10-K 1 pii-12312016x10xk.htm 10-K Document

 
 
 
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, 2016
 
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 $5,240,113,000 as of June 30, 2016, 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 10, 2017, 62,936,403 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, 2016 (the “2016 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 27, 2017 to be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this report (the “2017 Proxy Statement”), are incorporated by reference into Part III of this Form 10-K.
 



 
  POLARIS INDUSTRIES INC.
2016 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.
Item 16.
 
 

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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 1954. We design, engineer and manufacture powersports vehicles which include, Off-Road Vehicles (ORV), including All-Terrain Vehicles (ATV) and side-by-side vehicles for recreational and utility use, Snowmobiles, Motorcycles and Global Adjacent Markets vehicles, including Work & Transportation and military vehicles. Polaris products, together with related Parts, Garments and Accessories (PG&A), as well as aftermarket accessories and apparel are sold through dealers and distributors principally located in the United States, Canada, Western Europe, Australia and Mexico. Sales of our ORV/Snowmobiles, Motorcycles and Global Adjacent Markets reporting segments accounted for the following approximate percentages of our sales for the years ended December 31:
 
ORV / Snowmobiles
 
Motorcycles
 
Global Adjacent Markets
 
Other
2016
74%
 
16%
 
8%
 
2%
2015
78%
 
15%
 
7%
 
2014
84%
 
9%
 
7%
 
Industry
Off-Road Vehicles. ORVs are four-wheel vehicles designed for off-road use and traversing rough terrain, swamps and marshland. The vehicles can be multi-passenger or single passenger, are used for recreation, in such sports as fishing and hunting and for trail and dune riding, and for utility purposes on farms, ranches, and construction sites. The off-road vehicle industry is comprised of ATVs and side-by-side vehicles. The North American ATV industry decreased mid single-digits percent in 2016. Internationally, ATVs are also sold primarily in Western European countries by similar manufacturers as in North America. We estimate that during 2016 world-wide industry sales decreased low single-digits percent from 2015 levels with approximately 400,000 ATVs sold worldwide. We estimate that worldwide side-by-side vehicle market sales increased high single-digits percent during 2016 over 2015 levels with an estimated 480,000 side-by-side vehicles sold. The side-by-side market has increased consistently over the past several years primarily due to continued innovation by manufacturers. We estimate that total worldwide off-road vehicle industry sales for 2016, which include core ATVs and side-by-side vehicles, increased low single-digits percent from 2015 levels with approximately 880,000 units sold.
Snowmobiles. Snowmobiles have been manufactured under the Polaris name since 1954. We estimate that during the season ended March 31, 2016, world-wide industry sales of snowmobiles decreased low teens percent from the previous season levels with approximately 130,000 units sold worldwide.
Motorcycles. 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 motorcycle market in 1998. We estimate that the combined 900cc and above cruiser and touring market segments (including the moto-roadster Slingshot®) decreased low-single digits percent in 2016 compared to 2015 levels with an estimated 233,000 heavyweight cruiser, touring, and mid-size motorcycles sold in the North American market. We estimate that during 2016, worldwide combined 900cc and above cruiser and touring market segments (including Slingshot) sales increased low single-digits percent from 2015 levels, with an estimated 350,000 units sold worldwide.
Global Adjacent Markets. These vehicles are designed to support people mobility as well as various commercial work applications, and include products in the light-duty hauling, people mover, industrial and urban/suburban commuting sub-sectors of the Work and Transportation industry, as well as tactical defense vehicles. We estimate the worldwide target market for Work and Transportation vehicles at approximately $4.0 billion in 2016, which includes master planned communities and golf courses, light duty hauling, people movers, industrial, urban/suburban commuting and related quadricycles.
Products
Off-Road Vehicles. Our Off-Road Vehicle lineup includes the RZR® sport side-by-side, the RANGER® utility side-by-side, the GENERALcrossover side-by-side, the Sportsman® ATV and the Polaris ACE®. The full line (excluding military vehicles) spans 61 models, and includes two-, four- and six-wheel drive general purpose, commercial,

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recreational and side-by-side models. 2017 model year suggested retail prices range from approximately $2,100 to $27,500 in the United States.
Most of our ORVs feature the 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 gas or diesel engines, with available shaft and concentric chain drive systems. Our lineup continues to expand through the introduction of electric ORVs and gas and diesel commercial focused ORVs. In many of our segments, we offer youth, value, mid-size, trail and high-performance vehicles, which come in both single passenger and multi-passenger seating arrangements. Key 2016 ORV product introductions included the all-new RANGER XP® 1000, RZR XP® Turbo HO with 168 HP and the revolutionary RIDE COMMAND, an integrated in-vehicle rider experience enhancement system, available on the limited edition Velocity Blue RZR XP® 1000 EPS, or as an accessory option.     
We produce or supply a variety of replacement parts and Polaris Engineered Accessories® for our ORVs. ORV accessories include winches, bumper/brushguards, plows, racks, wheels and tires, pull-behinds, cab systems, lighting and audio systems, cargo box accessories, tracks and oil. We also market a full line of recreational apparel for our ORVs, including helmets, jackets, gloves, pants and hats. Aftermarket brands in our off-road category include Kolpin, a lifestyle brand specializing in purpose-built and universal-fit accessories for UTVs and outdoor enthusiasts, and Pro Armor®, a lineup that specializes in accessories for performance side-by-side vehicles and all-terrain vehicles.
Snowmobiles. We produce a full line of snowmobiles consisting of approximately 40 models, ranging from youth models to utility and economy models to performance and competition models. The 2017 model year suggested retail prices range from approximately $3,000 to $15,200 in the United States. Polaris snowmobiles are sold principally in the United States, Canada, Russia and western Europe. We believe our snowmobiles have a long-standing reputation for quality, dependability and performance. In 2014, we introduced the all-new AXYS chassis platform for the flatland rider, and in 2015, we introduced the AXYS chassis platform for the mountain rider. We also produce a snow bike conversion kit, under the Timbersled brand.
We produce or supply a variety of replacement parts and Polaris Engineered Accessories® for our snowmobiles and snow bike conversion kits. Snowmobile accessories include covers, traction products, reverse kits, electric starters, tracks, bags, windshields, oil and lubricants. We also market a full line of recreational apparel for our snowmobiles, including helmets, goggles, jackets, gloves, boots, bibs, pants and hats. Aftermarket brands in our snowmobile category include Klim, which primarily specializes in premium technical riding gear for the snowmobile industry, and 509, which is an aftermarket leader in snowmobile helmets and goggles. 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.
Motorcycles. In 1998, we began manufacturing V-twin cruiser motorcycles under the Victory® brand name. In 2011, we acquired Indian Motorcycle Company, America’s first motorcycle company, and in 2013 we re-launched the Indian Motorcycle® brand. The three-wheel motorcycle, Slingshot, was introduced in 2014. Our 2017 model year line of motorcycles for Victory, Indian and Slingshot consists of approximately 24 models with suggested retail prices ranging from approximately $9,000 to $30,000 in the United States. In January 2017, we announced the wind down of Victory Motorcycles.
We produce or supply a variety of replacement parts and accessories for our motorcycles. 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 motorcycles, including helmets, jackets, leathers and hats. We also market Klim as an aftermarket brand in our motorcycle category. 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.
Global Adjacent Markets - Work and Transportation. Our Work and Transportation brands include GEM, Goupil, Aixam and Taylor-Dunn. Our Global Adjacent Markets vehicles include low emission vehicles, light duty hauling, passenger vehicles and industrial vehicles. Across these brands we offer approximately 60 models with suggested retail prices ranging from approximately $6,000 to $80,000. Work and Transportation also includes all commercial vehicles, BRUTUS® side-by-side vehicles, and all business-to-business (B2B) applications of ORV, Snowmobiles, and Motorcycles outside of our traditional dealer channels.
Global Adjacent Markets - Military/Government. We offer a military version ATV and side-by-side vehicles with features specifically designed for ultra-light tactical military applications. These vehicles provide versatile mobility for

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up to nine passengers, and include DAGOR, Sportsman MV and MRZR®. Our standard line of military and government vehicles consists of seven models at suggested United States retail prices ranging from approximately $11,000 to $163,000.
Significant Acquisition
On October 11, 2016, we entered into a definitive agreement with TAP Automotive Holdings, LLC
(“Transamerican Auto Parts” or “TAP”), to acquire the outstanding equity interests in Transamerican Auto Parts, a privately held, vertically integrated manufacturer, distributor, retailer and installer of off-road Jeep and truck accessories, for an aggregate consideration of $668.8 million, net of cash acquired. The transaction closed on November 10, 2016. We funded the purchase price with borrowings under our existing credit facilities.
TAP is a leading participant in aftermarket parts and accessories for light trucks, Jeeps, sport-utility vehicles and other four-wheel drive vehicles. TAP sells through its retail stores, call center and e-commerce sites, while also supporting numerous independent accessory retailers/installers through their wholesale distribution network.
TAP conducts business through a three-pronged sales, service, and manufacturing paradigm. TAP has 76 brick-and-mortar retail centers, staffed with experienced product and installation specialists. TAP’s omni-channel retail strategy includes a significant e-commerce business including 4WheelParts.com and 4WD.com. The TAP e-commerce network facilitates consumer sales, service and support, including “pick-up-in-store.” TAP’s manufacturing system features a research and production facility that incorporates an in-house conceptualization, design, and development process. Industry-leading brands owned by TAP include Pro Comp, Smittybilt, Rubicon Express, Poison Spyder, Trail Master, LRG and G2 Axle & Gear.
Manufacturing and Distribution Operations
Our products are primarily assembled at our 18 global manufacturing facilities. We are vertically integrated in several key components of our manufacturing process, including plastic injection molding, welding, clutch assembly 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.
During 2016, approximately 80 percent of the total vehicles we produced were powered by engines designed and assembled by us, with the remainder purchased from other suppliers. 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.
Our corporate headquarters facilities are in Medina and Plymouth, Minnesota, and we maintain 25 other sales and administrative facilities across the world. Our products are distributed to our dealers, distributors and customers through a network of 30 distribution centers, including third-party providers.
Production Scheduling
We produce and deliver our products throughout the year based on dealer, distributor and customer orders. Side-by-side 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 process, but on a less frequent ordering cycle. Side-by-side 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 and distributors in the spring. Non-refundable deposits made by consumers to dealers in the spring for pre-ordered snowmobiles assist in production planning.
We utilize our Retail Flow Management (RFM) ordering system for motorcycle and 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. We are implementing the RFM system for our side-by-side vehicles in 2017.
For snowmobiles, we offer a pre-order SnowCheck program for our customers. This program allows our customers to order a true factory-customized snowmobile by selecting various options, including chassis, track, suspension, colors and accessories. Manufacture of snowmobiles commences in late winter of the previous season and continues through late

