News Column

POLARIS INDUSTRIES INC/MN - 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operations

February 21, 2014

The following discussion pertains to the results of operations and financial position of the Company for each of the three years in the period ended December 31, 2013, and should be read in conjunction with the Consolidated Financial Statements and the Notes thereto included elsewhere in this report.

Overview

In 2013, we had record sales and net income from continuing operations, with our fourth straight year of sales growth exceeding 15 percent and net income growth exceeding 20 percent. This growth is fueled by award-winning innovative new products leading to continued market share leadership in side-by-side vehicles and ATV's. In 2013, we also experienced growth in our motorcycles, international and adjacent market businesses. The overall North American powersports industry continued its positive trend with mid-single digit percentage growth in 2013. Our North America retail sales to consumers increased 10 percent in 2013, helping to drive total full year Company sales up 18 percent to a record $3.78 billion. Despite the global economy remaining difficult, our international sales increased 29 percent due to continued market share growth in all product categories and strong results by our recent European acquisitions. Full year earnings reflect the success of our margin expansion efforts, as we delivered a 40 basis point increase in net income margin from continuing operations to a record 10.1 percent of sales. The combination of increased sales growth and the expansion of gross margins by 90 basis points drove net income from continuing operations up 22 percent to $381.1 million, with diluted earnings per share from continuing operations increasing 23 percent to a record $5.40 per share. These increases came while we continued to invest in numerous longer-term diversification and growth opportunities. In 2013, we received a benefit from prior investments while continuing to invest in both product development and strategic initiatives. In August 2013, we re-launched the iconic Indian Motorcycle brand, headlined by three all-new models: Chief Classic, Chief Vintage and Chieftain. Additionally, in 2013 we introduced 11 new ORV products and eight new snowmobile models. Our late 2012 acquisition of Klim, a market leader in the design, development and distribution of premium technical riding gear for the snowmobile and motorcycle divisions, performed exceptionally well in 2013. Meanwhile, in the second quarter of 2013, we acquired Aixam, a leader in the European on-road quadricycles market. Our footprint expanded with the doubling of our Wyoming, Minnesota research and development facility being completed in 2013, and we broke ground on a new manufacturing plant in Poland and a new manufacturing plant for our joint venture with Eicher Motors Limited, which intends to design, develop and manufacture a full range of new vehicles in India and other emerging markets. In November 2013, we repurchased 3.96 million shares held by Fuji Heavy Industries Ltd. ("Fuji") for $497.5 million. The repurchase was funded from cash on hand and borrowings under our revolving credit facility and Master Note Purchases Agreement. The repurchase is expected to decrease our 2014 diluted share count while leaving available borrowing capacity to fund future growth. On January 30, 2014, we announced that our Board of Directors approved a 14 percent increase in the regular quarterly cash dividend to $0.48 per share for the first quarter of 2014, representing the 19th consecutive year of increased dividends to shareholders. This increase reflects the continued momentum and potential of our business and the strength of our balance sheet. 25



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Results of Operations Sales: Sales were $3,777.1 million in 2013, an 18 percent increase from $3,209.8 million for the same period in 2012. The following table is an analysis of the percentage change in total Company sales for 2013 compared to 2012 and 2012 compared to 2011: Percent change in total Company sales compared to the prior year 2013 2012 Volume 12 % 18 % Product mix and price 7 4 Currency (1 ) (1 ) 18 % 21 % Volume for 2013 and 2012 increased 12 percent and 18 percent, respectively, compared to 2012 and 2011. The volume increase in 2013 and 2012 is primarily the result of shipping more ORVs, snowmobiles, motorcycles and related PG&A items to dealers given increased consumer retail demand for our products worldwide, along with the inclusion of Aixam in our consolidated financial statements since it was acquired on April 10, 2013. Product mix and price contributed seven percent and four percent to the growth for 2013 and 2012, respectively, primarily due to the positive benefit of a greater number of higher priced ORVs sold to dealers relative to our other businesses. The impact from currency rates on our Canadian and other foreign subsidiaries' sales, when translated to U.S. dollars decreased sales by one percent in both 2013 and 2012 compared to the respective prior years. Our sales by product line were as follows: For the Years Ended December 31, Percent Percent Percent Percent Change Percent Change of Total of Total 2013 vs. of Total 2012 vs. ($ in millions) 2013 Sales 2012 Sales 2012 2011 Sales 2011 Off-Road Vehicles $ 2,521.5 67 % $ 2,225.8 69 % 13 % $ 1,822.3 69 % 22 % Snowmobiles 301.7 8 % 283.0 9 % 7 % 280.1 11 % 1 % Motorcycles 219.8 6 % 195.8 6 % 12 % 134.3 5 % 46 % Small Vehicles 122.8 3 % 44.4 2 % 177 % 12.0 - % 268 % PG&A 611.3 16 % 460.8 14 %



