
 %
 
$
5.9

 
5
 %
Equity in loss of other affiliates
$
4.1

 
$
2.4

 
71
 %
 
$
0.2

 
NM

Other expense (income), net
$
0.0

 
$
(5.1
)
 
NM

 
$
(7.5
)
 
(32
)%
 
 
 
 
 
 
 
 
 
 
Income before income taxes
$
699.3

 
$
574.4

 
22
 %
 
$
479.8

 
20
 %
Provision for income taxes
$
245.3

 
$
193.4

 
27
 %
 
$
167.5

 
15
 %
Percentage of income before income taxes
35.1%
 
33.7%
 
+141 basis points

 
34.9%
 
-125 basis points

 
 
 
 
 
 
 
 
 
 
Net income from continuing operations
$
454.0

 
$
381.1

 
19
 %
 
$
312.3

 
22
 %
Net income
$
454.0

 
$
377.3

 
20
 %
 
$
312.3

 
21
 %
Diluted net income per share:
 
 
 
 
 
 
 
 
 
Continuing operations
$
6.65

 
$
5.40

 
23
 %
 
$
4.40

 
23
 %
Diluted net income
$
6.65

 
$
5.35

 
24
 %
 
$
4.40

 
22
 %
Weighted average diluted shares outstanding
68.2

 
70.5

 
(3
)%
 
71.0

 
(1
)%
NM = not meaningful
 
 
 
 
 
 
 
 
 
Interest Expense. The increase in 2014 compared to 2013 is primarily due to increased debt levels through borrowings on our existing revolving credit facility and the additional borrowing of $100.0 million through our amended Master Note Purchase Agreement in December 2013. The increase in 2013 compared to 2012, is primarily related to the increased debt levels through borrowings in the 2013 fourth quarter on our existing revolving credit facility and additional borrowings of $100.0 million through our amended Master Note Purchases Agreement in November 2013 used to partially fund the $497.5 million buyback of outstanding Polaris shares held by Fuji.
Equity in loss of other affiliates. Increased losses at Eicher-Polaris Private Limited (EPPL) were the result of an increase in the joint venture's pre-production activities. We record our proportionate 50 percent share of EPPL gains and losses.
Other expense (income),net. The change primarily relates to foreign currency exchange rate movements and the corresponding effects on foreign currency transactions and balance sheet positions related to our foreign subsidiaries from period to period.
Provision for income taxes. The higher income tax rate for 2014 was primarily due to lower income generated from our international operations which generally have lower income tax rates. For 2014 and 2013, the income tax provision was positively impacted by the United States Congress extending the research and development income tax credit. However, in 2013 the research and development credit extension was retroactive to 2012, resulting in two years of benefit in 2013. In addition, we also had a favorable impact in 2013 from the release of certain income tax reserves due to favorable conclusions of federal income tax audits. The favorable impact from these items totaled $8.2 million and was recorded as a reduction to income tax expense in the first quarter of 2013.

30


Net income. The 2013 loss from discontinued operations is a result of a 2013 unfavorable jury verdict in a previously disclosed lawsuit involving a collision between a 2001 Polaris Virage personal watercraft and a boat. The jury awarded approximately $21.0 million in damages of which our liability was $10.0 million. We reported a loss from discontinued operations, net of tax, of $3.8 million in 2013 for an additional provision for our portion of the jury award and legal fees. The liability was fully paid by the end of 2013. There was no income or loss from discontinued operations in 2014 or 2012. In September 2004, we announced our decision to cease manufacturing marine products. Since then, any material financial results of that division have been recorded in discontinued operations. No additional charges are expected from this lawsuit.
Weighted average shares outstanding. The decrease in the weighted average diluted shares outstanding is primarily due to the Company's November 2013 purchase of 3.96 million shares of Polaris stock previously held by FHI Heavy Industries Ltd ("Fuji") under a Share Repurchase Agreement with Fuji. This buyback more than offset the issuance of shares under employee compensation plans and resulted in a decrease to the 2014, and to a lesser extent due to the timing of the transaction, the 2013 weighted average diluted shares outstanding.