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autumn or early winter of the current season. We manufacture ORVs, motorcycles and people mobility vehicles year round.
Sales and Marketing
Our powersports products are sold through a network of approximately 1,800 independent dealers in North America, and approximately 1,700 independent international dealers through 29 subsidiaries and approximately 80 distributors in over 100 countries outside of North America. With the exception of France, the United Kingdom, Sweden, Norway, Australia, New Zealand, Germany, Spain, China, India, Mexico and Brazil, sales of our non-Global Adjacent Markets vehicles in Europe and other offshore markets are handled through independent distributors. A majority of our dealers are multi-line dealers and also carry competitor products.
ORV/Snowmobiles. We sell our ORVs directly to a network of over 1,500 dealers. Many of our ORV dealers and distributors are also authorized snowmobile dealers, and are located in the snowbelt regions of the United States and Canada. We sell our snowmobiles to a network of over 700 dealers. Klim, Kolpin, Pro Armor, Timbersled and 509 each have their own dealer/distributor networks.
Motorcycles. Victory and Indian motorcycles and Slingshot are distributed directly through independently owned dealers and distributors, except in Australia where we have four Company-owned retail stores. Victory motorcycles are sold through a network of approximately 400 dealers, while Indian motorcycles are sold through a network of approximately 200 North American dealers. We expect the number of Indian retailing dealerships to continue to increase over the coming years. Slingshot currently has approximately 500 North American dealers retailing as of the end of 2016.
Global Adjacent Markets. Within Global Adjacent Markets, our Work and Transportation vehicles each have their own distribution networks through which their respective vehicles are distributed. GEM has approximately 200 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. Taylor-Dunn has approximately 180 United States dealers and 50 international dealers.
In addition, we sell Polaris vehicles directly to military and government agencies and other national accounts and supply a highly differentiated side-by-side vehicle to Bobcat Company (“Bobcat”), to dealerships in North America. We have a partnership with Ariens Company (“Ariens”), a manufacturer of outdoor power equipment. Through the partnership, we leverage each other’s dealer networks, share certain technologies and research and development, and supply Ariens with a highly differentiated work vehicle to sell through its dealer network.
Dealer agreements. 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.
Polaris Acceptance. Polaris Acceptance provides floor plan financing to our dealers in the United States under our current partnership agreement with Wells Fargo. Wells Fargo acquired the business in the first quarter of 2016. We have a 50 percent equity interest in Polaris Acceptance, and do not guarantee the outstanding indebtedness of Polaris Acceptance. As part of the agreement, Polaris sells portions of its receivable portfolio to a securitization facility (“Securitization Facility”), from time to time on an ongoing basis. The partnership agreement is effective through February 2022. See Notes 5 and 9 of Notes to Consolidated Financial Statements for a discussion of this financial services arrangement.
We have arrangements with Polaris Acceptance (United States) and Wells Fargo 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, Global Adjacent Markets vehicles 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. See Note 9 of Notes to Consolidated Financial Statements for a discussion of these financial services arrangements.
Customer financing. We do not offer consumer financing directly to the end users of our products. Instead, we have agreements in place with various third party financing companies, to provide financing services to those end consumers.

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A wholly-owned subsidiary of Polaris has a multi-year agreement 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 installment credit lending for ORVs, snowmobiles and certain other Polaris products expires in February 2021.
A wholly-owned subsidiary of Polaris entered into a multi-year agreement with Evergreen Bank Group in September 2016. The agreement established Performance Finance as a division of Evergreen Bank Group, and is exclusively focused on the financing of Polaris motorcycles. The agreement replaced our previous arrangement with Freedom Road. The current installment credit agreement under which Performance Finance provides installment credit lending for motorcycles expires in December 2021.
A wholly-owned subsidiary of Polaris has a multi-year contract with Synchrony Bank, under which Synchrony Bank makes available closed-end installment consumer and commercial credit to customers of our dealers for both Polaris and non-Polaris products. The current installment credit agreement under which Synchrony Bank provides installment credit lending for Polaris products expires in December 2020.
Marketing. Our marketing activities are designed primarily to promote and communicate directly with consumers 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. We advertise our products directly to consumers using print advertising in the industry press and in user group publications and on the internet, social media, 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. 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, posters, dealer signs and miscellaneous other promotional items for use by dealers.
We expended $342.2 million, $316.7 million and $314.5 million for sales and marketing activities in 2016, 2015 and 2014, respectively.
Engineering, Research and Development, and New Product Introduction
We have approximately 850 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.
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, motorcycles, and certain Global Adjacent Market vehicles, and our Roseau, Minnesota facility for our snowmobile and certain ATV research and development. We also own Swissauto Powersports Ltd., an engineering company that develops high performance and high efficiency engines and innovative vehicles.
We expended $185.1 million, $166.4 million and $148.5 million for research and development activities in 2016, 2015 and 2014, 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 other international countries.
Competition
The off-road vehicle, snowmobile, motorcycle, people mobility and work utility solutions, and aftermarket markets in the United States, Canada and other global markets are highly competitive. Our competition primarily comes from North American and Asian manufacturers. Competition in such markets is based upon a number of factors, including price,

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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, snow-bikes and off-road vehicles. The National Highway Transportation Safety Administration (NHTSA) has federal oversight over product safety issues related to motorcycles (including Slingshot) and on-road people mobility 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 related issues. The Act also includes a provision that 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, Polaris GENERAL, RZR, and Polaris ACE vehicles. Since early 2008, ROHVA has been engaged in a comprehensive process for developing and updating a voluntary standard for equipment, configuration and performance requirements of ROVs through ANSI. Comments on the draft standards have been 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, and then revised in 2011, 2014 and 2016.
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. As a result of those concerns, revisions to the standard were proposed. In 2015, CPSC expressed support for the proposed 2016 revisions to the ANSI standard, which may allow CPSC to terminate its rule-making process. 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.
Motorcycles and certain people mobility vehicles 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 U.S. federal law, but may be classified differently in other jurisdictions. We believe our motorcycles (including Slingshot) and people mobility vehicles comply with applicable federal and state safety standards.

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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, ORVs, snowmobiles, snow-bikes and people mobility vehicles 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.
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 made these European emission requirements more stringent, beginning in 2016. The first motorcycle and ATV-based product certifications were successfully executed in 2016. Emissions from certain other Polaris ORV and snowmobile engines in the EU will be covered in the future by the non-road mobile machinery directive, which is currently being finalized. Polaris is developing compliance solutions for these future EU emissions 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 2016, on a worldwide basis, we employed an average of approximately 8,600 full-time persons, a six percent increase from 2015. Including our 2016 acquisitions, we employed approximately 10,000 full-time persons as of December 31, 2016. Approximately 3,800 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 2016 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

9


—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.
Executive Officers of the Registrant
Set forth below are the names of our executive officers as of February 16, 2017, their ages, titles, the year first appointed as an executive officer, and employment for the past five years:
Name
 
Age
 
Title 
Scott W. Wine
 
49
 
Chairman of the Board of Directors and Chief Executive Officer
Kenneth J. Pucel
 
50
 
Executive Vice President—Global Operations, Engineering and Lean
Michael T. Speetzen
 
47
 
Executive Vice President—Finance and Chief Financial Officer
Robert P. Mack
 
47
 
Senior Vice President—Corporate Development and Strategy, and President—Adjacent Markets
Stacy L. Bogart
 
53
 
Senior Vice President—General Counsel, Compliance Officer and Secretary
Michael D. Dougherty
 
49
 
President—International
Stephen L. Eastman
 
52
 
President—Parts, Garments and Accessories
Matthew J. Homan
 
45
 
President—Off-Road Vehicles
James P. Williams
 
54
 
Senior Vice President—Chief Human Resources Officer
 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.
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, where 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.
Mr. Speetzen has been Executive Vice President—Finance and Chief Financial Officer of the Company since August 2015. Prior to joining Polaris, Mr. Speetzen was Senior Vice President and Chief Financial Officer of Xylem, Inc., a provider of fluid technology and equipment solutions for water issues, since 2011, when the company was formed from the spinoff of the water businesses of ITT Corporation.
Mr. Mack joined Polaris in April 2016 as Senior Vice President—Corporate Development and Strategy, and President—Adjacent Markets. Prior to joining Polaris, Mr. Mack was Vice President, Corporate Development for Ingersoll Rand plc, a diversified industrial company. In that role since July 2010, he had global responsibility for the company’s acquisition and divestiture activities.
Ms. Bogart has been Senior Vice President—General Counsel, Compliance Officer and Secretary of Polaris since September 2015. Prior to her current role, she was Vice President—General Counsel and Compliance Officer since November 2009 and Corporate Secretary since January 2010.
Mr. Dougherty has been President—International since September 2015.  Prior to his current role, he was Vice President—Asia Pacific and Latin America since August 2011.
Mr. Eastman has been President—Parts, Garments and Accessories since September 2015. Prior to his current role, he was 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.
Mr. Homan was promoted to President—Off-Road Vehicles in January 2016. Mr. Homan has held several key leadership positions at Polaris. Prior to his current role, most recently he was President—Global Adjacent Markets since September 2015, Vice President—Global Adjacent Markets since July 2014, Vice President—EMEA since August 2011.