33 % 408.2 15 % 13 % Total Sales $ 3,777.1 100 % $ 3,209.8 100 % 18 % $ 2,656.9 100 % 21 %

ORV sales of $2,521.5 million in 2013, which include core ATV and RANGER and RZR side-by-side vehicles, increased 13 percent from 2012. This increase reflects continued market share gains for both ATVs and side-by-side vehicles driven by strong consumer enthusiasm for our ORV offerings, including an expanded line-up of innovative new ATVs and side-by-side vehicles introduced in the 2013 third and fourth quarters. Polaris' North American ORV unit retail sales to consumers increased high-single digits percent for 2013 compared to 2012, with ATV unit retail sales growing mid-single digits percent and side-by-side vehicle unit retail sales increasing more than ten percent over the prior year. North American dealer inventories of ORVs increased mid-teens percent from 2012, in support of continued strong retail demand for side-by-side vehicles and incremental new market segments. ORV sales outside of North America increased nine percent in 2013 compared to 2012 resulting in market share gains. For 2013, the average ORV per unit sales price increased seven percent over 2012's per unit sales price, primarily as a result of the increased sales of higher priced side-by-side vehicle models. ORV sales of $2,225.8 million in 2012, which include core ATV and RANGER and RZR side-by-side vehicles, increased 22 percent from 2011. This increase reflects continued market share gains for both ATVs and side-by-side vehicles driven by industry leading product offerings. Polaris' North American ORV unit retail sales to consumers increased mid-teens percent for 2012 compared to 2011, with ATV unit retail sales growing mid-single digits percent and side-by-side vehicle unit retail sales increasing more than 20 percent over the prior year. North American dealer inventories of ORVs increased 26 percent from 2011, in support of continued strong retail demand for side-by-side vehicles and incremental 26



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new market segments. ORV sales outside of North America decreased six percent in 2012 compared to 2011, primarily due to weak demand in Europe. Despite decreased sales outside of North America, we widened our market share leadership in ORVs worldwide in 2012 compared to 2011. For 2012, the average ORV per unit sales price increased two percent over 2011's per unit sales price, primarily as a result of the increased sales of higher priced side-by-side vehicle models. Snowmobile sales increased seven percent to $301.7 million for 2013 compared to 2012. This increase is primarily due to lower dealer inventory coming out of the 2012-2013 snowmobile season and success of the model year 2014 new product introductions. Retail sales to consumers for the 2013-2014 season-to-date period through December 31, 2013, increased nearly ten percent. Sales of snowmobiles to customers outside of North America, principally within the Scandinavian region and Russia, increased 18 percent in 2013 as compared to 2012. The average unit sales price in 2013 decreased two percent when compared to 2012, resulting primarily from increased sales of our value-priced snowmobiles. Snowmobile sales increased one percent to $283.0 million for 2012 compared to 2011. This increase is primarily due to increased market share in North America driven by the success of model year 2013 new product introductions. Sales of snowmobiles to customers outside of North America, principally within the Scandinavian region and Russia, increased nine percent as compared to 2011. The average unit sales price in 2012 was flat when compared to 2011. Sales from the motorcycles division, which is comprised of Victory and Indian motorcycles, increased 12 percent to $219.8 million for 2013 compared to 2012. The increase in 2013 sales is due to the initial shipments of the new model year 2014 Indian motorcycles. North American industry heavyweight cruiser and touring motorcycle retail sales increased mid-single digits percent in 2013 compared to 2012. Over the same period, Polaris North American unit retail sales to consumers increased over 20 percent, driven by an unprecedented number of new product introductions in 2013, which includes three new Indian Motorcycle models. North American Polaris motorcycle dealer inventory increased high-single digits percent in 2013 versus 2012 levels due to stocking of the new Indian motorcycles. Sales of motorcycles to customers outside of North America increased three percent in 2013 compared to 2012. The average per unit sales price for the motorcycles division in 2013 increased five percent compared to 2012 due to the increased sales of higher priced Indian motorcycles. Sales from the motorcycle division, which in 2012 was comprised primarily of Victory motorcycles, increased 46 percent to $195.8 million for 2012 compared to 2011. The 2012 sales increase reflects an increase of Victory North American unit retail sales to consumers over ten times the North American heavyweight cruiser and touring motorcycle industry percentage growth rate. North American Victory dealer inventory increased over 2011 levels to support the sales increases, market share gains, new dealer additions and our new RFM ordering system. The RFM ordering system allows dealers to place more frequent orders based on retail sell-through along with encouraging display of each Victory model. Sales from the motorcycle division to customers outside of North America increased over 50 percent due to increased market share gains of our Victory motorcycles. The average per unit sales price for the motorcycle division increased two percent in 2012 compared to 2011. In April 2013, we acquired Aixam. Aixam is based in France and manufactures and sells enclosed on-road quadricycles and light duty commercial vehicles. Aixam complements our SV division, which also includes GEM and Goupil vehicles. SV sales of $122.8 million in 2013 represents an increase of 177 percent compared to 2012. The increase in sales over the comparable prior year periods is primarily due to the inclusion of Aixam in our consolidated financial statements since it was acquired in April 2013. Also, both GEM and Goupil experienced an increase in sales during 2013 compared to 2012. Sales of the SV division in 2012, which included the 2011 acquisitions of GEM and Goupil, were $44.4 million, which represented an increase of 268 percent compared to 2011. The increase in sales was due to the inclusion of GEM and Goupil in our consolidated financial statements for the full 2012 year, compared to inclusion in 2011 for the shortened periods since the acquisition of these companies in June and November of 2011, respectively. PG&A sales increased 33 percent to $611.3 million for 2013 compared to 2012. Sales of PG&A to customers outside of North America increased 26 percent during 2013 compared to 2012. The sales increase in 2013 was driven by double digit percent increases in all product lines and categories, which was primarily driven by the addition of over 300 new model year 2014 accessories, including additions to the family of Lock and RideŽ attachments that add comfort, style and utility to ORVs and motorcycles. PG&A sales also increased over the prior year periods due to the inclusion of Klim in our consolidated financial statements since it was acquired in December 2012, and Aixam related PG&A since it was acquired in April 2013. 27



