Polaris 2013 Annual Report Download - page 79

Download and view the complete annual report

Please find page 79 of the 2013 Polaris annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 112

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105
  • 106
  • 107
  • 108
  • 109
  • 110
  • 111
  • 112

options and restricted stock awards have characteristics significantly different from those of traded options,
and because changes in the input assumptions can materially affect the fair value estimate, the existing models
may not provide a reliable single measure of the fair value of the employee stock options or restricted stock
awards. Management will continue to assess the assumptions and methodologies used to calculate estimated
fair value of share-based compensation. Circumstances may change and additional data may become available
over time, which could result in changes to these assumptions and methodologies and thereby materially
impact the fair value determination. If factors change and the Company employs different assumptions in the
application of Topic 718 in future periods, the compensation expense that was recorded under Topic 718 may
differ significantly from what was recorded in the current period. Refer to Note 2 for additional information
regarding share-based compensation.
The Company estimates the likelihood and the rate of achievement for performance sensitive share-based
awards. Changes in the estimated rate of achievement and fluctuation in the market based stock price can
have a significant effect on reported share-based compensation expenses as the effect of a change in the
estimated achievement level and fluctuation in the market based stock price is recognized in the period that
the likelihood factor and stock price changes. If adjustments in the estimated rate of achievement and
fluctuation in the market based stock price are made, they would be reflected in our gross margin and
operating expenses.
Derivative instruments and hedging activities. Changes in the fair value of a derivative are recognized in
earnings unless the derivative qualifies as a hedge. To qualify as a hedge, the Company must formally
document, designate and assess the effectiveness of transactions that receive hedge accounting.
Polaris enters into foreign exchange contracts to manage currency exposures from certain of its purchase
commitments denominated in foreign currencies and transfers of funds from time to time from its foreign
subsidiaries. Polaris does not use any financial contracts for trading purposes. These contracts met the criteria
for cash flow hedges. Gains and losses on the Canadian dollar, Norwegian Krone, Swedish Krona and
Australian dollar contracts at settlement are recorded in non-operating other (income) in the consolidated
income statements, and gains and losses on the Japanese yen, Mexican peso and Euro contracts at settlement
are recorded in cost of sales in the consolidated income statements. Unrealized gains and losses are recorded
as a component of accumulated other comprehensive income.
Polaris is subject to market risk from fluctuating market prices of certain purchased commodity raw materials
including steel, aluminum, diesel fuel, and petroleum-based resins. In addition, the Company purchases
components and parts containing various commodities, including steel, aluminum, rubber, rare earth metals
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 commodities and components based upon market prices that are established with the vendor as
part of the purchase process. From time to time, Polaris utilizes derivative contracts to hedge a portion of the
exposure to commodity risks. During 2013 and 2012, the Company entered into derivative contracts to hedge
a portion of the exposure for diesel fuel and aluminum. The Company’s diesel fuel and aluminum hedging
contracts do not meet the criteria for hedge accounting and therefore, the resulting unrealized gains and
losses from those contracts are included in the consolidated statements of income in cost of sales. Refer to
Note 11 for additional information regarding derivative instruments and hedging activities.
The gross unrealized gains and losses of these contracts are recorded in the accompanying balance sheets as
other current assets or other current liabilities.
Interest rate swap agreements: At December 31, 2013 and 2012, Polaris did not have any outstanding interest
rate swaps.
Foreign currency translation: The functional currency for each of the Polaris foreign subsidiaries is their
respective local currencies. The assets and liabilities in all Polaris foreign entities are translated at the foreign
55