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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
(Mark one)
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2020
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 1-11411
 
POLARIS INC.
(Exact name of registrant as specified in its charter)
Minnesota
 
 
41-1790959
(State or other jurisdiction of
incorporation or organization)
 
 
(I.R.S. Employer
Identification No.)
 
 
 
 
 
 
2100 Highway 55,
Medina
MN
 
 
55340
(Address of principal executive offices)
 
 
(Zip Code)
 
 
 
763
542-0500
 
 
 
 
(Registrant’s telephone number, including area code)
 
 
 
 
N/A
 
 
 
 
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
 
 
Securities registered pursuant to Section 12(b) of the Act:
 
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, $.01 par value
PII
New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
x
Accelerated filer
Non-accelerated filer
Smaller reporting company
 
 
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨ 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes      No   x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
As of April 21, 2020, 61,249,315 shares of Common Stock, $.01 par value, of the registrant were outstanding. 
 

1


 
  POLARIS INC.
FORM 10-Q
For Quarterly Period Ended March 31, 2020
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2


Part I FINANCIAL INFORMATION
Item 1 – FINANCIAL STATEMENTS
POLARIS INC.
CONSOLIDATED BALANCE SHEETS
(In millions, except per share data)
 
March 31, 2020
 
December 31, 2019
 
(Unaudited)
 
 
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
424.4

 
$
157.1

Trade receivables, net
167.9

 
190.4

Inventories, net
1,234.8

 
1,121.1

Prepaid expenses and other
112.2

 
125.9

Income taxes receivable
45.9

 
32.5

Total current assets
1,985.2

 
1,627.0

Property and equipment, net
886.1

 
899.8

Investment in finance affiliate
112.4

 
110.6

Deferred tax assets
90.9

 
93.3

Goodwill and other intangible assets, net
1,478.4

 
1,490.2

Operating lease assets
110.0

 
110.2

Other long-term assets
100.9

 
99.4

Total assets
$
4,763.9

 
$
4,430.5

Liabilities and Shareholders’ Equity
 
 
 
Current liabilities:
 
 
 
Current portion of debt, finance lease obligations and notes payable
$
166.7

 
$
166.7

Accounts payable
556.1

 
450.2

Accrued expenses:
 
 
 
Compensation
79.2

 
184.5

Warranties
132.8

 
136.2

Sales promotions and incentives
186.5

 
189.9

Dealer holdback
121.1

 
145.8

Other
230.0

 
213.9

Current operating lease liabilities
36.9

 
34.9

Income taxes payable
3.7

 
5.9

Total current liabilities
1,513.0

 
1,528.0

Long-term income taxes payable
25.2

 
28.1

Finance lease obligations
14.3

 
14.8

Long-term debt
1,982.5

 
1,512.0

Deferred tax liabilities
3.4

 
4.0

Long-term operating lease liabilities
75.6

 
77.9

Other long-term liabilities
141.4

 
143.9

Total liabilities
$
3,755.4

 
$
3,308.7

Deferred compensation
$
6.7

 
$
13.6

Shareholders’ equity:
 
 
 
Preferred stock $0.01 par value per share, 20.0 shares authorized, no shares issued and outstanding

 

Common stock $0.01 par value per share, 160.0 shares authorized, 61.2 and 61.4 shares issued and outstanding, respectively
$
0.6

 
$
0.6

Additional paid-in capital
898.4

 
892.8

Retained earnings
210.6

 
287.3

Accumulated other comprehensive loss, net
(108.0
)
 
(72.7
)
Total shareholders’ equity
1,001.6

 
1,108.0

Noncontrolling interest
0.2

 
0.2

Total equity
1,001.8

 
1,108.2

Total liabilities and equity
$
4,763.9

 
$
4,430.5

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

3


POLARIS INC.
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(In millions, except per share data)
(Unaudited)
 
 
Three months ended March 31,
 
 
2020
 
2019
Sales
 
$
1,405.2

 
$
1,495.7

Cost of sales
 
1,112.3

 
1,143.2

Gross profit
 
292.9

 
352.5

Operating expenses:
 
 
 
 
Selling and marketing
 
150.2

 
129.3

Research and development
 
78.4

 
67.1

General and administrative
 
78.5

 
92.9

Total operating expenses
 
307.1

 
289.3

Income from financial services
 
19.7

 
18.7

Operating income
 
5.5

 
81.9

Non-operating expense:
 
 
 
 
Interest expense
 
16.2

 
20.4

Equity in loss of other affiliates
 

 
0.6

Other (income) expense, net
 
0.9

 
(3.5
)
Income (loss) before income taxes
 
(11.6
)
 
64.4

Provision for income taxes
 
(6.2
)
 
16.0

Net income (loss)
 
(5.4
)
 
48.4

Net (income) loss attributable to noncontrolling interest
 

 

Net income (loss) attributable to Polaris Inc.
 
