Arctic Cat (ACAT) 10-Q 2010 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q

xQuarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

for the quarterly period ended December 31, 2009

or

oTransition 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 to be filed 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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o	Accelerated filer x
Non-accelerated filer o	Smaller reporting company 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 8, 2010, 12,125,985 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,
	2009		2009
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	50,356,000	$	11,244,000
Short-term investments	—		169,000
Accounts receivable, less allowances	43,008,000		38,231,000
Inventories	106,264,000		120,804,000
Prepaid expenses	3,503,000		4,572,000
Income taxes receivable	—		352,000
Deferred income taxes	17,691,000		14,224,000
Total current assets	220,822,000		189,596,000
PROPERTY AND EQUIPMENT - at cost
Machinery, equipment and tooling	183,957,000		180,304,000
Land, buildings and improvements	28,899,000		28,877,000
	212,856,000		209,181,000
Less accumulated depreciation	168,719,000		149,684,000
	44,137,000		59,497,000
OTHER ASSETS
Intangibles and other assets	2,118,000		2,072,000
	$	267,077,000	$	251,165,000
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable	$	36,679,000	$	44,451,000
Accrued expenses	39,469,000		35,621,000
Income taxes payable	6,640,000		—
Total current liabilities	82,788,000		80,072,000
DEFERRED INCOME TAXES	4,579,000		6,245,000
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, 12,125,985 at December 31, 2009; 11,987,485 at March 31, 2009	121,000		120,000
Class B common stock, par value $.01; 7,560,000 shares authorized; issued and outstanding, 6,102,000 at December 31, 2009 and at March 31, 2009.	61,000		61,000
Additional paid in capital	4,698,000		2,568,000
Accumulated other comprehensive income (loss)	784,000		(512,000		)
Retained earnings	174,046,000		162,611,000
Total Shareholders’ equity	179,710,000		164,848,000
	$	267,077,000	$	251,165,000

The accompanying notes are an integral part of these condensed consolidated statements.

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Arctic Cat Inc.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

	Three Months  Ended December 31,						Nine Months Ended December 31,
	2009			2008			2009			2008
Net Sales
Snowmobile & ATV units	$	106,879,000		$	148,616,000		$	294,433,000		$	393,832,000
Parts, garments & accessories	24,161,000			26,083,000			72,277,000			79,058,000
Total net sales	131,040,000			174,699,000			366,710,000			472,890,000
Cost of goods sold
Snowmobile & ATV units	95,025,000			137,337,000			249,115,000			341,996,000
Parts, garments & accessories	13,434,000			16,995,000			42,255,000			50,528,000
Total cost of goods sold	108,459,000			154,332,000			291,370,000			392,524,000
Gross profit	22,581,000			20,367,000			75,340,000			80,366,000
Operating expenses
Selling and marketing	8,941,000			12,728,000			24,982,000			35,118,000
Research and development	2,979,000			4,206,000			9,177,000			13,135,000
General and administrative	10,037,000			7,284,000			27,323,000			23,598,000
Total operating expenses	21,957,000			24,218,000			61,482,000			71,851,000
Operating profit (loss)	624,000			(3,851,000		)	13,858,000			8,515,000
Other income (expense)
Interest income	—			17,000			4,000			116,000
Interest expense	(2,000		)	(323,000		)	(249,000		)	(941,000		)
Total other income (expense)	(2,000		)	(306,000		)	(245,000		)	(825,000		)
Earnings (loss) before income taxes	622,000			(4,157,000		)	13,613,000			7,690,000
Income tax expense (benefit)	(1,980,000		)	(1,433,000		)	2,178,000			462,000
Net income (loss)	$	2,602,000		$	(2,724,000	)	$	11,435,000		$	7,228,000
Net earnings (loss) per share
Basic	$	0.14		$	(0.15	)	$	0.63		$	0.40
Diluted	$	0.14		$	(0.15	)	$	0.63		$	0.40
Weighted average shares outstanding
Basic	18,228,000			18,092,000			18,217,000			18,063,000
Diluted	18,297,000			18,092,000			18,249,000			18,068,000

The accompanying notes are an integral part of these condensed consolidated statements.

