POLARIS INC. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Form 10-K)
The following discussion pertains to the results of operations and financial position of the Company and should be read in conjunction with the Consolidated Financial Statements and the Notes thereto included elsewhere in this report. This section of this Form 10-K generally discusses 2021 and 2020 items and year-to-year comparisons between 2021 and 2020. Discussions of 2019 items and year-to-year comparisons between 2020 and 2019 that are not included in this Form 10-K can be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2020 .
Overview
2021 was a record year for sales which totaled$8.2 billion , a 17 percent increase from 2020. The Company achieved growth across all segments and regions driven primarily by increased shipments and higher pricing compared to 2020, when we temporarily suspended select plant operations as a result of the then-emerging COVID-19 pandemic. The global spread of COVID-19 ultimately heightened consumer demand across industries, while the impact of the pandemic as well as other disruptive events have impacted the global economy, disrupted global supply chains and created significant volatility and disruption of financial markets. The impact of these factors has affected our business segments, employees, dealers, suppliers, and customers in a variety of ways. As a result of the COVID-19 pandemic, our sales and profitability during the first half of 2020 were negatively impacted by the temporary suspension of select plant operations, which reduced our manufacture and shipment of products, as well as the temporary closures of certain dealers. During this period, sales and profitability were also negatively impacted by a decline in economic activity related to certain of our end markets, such as those served by Global Adjacent Markets and Aftermarket. Beginning in the second quarter of 2020 and continuing through 2021 we have seen strong retail demand for our Powersports products and boats as they provide an attractive social-distancing solution for new and existing Powersports customers. Navigating difficulties associated with the global supply chain as we seek to satisfy retail demand has been challenging. Due to the dynamics of the COVID-19 pandemic, heightened demand, and other natural disasters, our supply chain and manufacturing operations have experienced inefficiencies caused by port delays and production-limiting disruptions. These disruptions, and related costs from associated plant, production, and labor inefficiencies, are significant, widespread and impacting many manufacturers across various industries including Polaris. We expect supply chain-related headwinds and elevated commodity and logistics prices to continue in 2022. While we have made pricing changes to address the increase in these costs, manufacturing disruptions combined with the impact of these elevated commodity and logistics costs are expected to negatively affect the Company's profitability. As a result of strong demand and supply chain disruptions, North American dealer inventory as ofDecember 31, 2021 was down significantly compared to pre-pandemic levels as retail sales outpaced shipments, and these factors will challenge our ability to replenish dealer inventory levels. Full year net income attributable toPolaris Inc. of$493.9 million was a$369.1 million increase from 2020, with diluted earnings per share increasing from$1.99 to$7.88 per share. These increases were primarily driven by increased volume as well the result of the$379.2 million (pre-tax) impairment of goodwill and other intangible assets recorded in the comparable prior year. OnJanuary 27, 2022 , we announced that our Board of Directors approved a two percent increase in the regular quarterly cash dividend to$0.64 per share for the first quarter of 2022, representing the 27th consecutive year of increased dividends to shareholders. The duration of these trends and the magnitude of such impacts cannot be precisely estimated at this time, as they are affected by a number of factors (some of which are outside management's control), including those presented in Item 1A. Risk Factors of this Annual Report. 22 -------------------------------------------------------------------------------- Table of Contents Consolidated Results of Operations The consolidated results of operations were as follows:
For the years ended