$
(5.4
)
 
$
48.4

Net income (loss) per share attributable to Polaris Inc. common shareholders:
 
 
 
 
Basic
 
$
(0.09
)
 
$
0.79

Diluted
 
$
(0.09
)
 
$
0.78

Weighted average shares outstanding:
 
 
 
 
Basic
 
61.9

 
61.3

Diluted
 
61.9

 
62.0


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

4


POLARIS INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In millions)
(Unaudited)
 
 
 
Three months ended March 31,
 
 
2020
 
2019
Net income (loss)
 
$
(5.4
)
 
$
48.4

Other comprehensive income, net of tax:
 
 
 
 
Foreign currency translation adjustments
 
(25.1
)
 
(3.7
)
Unrealized loss on derivative instruments
 
(10.3
)
 
(2.5
)
Retirement plan and other activity
 
0.1

 
(0.6
)
Comprehensive income (loss)
 
(40.7
)
 
41.6

Comprehensive income attributable to noncontrolling interest
 

 

Comprehensive income (loss) attributable to Polaris Inc.
 
$
(40.7
)
 
$
41.6

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

5


POLARIS INC.
CONSOLIDATED STATEMENTS OF EQUITY
(In millions)
(Unaudited)
 
 
Number
of Shares
 
Common
Stock
 
Additional
Paid-
In Capital
 
Retained
Earnings
 
Accumulated Other
Comprehensive
Income (loss)
 
Non Controlling Interest
 
Total Equity
Balance, December 31, 2019
61.4

 
$
0.6

 
$
892.8

 
$
287.3

 
$
(72.7
)
 
$
0.2

 
$
1,108.2

Employee stock compensation
0.4

 

 
11.9

 

 

 

 
11.9

Deferred compensation

 

 
(0.5
)
 
7.4

 

 

 
6.9

Proceeds from stock issuances under employee plans

 

 
2.3

 

 

 

 
2.3

Cash dividends declared (1)

 

 

 
(38.0
)
 

 

 
(38.0
)
Repurchase and retirement of common shares
(0.6
)
 

 
(8.1
)
 
(40.7
)
 

 

 
(48.8
)
Net loss

 

 

 
(5.4
)
 

 

 
(5.4
)
Other comprehensive loss

 

 

 

 
(35.3
)
 

 
(35.3
)
Balance, March 31, 2020
61.2

 
0.6

 
898.4

 
210.6

 
(108.0
)
 
0.2

 
1,001.8

 
 
Number
of Shares
 
Common
Stock
 
Additional
Paid-
In Capital
 
Retained
Earnings
 
Accumulated Other
Comprehensive
Income (loss)
 
Non Controlling Interest
 
Total Equity
Balance, December 31, 2018
60.9

 
$
0.6

 
$
808.0

 
$
121.1

 
$
(63.0
)
 
$
0.3

 
$
867.0

Employee stock compensation
0.2

 

 
12.1

 

 

 

 
12.1

Deferred compensation

 

 
(1.5
)
 
(0.3
)
 

 

 
(1.8
)
Proceeds from stock issuances under employee plans

 

 
3.2

 

 

 

 
3.2

Cash dividends declared (1)

 

 

 
(37.1
)
 

 

 
(37.1
)
Repurchase and retirement of common shares
(0.1
)
 

 
(1.0
)
 
(5.2
)
 

 

 
(6.2
)
Cumulative effect of adoption of accounting standards (ASU 2018-02)

 

 

 
0.6

 
(0.6
)
 

 

Net income

 

 

 
48.4

 

 

 
48.4

Other comprehensive loss

 

 

 

 
(6.1
)
 

 
(6.1
)
Balance, March 31, 2019
61.0

 
0.6

 
820.8

 
127.5

 
(69.7
)
 
0.3

 
879.5

(1) Polaris Inc. declared $0.62 and $0.61 dividends per share for the three months ended March 31, 2020, and March 31, 2019, respectively.

