ASV 10Q 2007 Q3 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2007

Commission file number: 0-25620

A.S.V., Inc.

(Exact name of registrant as specified in its charter)


Minnesota		41-1459569

(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

840 Lily Lane P.O. Box 5160 Grand Rapids, MN 55744		(218) 327-3434

(Address of principal executive offices, including zip code)		(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

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.þ Yeso No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filero Accelerated filerþ Non-accelerated filero

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).o Yesþ No

As of October 31, 2007, 26,717,522 shares of the issuer’s Common Stock were issued and outstanding.

TABLE OF CONTENTS


PART I — FINANCIAL INFORMATION
	ITEM 1 — FINANCIAL STATEMENTS
	ITEM 2 — MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
	ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
	ITEM 4. CONTROLS AND PROCEDURES
PART II — OTHER INFORMATION
	ITEM 1. LEGAL PROCEEDINGS
	ITEM 1A. RISK FACTORS
	ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
	ITEM 3. DEFAULTS UPON SENIOR SECURITIES
	ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
	ITEM 5. OTHER INFORMATION
	ITEM 6. EXHIBITS
SIGNATURES
Statement re: Computation of Per Share Earnings
Certification of CEO Pursuant to Section 302
Certification of CFO Pursuant to Section 302
Certification of CEO Pursuant to Section 906
Certification of CFO Pursuant to Section 906

PART I — FINANCIAL INFORMATION

ITEM 1 — FINANCIAL STATEMENTS

A.S.V., INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited and in thousands, except share data)


	September 30,		December 31,
	2007		2006
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	33,974	$	17,090
Short-term investments		3,295		220
Accounts receivable, net
Trade		38,178		39,777
Caterpillar Inc.		12,986		4,407
Inventories		59,216		71,384
Deferred income taxes		4,120		4,840
Other current assets		775		903

Total current assets		152,544		138,621

PROPERTY AND EQUIPMENT, net		28,600		29,342

LONG-TERM INVESTMENTS		11,041		14,155

OTHER NON-CURRENT ASSET		364		313

INTANGIBLES, net		7,684		7,771

GOODWILL		8,386		8,386

	$	208,619	$	198,588


LIABILITIES AND SHAREHOLDERS’ EQUITY

CURRENT LIABILITIES
Current portion of long-term liabilities	$	22	$	37
Accounts payable
Trade		11,081		10,660
Caterpillar		932		857
Accrued liabilities
Warranties		4,699		5,894
Other		3,020		2,582
Income taxes payable		153		686

Total current liabilities		19,907		20,716

LONG-TERM LIABILITIES, less current portion		32		40

INCOME TAXES PAYABLE		1,850		—

DEFERRED INCOME TAXES		2,065		1,630

COMMITMENTS AND CONTINGENCIES		—		—

SHAREHOLDERS’ EQUITY
Capital stock, $.01 par value:
Preferred stock, 5,000,000 shares authorized; no shares issued or outstanding		—		—
Common stock, 70,000,000 shares authorized; shares issued and outstanding - 26,716,922 in 2007; 26,716,420 in 2006		267		267
Additional paid-in capital		89,957		88,398
Retained earnings		94,541		87,537


Total shareholders’ equity		184,765		176,202


	$	208,619	$	198,588

See notes to consolidated financial statements.

A.S.V., INC.

CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited and in thousands, except share and per share data)


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2007		2006		2007		2006
Net sales
Trade	$	32,524	$	42,209	$	103,720	$	133,895
Caterpillar		23,736		20,789		50,066		66,129


Total net sales		56,260		62,998		153,786		200,024

Cost of goods sold		45,833		49,143		122,135		152,869


Gross profit		10,427		13,855		31,651		47,155

Operating expenses:
Selling, general and administrative		5,546		5,817		18,023		16,564
Research and development		551		406		1,655		1,185


Operating income		4,330		7,632		11,973		29,406

Other income
Interest income		517		384		1,345		1,287
Other, net		20		12		76		22


Income before income taxes		4,867		8,028		13,394		30,715

Income taxes		1,360		2,950		4,555		11,100


NET EARNINGS	$	3,507	$	5,078	$	8,839	$	19,615


Net earnings per common share

Basic	$	.13	$	.19	$	.33	$	.73


Diluted	$	.13	$	.19	$	.33	$	.72


Weighted average number of common shares outstanding

Basic		26,707,498		26,669,269	��	26,697,146		26,918,270


Diluted		27,096,211		26,871,671		27,119,688		27,424,305

See notes to consolidated financial statements.

