e10vq

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark one)


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934

For the quarterly period ended JUNE 30, 2005


o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934

For the transition period from ________to ________

Commission File Number 1-11411

Polaris Industries Inc.

(Exact Name of Registrant as Specified in its Charter)


Minnesota		41-1790959

(State or other jurisdiction of		(IRS Employer
incorporation or organization		Identification No.)


2100 Highway 55, Medina, MN 55340

(Address of principal executive offices) (Zip Code)

(763) 542-0500

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.

Yes þ No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Section 12b-2 of the Exchange Act).

Yes þ No o

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

As of July 25, 2005, 42,160,575 shares of Common Stock of the issuer were outstanding.

FORM 10-Q
For the Quarterly Period Ended
June 30, 2005

POLARIS INDUSTRIES INC.

CONSOLIDATED BALANCE SHEETS

(In Thousands)


	June 30, 2005			December 31, 2004
	(Unaudited)
Assets
Current Assets
Cash and cash equivalents	$	14,320		$	138,469
Trade receivables, net		57,344			71,172
Inventories, net		236,818			173,624
Prepaid expenses and other		11,297			12,090
Deferred tax assets		56,244			65,489
Current assets of discontinued operations		982			4,811

Total current assets		377,005			465,655

Property and equipment, net		219,845			200,901
Investments in finance affiliate and retail credit deposit		92,357			98,386
Goodwill, net		24,657			24,798
Intangible and other assets, net		3,139			3,185

Total Assets	$	717,003		$	792,925


Liabilities and Shareholders’ Equity
Current Liabilities:
Accounts payable	$	106,630		$	96,302
Accrued expenses		216,258			252,704
Income taxes payable		16,321			31,001
Current liabilities of discontinued operations		15,594			25,186

Total current liabilities		354,803			405,193

Deferred income taxes		4,000			8,000
Borrowings under credit agreement		30,000			18,000

Total liabilities	$	388,803		$	431,193


Shareholders’ Equity:
Preferred stock $0.01 par value, 20,000 shares authorized, no shares issued and outstanding		—			—

Common stock $0.01 par value, 80,000 shares authorized, 42,150 and 42,741 shares issued and outstanding	$	421		$	427
Additional paid-in capital		—			—
Deferred compensation		(5,874	)		(8,516	)
Retained earnings		333,113			366,345
Accumulated other comprehensive income, net		540			3,476

Total shareholders’ equity	$	328,200		$	361,732


Total Liabilities and Shareholders’ Equity	$	717,003		$	792,925

All periods reflect the classification of the Marine Division results as discontinued operations. The balance
sheet at December 31, 2004 has been derived from the audited financial statements at that date.

The accompanying footnotes are an integral part of these consolidated statements.

FORM 10-Q
For the Quarterly Period Ended
June 30, 2005

POLARIS INDUSTRIES INC.

CONSOLIDATED STATEMENTS OF INCOME

(In Thousands, Except Per Share Data)

(Unaudited)


	For Three Months						For Six Months
	Ended June 30,						Ended June 30,
	2005			2004			2005			2004
Sales	$	442,296		$	394,628		$	800,608		$	723,625
Cost of Sales		345,920			302,404			619,745			553,870

Gross profit		96,376			92,224			180,863			169,755
Operating expenses
Selling and marketing		25,800			23,399			52,931			51,514
Research and development		17,556			15,528			33,779			28,730
General and administrative		13,993			19,008			34,387			36,879

Total operating expenses		57,349			57,935			121,097			117,123

Income from financial services		8,206			7,252			16,748			15,388

Operating Income		47,233			41,541			76,514			68,020

Non-operating Expense (Income):
Interest expense		1,183			623			1,758			1,147
Other expense (income), net		1,073			(17	)		1,244			354

Income before income taxes		44,977			40,935			73,512			66,519

Provision for Income Taxes		14,842			13,509			24,259			21,951

Net Income from continuing operations	$	30,135		$	27,426		$	49,253		$	44,568

Loss from discontinued operations, net of tax		(145	)		(3,057	)		(420	)		(5,894	)

Net Income	$	29,990		$	24,369		$	48,833		$	38,674

Basic Net Income per share
Continuing operations	$	0.71		$	0.65		$	1.16		$	1.05
Loss from discontinued operations		(0.00	)		(0.07	)	$	(0.01	)	$	(0.14	)

Net Income	$	0.71		$	0.58		$	1.15		$	0.91


Diluted Net Income per share
Continuing operations	$	0.68		$	0.61		$	1.11		$	0.99
Loss from discontinued operations		(0.00	)		(0.07	)		(0.01	)		(0.13	)

Net Income	$	0.68		$	0.54		$	1.10		$	0.86


Weighted average shares outstanding:
Basic		42,270			42,181			42,543			42,376

Diluted		44,104			44,968			44,552			45,108

All periods presented reflect the classification of the Marine Division’s financial results as discontinued operations.

The accompanying footnotes are an integral part of these consolidated statements.

