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 |
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for the quarterly period ended December 31, 2010 | |
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or | |
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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.) |
505 Highway 169 North, Suite 1000, Plymouth Minnesota |
| 55441 |
(Address of principal executive offices) |
| (Zip Code) |
Registrant’s telephone number, including area code: (763) 354-1800
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 |
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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 3, 2011, 12,173,480 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, |
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|
| 2010 |
| 2010 |
| ||
ASSETS |
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Cash and cash equivalents |
| $ | 27,541,000 |
| $ | 31,811,000 |
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Short-term investments |
| 79,529,000 |
| 39,251,000 |
| ||
Accounts receivable, less allowances |
| 50,196,000 |
| 29,227,000 |
| ||
Inventories |
| 77,150,000 |
| 81,361,000 |
| ||
Prepaid expenses |
| 2,573,000 |
| 4,384,000 |
| ||
Deferred income taxes |
| 19,460,000 |
| 14,981,000 |
| ||
Total current assets |
| 256,449,000 |
| 201,015,000 |
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PROPERTY AND EQUIPMENT - at cost |
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Machinery, equipment and tooling |
| 192,065,000 |
| 185,023,000 |
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Land, buildings and improvements |
| 28,937,000 |
| 28,937,000 |
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|
| 221,002,000 |
| 213,960,000 |
| ||
Less accumulated depreciation |
| 182,799,000 |
| 170,644,000 |
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| 38,203,000 |
| 43,316,000 |
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OTHER ASSETS |
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Intangibles and other assets |
| 1,748,000 |
| 1,753,000 |
| ||
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| $ | 296,400,000 |
| $ | 246,084,000 |
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LIABILITIES AND SHAREHOLDERS’ EQUITY |
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CURRENT LIABILITIES |
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Accounts payable |
| $ | 38,098,000 |
| $ | 37,303,000 |
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Accrued expenses |
| 51,941,000 |
| 35,042,000 |
| ||
Income taxes payable |
| 12,840,000 |
| 2,975,000 |
| ||
Total current liabilities |
| 102,879,000 |
| 75,320,000 |
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DEFERRED INCOME TAXES |
| 2,568,000 |
| 3,425,000 |
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COMMITMENTS AND CONTINGENCIES |
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SHAREHOLDERS’ EQUITY |
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Preferred stock, par value $1.00; 2,050,000 shares authorized; none issued |
| — |
| — |
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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: 12,162,182 at December 31, 2010 and 12,125,985 at March 31, 2010 |
| 122,000 |
| 121,000 |
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Class B common stock, par value $.01; 7,560,000 shares authorized; issued and outstanding: 6,102,000 at December 31, 2010 and at March 31, 2010. |
| 61,000 |
| 61,000 |
| ||
Additional paid in capital |
| 6,733,000 |
| 5,053,000 |
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Accumulated other comprehensive loss |
| (3,042,000 | ) | (2,382,000 | ) | ||
Retained earnings |
| 187,079,000 |
| 164,486,000 |
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Total shareholders’ equity |
| 190,953,000 |
| 167,339,000 |
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| $ | 296,400,000 |
| $ | 246,084,000 |
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The accompanying notes are an integral part of these condensed consolidated statements.