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


6


POLARIS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
 
Three months ended March 31,
 
2020
 
2019
Operating Activities:
 
 
 
Net income (loss)
$
(5.4
)

$
48.4

Adjustments to reconcile net income (loss) to net cash used for operating activities:



Depreciation and amortization
62.4


54.4

Noncash compensation
11.9


12.1

Noncash income from financial services
(7.8
)

(7.7
)
Deferred income taxes
0.8


(1.3
)
Other, net


0.6

Changes in operating assets and liabilities:



Trade receivables
18.0


(11.2
)
Inventories
(121.5
)

(180.0
)
Accounts payable
106.3


91.2

Accrued expenses
(116.2
)

(75.7
)
Income taxes payable/receivable
(18.8
)

12.3

Prepaid expenses and others, net
(1.1
)

18.7

Net cash used for operating activities
(71.4
)

(38.2
)
Investing Activities:



Purchase of property and equipment
(46.8
)

(70.2
)
Investment in finance affiliate, net
6.0


0.2

Net cash used for investing activities
(40.8
)

(70.0
)
Financing Activities:



Borrowings under debt arrangements / finance lease obligations
939.4


1,010.2

Repayments under debt arrangements / finance lease obligations
(469.2
)

(870.5
)
Repurchase and retirement of common shares
(48.8
)

(6.2
)
Cash dividends to shareholders
(38.0
)

(37.1
)
Proceeds from stock issuances under employee plans
2.3


3.2

Net cash provided by financing activities
385.7


99.6

Impact of currency exchange rates on cash balances
(4.9
)

(1.0
)
Net increase (decrease) in cash, cash equivalents and restricted cash
268.6


(9.6
)
Cash, cash equivalents and restricted cash at beginning of period
196.3


193.1

Cash, cash equivalents and restricted cash at end of period
$
464.9


$
183.5

 
 
 
 
Supplemental Cash Flow Information:
 
 
 
Interest paid on debt borrowings
$
17.4


$
23.0

Income taxes paid
$
8.5


$
2.9

Leased assets obtained for operating lease liabilities
$
7.4

 
$
4.0

 



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



Cash and cash equivalents
$
424.4


$
151.4

Other long-term assets
40.5


32.1

Total
$
464.9


$
183.5

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

7


POLARIS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Significant Accounting Policies
Basis of presentation. The accompanying unaudited consolidated financial statements of Polaris Inc. (“Polaris” or the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States for interim financial statements and, therefore, do not include all information and disclosures of results of operations, financial position and changes in cash flow in conformity with accounting principles generally accepted in the United States for complete financial statements. Accordingly, such statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 previously filed with the Securities and Exchange Commission (“SEC”). In the opinion of management, such statements reflect all adjustments (which include only normal recurring adjustments) necessary for a fair presentation of the financial position, results of operations, equity, and cash flows for the periods presented. Due to the seasonality trends for certain products and to certain changes in production and shipping cycles, results of such periods are not necessarily indicative of the results to be expected for the complete year.
Reclassifications. Certain reclassifications of previously reported segment gross profit amounts have been made to conform to the current year presentation. The reclassifications had no impact on the consolidated balance sheets, statements of income (loss), comprehensive income (loss), equity, or cash flows, as previously reported. See further information in Note 10.
Fair value measurements. Fair value is the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Assets and liabilities measured at fair value are classified using the following hierarchy, which is based upon the transparency of inputs to the valuation as of the measurement date:
Level  1 — Quoted prices in active markets for identical assets or liabilities.
Level  2 — Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
In making fair value measurements, observable market data must be used when available. When inputs used to measure fair value fall within different levels of the hierarchy, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement. The Company utilizes the market approach to measure fair value for its non-qualified deferred compensation assets and liabilities, and the income approach for foreign currency contracts and interest rate contracts. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities, and for the income approach, the Company uses significant other observable inputs to value its derivative instruments used to hedge foreign currency and interest rate transactions.

