Organization and Significant Accounting Policies (Policies)

12 Months Ended

Dec. 31, 2012

Basis of Presentation

Basis of presentation: The accompanying consolidated financial statements include the accounts of Polaris and its wholly-owned subsidiaries. All inter-company transactions and balances have been eliminated in consolidation. Income from financial services is reported as a component of operating income to better reflect income from ongoing operations, of which financial services has a significant impact.

During the 2011 third quarter, the Board of Directors declared a two-for-one split of the Company’s outstanding shares of Common Stock. On September 12, 2011, Polaris shareholders received one additional share of Common Stock for each share they held of record at the close of business on September 2, 2011. All amounts, including shares and per share information, have been adjusted to give effect to the two-for-one stock split.

The Company evaluates consolidation of entities under Accounting Standards Codification (ASC) Topic 810. This Topic requires management to evaluate whether an entity or interest is a variable interest entity and whether the company is the primary beneficiary. Polaris used the guidelines to analyze the Company’s relationships, including the relationship with Polaris Acceptance, and concluded that there were no variable interest entities requiring consolidation by the Company in 2012, 2011 and 2010.

In December 2012, the Company completed an acquisition of Teton Outfitters, LLC (d/b/a Klim). The purchase price totaled approximately $41,200,000, of which approximately $11,061,000 was allocated to goodwill, $19,600,000 to identifiable intangible assets and $10,539,000 to assumed tangible assets, net of liabilities. Included in the acquisition of Klim were borrowings under a credit arrangement of $4,647,000, which was paid and retired by Polaris prior to December 31, 2012. The Company has included the financial results of this acquisition in its consolidated results of operations beginning on the acquisition date in accordance with ASC 805, Business Combinations; however, the impact of this acquisition did not have a material impact on Polaris’ consolidated financial position or results of operations.

Reclassifications

Reclassifications: Certain reclassifications of previously reported balance sheet amounts have been made to conform to the current year presentation. The reclassifications had no impact on the consolidated statements of income, or total assets and total liabilities in the consolidated balance sheets, as previously reported.

Fair Value Measurements

Fair value measurements: ASC Topic 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. This Topic also establishes a fair value hierarchy which requires classification based on observable and unobservable inputs when measuring fair value. There are three levels of inputs that may be used to measure fair value:

Level 1 — Quoted prices in active markets for identical assets or liabilities.

Level 2 — Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The Company utilizes the market approach to measure fair value for its non-qualified deferred compensation assets and liabilities, and the income approach for the interest rate swap agreements, foreign currency contracts and commodity contracts. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities and for the income approach the Company uses significant other observable inputs to value its derivative instruments used to hedge interest rate volatility, foreign currency and commodity transactions. Assets and liabilities measured at fair value on a recurring basis are summarized below (in thousands):

	Fair Value Measurements as of December 31, 2012
	Total			Level 1			Level 2			Level 3
Asset (Liability)
Non-qualified deferred compensation assets	$	15,872		$	15,872			—			—
Total assets at fair value	$	15,872		$	15,872			—			—
Foreign exchange contracts	$	(2,617	)		—		$	(2,617	)		—
Commodity contracts		(124	)		—			(124	)		—
Non-qualified deferred compensation liabilities		(15,872	)	$	(15,872	)		—			—
Total liabilities at fair value	$	(18,613	)	$	(15,872	)	$	(2,741	)		—

	Fair Value Measurements as of December 31, 2011
	Total			Level 1			Level 2			Level 3
Asset (Liability)
Non-qualified deferred compensation assets	$	3,639		$	3,639			—			—
Foreign exchange contracts		3,578			—		$	3,578			—
Total assets at fair value	$	7,217		$	3,639		$	3,578			—
Commodity contracts	$	(1,337	)		—		$	(1,337	)		—
Non-qualified deferred compensation liabilities		(3,639	)	$	(3,639	)		—			—
Total liabilities at fair value	$	(4,976	)	$	(3,639	)	$	(1,337	)		—

We measure certain assets and liabilities at fair value on a nonrecurring basis. Assets acquired and liabilities assumed as part of acquisitions are measured at fair value. Refer to Note 5 for additional information.