10


Mr. Williams was appointed Senior Vice President—Chief Human Resources Officer in September 2015. Prior to this Mr. Williams was Vice President—Human Resources since April 2011.
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.
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 product 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 $45.1 million at December 31, 2016 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 Global Adjacent Markets vehicles 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 limited warranties for our vehicles. We may also 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 business. For example, in April 2016, we issued a voluntary recall for certain RZR 900 and 1000 off-road vehicles manufactured since model year 2013 due to reports of thermal-related incidents, including fire, and in September 2016, we issued a voluntary recall for certain RZR XP Turbo off-road vehicles due to similar thermal-related incidents. 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.
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 overall consumer spending or reduce consumer spending on powersports and aftermarket products. A general reduction in consumer spending or a reduction in consumer spending on powersports and aftermarket products could adversely affect our sales growth and profitability. Overall demand for products sold in the Jeep and truck aftermarket is dependent upon

11


many factors including the total number of vehicle miles driven in the United States, the total number of registered vehicles in the United States, the age and quality of these registered vehicles and the level of unemployment in the United States. Adverse changes in these factors could lead to a decreased level of demand for our products, which could negatively impact our business, results of operations, financial condition and cash flows.
In addition, we have a financial services partnership arrangement with a subsidiary of Wells Fargo Bank, N.A. that requires us to repurchase products financed and repossessed by the partnership, subject to certain limitations. For calendar year 2016, our maximum aggregate repurchase obligation was approximately $182.8 million. If adverse 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.
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.
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.
Fluctuations in foreign currency exchange rates could result in declines in our reported sales and net earnings.
The changing relationships of 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.
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 markets we operate in 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.
We manufacture our products at, and distribute our products from, several locations in North America and internationally. Any disruption at any of these facilities or manufacturing delays could adversely affect our business and operating results.

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We manufacture most of our products at 18 locations, including North American and international facilities. We also have several locations that serve as wholegoods and PG&A distribution centers, warehouses and office facilities. In addition, we have agreements with other third-party manufacturers to manufacture products on our behalf. These facilities may be affected by natural or man-made disasters and other external events. In the event that one of our manufacturing facilities was affected by a disaster or other event, we could be forced to shift production to one of our other manufacturing facilities. Although we maintain insurance for damage to our property and disruption of our business from casualties, such insurance may not be sufficient to cover all of our potential losses. Any disruption in our manufacturing capacity could have an adverse impact on our ability to produce sufficient inventory of our products or may require us to incur additional expenses in order to produce sufficient inventory, and therefore, may adversely affect our net sales and operating results. Any disruption or delay at our manufacturing facilities could impair our ability to meet the demands of our customers, and our customers may cancel orders or purchase products from our competitors, which could adversely affect our business and operating results.
If we are unable to continue to enhance existing products and develop and market new products that respond to customer needs and preferences, 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 $185.1 million, $166.4 million and $148.5 million for research and development efforts in 2016, 2015 and 2014, 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 and be more attractive with more features and/or less expensive than 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 product financing sources 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.
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.
There can be no assurance that acquisitions will be consummated or that, if consummated, they will be successful. Acquisitions pose risks with respect to our ability to project and evaluate market demand, potential synergies and cost savings, make correct accounting estimates and achieve anticipated business goals and objectives. As we continue to grow, in part, through acquisitions, our success depends on our ability to anticipate and effectively manage these risks. If acquired businesses do not achieve forecasted results or otherwise fail to meet projections, it could affect our results of operations.
Acquisitions present a number of integration risks. For example, the acquisition may: disrupt operations in core, adjacent or acquired businesses; require more time than anticipated to be fully integrated into our operations and systems; create more costs than projected; divert management attention; create the potential of losing customer, supplier or other critical

13


business relationships; and pose difficulties retaining employees. The inability to successfully integrate new businesses may result in higher production costs, lost sales or otherwise negatively affect earnings and financial results.
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.
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.
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 Performance Finance, Sheffield Financial and Synchrony Bank to make retail financing available to consumers who purchase our products in the United States. During 2016, consumers financed approximately 33 percent of the vehicles we sold in the United States through these 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 also affected by changes in interest rates.
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 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

14


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.
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.
Approximately fourteen percent of our total sales are generated outside of North America, and we intend to continue to expand our international operations. Expanding international sales and operations is a part of our long-term strategic objectives. To support that strategy, we must increase our presence outside of North America, including additional employees and investment in business infrastructure and operations. International operations and sales are subject to various risks, including political and economic instability, local labor market conditions, the imposition of foreign tariffs and other trade barriers, the impact of foreign government laws and regulations and United States laws and regulations that apply to international operations, and the effects of income and withholding taxes, governmental expropriation and differences in business practices. We may incur increased costs and experience delays or disruptions in product deliveries and payments in connection with international operations and sales that could cause loss of revenues and earnings. Unfavorable changes in the political, regulatory and business climate could have a material adverse effect on our total sales, financial condition, profitability or cash flows. Violations of laws that apply to our foreign operations, such as the United States Foreign Corrupt Practices Act, could result in severe criminal or civil sanctions, could disrupt our business and result in an adverse effect on our reputation, business and results of operations.
The results of the November 2016 United States elections have introduced greater uncertainty with respect to tax and trade policies, tariffs and government regulations affecting trade between the United States and other countries. We have sourcing and manufacturing operations in international locations. Major developments in tax policy or trade relations, such as the disallowance of tax deductions for imported products or the imposition of unilateral tariffs on imported products, could have a material adverse effect on our business and results of operations.
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 other factors, 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.
An impairment in the carrying value of goodwill and trade names could negatively impact our consolidated results of operations and net worth.
Goodwill and indefinite-lived intangible assets, such as our trade names, are recorded at fair value at the time of acquisition and are not amortized, but are reviewed for impairment at least annually or more frequently if impairment indicators arise. Our determination of whether goodwill impairment has occurred is based on a comparison of each of our reporting units’ fair market value with its carrying value. Significant and unanticipated changes in circumstances, such as significant and long-term adverse changes in business climate, unanticipated competition, and/or changes in technology or markets, could require a provision for impairment in a future period that could negatively impact our reported earnings and reduce our consolidated net worth and shareholders’ equity.
We have a significant amount of debt outstanding and must comply with restrictive covenants in our debt agreements.
Our credit agreement and other debt agreements contain financial and restrictive covenants that may limit our ability to, among other things, borrow additional funds or take advantage of business opportunities. While we are currently in compliance with the financial covenants, increases in our debt or decreases in our earnings could cause us to fail to comply with these financial covenants. Failing to comply with such covenants could result in an event of default that, if not cured or waived, could result in the acceleration of all our indebtedness or otherwise have a material adverse effect on our financial position, results of operation and debt service capability.

15


Our level of debt and the financial and restrictive covenants contained in our credit agreement could have important consequences on our financial position and results of operations, including increasing our vulnerability to increases in interest rates because debt under our credit agreement bears interest at variable rates.
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.
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 that 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.


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Item 2. Properties
The following sets forth the Company’s principal and materially important facilities as of December 31, 2016:
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
 
733,000
Huntsville, Alabama
 
Wholegoods manufacturing
 
Owned
 
725,000
Milford, Iowa
 
Wholegoods manufacturing
 
Primarily owned
 
460,000
Monterrey, Mexico
 
Wholegoods manufacturing
 
Owned
 
440,000
Opole, Poland
 
Wholegoods manufacturing
 
Leased
 
300,000
Osceola, Wisconsin
 
Component parts & engine manufacturing
 
Owned
 
286,000
Spirit Lake, Iowa
 
Wholegoods manufacturing
 
Owned
 
273,000
Chanas, France
 
Wholegoods manufacturing
 
Owned
 
196,000
Shanghai, China
 
Wholegoods manufacturing
 
Leased
 
158,000
Anaheim, California
 
Wholegoods manufacturing
 
Leased
 
151,000
Bourran, France
 
Wholegoods manufacturing and R&D
 
Leased
 
100,000
Aix-les-Bains, France
 
Wholegoods manufacturing and R&D
 
Owned
 
98,000
Spearfish, South Dakota
 
Component parts manufacturing
 
Owned
 
51,000
Wyoming, Minnesota
 
Research and development facility
 
Owned
 
272,000
Burgdorf, Switzerland
 
Research and development facility
 
Leased
 
17,000
Wilmington, Ohio
 
Distribution center
 
Leased
 
429,000
Vermillion, South Dakota
 
Distribution center
 
Primarily owned
 
643,000
Coppell, Texas
 
Distribution center
 
Leased
 
165,000
Jacksonville, Florida
 
Distribution center
 
Leased
 
144,000
Columbiana, Ohio
 
Distribution center
 
Owned
 
102,000
Compton, California
 
Distribution center and office facility
 
Leased
 
254,000
Rigby, Idaho
 
Distribution center and office facility
 
Owned
 
55,000
Shakopee, Minnesota
 
Wholegoods distribution
 
Leased
 
870,000
Altona, Australia
 
Wholegoods distribution
 
Leased
 
215,000
Milford, Iowa
 
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 4.4 million square feet of global manufacturing and research and development space. Additionally, we have over 4.2 million square feet of global warehouse and distribution center space. In the United States and Canada, we lease 76 retail stores with approximately 900,000 square feet of space, and in Australia, we own four retail stores with approximately 30,000 square feet of space. We also have approximately 150,000 square feet of international office facility square footage in Western Europe, Australia, Brazil, India, China and Mexico.
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.