8


Assets and liabilities measured at fair value on a recurring basis are summarized below (in millions):
 
Fair Value Measurements as of March 31, 2020
Asset (Liability)
Total
 
Level 1
 
Level 2
 
Level 3
Non-qualified deferred compensation assets
$
51.0

 
$
51.0

 
$

 
$

Total assets at fair value
$
51.0

 
$
51.0

 
$

 
$

Non-qualified deferred compensation liabilities
$
(51.0
)
 
$
(51.0
)
 
$

 
$

Foreign exchange contracts, net
(1.1
)
 

 
(1.1
)
 

Interest rate contracts, net
(20.4
)
 

 
(20.4
)
 
 
Total liabilities at fair value
$
(72.5
)
 
$
(51.0
)
 
$
(21.5
)
 
$

 
 
 
 
 
 
 
 
 
Fair Value Measurements as of December 31, 2019
Asset (Liability)
Total
 
Level 1
 
Level 2
 
Level 3
Non-qualified deferred compensation assets
$
48.9

 
$
48.9

 
$

 
$

Total assets at fair value
$
48.9

 
$
48.9

 
$

 
$

Non-qualified deferred compensation liabilities
$
(48.9
)
 
$
(48.9
)
 
$

 
$

Foreign exchange contracts, net
(0.1
)
 
 
 
(0.1
)
 
 
Interest rate contracts, net
(8.0
)
 

 
(8.0
)
 

Total liabilities at fair value
$
(57.0
)
 
$
(48.9
)
 
$
(8.1
)
 
$

 

 

 

 


Fair value of other financial instruments. The carrying values of the Company’s short-term financial instruments, including cash and cash equivalents, trade receivables and short-term debt, including current maturities of long-term debt, finance lease obligations and notes payable, approximate their fair values. At March 31, 2020 and December 31, 2019, the fair value of the Company’s long-term debt, finance lease obligations and notes payable was approximately $2,277.8 million and $1,769.3 million, respectively, and was determined primarily using Level 2 inputs, including quoted market prices or discounted cash flows based on quoted market rates for similar types of debt. The carrying value of long-term debt, finance lease obligations and notes payable including current maturities was $2,163.5 million and $1,693.5 million as of March 31, 2020 and December 31, 2019, respectively.
Inventories. Inventory costs include material, labor and manufacturing overhead costs, including depreciation expense associated with the manufacture and distribution of the Company’s products. Inventories are stated at the lower of cost (first-in, first-out method) or net realizable value. The major components of inventories are as follows (in millions):
 
March 31, 2020
 
December 31, 2019
Raw materials and purchased components
$
425.2

 
$
344.6

Service parts, garments and accessories
358.4

 
357.0

Finished goods
513.5

 
476.2

Less: reserves
(62.3
)
 
(56.7
)
Inventories
$
1,234.8

 
$
1,121.1


Product warranties. The Company typically provides a limited warranty for its vehicles and boats for a period of six months to ten years, depending on the product. Polaris provides longer warranties in certain geographical markets as determined by local regulations and customary practice and may also provide longer warranties related to certain promotional programs. The Company’s standard warranties require the Company, generally through its dealer network, to repair or replace defective products during such warranty periods. The warranty reserve is established at the time of sale to the dealer or distributor based on management’s best estimate using historical rates and trends. The Company records these amounts as a liability in the consolidated balance sheet until they are ultimately paid. Adjustments to the warranty reserve are made based on actual claims experience in order to properly estimate the amounts necessary to settle future and existing claims on products sold as of the balance sheet date. The warranty reserve includes the estimated costs related to recalls, which are accrued when probable and estimable. Factors that could have an impact on the warranty reserve include the following: changes in manufacturing quality, shifts in product mix, changes in warranty coverage periods, impacts on product usage (including weather), product recalls and changes in sales volume.

9


The activity in the warranty reserve during the periods presented was as follows (in millions):
 
 
Three months ended March 31,
 
 
2020
 
2019
Balance at beginning of period
 
$
136.2

 
$
121.8

Additions charged to expense
 
24.2

 
26.0

Warranty claims paid, net
 
(27.6
)
 
(31.6
)
Balance at end of period
 
$
132.8

 
$
116.2



New accounting pronouncements.
Financial instruments. In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which replaces existing incurred loss impairment guidance and establishes a single allowance framework for financial assets carried at amortized cost. The Company adopted Topic 326 on January 1, 2020, using a modified retrospective transition method. The adoption of Topic 326 did not have a material impact on the Company’s consolidated financial position, results of operations, equity or cash flows.
Fair Value Measurement. In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement, which amends ASC 820 to eliminate, modify, and add certain disclosure requirements for fair value measurements. The Company adopted ASU 2018-13 on January 1, 2020. The adoption of ASU 2018-13 did not have have a material impact on the Company’s disclosures.
There are no other new accounting pronouncements that are expected to have a significant impact on the Company’s consolidated financial statements.


