UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x | Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarter ended December 31, 2007 or |
|
|
o | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
Commission File Number: 0-18607
ARCTIC CAT INC.
(Exact name of registrant as specified in its charter)
Minnesota |
| 41-1443470 |
(State or other jurisdiction |
| (I.R.S. Employer |
of incorporation or organization) |
| Identification No.) |
|
|
|
601 Brooks Avenue South, Thief River Falls, Minnesota |
| 56701 |
(Address of principal executive offices) |
| (Zip Code) |
Registrant’s telephone number, including area code: (218) 681-8558
Indicate by check mark whether the registrant (1) has filed all reports required 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 x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o Accelerated filer x Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No x
At February 4, 2008, 11,833,485 shares of Common Stock and 6,102,000 shares of Class B Common Stock of the Registrant were outstanding.
Part I - FINANCIAL INFORMATION
ITEM I — FINANCIAL STATEMENTS
Arctic Cat Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
|
| December 31, |
| March 31, |
| ||||||||
|
| 2007 |
| 2007 |
| ||||||||
ASSETS |
|
|
|
|
| ||||||||
CURRENT ASSETS |
|
|
|
|
| ||||||||
Cash and equivalents |
| $ | 951,000 |
| $ | 36,217,000 |
| ||||||
Short-term investments |
| 103,000 |
| 39,060,000 |
| ||||||||
Accounts receivable, less allowances |
| 43,904,000 |
| 40,428,000 |
| ||||||||
Inventories |
| 162,332,000 |
| 98,524,000 |
| ||||||||
Prepaid expenses |
| 1,178,000 |
| 3,488,000 |
| ||||||||
Income taxes receivable |
| 1,316,000 |
| — |
| ||||||||
Deferred income taxes |
| 17,212,000 |
| 14,861,000 |
| ||||||||
Total current assets |
| 226,996,000 |
| 232,578,000 |
| ||||||||
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|
|
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| ||||||||
PROPERTY AND EQUIPMENT - at cost |
|
|
|
|
| ||||||||
Machinery, equipment and tooling |
| 195,039,000 |
| 184,119,000 |
| ||||||||
Land, buildings and improvements |
| 28,980,000 |
| 28,568,000 |
| ||||||||
|
| 224,019,000 |
| 212,687,000 |
| ||||||||
Less accumulated depreciation |
| 147,291,000 |
| 123,566,000 |
| ||||||||
|
| 76,728,000 |
| 89,121,000 |
| ||||||||
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|
|
|
|
| ||||||||
OTHER ASSETS |
|
|
|
|
| ||||||||
Goodwill, intangibles and other assets |
| 4,349,000 |
| 4,505,000 |
| ||||||||
Total other assets |
| 4,349,000 |
| 4,505,000 |
| ||||||||
|
| $ | 308,073,000 |
| $ | 326,204,000 |
| ||||||
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LIABILITIES AND SHAREHOLDERS’ EQUITY |
|
|
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| ||||||||
CURRENT LIABILITIES |
|
|
|
|
| ||||||||
Notes payable |
| $ | 10,800,000 |
| $ | — |
| ||||||
Accounts payable |
| 58,830,000 |
| 60,440,000 |
| ||||||||
Accrued expenses |
| 49,304,000 |
| 53,512,000 |
| ||||||||
Income taxes payable |
| — |
| 8,244,000 |
| ||||||||
Total current liabilities |
| 118,934,000 |
| 122,196,000 |
| ||||||||
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|
|
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| ||||||||
DEFERRED INCOME TAXES |
| 11,121,000 |
| 11,787,000 |
| ||||||||
COMMITMENTS AND CONTINGENCIES |
| — |
| — |
| ||||||||
SHAREHOLDERS’ EQUITY |
|
|
|
|
| ||||||||
Preferred stock, par value $1.00; 2,050,000 shares authorized; none issued |
| — |
| — |
| ||||||||
Preferred stock - Series A Junior Participating, par value $1.00; 450,000 shares authorized; none issued |
| — |
| — |
| ||||||||
Common stock, par value $.01; 37,440,000 shares authorized; shares issued and outstanding, 11,833,485 at December 31, 2007; 12,259,423 at March 31, 2007 |
| 118,000 |
| 123,000 |
| ||||||||
Class B common stock, par value $.01; 7,560,000 shares authorized; issued, and outstanding, 6,102,000 at December 31, 2007 and at March 31, 2007. |
| 61,000 |
| 61,000 |
| ||||||||
Additional Paid in Capital |
| — |
| — |
| ||||||||
Accumulated other comprehensive income |
| 1,468,000 |
| 2,117,000 |
| ||||||||
Retained earnings |
| 176,371,000 |
| 189,920,000 |
| ||||||||
|
| 178,018,000 |
| 192,221,000 |
| ||||||||
|
| $ | 308,073,000 |
| $ | 326,204,000 |
| ||||||
The accompanying notes are an integral part of these condensed consolidated statements.