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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.
Class action lawsuit. Since September 16, 2016, three investors have filed two purported class action complaints in the United States District Court for the District of Minnesota naming the Company and two of its executive officers as defendants. On December 12, 2016, the District Court consolidated the two actions and appointed a lead plaintiff and lead counsel.  In a later order, the court set a date of March 14, 2017, for plaintiff to file a consolidated amended complaint or to designate one of the filed complaints as the operative pleading. One of the complaints on file seeks to represent a class of persons who purchased or acquired Polaris securities during the time period from January 26 to September 11, 2016; the other seeks to represent a class of persons who purchased or acquired Polaris securities during the time period from February 20, 2015 through September 11, 2016. Both complaints allege that, during the respective time period, defendants made materially false or misleading public statements about the Company’s business, operations, and compliance policies relating to RZR products and product recalls. Each complaint alleges claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and seeks damages in an unspecified amount, pre-judgment and post-judgment interest, and an award of attorneys’ fees and expenses. The Company intends to vigorously defend the action.

Item 4. Mine Safety Disclosures
Not applicable.

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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 2016 Annual Report is incorporated herein by reference. On February 14, 2017, the last reported sale price for shares of our common stock on the New York Stock Exchange was $87.71 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, 2011 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, 2011
Assumes Dividend Reinvestment
Fiscal Year Ended December 31, 2016
 
2011 
 
2012
 
2013
 
2014
 
2015
 
2016
Polaris Industries Inc.
$
100.00

 
$
153.29

 
$
269.62

 
$
283.83

 
$
163.91

 
$
161.08

S&P Midcap 400 Index
100.00

 
117.88

 
157.37

 
172.74

 
168.98

 
204.03

Recreational Vehicles Industry Group Index—Morningstar Group
100.00

 
137.54

 
213.25

 
210.28

 
153.46

 
213.95

Comparison of 5-Year Cumulative Total Return Among Polaris Industries Inc., S&P Midcap 400 Index and Morningstar’s Recreational Vehicles Group Index
pii-12312_chartx36024a03.jpg

19


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, 2016.
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, 2016
150,000

 
$
75.51

 
150,000

 
8,418,000
November 1–30, 2016
950,000

 
83.80

 
950,000

 
7,468,000
December 1–31, 2016
5,000

 
90.72

 
5,000

 
7,463,000
Total
1,105,000

 
$
82.71

 
1,105,000

 
7,463,000
 
(1)
The Board of Directors has authorized the cumulative repurchase of up to an aggregate of 86.5 million shares of the Company’s common stock (the “Program”). Of that total, 79.0 million shares have been repurchased cumulatively from 1996 through December 31, 2016. This Program does not have an expiration date.



20


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. The data presented for 2013 reflects 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.
Selected Financial Data
 
For the Years Ended December 31, 
(Dollars in millions, except per-share data) 
2016
2015
2014
2013
2012
Statement of Operations Data
 
 
 
 
 
Sales Data:
 
 
 
 
 
Total sales
$
4,516.6

$
4,719.3

$
4,479.6

$
3,777.1

$
3,209.8

Percent change from prior year
(4
)%
5
%
19
%
18
%
21
%
Gross Profit Data:
 
 
 
 
 
Total gross profit
$
1,105.6

$
1,339.0

$
1,319.2

$
1,120.9

$
925.3

Percent of sales
24.5
 %
28.4
%
29.4
%
29.7
%
28.8
%
Operating Expense Data:
 
 
 
 
 
Total operating expenses
$
833.8

$
692.2

$
666.2

$
588.9

$
480.8

Percent of sales
18.5
 %
14.7
%
14.9
%
15.6
%
15.0
%
Operating Income Data:
 
 
 
 
 
Total operating income
$
350.3

$
716.1

$
714.7

$
577.9

$
478.4

Percent of sales
7.8
 %
15.2
%
16.0
%
15.3
%
14.9
%
Net Income Data:
 
 
 
 
 
Net income from continuing operations
$
212.9

$
455.4

$
454.0

$
381.1

$
312.3

Percent of sales
4.7
 %
9.6
%
10.1
%
10.1
%
9.7
%
Diluted net income per share from continuing operations
$
3.27

$
6.75

$
6.65

$
5.40

$
4.40

Net income
$
212.9

$
455.4

$
454.0

$
377.3

$
312.3

Diluted net income per share
$
3.27

$
6.75

$
6.65

$
5.35

$
4.40

Cash Flow Data:
 
 
 
 
 
Cash flow provided by continuing operations
$
571.8

$
440.2

$
529.3

$
499.2

$
416.1

Purchase of property and equipment
209.1

249.5

205.1

251.4

103.1

Repurchase and retirement of common stock
245.8

293.6

81.8

530.0

127.5

Cash dividends to shareholders
140.3

139.3

126.9

113.7

101.5

Cash dividends per share
$
2.20

$
2.12

$
1.92

$
1.68

$
1.48

Balance Sheet Data (at end of year):
 
 
 
 
 
Cash and cash equivalents
$
127.3

$
155.3

$
137.6

$
92.2

$
417.0

Current assets
1,191.0

1,152.9

1,096.6

865.7

1,017.8

Total assets
3,099.6

2,385.7

2,074.9

1,685.5

1,488.5

Current liabilities
959.8

826.8

850.8

748.1

631.0

Long-term debt and capital lease obligations
1,138.1

456.4

223.6

284.3

104.3

Shareholders’ equity
867.0

981.5

861.3

535.6

690.5

 

21


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, 2016, and should be read in conjunction with the Consolidated Financial Statements and the Notes thereto included elsewhere in this report.
 Overview
2016 was a difficult and challenging year, as sales decreased, and the overall North American powersports industry was down slightly. Our North America retail sales to consumers decreased five percent in 2016, which drove total full year Company sales down four percent to $4.52 billion. Our 2016 results included approximately two months of activity related to our acquisition of TAP. With the global economy remaining challenged, and the U.S. dollar strengthening, our international sales were flat compared to 2015.
Full year net income of $212.9 million was a 53 percent decrease from 2015, with diluted earnings per share decreasing 52 percent to $3.27 per share. 2016 results were below expectations, as we responded to a series of vehicle recalls, and took the necessary steps to ensure that Polaris vehicles deliver the quality, safety and performance that our customers expect. We worked hard to serve our Off-Road Vehicle customers and dealers in 2016, and are accelerating that work into 2017.
In 2016, significant progress was made across our businesses, including mid-twenty percent growth in Indian Motorcycle retail sales, an eight percent reduction in dealer inventories year-over-year and improving operating cash flow by 30 percent. Further, we completed the acquisition of Taylor-Dunn Manufacturing Company (“Taylor-Dunn”) in the work and transportation space and the acquisition of TAP in the aftermarket space. Operationally, we completed the construction and started production in our new facility in Huntsville, Alabama.
On January 26, 2017, we announced that our Board of Directors approved a five percent increase in the regular quarterly cash dividend to $0.58 per share for the first quarter of 2017, representing the 22nd consecutive year of increased dividends to shareholders effective with the 2017 first quarter dividend.

Results of Operations
Sales:
Sales were $4,516.6 million in 2016, a four percent decrease from $4,719.3 million in 2015. The following table is an analysis of the percentage change in total Company sales for 2016 compared to 2015 and 2015 compared to 2014:
 
 
Percent change in total Company sales compared to the prior year
 
2016
 
2015
Volume
(5
)%
 
3
 %
Product mix and price
(1
)
 
6

Acquisitions
3

 

Currency
(1
)
 
(4
)
 
(4
)%
 
5
 %
The volume decrease in 2016 is primarily the result of lower ORV and snowmobile shipments, primarily due to our decision to delay model year 2017 ORV shipments, as well as lower retail driven by a weak powersports market and a weak end to the 2016 snow season. The volume increase in 2015 was primarily the result of shipping more motorcycles and Global Adjacent Markets vehicles, given increased consumer retail demand for those products. Product mix and price contributed a one percent decrease for 2016, primarily due to negative impact of a lower number of higher priced ORVs sold to dealers relative to our other businesses. Product mix and price contributed to a six percent increase to the growth for 2015, primarily due to the positive benefit of a greater number of higher priced ORVs sold to dealers relative to our other businesses. Acquisitions contributed a three percent increase for 2016, primarily due to the TAP acquisition. 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 2016 and four percent in 2015 compared to the respective prior years. Specifically, the U.S. dollar to Canadian dollar exchange rate, and overall strength of the U.S. dollar compared to other international currencies negatively impacted our 2016 sales by approximately $27.0 million and our 2015 sales by approximately $160.0 million when compared to the prior year period exchange rates.