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PG&A sales increased 13 percent to $460.8 million for 2012 compared to 2011. Sales of PG&A to customers outside of North America increased 16 percent during 2012 compared to 2011. The sales increase in 2012 was driven by increased sales in all product lines and product categories driven by the addition of over 250 model year 2013 accessories, and higher PG&A related sales to owners of the Company's large installed base of vehicles. The acquisition of Klim late in the 2012 fourth quarter did not have a significant impact on the 2012 PG&A sales results. Sales by geographic region were as follows: For the Years Ended December 31, Percent Percent Change Change ($ in Percent of Percent of 2013 vs. Percent of 2012 vs. millions) 2013 Total Sales 2012 Total Sales 2012 2011 Total Sales 2011 United States $ 2,721.3 72 % $ 2,311.0 72 % 18 % $ 1,864.1 70 % 24 % Canada 463.3 12 % 438.2 14 % 6 % 368.5 14 % 19 % Other foreign countries 592.5 16 % 460.6 14 % 29 % 424.3 16 % 9 % Total sales $ 3,777.1 100 % $ 3,209.8 100 % 18 % $ 2,656.9 100 % 21 % Significant regional trends were as follows: United States: Sales in the United States for 2013 increased 18 percent compared to 2012, primarily resulting from higher shipments in all product lines and related PG&A, improved pricing and more sales of higher priced side-by-side vehicles. The United States represented 72 percent, 72 percent and 70 percent of total company sales in 2013, 2012 and 2011, respectively. Sales in the United States for 2012 increased 24 percent compared to 2011, primarily resulting from higher shipments in all product lines due to market share gains driven by innovative products. Canada: Canadian sales increased six percent in 2013 compared to 2012. Increased shipments of ORVs and snowmobiles was the primary contributor for the increase in 2013, partially offset by currency rate movements which had an unfavorable three percent impact on sales for 2013 compared to 2012. Sales in Canada represented 12 percent, 14 percent and 14 percent of total company sales in 2013, 2012, and 2011, respectively. Canadian sales increased 19 percent in 2012 compared to 2011 due to increased volume from strong retail sales demand in Canada for our products, offset by an unfavorable one percent impact on sales from fluctuation in the Canadian currency compared to the United States dollar. Other Foreign Countries: Sales in other foreign countries, primarily in Europe, increased 29 percent for 2013 compared to 2012. The increase was primarily driven by the acquisition of Aixam in April 2013, along with increased sales of side-by-side vehicles and PG&A. This increase was partially offset by currency rate movements, which had an unfavorable one percent impact on sales for 2013 compared to 2012. Sales in other foreign countries, primarily in Europe, increased nine percent for 2012 compared to 2011. The increase was primarily driven by the additional sales from the Goupil acquisition, higher sales of Victory motorcycles and snowmobiles, and a 21 percent increase in the Asia/Pacific and Latin America region sales. Currency rates had an unfavorable two percent impact on sales for 2012 compared to 2011. 28



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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 Change Percent of Total Percent of Total Change 2013 Total 2012 vs.