Change Change ($ in millions except per share data) 2021 2020 2021 vs. 2020 2019 2020 vs. 2019 Sales$ 8,198.2 $ 7,027.9 17 %$ 6,782.5 4 % Cost of sales$ 6,255.5 $ 5,317.7 18 %$ 5,133.7 4 % Gross profit$ 1,942.7 $ 1,710.2 14 %$ 1,648.8 4 % Percentage of sales 23.7% 24.3% -64 basis points 24.3% +2 basis points Operating expenses: Selling and marketing$ 584.8 $ 544.3 7 %$ 559.2 (3) % Research and development 336.7 295.6 14 % 292.9 1 % General and administrative 366.0 359.2 2 % 393.9 (9) % Goodwill and other intangible asset - 379.2 NM -
NM
deficiency
Total operating expenses$ 1,287.5 $ 1,578.3 (18) %$ 1,246.0 27 % Percentage of sales 15.7 % 22.5 % -675 basis points 18.4% +409 basis
points
Financial services revenue
(33) %$ 80.9 (1) % Operating income$ 709.0 $ 212.3 NM$ 483.7 (56) % Non-operating expense: Interest expense$ 44.2 $ 66.7 (34) %$ 77.6 (14) % Equity in loss of other affiliates $ - $ - NM$ 5.1
NM
Other (income) expense, net$ 2.3 $ 4.2 (45) %$ (6.8)
NM
Loss on sale of businesses$ 36.8 $ - NM $ - - % Income before income taxes$ 625.7 $ 141.4 NM$ 407.8 (65) % Provision for income taxes$ 131.4 $ 16.5 NM$ 83.9 (80) % Effective income tax rate 21.0% 11.6% +938 basis points 20.6% -896 basis points Net income$ 494.3 $ 124.9 NM$ 323.9 (61) % Net (income) loss attributable to (0.4) (0.1) NM 0.1
NM
noncontrolling interest Net income attributable to Polaris$ 493.9 $ 124.8 NM$ 324.0 (61) % Inc. Diluted net income per share$ 7.88 $ 1.99 NM$ 5.20 (62) % attributable toPolaris Inc. shareholders Weighted average diluted shares 62.7 62.6 - % 62.3 - % outstanding NM = not meaningful 23
-------------------------------------------------------------------------------- Table of Contents Sales: Sales were$8,198.2 million in 2021, a 17 percent increase from$7,027.9 million in 2020. The components of the consolidated sales change were as follows: Percent
variation of the total turnover of the Company compared to the previous one
year
2021 2020
Volume 8 % 3 %
Product mix and price 8 1
Currency 1 -
17 % 4 %
Volume contributed a nine percent increase in 2021 driven by increased shipments
in all segments, but most significantly ORV and GAM shipments, as well as higher
PG&A sales. Product mix and price contributed a seven percent increase in 2021,
primarily due to lower promotional spending and increased product pricing.
Currency rate movements contributed a one percent increase for 2021.
Sales by geographic region were as follows:
For the Years Ended December 31,
Percent Percent
Percent of Percent of Change 2021 Percent of Change 2020
($ in millions) 2021 Total Sales 2020 Total Sales vs. 2020 2019 Total Sales vs. 2019
United States $ 6,472.9 79 % $ 5,791.1 82 % 12 % $ 5,551.7 82 % 4 %
Canada 602.1 7 % 396.1 6 % 52 % 394.8 6 % - %
Other foreign countries 1,123.2 14 % 840.7 12 % 34 % 836.0 12 % 1 %
Total sales $ 8,198.2 100 % $ 7,027.9 100 % 17 % $ 6,782.5 100 % 4 %
Sales in the United States for 2021 increased 12 percent compared to 2020,
primarily driven by increased ORV and boat shipments, as well as higher PG&A
sales. Sales in the United States represented 79 percent of total Company sales
in 2021.
Sales in Canada for 2021 increased 52 percent compared to 2020, primarily driven
by increased ORV shipments. Currency rate movements had an eight percentage
point impact on year-over-year sales. Sales in Canada represented seven percent
of total company sales in 2021.
Sales in other foreign countries, primarily in Europe , increased 34 percent in
2021 compared to 2020, primarily driven by increased ORV, motorcycle, and GAM
shipments. Currency rate movements had a five percentage point impact on
year-over-year sales. Sales in other foreign countries represented 14 percent of
total company sales in 2021.
Cost of sales:
The following table reflects our cost of sales in dollars and as a percentage of
sales:
For the Years Ended December 31,
Percent of Percent of Percent of
Total Cost of Total Cost of Change 2021 Total Cost of Change 2020
($ in millions) 2021 Sales 2020 Sales vs. 2020 2019 Sales vs. 2019
Purchased materials $ 5,391.7 86 % $ 4,562.6 86 % 18 % $ 4,418.5 86 % 3 %
and services
Labor and benefits 568.5 9 % 456.5 9 % 25 % 433.3 9 % 5 %
Depreciation and 164.9 3 % 174.9 3 % (6) % 159.0 3 % 10 %
amortization
Warranty costs 130.4 2 % 123.7 2 % 5 % 122.9 2 % 1 %
Total cost of sales $ 6,255.5 100 % $ 5,317.7 100 % 18 % $ 5,133.7 100 % 4 %
Percentage of sales 76.3 % 75.7 % +64 basis 75.7 % -2 basis
points points
24
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Table of Contents
Cost of sales increased 18 percent in 2021 primarily due to increased wholegood
and PG&A shipments, as well as higher labor, raw materials, and logistics costs.