22


Our sales by reporting segment, which includes the respective PG&A, were as follows:
 
For the Years Ended December 31,
($ in millions) 
2016
 
Percent of 
Sales 
 
2015
 
Percent of 
Sales 
 
Percent
Change
2016 vs.
2015
 
2014
 
Percent of 
Sales 
 
Percent
Change
2015 vs.
2014
ORV/Snowmobiles
$
3,357.5

 
74
%
 
$
3,708.9

 
78
%
 
(9
)%
 
$
3,741.2

 
84
%
 
(1
)%
Motorcycles
708.5

 
16
%
 
698.3

 
15
%
 
1
 %
 
418.5

 
9
%
 
67
 %
Global Adjacent Markets
341.9

 
8
%
 
312.1

 
7
%
 
10
 %
 
319.9

 
7
%
 
(2
)%
Other
108.7

 
2
%
 

 

 

 

 

 

Total Sales
$
4,516.6

 
100
%
 
$
4,719.3

 
100
%
 
(4
)%
 
$
4,479.6

 
100
%
 
5
 %
ORV/Snowmobiles
Off-Road Vehicles
ORV sales, inclusive of PG&A sales, of $3,015.3 million in 2016, which include core ATV, RANGER and RZR side-by-side vehicles, decreased nine percent from 2015. This decrease reflects internal challenges such as delayed model year 2017 shipments, as well as external challenges such as currency pressures, heightened competitive product offerings, market share declines and slower retail sales, including in oil and gas producing regions of North America. Polaris’ North American ORV unit retail sales to consumers decreased mid-single digits percent for 2016 compared to 2015, with ATV unit retail sales decreasing high-single digits percent and side-by-side vehicles unit retail sales decreasing mid-single digits percent over the prior year. North American dealer inventories of ORVs decreased 11 percent from 2015. ORV sales outside of North America decreased approximately three percent in 2016 compared to 2015. For 2016, the average ORV per unit sales price decreased approximately four percent compared to 2015’s per unit sales price.
ORV sales, inclusive of PG&A sales, of $3,304.4 million in 2015, which include core ATV, RANGER and RZR side-by-side vehicles, decreased one percent from 2014. This decrease reflects external challenges such as currency pressures, heightened competitive product offerings and slower retail sales, particularly in oil and gas producing regions of North America. Despite the external challenges, we continued North American 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. Polaris’ North American ORV unit retail sales to consumers increased low-single digits percent for 2015 compared to 2014, with both ATV and side-by-side vehicles unit retail sales growing low-single digits percent over the prior year. North American dealer inventories of ORVs decreased mid-single digits percent from 2014. ORV sales outside of North America decreased approximately 10 percent in 2015 compared to 2014, primarily due to decreased ATV sales and negative currencies. For 2015, the average ORV per unit sales price was approximately flat compared to 2014’s per unit sales price.
Snowmobiles
Snowmobiles sales, inclusive of PG&A sales, decreased 15 percent to $342.2 million for 2016 compared to 2015. This decrease is primarily due to lower wholegoods and PG&A sales, due to low snowfall levels in North America, currency pressures and market share declines. Retail sales to consumers for the 2016-2017 season-to-date period through December 31, 2016, decreased low double-digits percent. Sales of snowmobiles to customers outside of North America, principally within the Scandinavian region and Russia, decreased approximately 12 percent in 2016 as compared to 2015 due primarily to economic weakness in the region. The average unit sales price in 2016 increased three percent over 2015’s per unit sales price, primarily due to a favorable mix of premium snowmobiles.
Snowmobiles sales, inclusive of PG&A sales, decreased three percent to $404.5 million for 2015 compared to 2014. This decrease is primarily due to lower wholegoods and PG&A sales, partially offset by the acquisition of Timbersled in early 2015. Low snowfall levels in North America and currency pressures, were the primary drivers of the decreased sales for 2015. Retail sales to consumers for the 2015-2016 season-to-date period through December 31, 2015, decreased mid-teens percent; however, we realized North American market share gains for the same season-to-date period. Sales of snowmobiles to customers outside of North America, principally within the Scandinavian region and Russia, decreased over 20 percent in 2015 as compared to 2014 due primarily to economic weakness in the region. The average unit sales price in 2015 increased two percent over 2014’s per unit sales price, primarily due to a favorable mix of premium snowmobiles.


23


Motorcycles
Sales of Motorcycles, inclusive of PG&A sales, which is comprised of Indian and Victory motorcycles, and the moto-roadster Slingshot, increased one percent to $708.5 million for 2016 compared to 2015. The increase in 2016 sales is due to increased shipments for Indian and Victory motorcycles, partially offset by lower Slingshot shipments, which were negatively impacted by a recall during the fourth quarter. North American industry retail sales, 900cc and above (including Slingshot), decreased mid-single digits percent in 2016 compared to 2015. Over the same period, Polaris North American unit retail sales to consumers increased approximately ten percent, driven primarily by strong retail sales for Indian motorcycles. North American Polaris motorcycle dealer inventory increased approximately 30 percent in 2016 versus 2015 levels primarily due to stocking at appropriate RFM levels. Sales of motorcycles to customers outside of North America increased approximately eight percent in 2016 compared to 2015. The average per unit sales price for the Motorcycles segment in 2016 decreased four percent compared to 2015 due to the increased sales of our mid-sized motorcycles.
Sales of Motorcycles, inclusive of PG&A sales, which is comprised of Indian and Victory motorcycles, and the moto-roadster Slingshot, increased 67 percent to $698.3 million for 2015 compared to 2014. The increase in 2015 sales is due to the continued high demand for Indian motorcycles and Slingshot, but was negatively impacted by constrained product availability during the first three quarters of 2015 at our Spirit Lake, Iowa production facility. North American industry retail sales, 900cc and above (including Slingshot), increased low-single digits percent in 2015 compared to 2014. Over the same period, Polaris North American unit retail sales to consumers increased approximately 60 percent, driven primarily by continued strong retail sales for Indian motorcycles and Slingshot. North American Polaris motorcycle dealer inventory increased over 50 percent in 2015 versus 2014 levels primarily due to stocking of the Indian motorcycles and Slingshot. Sales of motorcycles to customers outside of North America increased approximately 40 percent in 2015 compared to 2014. The average per unit sales price for the Motorcycles segment in 2015 decreased two percent compared to 2014 due to the increased sales of our mid-sized motorcycles.
Global Adjacent Markets
Global Adjacent Markets sales, inclusive of PG&A sales, increased ten percent to $341.9 million for 2016 compared to 2015. The increase in sales is primarily due to the acquisition of Taylor-Dunn. Sales to customers outside of North America increased approximately three percent in 2016 compared to 2015. The average per unit sales price for the Global Adjacent Markets segment in 2016 was approximately flat compared to 2015.
Global Adjacent Markets sales, inclusive of PG&A sales, decreased two percent to $312.1 million for 2015 compared to 2014. The decrease in sales is primarily due to ongoing currency pressures, as the number of units sold in our Global Adjacent Markets segment increased compared to 2014. However, sales for our government/defense business decreased compared to 2014. The average per unit sales price for the Global Adjacent Markets segment in 2015 decreased eight percent compared to 2014 due primarily to currency pressures.
Other
In November 2016, we acquired Transamerican Auto Parts. TAP provided $108.7 million of sales for 2016.
Sales by geographic region were as follows:
 
For the Years Ended December 31,
($ in millions)
2016
 
Percent of Total Sales
 
2015
 
Percent of Total Sales 
 
Percent Change 2016 vs. 2015
 
2014
 
Percent of Total Sales 
 
Percent Change 2015 vs. 2014
United States
$
3,557.2

 
79
%
 
$
3,689.0

 
78
%
 
(4)
 %
 
$
3,339.9

 
75
%
 
10
 %
Canada
307.1

 
7
%
 
378.7

 
8
%
 
(19
)%
 
454.6

 
10
%
 
(17
)%
Other foreign countries
652.3

 
14
%
 
651.6

 
14
%
 
0
 %
 
685.1

 
15
%
 
(5
)%
Total sales
$
4,516.6

 
100
%
 
$
4,719.3

 
100
%
 
(4)
 %
 
$
4,479.6

 
100
%
 
5
 %
 Significant regional trends were as follows:
United States:
Sales in the United States for 2016 decreased four percent compared to 2015, primarily resulting from lower shipments of ORVs. The United States represented 79 percent, 78 percent and 75 percent of total company sales in 2016, 2015 and

24


2014, respectively. Sales in the United States for 2015 increased 10 percent compared to 2014, primarily resulting from higher shipments in motorcycles and related PG&A.
Canada:
Canadian sales decreased 19 percent in 2016 compared to 2015. A slower retail environment, driven by the oil and gas producing regions of Canada, contributed to the decrease in 2016, as well as negative currency rate movement, which had an unfavorable three percent impact on sales for 2016 compared to 2015. Sales in Canada represented seven percent, eight percent and ten percent of total company sales in 2016, 2015 and 2014, respectively. Canadian sales decreased seventeen percent in 2015 compared to 2014. Negative currency rate movement was the primary contributor for the decrease in 2015, which had an unfavorable 14 percent impact on sales for 2015 compared to 2014, along with a slower retail environment, particularly in the oil and gas producing regions.
Other Foreign Countries:
Sales in other foreign countries, primarily in Europe, were approximately flat for 2016 compared to 2015. Sales of motorcycles and Global Adjacent Markets vehicles increased, but were offset by decreased sales of snowmobiles and ORVs, as well as negative currency rate movements, which had an unfavorable three percentage point impact on sales for 2016 compared to 2015. Sales in other foreign countries, primarily in Europe, decreased five percent for 2015 compared to 2014. The decrease was primarily driven by negative currency rate movements, which had an unfavorable 15 percentage point impact on sales for 2015 compared to 2014, as well as decreased sales of side-by-side vehicles, snowmobiles, and Global Adjacent Markets vehicles, partially offset by increased sales of motorcycles. The decrease in snowmobile sales was primarily due to poor economic conditions in Russia.
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)
2016
 