Arctic Cat Inc.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
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| Three Months |
| Nine Months |
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|
| 2010 |
| 2009 |
| 2010 |
| 2009 |
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Net Sales |
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Snowmobile & ATV units |
| $ | 126,381,000 |
| $ | 106,879,000 |
| $ | 319,485,000 |
| $ | 294,433,000 |
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Parts, garments & accessories |
| 25,595,000 |
| 24,161,000 |
| 71,709,000 |
| 72,277,000 |
| ||||
Total net sales |
| 151,976,000 |
| 131,040,000 |
| 391,194,000 |
| 366,710,000 |
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Cost of goods sold |
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Snowmobile & ATV units |
| 104,723,000 |
| 95,025,000 |
| 254,252,000 |
| 249,115,000 |
| ||||
Parts, garments & accessories |
| 14,521,000 |
| 13,434,000 |
| 42,193,000 |
| 42,255,000 |
| ||||
Total cost of goods sold |
| 119,244,000 |
| 108,459,000 |
| 296,445,000 |
| 291,370,000 |
| ||||
Gross profit |
| 32,732,000 |
| 22,581,000 |
| 94,749,000 |
| 75,340,000 |
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Operating expenses |
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Selling & marketing |
| 8,502,000 |
| 8,941,000 |
| 24,973,000 |
| 24,982,000 |
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Research & development |
| 3,418,000 |
| 2,979,000 |
| 9,828,000 |
| 9,177,000 |
| ||||
General & administrative |
| 8,595,000 |
| 10,037,000 |
| 27,255,000 |
| 27,323,000 |
| ||||
Total operating expenses |
| 20,515,000 |
| 21,957,000 |
| 62,056,000 |
| 61,482,000 |
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Operating profit |
| 12,217,000 |
| 624,000 |
| 32,693,000 |
| 13,858,000 |
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Other income (expense) |
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Interest income |
| 28,000 |
| — |
| 72,000 |
| 4,000 |
| ||||
Interest expense |
| (1,000 | ) | (2,000 | ) | (11,000 | ) | (249,000 | ) | ||||
Total other income (expense) |
| 27,000 |
| (2,000 | ) | 61,000 |
| (245,000 | ) | ||||
Earnings before income taxes |
| 12,244,000 |
| 622,000 |
| 32,754,000 |
| 13,613,000 |
| ||||
Income tax expense (benefit) |
| 2,982,000 |
| (1,980,000 | ) | 10,161,000 |
| 2,178,000 |
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Net earnings |
| $ | 9,262,000 |
| $ | 2,602,000 |
| $ | 22,593,000 |
| $ | 11,435,000 |
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Net earnings per share |
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Basic |
| $ | 0.51 |
| $ | 0.14 |
| $ | 1.24 |
| $ | 0.63 |
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Diluted |
| $ | 0.50 |
| $ | 0.14 |
| $ | 1.22 |
| $ | 0.63 |
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Weighted average shares outstanding |
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Basic |
| 18,236,000 |
| 18,228,000 |
| 18,214,000 |
| 18,217,000 |
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Diluted |
| 18,644,000 |
| 18,297,000 |
| 18,484,000 |
| 18,249,000 |
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The accompanying notes are an integral part of these condensed consolidated statements.
Arctic Cat Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
| Nine Months Ended December 31, |
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|
| 2010 |
| 2009 |
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Cash flows from operating activities: |
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Net earnings |
| $ | 22,593,000 |
| $ | 11,435,000 |
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Adjustments to reconcile net earnings to net cash provided by operating activities: |
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Depreciation and amortization |
| 13,037,000 |
| 19,001,000 |
| ||
Deferred income taxes |
| (5,212,000 | ) | (5,030,000 | ) | ||
Stock based compensation expense |
| 2,869,000 |
| 2,131,000 |
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Changes in operating assets and liabilities: |
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Trading securities |
| (40,278,000 | ) | 169,000 |
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Accounts receivable, less allowances |
| (21,477,000 | ) | (3,971,000 | ) | ||
Inventories |
| 4,957,000 |
| 16,346,000 |
| ||
Prepaid expenses |
| 1,808,000 |
| 1,102,000 |
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Accounts payable |
| (695,000 | ) | (8,129,000 | ) | ||
Accrued expenses |
| 16,924,000 |
| 3,719,000 |
| ||
Income taxes |
| 9,946,000 |
| 6,972,000 |
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Net cash provided by operating activities |
| 4,472,000 |
| 43,745,000 |
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Cash flows from investing activities: |
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Purchase of property and equipment |
| (8,116,000 | ) | (3,563,000 | ) | ||
Proceeds from the sale of assets |
| 185,000 |
| — |
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Net cash used in investing activities |
| (7,931,000 | ) | (3,563,000 | ) | ||
Cash flows from financing activities: |
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Checks written in excess of bank balances |
| 574,000 |
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Proceeds from short-term borrowings |
| 1,012,000 |
| 73,429,000 |
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Payments on short-term borrowings |
| (1,012,000 | ) | (73,429,000 | ) | ||
Proceeds from issuance of common stock |
| 623,000 |
| — |
| ||
Tax benefit from stock options exercises |
| 608,000 |
| — |
| ||
Repurchase of common stock |
| (2,419,000 | ) | — |
| ||
Net cash used in financing activities |
| (614,000 | ) | — |
| ||
Effect of exchange rate changes on cash and cash equivalents |
| (197,000 | ) | (1,070,000 | ) | ||
Net increase (decrease) in cash and cash equivalents |
| (4,270,000 | ) | 39,112,000 |
| ||
Cash and cash equivalents at the beginning of period |
| 31,811,000 |
| 11,244,000 |
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Cash and cash equivalents at the end of period |
| $ | 27,541,000 |
| $ | 50,356,000 |
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Supplemental disclosure of cash payments for: |
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Income taxes |
| $ | 4,838,000 |
| $ | 374,000 |
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Interest |
| $ | 11,000 |
| $ | 277,000 |
|
The accompanying notes are an integral part of these condensed consolidated statements.
