Polaris Industries Hit With $27 Million Fine and Yet Another RZR Recall

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It's bad enough Polaris Industries (NYSE: PII) is announcing yet another recall of 107,000 RZR off-road vehicles, but it's also been hit by the Consumer Products Safety Commission with a $27 million civil penalty for failing to notify the agency in a timely manner that it had discovered defects in its RZR and Ranger vehicles. Including this latest one, Polaris has now recalled more than half a million vehicles because of manufacturing defects, most of which could result in fires, burns, or death.

Dragging its feet

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According to the CPSC, even though Polaris had good information that its RZRs were defective and risked injuring its customers, the company failed to notify the agency of the problems quickly enough. By the time it got around to doing so, it had received reports of 150 fires, including the death of a 15-year old passenger, 11 burn injury reports, and a fire that scorched 10 acres of land.

Similarly, Polaris knew its Rangers were also defective and that heat shields could fall off the vehicles, causing risk of fires and burn hazards. It first received reports of problems in December 2013, but waited until July 2016 after it had received dozens of reports of fires before notifying the CPSC. It wasn't until September 2016 that the CPSC and Polaris announced a recall.

After that, it learned that Polaris learned its model year 2015 Rangers were also undergoing problems with heat shields, but Polaris once again failed to alert the agency to it, and only after received 10 reports of heat shield incidents -- and five more fires -- did it notify the CPSC. A recall was then issued in April 2017.

But it did investigate the causes

In the settlement agreement between the CPSC and Polaris, the agency does submit that Polaris conducted "reasonable, expeditious, and diligent investigations" into the causes. Over the past few years, the powersports vehicle manufacturer has centralized its product safety organization, hired hundreds of people to oversee quality control, enhanced post-sales surveillance and data analysis, and invested in new tools and processes to improve safety.

But investors might want to know whether it was money well spent? Considering yet another 100,000 vehicles are getting recalled, it's clear Polaris Industries still has a long way to go before consumers can feel they'll be buying a product that's safe to ride.

Recalls are a part of manufacturing life. Harley-Davidson (NYSE: HOG) recalled about 250,000 motorcycles in February because of a problem that can cause their brakes to fail without warning. Last October, Textron (NYSE: TXT) recalled all 2014 to 2017 Wildcat Trail off-road vehicles and all 2015 to 2017 Wildcat Sport ROVs because of fire hazards. It's the recurring nature of Polaris' recalls that is the problem -- and apparently not telling the CPSC quickly enough -- particularly because even after repairing the problems, Polaris' vehicles are still subject to fire hazards.

A costly reminder

The recalls are also taking a toll financially. Warranty costs remain elevated, even if in 2017 they fell to $145 million from the peak they reached the year before when such expenses soared to $195 million. Still, the amount of warranty claims paid last year continued to rise, climbing almost 7% to $141 million.

Because Polaris had previously budgeted for the civil penalty it was hit with, it says having to shell out $27 million won't impact its earnings guidance for 2018 and that its forecasted range of $6.00 to $6.20 per share remains intact.

So far, consumers and investors seem mostly willing to forgive and forget. After falling in 2016 as ROVs were pulled from showroom floors to fix defects, sales bounced back last year, jumping 12%, which also helped gross profits recover, as they rose 16% year over year. Polaris Industries' stock has also rebounded. Shares are down around 20% from their 2015 peak, but they remain well above the lows they hit during the depths of the recall problem when they lost about half of their value.

Because Polaris is far and away the leading powersports vehicle manufacturer, holding market share that well exceeds its competitors, it has been able to skirt a public relations nightmare that would have engulfed a lesser company. Yet as the latest round of recalls shows, this is still not a problem that's going away, and recalls will continue to drain away shareholder resources until it is resolved.

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Rich Duprey has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Polaris Industries. The Motley Fool recommends Textron. The Motley Fool has a disclosure policy.