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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 September 30, 2023
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)
| | | | | | | | | | | | | | | | | |
| Delaware | | | 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 October 17, 2023, 56,472,703 shares of Common Stock, $.01 par value, of the registrant were outstanding.
POLARIS INC.
FORM 10-Q
For Quarterly Period Ended September 30, 2023
Part I FINANCIAL INFORMATION
Item 1 – FINANCIAL STATEMENTS
POLARIS INC.
CONSOLIDATED BALANCE SHEETS
(In millions, except per share data)
| | | | | | | | | | | |
| September 30, 2023 | | December 31, 2022 |
| (Unaudited) | | |
| Assets | | | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 295.3 | | | $ | 324.5 | |
| Trade receivables, net | 477.8 | | | 343.0 | |
| Inventories, net | 2,051.7 | | | 1,896.1 | |
| Prepaid expenses and other | 177.3 | | | 183.7 | |
| Income taxes receivable | 41.2 | | | 20.3 | |
| Total current assets | 3,043.3 | | | 2,767.6 | |
| Property and equipment, net | 1,161.5 | | | 1,018.4 | |
| Investment in finance affiliate | 109.7 | | | 93.1 | |
| Deferred tax assets | 247.1 | | | 210.5 | |
| Goodwill and other intangible assets, net | 907.1 | | | 910.6 | |
| Operating lease assets | 131.6 | | | 111.0 | |
| Other long-term assets | 132.7 | | | 106.7 | |
| Total assets | $ | 5,733.0 | | | $ | 5,217.9 | |
| Liabilities and Equity | | | |
| Current liabilities: | | | |
| Current financing obligations | $ | 553.9 | | | $ | 553.6 | |
| Accounts payable | 882.4 | | | 847.6 | |
| Accrued expenses | 967.6 | | | 896.8 | |
| Other current liabilities | 34.4 | | | 30.6 | |
| Total current liabilities | 2,438.3 | | | 2,328.6 | |
| Long-term financing obligations | 1,655.6 | | | 1,504.2 | |
| Other long-term liabilities | 292.7 | | | 271.0 | |
| Total liabilities | $ | 4,386.6 | | | $ | 4,103.8 | |
| Deferred compensation | $ | 11.2 | | | $ | 12.6 | |
| 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, 56.5 and 57.0 shares issued and outstanding, respectively | $ | 0.6 | | | $ | 0.6 | |
| Additional paid-in capital | 1,221.7 | | | 1,152.1 | |
| Retained earnings | 190.7 | | | 33.8 | |
| Accumulated other comprehensive loss, net | (80.3) | | | (87.5) | |
| Total shareholders’ equity | 1,332.7 | | | 1,099.0 | |
| Noncontrolling interest | 2.5 | | | 2.5 | |
| Total equity | 1,335.2 | | | 1,101.5 | |
| Total liabilities and equity | $ | 5,733.0 | | | $ | 5,217.9 | |
The accompanying footnotes are an integral part of these consolidated statements.
POLARIS INC.
CONSOLIDATED STATEMENTS OF INCOME
(In millions, except per share data)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
| Sales | $ | 2,248.9 | | | $ | 2,340.6 | | | $ | 6,645.2 | | | $ | 6,184.9 | |
| Cost of sales | 1,740.1 | | | 1,781.4 | | | 5,162.2 | | | 4,798.4 | |
| Gross profit | 508.8 | | | 559.2 | | | 1,483.0 | | | 1,386.5 | |
| Operating expenses: | | | | | | | |
| Selling and marketing | 145.1 | | | 120.7 | | | 415.3 | | | 347.8 | |
| Research and development | 91.8 | | | 98.5 | | | 281.5 | | | 266.1 | |
| General and administrative | 91.3 | | | 97.8 | | | 285.9 | | | 258.7 | |
| Total operating expenses | 328.2 | | | 317.0 | | | 982.7 | | | 872.6 | |
| Income from financial services | 20.5 | | | 12.1 | | | 57.9 | | | 33.7 | |
| Operating income | 201.1 | | | 254.3 | | | 558.2 | | | 547.6 | |
| Non-operating expense: | | | | | | | |
| Interest expense | 32.5 | | | 20.1 | | | 92.2 | | | 46.8 | |
| Other (income) expense, net | (13.1) | | | (7.4) | | | (33.6) | | | (13.9) | |
| | | | | | | |
| Income from continuing operations before income taxes | 181.7 | | | 241.6 | | | 499.6 | | | 514.7 | |
| Provision for income taxes | 30.2 | | | 50.9 | | | 100.2 | | | 107.9 | |
| Net income from continuing operations | 151.5 | | | 190.7 | | | 399.4 | | | 406.8 | |
| Loss from discontinued operations, net of tax | — | | | (3.5) | | | — | | | (11.9) | |
| Loss from sale of discontinued operations, net of tax | — | | | (0.6) | | | — | | | (142.8) | |
| Net income | 151.5 | | | 186.6 | | | 399.4 | | | 252.1 | |
| Net (income) loss attributable to noncontrolling interest | 0.2 | | | (0.3) | | | — | | | (0.5) | |
| Net income attributable to Polaris Inc. | $ | 151.7 | | | $ | 186.3 | | | $ | 399.4 | | | $ | 251.6 | |
| | | | | | | |
| Amounts attributable to Polaris Inc. common shareholders: | | | | | | | |
| Net income from continuing operations | $ | 151.5 | | | $ | 190.7 | | | $ | 399.4 | | | $ | 406.8 | |
| Less net income attributable to noncontrolling interest | 0.2 | | | (0.3) | | | — | | | (0.5) | |
| Net income from continuing operations attributable to Polaris Inc. common shareholders | 151.7 | | | 190.4 | | | 399.4 | | | 406.3 | |
| Net loss from discontinued operations attributable to Polaris Inc. common shareholders | — | | | (4.1) | | | — | | | (154.7) | |
| Net income attributable to Polaris Inc. | $ | 151.7 | | | $ | 186.3 | | | $ | 399.4 | | | $ | 251.6 | |
| | | | | | | |
| Net income (loss) per share attributable to Polaris Inc. common shareholders: | | | | | | | |
| Basic | | | | | | | |
| Continuing operations | $ | 2.66 | | | $ | 3.21 | | | $ | 6.98 | | | $ | 6.80 | |
| Discontinued operations | $ | — | | | $ | (0.06) | | | $ | — | | | $ | (2.59) | |
| Basic | $ | 2.66 | | | $ | 3.15 | | | $ | 6.98 | | | $ | 4.21 | |
| Diluted | | | | | | | |
| Continuing operations | $ | 2.62 | | | $ | 3.17 | | | $ | 6.90 | | | $ | 6.71 | |
| Discontinued operations | $ | — | | | $ | (0.07) | | | $ | — | | | $ | (2.56) | |
| Diluted | $ | 2.62 | | | $ | 3.10 | | | $ | 6.90 | | | $ | 4.15 | |
| Weighted average shares outstanding: | | | | | | | |
| Basic | 57.0 | | 59.2 | | 57.2 | | 59.8 |
| Diluted | 57.8 | | 60.0 | | 57.9 | | 60.6 |
The accompanying footnotes are an integral part of these consolidated statements.