Gain on Securities Available for Sale

Gain on Securities Available for Sale: The net gain of $825,000 in 2010 on securities available for sale resulted from a $1,594,000 gain on the sale of our remaining investment in KTM during the 2010 third quarter offset by a related non-cash impairment charge of $769,000 during the 2010 second quarter. In the first quarter 2009, we recorded a non-cash impairment charge on securities held for sale of $8,952,000 from the decline in the fair value of the KTM shares owned by Polaris as of March 31, 2009, when it was determined that the decline in the fair value of the KTM shares owned by the Company was other than temporary.

Use of Estimates

Use of estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Ultimate results could differ from those estimates.

Cash Equivalents

Cash equivalents: Polaris considers all highly liquid investments purchased with an original maturity of 90 days or less to be cash equivalents. Cash equivalents are stated at cost, which approximates fair value. Such investments consist principally of money market mutual funds.

Allowance for Doubtful Accounts

Allowance for doubtful accounts: Polaris’ financial exposure to collection of accounts receivable is limited due to its agreements with certain finance companies. For receivables not serviced through these finance companies, the Company provides a reserve for doubtful accounts based on historical rates and trends. This reserve is adjusted periodically as information about specific accounts becomes available.

Inventories

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

	December 31,
	2012			2011
Raw materials and purchased components	$	70,552		$	61,296
Service parts, garments and accessories		95,110			77,437
Finished goods		196,691			175,252
Less: reserves		(17,357	)		(15,943	)
Inventories	$	344,996		$	298,042

Property and Equipment

Property and equipment: Property and equipment is stated at cost. Depreciation is provided using the straight-line method over the estimated useful life of the respective assets, ranging from 10-40 years for buildings and improvements and from 1-7 years for equipment and tooling. Fully depreciated tooling is eliminated from the accounting records annually.

Goodwill and Other Intangible Assets

Goodwill and other intangible assets: ASC Topic 350 prohibits the amortization of goodwill and intangible assets with indefinite useful lives. Topic 350 requires that these assets be reviewed for impairment at least annually. An impairment charge for goodwill is recognized only when the estimated fair value of a reporting unit, including goodwill, is less than its carrying amount. In accordance with Topic 350, the Company completed an impairment analysis as of December 31, 2012 and 2011. Refer to Note 5 for additional information regarding goodwill and other intangible assets.

Research and Development Expenses

Research and Development Expenses: Polaris records research and development expenses in the period in which they are incurred as a component of operating expenses. In the years ended December 31, 2012, 2011, and 2010, Polaris incurred $127,361,000, $105,631,000, and $84,940,000, respectively.

Advertising Expenses

Advertising Expenses: Polaris records advertising expenses as a component of selling and marketing expenses in the period in which they are incurred. In the years ended December 31, 2012, 2011, and 2010, Polaris incurred $58,752,000, $48,877,000, and $40,833,000, respectively.

Shipping and Handling Costs

Shipping and Handling Costs: Polaris records shipping and handling costs as a component of cost of sales at the time the product is shipped.

Product Warranties

Product warranties: Polaris provides a limited warranty for its ORVs for a period of six months and for a period of one year for its snowmobiles and motorcycles and a two year period for SVs. Polaris provides longer warranties in certain geographical markets as determined by local regulations and market conditions and may provide longer warranties related to certain promotional programs. Polaris’ standard warranties require the Company or its dealers to repair or replace defective products during such warranty periods 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 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 the warranty reserve during the years presented is as follows (in thousands):

	For the Year Ended December 31,
	2012			2011			2010
Balance at beginning of year	$	44,355		$	32,651		$	25,520
Additions to warranty reserve through acquisitions		900			2,727			—
Additions charged to expense		46,088			46,217			43,721
Warranty claims paid		(43,620	)		(37,240	)		(36,590	)
Balance at end of year	$	47,723		$	44,355		$	32,651

Sales Promotions and Incentives

Sales promotions and incentives: Polaris provides for estimated sales promotion and incentive expenses, which are recognized as a reduction to sales, at the time of sale to the dealer or distributor. 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. 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. Polaris recorded accrued liabilities of $107,008,000 and $81,228,000 related to various sales promotions and incentive programs as of December 31, 2012 and 2011, respectively. Historically, sales promotion and incentive expenses have been within the Company’s expectations and differences have not been material.