FORM 10-Q
For the Quarterly Period Ended
June 30, 2005

POLARIS INDUSTRIES INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)

(Unaudited)


	For Six Months
	Ended June 30,
	2005			2004
Operating Activities:
Net income	$	48,833		$	38,674
Net loss from discontinued operations		420			5,894
Adjustments to reconcile net income to net cash provided by (used for) operating activities:
Depreciation and amortization		28,416			25,798
Noncash compensation		6,285			7,992
Noncash income from financial services		(6,259	)		(5,206	)
Deferred income taxes		5,245			4,765
Changes in current operating items:
Trade receivables		13,828			(12,976	)
Inventories		(63,193	)		(25,113	)
Accounts payable		10,328			24,652
Accrued expenses		(36,447	)		(38,643	)
Income taxes payable		122			8,390
Prepaid expenses and others, net		(2,143	)		3,602

Net cash provided by continuing operations		5,435			37,829
Net cash flow provided by (used for) discontinued operations		(6,182	)		853

Net cash provided by (used for) operating activities		(747	)		38,682

Investing Activities:
Purchase of property and equipment		(47,175	)		(38,038	)
Investments in finance affiliate and retail credit deposit, net		12,288			9,455

Net cash used for continuing operations investment activities		(34,887	)		(28,583	)
Net cash used for discontinued operations investment activities		—			(539	)

Net cash used for investing activities		(34,887	)		(29,122	)

Financing Activities:
Borrowings under credit agreement		297,000			231,000
Repayments under credit agreement		(285,000	)		(231,007	)
Repurchase and retirement of common shares		(92,096	)		(36,674	)
Cash dividends to shareholders		(23,646	)		(19,520	)
Proceeds from stock issuances under employee plans		15,227			2,716


Net cash used for financing activities		(88,515	)		(53,485	)


Net decrease in cash and cash equivalents		(124,149	)		(43,925	)

Cash and cash equivalents at beginning of period		138,469			82,761


Cash and cash equivalents at end of period	$	14,320		$	38,836

All periods presented reflect the classification of the marine division’s financial results as
discontinued operations.

The accompanying footnotes are an integral part of these consolidated statements.

FORM 10-Q
For the Quarterly Period Ended
June 30, 2005

POLARIS INDUSTRIES INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. Significant Accounting Policies

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial statements and, therefore, do not include all information and disclosures of results of operations, financial position and changes in cash flow in conformity with accounting principles generally accepted in the United States for complete financial statements. Accordingly, such statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2004, previously filed with the Securities and Exchange Commission. In the opinion of management, such statements reflect all adjustments (which include only normal recurring adjustments) necessary for a fair presentation of the financial position, results of operations, and cash flows for the periods presented. Due to the seasonality of the snowmobile, all terrain vehicle (ATV), motorcycle and the parts, garments and accessories (PG&A) business, and to certain changes in production and shipping cycles, results of such periods are not necessarily indicative of the results to be expected for the complete year.

On September 2, 2004, the Company announced its decision to discontinue the manufacture of marine products. In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, the marine products division’s financial results are reported separately as discontinued operations for all periods presented.

New accounting pronouncements

In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123 (revised 2004), “Share-Based Payments” (SFAS No. 123R). The statement originally required the expensing of stock options in the financial statements for periods no later than the annual or interim periods beginning after June 15, 2005. In April 2005, the Securities and Exchange Commission extended the implementation date of SFAS No. 123R to the beginning of the Company’s next fiscal year. Based on the change in the implementation date, Polaris expects to implement the statement beginning with its interim financial statements for the first quarter 2006. As of yet the Company has not made a determination of the valuation methodology and, therefore, has not determined the impact to future periods.

Product Warranties

Polaris provides a limited warranty for ATVs for a period of six months and for a period of one year for all remaining products. Polaris may provide longer warranties related to certain promotional programs, as well as longer warranties in certain geographical markets as determined by local regulations and market conditions. Polaris’ standard warranties require the Company or its dealers to repair or replace defective product during such warranty period at no cost to the consumer. 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

FORM 10-Q
For the Quarterly Period Ended
June 30, 2005

trends. Adjustments to the warranty reserve are made from time to time as actual claims become known in order to properly estimate the amounts necessary to settle future and existing claims on products sold as of the balance sheet date. Factors that could have an impact on the warranty accrual in any given period include the following: improved manufacturing quality, shifts in product mix, changes in warranty coverage periods, snowfall and its impact on snowmobile usage, product recalls and any significant changes in sales volume. The activity in Polaris’ accrued warranty reserve for the periods presented, excluding the discontinued marine business, is as follows (in thousands):


	For the Three Months						For the Six Months
	Ended June 30,						Ended June 30,
(in thousands)	2005			2004			2005			2004
Accrued warranty reserve, beginning	$	21,701		$	23,943		$	28,243		$	29,068
Additions charged to expense		10,581			4,857			16,046			8,213
Warranty claims paid		(8,896	)		(6,482	)		(19,953	)		(14,963	)
Consumer Products Safety Commission (CPSC) settlement paid (charged to expense prior to 2004)		—			—			(950	)		—

Accrued warranty reserve, ending	$	23,386		$	22,318		$	23,386		$	22,318

During the first quarter 2005, the Company paid the CPSC $950,000 to settle claims alleging that the Company violated the Consumer Product Safety Act dating back to the late 1990’s. Polaris and the CPSC approved the settlement to avoid continuing legal costs associated with protracted litigation.

Stock Based Employee Compensation

Polaris accounts for all stock based compensation plans in accordance with the provision of APB Opinion No. 25. Had compensation costs for these plans been recorded at fair value consistent with the methodology prescribed by SFAS No. 123 “Accounting for Stock-Based Compensation,” Polaris’ net income and net income per share would have been reduced to the following pro-forma amounts (in thousands except per share data):


	For the Three Months						For the Six Months
	Ended June 30,						Ended June 30,
	2005			2004			2005			2004
Net income from continuing operations:
As reported	$	30,135		$	27,426		$	49,253		$	44,568
Less: Additional compensation expense, net of tax		(1,002	)		(1,393	)		(2,256	)		(2,697	)


Pro forma	$	29,133		$	26,033		$	46,997		$	41,871

Net income from continuing operations per share (diluted):
As reported	$	0.68		$	0.61		$	1.11		$	0.99
Pro forma	$	0.66		$	0.58		$	1.06		$	0.93

The fair value of each award under the Option Plan is estimated on the date of grant using the Black-Scholes option-pricing model.