Gross profit:
Gross profit for 2021, as a percentage of sales, decreased primarily due to
higher input costs including logistics, components, and commodity prices, as
well as plant inefficiencies related to supply chain constraints. The decrease
was partially offset by higher sales volume, lower promotional costs and
favorable pricing.
Operating expenses:
Operating expenses for 2021, in absolute dollars and as a percent of sales,
decreased compared to 2020, primarily due to the prior year impairment of
goodwill and other intangible assets, partially offset by an increase in total
operating expenses to levels commensurate with increases in demand.
Income from financial services:
The following table reflects our income from financial services:
For the years ended
Change Change ($ in millions) 2021 2020 2021 vs. 2020 2019 2020 vs. 2019 Income from Polaris Acceptance joint$ 7.7 $ 18.5 (58) %$ 32.5 (43) %
business
Income from retail credit agreements 41.3 58.7 (30) % 45.6 29 % Income from other financial services 4.8 3.2 50 % 2.8 14 %
Activities
Total income from financial services$ 53.8 $ 80.4 (33) %$ 80.9 (1) % Percentage of sales 0.7 % 1.1 % -49 basis points 1.2 % -5 basis points Income from financial services decreased 33 percent, primarily due to lower retail credit income resulting from lower retail sales and lower penetration rates, as well as lower wholesale financing income from Polaris Acceptance driven by lower dealer inventory. Interest expense: Interest expense decreased due to lower debt levels and lower interest rates. Other (income) expense, net: The change in Other (income) expense, net primarily relates to foreign currency exchange rate movements and the corresponding effects on foreign currency transactions, currency hedging positions and balance sheet positions related to our foreign subsidiaries from period to period. Also included in Other (income) expense, net in 2021 is a$7.7 million impairment charge related to an investment in a strategic partner that was associated with a divested business. Loss on sale of businesses: In the fourth quarter of 2021, we divested our GEM and Taylor-Dunn businesses which resulted in a$36.8 million loss. Provision for income taxes: Income tax expense was$131.4 million , or 21.0% of income before income taxes, for 2021 compared with income tax expense of$16.5 million , or 11.6% of income before income taxes, for 2020. The increase in the effective income tax rate for 2021 as compared to 2020 is primarily due to the prior year favorable impact of lower pretax income generated in 2020 and the release of certain income tax reserves due to favorable federal tax examination developments in 2020. The increase was partially offset by favorable income tax benefits in jurisdictions with lower tax rates, as well as favorable income tax benefits from research and development credits in 2021. Weighted average shares outstanding: Weighted average diluted shares outstanding increased slightly in 2021 compared to 2020, primarily due to the increased dilution of weighted shares and options outstanding, partially offset by share repurchases. Segment Results of Operations The summary that follows provides a discussion of the results of operations of each of our five reportable segments. Each of these segments is comprised of various product offerings that serve multiple end markets. We evaluate performance based on sales and gross profit. 25 -------------------------------------------------------------------------------- Table of Contents Our sales and gross profit by reporting segment, which includes the respective PG&A, were as follows: For the Years Ended December 31, Percent Percent Percent of Percent Change Percent Change ($ in millions) 2021 Sales 2020 of Sales 2021 vs. 2020 2019 of Sales 2020 vs. 2019 Sales ORV/Snowmobiles$ 5,186.2 63 %$ 4,533.3 64 % 14 %$ 4,209.1 62 % 8 % Motorcycles 721.6 9 % 581.7 8 % 24 % 584.1 9 % - % Global Adjacent Markets 599.8 7 % 424.6 6 % 41 % 461.3 7 % (8) % Aftermarket 930.4 12 % 884.9 13 % 5 % 906.7 13 % (2) % Boats 760.2 9 % 603.4 9 % 26 % 621.3 9 % (3) % Total sales$ 8,198.2 100 %$ 7,027.9 100 % 17 %$ 6,782.5 100 % 4 % For the Years Ended December 31, Percent Percent Percent of Percent of Change
Percent of Change ($ in millions) 2021 Sales 2020 Sales 2021 vs. 2020 2019 Sales 2020 vs. 2019 Gross profit ORV/Snowmobiles$ 1,226.3 23.6 %$ 1,218.4 26.9 % 1 %$ 1,145.5 27.2 % 6 % Motorcycles 52.3 7.2 % 20.0 3.4 % 162 % 30.0 5.1 % (33) % Global Adjacent Markets 162.3 27.1 % 116.4 27.4 % 39 % 128.8 27.9 % (10) % Aftermarket 247.2 26.6 % 222.8 25.2 % 11 % 222.7 24.6 % - % Boats 170.6 22.4 % 116.4 19.3 % 47 % 124.6 20.1 % (7) % Corporate 84.0 16.2 NM (2.8) NM Total gross profit$ 1,942.7 23.7 %$ 1,710.2 24.3 % 14 %$ 1,648.8 24.3 % 4 % NM = not meaningful ORV/Snowmobiles: ORV sales, inclusive of PG&A sales, were$4,761.9 million in 2021, compared to$4,187.9 million in 2020. The increase was driven by broad-based demand and shipments across ATV and side-by-side product lines, including PG&A, as well as increased pricing. ORV sales to customers outside ofNorth America increased 35 percent in 2021. For 