Dealer Holdback Programs

Dealer holdback programs: Dealer holdback represents a portion of the invoiced sales price that is expected to be subsequently returned to the dealer or distributor as a sales incentive upon the ultimate retail sale of the product. Holdback amounts reduce the ultimate net price of the products purchased by Polaris’ dealers or distributors and, therefore, reduce the amount of sales Polaris recognizes at the time of shipment. The portion of the invoiced sales price estimated as the holdback is recognized as “dealer holdback” liability on the Company’s balance sheet until paid or forfeited. The minimal holdback adjustments in the estimated holdback liability due to forfeitures are recognized in net sales. Payments are made to dealers or distributors at various times during the year subject to previously established criteria. Polaris recorded accrued liabilities of $86,733,000 and $76,512,000, for dealer holdback programs in the consolidated balance sheets as of December 31, 2012 and 2011, respectively.

Foreign Currency Translation

Foreign currency translation: The functional currency for each of the Polaris foreign subsidiaries is their respective local currencies.

The assets and liabilities in all Polaris foreign entities are translated at the foreign exchange rate in effect at the balance sheet date. Translation gains and losses are reflected as a component of Accumulated other comprehensive income in the shareholders’ equity section of the accompanying consolidated balance sheets. Revenues and expenses in all of Polaris’ foreign entities are translated at the average foreign exchange rate in effect for each month of the quarter. Transaction gains and losses including intercompany transactions denominated in a currency other than the functional currency of the entity involved are included in “Other (income) expense, net” on our consolidated statements of income. The net Accumulated other comprehensive income related to translation gains and losses was a net gain of $13,669,000 and $9,545,000 at December 31, 2012 and 2011, respectively.

Revenue Recognition

Revenue recognition: Revenues are recognized at the time of shipment to the dealer or distributor or other customers. Product returns, whether in the normal course of business or resulting from repossession under its customer financing program (see Note 8), have not been material. Polaris sponsors certain sales incentive programs and accrues liabilities for estimated sales promotion expenses and estimated holdback amounts that are recognized as reductions to sales when products are sold to the dealer or distributor customer.

Share-Based Employee Compensation

Share-based employee compensation: For purposes of determining the estimated fair value of share-based payment awards on the date of grant under ASC Topic 718, Polaris uses the Black-Scholes Model. The Black-Scholes Model requires the input of certain assumptions that require judgment. Because employee stock options and restricted stock awards have characteristics significantly different from those of traded options, and because changes in the input assumptions can materially affect the fair value estimate, the existing models may not provide a reliable single measure of the fair value of the employee stock options or restricted stock awards. Management will continue to assess the assumptions and methodologies used to calculate estimated fair value of share-based compensation. Circumstances may change and additional data may become available over time, which could result in changes to these assumptions and methodologies and thereby materially impact the fair value determination. If factors change and the Company employs different assumptions in the application of Topic 718 in future periods, the compensation expense that was recorded under Topic 718 may differ significantly from what was recorded in the current period. Refer to Note 2 for additional information regarding share-based compensation.

The Company estimates the likelihood and the rate of achievement for performance sensitive share-based awards. Changes in the estimated rate of achievement and fluctuation in the market based stock price can have a significant effect on reported share-based compensation expenses as the effect of a change in the estimated achievement level and fluctuation in the market based stock price is recognized in the period that the likelihood factor and stock price changes. If adjustments in the estimated rate of achievement and fluctuation in the market based stock price are made, they would be reflected in our gross margin and operating expenses.

Accounting for Derivative Instruments and Hedging Activities

Accounting for derivative instruments and hedging activities: ASC Topic 815 requires that changes in the derivative’s fair value be recognized currently in earnings unless specific hedge criteria are met, and requires that a company must formally document, designate and assess the effectiveness of transactions that receive hedge accounting. The net unrealized loss of the derivative instruments of $2,741,000 at December 31, 2012 and the net unrealized gain of $2,241,000 at December 31, 2011 were recorded in the accompanying balance sheets as other current assets or other current liabilities. Polaris’ derivative instruments consist of foreign exchange and commodity contracts discussed below. The after tax unrealized losses on foreign exchange contracts of $1,431,000 and unrealized gains of $2,478,000 as of December 31, 2012 and 2011, respectively, were recorded as components of Accumulated other comprehensive income. The Company’s diesel fuel and aluminum contracts in 2012 and 2011 did not meet the criteria for hedge accounting and therefore, the resulting unrealized gains and losses from those contracts are included in the consolidated statements of income in Cost of sales. The unrealized gains for the diesel fuel contracts for 2012 and 2011 totaled $108,000 and $160,000, respectively, pretax, and the unrealized losses for the aluminum contracts for 2012 and 2011 totaled $232,000 and $1,497,000, respectively, pretax. Refer to Note 11 for additional information regarding derivative instruments and hedging activities.