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, 2010, the results of operations for the three month and nine month periods ended December 31, 2010 and 2009 and the cash flows for the nine month periods ended December 31, 2010 and 2009. 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, 2010 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.
NOTE B—STOCK BASED COMPENSATION
At December 31, 2010, the Company had stock based compensation plans, all previously approved by the shareholders. Awards granted under these plans generally vest over one to five years, have a contractual life that range from one to ten years and provide for accelerated vesting if there is a change in control, as such term is defined in the plans. If grantees are retirement eligible as defined in the plan and awards would either fully vest upon retirement or continue to vest after retirement, the full amount of the related expense is recognized upon grant. At December 31, 2010, the Company had approximately 3,187,282 shares available for future grant under its stock option and award plans.
The Company accounts for stock based compensation in accordance with Accounting Standards Codification (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, 2010, the Company had $1,841,000 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, 2010 and 2009, the Company recorded compensation expense of $334,000 and $371,000, and for the nine months ended December 31, 2010 and 2009, the Company recorded compensation expense of $2,869,000 and $2,131,000, 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 $0.01 and $0.02 for the three months ended December 31, 2010 and 2009, and by $0.11 and $0.10 for the nine months ended December 31, 2010 and 2009.
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, 2010.
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, 2010 are summarized as follows:
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| Shares |
| Weighted- |
| Weighted- |
| Aggregate |
| ||
Outstanding at March 31, 2010 |
| 3,052,829 |
| $ | 14.58 |
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Granted |
| 514,844 |
| 10.84 |
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Exercised |
| (230,371 | ) | 6.96 |
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Cancelled |
| (2,043 | ) | 18.80 |
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Outstanding at December 31, 2010 |
| 3,335,259 |
| $ | 14.53 |
| 5.85 |
| $ | 9,265,000 |
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Exercisable at December 31, 2010 |
| 2,458,356 |
| $ | 16.44 |
| 5.02 |
| $ | 4,473,000 |
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The aggregate intrinsic value is based on the difference between the exercise price and the Company’s December 31, 2010 common share market value for in-the-money options.
The following information applies to options outstanding at December 31, 2010.
Options Outstanding
Range of |
| Number |
| Weighted- |
| Weighted- |
| |
$4.16-6.11 |
| 43,157 |
| 3.05 |
| $ | 4.43 |
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6.26-9.38 |
| 504,758 |
| 8.18 |
| 6.40 |
| |
9.57-13.37 |
| 1,097,066 |
| 7.52 |
| 10.39 |
| |
15.33-21.96 |
| 1,469,278 |
| 4.23 |
| 18.73 |
| |
27.69 |
| 221,000 |
| 3.52 |
| 27.69 |
| |
|
| 3,335,259 |
| 5.85 |
| 14.53 |
| |
Options Exercisable
Range of |
| Number |
| Weighted- |
| |
$4.16-6.11 |
| 43,157 |
| $ | 4.43 |
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6.26-9.38 |
| 225,028 |
| 6.57 |
| |
9.57-13.37 |
| 499,893 |
| 10.21 |
| |
15.33-21.96 |
| 1,469,278 |
| 18.73 |
| |
27.69 |
| 221,000 |
| 27.69 |
| |
|
| 2,458,356 |
| 16.44 |
| |
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 the amount of any award is expensed over the requisite service period which approximates two years. If grantees are retirement eligible and awards would either fully vest upon retirement or continue to vest after retirement, the full amount of the related expense is recognized upon grant. At December 31, 2010, the Company had 222,726 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 PER SHARE
The Company’s basic net earnings per share is computed by dividing net earnings by the weighted average number of outstanding common shares. The Company’s diluted net earnings per share is computed by dividing net earnings by the weighted average number of outstanding common shares and common share equivalents relating to stock options, when dilutive. Options to purchase 1,690,278 and 2,446,322 shares of common stock with weighted average exercise prices of $19.90 and $16.79 outstanding during the three months ended December 31, 2010 and 2009, and options to purchase 2,095,113 and 2,654,491 shares of common stock with weighted average exercise prices of $18.09 and $15.97 outstanding during the nine months ended December 31, 2010 and 2009 were excluded from the computation of common share equivalents because they were anti-dilutive as the per share exercise prices exceeded the per share market value.
