The very large recall of RZR vehicles impacted Polaris 2nd quarter side-by-side revenue.

Polaris Industries reported fiscal year 2016 second quarter earnings with sales increasing 1% from the same quarter last year to reach $1,130.8 million. Net income was down 29% to $71.2 million, reflecting approximately $25 million in warranty, legal and recall costs. Here are some of the highlights of the earnings callrelated to small, task-oriented vehicles.

• ORV (ATV and UTV) sales decreased 6% in the quarter with Ranger shipments flat and RZR/ATV shipments down
• RZR retail was down significantly more than RANGER and that was anticipated given the impact from the recall
• North American (NA) ORV inventory was down 8%
• Demand for the new General line of UTVs is exceeding company expectations
• The Huntsville, AL plant is ramping up Ranger and Slingshot production
• NA retail market for side-by-sides was flat and declining for ATVs
• Management reports losing a few points of side-by-side market share attributable more to their product lineup in the utility segment in a competitive environment
• NA retail market for side-by-sides was flat and declining for ATVs
• Polaris NA retail was down double digits for ORV for the quarter impacted by the large product recall as well as weakness in the oil  and ag markets with side-by-side retail down high single digits
• Product recall costs have been approximately $27 million for the first half of the year. The company has had a 30% response rate so far and the Consumer Product Safety Commission is targeting a response rate close to 80%
• Global adjacent market sales increased 14% in the second quarter to $91 million including PG&A, driven by market share gains in Aixam and the added sales from the Taylor-Dunn acquisition.
• Management reports that Taylor-Dunn’s “performance out of the gate, it’s been one of our best acquisitions yet” and they like what is essentially a made to order model along with synergies for the people mover segment with other global adjacent brands
• The defense business was up over 30% and our PG&A related sales for the global adjacent division increased 21%.
• Defense sales were up with the DAGOR vehicle gaining traction
• Multix early sales have been disappointing but transmission issues were fixed during the 2nd quarter and the distribution network is expanding
• Polaris will begin transitioning their RZR and Ranger lines to their retail flow management system to improve lead times and inventory management
• ORV and Snowmobile sales are expected to decrease mid-single digits
• Global Adjacent markets which includes GEM, Aixam, Goupil, etc. is expected to be up mid teens for the year with strength across brands

Learn more:  Seekingalpha.com (Earnings call transcript)