2
Arctic Cat Inc.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (LOSSES)
(unaudited)
|
| Three Months |
| Nine Months |
| ||||||||
|
| Ended December 31, |
| Ended December 31, |
| ||||||||
|
| 2007 |
| 2006 |
| 2007 |
| 2006 |
| ||||
Net sales |
| $ | 159,595,000 |
| $ | 228,114,000 |
| $ | 452,667,000 |
| $ | 609,857,000 |
|
|
|
|
|
|
|
|
|
|
| ||||
Cost of goods sold |
| 141,439,000 |
| 188,335,000 |
| 367,514,000 |
| 494,188,000 |
| ||||
Gross profit |
| 18,156,000 |
| 39,779,000 |
| 85,153,000 |
| 115,669,000 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Selling, general and administrative expenses |
| 32,700,000 |
| 28,917,000 |
| 89,585,000 |
| 81,534,000 |
| ||||
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|
|
|
|
|
|
|
| ||||
Operating profit (loss) |
| (14,544,000 | ) | 10,862,000 |
| (4,432,000 | ) | 34,135,000 |
| ||||
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Other income (expense) |
|
|
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|
|
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|
| ||||
Interest income |
| 93,000 |
| 289,000 |
| 592,000 |
| 616,000 |
| ||||
Interest expense |
| (448,000 | ) | — |
| (900,000 | ) | (1,026,000 | ) | ||||
|
| (355,000 | ) | 289,000 |
| (308,000 | ) | (410,000 | ) | ||||
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| ||||
Earnings (loss) before income taxes |
| (14,899,000 | ) | 11,151,000 |
| (4,740,000 | ) | 33,725,000 |
| ||||
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| ||||
Income tax expense (benefit) |
| (4,427,000 | ) | 2,970,000 |
| (1,057,000 | ) | 10,100,000 |
| ||||
Net earnings (loss) |
| $ | (10,472,000 | ) | $ | 8,181,000 |
| $ | (3,683,000 | ) | $ | 23,625,000 |
|
Net earnings (loss) per share |
|
|
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|
|
|
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| ||||
Basic |
| $ | (0.58 | ) | $ | 0.43 |
| $ | (0.20 | ) | $ | 1.23 |
|
Diluted |
| $ | (0.58 | ) | $ | 0.43 |
| $ | (0.20 | ) | $ | 1.22 |
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Weighted average shares outstanding |
|
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| ||||
Basic |
| 17,991,000 |
| 19,042,000 |
| 18,204,000 |
| 19,252,000 |
| ||||
Diluted |
| 17,991,000 |
| 19,124,000 |
| 18,204,000 |
| 19,349,000 |
| ||||
The accompanying notes are an integral part of these condensed consolidated statements.
3
Arctic Cat Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
| Nine Months Ended December 31, |
| ||||
|
| 2007 |
| 2006 |
| ||
Cash flows from operating activities |
|
|
|
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| ||
Net earnings (loss) |
| $ | (3,683,000 | ) | $ | 23,625,000 |
|
Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities |
|
|
|
|
| ||
Depreciation and amortization |
| 24,617,000 |
| 22,609,000 |
| ||
Loss on the disposal of fixed assets |
| 34,000 |
| 414,000 |
| ||
Deferred income taxes |
| (1,548,000 | ) | (3,641,000 | ) | ||
Stock based compensation |
| 1,687,000 |
| 1,508,000 |
| ||
Changes in operating assets and liabilities: |
|
|
|
|
| ||
Trading securities |
| 38,604,000 |
| 6,838,000 |
| ||
Accounts receivable |
| (3,626,000 | ) | (2,936,000 | ) | ||
Inventories |
| (62,342,000 | ) | (37,991,000 | ) | ||
Prepaid expenses |
| 2,452,000 |
| 3,369,000 |
| ||
Accounts payable |
| (12,682,000 | ) | (7,989,000 | ) | ||
Accrued expenses |
| (4,333,000 | ) | 12,572,000 |
| ||
Income taxes payable |
| (9,560,000 | ) | 12,371,000 |
| ||
Net cash provided by (used in) operating activities |
| (30,380,000 | ) | 30,749,000 |
| ||
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Cash flows from investing activities |
|
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|
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| ||
Purchase of property and equipment |
| (11,783,000 | ) | (19,016,000 | ) | ||
Purchase of other assets |
| (125,000 | ) | (424,000 | ) | ||
Sale and maturity of available-for-sale securities |
| 350,000 |
| 1,451,000 |
| ||
Net cash used in investing activities |
| (11,558,000 | ) | (17,989,000 | ) | ||
|
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Cash flows from financing activities |
|
|
|
|
| ||
Checks written in excess of bank balance |
| 7,680,000 |
| — |
| ||
Proceeds from short-term borrowings |
| 162,575,000 |
| 120,776,000 |
| ||
Payments on short-term borrowings |
| (151,775,000 | ) | (120,776,000 | ) | ||
Proceeds from issuance of common stock |
| 2,537,000 |
| 1,075,000 |
| ||
Tax benefit from stock option exercises |
| 475,000 |
| 89,000 |
| ||
Repurchase of common stock |
| (10,762,000 | ) | (19,774,000 | ) | ||
Dividends paid |
| (3,808,000 | ) | (4,055,000 | ) | ||
Net Cash provided by (used in) financing activities |