POLARIS INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In millions)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
| Net income | $ | 151.5 | | | $ | 186.6 | | | $ | 399.4 | | | $ | 252.1 | |
| Other comprehensive income, net of tax: | | | | | | | |
| Foreign currency translation adjustments | (16.8) | | | (33.5) | | | 3.5 | | | (64.4) | |
| Unrealized gain on derivative instruments | (0.4) | | | 8.2 | | | 3.5 | | | 22.6 | |
| Retirement plan and other activity | — | | | — | | | 0.2 | | | 0.2 | |
| Comprehensive income | 134.3 | | | 161.3 | | | 406.6 | | | 210.5 | |
| Comprehensive (income) loss attributable to noncontrolling interest | 0.2 | | | (0.3) | | | — | | | (0.5) | |
| Comprehensive income attributable to Polaris Inc. | $ | 134.5 | | | $ | 161.0 | | | $ | 406.6 | | | $ | 210.0 | |
The accompanying footnotes are an integral part of these consolidated statements.
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 as of June 30, 2023 | 56.6 | | | $ | 0.6 | | | $ | 1,186.9 | | | $ | 122.1 | | | $ | (63.1) | | | $ | 2.7 | | | $ | 1,249.2 | |
Employee stock compensation | 0.1 | | | — | | | 15.2 | | | — | | | — | | | — | | | 15.2 | |
Deferred compensation | — | | | — | | | 2.2 | | | 2.2 | | | — | | | — | | | 4.4 | |
Proceeds from stock issuances under employee plans | 0.3 | | | — | | | 27.1 | | | — | | | — | | | — | | | 27.1 | |
Cash dividends declared (1) | — | | | — | | | — | | | (36.7) | | | — | | | — | | | (36.7) | |
Repurchase and retirement of common shares | (0.5) | | * | — | | | (9.7) | | | (48.6) | | | — | | | — | | | (58.3) | |
Net income (loss) | — | | | — | | | — | | | 151.7 | | | — | | | (0.2) | | | 151.5 | |
Other comprehensive loss | — | | | — | | | — | | | — | | | (17.2) | | | — | | | (17.2) | |
Balance as of September 30, 2023 | 56.5 | | | 0.6 | | | 1,221.7 | | | 190.7 | | | (80.3) | | | 2.5 | | | 1,335.2 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Number of Shares | | Common Stock | | Additional Paid-In Capital | | Retained Earnings (Accumulated Deficit) | | Accumulated Other Comprehensive Income (Loss) | | Non Controlling Interest | | Total Equity |
Balance as of June 30, 2022 | 59.5 | | | $ | 0.6 | | | $ | 1,161.4 | | | $ | 3.1 | | | $ | (93.7) | | | $ | 2.2 | | | $ | 1,073.6 | |
Employee stock compensation | — | | | — | | | 15.9 | | | — | | | — | | | — | | | 15.9 | |
Deferred compensation | — | | | — | | | (1.1) | | | 0.5 | | | — | | | — | | | (0.6) | |
Proceeds from stock issuances under employee plans | 0.2 | | | — | | | 12.9 | | | — | | | — | | | — | | | 12.9 | |
Cash dividends declared (1) | — | | | — | | | — | | | (37.5) | | | — | | | — | | | (37.5) | |
Repurchase and retirement of common shares | (1.7) | | | — | | | (33.6) | | | (172.6) | | | — | | | — | | | (206.2) | |
Net income | — | | | — | | | — | | | 186.3 | | | — | | | 0.3 | | | 186.6 | |
Other comprehensive loss | — | | | — | | | — | | | — | | | (25.3) | | | — | | | (25.3) | |
Balance as of September 30, 2022 | 58.0 | | | 0.6 | | | 1,155.5 | | | (20.2) | | | (119.0) | | | 2.5 | | | 1,019.4 | |
(1) Polaris Inc. declared a dividend of $0.65 per share for the three month period ended September 30, 2023 and a dividend of $0.64 per share for the three month period ended September 30, 2022.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Number of Shares | | Common Stock | | Additional Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Non Controlling Interest | | Total Equity |
Balance as of December 31, 2022 | 57.0 | | | $ | 0.6 | | | $ | 1,152.1 | | | $ | 33.8 | | | $ | (87.5) | | | $ | 2.5 | | | $ | 1,101.5 | |
Employee stock compensation | 0.4 | | | — | | | 44.8 | | | — | | | — | | | — | | | 44.8 | |
Deferred compensation | — | | | — | | | 1.7 | | | (0.3) | | | — | | | — | | | 1.4 | |
Proceeds from stock issuances under employee plans | 0.5 | | | — | | | 50.9 | | | — | | | — | | | — | | | 50.9 | |
Cash dividends declared (2) | — | | | — | | | — | | | (110.6) | | | — | | | — | | | (110.6) | |
Repurchase and retirement of common shares | (1.4) | | | — | | | (27.8) | | | (131.6) | | | — | | | — | | | (159.4) | |
Net income | — | | | — | | | — | | | 399.4 | | | — | | | — | | | 399.4 | |
Other comprehensive income | — | | | — | | | — | | | — | | | 7.2 | | | — | | | 7.2 | |
Balance as of September 30, 2023 | 56.5 | | | 0.6 | | | 1,221.7 | | | 190.7 | | | (80.3) | | | 2.5 | | | 1,335.2 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Number of Shares | | Common Stock | | Additional Paid-In Capital | | Retained Earnings (Accumulated Deficit) | | Accumulated Other Comprehensive Income (Loss) | | Non Controlling Interest | | Total Equity |