Percent of Total Cost of Sales
 
2015
 
Percent of Total Cost of Sales
 
Change 2016 vs. 2015
 
2014
 
Percent of
Total
Cost of Sales
 
Change 2015 vs. 2014
Purchased materials and services
$
2,840.8

 
83
%
 
$
2,929.9

 
87
%
 
(3
)%
 
$
2,757.6

 
87
%
 
6
%
Labor and benefits
250.7

 
7
%
 
258.7

 
8
%
 
(3
)%
 
244.1

 
8
%
 
6
%
Depreciation and amortization
124.5

 
4
%
 
117.9

 
3
%
 
6
 %
 
96.9

 
3
%
 
22
%
Warranty costs
195.0

 
6
%
 
73.7

 
2
%
 
165
 %
 
61.9

 
2
%
 
19
%
Total cost of sales
$
3,411.0

 
100
%
 
$
3,380.2

 
100
%
 
1
 %
 
$
3,160.5

 
100
%
 
7
%
Percentage of sales
75.5
%
 
 
 
71.6
%
 
 
 
+389 basis

 
70.6
%
 
 
 
+108 basis

 
 
 
 
 
 
 
 
 
points

 
 
 
 
 
   points

For 2016, cost of sales increased one percent to $3,411.0 million compared to $3,380.2 million in 2015. The increase in cost of sales in 2016 is primarily attributed to higher warranty costs incurred related to product recalls, partially offset by decreased production. Additionally, depreciation and amortization increased due to higher capital expenditures to increase production capacity and capabilities.
For 2015, cost of sales increased seven percent to $3,380.2 million compared to $3,160.5 million in 2014. The increase in cost of sales in 2015 resulted primarily from the effect of a three percent increase in sales volume on purchased materials and services and labor and benefits. Additionally, depreciation and amortization increased due to higher capital expenditures to increase production capacity and capabilities.

25


 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)
2016
 
Percent of Sales
 
2015
 
Percent of Sales
 
Change
2016 vs. 
2015
 
2014
 
Percent of Sales
 
Change
2015 vs. 
2014
ORV/Snowmobiles
$
930.2

 
27.7
%
 
$
1,190.6

 
32.1
%
 
(22
)%
 
$
1,206.6

 
32.3
%
 
(1
)%
Motorcycles
91.4

 
12.9
%
 
97.3

 
13.9
%
 
(6
)%
 
54.4

 
13.0
%
 
79
 %
Global Adjacent Markets
95.1

 
27.8
%
 
84.2

 
27.0
%
 
13
 %
 
88.8

 
27.8
%
 
(5
)%
Other
19.8

 
18.3
%
 

 

 

 

 

 

Corporate
(30.9
)
 
 
 
(33.1
)
 
 
 
(7
)%
 
(30.6
)
 
 
 
8
 %
Total gross profit dollars
$
1,105.6

 
 
 
$
1,339.0

 
 
 
(17
)%
 
$
1,319.2

 
 
 
2
 %
Percentage of sales
24.5
%
 
 
 
28.4
%
 
 
 
-389 basis points

 
29.4
%
 
 
 
-108 basis points

Consolidated. Consolidated gross profit, as a percentage of sales, decreased in 2016 due to increased warranty and promotional costs and negative currency impacts, partially offset by lower commodity costs and product cost reduction efforts. During 2016, we incurred additional warranty expense equating to approximately 250 basis points of negative impact to gross profit margins, related primarily to increased warranty costs associated with vehicle recalls, of which approximately 200 basis points is considered to be one-time in nature. Gross profit in absolute dollars decreased due to lower sales volume, unfavorable product mix, higher promotions and higher warranty costs, partially offset by lower commodity costs and cost savings from product cost reduction efforts. Foreign currencies had a negative impact to gross profit of approximately $43.0 million for 2016, when compared to the prior year period.
Consolidated gross profit, as a percentage of sales, was 28.4 percent for 2015, a decrease of 108 basis points from 2014. Gross profit dollars increased two percent to $1,339.0 million in 2015 compared to 2014. The increase in gross profit dollars resulted from higher selling prices, lower commodity costs and product cost reduction efforts, partially offset by the negative impact of currency movements and higher promotions. Foreign currencies had a negative impact to gross profit of approximately $70.0 million for 2015, when compared to the prior year period. The decrease in gross profit percentage resulted primarily from unfavorable foreign currency fluctuations, new plant start-up costs, higher promotional expenses and higher depreciation and amortization, partially offset by lower commodity costs, product cost reduction and higher selling prices.
ORV/Snowmobiles. Gross profit, as a percentage of sales, decreased from 2015 to 2016, primarily due to decreased volumes, higher warranty costs and higher promotions, partially offset by product cost reduction efforts. Included in warranty expense are costs related to recall activity, primarily for certain RZR vehicles. Gross profit, as a percentage of sales, was approximately flat from 2014 to 2015, primarily due to the negative impact of currency movements, decreased volumes and higher promotions, offset by product cost reduction efforts.
Motorcycles. Gross profit, as a percentage of sales, decreased from 2015 to 2016, primarily due to higher warranty costs associated with Slingshot, partially offset by increased sales volumes of Indian and Victory motorcycles, and the absence of costs incurred in 2015 related to additional manufacturing costs and inefficiencies associated with our Spirit Lake, Iowa motorcycle facility paint system. Gross profit, as a percentage of sales, increased from 2014 to 2015, primarily due to increased sales volumes of Indian and Slingshot, partially offset by additional manufacturing costs and inefficiencies associated with our efforts to scale-up production and add capacity to the paint system at our Spirit Lake, Iowa motorcycle facility.
Global Adjacent Markets. Gross profit, as a percentage of sales, increased from 2015 to 2016, primarily due to the acquisition of Taylor-Dunn and increased sales volumes of Aixam vehicles. Gross profit, as a percentage of sales, decreased from 2014 to 2015, primarily due to the negative impact of currency movements.
Other. Gross profit was $19.8 million for 2016 due to the acquisition of TAP in November 2016, which includes approximately $9.0 million related to a purchase accounting inventory step-up adjustment.

26


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) 
2016
 
2015
 
Change
2016 vs. 2015
 
2014
 
Change
2015 vs. 2014
Selling and marketing
$
342.2

 
$
316.7

 
8
%
 
$
314.5

 
1
%
Research and development
185.1

 
166.4

 
11
%
 
148.5

 
12
%
General and administrative
306.5

 
209.1

 
47
%
 
203.2

 
3
%
Total operating expenses
$
833.8

 
$
692.2

 
20
%
 
$
666.2

 
4
%
Percentage of sales
18.5
%
 
14.7
%
 
+379 basis points

 
14.9
%
 
-20 basis points

Operating expenses for 2016, as a percentage of sales and in absolute dollars, increased primarily due to higher general and administrative expenses due to increased legal expenses and other costs related to product recalls. Operating expenses also increased due to acquisitions and acquisition-related expenses, including approximately $13.0 million of acquisition-related expenses for the TAP acquisition, as well as increased research and development expenses for ongoing product refinement and innovation.
Operating expenses for 2015, as a percentage of sales decreased 20 basis points compared to 2014. Operating expenses in absolute dollars increased in 2015 primarily due to higher research and development expenses, 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 operating cost control measures and a reduction in incentive compensation plan expenses. Foreign currencies had a favorable impact to operating expenses of approximately $15.0 million for 2015, when compared to the prior year period.
Income from Financial Services:
The following table reflects our income from financial services:
 
For the Years Ended December 31,
($ in millions)
2016
 
2015
 
Change
2016 vs. 2015
 
2014
 
Change
2015 vs. 2014
Income from Polaris Acceptance joint venture
$
31.1

 
$
30.7

 
1
%
 
$
30.5

 
1
%
Income from retail credit agreements
41.8

 
33.9

 
23
%
 
27.6

 
23
%
Income from other financial services activities
5.6

 
4.7

 
19
%
 
3.6

 
31
%
Total income from financial services
$
78.5

 
$
69.3

 
13
%
 
$
61.7

 
12
%
Percentage of sales
1.7
%
 
1.5
%
 
+27 basis points

 
1.4
%
 
+9 basis points

Income from financial services increased 13 percent to $78.5 million in 2016 compared to $69.3 million in 2015. The increase in 2016 is primarily due to a 10 percent increase in retail credit contract volume and increased profitability generated from the retail credit portfolios with Performance Finance, Sheffield Financial and Synchrony Bank and higher income from the sale of extended service contracts.
Income from financial services increased 12 percent to $69.3 million in 2015 compared to $61.7 million in 2014. The increase in 2015 is primarily due to a 15 percent increase in retail credit contract volume and increased profitability generated from the retail credit portfolios with Sheffield Financial, Synchrony Bank, Capital One, Chrome Capital and FreedomRoad, and slightly higher income from dealer inventory financing through Polaris Acceptance, due primarily to a 14 percent increase in financed receivables as of December 31, 2015.