A.S.V., INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited and in thousands)


	Nine months ended September 30,
	2007			2006
Cash flows from operating activities:
Net earnings	$	8,839		$	19,615
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation		2,416			2,112
Amortization		87			77
Deferred income taxes		1,155			(480	)
Stock-based compensation expense		2,045			2,198
Tax benefit from stock option exercises		375			1,200
Changes in assets and liabilities
Accounts receivable		(6,980	)		(6,724	)
Inventories		12,168			(13,724	)
Other assets		77			282
Accounts payable		496			2,040
Accrued liabilities		(757	)		1,515
Income taxes payable		(518	)		(855	)


Net cash provided by operating activities		19,403			7,256


Cash flows from investing activities:
Purchase of property and equipment		(1,674	)		(9,030	)
Purchase of short-term investments		(112	)		(116	)
Redemption (purchase) of long-term investments		33			(6,175	)
Redemption of short-term investments		118			1,120


Net cash used in investing activities		(1,635	)		(14,201	)


Cash flows from financing activities:
Principal payments on long-term liabilities		(23	)		(125	)
Proceeds from exercise of stock options, net		627			1,538
Retirement of common stock		(1,488	)		(10,051	)


Net cash used in financing activities		(884	)		(8,638	)


Net increase (decrease) in cash and cash equivalents		16,884			(15,583	)

Cash and cash equivalents at beginning of period		17,090			35,517


Cash and cash equivalents at end of period	$	33,974		$	19,934


Supplemental disclosure of cash flow information:

Cash paid for income taxes	$	3,543		$	11,501

Adoption of FASB Interpretation 48	$	1,850		$	—

See notes to consolidated financial statements.

A.S.V., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

September 30, 2007

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

A summary of the significant accounting policies consistently applied in the preparation of the accompanying unaudited, consolidated financial statements follows:

Principles of Consolidation

The consolidated financial statements include the accounts of A.S.V., Inc. and our wholly-owned subsidiaries, collectively referred to herein as “ASV”, the “Company”, “we”, “us”, or “our.” All intercompany accounts and transactions have been eliminated in consolidation.

Revenue Recognition

ASV recognizes revenue on its product sales when persuasive evidence of an arrangement exists, product has shipped from our plant to the customer, the price is fixed or determinable and collectibility is reasonably assured. We obtain verbal or written purchase authorizations from customers for a specified amount of product at a specified price and consider delivery to have occurred at the time of shipment to the customer.

Research and Development

All research and development costs are expensed as incurred.

Interim Financial Information

The accompanying unaudited, consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (US GAAP) for interim financial information. Accordingly, they do not include all of the footnotes required by US GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal, recurring adjustments) considered necessary for a fair presentation have been included. Results for the interim periods are not necessarily indicative of the results for an entire year.

The balance sheet at December 31, 2006 has been derived from the audited financial statements at that date, but does not include all of the information and notes required by US GAAP for complete financial statements. For further information, refer to the consolidated financial statements and notes included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2006.

Warranties

We provide a limited warranty to our customers. A provision for estimated warranty costs is recorded when revenue is recognized based on estimated product failure rates, material usage and service delivery costs incurred in correcting a product failure. Should actual failure rates, material usage or service delivery costs differ from our estimates, revision to the warranty liability may be required.

Changes in our warranty liability are as follows:


	Three Months Ended September 30,
	2007			2006
Balance, June 30	$	5,131,000		$	6,013,000
Expense for new warranties issued		880,000			1,332,000
Warranty claims		(1,312,000	)		(1,403,000	)


Balance, September 30	$	4,699,000		$	5,942,000

A.S.V., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
(UNAUDITED)

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – Continued

Stock-Based Compensation

We account for stock-based compensation in accordance with the fair value recognition provisions of SFAS No. 123 (Revised 2004),Share-Based Payment(SFAS 123(R)). Accordingly, compensation expense includes the estimated expense for stock options granted on, and subsequent to, January 1, 2006. Estimated expense recognized for the options granted prior to, but not vested as of January 1, 2006, was calculated based on the grant date fair value estimated in accordance with the provisions of SFAS No. 123,Accounting for Stock-Based Compensation(SFAS 123).