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Arctic Cat Inc.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Nine Months Ended December 31,
	2009			2008
Cash flows from operating activities:
Net earnings	$	11,435,000		$	7,228,000
Adjustments to reconcile net earnings to net cash provided by (used in) operating activities:
Depreciation and amortization	19,001,000			25,088,000
Loss on disposal of fixed assets	—			98,000
Deferred income taxes	(5,030,000		)	(3,692,000		)
Stock based compensation expense	2,131,000			2,227,000
Changes in operating assets and liabilities:
Trading securities	169,000			24,838,000
Accounts receivable	(3,971,000		)	(21,465,000		)
Inventories	16,346,000			(25,444,000		)
Prepaid expenses	1,102,000			2,058,000
Accounts payable	(8,129,000		)	(28,108,000		)
Accrued expenses	3,719,000			6,147,000
Income taxes	6,972,000			9,197,000
Net cash provided by (used in) operating activities	43,745,000			(1,828,000		)
Cash flows from investing activities:
Purchase of property and equipment	(3,563,000		)	(11,018,000		)
Net cash used in investing activities	(3,563,000		)	(11,018,000		)
Cash flows from financing activities:
Checks written in excess of bank balance	—			3,831,000
Proceeds from short-term borrowings	73,429,000			192,280,000
Payments on short-term borrowings	(73,429,000		)	(183,250,000		)
Dividends paid	—			(3,796,000		)
Net cash provided by financing activities	—			9,065,000
Effect of exchange rate changes on cash and cash equivalents	(1,070,000		)	(1,012,000		)
Net increase (decrease) in cash and cash equivalents	39,112,000			(4,793,000		)
Cash and cash equivalents at the beginning of period	11,244,000			10,057,000
Cash and cash equivalents at the end of period	$	50,356,000		$	5,264,000
Supplemental disclosure of cash payments for income taxes	$	374,000		$	402,000
Supplemental disclosure of cash payment for interest	$	277,000		$	900,000

The accompanying notes are an integral part of these condensed consolidated statements.

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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, 2009, the results of operations for the three month and nine month periods ended December 31, 2009 and 2008 and cash flows for the nine month periods ended December 31, 2009 and 2008.  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, 2009 is derived from the audited balance sheet as of that date.

Preparation of the Company’s condensed 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 2009 amounts have been reclassified to conform with the fiscal 2010 financial statement presentation.  The reclassification had no effect on previously reported operating results.

NOTE B—STOCK BASED COMPENSATION

At December 31, 2009, the Company had stock based compensation plans, all previously approved by the shareholders. Stock options, stock appreciation rights and awards 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 such term is defined in the plans. At December 31, 2009, the Company had approximately 3,775,186 shares available for future grant under its stock option and award plans.

The Company accounts for stock based compensation in accordance with ASC Topic No. 718 (“ASC 718”), which requires that the fair value of all share-based payment transactions, including stock options and awards, be recognized in the statement of operations as an operating expense, based on their fair value over the requisite service period. At December 31, 2009, the Company had $1,513,000 of unrecognized compensation costs related to unvested stock options and awards that are expected to be recognized over a weighted average period of approximately two years.

For the three months ended December 31, 2009 and 2008, the Company recorded compensation expense of $371,000 and $353,000, and for the nine months ended December 31, 2009 and 2008, the Company recorded compensation expense of $2,131,000 and $2,227,000 in accordance with ASC 718, which has been included in selling, general and administrative expenses. The Company’s total stock-based compensation related expense decreased both the basic and diluted earnings per share by $0.02 and $0.02 for the three months ended December 31, 2009 and 2008, and by $0.10 and $0.12 for the nine months ended December 31, 2009 and 2008.

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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, 2009.

Assumptions:

Dividend Yield:  0%

Average Term: 5 years

Volatility: 32%

Risk free rate of return: 3.3%

Option transactions under the plans during the nine months ended December 31, 2009 are summarized as follows:

	Shares		Weighted- Average Exercise Price		Weighted- Average Contractual Life	Aggregate Intrinsic Value
Outstanding at March 31, 2009	2,465,229		$	16.82
Granted	605,600		5.85
Cancelled	(13,000	)	25.74
Outstanding at December 31, 2009	3,057,829		$	14.61	6.26	$	2,172,000
Exercisable at December 31, 2009	2,091,250		$	17.40	5.28	$	358,000

The aggregate intrinsic value is based on the Company’s December 31, 2009 common share market value for in-the-money options.

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The following information applies to options outstanding at December 31, 2009.