| 6,922,000 |
| (22,665,000 | ) | ||
|
|
|
|
|
| ||
Effect of exchange rate changes on cash and equivalents |
| (250,000 | ) | (52,000 | ) | ||
Net decrease in cash and equivalents |
| (35,266,000 | ) | (9,957,000 | ) | ||
|
|
|
|
|
| ||
Cash and equivalents at the beginning of period |
| 36,217,000 |
| 40,075,000 |
| ||
Cash and equivalents at the end of period |
| $ | 951,000 |
| $ | 30,118,000 |
|
Supplemental disclosure of cash payments for income taxes |
| $ | 9,575,000 |
| $ | 1,286,000 |
|
Supplemental disclosure of cash payments for interest |
| $ | 782,000 |
| $ | 1,026,000 |
|
Supplemental disclosure of non-cash investing and financing activities: |
|
|
|
|
| ||
As of December 31, 2007 and 2006, property and equipment purchases of $176,000 and $1,341,000 were included in accounts payable. |
| ||||||
The accompanying notes are an integral part of these condensed consolidated statements.
4
Arctic Cat Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE A-BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of Arctic Cat Inc. (the “Company”) have been prepared in accordance with Regulation S-X pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations, although management believes that the disclosures are adequate to make the information presented not misleading.
In the opinion of management, the unaudited condensed consolidated financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the financial position as of December 31, 2007 and the results of operations for the three and nine month periods ended December 31, 2007 and 2006 and cash flows for the nine month periods ended December 31, 2007 and 2006. Results of operations for the interim periods are not necessarily indicative of results for the full year. The condensed consolidated balance sheet as of March 31, 2007 is derived from the audited balance sheet as of that date.
Preparation of the Company’s consolidated financial statements requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and related revenues and expenses. Actual results could differ from those estimates.
Certain fiscal 2007 amounts have been reclassified to conform with the fiscal 2008 financial statement presentation. The reclassification had no effect on previously reported operating results.
NOTE B-STOCK BASED COMPENSATION
At December 31, 2007, the Company had stock based compensation plans, all previously approved by the shareholders. Stock options granted under these plans generally vest ratably over one to three years of service, have a contractual life of five to ten years and provide for accelerated vesting if there is a change in control, as defined. At December 31, 2007, the Company had approximately 1,491,380 shares available for future grant under its stock option plans.
On April 1, 2006, the Company adopted Statement of Financial Accounting Standard No. 123(R), Share Based Payments (SFAS 123(R)), which requires the fair value of all share-based payment transactions, including stock options, be recognized in the income statement as an operating expense, based on their fair value over the requisite service period. The Company elected the modified prospective transition method in applying SFAS 123(R). Accordingly, periods prior to adoption have not been restated. Under this transition method, the Company will apply the provisions of SFAS 123(R) to new awards modified, repurchased, or cancelled after April 1, 2006. Additionally, the Company recognizes compensation cost for the portion of awards for which the requisite service was not rendered (unvested awards) that were outstanding as of April 1, 2006, as the remaining service is rendered. The compensation cost recorded for these awards will be based on their grant-date fair value as calculated for the pro forma disclosures required by SFAS 123. At December 31, 2007, the Company had $3,017,000 of unrecognized compensation costs related to non-vested stock options that are expected to be recognized over a weighted average period of approximately two years.
For the three months ended December 31, 2007 and 2006, the Company recorded compensation expense of $374,000 and $554,000 and for the nine months ended December 31, 2007 and 2006 the Company recorded compensation expense of $1,687,000 and $1,508,000 related to the adoption of SFAS 123(R), which has been included in selling, general and administrative expenses. The Company’s total stock-based compensation related expense increased both the basic and diluted loss per share by $0.02 and $0.09 for the three and
5
and nine months ended December 31, 2007 and reduced both basic and diluted earnings per share by $0.02 and $0.05 for the three months and nine months ended December 31, 2006.