10


Note 2. Revenue Recognition
The following tables disaggregate the Company’s revenue by major product type and geography (in millions):
 
Three months ended March 31, 2020
 
ORV / Snowmobiles
 
Motorcycles
 
Global Adj. Markets
 
Aftermarket
 
Boats
 
Total
Revenue by product type
 
 
 
 
 
 
 
 
 
 
 
Wholegoods
$
644.7

 
$
109.8

 
$
77.4

 

 
$
154.5

 
$
986.4

PG&A
179.0

 
16.8

 
20.9

 
$
202.1

 

 
418.8

Total revenue
$
823.7

 
$
126.6

 
$
98.3

 
$
202.1

 
$
154.5

 
$
1,405.2

 
 
 
 
 
 
 
 
 
 
 
 
Revenue by geography
 
 
 
 
 
 
 
 
 
 
 
United States
$
682.7

 
$
77.8

 
$
48.5

 
$
194.0

 
$
151.4

 
$
1,154.4

Canada
52.0

 
4.6

 
1.5

 
8.1

 
3.1

 
69.3

EMEA
62.0

 
29.4

 
47.7

 

 

 
139.1

APLA
27.0

 
14.8

 
0.6

 

 

 
42.4

Total revenue
$
823.7

 
$
126.6

 
$
98.3

 
$
202.1

 
$
154.5

 
$
1,405.2

 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended March 31, 2019
 
ORV / Snowmobiles
 
Motorcycles
 
Global Adj. Markets
 
Aftermarket
 
Boats
 
Total
Revenue by product type
 
 
 
 
 
 
 
 
 
 
 
Wholegoods
$
700.9

 
$
102.3

 
$
84.7

 

 
$
184.8

 
$
1,072.7

PG&A
166.6

 
15.6

 
20.3

 
$
220.5

 

 
423.0

Total revenue
$
867.5

 
$
117.9

 
$
105.0

 
$
220.5

 
$
184.8

 
$
1,495.7

 
 
 
 
 
 
 
 
 
 
 
 
Revenue by geography
 
 
 
 
 
 
 
 
 
 
 
United States
$
708.9

 
$
67.9

 
$
51.7

 
$
211.6

 
$
180.8

 
$
1,220.9

Canada
51.6

 
6.0

 
1.1

 
8.9

 
4.0

 
71.6

EMEA
78.7

 
30.7

 
51.4

 

 

 
160.8

APLA
28.3

 
13.3

 
0.8

 

 

 
42.4

Total revenue
$
867.5

 
$
117.9

 
$
105.0

 
$
220.5

 
$
184.8

 
$
1,495.7


With respect to wholegood vehicles, boats, parts, garments and accessories, revenue is recognized when the Company transfers control of the product to the customer (or distributor). With respect to services provided by the Company, revenue is recognized upon completion of the service or over the term of the service agreement in proportion to the costs expected to be incurred in satisfying the obligations over the term of the service period. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring goods or providing services. Sales, value add, and other taxes the Company collects concurrent with revenue-producing activities are excluded from revenue. Incidental items that are immaterial in the context of the contract are recognized as expense. The expected costs associated with the Company’s limited warranties and field service bulletin actions are recognized as expense when the products are sold. The Company recognizes revenue for vehicle service contracts that extend mechanical and maintenance coverage beyond the Company’s limited warranties over the life of the contract. Revenue from goods and services transferred to customers at a point-in-time accounts for the majority of the Company’s revenue. Revenue from products or services transferred over time is discussed in the deferred revenue section.
ORV/Snowmobiles, Motorcycles and Global Adjacent Markets segments
Wholegood vehicles and parts, garments and accessories. For the majority of wholegood vehicles, parts, garments and accessories (PG&A), the Company transfers control and recognizes a sale when it ships the product from its manufacturing facility, distribution center, or vehicle holding center to its customer (primarily dealers and distributors). The amount of consideration the Company receives and revenue it recognizes varies with changes in marketing incentives and rebates it offers to its dealers and their customers. Sales returns are not material. The Company adjusts its estimate of revenue at the earlier of when the most likely amount of consideration it expects to receive changes or when the consideration becomes fixed.