Options Outstanding

Range of exercise prices	Number outstanding at period end	Weighted- average remaining contractual life	Weighted- average exercise price
$4.16-6.11	125,907	5.78	$	4.28
7.53-11.25	1,172,694	8.01	8.11
12.06-17.84	979,248	5.58	16.89
18.94-28.00	779,980	4.55	23.18
	3,057,829	6.26	$	14.61

Options Exercisable

Range of exercise prices	Number exercisable at period end	Weighted- average exercise price
$4.16-6.11	5,907	$	6.11
7.53-11.25	456,431	8.82
12.06-17.84	858,932	16.82
18.94-28.00	769,980	23.22
	2,091,250	$	17.40

The Company’s stock option plan provides for grants of restricted common stock to executive and key employees of the Company. The restricted common stock is valued based on the Company’s market value of common stock on the date of grant and expensed over the requisite service period which approximates two years.  At December 31, 2009, the Company had 292,500 shares of restricted common stock issued and outstanding under the plan.  The restricted shares have voting rights and participate equally in all dividends and other distributions duly declared by the Company’s Board of Directors.

NOTE C-NET EARNINGS (LOSS) PER SHARE

The Company’s basic net earnings (loss) per share is computed by dividing net earnings by the weighted average number of outstanding common shares.  The Company’s diluted net earnings (loss) per share is computed by dividing the net earnings by the weighted average number of outstanding common shares and common share equivalents relating to stock options, when dilutive.  Options to purchase 2,446,322 and 2,459,322 shares of common stock with weighted average exercise prices of $16.79 and $16.84 were outstanding during the three months ended December 31, 2009 and 2008, and options to purchase 2,654,491 and 2,227,861 shares of common stock with weighted average exercise prices of $15.97 and $17.65 were outstanding during the nine months ended December 31, 2009 and 2008, all of which were excluded from the computation of common share equivalents because they were anti-dilutive.

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Weighted average shares outstanding consist of the following:

	Three Months Ended December 31,		Nine Months Ended December 31,
	2009	2008	2009	2008
Number of common shares outstanding	18,228,000	18,092,000	18,217,000	18,063,000
Dilutive effect of option plan	69,000	—	32,000	5,000
Common and potential common shares outstanding-diluted	18,297,000	18,092,000	18,249,000	18,068,000

NOTE D-SHORT-TERM INVESTMENTS

The Company held no short-term investments at December 31, 2009, and had $169,000 of trading securities at March 31, 2009.

NOTE E-INVENTORIES

Inventories consist of the following:

	December 31,		March 31,
	2009		2009
Raw materials and sub-assemblies	$	29,439,000	$	29,421,000
Finished goods	45,229,000		60,123,000
Parts, garments and accessories	31,596,000		31,261,000
	$	106,264,000	$	120,805,000

NOTE F-LINE OF CREDIT

The Company entered into a $60,000,000 senior secured revolving bank agreement on November 10, 2009, for the documentary and stand-by letters of credit, for working capital needs and general corporate purposes.  The Company may borrow up to $60,000,000 during June through November and up to $35,000,000 during all other months of the fiscal year.  Borrowings under the line of credit bear interest at the greater of the following rates; the prime rate, or the federal funds rate plus 0.50% or the LIBOR for a 30 day interest period plus 1.00%.  As of December 31, 2009 the effective rate was 5.25%.  All borrowings are collateralized by substantially all of the Company’s assets including all real estate, accounts receivable and inventory.  No borrowings from the line of credit were outstanding at December 31, 2009 and borrowings outstanding at December 31, 2008, under the previous line of credit were $9,030,000.  The outstanding letters of credit balances were $14,038,000 and $3,181,000 at December 31, 2009 and 2008, respectively and borrowings under the line are subject to certain covenants and restrictions on indebtedness, financial guarantees, business combinations and other related items.  The Company was in compliance with the credit agreement as of December 31, 2009.

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NOTE G-ACCRUED EXPENSES

Accrued expenses consist of the following:

	December 31,		March 31,
	2009		2009
Marketing	$	11,761,000	$	6,171,000
Compensation	2,666,000		4,191,000
Warranties	15,885,000		15,702,000
Insurance	6,836,000		7,084,000
Other	2,321,000		2,473,000
	$	39,469,000	$	35,621,000

NOTE H-PRODUCT WARRANTIES

The Company generally provides a limited warranty to the original owner of snowmobiles and ATV’s.  The period of warranty is twelve months from the date of consumer registration for snowmobiles and six months from the date of consumer registration for 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 experience becomes known. The following represents changes in accrued warranty for the nine month periods ended December 31:

	2009			2008
Balance at beginning of period	$	15,702,000		$	16,494,000
Warranty provision	7,879,000			10,094,000
Warranty claim payments	(7,696,000		)	(6,324,000		)
Balance at end of period	$	15,885,000		$	20,264,000

NOTE I—SHAREHOLDERS’ EQUITY

Share Repurchase

In January 2008, the Company’s Board of Directors approved a $10,000,000 share repurchase program. During the nine months ended December 31, 2009 and 2008, the Company did not repurchase and cancel any shares, as authorized by the Board of Directors. At December 31, 2009, authorization to repurchase up to $10,000,000 of Company common stock or approximately 1,092,000 shares remain outstanding.