($ in millions) 2013 Cost of Sales 2012 Cost of Sales vs. 2012 2011 Cost of Sales 2011 Purchased materials and services $ 2,336.1

88 % $ 2,008.9 88 % 16 % $ 1,650.8 86 % 22 % Labor and benefits 198.7 8 % 177.7 8 % 12 % 165.5 9 % 7 % Depreciation and amortization 64.5 2 % 51.8 2 % 25 % 53.9 3 % (4 )% Warranty costs 56.9 2 % 46.1 2 % 23 % 46.2 2 % - % Total cost of sales $ 2,656.2 100 % $ 2,284.5 100 % 16 % $ 1,916.4 100 % 19 % Percentage of sales 70.3 % 71.2 % -90 basis 72.1 % -90 basis points points For 2013, cost of sales increased 16 percent to $2,656.2 million compared to $2,284.5 million in 2012. The increase in cost of sales in 2013 resulted primarily from the effect of a 12 percent increase in sales volume on purchased materials and services and labor and benefits, and also includes an unfavorable resolution regarding a contract dispute resulting in an approximate $10.0 million charge for additional royalties in 2013. For 2012, cost of sales increased 19 percent to $2,284.5 million compared to $1,916.4 million in 2011. The increase in cost of sales in 2012 resulted primarily from the effect of an 18 percent increase in sales volumes on purchased materials and services and labor and benefits offset somewhat by continued product cost reduction efforts in 2012. Gross Profit: The following table reflects our gross profit in dollars and as a percentage of sales: For the Years Ended December 31, Change Change ($ in millions) 2013 2012 2013 vs. 2012 2011 2012 vs. 2011 Gross profit dollars $ 1,120.9$ 925.3 21 % $ 740.6 25 %



Percentage of sales 29.7 % 28.8 % +90 basis points

27.9 % +90 basis points

Gross profit, as a percentage of sales, was 29.7 percent for 2013, an increase of 90 basis points from 2012. Gross profit dollars increased 21 percent to $1,120.9 million in 2013 compared to 2012. The increases in gross profit dollars and the increase in gross profit margin percentage resulted primarily from continued product cost reduction, production efficiencies on increased volumes and higher selling prices, partially offset by unfavorable foreign currency fluctuations, higher promotional costs and royalty expenses as a result of a contract dispute resolution. For 2012, gross profit dollars increased 25 percent to $925.3 million compared to 2011. Gross profit, as a percentage of sales, increased 90 basis points to 28.8 percent compared to 27.9 percent for 2011. The increase in gross profit dollars and the 90 basis points increase in the gross profit margin percentage in 2012 resulted primarily from continued product cost reduction efforts, production efficiencies on increased volumes, higher selling prices, and ongoing cost savings from the manufacturing realignment project, partially offset by higher sales promotions and unfavorable product mix. 29



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Operating Expenses: The following table reflects our operating expenses in dollars and as a percentage of sales: For the Years Ended December 31, Change Change ($ in millions) 2013 2012 2013 vs. 2012 2011 2012 vs. 2011

Selling and marketing $ 270.3$ 210.4 28 % $ 178.7 18 % Research and development 139.2 127.3 9 % 105.6 21 % General and administrative 179.4 143.1 25 % 130.4 10 % Total operating expenses $ 588.9$ 480.8 22 % $ 414.7 16 % Percentage of sales 15.6 % 15.0 % +60 basis points



15.6 % -60 basis points

Operating expenses for 2013 increased 22 percent to $588.9 million, compared to $480.8 million in 2012. Operating expenses as a percentage of sales increased 60 basis points in 2013 to 15.6 percent compared to 15.0 percent in 2012. Operating expenses in absolute dollars and as a percentage of sales increased in 2013 primarily due to higher selling, marketing and advertising expenses related, in part, to the re-launch of Indian Motorcycle, increased general and administrative expenses, which includes infrastructure investments being made to support global growth initiatives and higher accrued incentive compensation due to a higher stock price. Operating expenses in absolute dollars also increased due to the inclusion of Klim and Aixam operating expenses in our consolidated financial statements since these companies were acquired in December 2012 and April 2013, respectively. Operating expenses for 2012 increased 16 percent to $480.8 million compared to $414.7 million for 2011. Operating expenses as a percentage of sales decreased 60 basis points to 15.0 percent compared to 15.6 percent in 2011. Operating expenses in absolute dollars for 2012 increased primarily due to higher research and development expenses as we invest in growth initiatives and higher selling and marketing expenses due to sales growth, preparation for the Indian Motorcycle re-launch, and implementation of the new go-to-market program for motorcycles. Operating expenses as a percentage of sales decreased in 2012 compared to 2011 due to leverage achieved from the increased sales volume during the year. Income from Financial Services: The following table reflects our income from financial services: For the Years Ended December 31, Change Change ($ in millions) 2013 2012 2013 vs. 2012 2011 2012 vs. 2011 Equity in earnings of Polaris Acceptance $ 5.0$ 3.9 28 % $ 4.4 (12 )% Income from Securitization Facility 15.2 11.8 28 % 7.7 54 % Income from Capital One, Sheffield and GE Bank retail credit agreements 22.5 15.3 47 % 9.1 69 % Income from other financial services activities 3.2 2.9 14 % 2.9 (1 )% Total income from financial services $ 45.9$ 33.9 35 % $ 24.1 41 % Income from financial services increased 35 percent to $45.9 million in 2013 compared to $33.9 million in 2012. The increase in 2013 is primarily due to a nine percent increase in retail credit contract volume and increased profitability generated from the retail credit portfolios with Sheffield Financial ("Sheffield"), GE and Capital One, and higher income from dealer inventory financing through Polaris Acceptance and the Securitization Facility. Income from financial services increased 41 percent to $33.9 million in 2012 compared to $24.1 million in 2011. The increase was primarily due to increased profitability generated from retail credit arrangements with Sheffield, GE, and Capital One, an 11 percent increase in the retail credit volume, and higher income from dealer inventory financing through the Securitization Facility. Interest Expense: Interest expense increased to $6.2 million in 2013 compared to $5.9 million in 2012. In the 2013 fourth quarter, we increased debt levels through borrowings on our existing revolving credit facility and additional borrowings of $100.0 million through our amended Master Note Purchases Agreement used to partially fund the $497.5 million buyback of outstanding Polaris shares held by Fuji. The additional debt resulted in an increase to interest expense in 2013. Interest 30