The fair value of each stock option award is estimated on the date of grant using the Black-Scholes option pricing model. The following assumptions were used to estimate the fair value of options granted during the nine months ended December 31, 2007:
Assumptions: |
|
|
|
Dividend yield |
| 1.3 | % |
Average term |
| 5 years |
|
Volatility |
| 30 | % |
Risk-free rate of return |
| 5 | % |
Option transactions under the plans during the nine months ended December 31, 2007 are summarized as follows:
|
| Shares |
| Weighted- |
| Weighted- |
| Aggregate |
| ||
Outstanding at March 31, 2007 |
| 1,666,032 |
| $ | 18.92 |
|
|
|
|
| |
Granted |
| 408,620 |
| 17.43 |
|
|
|
|
| ||
Exercised |
| (197,862 | ) | 12.82 |
|
|
|
|
| ||
Cancelled |
| (14,655 | ) | 18.31 |
|
|
|
|
| ||
Outstanding at December 31, 2007 |
| 1,862,135 |
| $ | 19.25 |
| 6.92 |
| $ | 177,000 |
|
Exercisable at December 31, 2007 |
| 1,223,676 |
| $ | 19.81 |
| 5.99 |
| $ | 177,000 |
|
The aggregate intrinsic value is based on the Company’s December 31, 2007 common share market value for in-the-money options.
The following information applies to options outstanding at December 31, 2007.
|
| Options Outstanding |
| |||||
Range of |
| Number |
| Weighted- |
| Weighted- |
| |
$9.38-13.33 |
| 119,857 |
| 4.45 |
| $ | 10.56 |
|
15.33-21.96 |
| 1,503,278 |
| 7.24 |
| 18.62 |
| |
25.45-28.00 |
| 239,000 |
| 6.17 |
| 27.59 |
| |
|
| 1,862,135 |
| 6.92 |
| $ | 19.25 |
|
6
|
| Options Exercisable |
| |||
Range of |
| Number |
| Weighted- |
| |
$9.38-13.33 |
| 119,857 |
| 10.56 |
| |
15.33-21.96 |
| 866,485 |
| 18.96 |
| |
25.45-28.00 |
| 237,334 |
| 27.59 |
| |
|
| 1,223,676 |
| $ | 19.81 |
|
NOTE C-NET EARNINGS (LOSS) PER SHARE
The Company’s basic net earnings (loss) per share is computed by dividing net earnings (loss) by the weighted average number of outstanding common shares. The Company’s diluted net earnings per share is computed by dividing net earnings (loss) by the weighted average number of outstanding common shares and common share equivalents relating to stock options, when dilutive to earnings. Options to purchase 1,710,278 and 1,095,980 shares of common stock with weighted average exercise prices of $19.97 and $21.74 were outstanding during the three months ended December 31, 2007 and 2006 and options to purchase 1,198,079 and 991,375 shares of common stock with weighted average exercise prices of $21.23 and $22.14 were outstanding during the nine months ended December 31, 2007 and 2006, all of which were excluded from the computation of common share equivalents because they were anti-dilutive.
Weighted average shares outstanding consist of the following:
|
| Three Months Ended |
| Nine Months Ended |
| ||||
|
| December 31, |
| December 31, |
| ||||
|
| 2007 |
| 2006 |
| 2007 |
| 2006 |
|
Number of common shares outstanding |
| 17,991,000 |
| 19,042,000 |
| 18,204,000 |
| 19,252,000 |
|
Dilutive effect of option plan |
| — |
| 82,000 |
| — |
| 97,000 |
|
Common and potential common shares outstanding - diluted |
| 17,991,000 |
| 19,124,000 |
| 18,204,000 |
| 19,349,000 |
|
NOTE D-SHORT-TERM INVESTMENTS
Short-term investments consist of the following:
|
| December 31, |
| March 31, |
| ||
|
| 2007 |
| 2007 |
| ||
Trading securities |
| $ | 103,000 |
| $ | 38,707,000 |
|
Available-for-sale debt securities |
| — |
| 353,000 |
| ||
|
| $ | 103,000 |
| $ | 39,060,000 |
|
7
NOTE E-INVENTORIES
Inventories consist of the following:
|
| December 31, |
| March 31, |
| ||
|
| 2007 |
| 2007 |
| ||
Raw materials and sub-assemblies |
| $ | 37,666,000 |
| $ | 23,591,000 |
|
Finished goods |
| 90,451,000 |
| 44,058,000 |
| ||
Parts, garments and accessories |
| 34,215,000 |
| 30,875,000 |
| ||
|
| $ | 162,332,000 |
| $ | 98,524,000 |
|
NOTE F-ACCRUED EXPENSES
Accrued expenses consist of the following:
|
| December 31, |
| March 31, |
| ||
|
| 2007 |
| 2007 |
| ||
Marketing |
| $ | 16,881,000 |
| $ | 16,874,000 |
|
Compensation |
| 2,971,000 |
| 9,044,000 |
| ||
Warranties |
| 21,897,000 |
| 17,974,000 |
| ||
Insurance |
| 5,585,000 |
| 7,440,000 |
| ||
Other |
| 1,970,000 |
| 2,180,000 |
| ||
|
| $ | 49,304,000 |
| $ | 53,512,000 |
|
NOTE G-PRODUCT WARRANTIES
The Company generally provides a limited warranty to the original owner of snowmobiles for twelve months from the date of consumer registration and for six months on ATVs. The Company provides for estimated warranty costs at the time of sale based on historical rates and trends and makes subsequent adjustments to its estimate as actual claims become known or the amounts are determinable. The following represents changes in accrued warranty for the nine month periods ended December 31:
|
| 2007 |
| 2006 |
| ||
Balance at beginning of period |
| $ | 17,974,000 |
| $ | 14,203,000 |
|
Warranty provision |
| 9,604,000 |
| 14,186,000 |
| ||
Warranty claim payments |
| (5,681,000 | ) | (8,140,000 | ) | ||
Balance at end of period |
| $ | 21,897,000 |
| $ | 20,249,000 |
|
NOTE H-SHAREHOLDERS’ EQUITY
Dividend Declaration
On January 22, 2008, the Company announced that it’s Board of Directors declared a regular quarterly cash dividend of $0.07 per share, payable on or about March 3, 2008 to shareholders of record on February 14, 2008.