FORM 10-Q
For the Quarterly Period Ended
June 30, 2005

NOTE 2. Inventories

Inventories are stated as the lower of cost (first-in, first-out method) or market. The major components of inventories are as follows (in thousands):


	June 30, 2005			December 31, 2004
Raw Materials and Purchased Components	$	36,469		$	14,993
Service Parts, Garments and Accessories		73,413			67,966
Finished Goods		138,358			100,735
Less: reserves		(11,422	)		(10,070	)


Inventories	$	236,818		$	173,624

NOTE 3. Financing Agreement

Polaris has an unsecured bank line of credit arrangement with maximum available borrowings of $250,000,000 expiring on June 25, 2009. Interest is charged at rates based on LIBOR or “prime” (effective rate was 3.91 percent at June 30, 2005).

Polaris has entered into an interest rate swap agreement to manage exposures to fluctuations in interest rates. The effect of this agreement is to fix the interest rate at 7.21 percent for $18,000,000 of borrowings under the credit line until June 2007.

As of June 30, 2005, total borrowings under the bank line of credit arrangement was $30,000,000 and has been classified as long-term in the accompanying consolidated balance sheets.

NOTE 4. Investments in Finance Affiliate and Retail Credit Deposit

In 1996, a wholly owned subsidiary of Polaris entered into a partnership agreement with a subsidiary of Transamerica Distribution Finance (TDF) to form Polaris Acceptance. In January 2004, TDF was purchased by GE Commercial Distribution Finance (GECDF), a subsidiary of General Electric Company. Polaris Acceptance provides floor plan financing to Polaris’ dealers in the United States. Polaris’ subsidiary has a 50 percent equity interest in Polaris Acceptance. The receivable portfolio is recorded on Polaris Acceptance’s books, and is funded 85 percent through a loan from an affiliate of GECDF and 15 percent by a cash investment shared equally between the two partners. Polaris has not guaranteed the outstanding indebtedness of Polaris Acceptance. Substantially all of Polaris’ U.S. sales are financed through Polaris Acceptance whereby Polaris receives payment within a few days of shipment of the product. The net amount financed for dealers under this arrangement at June 30, 2005 was approximately $629,000,000.

FORM 10-Q
For the Quarterly Period Ended
June 30, 2005

GECDF. Polaris’ allocable share of the income of Polaris Acceptance has been included as a component of Income from financial services in the accompanying consolidated statements of income.

A wholly owned subsidiary of Polaris has an agreement with Household Bank, N.A. (Household) to provide private label retail credit financing to Polaris consumers through Polaris dealers in the United States. The receivable portfolio is owned and managed by Household and is funded 85 percent by Household and its affiliates and 15 percent by a cash deposit shared equally between the two parties. The amount financed by consumers under this arrangement, net of loss reserves, at June 30, 2005 was approximately $685,000,000. Polaris’ deposit in the retail credit portfolio is reflected as a component of Investments in finance affiliate and retail credit deposit in the accompanying consolidated balance sheets. The agreement with Household provides that all income and losses of the retail credit portfolio are shared 50 percent by Polaris and 50 percent by Household. Polaris’ allocable share of the income from the retail credit portfolio has been included as a component of Income from financial services in the accompanying consolidated statements of income. Under the terms of the agreement, either party has the right to terminate the agreement if profitability of the portfolio falls below certain minimum levels. Polaris’ financial exposure under this agreement is limited to its deposit plus an aggregate amount of not more than $15,000,000.

Polaris facilitates the availability of extended service contracts and certain insurance contracts to consumers through arrangements with various third party suppliers. Polaris does not have any incremental warranty, insurance or financial risk from any of these third party arrangements. Polaris collects commission fees from these arrangements which are included as a component of Income from financial services in the accompanying consolidated statements of income.

NOTE 5. Investment in Manufacturing Affiliate

Polaris is a partner with Fuji Heavy Industries Ltd. in Robin Manufacturing, U.S.A. (Robin). Polaris has a 40 percent ownership interest in Robin, which builds engines in the United States for recreational and industrial products. Polaris’ investment in Robin is accounted for under the equity method, and is recorded as a component of Intangible and other assets in the accompanying consolidated balance sheets. Polaris’ allocable share of the income of Robin has been included as a component of Other expense (income) in the accompanying consolidated statements of income.

FORM 10-Q
For the Quarterly Period Ended
June 30, 2005

NOTE 6. Shareholders’ Equity

During the first six months of 2005, Polaris paid $92,096,000 to repurchase and retire approximately 1,525,000 shares of its common stock. As of June 30, 2005 the Company has authorization from its Board of Directors to repurchase up to an additional 1,494,000 shares of Polaris stock.

Polaris paid a regular cash dividend of $0.28 per share on May 16, 2005 to holders of record on May 2, 2005.

On July 20, 2005, the Polaris Board of Directors declared a regular cash dividend of $0.28 per share payable on or about August 15, 2005 to holders of record of such shares at the close of business on August 1, 2005.

Net Income per Share

Basic net income per share is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding during each period, including shares earned under the non-qualified deferred compensation plan for the non-employee members of the Board of Directors (Director Plan) and the Employee Stock Ownership Plan (ESOP). Diluted net income per share is computed under the treasury stock method and is calculated to reflect the dilutive effect of outstanding stock options and certain shares issued under the restricted stock plan.

