• Reported and adjusted sales for the fourth quarter of 2018 increased 14% to $1,627 million
• Fourth quarter reported net income was $1.47 per diluted share, up 200% over the prior year; adjusted net income for the same period was $1.83 per diluted share, up 19% over the prior year
• Full year 2018 reported net income was $5.24 per diluted share up 95%; adjusted net income for the same period was $6.56 per diluted share, up 29%, which was near the high-end of previously issued guidance. Reported and adjusted sales for the full year of 2018 increased 12% to $6,079 million and $6,083 million, respectively
• North American retail sales increased 6% for the quarter compared to last year; ORV N.A. retail sales were up low single-digits driven by side-by-side vehicles sales
• Dealer inventory was up 1% year-over-year for the fourth quarter 2018, in line with expectations

Polaris Industries Inc. (NYSE: PII) (the "Company") recently reported fourth quarter 2018 sales of $1,627 million, up 14 percent from $1,431 million for the fourth quarter of 2017. Adjusted sales for the fourth quarter of 2018 were $1,627 million, up 14% from the prior year period. The Boat Holdings, LLC ("Boat Holdings") acquisition added $145 million of sales in the fourth quarter of 2018. The Company reported fourth quarter 2018 net income of $91 million, or $1.47 per diluted share, compared with net income of $31 million, or $0.49 per diluted share, for the 2017 fourth quarter. Adjusted net income for the quarter ended Dec. 31, 2018 was $113 million, or $1.83 per diluted share, up 14% and 19% respectively, compared to $100 million, or $1.54 per diluted share, in the 2017 fourth quarter.

Gross profit increased 6% to $391 million for the fourth quarter of 2018 from $368 million in the fourth quarter of 2017. Reported gross profit margin was 24.0% of sales for the fourth quarter of 2018 compared to 25.7%t of sales for the fourth quarter of 2017. Gross profit for the fourth quarter of 2018 includes the net negative impact of $3 million of Victory Motorcycles wind-down costs and other restructuring and realignment costs. Excluding these items, fourth quarter 2018 adjusted gross profit was $394 million, or 24.2% of adjusted sales. For the fourth quarter of 2017 adjusted gross profit of $373 million, or 26.1% of adjusted sales, excludes the negative impact of $5 million in Victory Motorcycles wind down costs and restructuring and realignment costs. Gross profit margins on an adjusted basis were down 190 basis points reflecting tariff, logistics, and commodity costs partially offset by lower promotions and warranty expense.

Operating expenses increased three percent for the fourth quarter of 2018 to $272 million, or 16.7 percent of sales, from $264 million, or 18.4 percent of sales, in the same period in 2017. Operating expenses in dollars increased primarily due to the Boat Holdings acquisition completed during the third quarter of 2018 and investments in strategic projects. Operating expenses as a percentage of sales, improved as the Company realized efficiencies through its selling, marketing and general and administrative spend, along with the addition of Boat Holdings which inherently has a lower operating expense to sales ratio.

Income from financial services was $23 million for the fourth quarter of 2018, up 25% compared with $19 million for the fourth quarter of 2017. The increase is primarily attributable to increased retail demand, higher penetration rates and increased dealer inventory levels.

Interest expense was $20 million for the fourth quarter of 2018 compared to $8 million for the same period last year, primarily due to increased debt levels to finance the Boat Holdings acquisition.

Equity in loss of other affiliates was $4 million for the fourth quarter of 2018 compared to $2 million last year's fourth quarter. During the quarter we incurred additional wind-down related costs related to the earlier decision by the Eicher-Polaris Private Limited (EPPL) Board of Directors to shut down the operations of the EPPL joint venture in 2018.

Other income, net, was $0.4 million and $5 million in the fourth quarter of 2018 and 2017, respectively, resulting from foreign currency exchange rate movements and the corresponding effects on foreign currency transactions related to the company’s foreign subsidiaries.

The provision for income taxes for the fourth quarter of 2018 was $28 million, or 23.5 percent of pretax income, compared with $87 million, or 73.3 percent of pretax income for the fourth quarter of 2017. The fourth quarter of 2017 income tax provision was higher due to a non-cash $55 million write-down of deferred tax assets resulting from the passing of the U.S. tax reform bill in fourth quarter of 2017. The fourth quarter 2018 income tax provision also benefited from the reduction in the federal statutory tax rate to 21%, partially offset by a decrease in excess tax benefits related to stock based compensation compared to the prior year.