27


Remainder of the Income Statement:
 
For the Years Ended December 31,
($ in millions except per share data)
2016
 
2015
 
Change
2016 vs. 2015
 
2014
 
Change
2015 vs. 2014
Interest expense
$
16.3

 
$
11.5

 
42
 %
 
$
11.2

 
2
 %
Equity in loss of other affiliates
$
6.9

 
$
6.8

 
1
 %
 
$
4.1

 
65
 %
Other expense, net
$
13.8

 
$
12.1

 
14
 %
 
$
0.0

 
NM

 
 
 
 
 
 
 
 
 
 
Income before income taxes
$
313.3

 
$
685.7

 
(54
)%
 
$
699.3

 
(2
)%
Provision for income taxes
$
100.3

 
$
230.4

 
(56
)%
 
$
245.3

 
(6
)%
Percentage of income before income taxes
32.0%
 
33.6%
 
-158 basis points

 
35.1%
 
-148 basis points

 
 
 
 
 
 
 
 
 
 
Net income
$
212.9

 
$
455.4

 
(53
)%
 
$
454.0

 
0
 %
Diluted net income per share
$
3.27

 
$
6.75

 
(52
)%
 
$
6.65

 
2
 %
Weighted average diluted shares outstanding
65.2

 
67.5

 
(3
)%
 
68.2

 
(1
)%
NM = not meaningful
 
 
 
 
 
 
 
 
 
Interest Expense. The increase in 2016 compared to 2015 is primarily due to increased debt levels through borrowings on our term loan facility and revolving credit facility, primarily to finance acquisitions. The increase in 2015 compared to 2014 is primarily due to increased debt levels through borrowings on our existing revolving credit facility.
Equity in loss of other affiliates. Increased losses at Eicher-Polaris Private Limited (EPPL) related to continued operating activities related to the production of the jointly-developed Multix personal vehicle, which is specifically designed to satisfy the varied transportation needs of consumers in India. During 2015, EPPL began production of the Multix vehicle. We have recorded our proportionate 50 percent share of EPPL losses.
Other expense,net. The change primarily relates to foreign currency exchange rate movements and the corresponding effects on foreign currency transactions, currency hedging positions and balance sheet positions related to our foreign subsidiaries from period to period.
Provision for income taxes. The income tax rate for 2016 was 32.0% as compared with 33.6% and 35.1% in 2015 and 2014, respectively.  The lower income tax rate for 2016, compared with 2015 was primarily due to the decrease in 2016 pretax income, as the beneficial impact of discrete items increases with lower pretax earnings. The lower income tax rate for 2015 as compared to 2014 was primarily due to tax benefits recorded related to research and development credits from the filing of our 2014 federal income tax return and other amended returns. The favorable impact, net of related tax reserves in 2015, totaled approximately $10.0 million. For 2016, 2015 and 2014, the income tax provision was positively impacted by the United States Congress extending and permanently enacting the research and development income tax credit.
Weighted average shares outstanding. The change in the weighted average diluted shares outstanding from 2015 to 2016 and from 2014 to 2015 is primarily due to share repurchases under our stock repurchase program.

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

28


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, 2016 and 2015, accrued sales promotions and incentives were $158.6 million and $141.1 million, respectively, resulting primarily from an increased competitive environment in 2016. 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 $117.6 million and $123.3 million for dealer holdback programs in the consolidated balance sheets as of December 31, 2016 and 2015, 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 the fair value of share-based awards at the date of grant requires judgment. We utilize 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. We utilize historical volatility as we believe 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 2016, if all long-term incentive program performance based awards were expected to achieve the maximum payout, we would have recorded an additional $46.9 million of expense in 2016. 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, 2016, the accrual for liability-based awards outstanding was $6.1 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, for a period of one year for our Taylor-Dunn vehicles, and for a two year period for GEM, Goupil and Aixam vehicles. 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

29


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, 2016 and 2015, the accrued warranty liability was $119.3 million and $56.5 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, 2016 and 2015, we had accruals of $45.1 million and $19.7 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.”

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, 2016 and 2015:
($ in millions)
For the Years Ended December 31,
2016
 
2015
 
Change
Total cash provided by (used for):
 
 
 
 
 
Operating activities
$
571.8

 
$
440.2

 
$
131.6

Investing activities
(909.3
)
 
(289.1
)
 
(620.2
)
Financing activities
314.5

 
(120.1
)
 
434.6

Impact of currency exchange rates on cash balances
(5.0
)
 
(13.3
)
 
8.3

Increase (decrease) in cash and cash equivalents
$
(28.0
)
 
$
17.7

 
$
(45.7
)
Operating Activities:
Net cash provided by operating activities totaled $571.8 million and $440.2 million in 2016 and 2015, respectively. The $131.6 million increase in net cash provided by operating activities in 2016 is primarily the result of a $335.3 million decrease in net working capital, partially offset by decreased net income. Changes in working capital (as reflected in our statements of cash flows) for the year ended 2016 was a decrease of $179.7 million, compared to an increase of $155.6 million in 2015. This was primarily due to a decrease in net cash used of $260.7 million related to inventory purchases, and a decrease in net cash used of $136.1 million related to payments made for accrued expenses due to our focused efforts on working capital required, partially offset by the timing of collections of trade receivables of $46.8 million.

30


Investing Activities:
Net cash used for investing activities was $909.3 million in 2016 compared to $289.1 million in 2015. The primary uses of cash in 2016 were the acquisitions of TAP and Taylor-Dunn. In 2016, we made large capital expenditures related to continued capacity and capability expansion at many of our North America facilities, including the completion of our our manufacturing facility in Huntsville, Alabama.
Financing Activities:
Net cash provided by financing activities was $314.5 million in 2016 compared to cash used of $120.1 million in 2015. We paid cash dividends of $140.3 million and $139.3 million in 2016 and 2015, respectively. Total common stock repurchased in 2016 and 2015 totaled $245.8 million and $293.6 million, respectively. In 2016, we had net borrowings under our capital lease arrangements and debt arrangements of $679.4 million, compared to net borrowings of $245.6 million in 2015. Proceeds from the issuance of stock under employee plans were $17.7 million and $32.5 million in 2016 and 2015, respectively.
The seasonality of production and shipments cause working capital requirements to fluctuate during the year. We are party to an unsecured $600 million variable interest rate bank lending agreement that expires in May 2021. At December 31, 2016, there were borrowings of $172.1 million outstanding under this arrangement. We are also party to a $750 million term loan facility, of which $740 million is outstanding as of December 31, 2016. Interest is charged at rates based on LIBOR or “prime.”
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, we entered into a First Supplement to Master Note Purchase Agreement, under which we issued $100.0 million of 3.13 percent unsecured senior notes due December 2020. At December 31, 2016 and 2015, outstanding borrowings under the amended Master Note Purchase Agreement totaled $200.0 million for both periods.
At December 31, 2016 and 2015, we were in compliance with all debt covenants. Our debt to total capital ratio was 57 percent and 32 percent at December 31, 2016 and 2015, respectively.
The following table summarizes our significant future contractual obligations at December 31, 2016:
 
 
 
 
 
 
 
 
 
 
(In millions): 
Total 
 
<1 Year
 
1-3 Years
 
3-5 Years
 
>5 Years
Senior notes
$
200.0

 

 
$
25.0

 
$
175.0

 

Borrowings under our credit facility
172.1

 

 

 
172.1

 

Term loan facility
740.0

 

 

 
740.0

 

Notes Payable
13.6

 
$
1.2

 
2.7

 
2.4

 
$
7.3

Interest expense
102.9

 
25.0

 
48.6

 
29.3

 

Capital leases
26.0

 
2.9

 
4.3

 
3.9

 
14.9

Operating leases
112.6

 
30.9

 
43.6

 
25.0

 
13.1

Total
$
1,367.2

 
$
60.0

 
$
124.2

 
$
1,147.7

 
$
35.3

In the table above, we assumed our December 31, 2016, outstanding borrowings under the Senior Notes will be paid at their respective due dates. Additionally, at December 31, 2016, we had letters of credit outstanding of $13.4 million related to purchase obligations for raw materials. Not included in the above table are unrecognized tax benefits of $26.4 million.
Our Board of Directors has authorized the cumulative repurchase of up to 86.5 million shares of our common stock through an authorized stock repurchase program. Of that total, approximately 79.0 million shares have been repurchased cumulatively from 1996 through December 31, 2016. We repurchased a total of 2.9 million shares of our common stock for $245.8 million during 2016, which increased earnings per share by seven cents. We have authorization from our Board of Directors to repurchase up to an additional 7.5 million shares of our common stock as of December 31, 2016. 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

31


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, 2016 and 2015, was approximately $1,438.8 million and $1,562.0 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.
On March 1, 2016, Wells Fargo announced that it completed the purchase of the North American portion of GE Capital’s Commercial Distribution Finance (GECDF) business, including GECDF’s ownership interests in Polaris Acceptance, and adopted the tradename Wells Fargo Commercial Distribution Finance (WFCDF).
Polaris Acceptance, a joint venture with Wells Fargo, provides floor plan financing to our dealers in the United States. Our subsidiary has a 50 percent equity interest in Polaris Acceptance. As part of the agreement, Polaris sells portions of its receivable portfolio (“Securitized Receivables”) to a securitization facility (“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 WFCDF and through equity contributions from both partners.
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, 2016 was $94.0 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 Wells Fargo’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 2017, the potential 15 percent aggregate repurchase obligation is approximately $184.0 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 2016, Wells Fargo & Company purchased the ownership interests in Polaris Accepttance from GE. The partnership agreement is effective through February 2022.
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, 2016, Polaris Acceptance’s wholesale portfolio receivables from dealers in the United States (including the Securitized Receivables) was $1,206.6 million, an eight percent decrease from $1,305.1 million at December 31, 2015. Credit losses in the Polaris Acceptance portfolio have been modest, averaging less than one percent of the portfolio.
We have agreements with Performance Finance, Sheffield Financial and Synchrony Bank, under which these financial institutions provide financing to end consumers of our products. The income generated from these agreements has been included as a component of income from financial services in the accompanying consolidated statements of income. In September 2016, our Performance Finance agreement became effective, which replaced our previous agreement with Freedom Road. In September 2016, we also terminated our agreement with Chrome Capital. At December 31, 2016, the agreements in place were as follows:

32


Financial institution
Agreement expiration date
Performance Finance
December 2021
Sheffield Financial
February 2021
Synchrony Bank
December 2020
During 2016, consumers financed 33 percent of our vehicles sold in the United States through the Sheffield Financial, Synchrony Bank and Performance Finance installment retail credit arrangements. The volume of revolving and installment credit contracts written in calendar year 2016 was $1,145.0 million, a ten percent increase from 2015.
We administer and provide extended service contracts to consumers and certain insurance contracts to dealers and consumers through various third-party suppliers. We finance our self-insured risks related to extended service contracts, but do not retain any insurance or financial risk under any of the other 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.
The balance of restricted cash and cash equivalents as of December 31, 2016 was $17.8 million. There was no restricted cash as of December 31, 2015. Restricted cash represents cash equivalents held in trust, as well as amounts held on deposit with regulatory agencies in the various jurisdictions in which our insurance entity does business.
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.
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 2016, 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, 2016, we had the following open foreign currency hedging contracts for 2016, and expect the following currency impact on net income, after consideration of the existing foreign currency hedging contracts, when compared to the respective prior year periods:

33


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 
 
2016
 
2017
Australian Dollar (AUD)
 
Long
 
$
22,498

 
$0.74 to 1 AUD
 
Neutral
 
Neutral
Canadian Dollar (CAD)
 
Long
 
65,154

 
$0.76 to 1 CAD
 
Negative
 
Negative
Euro
 
Long
 

 
 
Slightly negative
 
Negative
Japanese Yen
 
Short
 
1,371

 
107.93 Yen to $1
 
Negative
 
Slightly positive
Mexican Peso
 
Short
 
17,942

 
19.18 Peso to $1
 
Positive
 
Positive
Norwegian Kroner
 
Long
 

 
 
Slightly negative
 
Slightly negative
Swedish Krona
 
Long
 

 
 
Slightly negative
 
Slightly negative
Swiss Franc
 
Short
 

 
 
Slightly positive
 
Slightly 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 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, 2016, we did not have any outstanding commodity derivative contracts in place. Based on our current outlook for commodity prices, the total impact of commodities is expected to have a slightly negative impact on our gross margins for 2017 when compared to 2016.
We are a party to a credit agreement with various lenders consisting of a $600 million revolving loan facility and a $750 million term 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, 2016, we had an outstanding balance of $172.1 million on the revolving loan, and an outstanding balance of $740.0 million on the term loan. Assuming no additional borrowings or payments on the debt, a one-percent fluctuation in interest rates would have an approximate $4.0 million impact to interest expense in 2016.

34


INDEX TO FINANCIAL STATEMENTS
 
 

35



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, 2016. 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, 2016.
Management has excluded from its assessment the internal control over financial reporting at Transamerican Auto Parts, which was acquired on November 10, 2016, and the other 2016 acquisitions, whose collective financial statements constitute 26 percent of total assets, three percent of revenues and less than one percent of operating income on the consolidated financial statement amounts as of and for the year ended December 31, 2016.
Management’s internal control over financial reporting as of December 31, 2016 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 thereon.
 
 
/S/ SCOTT W. WINE
 
Scott W. Wine
Chairman and Chief Executive Officer
 
/S/ MICHAEL T. SPEETZEN
 
Michael T. Speetzen
Executive Vice President—Finance and
Chief Financial Officer
February 16, 2017
Further discussion of our internal controls and procedures is included in Item 9A of this report, under the caption “Controls and Procedures.”

36



 
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, 2016, 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.
As indicated in the accompanying Management’s Report on Internal Control over Financial Reporting, management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of Transamerican Auto Parts, acquired by the Company on November 10, 2016, and the other 2016 acquisitions, the results of which are included in the 2016 consolidated financial statements of the Company. The collective financial statements constitute 26 percent of total assets as of December 31, 2016, and three percent and less than one percent of revenues and operating income, respectively, for the year then ended. Our audit of internal control over financial reporting of Polaris Industries Inc. also did not include an evaluation of the internal control over financial reporting of Transamerican Auto Parts and the other acquisitions.
In our opinion, Polaris Industries Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, 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, 2016 and 2015, 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, 2016 of Polaris Industries Inc., and our report, dated February 16, 2017, expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
February 16, 2017


37


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, 2016 and 2015, 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, 2016. Our audits also included the financial statement schedule listed in the Index at Item 15. These financial statements and 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, 2016 and 2015, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2016, 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, 2016, 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 16, 2017, expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Minneapolis, Minnesota
February 16, 2017


 


38


POLARIS INDUSTRIES INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
Assets
December 31, 2016
 
December 31, 2015
Current Assets:
 
 
 
Cash and cash equivalents
$
127,325

 
$
155,349

Trade receivables, net
174,832

 
150,778

Inventories, net
746,534

 
710,001

Prepaid expenses and other
91,636

 
90,619

Income taxes receivable
50,662

 
46,175

Total current assets
1,190,989

 
1,152,922

Property and equipment:
 
 
 
Land, buildings and improvements
386,366

 
301,874

Equipment and tooling
1,080,239

 
995,449

 
1,466,605

 
1,297,323

Less: accumulated depreciation
(739,009
)
 
(646,645
)
Property and equipment, net
727,596

 
650,678

Investment in finance affiliate
94,009

 
99,073

Deferred tax assets
188,471

 
166,538

Goodwill and other intangible assets, net
792,979

 
236,117

Other long-term assets
105,553

 
80,331

Total assets
$
3,099,597

 
$
2,385,659

Liabilities and Shareholders’ Equity
 
 
 
Current liabilities:
 
 
 
Current portion of debt, capital lease obligations, and notes payable
$
3,847

 
$
5,059

Accounts payable
273,742

 
299,660

Accrued expenses:
 
 
 
Compensation
122,214

 
106,486

Warranties
119,274

 
56,474

Sales promotions and incentives
158,562

 
141,057

Dealer holdback
117,574

 
123,276

Other
162,432

 
88,030

Income taxes payable
2,106

 
6,741

Total current liabilities
959,751

 
826,783

Long-term income taxes payable
26,391

 
23,416

Capital lease obligations
17,538

 
19,660

Long-term debt
1,120,525

 
436,757

Deferred tax liabilities
9,127

 
13,733

Other long-term liabilities
90,497

 
74,188

Total liabilities
$
2,223,829

 
$
1,394,537

Deferred compensation
8,728

 
9,645

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, 63,109 and 65,309 shares issued and outstanding, respectively
$
631

 
$
653

Additional paid-in capital
650,162

 
596,143

Retained earnings
300,084

 
447,173

Accumulated other comprehensive loss, net
(83,837
)
 
(62,492
)
Total shareholders’ equity
867,040

 
981,477

Total liabilities and shareholders’ equity
$
3,099,597

 
$
2,385,659


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

39


POLARIS INDUSTRIES INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
 
For the Years Ended December 31,
 
2016
 
2015
 
2014
Sales
$
4,516,629

 
$
4,719,290

 
$
4,479,648

Cost of sales
3,411,006

 
3,380,248

 
3,160,470

Gross profit
1,105,623

 
1,339,042

 
1,319,178

Operating expenses:
 
 
 
 
 
Selling and marketing
342,235

 
316,669

 
314,449

Research and development
185,126

 
166,460

 
148,458

General and administrative
306,442

 
209,077

 
203,248

Total operating expenses
833,803

 
692,206

 
666,155

Income from financial services
78,458

 
69,303

 
61,667

Operating income
350,278

 
716,139

 
714,690

Non-operating expense:
 
 
 
 
 
Interest expense
16,319

 
11,456

 
11,239

Equity in loss of other affiliates
6,873

 
6,802

 
4,124

Other expense, net
13,835

 
12,144

 
10

Income before income taxes
313,251

 
685,737

 
699,317

Provision for income taxes
100,303

 
230,376

 
245,288

Net income
$
212,948

 
$
455,361

 
$
454,029

Net income per share:
 
 
 
 
 
Basic
$
3.31

 
$
6.90

 
$
6.86

Diluted
$
3.27

 
$
6.75

 
$
6.65

Weighted average shares outstanding:
 
 
 
 
 
Basic
64,296

 
66,020

 
66,175

Diluted
65,158

 
67,484

 
68,229


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

40


POLARIS INDUSTRIES INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
 
 
For the Years Ended December 31,
 
2016
 
2015
 
2014
Net income
$
212,948

 
$
455,361

 
$
454,029

Other comprehensive income (loss), net of tax:
 
 
 
 
 
Foreign currency translation adjustments, net of tax benefit of $195, $643 and $65
(19,773
)
 
(38,571
)
 
(44,371
)
Unrealized gain (loss) on derivative instruments, net of tax benefit (expense) of $936, ($1,975) and $970
(1,572
)
 
3,320

 
(1,631
)
Comprehensive income
$
191,603

 
$
420,110

 
$
408,027

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

41


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, 2013
65,623

 
$
656

 
$
360,616

 
$
155,572

 
$
18,761

 
$
535,605

Employee stock compensation
254

 
3

 
63,180

 

 

 
63,183

Deferred compensation

 

 
(3,020
)
 
(2,087
)
 

 
(5,107
)
Proceeds from stock issuances under employee plans
984

 
10

 
31,303

 

 

 
31,313

Tax effect of exercise of stock options

 

 
36,966

 

 

 
36,966

Cash dividends declared ($1.92 per share)

 

 

 
(126,908
)
 

 
(126,908
)
Repurchase and retirement of common shares
(554
)
 
(6
)
 
(3,040
)
 
(78,766
)
 

 
(81,812
)
Net income

 

 

 
454,029

 

 
454,029

Other comprehensive income

 

 

 

 
(46,002
)
 
(46,002
)
Balance, December 31, 2014
66,307

 
663

 
486,005

 
401,840

 
(27,241
)
 
861,267

Employee stock compensation
144

 
2

 
61,927

 

 

 
61,929

Deferred compensation

 

 
(2,994
)
 
6,877