A reconciliation of these amounts is as follows (in thousands):


	For the Three Months				For the Six Months
	Ended June 30,				Ended June 30,
	2005		2004		2005		2004
Weighted average number of common shares outstanding		42,030		41,944		42,325		42,133

Director Plan		65		58		64		59

ESOP		175		179		154		184


Weighted average shares outstanding - basic		42,270		42,181		42,543		42,376

Net effect of dilutive stock options and restricted stock		1,834		2,787		2,009		2,732


Weighted average shares outstanding – diluted		44,104		44,968		44,552		45,108

Comprehensive Income

Comprehensive income represents net income adjusted for foreign currency translation adjustments and the deferred gains or losses on derivative instruments utilized to hedge Polaris’ interest and foreign exchange exposures. Comprehensive income is as follows (in thousands):

FORM 10-Q
For the Quarterly Period Ended
June 30, 2005


	For the Three Months						For the Six Months
	Ended June 30,						Ended June 30,
	2005			2004			2005			2004
Net income	$	29,990		$	24,369		$	48,833		$	38,674

Other comprehensive income:

Foreign currency translation adjustment		(2,669	)		(1,305	)		(4,894	)		(2,365	)
Unrealized gain (loss) on derivative instruments		586			234			1,958			4,265

Comprehensive income	$	27,907		$	23,298		$	45,897		$	40,574

NOTE 7. Commitments and Contingencies

Polaris is subject to product liability claims in the normal course of business. Polaris is currently self insured for all product liability claims. The estimated costs resulting from any losses are charged to operating expenses when it is probable a loss has been incurred and the amount of the loss is reasonably determinable. The Company utilizes historical trends and actuarial analysis tools to assist in determining the appropriate loss reserve levels.

Polaris is a defendant in lawsuits and subject to claims arising in the normal course of business. In the opinion of management, it is not probable that any legal proceedings pending against or involving Polaris will have a material adverse effect on Polaris’ financial position or results of operations.

NOTE 8. Accounting for Derivative Instruments and Hedging Activities

Accounting and reporting standards require that every derivative instrument, including certain derivative instruments embedded in other contracts be recorded in the balance sheet as either an asset or liability measured at its fair value. Changes in the derivative’s fair value should be recognized currently in earnings unless specific hedge criteria are met and companies must formally document, designate and assess the effectiveness of transactions that receive hedge accounting.

Interest Rate Swap Agreements

Polaris has an interest rate swap agreement expiring in 2007 related to $18,000,000 of debt that has been designated and meets the criteria as a cash flow hedge. At June 30, 2005, the fair value of the interest rate swap agreement was an unrealized loss of $1,175,000, which is recorded net of tax as a component of Accumulated other comprehensive income (loss) in shareholders’ equity.

Foreign Exchange Contracts

Polaris enters into foreign exchange contracts to manage currency exposures of certain of its purchase commitments denominated in foreign currencies and transfers of funds from its foreign subsidiaries. Polaris does not use any financial contracts for trading purposes. These contracts have been designated as and meet the criteria for cash flow hedges or fair value hedges.

FORM 10-Q
For the Quarterly Period Ended
June 30, 2005

At June 30, 2005, Polaris had open Japanese yen foreign exchange contracts with notional amounts totaling U.S. $36,271,000, and an unrealized loss of $1,459,000 and open Canadian dollar contracts with notional amounts totaling U.S. $37,783,000 and an unrealized loss of $567,000. These contracts met the criteria for cash flow hedges and the net unrealized losses, after tax, are recorded as a component of Accumulated other comprehensive income (loss) in shareholders’ equity.

NOTE 9. Discontinued Operations

On September 2, 2004, the Company announced its decision to discontinue the manufacture of marine products. In the third quarter 2004, the Company recorded a loss on disposal of discontinued operations of $35,600,000 before tax or $23,852,000 after tax. This loss included a total of $28,705,000 in expected future cash payments for costs to assist the dealers in selling their remaining inventory, incentives and discounts to encourage consumers to purchase remaining products, costs to cancel supplier arrangements, legal and regulatory issues, and personnel termination costs. In addition, there were $8,287,000 of liabilities related to the marine products division at the time of the exit announcement. Total cash outlays of $4,473,000 were made in the second quarter 2005 related to the liabilities. Total cash outlays of $22,327,000 have been made since the marine products division exit announcement.

In addition, the loss on disposal of discontinued operations included $6,895,000 in non-cash costs related primarily to the disposition of tooling, other physical assets, and the Company’s remaining inventory. Non-cash charges totaling $67,000 were made to the accrual in the second quarter 2005. Total non-cash charges of $5,966,000 have been made to the accrual since the marine products division exit announcement.

No adjustments were made to the closedown accrual during the second quarter 2005. Utilization of components of the accrued disposal costs during the second quarter 2005 is as follows (in thousands):


			Utilization					Utilization
			Three					Three
			Months					Months
	Balance		Ended			Balance,		Ended			Balance
	December 31,		March 31,			March 31,		June 30,			June 30,
	2004		2005			2005		2005			2005
Dealer & customer incentive costs to sell remaining dealer inventory including product warranty	$	12,111	$	(3,986	)	$	8,125	$	(3,520	)	$	4,605

Costs related to canceling supplier arrangements		5,039		(290	)		4,749		(208	)		4,541

Legal, regulatory, personnel and other costs		6,932		(668	)		6,264		(745	)		5,519

Disposition of tooling, inventory and other fixed assets (non-cash)		1,104		(108	)		996		(67	)		929

Total	$	25,186	$	(5,052	)	$	20,134	$	(4,540	)	$	15,594

FORM 10-Q
For the Quarterly Period Ended
June 30, 2005

The financial results of the marine products division included in discontinued operations were as follows (in thousands):


	For Three Months						For Six Months
	Ended June 30,						Ended June 30,
	2005			2004			2005			2004
Sales	$	1,923		$	27,717		$	3,598		$	44,696

Loss on discontinued operations before income tax benefit		(216	)		(4,563	)		(627	)		(8,797	)

Income tax (benefit)		(71	)		(1,506	)		(207	)		(2,903	)

Loss on discontinued operations, net of tax	$	(145	)	$	(3,057	)	$	(420	)	$	(5,894	)