Share Repurchase
In October 2006, the Company’s Board of Director’s approved a $20,000,000 repurchase program for the share repurchase program. During the nine months ended December 31, 2007 and 2006, the Company invested $10,762,000 and $19,774,000, respectively, to repurchase and cancel 623,800 and 1,127,500 shares, respectively,
8
pursuant to the Board of Directors’ authorizations. At December 31, 2007, no authorizations to repurchase shares remained outstanding. In January 2008 the Board of Directors approved a new share repurchase program of up to $10,000,000.
Additional Paid-in-Capital
During the nine months ended December 31, 2007 and 2006 additional paid-in-capital increases of $4,698,000 and $2,672,000 from the exercise of stock options and the expensing of stock based compensation under the SFAS 123(R) were offset by share repurchases of $4,698,000 and $3,682,000. During the nine months ended December 31, 2007 and 2006, additional paid-in capital increases of $1,687,000 and $1,508,000 were recorded under SFAS 123(R).
Accumulated Other Comprehensive Income (Loss)
The components and changes in accumulated other comprehensive income (loss), net of taxes, during the following periods were as follows:
|
| Nine months ended December 31, |
| ||||
|
| 2007 |
| 2006 |
| ||
Total accumulated other comprehensive income (loss) |
|
|
|
|
| ||
Balance at beginning of period |
| $ | 2,117,000 |
| $ | (440,000 | ) |
Unrealized loss on securities available-for-sale, net of tax |
| (2,000 | ) | (10,000 | ) | ||
Unrealized gain (loss) on derivative instruments, net of tax |
| (2,501,000 | ) | 988,000 |
| ||
Foreign currency translation adjustment |
| 1,854,000 |
| 1,653,000 |
| ||
Balance at end of period |
| $ | 1,468,000 |
| $ | 2,191,000 |
|
Other comprehensive income (loss) was as follows:
|
| Nine months ended December 31, |
| ||||
|
| 2007 |
| 2006 |
| ||
Net earnings (loss) |
| $ | (3,683,000 | ) | $ | 23,625,000 |
|
Unrealized loss on securities available-for-sale, net of tax |
| (2,000 | ) | (10,000 | ) | ||
Unrealized gain (loss) on derivative instruments, net of tax |
| (2,501,000 | ) | 988,000 |
| ||
Foreign currency translation adjustment |
| 1,854,000 |
| 1,653,000 |
| ||
Total other comprehensive income (loss) |
| $ | (4,332,000 | ) | $ | 26,256,000 |
|
Note I-COMMITMENTS AND CONTINGENCIES
Dealer Financing
Finance companies provide certain of the Company’s dealers and distributors with floor plan financing. The Company has agreements with these finance companies to repurchase certain repossessed products sold to its dealers. At December 31, 2007 the Company’s contingent maximum repurchase obligation was approximately $48,051,000. The Company’s financial exposure under these agreements is limited to the difference between
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the amount paid to the finance companies for repurchases and the amount received upon the resale of the repossessed product. Losses incurred under these agreements during the periods presented have not been material.
Litigation
The Company is subject to legal proceedings and claims which arise in the ordinary course of business. Accidents involving personal injury and property damage occur in the use of snowmobiles and ATVs. Claims have been made against the Company from time to time. It is the Company’s policy to vigorously defend against these actions. The Company believes that the cases in discovery are adequately covered by reserves and product liability insurance.