Additional Paid-in-Capital

During the nine months ended December 31, 2009 and 2008, additional paid-in-capital increases of $2,131,000 and $2,227,000 were recorded related to stock based compensation under ASC 718.

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Accumulated Other Comprehensive Income (Loss)

The components of the changes in accumulated other comprehensive income (loss), net of taxes, during the following periods were as follows:

	Nine Months Ended December 31,
	2009			2008
Total accumulated other comprehensive income (loss)
Balance at beginning of period	$	(512,000	)	$	4,768,000
Unrealized loss on derivative instruments, net of tax	—			(133,000		)
Foreign currency translation adjustment	1,296,000			(4,036,000		)
Balance at end of period	$	784,000		$	599,000

Other comprehensive income (loss) was as follows:

	Nine Months Ended December 31,
	2009		2008
Net earnings	$	11,435,000	$	7,228,000
Unrealized loss on derivative instruments, net of tax	—		(133,000		)
Foreign currency translation adjustment	1,296,000		(4,036,000		)
Total Other Comprehensive Income	$	12,731,000	$	3,059,000

Note J—COMMITMENTS AND CONTINGENCIES

Dealer Financing

Finance companies provide certain of the Company’s dealers with floorplan credit facilities. The Company has agreements with these finance companies to repurchase certain repossessed products originally sold to its dealers. At December 31, 2009, the Company’s contingent maximum repurchase obligation was approximately $94,650,000. The Company’s financial exposure under these agreements is limited to the difference between 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.

On October 14, 2009, the Company and GE Commercial Distribution Finance Corporation (“CDF”) entered into an agreement pursuant to which CDF will provide the Company’s U.S. dealers with floorplan credit facilities to finance the purchase of inventory from the Company.  The agreement became effective upon the occurrence of certain events, including establishment of a new multi-year working capital credit facility.  The agreement is for an initial term of two years with one year automatic renewals, and may be terminated earlier if certain events of default occur.  The Company will repurchase from CDF repossessed inventory and the Company and CDF will share certain profits and losses from operation of the credit facilities.  The CDF floorplan credit facility will replace the Company’s floorplan agreement with Textron Financial Corporation, which had previously announced its intent to exit the dealer floorplan business. The new floorplan program began December 1, 2009.

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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 currently in discovery are adequately covered by reserves and product liability insurance. The Company is not involved in any legal proceedings which it believes will have the potential for a materially adverse impact on the Company’s business or financial condition, results of operations or cash flows.

NOTE K — RECENT ACCOUNTING PRONOUNCEMENTS

In April 2009, the FASB issued ASC Topic No. 825, “Financial Instruments” (“ASC 825”), that requires interim reporting period disclosure about the fair value of financial instruments, effective for interim reporting periods ending after June 15, 2009.  The Company has adopted the disclosure requirements of ASC 825.  Due to their nature, the carrying value of cash, receivables, payables and debt obligations approximates fair value.

In May 2009, the FASB issued ASC Topic No. 855, “Subsequent Events” (“ASC 855”), that incorporates guidance into accounting literature that was previously addressed only in auditing standards.  The statement refers to subsequent events that provide additional evidence about conditions that existed at the balance-sheet date as “recognized subsequent events.”  Subsequent events which provide evidence about conditions that arose after the balance-sheet date but prior to the issuance of the financial statements are referred to as “non-recognized subsequent events.”  It also requires companies to disclose the date through which subsequent events have been evaluated and whether this date is the date the financial statements were issued or the date the financial statements were available to be issued.  ASC 855 is effective for interim and annual periods ending after June 15, 2009.  The Company has adopted this new standard.  Subsequent events have been evaluated through February 9, 2010 which is considered the date of issuance of these financial statements.

In June 2009, the FASB issued ASC Topic No. 105, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles” (“ASC 105”), that replaced FASB Statement No. 162, The Hierarchy of Generally Accepted Accounting Principles, and establishes the FASB Accounting Standards Codification TM (the “Codification”) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with generally accepted accounting principles (GAAP).  ASC 105 is effective for interim and annual periods ending after September 15, 2009.  The Company adopted the new Codification when referring to GAAP on Form 10-Q for the fiscal period ending September 30, 2009.  This did not have an impact on the consolidated results of the Company.