11


Depending on the terms of the arrangement, the Company may also defer the recognition of a portion of the consideration received because it has to satisfy a future obligation (e.g., free extended service contracts). The Company uses an observable price to determine the stand-alone selling price for separate performance obligations. The Company has elected to recognize the cost for freight and shipping when control over vehicles, parts, garments or accessories has transferred to the customer as an expense in cost of sales.
Extended Service Contracts. The Company sells separately-priced service contracts that extend mechanical and maintenance coverages beyond its base limited warranty agreements to vehicle owners. The separately priced service contracts range from 12 months to 84 months. The Company primarily receives payment at the inception of the contract and recognizes revenue over the term of the agreement in proportion to the costs expected to be incurred in satisfying the obligations under the contract.
Aftermarket segment
The Company’s Aftermarket products are sold through dealer, distributor, retail, and e-commerce channels. The Company transfers control and recognizes a sale when products are shipped or delivered to its customer. The amount of consideration the Company receives and revenue it recognizes varies with changes in marketing incentives and rebates it offers to its customers and their customers. When the Company gives its customers the right to return eligible parts and accessories, it estimates the expected returns based on an analysis of historical experience. The Company adjusts its estimate of revenue at the earlier of when the most likely amount of consideration it expects to receive changes or when the consideration becomes fixed.
Service revenue. The Company offers installation services for parts that it sells. Service revenues are recognized upon completion of the service.
Depending on the terms of the arrangement, the Company may also defer the recognition of a portion of the consideration received because it has to satisfy a future obligation (e.g., extended service contracts). The Company uses an observable price to determine the stand-alone selling price for separate performance obligations. The Company has elected to recognize the cost for freight and shipping when control over parts, garments or accessories has transferred to the customer as an expense in cost of sales.
Boats segment
Boats. The Company transfers control and recognizes a sale when it ships the product from its manufacturing facility or distribution center to its customer (primarily dealers). The amount of consideration the Company receives and revenue it recognizes varies with changes in marketing incentives and rebates it offers to its dealers and their customers. Sales returns are not material. The Company adjusts its estimate of revenue at the earlier of when the most likely amount of consideration it expects to receive changes or when the consideration becomes fixed. The Company has elected to recognize the cost for freight and shipping when control over boats has transferred to the customer as an expense in cost of sales.
Deferred revenue
The Company finances its self-insured risks related to extended service contracts (“ESCs”). The premiums for ESCs are primarily recognized in income in proportion to the costs expected to be incurred over the contract period. Warranty costs are recognized as incurred.
The Company expects to recognize approximately $35.8 million of the unearned amount over the next 12 months and $49.8 million thereafter. The activity in the deferred revenue reserve during the periods presented was as follows (in millions):
 
Three months ended March 31,
 
2020
 
2019
Balance at beginning of period
$
81.6

 
$
59.9

New contracts sold
13.2

 
9.9

Less: reductions for revenue recognized
(9.2
)
 
(6.3
)
Balance at end of period (1)
$
85.6

 
$
63.5


(1) The unamortized ESC premiums (deferred revenue) recorded in other current liabilities totaled $35.8 million and $27.2 million at March 31, 2020 and 2019, respectively, while the amount recorded in other long-term liabilities totaled $49.8 million and $36.3 million at March 31, 2020 and 2019, respectively.