2021, the average ORV per unit sales price increased nine percent compared to 2020, driven by lower promotional costs and increased product pricing. Additional information on our ORV end markets in 2021 compared to 2020: •Polaris North America ATV unit retail sales down low-double digits percent •Polaris North America side-by-side unit retail sales down mid-teens percent •Total Polaris North America ORV unit retail sales down mid-teens percent •Estimated North America industry ORV unit retail sales down high-teens percent •Total Polaris North America ORV dealer inventories down approximately 20 percent Snowmobiles sales, inclusive of PG&A sales, were$424.3 million for 2021, compared to$345.4 million in 2020. The increase was driven primarily by increased pricing and favorable mix, as well as higher PG&A sales. Sales of snowmobiles to customers outside ofNorth America , principally within the Scandinavian region andRussia , decreased approximately 11 percent in 2021. For 2021, the average snowmobile per unit sales price increased 15 percent compared to 2020, driven by lower promotional costs. 26 -------------------------------------------------------------------------------- Table of Contents Additional information on our snowmobile end markets in 2021 compared to 2020: •Polaris North America snowmobile unit retail sales down high-teens percent •Polaris North America snowmobile unit retail sales for the 2021-2022 season-to-date period throughDecember 31, 2021 down high-twenties percent •Estimated North America industry snowmobile unit retail sales down high-teens percent •Estimated North America industry snowmobile unit retail sales for the 2021-2022 season-to-date period throughDecember 31, 2021 down mid-twenties percent •Total Polaris North America snowmobile dealer inventories down approximately 30 percent For the ORV/Snowmobiles segment, gross profit, as a percentage of sales, decreased from 2020 to 2021, primarily due to higher input costs including logistics, components, and commodity prices, as well as plant inefficiencies related to supply chain constraints, partially offset by favorable mix, lower promotional costs, and higher pricing. Motorcycles: Motorcycle sales, inclusive of PG&A sales, increased 24 percent driven by increased Indian motorcycle and Slingshot shipments as a result of strong retail sales, lower promotional costs, and higher PG&A sales. Sales of motorcycles (including Slingshot) to customers outside ofNorth America increased 34 percent in 2021. The average per unit sales price for the Motorcycles segment increased eight percent, driven by lower promotional costs. Additional information on our motorcycle end markets in 2021 compared to 2020: •Indian Motorcycle North America unit retail sales up mid-teens percent •Slingshot North American unit retail sales up approximately 20 percent •Polaris North America 900cc cruiser, touring (including Slingshot), and standard unit retail sales up mid-teens percent •Estimated North America industry 900cc cruiser, touring, and standard unit retail sales up high-teens percent •Polaris North America motorcycle dealer inventories down approximately 60 percent Gross profit, as a percentage of sales, increased from 2020 to 2021, primarily due to lower promotional costs, partially offset by increased input costs related to supply chain constraints. Global Adjacent Markets: Global Adjacent Markets sales, inclusive of PG&A sales, increased 41 percent driven by increases in demand inNorth America and EMEA. Sales to customers outside ofNorth America increased 40 percent in 2021. Gross profit, as a percentage of sales, decreased from 2020 to 2021, primarily due to higher input costs related to supply chain constraints, partially offset by lower promotional costs and higher pricing. Aftermarket: Aftermarket sales, which includesTransamerican Auto Parts (TAP), along with our other aftermarket brands of Klim, Kolpin, ProArmor, Trail Tech and 509, increased five percent, driven by growth for both TAP and the other aftermarket brands. TAP sales increased two percent in 2021 while the other aftermarket brands grew 24%, driven by strong demand. Gross profit, as a percentage of sales, increased from 2020 to 2021, primarily due to increased pricing and favorable mix. Boats: Boat sales increased 26 percent, primarily due to increased production levels driven by retail and demand, as well as higher pricing and favorable mix. Additional information on our boat end markets in 2021 compared to 2020: •PolarisU.S pontoon unit retail sales down low-single digits percent •EstimatedU.S. industry pontoon unit retail sales down mid-single digits percent Gross profit, as a percentage of sales, increased from 2020 to 2021, primarily due to favorable product mix, partially offset by higher input costs related to supply chain constraints. 