NOTE J-RECENT ACCOUNTING PRONOUNCEMENTS
During the first quarter of fiscal 2008 the Company adopted Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”) which clarifies the accounting for income taxes by prescribing the minimum threshold a tax position is required to meet before being recognized in the financial statements as well as guidance on de-recognition, measurement, classification and disclosure of tax positions. The adoption of FIN 48 by the Company resulted in no cumulative effect of accounting change being recorded by the Company as of April 1, 2007. The Company had liabilities recorded related to unrecognized tax benefits totaling $3,670,000 and $4,510,000 at December 31, 2007 and March 31, 2007. At March 31, 2007 the liability was classified as income taxes payable. The December 31, 2007 liability was classified as an offset to income taxes receivable in the accompanying condensed consolidated balance sheets in accordance with FIN 48. The Company recognizes potential interest and penalties related to income tax positions as a component of the provision for income taxes on the consolidated statements of earnings (losses). The Company had reserves related to potential interest and penalties of $670,000 recorded as a component of the liability at December 31, 2007. The entire amount of the liability at December 31, 2007, if recognized, would affect the Company’s effective tax rate. The Company does not anticipate that total unrecognized tax benefits will significantly change during the next twelve months. With few exceptions, the Company is no longer subject to federal, state, or foreign income tax examinations for years prior to 2004.
Item 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
Arctic Cat Inc. (the “Company”) designs, engineers, manufactures and markets snowmobiles and all-terrain vehicles (ATVs) under the Arctic Cat brand name, as well as related parts, garments and accessories principally through its facilities in Thief River Falls, Minnesota. The Company markets its products through a network of independent dealers located throughout the United States, Canada, and Europe and through distributors representing dealers in Europe, the Middle East, Asia, and other international markets. The Arctic Cat brand name has existed for more than 45 years and is among the most widely recognized and respected names in the snowmobile industry. The Company trades on the NASDAQ Global Select Market under the symbol “ACAT”.
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Results of Operations
THREE AND NINE MONTHS ENDED DECEMBER 31, 2007 COMPARED TO THE THREE AND NINE MONTHS ENDED DECEMBER 31, 2006.
Net sales for the third quarter of fiscal 2008 decreased 30.0% to $159,595,000 from $228,114,000 for the third quarter of fiscal 2007, primarily due to the planned reduction in fiscal 2008 snowmobile production levels (and resulting sales levels) and the lower ATV sales. Snowmobile sales decreased 43.6% to $60,016,000 for the third quarter of 2008 from $106,352,000 for the same quarter in fiscal 2007. ATV sales decreased 23.6% to $70,109,000 for the third quarter of 2008 from $91,823,000 for the same quarter in fiscal 2007. Parts, garments and accessory sales decreased 1.6% to $29,470,000 for the third quarter of 2008 from $29,939,000 in the same quarter in fiscal 2007. Snowmobile unit volume decreased 41.1% and ATV unit volume decreased 24.5% for the third quarter of fiscal 2008 compared to the same quarter last year. Net sales for the first nine months of fiscal 2008 decreased 25.8% to $452,667,000 from $609,857,000 for the first nine months of fiscal 2007, due to the planned reduction in snowmobile production (and resulting sales levels) and lower ATV shipments that will better align dealer inventories with consumer demand. Year-to-date snowmobile sales decreased 32.1% to $168,938,000 from $248,794,000 compared to the first nine months of fiscal 2007. ATV sales decreased 27.4% to $207,372,000 from $285,798,000 compared to the first nine months of fiscal 2007, and parts, garments and accessory sales increased 1.5% to $76,357,000 from $75,265,000 compared to the first nine months of fiscal 2007. Year-to-date snowmobile unit volume decreased 35.6% compared to the same period last year, while ATV unit volume decreased 33.8%.
Gross profit for the third quarter of fiscal 2008 decreased 54.4% to $18,156,000 from $39,779,000 for the same quarter in fiscal 2007. The quarterly gross profit percentage for the third quarter in fiscal 2008 was 11.4%, compared to 17.4% for the third quarter in fiscal 2007. The year-to-date gross profit percentage was 18.8% compared to 19.0% for the same period last year. The quarterly decrease in gross profit percentage was primarily due to Canadian sales incentives and discounts given to Canadian dealers to help offset a stronger Canadian dollar exchange rate as well as a less rich snowmobile sales mix.
Operating expenses for the third quarter of fiscal 2008 increased 13.1% to $32,700,000 from $28,917,000 for the same quarter of last year, primarily from increased Canadian currency exchange losses. As a percent of sales, operating expenses were 20.5% for the third quarter of fiscal 2008 versus 12.7% for the same quarter last year. Year-to-date operating expense for the period ended December 31, 2007 increased 9.9% to $89,585,000 from $81,534,000 for the same period last year. As a percent of sales, operating expenses were 19.8% for the first nine months of fiscal 2008 compared to 13.4% for the first nine months of fiscal 2007. The year-to-date increase in operating expenses resulted primarily from increased Canadian currency exchange losses and legal expenses compared to the same period last year.