The fair value of each option award is estimated on the date of grant using the Black-Scholes option pricing model. Expected volatilities are based on an historical measure of the volatility of our common stock. The risk-free rate for the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. We use historical data to estimate option exercise and employee termination activity within the valuation model. The expected term of stock options granted is based on historical data and represents the period of time that stock options granted are expected to be outstanding. The dividend yield is zero as we have not paid dividends and do not anticipate paying any dividends in the future. Forfeitures are estimated based on historical experience and current demographics. See Note 3 for additional information regarding stock-based compensation.

Net Earnings per Common Share

Basic net earnings per common share is computed by dividing net earnings by the weighted average number of common shares outstanding. Diluted net earnings per share is computed by dividing net earnings by the weighted average number of common shares outstanding and common stock equivalents relating to stock options, when dilutive.

Summarized below is the number of common stock equivalents that were included in the computation of diluted net earnings per share, along with the number of anti-dilutive options for the periods presented.

Three Months Ended

Nine Months Ended

September 30,

2007

2006

2007

2006

Dilutive common stock equivalents

388,713

202,402

422,542

506,035

Anti-dilutive options

911,343

364,163

796,325

328,554

NOTE 2. INVENTORIES

Inventories consist of the following:


	September 30,		December 31,
	2007		2006
Raw materials, service parts and work in process	$	44,861,000	$	53,390,000
Finished goods		13,423,000		16,682,000
Used equipment held for resale		932,000		1,312,000


Balance	$	59,216,000	$	71,384,000

A.S.V., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
(UNAUDITED)

NOTE 3. STOCK-BASED COMPENSATION

At September 30, 2007, we had three stock-based compensation plans, all previously approved by our shareholders. Stock options granted under these plans generally vest ratably over four years of service, have a contractual life of five or seven years and provide for accelerated vesting if there is a change in control, as defined. At September 30, 2007, we had 3,119,000 shares available for future grant under our three stock option plans.

We use the Black-Scholes option pricing model to determine the fair value of our options granted. The weighted average fair values of the options granted during the nine months ended September 30, 2007 and 2006 were $5.10 and $10.32, respectively. The assumptions used to determine such values are indicated in the following table:


	Nine months ended September 30,
	2007			2006
Risk-free interest rate		4.63	%		4.73	%
Expected volatility		33.95	%		34.95	%
Expected term (in years)		3.75			3.75
Dividend yield		0.0			0.0

The expected term of the options is based on evaluations of historical and expected future employee exercise behavior. The risk-free interest rate is based on the U.S. Treasury rate as of the date of grant with maturity dates approximately equal to the expected life at the grant date. Volatility is based on an historical measure of the volatility of our common stock. We have not historically issued any dividends and do not expect to do so in the future. In 2006, we reduced the contractual life of all newly granted stock options to our employees from seven years to five years.

We recorded stock-based compensation expense of $2,045,000 and $2,198,000 for the nine months ended September 30, 2007 and 2006, respectively.

Option transactions under the plans during, 2007 are summarized as follows:

A.S.V., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
(UNAUDITED)

NOTE 3. STOCK-BASED COMPENSATION – Continued


						Weighted
				Weighted		Average
				Average		Remaining		Aggregate
				Exercise		Contractual		Intrinsic
	Shares			Price		Life (Years)		Value
Outstanding at December 31, 2006		1,974,813		$	13.15

Granted		213,500			15.43
Exercised		(24,350	)		5.93
Canceled		(2,500	)		24.30


Outstanding at March 31, 2007		2,161,463		$	13.45

Granted		60,830			17.21
Exercised		(58,152	)		6.99
Canceled		(28,375	)		20.04


Outstanding at June 30, 2007		2,135,766		$	13.64
Granted		2,500			15.45
Exercised		(18,000	)		4.51
Canceled		(7,375	)		20.74


Outstanding at September 30, 2007		2,112,891		$	13.70		3.12	$	7,594,000


Exercisable at September 30, 2007		1,382,448		$	10.25		2.67	$	7,594,000

The total intrinsic value of stock options exercised during the nine months ended September 30, 2007 and 2006 was $1,005,000 and $3,261,000, respectively.

NOTE 4. STOCK BUYBACK PLAN

In October 2006, our Board of Directors approved a $50 million stock buyback plan. Under this plan, we may repurchase up to $50 million of our common stock over a three year period beginning in October 2006. We anticipate that share purchases may be made from time to time, depending on market conditions and other factors. Shares may be purchased in the open market, including block purchases, or through privately negotiated transactions. Under this authorization, we will not repurchase any shares from our directors, officers or affiliates. The buyback program does not obligate us to acquire any specific number of shares and may be discontinued at any time.