27 -------------------------------------------------------------------------------- Table of Contents Liquidity and Capital Resources Our primary sources of funds have been cash provided by operating and financing activities. Our primary uses of funds have been for acquisitions, repurchases and retirement of common stock, capital investments, new product development, and cash dividends to shareholders. The seasonality of production and shipments cause working capital requirements to fluctuate during the year. We believe that existing cash balances, cash flow to be generated from operating activities and borrowing capacity under the credit facility arrangement will be sufficient to fund operations, new product development, cash dividends, share repurchases, and capital requirements for the foreseeable future. The following table summarizes the cash flows from operating, investing and financing activities for the years endedDecember 31, 2021 , 2020 and 2019: For the Years Ended December 31, Change Change ($ in millions) 2021 2020 2021 vs. 2020 2019 2020 vs. 2019 Total cash provided by (used for): Operating activities$ 293.7 $ 1,018.6 $ (724.9) $ 655.1 $ 363.5 Investing activities (303.9) (150.7) (153.2) (239.3) 88.6 Financing activities (107.6) (415.4) 307.8 (411.8) (3.6) Impact of currency exchange rates on (10.6) 8.7 (19.3) (0.8) 9.5 cash balances Increase (decrease) in cash, cash$ (128.4) $ 461.2 $ 3.2
cash equivalents and restricted cash
Operating Activities: The decrease in net cash provided by operating activities was primarily the result of higher working capital additions due to increases in inventory driven by strong end-market demand and supply chain inefficiencies, partially offset by higher net income. Investing Activities: The primary sources and uses of cash in 2021 were for the purchase of property and equipment and tooling for continued capacity and capability at our manufacturing and distribution facilities and for product development, as well as distributions from and contributions to Polaris Acceptance. An increase in property, equipment and tooling purchases resulted in more cash used for investing activities compared to the prior year. Financing Activities: The decrease in net cash used for financing activities was primarily due to increased net borrowings under debt arrangements, finance lease obligations and notes payable in 2021. Net borrowings totaled$351.3 million in 2021 compared to net repayments of$246.2 million in 2020. The increase was partially offset by higher share repurchases in 2021. Financing Arrangements: We are party to an unsecured Master Note Purchase Agreement, as amended and supplemented, under which we have issued senior notes. As ofDecember 31, 2021 , outstanding borrowings under the Master Note Purchase Agreement totaled$350.0 million . We are also party to an unsecured credit agreement, which includes a$1.0 billion variable interest rate Revolving Loan Facility that matures inJune 2026 , under which we have unsecured borrowings. As ofDecember 31, 2021 , there were no borrowings outstanding under the Revolving Loan Facility. Our credit agreement also includes a Term Loan Facility, on which$876.0 million was outstanding as ofDecember 31, 2021 . Interest is charged at rates based on LIBOR or "prime" for the credit facility. As ofDecember 31, 2021 , we had$992.5 million of availability on the Revolving Loan Facility. OnDecember 17, 2021 , we amended the credit agreement to provide a new incremental 364-day term loan (the "incremental term loan") in the amount of$500 million . The new incremental term loan, which was fully drawn on closing, is unsecured and matures onDecember 16, 2022 . There are no required principal payments prior to the maturity date. In addition to the payment of the$500 million incremental term loan, we are required to make principal payments under the Term Loan Facility totaling$45 million over the next 12 months. 28 -------------------------------------------------------------------------------- Table of Contents The credit facility and the amended Master Note Purchase Agreement contain covenants that require us to maintain certain financial ratios, including minimum interest coverage and maximum leverage ratios. The agreements also require us 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. OnJuly 2, 2018 , pursuant to the Agreement and Plan of Merger datedMay 29, 2018 , the Company completed the acquisition ofBoat Holdings, LLC , a privately heldDelaware limited liability company, headquartered inElkhart, Indiana which manufactures boats ("Boat Holdings "). As a component of theBoat Holdings merger agreement, we have committed to make a series of deferred payments to the former owners throughJuly 2030 . The original discounted payable was for$76.7 million , of which$61.0 million is outstanding as ofDecember 31, 2021 . As ofDecember 31, 2021 and 2020, we were in compliance with all debt covenants. Our debt to total capital ratio was 60 percent and 56 percent as ofDecember 31, 2021 and 2020, respectively. Share Repurchases: As ofDecember 31, 2021 , our Board of Directors has authorized us to repurchase up to an additional$838.8 million of our common stock. We repurchased a total of 3.8 million shares of our common stock for$461.6 million during 2021, which had a favorable impact on earnings per share of32 cents . Wholesale Customer Financing Arrangements: We have arrangements with