Interest income for the third quarter of fiscal 2008 decreased to $93,000 from $289,000 for the third quarter of last year and interest expense was $448,000 for the third quarter of fiscal 2008 compared to zero interest expense for the third quarter of last year. Year-to-date interest income decreased to $592,000 from $616,000 and year-to-date interest expense decreased to $900,000 from $1,026,000. Interest income was primarily affected by the higher cash levels at the beginning of our fiscal year compared to last year, and lower cash balances during the third quarter of fiscal 2008 due primarily to higher inventories. Interest expense was also affected by the higher cash balances that resulted in decreased borrowings from the Company’s line of credit during the first and second quarters and increased borrowings during the third quarter of fiscal 2008 compared to the same period last year due primarily to higher inventories.
The net loss for the third quarter of fiscal 2008 was $10,472,000, or $0.58 per diluted share. The Company reported net earnings for the third quarter of fiscal 2007 of $8,181,000, or $0.43 per diluted share. The net loss for the first nine months of fiscal
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2008 was $3,683,000 or $0.20 per diluted share, compared to net earnings of $23,625,000 or $1.22 per diluted share for the same periods last year.
Liquidity and Capital Resources
The seasonality of the Company’s snowmobile production cycle and the lead time between the commencement of snowmobile and ATV production in the early spring and commencement of shipments late in the first quarter have resulted in significant fluctuations in the Company’s working capital requirements during the year. Historically, the Company has financed its working capital requirements out of available cash balances at the beginning and end of the production cycle and with short-term bank borrowings during the middle of the cycle and as needed. The Company’s cash balances traditionally peak early in the fourth quarter and then decrease as working capital requirements increase when the Company’s snowmobile and spring ATV production cycles begin. During the nine months ended December 31, 2007, the Company paid $10,762,000 to repurchase its common shares compared to $19,774,000 for the same nine month period of the prior year. Cash and short-term investments were $1,054,000 and $51,631,000 at December 31, 2007 and 2006, respectively. The decrease in cash and short-term investments primarily resulted from increased inventories primarily due to the reduction of ATV shipments this fiscal year. The Company’s investment objectives are first, safety of principal and second, rate of return.
The Company believes current available cash and cash generated from operations together with its available line of credit will provide sufficient funds to finance the Company on a short and long-term basis.
Line of Credit
The Company has an unsecured credit agreement with a bank for the issuance of up to $60,000,000 of documentary and stand-by letters of credit and for working capital and in addition has a $15,000,000 seasonal credit agreement for the Company’s peak production period.
Significant Accounting Policies
See the Company’s most recent Annual Report on Form 10-K for the year ended March 31, 2007 for a discussion of its critical accounting policies.
Recent Accounting Pronouncement
During the first quarter of fiscal 2008 the Company adopted Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”) which clarifies the accounting for income taxes by prescribing the minimum threshold a tax position is required to meet before being recognized in the financial statements as well as guidance on de-recognition, measurement, classification and disclosure of tax positions. The adoption of FIN 48 by the Company resulted in no cumulative effect of accounting change being recorded by the Company as of April 1, 2007. The Company had liabilities recorded related to unrecognized tax benefits totaling $3,670,000 and $4,510,000 at December 31, 2007 and March 31, 2007. At March 31, 2007 the liability was classified as Income taxes payable. The December 31, 2007 liability was classified as an offset to income taxes receivable in the accompanying condensed consolidated balance sheets in accordance with FIN 48. The Company recognizes potential interest and penalties related to income tax positions as a component of the provision for income taxes on the consolidated statements of earnings (losses). The Company had reserves related to potential interest and penalties of $670,000 recorded as a component of the liability at December 31, 2007. The entire amount of the liability at December 31, 2007, if recognized, would affect the Company’s effective tax rate. The Company does not anticipate that total unrecognized tax benefits will significantly change during the next twelve months. With few exceptions, the Company is no longer subject to federal, state, or foreign income tax examinations for years prior to 2004.