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expense increased to $5.9 million in 2012 compared to $4.0 million in 2011. This increase was due to both sustained increased levels of capital lease obligations and interest bearing long-term senior notes being outstanding throughout all of 2012. Other (Income), Net: Non-operating other income was $5.1 million, $7.5 million and $0.7 million for 2013, 2012 and 2011. The change in income primarily relates to foreign currency exchange rate movements and the resulting effects on foreign currency transactions and balance sheet positions related to our foreign subsidiaries from period to period. Additionally, in 2013, we recorded a $5.0 million charge due to an other-than-temporary impairment of our Brammo, Inc. cost-based investment. Provision for Income Taxes: The income tax provision was similar for 2013, 2012 and 2011 and reflected a rate of 33.7 percent, 34.9 percent and 34.3 percent of pretax income. The lower income tax rate for 2013, and higher rate in 2012, was primarily due to the timing of the extension of the research and development income tax credit in the first quarter 2013. The credit was recorded in 2013 but applied retroactively to 2012 resulting in a lower tax rate in 2013. In addition, in 2013 we also had a favorable impact from the release of certain income tax reserves due to favorable conclusions of federal income tax audits. The favorable impact from these items totaled $8.2 million and was recorded as a reduction to income tax expense in the first quarter of 2013.



Net Income from Continuing Operations: The following table reflects our reported net income from continuing operations:

For the Years Ended December 31, ($ in millions, except per Change Change share data) 2013 2012 2013 vs. 2012 2011 2012 vs. 2011 Net income from continuing operations $ 381.1$ 312.3 22 % $ 227.6 37 % Diluted net income per share $ 5.40$ 4.40 23 % $ 3.20 38 %



Net Income, Including Loss From Discontinued Operations: The following table reflects our reported net income:

For the Years Ended December 31, ($ in millions, except per Change Change share data) 2013 2012 2013 vs. 2012 2011 2012 vs. 2011 Net income $ 377.3$ 312.3 21 % $ 227.6 37 % Diluted net income per share $ 5.35$ 4.40 22 % $ 3.20 38 % Net income, including the loss from discontinued operations, increased 21 percent in 2013 compared to 2012. The 2013 loss from discontinued operations is a result of a 2013 unfavorable jury verdict in a previously disclosed lawsuit involving a collision between a 2001 Polaris Virage personal watercraft and a boat. The jury awarded approximately $21.0 million in damages of which our liability was $10.0 million. We reported a loss from discontinued operations, net of tax, of $3.8 million in 2013 for an additional provision for our portion of the jury award and legal fees. The liability was fully paid by the end of 2013. There was no income or loss from discontinued operations in 2012 or 2011. In September 2004, we announced our decision to cease manufacturing marine products. Since then, any material financial results of that division have been recorded in discontinued operations. No additional charges are expected from this lawsuit. Weighted Average Shares Outstanding: The weighted average diluted shares outstanding for 2013, 2012 and 2011 were 70.5 million, 71.0 million, and 71.1 million shares, respectively. In November 2013, Polaris entered into and executed a Share Repurchase Agreement with Fuji pursuant to which Polaris purchased 3.96 million shares of Polaris stock held by Fuji. This buyback more than offset the issuance of shares under employee compensation plans and resulted in a decrease to the 2013 weighted average diluted shares outstanding; however, as a result of the timing of the buyback, it will have a more significant impact on our 2014 weighted average diluted shares outstanding. In 2012, the issuance of shares under employee compensation plans offset market share repurchases under our stock repurchase program, resulting in flat weighted average shares outstanding compared to 2011. 31