Balance as of December 31, 2021 | 60.4 | | | $ | 0.6 | | | $ | 1,143.8 | | | $ | 157.3 | | | $ | (77.4) | | | $ | 2.0 | | | $ | 1,226.3 | |
Employee stock compensation | 0.4 | | | — | | | 44.7 | | | — | | | — | | | — | | | 44.7 | |
Deferred compensation | — | | | — | | | (2.6) | | | 1.8 | | | — | | | — | | | (0.8) | |
Proceeds from stock issuances under employee plans | 0.4 | | | — | | | 30.7 | | | — | | | — | | | — | | | 30.7 | |
Cash dividends declared (2) | — | | | — | | | — | | | (113.5) | | | — | | | — | | | (113.5) | |
Repurchase and retirement of common shares | (3.2) | | | — | | | (61.1) | | | (317.4) | | | — | | | — | | | (378.5) | |
Net income | — | | | — | | | — | | | 251.6 | | | — | | | 0.5 | | | 252.1 | |
Other comprehensive loss | — | | | — | | | — | | | — | | | (41.6) | | | — | | | (41.6) | |
Balance as of September 30, 2022 | 58.0 | | | 0.6 | | | 1,155.5 | | | (20.2) | | | (119.0) | | | 2.5 | | | 1,019.4 | |
(2) Polaris Inc. declared aggregate dividends of $1.95 per share for the nine month period ended September 30, 2023 and aggregate dividends of $1.92 per share for the nine month period ended September 30, 2022.
The accompanying footnotes are an integral part of these consolidated statements.
POLARIS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions) (Unaudited)
| | | | | | | | | | | |
| Nine months ended September 30, |
| 2023 | | 2022 |
| Operating Activities: | | | |
| Net income | $ | 399.4 | | | $ | 252.1 | |
| Loss from discontinued operations, net of tax | — | | | 11.9 | |
| Loss from sale of discontinued operations, net of tax | — | | | 142.8 | |
| Adjustments to reconcile net income to net cash provided by operating activities: | | | |
| Depreciation and amortization | 186.9 | | | 169.9 | |
| Noncash compensation | 44.8 | | | 47.5 | |
| Noncash income from financial services | (29.1) | | | (8.5) | |
| Deferred income taxes | (36.5) | | | 11.9 | |
| Other, net | (6.2) | | | (0.6) | |
| Changes in operating assets and liabilities: | | | |
| Trade receivables | (131.5) | | | (120.7) | |
| Inventories | (151.9) | | | (442.5) | |
| Accounts payable | 31.4 | | | 82.9 | |
| Accrued expenses | 71.8 | | | 12.4 | |
| Income taxes payable/receivable | (18.9) | | | (49.7) | |
| Prepaid expenses and others, net | 15.8 | | | 30.0 | |
| Net cash provided by operating activities of continuing operations | 376.0 | | | 139.4 | |
| Net cash used for operating activities of discontinued operations | — | | | (25.8) | |
| Net cash provided by operating activities | 376.0 | | | 113.6 | |
| Investing Activities: | | | |
| Purchase of property and equipment | (311.7) | | | (193.6) | |
| Investment in finance affiliate, net | 12.5 | | | (0.8) | |
| Investments in and distributions from other affiliates | (21.6) | | | 0.7 | |
| Acquisitions and disposals of businesses, net of cash acquired | (25.1) | | | 40.8 | |
| Net cash used for investing activities of continuing operations | (345.9) | | | (152.9) | |
| Net cash used for investing activities of discontinued operations | — | | | (5.3) | |
| Net cash used for investing activities | (345.9) | | | (158.2) | |
| Financing Activities: | | | |
| Borrowings under financing obligations | 1,910.5 | | | 1,364.0 | |
| Repayments under financing obligations | (1,752.8) | | | (1,028.0) | |
| Repurchase and retirement of common shares | (159.4) | | | (378.5) | |
| Cash dividends to shareholders | (110.6) | | | (113.5) | |
| Proceeds from stock issuances under employee plans | 50.9 | | | 30.7 | |
| Net cash used for financing activities | (61.4) | | | (125.3) | |
| Impact of currency exchange rates on cash balances | 2.1 | | | (24.5) | |
| Net decrease in cash, cash equivalents and restricted cash | (29.2) | | | (194.4) | |
| Cash, cash equivalents and restricted cash at beginning of period | 339.7 | | | 529.1 | |
| Cash, cash equivalents and restricted cash at end of period | $ | 310.5 | | | $ | 334.7 | |
| | | |
| Supplemental Cash Flow Information: | | | |
| Interest paid on debt borrowings | $ | 96.6 | | | $ | 51.0 | |
| Income taxes paid | $ | 156.9 | | | $ | 152.9 | |
| Leased assets obtained for operating lease liabilities | $ | 38.6 | | | $ | 44.5 | |
| | | |
| The following presents the classification of cash, cash equivalents and restricted cash within the consolidated balance sheets: | | | |
| Cash and cash equivalents | $ | 295.3 | | | $ | 318.9 | |
| Other long-term assets | 15.2 | | | 15.8 | |
| Total | $ | 310.5 | | | $ | 334.7 | |
The accompanying footnotes are an integral part of these consolidated statements.