NOTE D-SHORT-TERM INVESTMENTS
Trading securities consist of $79,529,000 and $39,251,000 invested in various money market funds at December 31, 2010, and March 31, 2010, respectively.
NOTE E-INVENTORIES
|
| December 31, |
| March 31, |
| ||
Inventories consist of the following: |
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Raw materials and sub-assemblies |
| $ | 21,001,000 |
| $ | 21,429,000 |
|
Finished goods |
| 30,598,000 |
| 34,741,000 |
| ||
Parts, garments and accessories |
| 25,551,000 |
| 25,191,000 |
| ||
|
| $ | 77,150,000 |
| $ | 81,361,000 |
|
NOTE F-LINE OF CREDIT
The Company entered into a $60,000,000 senior secured revolving bank agreement on November 10, 2009, for documentary and stand-by letters of credit, 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, 2010 the effective rate was 5.00%. 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, 2010 and March 31, 2010. The outstanding letters of credit balances were $3,232,000 and $14,038,000 at December 31, 2010 and 2009, 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 terms of the credit agreement as of December 31, 2010.
NOTE G-ACCRUED EXPENSES
Accrued expenses consist of the following:
|
| December 31, |
| March 31, |
| ||
Marketing |
| $ | 15,748,000 |
| $ | 7,940,000 |
|
Compensation |
| 8,072,000 |
| 2,645,000 |
| ||
Warranties |
| 16,339,000 |
| 14,077,000 |
| ||
Insurance |
| 9,322,000 |
| 7,089,000 |
| ||
Other |
| 2,460,000 |
| 3,291,000 |
| ||
|
| $ | 51,941,000 |
| $ | 35,042,000 |
|
NOTE H-PRODUCT WARRANTIES
The Company generally provides a limited warranty for 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:
|
| 2010 |
| 2009 |
| ||
Balance at April 1 |
| $ | 14,077,000 |
| $ | 15,702,000 |
|
Warranty provision |
| 7,784,000 |
| 7,879,000 |
| ||
Warranty claim payments |
| (5,522,000 | ) | (7,696,000 | ) | ||
Balance at December 31 |
| $ | 16,339,000 |
| $ | 15,885,000 |
|
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, 2010, the Company repurchased $2,419,000 or 185,950 shares of common stock under the program approved by the Board of Directors. During the nine months ended December 31, 2009, the Company did not repurchase or cancel any shares under the program approved by the Board of Directors. At December 31, 2010, authorization to repurchase up to $7,581,000 of Company common stock or approximately 518,000 shares based on the per share price of $14.64 as of December 31, 2010, remains outstanding.
Additional Paid-in-Capital
During the nine months ended December 31, 2010 and 2009, the Company recorded increases to additional paid-in-capital of $2,869,000 and $2,131,000 related to stock based compensation.
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, |
| ||||
|
| 2010 |
| 2009 |
| ||
Balance at beginning of period |
| $ | (2,382,000 | ) | $ | (512,000 | ) |
Unrealized loss on derivative instruments, net of tax |
| (446,000 | ) | — |
| ||
Foreign currency translation adjustment |
| (214,000 | ) | 1,296,000 |
| ||
Balance at end of period |
| $ | (3,042,000 | ) | $ | 784,000 |
|
|
| Nine Months Ended December 31, |
| ||||
|
| 2010 |
| 2009 |
| ||
Other comprehensive income was as follows: |
|
|
|
|
| ||
Net earnings |
| $ | 22,593,000 |
| $ | 11,435,000 |
|
Unrealized loss on derivative instruments, net of tax |
| (446,000 | ) | — |
| ||
Foreign currency translation adjustment |
| (214,000 | ) | 1,296,000 |
| ||
Total Other Comprehensive Income |
| $ | 21,933,000 |
| $ | 12,731,000 |
|
Note J—COMMITMENTS AND CONTINGENCIES
Dealer Financing
Finance companies provide certain of the Company’s dealers with floorplan financing. The Company has agreements with these finance companies to repurchase certain repossessed products sold to its dealers. At December 31, 2010, the Company’s contingent maximum repurchase obligation was approximately $75,113,000. 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 subsequent 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 term of the agreement runs through April 30, 2014 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.