NOTE 10. Subsequent Events

KTM Transaction

On July 18, 2005, a wholly owned Austrian subsidiary of Polaris (“Polaris Austria”) entered into an agreement to purchase from an institutional investor approximately 24.9% of the issued and outstanding share capital of Cross Holding AG, an Austrian joint stock company whose shares are traded on the Vienna stock exchange and whose name is in the process of being changed to KTM Power Sports AG (“KTM Power Sports”). The purchase price, subject to adjustment depending upon the number of shares of KTM Power Sports issued and outstanding and the related number of shares purchased on the closing date of the transaction, is estimated to be approximately Euros 62.6 million to Euros 68.5 million. The transaction, subject to customary closing conditions and regulatory approval, is expected to close during the third quarter 2005. Additionally, on July 18, 2005, Polaris Austria entered into a Call Option Agreement (“Call Option Agreement”) with Cross Industries AG (“Cross Industries”), the largest shareholder of KTM Power Sports, pursuant to which, among other things and subject to certain conditions, in 2007 either Cross Industries may purchase Polaris Austria’s interest in KTM Power Sports or, alternatively, Polaris Austria may purchase Cross Industries’ interest in KTM Power Sports. The Call Option Agreement is included as Exhibit 2.1 to Polaris’ Current Report on Form 8-K as furnished to the Securities and Exchange Commission on July 19, 2005.

Amendment of Polaris’ Five-Year Revolving Credit Agreement

On July 11, 2005, Polaris entered into an amendment (the “First Amendment”) to its Five-Year Revolving Credit Agreement (the “Facility”), dated as of June 25, 2004. The First Amendment provides for borrowings in currencies other than U.S. Dollars and revises certain non-financial covenants. Except as noted, all other terms of the Facility, including but not limited to, the applicable interest rates, maturity date, financial covenants and conditions to borrowing, remain in full force and effect.

FORM 10-Q
For the Quarterly Period Ended
June 30, 2005

Item 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

The following discussion pertains to the results of operations and financial position of Polaris Industries Inc., a Minnesota corporation (“Polaris” or the “Company”) for the quarters and the year-to-date periods ended June 30, 2005 and 2004. Due to the seasonality of the snowmobile, all terrain vehicle (ATV), motorcycle and parts, garments and accessories (PG&A) business, and to certain changes in production and shipping cycles, results of such periods are not necessarily indicative of the results to be expected for the complete year.

The Company ceased manufacturing marine products on September 2, 2004. The marine products division’s financial results are reported separately as discontinued operations for all periods presented.

Results of Operations

Note: Unless otherwise noted, the following discussion relates only to results from continuing operations.

Sales were $442.3 million in the second quarter 2005, representing a 12 percent increase from $ 394.6 million in sales for the same period in 2004.

Sales of ATVs were $302.3 million in the second quarter 2005, up 13 percent from the second quarter 2004 sales of $266.7 million. Sales growth was driven by the RANGER™ product line and international ATV sales. The new value-priced Phoenix ATV also contributed to the sales growth. Year-to-date 2005 sales of ATVs increased 13 percent over last year, a direct result of growth in the RANGER™ product line and strong international sales growth during the year-to-date period. The average ATV per unit sales price in 2005 increased eight percent over last year’s second quarter and seven percent over last year’s year-to-date period primarily as a result of the increased sales of the higher priced RANGER™ product and a positive product mix change.

Sales of snowmobiles were $51.9 million for the second quarter 2005, an increase of six percent from sales of $48.7 million for the comparable period in 2004, primarily due to timing of shipments. For the year-to-date 2005 period, snowmobile sales decreased five percent compared to the prior year-to-date period. The average snowmobile per unit sales price for the second quarter 2005 decreased four percent compared to last year’s second quarter unit sales price due to product mix change.

Sales of Victory motorcycles were $22.2 million for the second quarter 2005, a 24 percent increase from $17.9 million for the comparable period in 2004. The increase is attributable to improved brand recognition, the success of the new Hammer and 8-Ball models and continued acceptance of the Vegas and Kingpin models. Additionally, improvement in the dealer network is contributing to the higher sales. Victory motorcycle sales increased 18 percent for the first six months of 2005 over the same period in 2004. The average per unit sales price for Victory motorcycles increased nine percent during the second quarter 2005 when compared to the same period in 2004 due to a product mix change.

FORM 10-Q
For the Quarterly Period Ended
June 30, 2005

PG&A sales were $65.9 million for the second quarter 2005, an increase of eight percent from $61.3 million for the second quarter 2004. For the six-month period ended June 30, 2005, PG&A sales increased eight percent from the comparable period in 2004. Higher sales for ATV, RANGER^TM and Victory PG&A offset somewhat by lower sales of snowmobile PG&A contributed to the increase for the second quarter and year-to-date 2005 periods.

Gross profit for the second quarter 2005 increased five percent to $96.4 million compared to $92.2 million for the second quarter 2004. For the year-to-date period ended June 30, 2005, gross profit increased seven percent to $180.9 million compared to $169.8 million in the comparable period in 2004. Gross profit, as a percentage of sales, was 21.8 percent for the second quarter 2005, a decrease from 23.4 percent in the comparable quarter of 2004. For the first six months 2005, gross margins were 22.6 percent compared to 23.5 percent for the same six-month period in 2004. The gross profit margin for the second quarter and six-month periods in 2005 decreased primarily due to higher warranty expense incurred during the second quarter 2005 resulting from certain quality issues and product recalls, higher floor plan financing costs, increased raw material costs, and incremental transportation and fuel costs on a year over year comparative basis. These higher costs were partially offset by continued efficiency gains and savings from various cost reduction initiatives.