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Critical Accounting Policies 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, dealer holdback programs, product warranties, share-based employee compensation and product liability. Revenue recognition. Revenues are recognized at the time of shipment to the dealer, distributor or other customers. Historically, product returns, whether in the normal course of business or resulting from repurchases made under the floorplan 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. No material losses have been incurred under these agreements. We have not historically recorded any significant sales return allowances because we have not been required to repurchase a significant number of units. However, an adverse change in retail sales could cause this situation to change. 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. Sales promotions and incentives. We provide 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. We record these amounts as a liability in the consolidated balance sheet until they are ultimately paid. At December 31, 2013 and 2012, accrued sales promotions and incentives were $123.1 million and $107.0 million, respectively, resulting primarily from an increase in the volume of units sold and an increase in the level of dealer inventories in 2013. 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 from time to time 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. Historically, actual sales promotion and incentive expenses have been within our expectations and differences have not been material. 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 our dealers or distributors and, therefore, reduce the amount of sales we recognize at the time of shipment. The portion of the invoiced sales price estimated as the holdback is recognized as "dealer holdback" liability on our 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 $100.6 million and $86.7 million for dealer holdback programs in the consolidated balance sheets as of December 31, 2013 and 2012, respectively. Share-based employee compensation. We recognize in the financial statements the grant-date fair value of stock options and other equity-based compensation issued to employees. Determining the appropriate fair-value model and calculating the fair value of share-based awards at the date of grant requires judgment. The Company utilizes the Black-Scholes option pricing model to estimate the fair value of employee stock options. Option pricing models, including the Black-Scholes model, also require the use of input assumptions, including expected volatility, expected life, expected dividend rate, and expected risk-free rate of return. The Company utilizes historical volatility as it believes this is reflective of market conditions. The expected life of the awards is based on historical exercise patterns. The risk-free interest rate assumption is based on observed interest rates appropriate for the terms of awards. The dividend yield assumption is based on our history of dividend payouts. We develop an estimate of the number of share-based awards that will be forfeited due to employee turnover. Changes in the estimated forfeiture rate can have a significant effect on reported share-based compensation, as the effect of adjusting the rate for all expense amortization is recognized in the period the forfeiture estimate is changed. If the actual forfeiture rate is higher or lower than the estimated forfeiture rate, then an adjustment is made to increase or decrease the estimated forfeiture rate, which will result in a decrease or increase to the expense recognized in the financial statements. If forfeiture adjustments are made, they would affect our gross margin and operating expenses. We estimate the likelihood and the rate of achievement for performance sensitive share-based 32



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awards, specifically long-term compensation grants of performance-based restricted stock awards. Changes in the estimated rate of achievement can have a significant effect on reported share-based compensation expenses as the effect of a change in the estimated achievement level is recognized in the period that the likelihood factor changes. If adjustments in the estimated rate of achievement are made, they would be reflected in our gross margin and operating expenses. At the end of 2013, if all long-term incentive program performance based awards were expected to achieve the maximum payout, we would have recorded an additional $2.6 million of expense in 2013. Fluctuations in our stock price can have a significant effect on reported share-based compensation expenses for liability-based awards. The impact from fluctuations in our stock price is recognized in the period of the change, and is reflected in our gross margin and operating expenses. At December 31, 2013, the accrual for liability-based awards outstanding was $74.2 million. Product warranties. We provide a limited warranty for ORVs for a period of six months, for a period of one year for our snowmobiles and motorcycles and two years for SVs. We provide longer warranties in certain geographical markets as determined by local regulations and market conditions and may provide longer warranties related to certain promotional programs. Our standard warranties require us or our dealers to repair or replace defective products during such warranty periods at no cost to the consumers. 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. At December 31, 2013 and 2012, the accrued warranty liability was $52.8 million and $47.7 million, respectively. Adjustments to the warranty reserve are made from time to time 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. 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. Product liability. We are subject to product liability claims in the normal course of business. In late 2012, we purchased excess insurance coverage for catastrophic product liability claims for incidents occurring after the policy date. We self-insure product liability claims up to the purchased catastrophic insurance coverage. 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 determinable. We utilize historical trends and actuarial analysis tools, along with an analysis of current claims, to assist in determining the appropriate loss reserve levels. At December 31, 2013 and 2012, we had accruals of $17.1 million and $14.0 million, respectively, for the probable payment of pending claims related to continuing operations product liability litigation associated with our products. These accruals are included in other accrued expenses in the consolidated balance sheets. 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.



New Accounting Pronouncements See Item 8 of Part II, "Financial Statements and Supplementary Data-Note 1-Organization and Significant Accounting Policies-New Accounting Pronouncements."

Liquidity and Capital Resources Our primary source of funds has been cash provided by operating activities. Our primary uses of funds have been for acquisitions, repurchase and retirement of common stock, capital investment, new product development and cash dividends to shareholders. 33



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The following table summarizes the cash flows from operating, investing and financing activities for the years ended December 31, 2013 and 2012:

For the Years Ended December 31, ($ in millions) 2013 2012



Change

Total cash provided by (used for): Operating activities $ 492.2$ 416.1$ 76.1 Investing activities (406.7 ) (163.0 ) (243.7 ) Financing activities (409.0 ) (162.5 ) (246.5 ) Impact of currency exchange rates on cash balances (1.3 ) 1.1 (2.4 ) (Decrease) increase in cash and cash equivalents $ (324.8 )$ 91.7$ (416.5 ) Operating Activities: Net cash provided by operating activities totaled $492.2 million and $416.1 million in 2013 and 2012, respectively. The $76.1 million increase in net cash provided by operating activities in 2013 is primarily the result of higher net income compared to 2012, which includes a $21.5 million increase in depreciation and amortization and $22.5 million increase in noncash compensation, partially offset by a $60.1 million increase in net investment in working capital. Investing Activities: Net cash used for investing activities was $406.7 million in 2013 compared to $163.0 million in 2012. The primary uses of cash in 2013 were the acquisition of Aixam and capital expenditures for the purchase of property and equipment. The acquisition of Aixam was funded with cash on hand for $134.8 million, net of cash acquired. In 2013, we acquired the land and manufacturing facility in Monterrey, Mexico, which we had previously leased. In addition, we made large capital expenditures related to the expansion of many of our North America locations, including our Product Development Center near Wyoming, Minnesota, and manufacturing facilities in Roseau, Minnesota and Monterrey, Mexico. Additionally, we purchased warehouses in Wilmington, Ohio, which have become a new regional distribution center for our PG&A business, and purchased a previously leased manufacturing facility in Milford, Iowa to support growing vehicle production capacity needs. We expect that capital expenditures for 2014 will be between $200 million and $250 million. Financing Activities: Net cash used for financing activities was $409.0 million in 2013 compared to $162.5 million in 2012. We paid cash dividends of $113.7 million and $101.5 million in 2013 and 2012, respectively. In November 2013, Polaris repurchased the 3.96 million Polaris shares held by Fuji for $497.5 million. Total common stock repurchased in 2013 and 2012 totaled $530.0 million and $127.5 million, respectively. The repurchase of the Polaris shares held by Fuji was partially funded through additional debt borrowings. In 2013, we had net borrowings under our capital lease arrangements and debt arrangements of $179.2 million, compared to net repayments of $5.0 million in 2012. Proceeds from the issuance of stock under employee plans were $26.9 million and $41.7 million in 2013 and 2012, respectively. The seasonality of production and shipments cause working capital requirements to fluctuate during the year. We are party to an unsecured $350 million variable interest rate bank lending agreement that expires in January 2018. Interest is charged at rates based on LIBOR or "prime." At December 31, 2013, there were borrowings of $80.5 million outstanding. In December 2010, we entered into a Master Note Purchase Agreement to issue $25.0 million of 3.81 percent unsecured Senior Notes due May 2018 and $75.0 million of 4.60 percent unsecured Senior Notes due May 2021 (collectively, the "Senior Notes"). The Senior Notes were issued in May 2011. In December 2013, the Company entered into a First Supplement to Master Note Purchase Agreement, under which the Company issued $100.0 million of 3.13 percent unsecured senior notes due December 2020. At December 31, 2013 and 2012, outstanding borrowings under the amended Master Note Purchase Agreement totaled $200.0 million and $100.0 million, respectively. At December 31, 2013 and 2012 we were in compliance with all debt covenants. Our debt to total capital ratio was 35 percent and 13 percent at December 31, 2013 and 2012, respectively. 34