POLARIS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Basis of Presentation and 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, 2022 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. On July 1, 2022, the Company completed the sale of its Transamerican Auto Parts (“TAP”) business. The operating results of the TAP business are reported in loss from discontinued operations, net of tax, in the consolidated statements of income. All amounts and disclosures included in the Notes to consolidated financial statements reflect only the Company's continuing operations unless otherwise noted. Refer to Note 4 for additional information.
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, interest rate contracts, and commodity 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, interest rate transactions, and commodity transactions.
Assets and liabilities measured at fair value on a recurring basis are summarized below (in millions):
| | | | | | | | | | | | | | | | | | | | |
| | Input Level | | September 30, 2023 | | December 31, 2022 |
| Assets | | | | | | |
| Non-qualified deferred compensation assets | | Level 1 | | $ | 43.6 | | | $ | 39.8 | |
| Foreign exchange contracts, net | | Level 2 | | $ | 9.3 | | | $ | 8.4 | |
| Interest rate contracts, net | | Level 2 | | $ | 7.9 | | | $ | 5.9 | |
| Commodity contracts, net | | Level 2 | | $ | 0.8 | | | $ | — | |
| Liabilities | | | | | | |
| Non-qualified deferred compensation liabilities | | Level 1 | | $ | (43.6) | | | $ | (39.8) | |
| | | | | | |
| | | | | | |
Fair value of other financial instruments. The carrying values of the Company’s short-term financial instruments, including cash and cash equivalents, trade receivables, accounts payable and current financing obligations, approximate their fair values due to their short-term nature. As of September 30, 2023 and December 31, 2022, the fair value of the Company’s current and long-term financing obligations was approximately $2,207.3 million and $2,070.3 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 current and long-term financing obligations was $2,209.5 million and $2,057.8 million as of September 30, 2023 and December 31, 2022, respectively.
Property and equipment. Depreciation expense was $62.0 million and $51.7 million for the three months ended September 30, 2023 and 2022, respectively, and $173.6 million and $155.6 million for the nine months ended September 30, 2023 and 2022, respectively. Substantially all of the Company’s property and equipment is located in North America.
Product warranties. The activity in the warranty reserve during the periods presented was as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
| Balance at beginning of period | $ | 154.6 | | | $ | 128.7 | | | $ | 172.9 | | | $ | 132.9 | |
| | | | | | | |
| Additions charged to expense | 49.3 | | | 60.5 | | | 141.7 | | | 121.2 | |
| Warranty claims paid, net | (40.9) | | | (32.1) | | | (151.6) | | | (97.0) | |
| Balance at end of period | $ | 163.0 | | | $ | 157.1 | | | $ | 163.0 | | | $ | 157.1 | |
New accounting pronouncements.
There are no new accounting pronouncements that are expected to have a significant impact on the Company’s consolidated financial statements.
Note 2. Supplemental Balance Sheet Information
| | | | | | | | | | | | | | |
| In millions | | September 30, 2023 | | December 31, 2022 |
| Inventories | | | | |
| Raw materials and purchased components | | $ | 926.7 | | | $ | 843.5 | |
| Service parts, garments and accessories | | 365.5 | | | 371.1 | |
| Finished goods | | 853.3 | | | 768.2 | |
| Less: reserves | | (93.8) | | | (86.7) | |
| Inventories, net | | $ | 2,051.7 | | | $ | 1,896.1 | |
| Property and equipment | | | | |
| Land, buildings and improvements | | $ | 622.7 | | | $ | 539.1 | |
| Equipment and tooling | | 1,857.5 | | | 1,645.0 | |
| | 2,480.2 | | | 2,184.1 | |
| Less: accumulated depreciation | | (1,318.7) | | | (1,165.7) | |
| Property and equipment, net | | $ | 1,161.5 | | | $ | 1,018.4 | |
| Accrued expenses | | | | |
| Compensation | | $ | 208.5 | | | $ | 212.3 | |
| Warranties | | 163.0 | | | 172.9 | |
| Sales promotions and incentives | | 192.7 | | | 127.0 | |
| Dealer holdback | | 166.4 | | | 129.7 | |
| Other accrued expenses | | 237.0 | | | 254.9 | |
| Total accrued expenses | | $ | 967.6 | | | $ | 896.8 | |
| Other current liabilities | | | | |
| Current operating lease liabilities | | 27.9 | | | 24.1 | |
| Income taxes payable | | 6.5 | | | 6.5 | |
| Total other current liabilities | | $ | 34.4 | | | $ | 30.6 | |
| Other long-term liabilities | | | | |
| Long-term operating lease liabilities | | $ | 104.3 | | | $ | 87.0 | |
| Long-term income taxes payable | | 13.5 | | | 11.7 | |
| Deferred tax liabilities | | 4.5 | | | 4.6 | |
| Other long-term liabilities | | 170.4 | | | 167.7 | |
| Total other long-term liabilities | | $ | 292.7 | | | $ | 271.0 | |
Note 3. Revenue Recognition
The Company recognizes revenue when it satisfies a performance obligation by transferring control of a good or service to a customer. Revenue is measured based on the amount of consideration that the Company expects to be entitled to in exchange for the goods or services transferred. Sales, value add, and other taxes that are collected from a customer concurrent with revenue-producing activities are excluded from revenue. 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 contract liabilities section.