We intend to fund the repurchases with available cash and investments, as well as cash generated from future operations. The repurchase program is expected to be in effect through the earlier of October 31, 2009 or until $50 million of our stock is repurchased. For the nine months ended September 30, 2007, we repurchased 100,000 shares of our common stock at an aggregate cost of $1.5 million.

A.S.V., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
(UNAUDITED)

NOTE 5. ADOPTION OF NEW ACCOUNTING STANDARD

Accounting for Uncertainty in Income Taxes: In July 2006, the FASB issued FASB Interpretation No. 48,Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109(FIN 48), which clarified the accounting for uncertainty in tax positions. FIN 48 requires that we recognize in our financial statements the impact of a tax position if that position is more likely than not to be sustained upon audit, based on the technical merits of the position. We adopted FIN 48 effective January 1, 2007, with the cumulative effect of the change in accounting principle recorded as an adjustment to opening retained earnings. Accordingly, we have recorded an increase in income taxes payable and a corresponding decrease to retained earnings at January 1, 2007 in the amount of $1,835,000.

During the third quarter of 2007, we had a net favorable settlement of an uncertain tax position in the amount of $460,000, which has been recorded as a reduction of income taxes payable and income tax expense. Also during the third quarter of 2007, we reclassified $475,000 from current to long-term income taxes payable to reflect its expected payment. Included in income taxes payable at September 30, 2007 is $587,000 of interest and penalties related to more likely than not uncertain tax positions.

We file income tax returns in the U.S. and various states, for which we are generally no longer subject to income tax examinations by tax authorities for years before 2004.

NOTE 6. NEW ACCOUNTING PRONOUNCEMENTS

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157,Fair Value Measurement(SFAS 157). This standard clarifies the principle that fair value should be based on the assumptions that market participants would use when pricing an asset or liability. Additionally, it establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. We do not expect the implementation of SFAS 157 to have an effect on our results of operations or financial condition.

In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159,The Fair Value Option for Financial Assets and Financial Liabilities(SFAS 159). SFAS 159 allows entities the option to measure eligible financial instruments at fair value as of specified dates. Such election, which may be applied on an instrument by instrument basis, is typically irrevocable once elected. SFAS 159 is effective for fiscal years beginning after November 15, 2007, and early application is allowed under certain circumstances. We do not expect the implementation of SFAS 159 to have an effect on our results of operations or financial condition.

ITEM 2 — MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

We design, manufacture and sell rubber track machines, related accessories, attachments and traction products. We also manufacture rubber track undercarriages, which are a primary component on Multi-Terrain Loaders (MTL) sold by Caterpillar Inc. (Caterpillar). Our products are able to traverse nearly any terrain with minimal damage to the ground, making them useful in industries such as construction, landscaping, rental, forestry and agriculture. We distribute our products through an independent dealer network in the United States, Canada, Australia, New Zealand and Kuwait. The undercarriages sold to Caterpillar are utilized by Caterpillar in its MTL products and are sold exclusively through the Caterpillar dealer network. We also sell undercarriages to Vermeer Manufacturing Company (Vermeer) for use on certain Vermeer machines which are sold exclusively through the Vermeer dealer network. Our wholly-owned subsidiary, Loegering Mfg. Inc. (Loegering), sells its products primarily through independent equipment dealers in North America.

Nine Month Overview

Our overall sales decreased 23% for the nine months ended September 30, 2007, compared to the same period in 2006. We believe this was due primarily to a decrease in domestic construction activity, particularly residential housing construction, along with increased competition as more equipment manufacturers offer rubber track products than in prior years. Included in our sales for the nine months ended September 30, 2007 was a 32% reduction in the sale of original equipment manufacturer (OEM) undercarriages, primarily to Caterpillar, due to a decrease in construction activity and lower production schedules by Caterpillar in anticipation of model changeovers which began in the second quarter of 2007. We currently anticipate that our net sales for 2007 will be in the range of $200-210 million based on our current and projected level of orders for our machines, OEM undercarriages, Loegering products and expected future service parts demand.