Critical Accounting Policies
The significant accounting policies that management believes are the most critical to aid in fully understanding and evaluating our reported financial results include the following: revenue recognition, sales promotions and incentives, dealer holdback programs, share-based employee compensation, product warranties and product liability.
Revenue recognition. Revenues are recognized at the time of shipment to the dealer, distributor or other customers. Historically, product returns, whether in the normal course of business or resulting from repurchases made under the floorplan financing program, have not been material. However, we have agreed to repurchase products repossessed by the finance companies up to certain limits. Our financial exposure is limited to the difference between the amount paid to the finance companies and the amount received on the resale of the repossessed product. No material losses have been incurred under these agreements. We have not historically recorded any significant sales return allowances because we have not been required to repurchase a significant number of units. However, an adverse change in retail sales could cause this situation to change. Polaris sponsors certain sales incentive programs and accrues liabilities for estimated sales promotion expenses and estimated holdback amounts that are recognized as reductions to sales when products are sold to the dealer or distributor customer.
Sales promotions and incentives. We provide for estimated sales promotion and incentive expenses, which are recognized as a reduction to sales at the time of sale to the dealer or distributor. Examples of sales promotion and incentive programs include dealer and consumer rebates, volume incentives, retail financing programs and sales associate incentives. Sales promotion and incentive expenses are estimated based on current programs and historical rates for each product line. We record these amounts as a liability in the consolidated balance sheet until they are ultimately paid. At December 31, 2014 and 2013, accrued sales promotions and incentives were $138.6 million and $123.1 million, respectively, resulting primarily from an increase in the volume of units sold and an increase in the level of dealer inventories in 2014. Actual results may differ from these estimates if market conditions dictate the need to enhance or reduce sales promotion and incentive programs or if the customer usage rate varies from historical trends. Adjustments to sales promotions and incentives accruals are made from time to time as actual usage becomes known in order to properly estimate the amounts necessary to generate consumer demand based on market conditions as of the balance sheet date. Historically, actual sales promotion and incentive expenses have been within our expectations and differences have not been material.
 Dealer holdback programs. Dealer holdback represents a portion of the invoiced sales price that is expected to be subsequently returned to the dealer or distributor as a sales incentive upon the ultimate retail sale of the product. Holdback amounts reduce the ultimate net price of the products purchased by our dealers or distributors and, therefore, reduce the amount of sales we recognize at the time of shipment. The portion of the invoiced sales price estimated as the holdback is recognized as “dealer holdback” liability on our balance sheet until paid or forfeited. The minimal holdback adjustments in the estimated holdback liability due to forfeitures are recognized in net sales. Payments are made to dealers or distributors at various times during the year subject to previously established criteria. Polaris recorded accrued liabilities of $120.1 million and $100.6 million for dealer holdback programs in the consolidated balance sheets as of December 31, 2014 and 2013, respectively.
Share-based employee compensation. We recognize in the financial statements the grant-date fair value of stock options and other equity-based compensation issued to employees. Determining the appropriate fair-value model and calculating