In March 2008, the FASB issued ASC Topic No. 815, “Derivatives and Hedging” (“ASC 815”), which requires increased disclosure about the Company’s strategies and objectives for using derivative instruments; the location and amounts of derivative instruments in the Company’s financial statements; how derivative instruments and related hedged items are accounted for under ASC 815, and how derivative instruments and related hedged items affect the Company’s financial position, financial performance, and cash flows.  Certain disclosures are also required with respect to derivative features that are credit-risk related.  ASC 815 became effective for the Company as of January 1, 2009 on a prospective basis.  The adoption of this standard did not have a material impact on the Company’s consolidated results of operations or financial condition.

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In December 2007, the FASB issued ASC Topic 805, “Business Combinations” (“ASC 805”), that establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any non-controlling interest in the acquired company and the goodwill acquired.  ASC 805 also establishes disclosure requirements to enable the evaluation of the nature and financial effects of the business combination.  ASC 805 was effective for fiscal years beginning after December 15, 2008.  The adoption of ASC 805 did not have any significant impact on the Company’s accounting treatment for business combinations on a prospective basis beginning in the period it was adopted.

NOTE L — CASH AND CASH EQUIVALENTS

The Company includes checks issued but not presented for payment in cash and cash equivalents as a reduction of other cash balances unless checks written are in excess of the bank balance.  As of December 31, 2008, checks written in excess of bank balances were $3,831,000 and classified as accounts payable on the balance sheet and a financing activity on the statement of cash flow.  There were no check written in excess of bank balances at December 31, 2009.

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 (“PG&A”) 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.”

Executive Overview

The following discussion pertains to the results of operations and financial position of the Company for the quarter and the nine month period ended December 31, 2009.  Due to the seasonality of the snowmobile, ATV and PG&A businesses, and to certain changes in production and shipping cycles, results of such periods are not necessarily indicative of the results to be expected for the full year.

For the third quarter ended December 31, 2009 the Company reported net sales of $131.0 million, net earnings of $2.6 million and earnings per share of $0.14 compared to December 31, 2008 quarterly net sales of $174.7 million, a net loss of $2.7 million and loss per share of $0.15.  Lower operating expenses for the quarter drove an increase in operating profits to $624,000 from a loss of $3.9 million.  For the nine month period ended December 31, 2009, the Company reported net sales of $366.7 million, net earnings of $11.4 million and earnings per share of $0.63 compared to net sales of $472.9 million, net earnings of $7.2 million and earnings per share of $0.40 for the same period last year.

Overall demand for recreational products remains weak, due to the continued difficult global economic conditions, higher unemployment and historically low consumer confidence. As a result, recreational product retail sales declined further in the third

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quarter of fiscal 2010. Retail sales of the Company’s ATVs and snowmobiles fared somewhat better than the industry as a whole for the quarter, and the Company gained market share. However, because of the weak retail environment, the Company expects significantly lower ATV and snowmobile sales to its dealers as it aligns dealer inventories to better match consumer demand. Given this situation, the Company has implemented several profitability initiatives aimed at improving its margins and, reducing operating expenses to achieve improved operating results this fiscal year on lower sales.

Results of Operations

Product Line Sales

	Three Months Ended December 31,										Nine Months Ended December 31,
($ in millions)	2009		PercentOfTotalSales		2008		PercentOfTotalSales		Percent Change 2009 vs 2008		2009		PercentOfTotalSales		2008		PercentOfTotalSales		Percent Change 2009 vs 2008
ATV	$	48.1	37	%	$	57.8	33	%	(17	)%	$	132.1	36	%	$	183.2	39	%	(28	)%
Snowmobile	58.7		45	%	90.8		52	%	(35	)%	162.3		44	%	210.7		44	%	(23	)%
Parts, garments & accessories	24.2		18	%	26.1		15	%	(7	)%	72.3		20	%	79.1		17	%	(9	)%
Net Sales	$	131.0	100	%	$	174.7	100	%	(25	)%	$	366.7	100	%	$	473.0	100	%	(22	)%

During the fiscal 2010 third quarter net sales decreased 25% to $131.0 million from $174.7 million in the fiscal 2009 third quarter. ATV unit volume decreased 26%, snowmobile unit volume decreased 31% and PG&A sales decreased $1.9 million.  ATV and snowmobile unit volume decreased primarily due to planned reductions in production as the Company better matches dealer inventory with retail demand. PG&A sales decreases during the third quarter of fiscal 2010 were primarily due to lower ATV accessory shipments.  Net sales for the nine months ended December 31, 2009, decreased 22% to $366.7 million from $472.9 million for the same period in fiscal 2009. ATV unit volume decreased 37%, snowmobile unit volume decreased 30% and PG&A sales decreased $6.8 million during the first nine months of fiscal 2010 as compared to the same period in fiscal 2009.  ATV and snowmobile unit volume again decreased primarily due to planned reductions in production as the Company better matches dealer inventory with retail demand.  PG&A sales decreases during the first nine months of fiscal 2010 were also primarily related to declining ATV and snowmobile retail sales.