Critical Accounting Policies

The following discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with US GAAP. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities and expenses, and related disclosures. On an on-going basis, management evaluates its estimates and judgments, including those related to accounts receivable, inventories, warranty obligations, income taxes and stock-based compensation. By their nature, these estimates and judgments are subject to an inherent degree of uncertainty. Management bases its estimates and judgments on historical experience, observance of trends in the industry, information provided by customers as well as other outside sources and on various other factors that it believes to be reasonable under the circumstances. The factors listed above form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources and actual results may differ from these estimates under different assumptions or conditions.

Management believes the following critical accounting policies, among others, affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.

Revenue Recognition and Accounts Receivable.ASV recognizes revenue on its product sales when persuasive evidence of an arrangement exists, product has shipped from our plant to the customer, the price is fixed or determinable and collectibility is reasonably assured. We have determined that the time of shipment is the most appropriate point to recognize revenue as the risk of loss passes to the customer when product is placed with a carrier for delivery (i.e., upon shipment). Any post-sale obligations on our part, consisting primarily of warranty obligations, are estimated and accrued for at the time of shipment. We obtain verbal or written purchase authorizations from customers for a specified amount of product at a specified price and consider delivery to have occurred at the time of shipment. We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.

Inventories.Inventories are stated at the lower of cost or market, cost being determined on the first-in, first-out method. Adjustments to slow moving and obsolete inventories to the lower of cost or market are provided based on historical experience and current product demand. We do not believe that our inventories are subject to rapid obsolescence. We evaluate the adequacy of our inventories’ carrying value quarterly.

Intangible Assets.Our intangible assets include patents granted, patent applications, trade name, trade dress and trademarks. All of the intangibles represent the value assigned to the respective assets from our 2004 acquisition of Loegering. Patents granted are being amortized over the remaining life of the patents. All other intangibles are not being amortized as they are believed to have an indefinite life.

We periodically review the carrying value of our intangible assets to determine whether current events or circumstances indicate that such carrying value may not be recoverable. If the tests indicate that the carrying value of the asset is greater than the expected undiscounted cash flows to be generated by such asset, an impairment loss would be recognized. The impairment loss is determined by the amount by which the carrying value of such asset exceeds its fair value. We generally measure fair value by considering sale prices for similar assets or by discounting estimated future cash flows from such assets using an appropriate discount rate. Assets to be disposed of are carried at the lower of their carrying value or fair value, less costs to sell. Considerable management judgment is necessary to estimate the fair value of assets, and accordingly, actual results could vary significantly from such estimates.

Goodwill.Goodwill represents the excess of the purchase price over the fair value of net assets acquired from Loegering. Goodwill is not amortized but is tested for impairment annually. Goodwill will be tested for impairment between annual tests if a triggering event occurs or circumstances change that would indicate the carrying amount may be impaired. An impairment loss generally would be recognized when the carrying amount of Loegering’s net assets exceeds their estimated fair value. The estimated fair value is determined by using a discounted cash flow analysis. We completed our annual goodwill impairment test most recently as of September 30, 2006.

Warranties.We provide limited warranties to purchasers of our products which vary by product. Our warranties generally cover defects in materials and workmanship for one year from the delivery date to the first end-user. The rubber tracks used on our products carry a pro-rated warranty up to 1,500 hours of usage. While we engage in extensive product quality programs and processes, including actively monitoring and evaluating the quality of our component suppliers, our warranty obligation is affected by product failure rates, material usage and service delivery costs incurred in correcting a product failure. Should actual product failure rates, material usage or service delivery costs differ from our estimates, revisions to the estimated warranty liability may be required.

Income Taxes. We record deferred income taxes using the liability method whereby deferred tax assets are recognized for deductible temporary differences and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their income tax bases. Deferred tax assets are reduced by a valuation allowance when, in our opinion, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.

When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would ultimately be sustained. The outcome of a tax position is recognized in the financial statements in the period during which, based on all available evidence, we believe that it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more likely than not recognition threshold are measured as the largest amount of tax that is more than 50% likely of being realized upon settlement with the applicable taxing authority. The portion of the tax associated with tax positions taken that exceeds the amount measured above is included in income taxes payable in the accompanying balance sheet along with any associated interest and penalties that would be payable to the taxing authorities upon examination. Such interest and penalties, if any, would be classified as additional income taxes in our statement of earnings.