On August 16, 2010, the Company and TCF Commercial Distribution Finance Canada, Inc.(“TCF”) entered into an agreement pursuant to which TCF will provide the Company’s Canadian dealers with floorplan credit facilities to finance the purchase of inventory from the Company. The term of the agreement runs through April 30, 2013. The Company will repurchase from TCF repossessed inventory and the Company and TCF will share certain profits and losses from operation of the credit facilities. The TCF floorplan credit facility replaced the Company’s previous floorplan agreement with Textron Financial Corporation, which had announced its intent to exit the dealer floorplan business.
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 January 2010, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update (ASU) 2010-06, “Improving Disclosures about Fair Value Measurements,” that revised two disclosure requirements concerning fair value measurements and clarified two others. It requires separate disclosure of the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and the reasons for the transfers. It also requires the presentation of purchases, sales, issuances and settlements within Level 3 on a gross basis rather than a net basis. The amendment also clarified that disclosures should be disaggregated by class of asset or liability and that disclosures about the valuation techniques and inputs used to measure fair value should be provided for both recurring and nonrecurring fair value measurements. ASU 2010-06 was effecti ve for interim and annual reporting periods beginning after December 15, 2009, except for certain Level 3 activity disclosure requirements that will become effective for fiscal years beginning after December 15, 2010 and interim periods within those fiscal years. The adoption of this amended guidance did not have a material impact on the Company’s consolidated results of operation or financial condition.
In September 2010, the FASB issued ASU No. 2010-20, “Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses,” to enhance the disclosures required for financing receivables (for example, loans, trade accounts receivable, notes receivable, and receivables relating to a lessor’s leveraged, direct financing, and sales-type leases) and allowances for credit losses. The amended disclosures are designed to provide more information to financial statement users regarding the credit quality of a creditor’s financing receivables and the adequacy of its allowance for credit losses. The amended guidance is effective for period-end balances beginning with the first interim or annual reporting period ending on or after December 15, 2010. The amended guidance is effective for activity during a reporting period beginning on or after D ecember 15, 2010. The adoption of this amended guidance did not have a significant effect on the consolidated financial statements.
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, 2010, checks written in excess of bank balances were $574,000 and classified as accounts payable on the balance sheet and included in the statement of cash flows for the nine months ended December 31, 2010 as a financing activity. As of March 31, 2010, December 31, 2009 and March 31, 2009, the Company had no checks written in excess of bank balances.
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, South America and other international markets. The Arctic Cat brand name has existed for nearly 50 years and is among the most widely recognized and respected names in the snowmobile and ATV industries. 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 nine month period ended December 31, 2010. 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, 2010, the Company reported net sales of $152.0 million and, net earnings of $9.3 million or $0.50 per diluted share compared to third quarter ended December 31, 2009 net sales of $131.0 million and, net earnings of $2.6 million or $0.14 per diluted share. A 430 basis point improvement in gross margins and a 6.6% decrease in operating expenses contributed to improved quarterly results compared to the same period in the prior year. For the nine month period ended December 31, 2010, the Company reported net sales of $391.2 million and, net earnings of $22.6 million or $1.22 per diluted share compared to net sales of $366.7 million and, net earnings of $11.4 million or $0.63 per diluted share for the same period last year.
Overall retail demand for recreational products remains weak, due to the continued difficult global economic conditions, high unemployment and low consumer confidence. As a result, recreational product retail sales, excluding the snowmobile industry, declined further in the third quarter of fiscal 2011. However, despite the weak retail environment the Company expects its ATV retail sales to outperform industry retail sales and snowmobile sales to international distributors to increase this fiscal year. The Company benefited from numerous profitability initiatives aimed at improving margins to achieve improved operating results this fiscal year. In addition the Company continues to make progress on decreasing overall dealer and factory inventories to better align them with consumer demand.
Based on our year-to-date results and expectations of fourth quarter financial performance, the Company is raising its full-year fiscal 2011 earnings guidance. The Company continues to estimate fiscal 2011 net sales in the range of $453 million to $463 million and anticipates that fiscal 2011 earnings will be in the range of $0.57 to $0.65 per diluted share, driven by increased gross margins including lower than planned sales incentives. The Company’s previous guidance anticipated fiscal 2011 earnings of $0.40 to $0.55 per diluted share.