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Cost of Goods Sold

	Three Months Ended December 31,										Nine Months Ended December 31,
($ in millions)	2009		PercentOfTotalSales		2008		PercentOfTotalSales		Percent Change 2009 vs 2008		2009		PercentOfTotalSales		2008		PercentOfTotalSales		Percent Change 2009 vs 2008
Snowmobile & ATV units	$	95.0	72.5	%	$	137.3	78.6	%	(30.8	)%	$	249.1	67.9	%	$	342.0	72.3	%	(27.2	)%
Parts, garments & accessories	13.4		10.2	%	17.0		9.7	%	(21.2	)%	42.3		11.5	%	50.5		10.7	%	(16.2	)%
Total Cost of Goods Sold	$	108.4	82.7	%	$	154.3	88.3	%	(29.7	)%	$	291.4	79.4	%	$	392.5	83.0	%	(25.8	)%

During the third quarter of fiscal 2010, cost of sales decreased 29.7% to $108.4 million from $154.3 million for the third quarter of fiscal 2009.  Fiscal 2010 snowmobile and ATV unit cost of sales decreased 30.8% to $95 million from $137.3 million due to a 25% decrease in net sales from units during the quarter compared to the third quarter of fiscal 2009.  The third quarter of fiscal 2010 cost of sales for PG&A decreased to $13.4 million compared to $17.0 million for fiscal 2009, in line with decreased sales.  During the first nine months of fiscal 2010 cost of sales decreased 25.8% to $291.4 million from $392.4 million for the first nine months of fiscal 2009.  Fiscal 2010 snowmobile and ATV unit cost of sales for the first nine months decreased 27.2% to $249.1 million from $342.0 million due to a 25% decrease in net sales from units during the period compared to the same period of fiscal 2009.  The first nine months of fiscal 2010 cost of sales for PG&A decreased to $42.3 million compared to $50.5 million for fiscal 2009, in line with decreased sales.

Gross Profit

	Three Months Ended December 31,								Nine Months Ended December 31,
($ in millions)	2009			2008			PercentChange 2009 vs 2008		2009			2008			Percent Change 2009 vs 2008
Gross Profit Dollars	$	22.6		$	20.4		10.9	%	$	75.3		$	80.4		(6.3	)%
Percentage of Sales	17.2		%	11.7		%	5.5	%	20.5		%	17.0		%	3.5	%

Gross profit increased 10.9% to $22.6 million in the third quarter of fiscal 2010 from $20.4 million in the third quarter of fiscal 2009. The gross profit percentage for the third quarter of fiscal 2009 increased to 17.2% versus 11.7% in 2009. Gross profit decreased 6.3% to $75.3 million in the first nine months of fiscal 2010 from $80.4 million in the same period of fiscal 2009. The gross profit percentage for the first nine months of fiscal 2010 increased to 20.5% versus 17.0% in 2009. The increase in the quarterly and year-to-date 2010 gross profit percentages were primarily due to higher margins for all product lines as a result of product cost reductions, price increases, favorable Canadian currency exchange rates, and rescaled production activities.

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Operating Expenses

	Three Months Ended December 31,								Nine Months Ended December 31,
(in millions)	2009			2008			PercentChange 2009 vs 2008		2009			2008			PercentChange 2009vs 2008
Selling and Marketing	$	8.9		$	12.7		(30	)%	$	25.0		$	35.1		(29	)%
Research and Development	3.0			4.2			(29	)%	9.2			13.2			(30	)%
General and Administrative	10.0			7.3			37	%	27.3			23.6			16	%
Total Operating Expenses	$	21.9		$	24.2		(9	)%	$	61.5		$	71.9		(15	)%
Percentage of Sales	16.7		%	13.9		%			16.8		%	15.2		%