31


the fair value of share-based awards at the date of grant requires judgment. The Company utilizes the Black-Scholes option pricing model to estimate the fair value of employee stock options. Option pricing models, including the Black-Scholes model, also require the use of input assumptions, including expected volatility, expected life, expected dividend rate, and expected risk-free rate of return. The Company utilizes historical volatility as it believes this is reflective of market conditions. The expected life of the awards is based on historical exercise patterns. The risk-free interest rate assumption is based on observed interest rates appropriate for the terms of awards. The dividend yield assumption is based on our history of dividend payouts. We develop an estimate of the number of share-based awards that will be forfeited due to employee turnover. Changes in the estimated forfeiture rate can have a significant effect on reported share-based compensation, as the effect of adjusting the rate for all expense amortization is recognized in the period the forfeiture estimate is changed. If the actual forfeiture rate is higher or lower than the estimated forfeiture rate, then an adjustment is made to increase or decrease the estimated forfeiture rate, which will result in a decrease or increase to the expense recognized in the financial statements. If forfeiture adjustments are made, they would affect our gross margin and operating expenses. We estimate the likelihood and the rate of achievement for performance share-based awards, specifically long-term compensation grants of performance-based restricted stock awards. Changes in the estimated rate of achievement can have a significant effect on reported share-based compensation expenses as the effect of a change in the estimated achievement level is recognized in the period that the likelihood factor changes. If adjustments in the estimated rate of achievement are made, they would be reflected in our gross margin and operating expenses. At the end of 2014, if all long-term incentive program performance based awards were expected to achieve the maximum payout, we would have recorded an additional $7.5 million of expense in 2014. Fluctuations in our stock price can have a significant effect on reported share-based compensation expenses for liability-based awards. The impact from fluctuations in our stock price is recognized in the period of the change, and is reflected in our gross margin and operating expenses. At December 31, 2014, the accrual for liability-based awards outstanding was $15.2 million, and is included in accrued compensation in the consolidated balance sheets.
Product warranties. We provide a limited warranty for ORVs for a period of six months, for a period of one year for our snowmobiles, for a period of one or two years for our motorcycles depending on brand and model year, and two years for SVs. We provide longer warranties in certain geographical markets as determined by local regulations and market conditions and may provide longer warranties related to certain promotional programs. Our standard warranties require us or our dealers to repair or replace defective products during such warranty periods at no cost to the consumers. 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. We record these amounts as a liability in the consolidated balance sheet until they are ultimately paid. At December 31, 2014 and 2013, the accrued warranty liability was $53.1 million and $52.8 million, respectively. Adjustments to the warranty reserve are made from time to time 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. While management believes that the warranty reserve is adequate and that the judgment applied is appropriate, such amounts estimated to be due and payable could differ materially from what will ultimately transpire in the future.
Product liability. We are subject to product liability claims in the normal course of business. In late 2012, we purchased excess insurance coverage for catastrophic product liability claims for incidents occurring after the policy date. We self-insure product liability claims up to the purchased catastrophic insurance coverage. The estimated costs resulting from any uninsured losses are charged to operating expenses when it is probable a loss has been incurred and the amount of the loss is reasonably determinable. We utilize historical trends and actuarial analysis tools, along with an analysis of current claims, to assist in determining the appropriate loss reserve levels. At December 31, 2014 and 2013, we had accruals of $17.3 million and $17.1 million, respectively, for the probable payment of pending claims related to continuing operations product liability litigation associated with our products. These accruals are included in other accrued expenses in the consolidated balance sheets. While management believes the product liability reserves are adequate, adverse determination of material product liability claims made against us could have a material adverse effect on our financial condition.

New Accounting Pronouncements
See Item 8 of Part II, “Financial Statements and Supplementary Data—Note 1—Organization and Significant Accounting Policies—New Accounting Pronouncements.”


32


Liquidity and Capital Resources
Our primary source of funds has been cash provided by operating activities. Our primary uses of funds have been for acquisitions, repurchase and retirement of common stock, capital investment, new product development and cash dividends to shareholders.
The following table summarizes the cash flows from operating, investing and financing activities for the years ended December 31, 2014 and 2013:
($ in millions)
For the Years Ended December 31,
2014
 
2013
 
Change
Total cash provided by (used for):
 
 
 
 
 
Operating activities
$
529.3

 
$
492.2

 
$
37.1

Investing activities
(246.8
)
 
(406.7
)
 
159.9

Financing activities
(222.6
)
 
(409.0
)
 
186.4

Impact of currency exchange rates on cash balances
(14.5
)
 
(1.3
)
 
(13.2
)
Increase (decrease) in cash and cash equivalents
$
45.4

 
$
(324.8
)
 