Stock-Based Compensation.We record stock-based compensation in accordance with the fair value recognition provisions of SFAS 123(R).Compensation expense for stock-based compensation includes the estimated expense for stock options granted on, and subsequent to, January 1, 2006. Estimated expense recognized for the options granted prior to, but not vested as of January 1, 2006, was calculated based on the grant date fair value estimated in accordance with the provisions of SFAS 123.At September 30, 2007, we had $4.2 million of unrecognized compensation costs related to non-vested stock options that are expected to be recognized over a weighted average period of 1.0 years.

The fair value of each option award is estimated on the date of grant using the Black-Scholes option pricing model. Expected volatilities are based on an historical measure of the volatility of our common stock. The risk-free rate for the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. We use historical data to estimate option exercise and employee termination activity within the valuation model. The expected term of stock options granted is based on historical data and represents the period of time that stock options granted are expected to be outstanding. The dividend yield is zero as we have not paid dividends. Forfeitures are estimated based on historical experience and current demographics. In 2006, we reduced the contractual life of all newly granted stock options to our employees from seven years to five years.

Results of Operations

The following table sets forth certain Statement of Earnings data as a percentage of net sales:


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2007			2006			2007			2006
Net sales		100.0	%		100.0	%		100.0	%		100.0	%
Gross profit		18.5			22.0			20.6			23.6
Selling general and administrative		9.9			9.2			11.7			8.3
Research and development		1.0			0.6			1.1			0.6
Operating income		7.7			12.1			7.9			14.7
Net Earnings		6.2			8.1			5.7			9.8

For the three months ended September 30, 2007 and 2006.

Net Sales.For the three months ended September 30, 2007, net sales decreased 11% to $56.3 million, compared with $63.0 million for the same period in 2006. This decrease was primarily the result of a significantly weaker U.S. economic climate in 2007, particularly residential housing construction, which resulted in lower sales of our ASV machines. Sales of ASV machines decreased 33% and represented 42%, or $23.7 million, of our sales in the third quarter of 2007, compared with 56%, or $35.2 million, in the third quarter of 2006. This decrease was also due to caution on the part of our dealers to carry inventory from the weakened U.S. economic climate. Partially offsetting this decrease was a 24% increase in the sale of OEM undercarriages in the third quarter of 2007 compared with the same period in 2006. This increase was due primarily to increased orders for our undercarriages used on Caterpillar’s MTLs due to a model changeover by Caterpillar which began in the second quarter of 2007. Sales of OEM undercarriages represented 31%, or $17.3 million, of our sales in the third quarter of 2007, compared with 22%, or $14.0 million, in the third quarter of 2006. Sales of Loegering’s products increased 42% in the third quarter of 2007 compared with the same period in 2006. This increase was due to sales of its QTS™ product, which was introduced in the first quarter of 2007, along with increased sales of its VTS™ product from greater market acceptance and an increase in VTS parts sales as the population of VTS products in the field continues to grow. Finally, sales of ASV parts and other items decreased 3% to $9.3 million, or 17% of net sales, compared with $9.6 million, or 15% of net sales, for the same period in 2006. We believe this decrease was due to lower levels of machine usage in 2007 resulting from decreased construction activity.

Gross Profit.Gross profit for the three months ended September 30, 2007 decreased to $10.4 million, compared with $13.9 million for the same period in 2006, and the gross profit percentage decreased to 18.5% in the third quarter of 2007 compared with 22.0% for the same period in 2006. The decrease in gross profit was due to the decreased sales and decreased gross profit percentage experienced during the third quarter of 2007. The decrease in gross profit percentage reflected a number of factors including one-time costs resulting from the return and rework of a limited quantity of OEM undercarriage product which included overtime and freight, a greater concentration of lower gross margin products, increased use of sales incentive programs during the period, the effects of lower

production throughput, and one-time production start-up costs as ASV began implementation of its new brand and nomenclature strategy. The rollout included several new product enhancements across all machine models, including major engineering upgrades to the RC-60 (now known as the “PT-60”).

Selling, General and Administrative.Selling, general and administrative expenses decreased from $5.8 million, or 9.2% of net sales, in the third quarter of 2006, to $5.5 million, or 9.9% of net sales, in the third quarter of 2007. The absolute dollar decrease was due primarily to no increase in our allowance for bad debts as was required in 2006, along with the a reduction in short-term incentive compensation expense and lower stock option and advertising expenses.

Research and Development.Research and development expenses increased from $406,000 in the third quarter of 2006 to $551,000 in the third quarter of 2007. The increase was due to the addition of engineering and product testing personnel to enhance new product development and product quality.