certain finance companies to provide secured floor plan financing for our dealers. These arrangements provide liquidity by financing dealer purchases of our products without the use of our working capital. A majority of the worldwide sales of snowmobiles, ORVs, motorcycles, boats and related PG&A are financed under similar arrangements whereby we receive payment within a few days of shipment of the product. The amount financed by worldwide dealers under these arrangements related to snowmobiles, ORVs, motorcycles, boats and related PG&A as ofDecember 31, 2021 and 2020, was approximately$946.7 million and$1,064.0 million , respectively. We participate in the cost of dealer financing up to certain limits. Under these arrangements, we have agreed to repurchase products repossessed by these finance companies. For calendar year 2021, the potential aggregate repurchase obligations were approximately$293.8 million . Our financial exposure under these repurchase agreements is limited to the difference between the amounts unpaid by the dealer 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 this agreement during the periods presented. Retail Customer Financing Arrangements: We have agreements with third-party financing companies to provide financing options to end consumers of our products. We have no material contingent liabilities for residual value or credit collection risk under these agreements. During 2021, consumers financed 22 percent of our vehicles sold inthe United States through these arrangements. The volume of installment credit contracts written in calendar year 2021 with these institutions was$1,081.8 million , a 29 percent decrease from 2020. Critical Accounting Policies and Critical Accounting Estimates We have adopted various accounting policies to prepare the consolidated financial statements in accordance withU.S. GAAP. Our significant accounting policies are described in Note 1 of the Notes to Consolidated Financial Statements. Some of those significant accounting policies require us to make difficult, subjective, or complex judgments or estimates. An accounting estimate is considered to be critical if it meets both of the following criteria: (i) the estimate requires assumptions about matters that are highly uncertain at the time the accounting estimate is made, and (ii) different estimates reasonably could have been used, or changes in the estimate that are reasonably likely to occur may have a material impact on our financial condition or results of operations. The significant accounting policies that management believes are the most critical to aid in fully understanding and evaluating our reported financial results include the following: revenue recognition, sales promotions and incentives, product warranties, product liability, and goodwill and indefinite-lived intangibles. Revenue recognition. With respect to wholegood vehicles, boats, parts, garments and accessories, revenue is recognized when we transfer control of the product to our customer. With respect to services provided by us, revenue is recognized upon completion of the service or over the term of the service agreement in proportion to the costs expected to be incurred in satisfying the obligations over the term of the service period. Revenue is measured based on the amount of 29 -------------------------------------------------------------------------------- Table of Contents consideration that we expect to be entitled to in exchange for the goods or services transferred. Sales, value add, and other taxes 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 our revenue. Incidental items that are immaterial in the context of the contract are recognized as expense. The expected costs associated with our limited warranties are recognized as expense when the products are sold. When the right of return exists, we adjust the consideration for the estimated effect of returns. We estimate 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. Historically, product returns, whether in the normal course of business or resulting from repurchases made under the floor plan financing program, have not been material. However, we have agreed to repurchase products repossessed by the finance companies up to certain limits. Our financial exposure is limited to the difference between the amount paid to the finance companies and the amount received on the resale of the repossessed product. Sales promotions and incentives. We accrue for estimated sales promotion and incentive expenses, which are recognized as a component of sales in measuring the amount of consideration we expect to receive in exchange for transferring goods or providing services. Examples of sales promotion and incentive programs include dealer and consumer rebates, volume incentives, retail financing programs and sales associate incentives. Sales promotion and incentive expenses are estimated based on current programs and historical rates for each product line. We record these amounts as a liability in the consolidated balance sheet until they are ultimately paid. As ofDecember 31, 2021 and 2020, accrued sales promotions