$
370.2

Operating Activities:
Net cash provided by operating activities totaled $529.3 million and $492.2 million in 2014 and 2013, respectively. The $37.1 million increase in net cash provided by operating activities in 2014 is primarily the result of higher net income compared to 2013, which includes a $35.4 million increase in depreciation and amortization, partially offset by a $44.5 million increase in deferred income taxes and a $15.8 million increase in net working capital. Changes in working capital (as reflected in our statements of cash flows) for the year ended 2014 was an increase of $15.6 million, compared to an increase of $0.2 million in 2013. This was primarily due to an increase in net cash used of $106.4 million related to higher inventory required to support the growth in the business, offset by an increase in net cash provided related to timing of payments made for accounts payable of $54.3 million and the timing of collections of trade receivables of $29.9 million.
Investing Activities:
Net cash used for investing activities was $246.8 million in 2014 compared to $406.7 million in 2013. The primary uses of cash in 2014 were the acquisitions of Kolpin and Pro Armor and capital expenditures for the purchase of property and equipment. In 2014, we made large capital expenditures related to the expansion of many of our North America locations, including our manufacturing facilities in Spirit Lake, Iowa; Milford, Iowa; Roseau, Minnesota; and Monterrey, Mexico, as well as the construction of our new manufacturing facility in Opole, Poland. We expect that capital expenditures for 2015 will be in excess of $250 million.
Financing Activities:
Net cash used for financing activities was $222.6 million in 2014 compared to $409.0 million in 2013. We paid cash dividends of $126.9 million and $113.7 million in 2014 and 2013, respectively. Total common stock repurchased in 2014 and 2013 totaled $81.8 million and $530.0 million, respectively. In November 2013, Polaris repurchased the 3.96 million Polaris shares held by Fuji for $497.5 million. The repurchase of the Polaris shares held by Fuji was partially funded through additional debt borrowings. In 2014, we had net repayments under our capital lease arrangements and debt arrangements of $82.1 million, compared to net borrowings of $179.2 million in 2013. Proceeds from the issuance of stock under employee plans were $31.3 million and $26.9 million in 2014 and 2013, respectively.
The seasonality of production and shipments cause working capital requirements to fluctuate during the year. We are party to an unsecured $350 million variable interest rate bank lending agreement that expires in January 2018. Interest is charged at rates based on LIBOR or "prime." At December 31, 2014, there were no borrowings under this arrangement.
In December 2010, we entered into a Master Note Purchase Agreement to issue $25.0 million of 3.81 percent unsecured Senior Notes due May 2018 and $75.0 million of 4.60 percent unsecured Senior Notes due May 2021 (collectively, the "Senior Notes"). The Senior Notes were issued in May 2011. In December 2013, the Company entered into a First Supplement to Master Note Purchase Agreement, under which the Company issued $100.0 million of 3.13 percent

33


unsecured senior notes due December 2020. At December 31, 2014 and 2013, outstanding borrowings under the amended Master Note Purchase Agreement totaled $200.0 million for both periods.
At December 31, 2014 and 2013, we were in compliance with all debt covenants. Our debt to total capital ratio was 21 percent and 35 percent at December 31, 2014 and 2013, respectively.
The following table summarizes our significant future contractual obligations at December 31, 2014:
(In millions): 
Total 
 
<1 Year
 
1-3 Years
 
3-5 Years
 
>5 Years
Senior notes
$
200.0

 

 

 
$
25.0

 
$
175.0

Interest expense
44.4

 
$
7.6

 
$
15.1

 
13.6

 
8.1

Capital leases
38.3

 
3.9

 
6.2

 
4.6

 
23.6

Operating leases
22.5

 
9.6

 
8.4

 
3.1

 
1.4

Total
$
305.2

 
$
21.1

 
$
29.7

 
$
46.3

 
$
208.1

In the table above, we assumed our December 31, 2014, outstanding borrowings under the Senior Notes will be paid at their respective due dates. Additionally, at December 31, 2014, we had letters of credit outstanding of $24.9 million related to purchase obligations for raw materials. Not included in the above table is unrecognized tax benefits of $10.6 million and the estimated future payments of contingent purchase price related to acquisitions which have a fair value of $27.9 million at December 31, 2014, and are expected to be paid at various times in 2015 through 2017.
Our Board of Directors has authorized the cumulative repurchase of up to 75.0 million shares of our common stock through an authorized stock repurchase program. Of that total, approximately 73.9 million shares have been repurchased cumulatively from 1996 through December 31, 2014. In addition to this stock repurchase authorization, in 2013 the Polaris Board of Directors authorized the one-time repurchase of all the shares of Polaris stock owned by Fuji. On November 12, 2013, Polaris entered into and executed a Share Repurchase Agreement with Fuji pursuant to which Polaris purchased 3.96 million shares of Polaris stock held by Fuji. We repurchased a total of 0.6 million shares of our common stock for $81.8 million during 2014, which increased earnings per share by one cent. We have authorization from our Board of Directors to repurchase up to an additional 1.1 million shares of our common stock as of December 31, 2014. On January 29, 2015, the Board of Directors approved an increase in the Company’s common stock repurchase authorization by an additional 4.0 million shares. The repurchase of any or all such shares authorized remaining for repurchase will be governed by applicable SEC rules.
We have arrangements with certain finance companies (including Polaris Acceptance) to provide secured floor plan financing for our dealers. These arrangements provide liquidity by financing dealer purchases of our products without the use of our working capital. A majority of the worldwide sales of snowmobiles, ORVs, motorcycles and related PG&A are financed under similar arrangements whereby we receive payment within a few days of shipment of the product. The amount financed by worldwide dealers under these arrangements at December 31, 2014 and 2013, was approximately $1,337.2 million and $1,163.5 million, respectively. We participate in the cost of dealer financing up to certain limits. We have agreed to repurchase products repossessed by the finance companies up to an annual maximum of no more than 15 percent of the average month-end balances outstanding during the prior calendar year. Our financial exposure under these agreements is limited to the difference between the amounts unpaid by the dealer with respect to the repossessed product plus costs of repossession and the amount received on the resale of the repossessed product. No material losses have been incurred under these agreements. However, an adverse change in retail sales could cause this situation to change and thereby require us to repurchase repossessed units subject to the annual limitation referred to above.
In 1996, a wholly owned subsidiary of Polaris entered into a partnership agreement with an entity that is now a subsidiary of GE Commercial Distribution Finance Corporation (GECDF) to form Polaris Acceptance. Polaris Acceptance provides floor plan financing to our dealers in the United States. Our subsidiary has a 50 percent equity interest in Polaris Acceptance. In November 2006, Polaris Acceptance sold a majority of its receivable portfolio (the “Securitized Receivables”) to a securitization facility (“Securitization Facility”) arranged by General Electric Capital Corporation, a GECDF affiliate, 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. The sale of receivables from Polaris Acceptance to the Securitization Facility is accounted for in Polaris Acceptance’s financial statements as a “true-sale” under ASC Topic 860. Polaris Acceptance is not responsible for any continuing servicing costs or obligations with respect to the Securitized Receivables. The remaining portion of the receivable portfolio is recorded on Polaris Acceptance’s books, and is funded through a loan from an affiliate of GECDF and through equity contributions from both partners.