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The following table summarizes our significant future contractual obligations at December 31, 2013: (In millions): Total 5 Years Senior notes $ 200.0 - - $ 25.0$ 175.0 Borrowings under our credit facility 80.5 - - 80.5 - Interest expense 55.3 $ 8.5$ 17.0 15.5 14.3 Capital leases 42.1 4.3 7.3 5.4 25.1 Operating leases 17.7 6.4 7.2 2.4 1.7 Total $ 395.6$ 19.2$ 31.5$ 128.8$ 216.1 In the table above, we assumed our December 31, 2013, outstanding borrowings under our credit facility and under the Senior Notes will be paid at their respective due dates. Additionally, at December 31, 2013, we had letters of credit outstanding of $19.1 million related to purchase obligations for raw materials. Not included in the above table is unrecognized tax benefits of $14.3 million and the estimated future payments of contingent purchase price related to acquisitions which have a fair value of $18.2 million at December 31, 2013, and are expected to be paid at various times in 2014 through 2017. Our Board of Directors has authorized the cumulative repurchase of up to 75.0 million shares of our common stock through an authorized stock repurchase program. Of that total, approximately 73.4 million shares have been repurchased cumulatively from 1996 through December 31, 2013. In addition to this stock repurchase authorization, in 2013 the Polaris Board of Directors authorized the one-time repurchase of all the shares of Polaris stock owned by Fuji. On November 12, 2013, Polaris entered into and executed a Share Repurchase Agreement with Fuji pursuant to which Polaris purchased 3.96 million shares of Polaris stock held by Fuji. We repurchased a total of 4.3 million shares of our common stock for $530.0 million during 2013, which increased earnings per share by six cents. We have authorization from our Board of Directors to repurchase up to an additional 1.6 million shares of our common stock as of December 31, 2013. The repurchase of any or all such shares authorized remaining for repurchase will be governed by applicable SEC rules. We have arrangements with certain finance companies (including Polaris Acceptance) 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 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 at December 31, 2013 and 2012, was approximately $1,163.5 million and $981.6 million, respectively. We participate in the cost of dealer financing up to certain limits. We have agreed to repurchase products repossessed by the finance companies up to an annual maximum of no more than 15 percent of the average month-end balances outstanding during the prior calendar year. Our financial exposure under these 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 these agreements. However, an adverse change in retail sales could cause this situation to change and thereby require us to repurchase repossessed units subject to the annual limitation referred to above. In 1996, a wholly owned subsidiary of Polaris entered into a partnership agreement with an entity that is now a subsidiary of GE Commercial Distribution Finance Corporation (GECDF) to form Polaris Acceptance. Polaris Acceptance provides floor plan financing to our dealers in the United States. Our subsidiary has a 50 percent equity interest in Polaris Acceptance. In November 2006, Polaris Acceptance sold a majority of its receivable portfolio (the "Securitized Receivables") to a securitization facility ("Securitization Facility") arranged by General Electric Capital Corporation, a GECDF affiliate, and the partnership agreement was amended to provide that Polaris Acceptance would continue to sell portions of its receivable portfolio to the Securitization Facility from time to time on an ongoing basis. The sale of receivables from Polaris Acceptance to the Securitization Facility is accounted for in Polaris Acceptance's financial statements as a "true-sale" under ASC Topic 860. Polaris Acceptance is not responsible for any continuing servicing costs or obligations with respect to the Securitized Receivables. The remaining portion of the receivable portfolio is recorded on Polaris Acceptance's books, and is funded to the extent of 85 percent through a loan from an affiliate of GECDF. We have not guaranteed the outstanding indebtedness of Polaris Acceptance or the Securitized Receivables. In addition, the two partners of Polaris Acceptance share equally an equity cash investment equal to 15 percent of the sum of the portfolio balance in Polaris Acceptance plus the Securitized Receivables. Our total investment in Polaris Acceptance at 35



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December 31, 2013 was $69.2 million. Substantially all of our U.S. sales are financed through Polaris Acceptance and the Securitization Facility whereby Polaris receives payment within a few days of shipment of the product. The partnership agreement provides that all income and losses of the Polaris Acceptance portfolio and income and losses realized by GECDF's affiliates with respect to the Securitized Receivables are shared 50 percent by our wholly owned subsidiary and 50 percent by GECDF's subsidiary. Our exposure to losses associated with respect to the Polaris Acceptance Portfolio and the Securitized Receivables is limited to its equity in its wholly owned subsidiary that is a partner in Polaris Acceptance. We have agreed to repurchase products repossessed by Polaris Acceptance or the Securitization Facility up to an annual maximum of 15 percent of the aggregate average month-end balances outstanding during the prior calendar year with respect to receivables retained by Polaris Acceptance and the Securitized Receivables. For calendar year 2014, the potential 15 percent aggregate repurchase obligation is approximately $120.8 million. Our financial exposure under this arrangement is limited to the difference between the amount paid to the finance company for repurchases and the amount received on the resale of the repossessed product. No material losses have been incurred under this agreement. During 2011, Polaris and GECDF amended the Polaris Acceptance partnership agreement to extend it through February 2017 with similar terms to the previous agreement. Our investment in Polaris Acceptance is accounted for under the equity method and is recorded as investment in finance affiliate in the accompanying consolidated balance sheets. Our 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 accompanying consolidated statements of income. At December 31, 2013, Polaris Acceptance's wholesale portfolio receivables from dealers in the United States (including the Securitized Receivables) was $928.5 million, a 21 percent increase from $767.2 million at December 31, 2012. Credit losses in the Polaris Acceptance portfolio have been modest, averaging less than one percent of the portfolio. We have agreements with Capital One, GE Money Bank and Sheffield Financial under which these financial institutions provide financing to end consumers of our products. The agreements expire in October 2014, March 2016 and February 2016, respectively. The income generated from these agreements has been included as a component of income from financial services in the accompanying consolidated statements of income. During 2013, consumers financed approximately 32 percent of our vehicles sold in the United States through the combined Capital One revolving retail credit and GE Bank and Sheffield installment retail credit arrangement. The volume of revolving and installment credit contracts written in calendar year 2013 was $779.0 million, a nine percent increase from 2012. We administer and provide extended service contracts to consumers and certain insurance contracts to dealers and consumers through various third-party suppliers. We do not retain any warranty, insurance or financial risk under any of these arrangements. The service fee income generated from these arrangements has been included as a component of income from financial services in the accompanying consolidated statements of income. We believe that existing cash balances, cash flow to be generated from operating activities and available borrowing capacity under the line of credit arrangement will be sufficient to fund operations, new product development, cash dividends, share repurchases, acquisitions and capital requirements for the foreseeable future. At this time, we are not aware of any factors that would have a material adverse impact on cash flow. 36



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