Polaris 2008 Annual Report Download - page 48

credit customers who would be able to obtain credit from HSBC. In order to avoid the potential reduction of
revolving retail credit available to Polaris consumers, Polaris began to forgo the receipt of a volume based fee
provided for under its agreement with HSBC effective March 1, 2008. Additionally, the Company initiated legal
action against HSBC alleging, among other things, breach of contract. The Company and HSBC reached an
amicable settlement in the case and have agreed to dismiss the lawsuit. The settlement will not result in a financial
payment to Polaris. Management currently anticipates that the elimination of the volume based fee will continue
and that HSBC will continue to provide revolving retail credit to qualified customers through the end of the contract
term on October 31, 2010.
In April 2006, a wholly-owned subsidiary of Polaris entered into a multi-year contract with GE Money Bank
(“GE Bank”) under which GE Bank makes available closed-end installment consumer and commercial credit to
customers of Polaris dealers for both Polaris and non-Polaris products. Polaris’ income generated from the GE Bank
agreement has been included as a component of Income from financial services in the accompanying consolidated
statements of income.
During 2008 consumers financed approximately 39 percent of Polaris vehicles sold in the United States
through the combined HSBC revolving retail credit and GE Bank installment retail credit arrangements, while the
volume of revolving and installment credit contracts written in calendar year 2008 was $638.0 million, a 25 percent
decrease from 2007. This negative trend combined with the less favorable terms imposed by HSBC discussed
above, will likely result in significantly lower income generated from the HSBC and GE Bank retail credit
agreements again in 2009.
In January 2009, a wholly owned subsidiary of Polaris entered into a multi-year contract with Sheffield
Financial (“Sheffield”) pursuant to which Sheffield agreed to make available closed-end installment consumer and
commercial credit to customers of Polaris dealers for Polaris products in the United States.
In 2005 Polaris invested in Austrian motorcycle manufacturer KTM by purchasing a 25 percent interest in that
company from a third party for $85.4 million including transaction costs. Additionally, Polaris and KTM’s largest
shareholder, Cross Industries AG (“Cross”), entered into an option agreement which provided that under certain
conditions in 2007, either Cross could purchase Polaris’ interest in KTM or, alternatively, Polaris could purchase
Cross’ interest in KTM. In December 2006, Polaris and Cross cancelled the option agreement and entered into a
share purchase agreement for the sale by the Company of approximately 1.38 million shares of KTM, or
approximately 80 percent of its investment in KTM, to a subsidiary of Cross. The agreement provided for
completion of the sale of the KTM shares in two stages during the first half of 2007. On June 15, 2007, Polaris
completed the second and final closing of its sale of KTM shares to Cross under the terms of the December 2006
agreement as supplemented on February 20, 2007, generating combined proceeds of $77.1 million including a total
gain of $6.2 million. Polaris now holds ownership of approximately 0.34 million shares, representing slightly less
than 5 percent of KTM’s outstanding shares.
Improvements in manufacturing capacity and product development during 2008 included $29.0 million of
tooling expenditures for new product development across all product lines. Polaris anticipates that capital
expenditures for 2009, including tooling and research and development equipment, will range from $50.0 million
to $60.0 million.
Management believes that existing cash balances, cash flows to be generated from operating activities and
available borrowing capacity under the line of credit arrangement will be sufficient to fund operations, regular
dividends, share repurchases, and capital expenditure requirements for 2009. At this time, management is not aware
of any factors that would have a material adverse impact on cash flow beyond 2009.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Inflation, Foreign Exchange Rates, Equity Prices and Interest Rates
Commodity inflation has had an impact on the Company’s results of operations in 2008. The changing
relationships of the U.S. dollar to the Canadian dollar, Euro and Japanese yen have also had a material impact from
time-to-time.
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