Selling and marketing expenses decreased 30% to $8.9 million in the third quarter of fiscal 2010 from $12.7 million in the third quarter of fiscal 2009, primarily due to lower advertising expenses.  Research and development expenses decreased 29% to $3.0 million in the third quarter of fiscal 2010 compared to $4.2 million in the third quarter of fiscal 2009 due primarily to lower development expenses.  General and administrative expenses increased 37% to $10.0 million in the third quarter of fiscal 2010 from $7.3 million in the third quarter of fiscal 2009 due primarily to increased Canadian hedge costs.  Selling and marketing expenses decreased 29% to $25.0 million in the first nine months of fiscal 2010 from $35.1 million in the same period of fiscal 2009, primarily due to lower advertising expenses.  Research and development expenses decreased 30% to $9.2 million in the first nine months of fiscal 2010 compared to $13.1 million in the same period of fiscal 2009 due primarily to lower development expenses.  General and administrative expenses increased 16% to $27.3 million in the first nine months of fiscal 2010 from $23.6 million in the same period of fiscal 2009, primarily due to increased Canadian hedge costs.

Other Income / Expense

The Company had no interest income in the third quarter of fiscal 2010 compared to $17,000 in the third quarter of fiscal 2009. Interest expense decreased to $2,000 in the third quarter of fiscal 2010 from $323,000 in the third quarter of fiscal 2009.   Interest income decreased to $4,000 in the first nine months of fiscal 2010 from $116,000 in the same period of fiscal 2009. Interest expense decreased to $249,000 in the first nine months of fiscal 2010 from $941,000 in the same period of fiscal 2009. Interest income was primarily affected by the lower cash levels at the beginning of the fiscal year compared to last year.  Interest expense was affected by lower borrowing levels in the first nine months of fiscal 2010 compared to the same period of fiscal 2009, primarily due to reduced inventory levels in the first nine months of fiscal 2010.

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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 spring and commencement of shipments late in the first quarter have resulted in significant fluctuations in the Company’s working capital requirements. 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. 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 ATV production cycles begin in the spring.  The increase in the Company’s receivable balance as of December 31, 2009 compared to March 31, 2009 is due to the seasonality of the Company’s snowmobile, ATV and PG&A businesses.  Inventory was $106.3 million at December 31, 2009 compared to $150.4 million at December 31, 2008 and $120.8 million on March 31, 2009, due primarily to decreased ATV and snowmobile finished unit inventories.  Accounts receivable was $43.0 million at December 31, 2009 compared to $59.7 million at December 31, 2008.  The decrease in accounts receivable is due to decreased ATV and snowmobile sales.  The accounts receivable balance at March 31, 2009 was $ 38.2 million.  During the nine months ended December 31, 2009 and 2008, the Company had no repurchases of its common shares.  Cash and short-term investments were $50.4 million and $5.4 million at December 31, 2009 and 2008, respectively. The Company’s investment objectives are first, safety of principal and second, rate of return.

The Company believes that the cash generated from operations and the available line of credit will be sufficient to meet its working capital, and capital expenditure requirements on a short and long-term basis.

Line of Credit

The Company has operated this year under senior secured credit agreements with borrowings of up to $60,000,000 for working capital, including $30,000,000 for documentary and stand-by letters of credit.  The Company was in compliance with the terms of the credit agreement as of December 31, 2009.

Dealer Floorplan Financing

The Company announced on October 20, 2009 that it has entered into an agreement for GE Commercial Distribution Finance to become the exclusive provider of floorplan financing for the Company’s U.S. dealers. The new multi-year financing program will replace the Company’s current financing agreement with Textron Financial Corporation, which had previously announced its intent to exit the dealer floorplan business. The new financing program began December 1, 2009.

Significant Accounting Policies

See the Company’s most recent Annual Report on Form 10-K for the year ended March 31, 2009 for a discussion of its critical accounting policies.

In April 2009, the FASB issued ASC Topic No. 825, “Financial Instruments” (“ASC 825”), that requires interim reporting period disclosure about the fair value of financial instruments, effective for interim reporting periods ending after June 15, 2009.  The Company has adopted the disclosure requirements of ASC 825.  Due to their nature, the carrying value of cash, receivables, payables and debt obligations approximates fair value.

In May 2009, the FASB issued ASC Topic No. 855, “Subsequent Events” (“ASC 855”), that incorporates guidance into accounting literature that was previously addressed only

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in auditing standards.  The statement refers to subsequent events that provide additional evidence about conditions that existed at the balance-sheet date as “recognized subsequent events.”  Subsequent events which provide evidence about conditions that arose after the balance-sheet date but prior to the issuance of the financial statements are referred to as “non-recognized subsequent events.”  It also requires companies to disclose the date through which subsequent events have been evaluated and whether this date is the date the financial statements were issued or the date the financial statements were available to be issued. ASC 855 is effective for interim and annual periods ending after June 15, 2009.  The Company has adopted this new standard.