Results of Operations
Product Line Sales
|
| Three Months Ended December 31, |
| Nine Months Ended December 31, |
| ||||||||||||||||||||
($ in millions) |
| 2010 |
| Percent |
| 2009 |
| Percent |
| Percent |
| 2010 |
| Percent |
| 2009 |
| Percent |
| Percent |
| ||||
Snowmobile |
| $ | 77.8 |
| 51 | % | $ | 58.7 |
| 45 | % | 33 | % | $ | 186.5 |
| 48 | % | $ | 162.3 |
| 44 | % | 15 | % |
ATV |
| 48.6 |
| 32 | % | 48.1 |
| 37 | % | 1 | % | 133.0 |
| 34 | % | 132.1 |
| 36 | % | 1 | % | ||||
Parts, garments & accessories |
| 25.6 |
| 17 | % | 24.2 |
| 18 | % | 6 | % | 71.7 |
| 18 | % | 72.3 |
| 20 | % | (1 | )% | ||||
Net Sales |
| $ | 152.0 |
| 100 | % | $ | 131.0 |
| 100 | % | 16 | % | $ | 391.2 |
| 100 | % | $ | 366.7 |
| 100 | % | 7 | % |
During the third quarter of fiscal 2011, net sales increased 16% to $152.0 million from $131.0 million in the third quarter of fiscal 2010. Snowmobile unit volume increased 33%, ATV unit volume increased 2%, and PG&A sales increased $1.4 million. Net sales for the nine months ended December 31, 2010, increased 7% to $391.2 million from $366.7 million for the same period in fiscal 2010. Snowmobile unit volume increased 16%, ATV unit volume increased 2%, and PG&A sales decreased $600,000 during the first nine months of fiscal 2011 as compared to the same period a year ago. Increases in snowmobile unit volume for the quarter were driven by increased North American dealer sales as well as international sales to distributors, and year to date increases were driven by increased international sales to distributors. Increased ATV unit volume for the quarter and year to date resulted from s ales of the new Prowler HDX utility model. PG&A sales increases during the quarter were primarily due to increased garment sales including the new Drift garment line.
Cost of Goods Sold
|
| Three Months Ended December 31, |
| Nine Months Ended December 31, |
| ||||||||||||||||||||
($ in millions) |
| 2010 |
| Percent |
| 2009 |
| Percent |
| Percent |
| 2010 |
| Percent |
| 2009 |
| Percent |
| Percent |
| ||||
Snowmobile & ATV units |
| $ | 104.7 |
| 68.9 | % | $ | 95.0 |
| 72.5 | % | 10.2 | % | $ | 254.3 |
| 65.0 | % | $ | 249.1 |
| 67.9 | % | 2.1 | % |
Parts, garments & accessories |
| 14.5 |
| 9.5 | % | 13.4 |
| 10.2 | % | 8.2 | % | 42.2 |
| 10.8 | % | 42.3 |
| 11.5 | % | (0.2 | )% | ||||
Total Cost of Goods Sold |
| $ | 119.2 |
| 78.4 | % | $ | 108.4 |
| 82.7 | % | 10.0 | % | $ | 296.5 |
| 75.8 | % | $ | 291.4 |
| 79.4 | % | 1.8 | % |
During the third quarter of fiscal 2011, cost of sales increased 10.0% to $119.2 million from $108.4 million for the third quarter of fiscal 2010. Fiscal 2011 snowmobile and ATV unit cost of sales increased 10.2% to $104.7 million from $95.0 million directionally in line with increases in unit sales during the third quarter of fiscal 2011 compared to the third quarter of fiscal 2010. The third quarter of fiscal 2011 cost of sales for PG&A increased 8.2% to $14.5 million from $13.4 million in line with increased sales. During the first nine months of fiscal 2011 cost of sales increased 1.8% to $296.5 million from $291.4 million for the first nine months of fiscal 2010. Fiscal 2011 snowmobile and ATV unit cost of sales for the first nine months increased 2.1% to $254.3 million from $249.1 million due to increased sales during the period compared to the same period of fiscal 2010. The fi rst nine months of fiscal 2011 cost of sales for PG&A were essentially flat at $42.2 million in the first nine months of fiscal 2011 compared to $42.3 million for fiscal 2010.