The following tables disaggregate the Company's revenue by major product type and geography (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, 2023 |
| Off Road | | On Road | | Marine | | Total |
| Revenue by product type | | | | | | | |
| Wholegoods | $ | 1,385.4 |
| $ | 221.6 | | $ | 134.2 |
| $ | 1,741.2 |
| PG&A | 459.0 |
| 48.7 | | — | | 507.7 |
| Total revenue | $ | 1,844.4 |
| $ | 270.3 | | $ | 134.2 |
| $ | 2,248.9 |
|
| | | | | | |
| Revenue by geography |
| | | | | | |
| United States | $ | 1,566.1 | | $ | 147.3 | | $ | 132.1 | | $ | 1,845.5 |
| Canada | 128.9 | | 9.2 | | 1.9 | | 140.0 |
| EMEA | 81.6 | | 96.5 | | 0.1 | | 178.2 |
| APLA | 67.8 | | 17.3 | | 0.1 | | 85.2 |
| Total revenue | $ | 1,844.4 | | $ | 270.3 | | $ | 134.2 | | $ | 2,248.9 |
| | | | | | | |
| Three months ended September 30, 2022 |
| Off Road | | On Road | | Marine | | Total |
| Revenue by product type | | | | | | | |
| Wholegoods | $ | 1,345.7 | | $ | 282.1 | | $ | 260.2 | | $ | 1,888.0 |
| PG&A | 400.7 | | 51.9 | | — | | 452.6 |
| Total revenue | $ | 1,746.4 | | $ | 334.0 | | $ | 260.2 | | $ | 2,340.6 |
| | | | | | | |
| Revenue by geography | | | | | | | |
| United States | $ | 1,472.2 | | $ | 191.7 | | $ | 251.2 | | $ | 1,915.1 |
| Canada | 127.2 | | 17.4 | | 9.0 | | 153.6 |
| EMEA | 86.5 | | 101.9 | | — | | 188.4 |
| APLA | 60.5 | | 23.0 | | — | | 83.5 |
| Total revenue | $ | 1,746.4 | | $ | 334.0 | | $ | 260.2 | | $ | 2,340.6 |
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine months ended September 30, 2023 |
| Off Road | | On Road | | Marine | | Total |
| Revenue by product type | | | | | | | |
| Wholegoods | $ | 3,905.8 |
| $ | 789.7 | | $ | 622.2 |
| $ | 5,317.7 |
| PG&A | 1,161.8 |
| 165.7 | | — | | 1,327.5 |
| Total revenue | $ | 5,067.6 |
| $ | 955.4 | | $ | 622.2 |
| $ | 6,645.2 |
|
| | | | | | |
| Revenue by geography |
| | | | | | |
| United States | $ | 4,189.1 | | $ | 491.8 | | $ | 605.0 | | $ | 5,285.9 |
| Canada | 372.3 | | 37.5 | | 15.3 | | 425.1 |
| EMEA | 287.8 | | 368.4 | | 0.7 | | 656.9 |
| APLA | 218.4 | | 57.7 | | 1.2 | | 277.3 |
| Total revenue | $ | 5,067.6 | | $ | 955.4 | | $ | 622.2 | | $ | 6,645.2 |
| | | | | | | |
| Nine months ended September 30, 2022 |
| Off Road | | On Road | | Marine | | Total |
| Revenue by product type | | | | | | | |
| Wholegoods | $ | 3,527.6 | | $ | 693.0 | | $ | 744.7 | | $ | 4,965.3 |
| PG&A | 1,051.3 | | 168.3 | | — | | 1,219.6 |
| Total revenue | $ | 4,578.9 | | $ | 861.3 | | $ | 744.7 | | $ | 6,184.9 |
| | | | | | | |
| Revenue by geography | | | | | | | |
| United States | $ | 3,689.0 | | $ | 449.2 | | $ | 723.1 | | $ | 4,861.3 |
| Canada | 388.8 | | 36.6 | | 21.5 | | 446.9 |
| EMEA | 317.3 | | 313.8 | | 0.1 | | 631.2 |
| APLA | 183.8 | | 61.7 | | — | | 245.5 |
| Total revenue | $ | 4,578.9 | | $ | 861.3 | | $ | 744.7 | | $ | 6,184.9 |
For the majority of wholegood vehicles, boats, and 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. The amount of consideration the Company receives and revenue it recognizes varies with changes in marketing incentives and rebates it offers to its customers. Payment terms vary by customer and most of the Company’s sales are financed by the customer under floorplan financing arrangements whereby the Company receives payment within a few days of shipment of the product.
When the right of return exists, the Company adjusts the consideration for the estimated effect of returns. The Company estimates expected returns based on historical sales levels, the timing and magnitude of historical sales return levels as a percent of sales, type of product, type of customer, and a projection of this experience into the future. 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.
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. 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, boats, parts, garments or accessories has transferred to the customer as an expense in cost of sales.
Financial Products. The Company sells separately-priced extended service contracts (“ESCs”) that extend mechanical coverages beyond the base limited warranty as well as prepaid maintenance agreements to vehicle owners. Each of these separately priced service contracts range from 12 months to 84 months. The Company typically 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.