and incentives were$96.9 million and$138.1 million , respectively. Actual results may differ from these estimates if market conditions dictate the need to enhance or reduce sales promotion and incentive programs or if the customer usage rate varies from historical trends. Adjustments to sales promotions and incentives accruals are made as actual usage becomes known in order to properly estimate the amounts necessary to generate consumer demand based on market conditions as of the balance sheet date. Product warranties. We typically provide a limited warranty for our vehicles and boats for a period of six months to ten years, depending on the product. We provide longer warranties in certain geographical markets as determined by local regulations and customary practice and may also provide longer warranties related to certain promotional programs. Our standard warranties require us, generally through our dealer network, to repair or replace defective products during such warranty periods. The warranty reserve is established at the time of sale to the dealer or distributor based on management's best estimate using historical rates and trends. We record these amounts as a liability in the consolidated balance sheet until they are ultimately paid. As ofDecember 31, 2021 and 2020, the accrued warranty liability was$135.1 million and$140.8 million , respectively. Adjustments to the warranty reserve are made based on actual claims experience in order to properly estimate the amounts necessary to settle future and existing claims on products sold as of the balance sheet date. The warranty reserve includes the estimated costs related to recalls, which are accrued when probable and estimable. Factors that could have an impact on the warranty accrual include the following: changes in manufacturing quality, shifts in product mix, changes in warranty coverage periods, impacts on product usage (including weather), product recalls and changes in sales volume. While management believes that the warranty reserve is adequate and that the judgment applied is appropriate, such amounts estimated to be due and payable could differ materially from what will ultimately transpire in the future, and have a material adverse effect on our financial condition. Product liability. We are subject to product liability claims in the normal course of business. We carry excess insurance coverage for product liability claims. We self-insure product liability claims before the policy date and up to the purchased insurance coverage after the policy date. The estimated costs resulting from any uninsured losses are charged to operating expenses when it is probable a loss has been incurred and the amount of the loss is reasonably estimable. There is significant judgment and estimation required in evaluating the possible outcomes and potential losses of product liability matters. We utilize claims experience, historical trends and actuarial analysis, along with an analysis of current claims, to assist in determining the appropriate loss reserve levels. As ofDecember 31, 2021 and 2020, we had accruals of$70.3 million and$70.7 million , respectively, for the probable payment of pending and expected claims related to product liability litigation associated with our products. While management believes the product liability reserves are adequate, adverse determination of material product liability claims made against us could have a material adverse effect on our financial condition.Goodwill .Goodwill is tested at least annually for impairment and is tested for impairment more frequently when events or changes in circumstances indicate that the asset might be impaired. We complete our annual goodwill impairment test as of the first day of the fourth quarter. 30 -------------------------------------------------------------------------------- Table of Contents We may first perform a qualitative assessment to determine whether it is more likely than not that the fair value of each reporting unit is less than its carrying amount. A qualitative assessment requires that we consider events or circumstances including macroeconomic conditions, industry and market considerations, cost factors, overall financial performance, changes in management or key personnel, changes in strategy, changes in customers, changes in the composition or carrying amount of a reporting unit's net assets, and changes in our stock price. If, after assessing the totality of events or circumstances, it is determined that it is more likely than not that the fair value of the reporting unit is less than its carrying amount, or if we elect to bypass the qualitative test and proceed to a quantitative test, then the quantitative goodwill impairment test is performed. A quantitative test includes comparing the fair value of each reporting unit to the carrying amount of the reporting unit, including goodwill. If the estimated fair value is less than the carrying amount of the reporting unit, an impairment is recognized in an amount equal to the difference, limited to the total amount of goodwill allocated to that reporting unit. Under the