Off-Road Vehicle (“ORV”) and Snowmobile segment sales, including PG&A, totaled $1,060 million for the fourth quarter of 2018, up 7% over $994 million for the fourth quarter of 2017 driven by growth in snowmobile sales reflecting a successful SnowCheck pre-order program in 2018. PG&A sales for ORV and Snowmobiles combined increased 6% in the 2018 fourth quarter compared to the fourth quarter last year. Gross profit increased 1% to $282 million in the fourth quarter of 2018, compared to $279 million in the fourth quarter of 2017. Gross profit percentage declined during the quarter as increased pricing was more than offset by tariffs, higher logistics and commodity costs and negative product mix.

ORV wholegood sales for the fourth quarter of 2018 decreased two percent largely due to a tough comparison versus the prior year period when shipments were accelerated to address shortages and demand requirements in the second half of 2017. Polaris North American ORV retail sales increased low-single digits percent for the quarter with side-by-side vehicles up mid-single digits percent, offset somewhat by ATV vehicles down mid-single digits percent. Side-by-sides gained market share during the quarter, while ATV share was flat. The North American ORV industry was down low-single digits percent compared to the fourth quarter last year.

Snowmobile wholegood sales in the fourth quarter of 2018 was $195 million, up 49 percent compared to $131 million in the fourth quarter last year. Snowmobile sales were positively impacted in the fourth quarter due to timing of shipments of pre-season SnowCheck orders, the highest in 17 years, driven by the strength of the new 850 Patriot engine which was available only in a pre-ordered snowmobile.

Motorcycle segment sales, including PG&A, totaled $87 million, down 15% compared to the fourth quarter of 2017. Indian sales increased slightly, but were more than offset by the decline in Slingshot sales. Gross profit for the fourth quarter of 2018 was $2 million compared to $5 million in the fourth quarter of 2017. Adjusted for the Victory wind-down costs for both 2018 and 2017 fourth quarters, motorcycle gross profit was $2 million in the 2018 fourth quarter compared to $8 million for the 2017 fourth quarter. The decrease in gross profit was the result of negative product mix, along with tariff costs and higher logistics and commodity costs.

North American consumer retail sales for the Polaris motorcycle segment, including both Indian Motorcycle and Slingshot, decreased high-teens during the 2018 fourth quarter. Indian Motorcycle retail sales decreased low double-digits. Slingshot's retail sales were down substantially during the quarter. Motorcycle industry retail sales, 900cc and above, were down low-double digits percent in the 2018 fourth quarter. Indian Motorcycle gained market share for the 2018 fourth quarter on a year-over-year basis.

Global Adjacent Markets segment sales, including PG&A, increased four percent to $122 million in the 2018 fourth quarter compared to $117 million in the 2017 fourth quarter, driven by growth in Aixam and Polaris Adventures. Gross profit increased 12% to $33 million in the fourth quarter of 2018, compared to $30 million in the fourth quarter of 2017 driven by higher volume.

Aftermarket segment sales decreased 3% to $212 million in the 2018 fourth quarter compared to $218 million in the 2017 fourth quarter driven primarily by a decrease in Transamerican Auto Parts (TAP) sales during the fourth quarter. TAP sales in the fourth quarter of 2018 were $183 million, which was down 5% compared to the fourth quarter of 2017. TAP sales declined due to ongoing soft wholesale sales along with lower e-commence demand. Gross profit decreased to $52 million in the fourth quarter of 2018, compared to $61 million in the fourth quarter of 2017 due to the lower sales volume.

2019 Business Outlook

The Company announced its adjusted sales and earnings guidance for the full year 2019. Adjusted sales are expected to increase in the range of 11% to 13% over 2018 adjusted sales of $6,083 million and adjusted net income is expected to be in the range of $6.00 to $6.25 per diluted share for the full year 2019 compared to adjusted net income of $6.56 per diluted share for 2018. The full year earnings guidance is inclusive of the Company's expectations related to the impact of external factors such as the annualized impact of current tariffs which assumes 301, list 3 remains at the current 10% rate for the full year, adverse foreign exchange impacts, and higher interest rates, totaling approximately $1.50 per diluted share, on a combined basis. Absent these items, the Company is expected to generate positive earnings growth on a year-over-year basis.