Polaris 2008 Annual Report Download - page 49

During 2008, purchases totaling seven percent of Polaris’ cost of sales were from Japanese yen denominated
suppliers. The impact of the Japanese yen exchange rate fluctuation on Polaris’ raw material purchase prices and
cost of sales in 2008 had a negative financial impact when compared to the prior year. Polaris had no foreign
exchange hedging contracts in place for the Japanese Yen as of December 31, 2008. Polaris anticipates that the yen-
dollar exchange rate fluctuation will again have a negative impact on cost of sales during 2009 when compared to
2008.
Polaris operates in Canada through a wholly-owned subsidiary. Sales of the Canadian subsidiary comprised
14 percent of total Polaris sales in 2008. From time to time, Polaris utilizes foreign exchange hedging contracts to
manage its exposure to the Canadian dollar. The U.S. dollar strengthened in relation to the Canadian dollar in the
latter part of 2008 which resulted in a net negative financial impact on Polaris sales and gross margins for the full
year 2008 when compared to 2007. As of December 31, 2008, Polaris had no Canadian dollar hedging contracts in
place. In January 2009, Polaris entered into Canadian dollar hedge contracts through June 2009 to hedge
approximately 20 percent of the estimated exposure for the first half of 2009. Polaris anticipates that the Canadian
dollar exchange rate fluctuation will have a negative impact on sales and gross margins during 2009 when compared
to 2008.
During each year Polaris sells its products to certain international distributors and certain Polaris subsidiaries
sell to its dealers in Euros. The Company also purchases components from European suppliers in Euros. The Euro-
denominated sales and purchases are approximately equal on an annual basis creating a natural hedge for the Euro.
At December 31, 2008 the Company had no Euro foreign exchange hedging contracts in place.
In the past, Polaris has been a party to, and in the future may enter into, foreign exchange hedging contracts for
the Japanese yen, Euro, and the Canadian dollar to minimize the impact of exchange rate fluctuations within each
year. At December 31, 2008, the Company had no foreign hedging contracts outstanding.
Polaris is subject to market risk from fluctuating market prices of certain purchased commodities and raw
materials including steel, aluminum, fuel, natural gas, and petroleum-based resins. In addition, the Company is a
purchaser of components and parts containing various commodities, including steel, aluminum, rubber and others
which are integrated into the Company’s end products. While such materials are typically available from numerous
suppliers, commodity raw materials are subject to price fluctuations. The Company generally buys these com-
modities and components based upon market prices that are established with the vendor as part of the purchase
process.
The Company generally attempts to obtain firm pricing from most of its suppliers for volumes consistent with
planned production. To the extent that commodity prices increase and the Company does not have firm pricing from
its suppliers, or its suppliers are not able to honor such prices, the Company may experience gross margin declines
to the extent it is not able to increase selling prices of its products. During the first three quarters of 2008 the
Company experienced commodity price increases with some of its key raw materials although some of the raw
materials prices began to decline in the 2008 fourth quarter. During the fourth quarter of 2008, Polaris entered into
diesel fuel hedging contracts to hedge approximately 50 percent of the Company’s expected exposure for the first
half of 2009. These diesel fuel contracts did not meet the criteria for hedge accounting and the resulting unrealized
loss as of December 31, 2008 was $0.6 million pretax, which was included in the consolidated statements of income
as a component of cost of sales.
Polaris is a party to a credit agreement with various lenders consisting of a $250 million revolving loan facility
and a $200 million term loan. Interest accrues on both the revolving loan and the term loan at variable rates based on
LIBOR or “prime.” Additionally, as of December 31, 2008, Polaris is a party to two interest rate swap agreements
that lock in a fixed interest rate on a total of $50.0 million of borrowings. The Company is exposed to interest rate
changes on any borrowings during the year in excess of $50.0 million. Based upon the average outstanding line of
credit borrowings of $282.6 million during 2008 and the interest rate swap agreements, a one-percent fluctuation in
interest rates would have had an approximately $2.3 million impact on interest expense in 2008.
Polaris has been manufacturing its own engines for selected models of snowmobiles since 1995, motorcycles
since 1998 and ORVs since 2001 at its Osceola, Wisconsin facility. Also, in 1995, Polaris entered into an agreement
with Fuji to form Robin. Under the terms of the agreement, Polaris has a 40 percent ownership interest in Robin,
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