quantitative goodwill impairment test, the fair value of each reporting unit is determined using a discounted cash flow analysis and market approach. Determining the fair value of the reporting units requires the use of significant judgment, including discount rates, assumptions in our long-term business plan about future revenues and expenses, capital expenditures, and changes in working capital, which are dependent on internal forecasts, estimation of long-term growth for each reporting unit, and determination of the discount rate. These plans take into consideration numerous factors including historical experience, anticipated future economic conditions, changes in raw material prices and growth expectations for the industries and end markets in which we participate. These assumptions are determined over a five year long-term planning period. The five year growth rates for revenues and earnings before interest, taxes, depreciation and amortization ("EBITDA") vary for each reporting unit being evaluated. Revenues and EBITDA beyond five years are projected to grow at a terminal growth rate consistent with industry expectations. Actual results may significantly differ from those used in our valuations. The forecasted future cash flows are discounted using a discount rate developed for each reporting unit. The discount rates were developed using market observable inputs, as well as our assessment of risks inherent in the future cash flows of the respective reporting unit. In estimating fair value using the market approach, we identify a group of comparable publicly traded companies for each reporting unit that are similar in terms of size and product offering. These groups of comparable companies are used to develop multiples based on total market-based invested capital as a multiple of EBITDA. We determine our estimated values by applying these comparable EBITDA multiples to the operating results of our reporting units. The ultimate fair value of each reporting unit is determined considering the results of both valuation methods. Inputs used to estimate these fair values included significant unobservable inputs that reflect our assumptions about the inputs that market participants would use and, therefore, the fair value assessments are classified within Level 3 of the fair value hierarchy. In the fourth quarter of 2021, we completed the annual impairment test. It was determined that goodwill was not impaired as each reporting unit's fair value exceeded its carrying value. We completed a qualitative assessment for the ORV, Snow, Motorcycles and Global Adjacent Markets reporting units and elected to perform a quantitative goodwill test for the Boats reporting unit. The Boats reporting unit did not have a difference between its fair value and carrying value that was lower than 10%. No assessment was performed for the Aftermarket reporting unit as it did not have a goodwill balance as of the annual testing date. Identifiable intangible assets. Our primary identifiable intangible assets include: dealer/customer relationships, brand/trade names, developed technology, and non-compete agreements. Identifiable intangibles with finite lives are amortized and those identifiable intangibles with indefinite lives are not amortized. Identifiable intangible assets that are subject to amortization are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Identifiable intangible assets with indefinite lives are tested for impairment annually or more frequently when events or changes in circumstances indicate that the asset might be impaired. We complete our annual impairment test as of the first day of the fourth quarter each year for identifiable intangible assets with indefinite lives. Our identifiable intangible assets with indefinite lives include brand/trade names. The impairment test consists of a comparison of the fair value of the brand/trade name with its carrying value. The fair value is determined using the relief-from-royalty method. This method assumes the trade name has value to the extent that the owner is relieved of the obligation to pay royalties for the benefits received from them. This method requires us to estimate the future revenue for the related brands, the appropriate royalty rate and the discount rate. Forecasted revenues are derived from our annual budget and long-term business plan and royalty rates were based on brand profitability. The discount rates are developed using the market observable inputs used in the development of the reporting unit discount rates, as well as our assessment of risks inherent in the future cash flows of the respective trade name. 31 -------------------------------------------------------------------------------- Table of Contents In the fourth quarter of 2021, we completed the annual impairment test. It was determined that our indefinite lived intangible assets were not impaired.
New Accounting Pronouncements See Section 8 of Part II, “Financial Statements and Supplementary Data – Note 1 – Organization and Significant Accounting Policies – New Accounting Pronouncements”.
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