34


We have not guaranteed the outstanding indebtedness of Polaris Acceptance. In addition, the two partners of Polaris Acceptance share equally a variable equity cash investment based on the sum of the portfolio balance in Polaris Acceptance. Our total investment in Polaris Acceptance at December 31, 2014 was $89.1 million. Substantially all of our U.S. sales are financed through Polaris Acceptance whereby Polaris receives payment within a few days of shipment of the product. The partnership agreement provides that all income and losses of Polaris Acceptance are shared 50 percent by our wholly owned subsidiary and 50 percent by GECDF’s subsidiary. Our exposure to losses associated with respect to the Polaris Acceptance is limited to our equity in Polaris Acceptance. We have agreed to repurchase products repossessed by Polaris Acceptance up to an annual maximum of 15 percent of the aggregate average month-end balances outstanding during the prior calendar year with respect to receivables retained by Polaris Acceptance and the Securitized Receivables. For calendar year 2015, the potential 15 percent aggregate repurchase obligation is approximately $146.4 million. Our financial exposure under this arrangement is limited to the difference between the amount paid to the finance company for repurchases and the amount received on the resale of the repossessed product. No material losses have been incurred under this agreement. During 2011, Polaris and GECDF amended the Polaris Acceptance partnership agreement to extend it through February 2017 with similar terms to the previous agreement.
Our investment in Polaris Acceptance is accounted for under the equity method and is recorded as investment in finance affiliate in the accompanying consolidated balance sheets. Our allocable share of the income of Polaris Acceptance has been included as a component of income from financial services in the accompanying consolidated statements of income. At December 31, 2014, Polaris Acceptance’s wholesale portfolio receivables from dealers in the United States (including the Securitized Receivables) was $1,141.1 million, a 23 percent increase from $928.5 million at December 31, 2013. Credit losses in the Polaris Acceptance portfolio have been modest, averaging less than one percent of the portfolio.
We have agreements with Capital One, Sheffield, FreedomRoad, Synchrony Bank, and Chrome under which these financial institutions provide financing to end consumers of our products. The agreements expire in October 2015, February 2016, February 2016, April 2016, and January 2018, respectively. The income generated from these agreements has been included as a component of income from financial services in the accompanying consolidated statements of income.
During 2014, consumers financed 32 percent of our vehicles sold in the United States through the combined Capital One revolving retail credit and Sheffield, Synchrony Bank and FreedomRoad installment retail credit arrangement. The volume of revolving and installment credit contracts written in calendar year 2014 was $903.7 million, a 16 percent increase from 2013.
We administer and provide extended service contracts to consumers and certain insurance contracts to dealers and consumers through various third-party suppliers. We do not retain any warranty, insurance or financial risk under any of these arrangements. The service fee income generated from these arrangements has been included as a component of income from financial services in the accompanying consolidated statements of income.
We believe that existing cash balances, cash flow to be generated from operating activities and available borrowing capacity under the line of credit arrangement will be sufficient to fund operations, new product development, cash dividends, share repurchases, acquisitions and capital requirements for the foreseeable future. At this time, we are not aware of any factors that would have a material adverse impact on cash flow.