Gross Profit
|
| Three Months Ended December 31, |
| Nine Months Ended December 31, |
| ||||||||||||
($ in millions) |
| 2010 |
| 2009 |
| Percent Change |
| 2010 |
| 2009 |
| Percent Change |
| ||||
Gross Profit Dollars |
| $ | 32.7 |
| $ | 22.6 |
| 44.7 | % | $ | 94.8 |
| $ | 75.3 |
| 25.8 | % |
Percentage of Sales |
| 21.5 | % | 17.2 | % | 4.3 | % | 24.2 | % | 20.5 | % | 3.7 | % | ||||
Gross profit increased 44.7% to $32.7 million in the third quarter of fiscal 2011 from $22.6 million in the third quarter of fiscal 2010. The gross profit percentage for the third quarter of fiscal 2011 increased to 21.5% versus 17.2% in 2010. The gross profit percentage for the first nine months of fiscal 2011 increased to 24.2% versus 20.5% in 2010. The increases in the quarterly and year-to-date 2011 gross profit percentages were primarily due to higher margins as a result of product cost reductions, price increases and favorable Canadian currency exchange rates.
Operating Expenses
|
| Three Months Ended December 31, |
| Nine Months Ended December 31, |
| ||||||||||||
($ in millions) |
| 2010 |
| 2009 |
| Percent |
| 2010 |
| 2009 |
| Percent |
| ||||
Selling & Marketing |
| $ | 8.5 |
| $ | 8.9 |
| (5 | )% | $ | 25.0 |
| $ | 25.0 |
| 0 | % |
Research & Development |
| 3.4 |
| 3.0 |
| 13 | % | 9.8 |
| 9.2 |
| 7 | % | ||||
General & Administrative |
| 8.6 |
| 10.0 |
| (14 | )% | 27.3 |
| 27.3 |
| 0 | % | ||||
Total Operating Expenses |
| $ | 20.5 |
| $ | 21.9 |
| (6 | )% | $ | 62.1 |
| $ | 61.5 |
| 1 | % |
Percentage of Sales |
| 13.5 | % | 16.7 | % |
|
| 15.9 | % | 16.8 | % |
|
| ||||
Selling and Marketing expenses decreased 5% to $8.5 million in the third quarter of fiscal 2011 from $8.9 million in the third quarter of fiscal 2010, primarily due to timing of expenses. Research and Development expenses increased 13% to $3.4 million in the third quarter of fiscal 2011 compared to $3.0 million in the third quarter of fiscal 2010 due primarily to higher product development expenses. General and Administrative expenses decreased 14% to $8.6 million in the third quarter of fiscal 2011 from $10.0 million in the third quarter of fiscal 2010 due to lower Canadian hedge costs and lower international administration expenses, offset to a certain extent by higher compensation expenses. Selling and Marketing expenses were flat at $25.0 million in the first nine months of fiscal 2011 compared to the same period of fiscal 2010. Research and Development expenses increased 7% to $9.8 m illion in the first nine months of fiscal 2011 compared to $9.2 million in the same period of fiscal 2010, due primarily to higher product development expenses. General and Administrative expenses were flat at $27.3 million in the first nine months of fiscal 2011 compared to the same period of fiscal 2010; higher compensation and legal costs were offset by lower international administrative expenses and lower Canadian hedge costs.
Other Income / Expense
The Company had $28,000 interest income in the third quarter of fiscal 2011 compared to $0 in the third quarter of fiscal 2010. Interest expense decreased to $1,000 in the third quarter of fiscal 2011 from $2,000 in the third quarter of fiscal 2010. Interest income increased to $72,000 in the first nine months of fiscal 2011 from $4,000 in the same period of fiscal 2010. Interest expense decreased to $11,000 in the first nine months of fiscal 2011 from $249,000 in the same period of fiscal 2010. Interest
income was primarily affected by higher cash levels throughout the fiscal year compared to last year. Interest expense is lower due to lower borrowing levels primarily driven by reduced inventory levels.
