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 ended December 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 of December 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 to Polaris 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.
On January 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.

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Consolidated Results of Operations
The consolidated results of operations were as follows:
                                                                            

For the years ended the 31st of December,

                                                                                        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 $53.8 $80.4

                        (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 to Polaris Inc.
shareholders
Weighted average diluted shares              62.7               62.6                                 -  %            62.3                                 -  %
outstanding
NM = not meaningful


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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


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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 the 31st of December,

                                                                                       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 $16.5 million, or 11.6% of income
before income taxes, for 2020. The increase in the effective income tax rate for
2021 as compared to 2020 is primarily due to the prior year favorable impact of
lower pretax income generated in 2020 and the release of certain income tax
reserves due to favorable federal tax examination developments in 2020. The
increase was partially offset by favorable income tax benefits in jurisdictions
with lower tax rates, as well as favorable income tax benefits from research and
development credits in 2021.
Weighted average shares outstanding:
Weighted average diluted shares outstanding increased slightly in 2021 compared
to 2020, primarily due to the increased dilution of weighted shares and options
outstanding, partially offset by share repurchases.
Segment Results of Operations
The summary that follows provides a discussion of the results of operations of
each of our five reportable segments. Each of these segments is comprised of
various product offerings that serve multiple end markets. We evaluate
performance based on sales and gross profit.
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Our sales and gross profit by reporting segment, which includes the respective
PG&A, were as follows:
                                                                                            For the Years Ended December 31,
                                                                                                                  Percent                                                     Percent
                                                     Percent of                              Percent              Change                                 Percent              Change
($ 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 of North 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 of North America, principally within the
Scandinavian region and Russia, 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.
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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 through December 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 through December 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 of North 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 in North America and EMEA. Sales to customers
outside of North 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 includes Transamerican 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:
•Polaris U.S pontoon unit retail sales down low-single digits percent
•Estimated U.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.

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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 ended December 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 of December 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 in June
2026, under which we have unsecured borrowings. As of December 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 of December 31, 2021. Interest is charged at rates based on LIBOR
or "prime" for the credit facility. As of December 31, 2021, we had $992.5
million of availability on the Revolving Loan Facility.
On December 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 on December 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.
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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.
On July 2, 2018, pursuant to the Agreement and Plan of Merger dated May 29,
2018, the Company completed the acquisition of Boat Holdings, LLC, a privately
held Delaware limited liability company, headquartered in Elkhart, Indiana which
manufactures boats ("Boat Holdings"). As a component of the Boat Holdings merger
agreement, we have committed to make a series of deferred payments to the former
owners through July 2030. The original discounted payable was for $76.7 million,
of which $61.0 million is outstanding as of December 31, 2021.
As of December 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 of December 31,
2021 and 2020, respectively.
Share Repurchases:
As of December 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 of 32 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 of December 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 in the 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 with U.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
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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 of December 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 of December 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 of December 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.
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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.
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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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