Contract Liabilities
Contract liabilities relate to deferred revenue recognized for cash consideration received at contract inception in advance of the Company's performance under the respective contract and generally relate to the sale of separately priced ESCs. The Company finances its self-insured risks related to 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 activity in the deferred revenue reserve during the periods presented was as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
| Balance at beginning of period | $ | 108.7 | | | $ | 113.6 | | | $ | 111.1 | | | $ | 108.3 | |
| New contracts sold | 9.9 | | | 10.7 | | | 35.2 | | | 38.5 | |
| Revenue recognized on existing contracts | (11.4) | | | (12.3) | | | (39.1) | | | (34.8) | |
| Balance at end of period | $ | 107.2 | | | $ | 112.0 | | | $ | 107.2 | | | $ | 112.0 | |
The Company expects to recognize approximately $34.3 million of the unearned amount over the next 12 months, which is recorded in other current liabilities as of September 30, 2023, compared to $35.8 million as of September 30, 2022. The amount recorded in other long-term liabilities totaled $72.9 million and $76.2 million as of September 30, 2023 and 2022, respectively.
Note 4. Divestitures and Discontinued Operations
2022 Divestitures.
On July 1, 2022, the Company completed the sale of its TAP business, an aftermarket parts business, for a sales price, net of post-closing purchase price adjustments, of $42.2 million. The results of TAP have been presented as discontinued operations. TAP was historically included within the Company’s Aftermarket segment; however, as a result of the divestiture, the Company began management of its portfolio of businesses under a new basis as of June 30, 2022. The Aftermarket segment was eliminated and the results of the Company’s remaining aftermarket businesses historically included within the Aftermarket segment were reclassified to the Off Road and On Road segments. The comparative 2022 segment results were reclassified for comparability.
Results of discontinued operations were as follows (in millions):
| | | | | | | | | | | |
| Three months ended September 30, 2022 | | Nine months ended September 30, 2022 |
| Sales | $ | — | | | $ | 349.3 | |
| Cost of sales | — | | | 262.9 | |
| Other costs and expenses | 2.0 | | | 99.5 | |
| Loss from discontinued operations before income taxes | (2.0) | | | (13.1) | |
| Income tax benefit | 1.5 | | | (1.2) | |
| Loss from discontinued operations, net of tax | (3.5) | | | (11.9) | |
| | | |
| Impairment of discontinued operations | — | | | 187.8 | |
| Income tax benefit | 0.6 | | | (45.0) | |
| Impairment of discontinued operations, net of tax | 0.6 | | | 142.8 | |
| | | |
| Net loss from discontinued operations | $ | (4.1) | | | $ | (154.7) | |
Note 5. Share-Based Compensation
Total share-based compensation expenses were comprised as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
| Option awards | $ | 2.0 | | | $ | 2.5 | | | $ | 9.7 | | | $ | 9.7 | |
| Other share-based awards | 7.9 | | | 12.8 | | | 24.7 | | | 28.6 | |
| Total share-based compensation before tax | 9.9 | | | 15.3 | | | 34.4 | | | 38.3 | |
| Tax benefit | 2.4 | | | 3.7 | | | 8.2 | | | 9.2 | |
| Total share-based compensation expense included in net income | $ | 7.5 | | | $ | 11.6 | | | $ | 26.2 | | | $ | 29.1 | |
In addition to the above share-based compensation expenses, the Company 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.
As of September 30, 2023, there was $60.1 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 1.5 years. Included in unrecognized share-based compensation expense was approximately $7.1 million related to stock options and $53.0 million related to restricted stock.
Note 6. Financing Agreements
The carrying value of financing obligations and the average related interest rates were as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| Average interest rate as of September 30, 2023 | | Maturity | | September 30, 2023 | | December 31, 2022 |
| Incremental term loan | 6.54% | | December 2023 | | $ | 500.0 | | | $ | 500.0 | |
| Revolving loan facility | 5.78% | | June 2026 | | 507.7 | | | 312.9 | |
| Term loan facility | 6.54% | | June 2026 | | 792.0 | | | 828.0 | |
| Senior notes—fixed rate | 4.23% | | July 2028 | | 350.0 | | | 350.0 | |
| Finance lease obligations | 5.22% | | Various through 2029 | | 10.2 | | | 11.4 | |
| Notes payable and other | 4.26% | | Various through 2030 | | 54.2 | | | 61.4 | |
| Debt issuance costs | | | | | (4.6) | | | (5.9) | |
| Total financing obligations | | $ | 2,209.5 | | | $ | 2,057.8 | |
| Less: Current financing obligations | | 553.9 | | | 553.6 | |
| Long-term financing obligations | | $ | 1,655.6 | | | $ | 1,504.2 | |
In December 2010, the Company entered into an unsecured Master Note Purchase Agreement, which has been amended and supplemented, under which it has issued senior notes. In July 2018, the Company issued $350 million of unsecured senior notes due July 2028 that remain outstanding.
The Company maintains an unsecured credit facility which consists of a term loan facility (the “Term Loan Facility”) and a revolving loan facility (the “Revolving Loan Facility”). In July 2018, the Company amended its unsecured credit facility to increase its Term Loan Facility to $1,180 million, of which $792.0 million was outstanding as of September 30, 2023. In June 2021, the Company further amended its unsecured credit facility to increase its Revolving Loan Facility to $1.0 billion, of which $507.7 million was outstanding as of September 30, 2023, and extend the maturity date to June 2026. Interest is charged at rates based on adjusted Term SOFR.
In December 2021, the Company amended the credit facility to provide an unsecured incremental 364-day term loan (the “Incremental Term Loan”) in the amount of $500 million, which was fully drawn on closing. In December 2022, the Company further amended its credit facility to extend the maturity date of the Incremental Term Loan to December 15, 2023. There are no required principal payments prior to the maturity date. In addition to the payment of the $500 million Incremental Term Loan, the Company is required to make principal payments under the Term Loan Facility totaling $45.0 million over the next 12 months. These payments are classified as current maturities in the consolidated balance sheets.