12


Note 3. Share-Based Compensation
The amount of compensation cost for share-based awards recognized during a period is based on the portion of the awards that are ultimately expected to vest. The Company estimates forfeitures at the time of grant and revises those estimates in subsequent periods if actual forfeitures differ from those estimates. The Company analyzes historical data to estimate pre-vesting forfeitures and records share-based compensation expense for those awards expected to vest.
Total share-based compensation expenses were comprised as follows (in millions):
 
 
Three months ended March 31,
 
 
2020
 
2019
Option awards
 
$
3.7

 
$
1.3

Other share-based awards
 
1.8

 
9.6

Total share-based compensation before tax
 
5.5

 
10.9

Tax benefit
 
1.3

 
2.6

Total share-based compensation expense included in net income
 
$
4.2

 
$
8.3


In addition to the above share-based compensation expenses, Polaris sponsors a qualified non-leveraged employee stock ownership plan (ESOP). Shares allocated to eligible participants’ accounts vest at various percentage rates based on years of service and require no cash payments from the recipient.
At March 31, 2020, there was $116.8 million of total unrecognized share-based compensation expense related to unvested share-based equity awards. Unrecognized share-based compensation expense is expected to be recognized over a weighted-average period of 1.74 years. Included in unrecognized share-based compensation expense is approximately $28.4 million related to stock options and $88.4 million for restricted stock.

Note 4. Financing Agreements
The carrying value of debt, finance lease obligations, and notes payable and the average related interest rates were as follows (in millions):
 
Average interest rate at March 31, 2020
 
Maturity
 
March 31, 2020
 
December 31, 2019
Revolving loan facility
1.67%
 
July 2023
 
$
561.6

 
$
75.1

Term loan facility
2.24%
 
July 2023
 
985.0

 
1,000.0

Senior notes—fixed rate
4.60%
 
May 2021
 
75.0

 
75.0

Senior notes—fixed rate
3.13%
 
December 2020
 
100.0

 
100.0

Senior notes—fixed rate
4.23%
 
July 2028
 
350.0

 
350.0

Finance lease obligations
5.15%
 
Various through 2029
 
15.6

 
16.1

Notes payable and other
4.24%
 
Various through 2030
 
80.2

 
81.4

Debt issuance costs
 
 
 
 
(3.9
)
 
(4.1
)
Total debt, finance lease obligations, and notes payable
 
 
 
 
$
2,163.5

 
$
1,693.5

Less: current maturities
 
 
 
 
166.7

 
166.7

Total long-term debt, finance lease obligations, and notes payable
 
 
 
 
$
1,996.8

 
$
1,526.8


In December 2010, the Company entered into a Master Note Purchase Agreement to issue $75 million of unsecured senior notes due May 2021 (collectively, the “Senior Notes”). The Senior Notes were issued in May 2011. In December 2013, the Company entered into a First Supplement to Master Note Purchase Agreement, under which the Company issued $100 million of unsecured senior notes due December 2020. In July 2018, the Company entered into a Master Note Purchase Agreement to issue $350 million of unsecured senior notes due July 2028.
In July 2018, Polaris amended its unsecured revolving loan facility to increase the facility to $700 million and increase its term loan facility to $1,180 million, of which $985 million is outstanding as of March 31, 2020. The expiration date of the facility was extended to July 2023, and interest will continue to be charged at rates based on a LIBOR or “prime” base rate. Under the facility, the Company is required to make principal payments totaling $59 million over the next 12 months, which are classified as current maturities in the consolidated balance sheets.

13


The unsecured revolving loan facility and the amended Master Note Purchase Agreement contain covenants that require Polaris to maintain certain financial ratios, including minimum interest coverage and maximum leverage ratios. The agreements require the Company to maintain an interest coverage ratio of not less than 3.00 to 1.00 and a leverage ratio of not more than 3.50 to 1.00 on a rolling four quarter basis. Polaris was in compliance with all such covenants at March 31, 2020.
On April 9, 2020, the Company amended the revolving loan facility to provide a new incremental 364-day term loan in the amount of $300 million. The new incremental term loan, which was fully drawn on closing, is unsecured and matures on April 8, 2021 and can be extended for an additional 364-day term upon request of Polaris and consent by the lenders. Applicable margins under the incremental term loan range from 0.50% to 1.25% for base advances and from 1.50% to 2.25% for eurocurrency advances, depending on leverage ratio. There are no required principal payments prior to the maturity date. The amended credit facility prohibits share repurchases until the 2020 incremental term loans have been repaid, but did not change the required financial covenant ratios and continues to contain standard covenants with regards to mergers and consolidations, asset sales, and is subject to acceleration upon various events of default.
Debt issuance costs are recognized as a reduction in the carrying value of the related long-term debt in the consolidated balance sheets and are being amortized to interest expense in the consolidated statements of income over the expected remaining terms of the related debt.
As a component of the Boat Holdings merger agreement, Polaris has committed to make a series of deferred payments to the former owners following the closing date of the merger through July 2030. The original discounted payable was for $76.7 million, of which $71.7 million is outstanding as of March 31, 2020. The outstanding balance is included in long-term debt and current portion of long-term debt in the consolidated balance sheets.
The Company has a mortgage note payable agreement for land, on which Polaris built the Huntsville, Alabama manufacturing facility in 2016. The original mortgage note payable was for $14.5 million, of which $8.5 million is outstanding as of March 31, 2020. The outstanding balance is included in Notes payable and other. The payment of principal and interest for the note payable is forgivable if the Company satisfies certain job commitments over the term of the note. The Company has met the required commitments to date.