Comprehensive Income

Comprehensive income: Components of comprehensive income include net income, foreign currency translation adjustments, unrealized gains or losses on derivative instruments, and unrealized gains or losses on securities held for sale, net of tax. The Company has chosen to disclose comprehensive income in a separate Consolidated Statements of Comprehensive Income.

New Accounting Pronouncements

New accounting pronouncements: There are no new accounting pronouncements which are expected to have a significant impact on Polaris’ consolidated financial statements.

Other Affiliates

Investment in Affiliate

Investment in other affiliates: The caption Investment in other affiliates in the consolidated balance sheets represents the Company’s investment in nonmarketable securities of strategic companies. For each investment, Polaris assesses the level of influence in determining whether to account for the investment under the cost method or equity method. For equity method investments, Polaris’ proportionate share of income or losses is recorded in the Consolidated Statements of Income. Polaris will write down or write off an investment and recognize a loss when events or circumstances indicate there is impairment in the investment that is other-than-temporary. No impairments have been recognized on currently held investments. Refer to Note 9 for additional information regarding Polaris’ investment in other affiliates.

Finance

Investment in Affiliate

Investment in finance affiliate: The caption Investment in finance affiliate in the consolidated balance sheets represents Polaris’ 50 percent equity interest in Polaris Acceptance, a partnership agreement between GE Commercial Distribution Finance Corporation (“GECDF”) and one of Polaris’ wholly-owned subsidiaries. Polaris Acceptance provides floor plan financing to Polaris dealers in the United States. Polaris’ investment in Polaris Acceptance is accounted for under the equity method, and is recorded as Investment in finance affiliate in the consolidated balance sheets. Polaris’ allocable share of the income of Polaris Acceptance and the Securitized Receivables has been included as a component of Income from financial services in the consolidated statements of income. Refer to Note 8 for additional information regarding Polaris’ investment in Polaris Acceptance.

Interest Rate Swap

Accounting for Derivative Instruments and Hedging Activities

Interest rate swap agreements: At December 31, 2012 and 2011, Polaris did not have any outstanding interest rate swaps.

Foreign currency contracts

Accounting for Derivative Instruments and Hedging Activities

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 time to time from its foreign subsidiaries. Polaris does not use any financial contracts for trading purposes. These contracts met the criteria for cash flow hedges. Gains and losses on the Canadian dollar, Swedish Krona and Australian dollar contracts at settlement are recorded in Non-operating other expense (income). Gains and losses on the Japanese yen, Mexican peso and Euro contracts at settlement are recorded in Cost of sales. Unrealized gains or losses, after tax, are recorded as a component of Accumulated other comprehensive income in Shareholders’ Equity. The fair value of the foreign exchange contracts was a net liability of $2,617,000 as of December 31, 2012 and a net asset of $3,578,000 as of December 31, 2011.

Commodity Contract

Accounting for Derivative Instruments and Hedging Activities

Commodity derivative contracts: Polaris is subject to market risk from fluctuating market prices of certain purchased commodity raw materials including steel, aluminum, diesel fuel, and petroleum-based resins. In addition, the Company purchases components and parts containing various commodities, including steel, aluminum, rubber, rare earth metals and others which are integrated into the Company’s end products. While such materials are typically available from numerous suppliers, commodity raw materials are subject to price fluctuations. The Company generally buys these commodities and components based upon market prices that are established with the vendor as part of the purchase process. From time to time, Polaris utilizes derivative contracts to hedge a portion of the exposure to commodity risks. During 2012 and 2011, the Company entered into derivative contracts to hedge a portion of the exposure for diesel fuel and aluminum. These contracts did not meet the criteria for hedge accounting and the resulting unrealized gains and losses are recorded in the consolidated statement of income as a component of Cost of sales. The fair value of the commodity derivative contracts was a net liability of $124,000 and $1,337,000 as of December 31, 2012 and 2011, respectively.