The agreements governing the credit facility and the Master Note Purchase Agreement contain covenants that require the Company 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. The Company was in compliance with all such covenants as of September 30, 2023.
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.
On July 2, 2018, pursuant to the Agreement and Plan of Merger dated May 29, 2018, the Company completed the acquisition of Boat Holdings, LLC, a privately held Delaware limited liability company, headquartered in Elkhart, Indiana that manufactures boats (“Boat Holdings”). As a component of the Boat Holdings merger agreement, the Company 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 $49.4 million was outstanding as of September 30, 2023. The outstanding balance is included in long-term financing obligations and current financing obligations in the consolidated balance sheets.
Note 7. Goodwill and Other Intangible Assets
Goodwill and other intangible assets, net of accumulated amortization, as of September 30, 2023 and December 31, 2022 are as follows (in millions):
| | | | | | | | | | | |
| September 30, 2023 | | December 31, 2022 |
| Goodwill | $ | 389.4 | | | $ | 386.2 | |
| Other intangible assets, net | 517.7 | | | 524.4 | |
| Total goodwill and other intangible assets, net | $ | 907.1 | | | $ | 910.6 | |
The changes in the carrying amount of goodwill by reportable segment for the nine months ended September 30, 2023 and 2022 are as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| Off Road | | On Road | | Marine | | Total |
| Balance as of December 31, 2022 | $ | 110.7 | | | $ | 48.4 | | | $ | 227.1 | | | $ | 386.2 | |
| Goodwill acquired and related adjustments | 4.2 | | | — | | | — | | | 4.2 | |
| Currency translation effect on foreign goodwill balances | (0.3) | | | (0.7) | | | — | | | (1.0) | |
| Balance as of September 30, 2023 | $ | 114.6 | | | $ | 47.7 | | | $ | 227.1 | | | $ | 389.4 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Off Road | | On Road | | Marine | | Total |
| Balance as of December 31, 2021 | $ | 111.7 | | | $ | 52.5 | | | $ | 227.1 | | | $ | 391.3 | |
| Currency translation effect on foreign goodwill balances | (1.5) | | | (10.1) | | | — | | | (11.6) | |
| Balance as of September 30, 2022 | $ | 110.2 | | | $ | 42.4 | | | $ | 227.1 | | | $ | 379.7 | |
During 2020, the Company recorded impairment charges of $270.3 million related to goodwill of the Company’s Aftermarket reporting segment. As part of the Company’s segment reorganization in the second quarter of 2022, the Aftermarket segment was eliminated and historical goodwill impairments of $60.8 million and $20.3 million were allocated to the Off Road and On Road segments, respectively, on a relative fair value basis. The goodwill amounts above are shown net of these impairment charges.
The components of other intangible assets were as follows ($ in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | September 30, 2023 | | December 31, 2022 |
| Weighted-average useful life (years) | | Cost | Accumulated amortization | Net | | Cost | Accumulated amortization | Net |
| Definite-life intangibles | | | | | | | | | |
| Dealer/customer related | 19 | | $ | 341.6 | | $ | (93.2) | | $ | 248.4 | | | $ | 341.7 | | $ | (80.0) | | $ | 261.7 | |
| Indefinite-life intangibles | | | | | | | | | |
| Brand/trade names | | | 269.3 | | — | | 269.3 | | | 262.7 | | — | | 262.7 | |
| Total other intangible assets, net | | | $ | 610.9 | | $ | (93.2) | | $ | 517.7 | | | $ | 604.4 | | $ | (80.0) | | $ | 524.4 | |
Amortization expense for intangible assets was $4.4 million and $4.5 million for the three months ended September 30, 2023 and 2022, respectively, and $13.3 million and $14.3 million for the nine months ended September 30, 2023 and 2022, respectively. Estimated future amortization expense for identifiable intangible assets during the next five years is as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Remainder 2023 | | 2024 | | 2025 | | 2026 | | 2027 | | 2028 |
| Estimated amortization expense | $ | 4.4 | | | $ | 17.7 | | | $ | 17.7 | | | $ | 17.7 | | | $ | 17.7 | | | $ | 17.7 | |
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 impairments of intangible assets.
Note 8. Shareholders’ Equity
During the nine months ended September 30, 2023, the Company paid $159.4 million to repurchase approximately 1.4 million shares of its common stock. As of September 30, 2023, the Board of Directors has authorized the Company to repurchase up to an additional $204.0 million of the Company’s common stock.
The Company paid a regular cash dividend of $0.65 per share on September 15, 2023 to holders of record at the close of business on September 1, 2023. Cash dividends declared and paid per common share for the three and nine months ended September 30, 2023 and 2022 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three months ended September 30, | | Nine months ended September 30, |
| | | 2023 | | 2022 | | 2023 | | 2022 |
| Cash dividends declared and paid per common share | | $ | 0.65 | | | $ | 0.64 | | | $ | 1.95 | | | $ | 1.92 | |
Net income per share
Basic income 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”), the ESOP and deferred stock units under the 2007 Omnibus Incentive Plan (“Omnibus Plan”). Diluted income per share is computed under the treasury stock method and is calculated to compute the dilutive effect of outstanding stock options and certain share-based awards issued under the Omnibus Plan. A reconciliation of these amounts is as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
| Weighted average number of common shares outstanding | 56.6 | | | 58.8 | | | 56.8 | | | 59.4 | |
| Director Plan and deferred stock units | 0.2 | | | 0.2 | | | 0.2 | | | 0.2 | |
| ESOP | 0.2 | | | 0.2 | | | 0.2 | | | 0.2 | |
| Common shares outstanding—basic | 57.0 | | | 59.2 | | | 57.2 | | | 59.8 | |
| Dilutive effect of restricted stock units | 0.4 | | | 0.4 | | | 0.4 | | | 0.4 | |
| Dilutive effect of stock option awards | 0.4 | | | 0.4 | | | 0.3 | | | 0.4 | |
| Common and potential common shares outstanding—diluted | 57.8 | | | 60.0 | | | 57.9 | | | 60.6 | |
During the three and nine months ended September 30, 2023, the number of options that were not included in the computation of diluted income per share because the option exercise price was greater than the market price, and therefore the effect would have been anti-dilutive, were 1.0 million and 1.4 million, respectively, compared to 1.4 million and 1.6 million for the comparable periods in 2022.