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 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. Accounts receivable increased to $50.2 million at December 31, 2010 from $43.0 million at December 31, 2009 in line with the Company’s sales increase. Th e accounts receivable balance at March 31, 2010 was $ 29.2 million. The increase in the Company’s accounts receivable balance as of December 31, 2010 compared to March 31, 2010 is due to the seasonality of the Company’s snowmobile, ATV and PG&A businesses. Inventory was $77.2 million at December 31, 2010 compared to $106.3 million at December 31, 2009 and $81.4 million on March 31, 2010, due primarily to decreased inventory for all product lines. During the nine months ended December 31, 2010, the Company repurchased $2.4 million of its common shares. Cash and short-term investments were $107.1 million and $50.4 million at December 31, 2010 and 2009, 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 operates under a multi-year senior secured credit agreement that allows borrowings of up to $60 million for working capital during June through November and up to $35 million during all other months of the fiscal year. The Company was in compliance with the terms of the credit agreement as of December 31, 2010.
Dealer Floorplan Financing
The Company entered into a multi-year agreement in October 2009 for GE Commercial Distribution Finance to become the exclusive provider of floorplan financing for the Company’s U.S. dealers.
In August 2010, the Company entered into an agreement with a Canadian subsidiary of TCF Bank to become the exclusive provider of floorplan financing for the Company’s Canadian dealers. The new multi-year financing program replaced the Company’s previous financing agreement with Textron Financial Corporation.
Significant Accounting Policies
See the Company’s most recent Annual Report on Form 10-K for the year ended March 31, 2010 for a discussion of its critical accounting policies.
In January 2010, the FASB issued ASU 2010-06, “Improving Disclosures about Fair Value Measurements,” that revised two disclosure requirements concerning fair value measurements and clarified two others. It requires separate disclosure of the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and the
reasons for the transfers. It also requires the presentation of purchases, sales, issuances and settlements within Level 3 on a gross basis rather than a net basis. The amendment also clarified that disclosures should be disaggregated by class of asset or liability and that disclosures about the valuation techniques and inputs used to measure fair value should be provided for both recurring and nonrecurring fair value measurements. ASU 2010-06 was effective for interim and annual reporting periods beginning after December 15, 2009, except for certain Level 3 activity disclosure requirements that will become effective for fiscal years beginning after December 15, 2010 and interim periods within those fiscal years. The adoption of this amendment did not have a material impact on the Company’s consolidated results of operation or financial condition.
In September 2010, the FASB issued ASU No. 2010-20, “Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses,” to enhance the disclosures required for financing receivables (for example, loans, trade accounts receivable, notes receivable, and receivables relating to a lessor’s leveraged, direct financing, and sales-type leases) and allowances for credit losses. The amended disclosures are designed to provide more information to financial statement users regarding the credit quality of a creditor’s financing receivables and the adequacy of its allowance for credit losses. The amended guidance is effective for period-end balances beginning with the first interim or annual reporting period ending on or after December 15, 2010. The amended guidance is effective for activity during a reporting period beginning on or after D ecember 15, 2010. The adoption of this amended guidance did not have a significant effect on the consolidated financial statements.
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 m ix 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; 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, 2010. As of December 31, 2010, the Company has notional Canadian dollar denominated cash flow hedges of approximately $14.0 million (USD) with a weighted average contract exchange rate of 102.3. The fair values of the Canadian dollar contracts at December 31, 2010, represent an unrealized loss of $327,000. A ten percent fluctuation in the currency rates as of December 31, 2010 would have resulted in a change in the fair value of the Canadian dollar hedge contracts of approximately $1,400,000. 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 transactions being hedged. As of December 31, 2010, 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 2010 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, 2010 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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) |
|
|
|
|
|
31.1 |
| CEO Certification pursuant to section 302 of the Sarbanes-Oxley Act of 2002 |
| (4) |
|
|
|
|
|
31.2 |
| CFO Certification pursuant section 302 of the Sarbanes-Oxley Act of 2002 |
| (4) |
|
|
|
|
|
32.1 |
| CEO Certification pursuant to section 906 of the Sarbanes-Oxley Act of 2002 |
| (4) |
|
|
|
|
|
32.2 |
| CFO Certification pursuant to section 906 of the Sarbanes-Oxley Act of 2002 |
| (4) |
(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) |
| Filed with this Quarterly Report on Form 10-Q. |
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, 2011 |
| By | /s/ Claude J. Jordan |
|
|
| ||
|
| Claude J. Jordan | ||
|
| Chief Executive Officer | ||
|
|
| ||
|
|
| ||
Date: | February 8, 2011 |
| By | /s/ Timothy C. Delmore |
|
|
| ||
|
| Timothy C. Delmore | ||
|
| Chief Financial Officer | ||