35



Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Inflation, Foreign Exchange Rates, Equity Prices and Interest Rates
The changing relationships of the U.S. dollar to the Japanese yen, the Mexican Peso, the Canadian dollar, the Australian dollar, the Euro, the Swiss Franc and other foreign currencies have had a material impact from time to time. We actively manage our exposure to fluctuating foreign currency exchange rates by entering into foreign exchange hedging contracts.
Japanese Yen: During 2014, purchases totaling approximately two percent of our cost of sales were from yen-denominated suppliers. Fluctuations in the yen to U.S. dollar exchange rate primarily impacts cost of sales and net income.
Mexican Peso: With increased production at our Monterrey, Mexico facility, our costs in the Mexican peso have continued to increase. We also market and sell to customers in Mexico through a wholly owned subsidiary. Fluctuations in the peso to U.S. dollar exchange rate primarily impacts sales, cost of sales, and net income.
Canadian Dollar: We operate in Canada through a wholly owned subsidiary. The relationship of the U.S. dollar in relation to the Canadian dollar impacts both sales and net income.
Other currencies: We operate in various countries, principally in Europe and Australia, through wholly owned subsidiaries and also sell to certain distributors in other countries. We also purchase components from certain suppliers directly for our U.S. operations in transactions denominated in Euros and other foreign currencies. The relationship of the U.S. dollar in relation to these other currencies impacts each of sales, cost of sales and net income.
At December 31, 2014, we had the following open foreign currency hedging contracts for 2015, and expect the following currency impact on gross profit when compared to the respective prior year periods:
Foreign Currency 
 
 
 
Foreign currency hedging contracts
 
Currency impact compared to the prior year period
 
Currency Position
 
Notional amounts (in thousands of U.S. dollars)
 
Average exchange rate of open contracts 
 
2014
 
2015
Australian Dollar
 
Long
 
$
3,491

 
$0.91 to 1 AUD
 
Negative
 
Negative
Canadian Dollar (CAD)
 
Long
 
40,550

 
$0.85 to 1 CAD
 
Negative
 
Negative
Euro
 
Long
 

 
 
Negative
 
Negative
Japanese Yen
 
Short
 
22,201

 
109.37 Yen to $1
 
Positive
 
Positive
Mexican Peso
 
Short
 
34,060

 
14.01 Peso to $1
 
Slightly positive
 
Positive
Norwegian Kroner
 
Long
 

 
 
Negative
 
Negative
Swedish Krona
 
Long
 

 
 
Negative
 
Negative
Swiss Franc
 
Short
 

 
 
Negative
 
Positive
The assets and liabilities in all our foreign entities are translated at the foreign exchange rate in effect at the balance sheet date. Translation gains and losses are reflected as a component of accumulated other comprehensive income (loss), net in the shareholders’ equity section of the accompanying consolidated balance sheets. Revenues and expenses in all of our foreign entities are translated at the average foreign exchange rate in effect for each month of the quarter. Certain assets and liabilities related to intercompany positions reported on our consolidated balance sheet that are denominated in a currency other than the entity’s functional currency are translated at the foreign exchange rates at the balance sheet date and the associated gains and losses are included in net income.
We are subject to market risk from fluctuating market prices of certain purchased commodities and raw materials including steel, aluminum, petroleum-based resins, certain rare earth metals and diesel fuel. In addition, we are a purchaser of components and parts containing various commodities, including steel, aluminum, rubber and others, which are integrated into the Company’s end products. While such materials are typically available from numerous suppliers, commodity raw materials are subject to price fluctuations. We generally buy these commodities and components based upon market prices that are established with the vendor as part of the purchase process and from time to time will enter into derivative contracts to hedge a portion of the exposure to commodity risk. At December 31, 2014, derivative contracts were in place to hedge approximately 50% of our diesel fuel exposures for 2015. These contracts did not meet the criteria for hedge accounting and the resulting unrealized loss as of December 31, 2014 was $4.8 million pretax,

36


which was included in the consolidated statements of income as a component of cost of sales. Based on our current outlook for commodity prices, the total impact of commodities is expected to have a positive impact on our gross margins for 2015 when compared to 2014.
We are a party to a credit agreement with various lenders consisting of a $350 million revolving loan facility. Interest accrues on the revolving loan at variable rates based on LIBOR or “prime” plus the applicable add-on percentage as defined. At December 31, 2014, there was no outstanding balance on the revolving loan. Assuming no additional borrowings or payments on the debt, a one-percent fluctuation in interest rates would have a $1.6 million impact to interest expense in 2014.