In June 2009, the FASB issued ASC 105, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles” (“ASC 105”), that replaces FASB Statement No. 162, “The Hierarchy of Generally Accepted Accounting Principles,” and establishes the FASB Accounting Standards Codification TM (the “Codification”) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with generally accepted accounting principles (GAAP).  ASC 105 is effective for interim and annual periods ending after September 15, 2009.  The Company adopted the new Codification when referring to GAAP on Form 10-Q for the fiscal period ending September 30, 2009.  This did not have an impact on the consolidated results of the Company.

In March 2008, the FASB issued ASC Topic No. 815, “Derivatives and Hedging” (“ASC 815”), which requires increased disclosure about the Company’s strategies and objectives for using derivative instruments; the location and amounts of derivative instruments in the Company’s financial statements; how derivative instruments and related hedged items are accounted for under ASC 815, and how derivative instruments and related hedged items affect the Company’s financial position, financial performance, and cash flows.  Certain disclosures are also required with respect to derivative features that are credit-risk related.  ASC 815 became effective for the Company as of January 1, 2009 on a prospective basis.  The adoption of this standard did not have a material impact on the Company’s consolidated results of operations or financial condition.

In December 2007, the FASB issued ASC Topic No. 805, “Business Combinations” (“ASC 805”), that establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any non-controlling interest in the acquired Company and the goodwill acquired.  ASC 805 also establishes disclosure requirements to enable the evaluation of the nature and financial effects of the business combination.  ASC 805 was effective for fiscal years beginning after December 15, 2008.  The adoption of ASC 805 did not have any significant impact on the Company’s accounting treatment for business combinations on a prospective basis beginning in the period it was adopted.

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Forward-Looking Statements

The Private Securities Litigation Reform Act of 1995 provides a safe harbor for certain forward-looking statements.  This Quarterly Report on Form 10-Q contains forward-looking statements that reflect the Company’s current views with respect to future events and financial performance.  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 depending on a variety of factors, including, but not limited to: 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; interruption of dealer floorplan financing; 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 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 risks relating to changes in inflation, foreign currency exchange rates and interest rates. These market risks have not changed significantly since March 31, 2009. As of December 31, 2009, the Company had no Japanese Yen denominated cash flow hedges.

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 Company’s 2009 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 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 Securities and Exchange Commission’s rules and forms.

There were no changes in internal control over financial reporting during the fiscal quarter ended December 31, 2009 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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Item 6.  Exhibits

Exhibit
Number	Description
3 (a)	Amended and Restated Articles of Incorporation of Company	(1)
3 (b)	Restated By-Laws of the Company	(2)
4 (a)	Form of Specimen Common Stock Certificate	(2)
4 (b)	Rights Agreement by and between the Company and Wells Fargo Bank Minnesota, N.A., dated September 17, 2001	(3)
10.1	Vendor Agreement, dated October 14, 2009, among the Company, Arctic Sales Inc. and GE Commercial Distribution Finance Corporation (the “Vendor Agreement”)	(4)
10.2	Amendment No. 1 dated October 20, 2009 to the Vendor Agreement	(4)
31.1	CEO Certification pursuant to section 302 of the Sarbanes-Oxley Act of 2002	(5)
31.2	CFO Certification pursuant section 302 of the Sarbanes-Oxley Act of 2002	(5)
32.1	CEO Certification pursuant to section 906 of the Sarbanes-Oxley Act of 2002	(5)
32.2	CFO Certification pursuant to section 906 of the Sarbanes-Oxley Act of 2002	(5)

(1)	Incorporated herein by reference to the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 1997.
(2)	Incorporated herein by reference to the Company’s Form S-1 Registration Statement (File Number 33-34984), as amended by Current Report on Form 8-K filed on December 13, 2007.
(3)	Incorporated herein by reference to Exhibit 1 to the Company’s Registration on Form 8-A filed on September 20, 2001.
(4)	Incorporated herein by reference to the Company’s Current Report on Form 8-K filed on October 20, 2009. Filed with this Quarterly Report on Form 10-Q.
(5)	Filed with this Quarterly Report on Form 10-Q.

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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 9, 2010	By	/s/ Christopher A. Twomey
			Christopher A. Twomey
			Chief Executive Officer
Date:	February 9, 2010	By	/s/ Timothy C. Delmore
			Timothy C. Delmore
			Chief Financial Officer

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