Note 5. Goodwill and Other Intangible Assets
Goodwill and other intangible assets, net of accumulated amortization, at March 31, 2020 and December 31, 2019 are as follows (in millions):
 
March 31, 2020
 
December 31, 2019
Goodwill
$
658.4

 
$
659.9

Other intangible assets, net
820.0

 
830.3

Total goodwill and other intangible assets, net
$
1,478.4

 
$
1,490.2


The changes in the carrying amount of goodwill for the three months ended March 31, 2020 were as follows (in millions):
 
Three months ended March 31, 2020
Goodwill, beginning of period
$
659.9

Currency translation effect on foreign goodwill balances
(1.5
)
Goodwill, end of period
$
658.4



14


The components of other intangible assets were as follows (in millions):
 
Total estimated life (years)
 
March 31, 2020
 
December 31, 2019
Non-amortizable—indefinite lived:
 
 
 
 
 
Brand/trade names
 
 
$
441.9

 
$
442.0

Amortizable:
 
 
 
 
 
Non-compete agreements
4
 
2.6

 
2.6

Dealer/customer related
5-20
 
498.9

 
499.5

Developed technology
5-7
 
12.6

 
12.7

Total amortizable
 
 
514.1

 
514.8

Less: Accumulated amortization
 
 
(136.0
)
 
(126.5
)
Net amortized other intangible assets
 
 
378.1

 
388.3

Total other intangible assets, net
 
 
$
820.0

 
$
830.3


Amortization expense for intangible assets for the three months ended March 31, 2020 and 2019 was $10.0 million and $10.2 million, respectively. Estimated amortization expense for the remainder of 2020 through 2025 is as follows: 2020 (remainder), $26.1 million; 2021, $33.3 million; 2022, $28.3 million; 2023, $25.8 million; 2024, $25.0 million; 2025, $25.0 million; and after 2025, $214.6 million. The preceding expected amortization expense is an estimate and actual amounts could differ due to additional intangible asset acquisitions, changes in foreign currency rates or impairment of intangible assets.

Note 6. Shareholders’ Equity
During the three months ended March 31, 2020, Polaris paid $48.8 million to repurchase approximately 0.6 million shares of its common stock. As of March 31, 2020, the Board of Directors has authorized the Company to repurchase up to an additional 2.6 million million shares of Polaris stock. The repurchase of any or all such shares authorized for repurchase will be governed by applicable SEC rules and dependent on management’s assessment of market conditions.
Polaris paid a regular cash dividend of $0.62 per share on March 16, 2020 to holders of record at the close of business on March 2, 2020.
Cash dividends declared and paid per common share for the three months ended March 31, 2020 and 2019, were as follows: 
 
 
Three months ended March 31,
 
 
2020
 
2019
Cash dividends declared and paid per common share
 
$
0.62

 
$
0.61


Net income (loss) per share
Basic income (loss) per share is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding during each period, including shares earned under the Deferred Compensation Plan for Directors (“Director Plan”) and the ESOP and deferred stock units under the 2007 Omnibus Incentive Plan (“Omnibus Plan”). Diluted income (loss) per share is computed under the treasury stock method and is calculated to compute the dilutive effect of outstanding stock options and certain shares issued under the Omnibus Plan. A reconciliation of these amounts is as follows (in millions):
 
 
Three months ended March 31,
 
 
2020
 
2019
Weighted average number of common shares outstanding
 
61.4

 
61.0

Director Plan and deferred stock units
 
0.2

 
0.2

ESOP
 
0.3

 
0.1

Common shares outstanding—basic
 
61.9

 
61.3

Dilutive effect of Omnibus Plan