For the second quarter 2005, operating expenses decreased both as a percent of sales and in actual dollars spent compared to the second quarter 2004. Operating expenses for the second quarter 2005 decreased one percent to $57.3 million or 13.0 percent of sales compared to $57.9 million or 14.7 percent of sales for the second quarter 2004. For the year-to-date period, operating expenses increased three percent to $121.1 million or 15.1 percent of sales compared to $117.1 million or 16.2 percent of sales for the same period in 2004. Operating expenses, as a percent of sales, decreased in the second quarter and year-to-date periods ended June 30, 2005 primarily due to the lower Polaris stock price that reduced stock based compensation plan expenses. These reductions were partially offset by higher research and development expenses related to new product development and the new research and development facility in Wyoming, Minnesota which opened during the second quarter 2005.

Income from financial services increased 13 percent to $8.2 million in the second quarter 2005, up from $7.3 million in the second quarter 2004, primarily due to increased profitability generated from the wholesale credit portfolio. Retail credit losses, which have increased to approximately four percent of the portfolio balance, continue to be in line with our expectations and the experience of portfolios similar in nature and maturity. Income from financial services for the year-to-date period ended June 30, 2005 increased nine percent to $16.7 million compared to $15.4 million for the same period in 2004.

Discontinued Operations

The Company ceased manufacturing marine products on September 2, 2004. As a result, the marine products division’s financial results are being reported separately as discontinued operations for all periods presented. The Company’s second quarter 2005 loss from discontinued operations was $0.1 million, net of tax, or less than $0.01 per diluted share, compared to a loss of $3.1 million, net of tax, or $0.07 per diluted share in the second quarter 2004. Reported net income for the second quarter 2005, including both continuing and discontinued operations, was $30.0 million, or $0.68 per diluted share compared to $24.4 million, or $0.54 per diluted share in the second quarter 2004. For the six months ended June 30, 2005, the loss from discontinued operations was $0.4 million,

FORM 10-Q
For the Quarterly Period Ended
June 30, 2005

after tax, or $0.01 per diluted share, compared to a loss of $5.9 million or $0.13 per diluted share in 2004. Reported net income for the six months ended June 30, 2005, including both continuing and discontinued operations was $48.8 million or $1.10 per diluted share, compared to $38.7 million, or $0.86 per diluted share for the six months ended June 30, 2004.

Cash Dividends

Polaris paid a $0.28 per share dividend on May 16, 2005 to shareholders of record on May 2, 2005. On July 20, 2005, the Polaris Board of Directors declared a regular cash dividend of $0.28 per share payable on or about August 15, 2005 to holders of record of such shares at the close of business on August 1, 2005.

Liquidity and Capital Resources

Net cash provided by operating activities of continuing operations totaled $64.1 million for the second quarter 2005, a three percent increase from $62.1 million in the second quarter 2004. Year-to-date ended June 30, 2005, net cash provided by operating activities of continuing operations totaled $5.4 million compared to $37.8 million in the first half of 2004. An increase in inventory levels compared to the same period last year was the primary reason for the decrease in net cash provided by operating activities during the first half of 2005. Net cash used for investing activities from continuing operations was $34.9 million during the first six months of 2005 and primarily represents the purchase of property and equipment offset somewhat by a reduction of the investment in finance affiliate and retail credit deposit. Net cash used for financing activities was $88.5 million during the six months ended June 30, 2005, which primarily represents dividends paid to shareholders and the repurchase of common shares offset somewhat by an increase in proceeds from employee stock option exercises. Cash and cash equivalents totaled $14.3 million at June 30, 2005.

The seasonality of production and shipments causes working capital requirements to fluctuate during the year. Polaris has an unsecured bank line of credit arrangement with maximum available borrowings of $250.0 million. Interest is charged at rates based on LIBOR or “prime” (effective rate was 3.91 percent at June 30, 2005). As of June 30, 2005, total borrowing under this credit arrangement was $30.0 million and has been classified as long-term in the accompanying consolidated balance sheets. The Company’s debt to total capital ratio was eight percent at June 30, 2005 compared to five percent at June 30, 2004.

The following table summarizes the Company’s significant future contractual obligations at June 30, 2005 (in millions):


	Total		< 1 year		1-3 Years		> 3 Years
Borrowings under credit agreement	$	30.0	$	—	$	—	$	30.0
Interest expense under swap agreement		2.6		1.3		1.3		—
Operating leases		4.6		2.0		2.2		0.4
Capital leases		0.4		0.1		0.3		—

Total	$	37.6	$	3.4	$	3.8	$	30.4

Additionally, at June 30, 2005, Polaris had letters of credit outstanding of $7.5 million related to purchase obligations for raw materials.

In the past, Polaris has entered into interest rate swap agreements to manage exposures

FORM 10-Q
For the Quarterly Period Ended
June 30, 2005

to fluctuations in interest rates. Currently the Company has one such agreement in place. The effect of the agreement is to fix the interest rate at 7.21 percent for $18.0 million of borrowings under the credit line until June 2007.

During the first six months of 2005, Polaris paid $92.1 million to repurchase and retire 1.5 million shares of its common stock. The shares repurchased in the second quarter had a positive impact on earnings per share of less than $0.02 per share for the quarter ended June 30, 2005. The Company has authorization from its Board of Directors to repurchase up to an additional 1.5 million shares of Polaris stock as of June 30, 2005.

Management believes that existing cash balances and bank borrowings, cash flow to be generated from operating activities and available borrowing capacity under the line of credit arrangement will be sufficient to fund operations, regular dividends, share repurchases, and capital requirements for the foreseeable future. At this time, management is not aware of any adverse factors that would have a material impact on cash flow.