Accumulated other comprehensive loss
Changes in the accumulated other comprehensive loss balance were as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| Foreign Currency Translation | | Cash Flow Hedging Derivatives | | Retirement Plan Activity | | Accumulated Other Comprehensive Loss |
| Balance as of December 31, 2022 | $ | (94.8) | | | $ | 10.5 | | | $ | (3.2) | | | $ | (87.5) | |
| Reclassification to the statement of income | — | | | (25.2) | | | 0.2 | | | (25.0) | |
| Change in fair value | 3.5 | | | 28.7 | | | — | | | 32.2 | |
| Balance as of September 30, 2023 | $ | (91.3) | | | $ | 14.0 | | | $ | (3.0) | | | $ | (80.3) | |
See Note 11 for the amount of gains and losses, net of tax, reclassified from accumulated other comprehensive loss into the statements of income for cash flow derivatives designated as hedging instruments.
Note 9. Financial Services Arrangements
Polaris Acceptance, a joint venture between the Company and Wells Fargo Commercial Distribution Finance Corporation, a direct subsidiary of Wells Fargo Bank, N.A. (“Wells Fargo”), which is supported by a partnership agreement between their respective wholly owned subsidiaries, finances substantially all of the Company’s United States sales of snowmobiles, off-road vehicles (“ORV”), motorcycles, and related PG&A, whereby the Company receives payment within a few days of shipment of the product.
The Company’s subsidiary has a 50 percent equity interest in Polaris Acceptance. The Company’s allocable share of the income of Polaris Acceptance has been included as a component of income from financial services in the consolidated statements of income. The partnership agreement is effective through February 2027.
The Company’s total investment in Polaris Acceptance of $109.7 million as of September 30, 2023 is accounted for under the equity method and is recorded in investment in finance affiliate in the consolidated balance sheets. As of September 30, 2023, the outstanding amount of net receivables financed for dealers under this arrangement was $1,705.9 million.
The Company has agreed to repurchase products repossessed by Polaris Acceptance up to an annual maximum of 15 percent of the aggregate average month-end outstanding Polaris Acceptance receivables and Securitized Receivables during the prior calendar year. For calendar year 2023, the potential 15 percent aggregate repurchase obligation is approximately $110.5 million.
A subsidiary of Huntington Bancshares Incorporated (“Huntington”) finances a portion of the Company’s United States sales of boats whereby the Company receives payment within a few days of shipment of the product. The Company has agreed to repurchase products repossessed by Huntington up to a maximum of 100 percent of the aggregate outstanding Huntington receivables balance. As of September 30, 2023, the potential aggregate repurchase obligation was approximately $288.1 million.
The Company has other financing arrangements related to its foreign subsidiaries in which it has agreed to repurchase repossessed products. For calendar year 2023, the potential aggregate repurchase obligations are approximately $24.4 million.
The Company’s financial exposure under these repurchase agreements is limited to the difference between the amounts unpaid by the dealer or distributor 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 during the periods presented.
The Company has agreements with third-party financing companies to provide financing options to end consumers of the Company’s products. The Company has no material contingent liabilities for residual value or credit collection risk under these agreements. The Company’s income generated from these agreements has been included as a component of income from financial services in the consolidated statements of income.
Note 10. Commitments and Contingencies
Product liability. The Company is subject to product liability claims in the normal course of business. In 2012, the Company began purchasing excess insurance coverage for product liability claims. The Company self-insures product liability claims before the policy date and up to the purchased insurance coverage after the policy date. The estimated costs resulting from any losses are charged to operating expenses when it is probable a loss has been incurred and the amount of the loss is reasonably estimable. The Company utilizes historical trends and actuarial analysis, along with an analysis of current claims, to assist in determining the appropriate loss reserve levels. As of September 30, 2023, the Company had an accrual of $98.2 million for the probable payment of pending claims related to product liability litigation associated with the Company’s products. This accrual is included as a component of other accrued expenses in the consolidated balance sheets.
Litigation. The Company is a defendant in lawsuits and subject to other claims arising in the normal course of business, including matters related to intellectual property, commercial matters, employment, and product liability claims. In addition, as of September 30, 2023, the Company is party to putative class actions pending against the Company in the United States which are described in more detail in Part II, Item 1 – Legal Proceedings. The Company is unable to provide an evaluation of the likelihood that a loss will be incurred or an estimate of the range of possible loss on the putative class actions.
In the opinion of management, it is presently unlikely that any legal proceedings pending against or involving the Company will have a material adverse effect on the Company’s financial position, results of operations, or cash flows. However, in many of these matters, it is inherently difficult to determine whether a loss is probable or reasonably possible or to estimate the size or range of the possible loss given the variety of potential outcomes of actual and potential claims, including legal proceedings seeking punitive damages for which we are not insured, the uncertainty of future rulings, the behavior or incentives of adverse parties, and other factors outside of the control of the Company. Accordingly, the Company’s loss reserve may change from time to time, and actual losses could exceed the amounts accrued by an amount that could be material to the Company’s consolidated financial position, results of operations, or cash flows in any particular reporting period.
Regulatory. In the normal course of business, the Company’s 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, penalties or other costs.
Note 11.