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Forward Looking Statements
The Private Securities Litigation Reform Act of 1995 (the “Act”) provides a safe harbor for certain forward-looking statements. This Form 10-Q contains forward-looking statements that reflect the Company’s current views with respect to future events and financial performance. In addition, certain statements in our future filings with the Securities and Exchange Commission, in press releases, and in oral and written statements made by us or with our approval that are not statements of historical fact constitute forward-looking statements within the meaning of Act. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results or those anticipated. The words “aim,” “believe,” “expect,” “anticipate,” “intend,” “estimate,” and other expressions that indicate future events and trends identify forward-looking statements. Actual future results and trends may differ materially from historical results or those anticipated ore referenced in forward-looking statements depending on a variety of factors, including, but not limited to, those described in Part I, Item 1A, “Risk Factors”, of the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2007 and the following: product mix and volume; competitive pressure on sales, pricing and sales incentives; increase in material or production cost which cannot be recouped in product pricing; changes in the sourcing of engines from Suzuki; warranty expenses and product recalls; foreign currency exchange rate fluctuations; product liability claims and other legal proceedings in excess of reserves or insured amounts; environmental and product safety regulatory activity; effects of the weather; general economic conditions and political changes, interest rate changes and consumer demand and confidence. The Company’s forward-looking statements speak only as of the date made and the Company does not undertake any obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company is subject to certain market risk relating to changes in inflation, foreign currency exchange rates and interest rates. These market risks have not changed significantly since March 31, 2007. As of December 31, 2007 the Company has notional Japanese yen and Canadian dollar denominated cash flow hedges of approximately $12.1 million (USD) and $61.5 million (USD), respectively, with a weighted average contract exchange rate of 114.0 and 1.05 respectively. The fair values of the Japanese yen and Canadian dollar hedge contracts at December 31, 2007 represent an unrealized loss of $3,066,000. A ten percent fluctuation in the currency rates as of December 31, 2007 would have resulted in a change in the fair value of the Japanese yen and Canadian dollar hedge contracts of approximately $1,213,000 and $6,152,000, respectively. However, since these contracts hedge foreign currency denominated transactions, any change in the fair value of the contracts would be offset by changes in the underlying value of the transaction being hedged.
Information regarding inflation, foreign currency exchange rates and interest rates, is discussed within “Quantitative and Qualitative Disclosures About Market Risk — Inflation, Foreign Exchange Rates and Interest Rates” and Footnote A to the Financial Statements in the 2007 Annual Report on Form 10-K. Interest rate market risk is managed for cash and short-term investments by investing in a diversified frequently maturing portfolio consisting of municipal bonds and money market funds that experience minimal volatility and is not deemed to be significant.
Item 4. Controls and Procedures
The Company’s management, including the Chief Executive Officer and Chief Financial Officer, have conducted an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “1934 Act”)as of the end of the period covered by this report. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and
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procedures are effective in ensuring that information required to be disclosed by the Company in the reports it files or submits under the 1934 Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
There were no changes in internal control over financial reporting during the nine months ended December 31, 2007 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II - OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Period |
| Total |
| Average |
| Total number |
| Maximum Number |
| |
Oct. 1, 2007 — Oct. 31, 2007 |
| 53,000 |
| $ | 14.44 |
| 53,000 |
| 111,674 |
|
Nov. 1, 2007 — Nov. 30, 2007 |
| 112,900 |
| $ | 14.26 |
| 112,900 |
| 0 |
|
Dec. 1, 2007 — Dec. 31, 2007 |
| 0 |
| $ | — |
| 0 |
| 0 |
|
The Company purchases Company common stock to offset the dilution created by employee stock option programs and because the Board of Directors believes investment in the Company’s common stock is an excellent use of its excess cash.
On October 30, 2006 the Company announced that its Board of Directors had approved a $20,000,000 repurchase program. On January 4, 2008 the Company announced that its Board of Directors had approved a new $10,000,000 share repurchase program. Authority over pricing and timing under these programs has been delegated to management and there is no expiration date for these programs.
The Company has executed the Company stock purchases in accordance with Rule 10b-18 of the Securities Exchange Act of 1934 and there have been no other purchases by the Company of its common stock during the quarter.
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Item 6. Exhibits
Exhibit |
|
|
Number |
| Description |
3 (a) |
| Amended and Restated Articles of Incorporation of Company(3) |
|
|
|
3 (b) |
| Restated By-Laws of the Company(1) |
|
|
|
4 (a) |
| Form of Specimen Common Stock Certificate(1) |
|
|
|
4 (b) |
| Rights Agreement by and between the Company and Wells Fargo Bank Minnesota, N.A., dated September 17, 2001(4) |
|
|
|
31.1 |
| CEO Certification pursuant to section 302 of the Sarbanes-Oxley Act of 2002.(2) |
|
|
|
31.2 |
| CFO Certification pursuant section 302 of the Sarbanes-Oxley Act Of 2002.(2) |
|
|
|
32.1 |
| CEO Certification pursuant to section 906 of the Sarbanes-Oxley Act of 2002.(2) |
|
|
|
32.2 |
| CFO Certification pursuant to section 906 of the Sarbanes-Oxley Act of 2002.(2) |
(1) Incorporated herein by reference to the Company’s Form S-1 Registration Statement (File Number 33-34984).
(2) Filed with this Form 10-Q.
(3) Incorporated herein by reference to the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 1997.
(4) Incorporated by reference to Exhibit 1 to the Company’s Registration on Form 8-A filed with the SEC on September 20, 2001.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| ARCTIC CAT INC. | |
|
|
|
|
|
|
Date: February 8, 2008 | By | /s/ Christopher A Twomey |
|
| Christopher A. Twomey |
|
| Chief Executive Officer |
|
|
|
|
|
|
Date: February 8, 2008 | By | /s/ Timothy C Delmore |
|
| Timothy C. Delmore |
|
| Chief Financial Officer |
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