In 1996, a wholly owned subsidiary of Polaris entered into a partnership agreement with a subsidiary of Transamerica Distribution Finance (TDF) to form Polaris Acceptance. In January 2004, TDF was purchased by GE Commercial Distribution Finance (GECDF), a subsidiary of General Electric Company. Polaris Acceptance provides floor plan financing to Polaris’ dealers in the United States. Polaris’ subsidiary has a 50 percent equity interest in Polaris Acceptance. The receivable portfolio is recorded on Polaris Acceptance’s books, and is funded 85 percent with a loan from an affiliate of GECDF and 15 percent by a cash investment shared equally between the two partners. Polaris has not guaranteed the outstanding indebtedness of Polaris Acceptance. Substantially all of Polaris’ U.S. sales are financed through Polaris Acceptance whereby Polaris receives payment within a few days of shipment of the product.

Polaris’ investment in Polaris Acceptance is accounted for under the equity method, and is recorded as a component of Investments in finance affiliate and retail credit deposit in the accompanying consolidated balance sheets. The partnership agreement provides that all income and losses of the portfolio are shared 50 percent by Polaris’ wholly owned subsidiary and 50 percent by GECDF. Polaris’ allocable share of the income of Polaris Acceptance has been included as a component of Income from financial services in the accompanying consolidated statements of income.

A wholly owned subsidiary of Polaris has an agreement with Household to provide private label retail credit financing through installment and revolving loans to Polaris consumers through Polaris dealers in the United States. The receivable portfolio is owned and managed by Household and its affiliate and is funded by Household and its affiliate except to the extent of a cash deposit by Polaris’ subsidiary equal to seven and one-half percent of the revolving credit portfolio balance. Polaris’ deposit with Household is reflected as a component of Investments in finance affiliate and retail credit deposit in the accompanying consolidated balance sheets. Polaris’ subsidiary participates in 50 percent of the profits or losses of the revolving credit portfolio. Polaris’ allocable share of the income from the retail credit portfolio has been included as a component of Income from financial services in the accompanying consolidated statements of income. Under the terms of the agreement, either party has the right to terminate the agreement if profitability of the portfolio falls below certain minimum levels. Polaris’ financial exposure under this agreement is limited to its deposit plus an aggregate amount of not more than $15.0 million.

FORM 10-Q
For the Quarterly Period Ended
June 30, 2005

As of June 30, 2005, the Polaris Acceptance wholesale portfolio balance for dealers in the United States was approximately $629.0 million, a 15 percent increase from $549.0 million at June 30, 2004. Credit losses in this portfolio have been modest, averaging less than one percent of the portfolio. The Household retail credit portfolio balance as of June 30, 2005, was approximately $685.0 million, a 31 percent increase from $524.0 million at June 30, 2004. Credit losses have averaged approximately four percent of the portfolio balance, in line with Household’s experience with portfolios similar in nature and maturity.

Inflation and Foreign Exchange Rates

Polaris does not believe that inflation has had a material impact on the results of its recent operations. However, the changing relationships of the U.S. dollar to the Japanese yen, Canadian dollar and Euro have had a material impact from time to time.

During calendar year 2004, purchases totaling 13 percent of Polaris’ cost of sales were from yen-denominated suppliers. Polaris’ cost of sales in the second quarter and year-to-date periods ended June 30, 2005 were negatively impacted by the Japanese yen-U.S. dollar exchange rate fluctuation when compared to the same periods in 2004. At June 30, 2005 Polaris had open Japanese yen foreign exchange hedging contracts in place through the fourth quarter 2005 with notional amounts totaling $36.3 million with an average rate of approximately 106 Japanese yen to the U.S. dollar. In view of the foreign exchange hedging contracts currently in place, Polaris anticipates that the Japanese yen-U.S. dollar exchange rate will continue to have a negative impact on cost of sales for the remainder of 2005 when compared to the same periods in 2004.

Polaris operates in Canada through a wholly owned subsidiary. The weakening of the U.S. dollar in relation to the Canadian dollar has resulted in higher gross margin levels in the second quarter and year-to-date periods ended June 30, 2005 when compared to the same periods in 2004. At June 30, 2005 Polaris had open Canadian dollar foreign exchange hedging contracts in place through the third quarter 2005 with notional amounts totaling $37.8 million with an average rate of approximately 0.80. In view of the foreign exchange hedging contracts currently in place, Polaris anticipates that the Canadian dollar-U.S. dollar exchange rate will continue to have a positive impact on net income for the remainder of 2005 when compared to the same periods in 2004.

Polaris operates in various countries in Europe through wholly owned subsidiaries and also sells to certain distributors in other countries and purchases components from certain suppliers directly from its U.S. operations in Euro denominated transactions. The weakening of the U.S. dollar in relation to the Euro has resulted in slightly lower gross margin levels on a comparable basis in the second quarter and year-to-date periods ended June 30, 2005 when compared to the same periods in 2004. Polaris currently does not have any Euro currency hedging contracts in place for the remainder of 2005.

The assets and liabilities in all Polaris foreign entities are translated at the foreign exchange rate in effect at the balance sheet date. Translation gains and losses are reflected as a component of Accumulated other comprehensive income (loss) in the shareholders’ equity section of the accompanying consolidated balance sheets. Revenues and expenses in all Polaris foreign entities are translated at the average foreign exchange rate in effect for each month of the quarter.

FORM 10-Q
For the Quarterly Period Ended
June 30, 2005

Significant Accounting Policies

There have been no material changes in the Company’s significant accounting policies as disclosed in its Annual Report on Form 10-K for the year ended December 31, 2004.

Subsequent Events

KTM Transaction

Amendment of Polaris’ Five-Year Revolving Credit Agreement

FORM 10-Q
For the Quarterly Period Ended
June 30, 2005

Item 3

QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK

Refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2004 for a complete discussion on the Company’s market risk. There have been no material changes to the market risk information included in the Company’s 2004 Annual Report on Form 10-K.