37



INDEX TO FINANCIAL STATEMENTS
 
 

38



Item 8. Financial Statements and Supplementary Data

Management’s Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining an adequate system of internal control over financial reporting of the Company. This system is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with United States generally accepted accounting principles.
Our internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management conducted an evaluation of the effectiveness of the system of internal control over financial reporting as of December 31, 2014. In making this evaluation, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—2013 Integrated Framework. Based on management’s evaluation and those criteria, management concluded that the Company’s system of internal control over financial reporting was effective as of December 31, 2014.
Management’s internal control over financial reporting as of December 31, 2014 has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in their report appearing on the following page, in which they expressed an unqualified opinion.
 
 
/S/ SCOTT W. WINE
 
Scott W. Wine
Chairman and Chief Executive Officer
 
/S/ MICHAEL W. MALONE
 
Michael W. Malone
Vice President—Finance and
Chief Financial Officer
February 20, 2015
Further discussion of our internal controls and procedures is included in Item 9A of this report, under the caption “Controls and Procedures.”

39



 
Report Of Independent Registered Public Accounting Firm
on Internal Control over Financial Reporting

The Board of Directors and Shareholders of
Polaris Industries Inc.
We have audited Polaris Industries Inc.’s (the Company) internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). Polaris Industries Inc.’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Polaris Industries Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2014, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Polaris Industries Inc. as of December 31, 2014 and 2013, and the related consolidated statements of income, comprehensive income, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2014 of Polaris Industries Inc., and our report, dated February 20, 2015, expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
February 20, 2015

40




Report of Independent Registered Public Accounting Firm
on Consolidated Financial Statements

The Board of Directors and Shareholders of
Polaris Industries Inc.
We have audited the accompanying consolidated balance sheets of Polaris Industries Inc. (the Company) as of December 31, 2014 and 2013, and the related consolidated statements of income, comprehensive income, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2014. Our audits also included the financial statement schedule listed in the Index at Item 15. These financial statements and the schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Polaris Industries Inc. at December 31, 2014 and 2013, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2014, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Polaris Industries Inc.’s internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control-Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission 2013 framework and our report, dated February 20, 2015, expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
February 20, 2015


 


41


POLARIS INDUSTRIES INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
Assets
December 31, 2014
 
December 31, 2013
Current Assets:
 
 
 
Cash and cash equivalents
$
137,600

 
$
92,248

Trade receivables, net
204,876

 
186,213

Inventories, net
565,685

 
417,948

Prepaid expenses and other
71,526

 
63,716

Income taxes receivable
2,691

 
12,217

Deferred tax assets
114,177

 
93,356

Total current assets
1,096,555

 
865,698

Property and equipment:
 
 
 
Land, buildings and improvements
272,802

 
228,916

Equipment and tooling
826,997

 
701,101

 
1,099,799

 
930,017

Less: accumulated depreciation
(544,371
)
 
(474,850
)
Property and equipment, net
555,428

 
455,167

Investment in finance affiliate
89,107

 
69,217

Deferred tax assets
41,201

 
18,616

Goodwill and other intangible assets, net
223,966

 
229,708

Other long-term assets
68,678

 
47,082

Total assets
$
2,074,935

 
$
1,685,488

Liabilities and Shareholders' Equity
 
 
 
Current liabilities:
 
 
 
Current portion of capital lease obligations
$
2,528

 
$
3,281

Accounts payable
343,470

 
238,044

Accrued expenses:
 
 
 
Compensation
102,379

 
143,504

Warranties
53,104

 
52,818

Sales promotions and incentives
138,630

 
123,089

Dealer holdback
120,093

 
100,600

Other
79,262

 
77,480

Income taxes payable
11,344

 
9,254

Total current liabilities
850,810

 
748,070

Long-term income taxes payable
10,568

 
14,292

Capital lease obligations
23,620

 
3,842

Long-term debt
200,000

 
280,500

Deferred tax liabilities
18,191

 
25,028

Other long-term liabilities
96,951

 
69,730

Total liabilities
$
1,200,140

 
$
1,141,462

Deferred compensation
13,528

 
8,421

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

 