Note Regarding Forward Looking Statements

Certain matters discussed in this report are “forward-looking statements” intended to qualify for the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These “forward-looking statements” can generally be identified as such because the context of the statement will include words such as the Company or management “believes,” “anticipates,” “expects,” “estimates” or words of similar import. Similarly, statements that describe the Company’s future plans, objectives or goals are also forward-looking. Shareholders, potential investors and others are cautioned that all forward-looking statements involve risks and uncertainty that could cause results in future periods to differ materially from those anticipated by some of the statements made in this report. In addition to the factors discussed above, among the other factors that could cause actual results to differ materially are the following: product offerings, promotional activities and pricing strategies by competitors; future conduct of litigation processes; warranty expenses; foreign currency exchange rate fluctuations; benefits from the KTM relationship; environmental and product safety regulatory activity; effects of weather; uninsured product liability claims; and overall economic conditions, including inflation and consumer confidence and spending.

FORM 10-Q
For the Quarterly Period Ended
June 30, 2005

Item 4

CONTROLS AND PROCEDURES

The Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and its Vice President-Finance and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Exchange Act Rule 13a-15) as of the end of the period covered by this report. Based upon that evaluation, the Company’s Chief Executive Officer along with the Company’s Vice President-Finance and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company’s periodic SEC filings. There were no material changes in the Company’s internal controls over financial reporting during the second quarter 2005.

FORM 10-Q
For the Quarterly Period Ended
June 30, 2005

PART II. OTHER INFORMATION

Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds


					Total		Maximum
					Number of		Number of
					Shares		Shares
					Purchased		That May
	Total				as Part of		Yet Be
	Number of		Average		Publicly		Purchased
	Shares		Price Paid		Announced		Under the
Period	Purchased		per Share		Program		Program ⁽¹⁾
April 1 – 30, 2005		820,000	$	58.80		820,000		1,895,000
May 1 – 31, 2005		400,000	$	55.82		400,000		1,495,000
June 1 – 30, 2005		1,000	$	55.14		1,000		1,494,000


Total		1,221,000	$	57.82		1,221,000		1,494,000

⁽¹⁾ Our Board of Directors approved the repurchase of up to an aggregate of 23.0 million shares of the Company’s common stock pursuant to the share repurchase program (the “Program”) of which 21.5 million shares have been repurchased through June 30, 2005. This Program does not have an expiration date.

Item 4. Submission of Matters to a Vote of Security Holders

The Company held its annual meeting of shareholders on April 21, 2005. Proxies for matters to be voted upon at the annual meeting were solicited pursuant to Regulation 14 under the Securities Exchange Act of 1934, as amended. The following matters were voted upon at the annual meeting:

To elect the following nominee as a Class I member of the board of directors of the Company for a two year term and until his successor is duly elected and qualified:


	Votes For		Withheld Authority
Robert L. Caulk		37,542,532		208,668

To elect the following nominees as Class II members of the board of directors of the Company for a three year term and until their successors are duly elected and qualified:


	Votes For		Withheld Authority
William E. Fruhan, Jr.		36,908,499		842,701
R.M. (Mark) Schreck		37,566,576		184,624
John R. Menard, Jr.		37,554,955		196,245

The terms of the following directors continued after the annual meeting: Andris A. Baltins, Annette K. Clayton, Gregory R. Palen, Thomas C. Tiller and Richard A. Zona.

FORM 10-Q
For the Quarterly Period Ended
June 30, 2005

To approve amendments to the Polaris Industries Inc. Deferred Compensation Plan for Directors:


Votes For	Votes Against		Abstentions		Broker Non-Vote
30,868,065		753,549		146,886		5,982,699

To approve amendments to the Polaris Industries Inc. 1996 Restricted Stock Plan:


Votes For	Votes Against		Abstentions		Broker Non-Vote
20,370,076		11,257,302		141,123		5,982,689

Item 6-Exhibits

(a) Exhibits

Exhibit 10(j) – First Amendment to Five-Year Revolving Credit Agreement among the Company, certain subsidiaries of the Company, the lenders identified therein and Bank of America, N.A., as administrative agent dated July 11, 2005.

Exhibit 31.a – Certification of Chief Executive Officer – Section 302

Exhibit 31.b – Certification of Chief Financial Officer – Section 302

Exhibit 32.a – Certification of Chief Executive Officer – Section 906

Exhibit 32.b – Certification of Chief Financial Officer – Section 906


		POLARIS INDUSTRIES INC. (Registrant)

Date: July 29, 2005		/s/ Thomas C. Tiller

		Thomas C. Tiller
		Chief Executive Officer
		(Principal Executive Officer)

Date: July 29, 2005		/s/ Michael W. Malone

		Michael W. Malone
		Vice President, Finance, Chief
		Financial Officer, and Secretary
		(Principal Financial and Chief
		Accounting Officer)

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	Page
Part 1 FINANCIAL INFORMATION

Item 1 — Consolidated Financial Statements

Consolidated Balance Sheets		3
Consolidated Statements of Income		4
Consolidated Statements of Cash Flows		5
Notes to Unaudited Consolidated Financial Statements		6

Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview		14
Results of Operations		14
Discontinued Operations		15
Cash Dividends		16
Liquidity and Capital Resources		16
Inflation and Foreign Exchange Rates		18
Significant Accounting Policies		19
Subsequent Events		19

Item 3 — Quantitative and Qualitative Disclosures about Market Risk

Note Regarding Forward Looking Statements		20

Item 4 — Controls and Procedures		21

Part II OTHER INFORMATION

Item 2 Unregistered Sales of Equity Securities and Use of Proceeds		22
Item 4 Submission of Matters to a Vote of Security Holders		22
Item 6 Exhibits		23

SIGNATURE PAGE		24
Amendment to Five-Year Revolving Credit Agreement
Certification of CEO Pursuant to Section 302
Certification of CFO Pursuant to Section 302
Certification of CEO Pursuant to Section 906
Certification of CFO Pursuant to Section 906