Common stock $0.01 par value, 160,000 shares authorized, 66,307 and 65,623 shares issued and outstanding, respectively
$
663

 
$
656

Additional paid-in capital
486,005

 
360,616

Retained earnings
401,840

 
155,572

Accumulated other comprehensive income (loss), net
(27,241
)
 
18,761

Total shareholders’ equity
861,267

 
535,605

Total liabilities and shareholders’ equity
$
2,074,935

 
$
1,685,488


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

42


POLARIS INDUSTRIES INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
 
For the Years Ended December 31,
 
2014
 
2013
 
2012
Sales
$
4,479,648

 
$
3,777,068

 
$
3,209,782

Cost of sales
3,160,470

 
2,656,189

 
2,284,485

Gross profit
1,319,178

 
1,120,879

 
925,297

Operating expenses:
 
 
 
 
 
Selling and marketing
314,449

 
270,266

 
210,367

Research and development
148,458

 
139,193

 
127,361

General and administrative
203,248

 
179,407

 
143,064

Total operating expenses
666,155

 
588,866

 
480,792

Income from financial services
61,667

 
45,901

 
33,920

Operating income
714,690

 
577,914

 
478,425

Non-operating expense (income):
 
 
 
 
 
Interest expense
11,239

 
6,210

 
5,932

Equity in loss of other affiliates
4,124

 
2,414

 
179

Other expense (income), net
10

 
(5,139
)
 
(7,529
)
Income before income taxes
699,317

 
574,429

 
479,843

Provision for income taxes
245,288

 
193,360

 
167,533

Net income from continuing operations
454,029

 
381,069

 
312,310

Loss from discontinued operations, net of tax

 
(3,777
)
 

Net income
$
454,029

 
$
377,292

 
$
312,310

Basic net income per share:
 
 
 
 
 
Continuing operations
$
6.86

 
$
5.56

 
$
4.54

Loss from discontinued operations

 
(0.05
)
 

Basic net income per share
$
6.86

 
$
5.51

 
$
4.54

Diluted net income per share:
 
 
 
 
 
Continuing operations
$
6.65

 
$
5.40

 
$
4.40

Loss from discontinued operations

 
(0.05
)
 

Diluted net income per share
$
6.65

 
$
5.35

 
$
4.40

Weighted average shares outstanding:
 
 
 
 
 
Basic
66,175

 
68,535

 
68,849

Diluted
68,229

 
70,546

 
71,005


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

43


POLARIS INDUSTRIES INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
 
 
For the Years Ended December 31,
 
2014
 
2013
 
2012
Net income
$
454,029

 
$
377,292

 
$
312,310

Other comprehensive income (loss), net of tax:
 
 
 
 
 
Foreign currency translation adjustments, net of tax benefit (expense) of $65, $1,841, and ($182)
(44,371
)
 
4,913

 
4,124

Unrealized gain (loss) on derivative instruments, net of tax benefit (expense) of $970, ($950), and $2,325
(1,631
)
 
1,610

 
(3,909
)
Comprehensive income
$
408,027

 
$
383,815

 
$
312,525

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

44


POLARIS INDUSTRIES INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(In thousands, except per share data)
 

 
Number
of Shares
 
Common
Stock
 
Additional
Paid-
In Capital
 
Retained
Earnings
 
Accumulated Other
Comprehensive
Income (loss)
 
Total
Balance, December 31, 2011
68,430

 
$
684

 
$
165,518

 
$
321,831

 
$
12,023

 
$
500,056

Employee stock compensation
174

 
2

 
35,418

 

 

 
35,420

Proceeds from stock issuances under employee plans
1,692

 
17

 
41,679

 

 

 
41,696

Tax effect of exercise of stock options

 

 
29,892

 

 

 
29,892

Cash dividends declared ($1.48 per share)

 

 

 
(101,534
)
 

 
(101,534
)
Repurchase and retirement of common shares
(1,649
)
 
(17
)
 
(3,992
)
 
(123,516
)
 

 
(127,525
)
Net income

 

 

 
312,310

 

 
312,310

Other comprehensive income

 

 

 

 
215

 
215

Balance, December 31, 2012
68,647