Other Income.For the three months ended September 30, 2007, other income (primarily interest income) was $537,000, compared with $396,000 for same period in 2006. This increase was due primarily to greater interest income from higher short-term interest rates on greater investable cash balances during the third quarter of 2007 compared with the third quarter of 2006.

Income Taxes.Our effective income tax rate was 27.9% for the three months ended September 30, 2007 compared to 36.7% for the same period in 2006. The decrease was due primarily to the favorable settlement of an uncertain tax position during the third quarter of 2007 in the amount of $460,000. Exclusive of this settlement, our tax rate would have been 37.4%, with the increase due to a combination of lower taxable income during 2007 and non-deductible expenses which occur evenly throughout the year.

Net Earnings.For the third quarter of 2007, net earnings were $3.5 million, compared with net earnings of $5.1 million for the third quarter of 2006. The decrease was primarily a result of decreased sales with a decreased gross profit percentage, offset in part by decreased operating expenses and a lower effective income tax rate.

For the nine months ended September 30, 2007 and 2006.

Net Sales.For the nine months ended September 30, 2007, net sales decreased 23% to $153.8 million, compared with $200.0 million for the same period in 2006. This decrease was primarily the result of a significantly weaker U.S. economic climate in 2007, particularly residential housing construction, which affected all four categories of our sales. First, sales of ASV machines decreased 25% and represented 52%, or $79.6 million, of our sales for the nine months ended September 30, 2007, compared with 53%, or $105.6 million, for the same period in 2006. This decrease was also due to caution on the part of our dealers to carry inventory from the weakened U.S. economic climate. Second, sales of OEM undercarriages decreased 32% for the nine months ended September 30, 2007, compared with the same period in 2006. This decrease was due primarily to reduced orders for our undercarriages used on Caterpillar’s MTLs. In addition to the economic effects experienced in 2007, the reduced orders were also due in part to lower production schedules by Caterpillar in anticipation of model changeovers which began in the second quarter of 2007. Sales of OEM undercarriages represented 22%, or $34.5 million, of our sales for the nine months ended September 30, 2007, compared with 25%, or $50.9 million, for the same period in 2006. Third, sales of Loegering’s products totaled $17.8 million for the nine months ended September 30, 2007, or 12% of our net sales, compared with $19.8 million, or 10% of our net sales, for the same period in 2006. This change was due primarily to decreased demand for Loegering’s VTS products, which are sold to the skid-steer market, offset in part by sales of its QTS product, which was introduced in the first quarter of 2007. We believe the skid-steer market continues to be impacted by the slumping U.S. housing market as stated above. Finally, sales of parts and other items decreased 8% in the nine months ended September 30, 2007 to $21.8 million, or 14% of net sales, compared with $23.7 million, or 12% of net sales, for the same period in 2006. We believe this decrease was due to lower levels of machine usage in 2007 resulting from decreased activity.

Gross Profit.Gross profit for the nine months ended September 30, 2007 decreased to $31.7 million, compared with $47.2 million for the same period in 2006, and the gross profit percentage decreased to 20.6% the nine months ended September 30, 2007, compared with 23.6% for the same period in 2006. The decrease in gross profit was due primarily to the decreased sales experienced during 2007. The decrease in gross profit percentage was due primarily to the increased use of sales incentive programs during 2007, lower production throughput levels, one-time costs resulting from the return and rework of a limited quantity of OEM undercarriage product which included

overtime and freight and one-time production start-up costs as ASV began implementation of its new brand and nomenclature strategy. Based on our anticipated sales levels for 2007, we currently anticipate our gross profit percentage for fiscal 2007 to be in the range of 20.4-20.8%.

Selling, General and Administrative.Selling, general and administrative expenses increased from $16.6 million, or 8.3% of net sales, for the nine months ended September 30, 2006, to $18.0 million, or 11.7% of net sales, for the same period in 2007. The increase was due primarily to personnel additions made during 2006 and 2007 to support our strategic priorities, including increased marketing support. The increase in percent was due to the combination of increased expenses and lower overall sales. We currently anticipate our selling, general and administrative expenses will be in the range of 11.4-11.8% of net sales for fiscal 2007.

Research and Development.Research and development expenses increased from $1.2 million for the nine months ended September 30, 2006 to $1.7 million for the same period in 2007. The increase was due to the addition of engineering and product testing personnel to enhance new product development and product quality. We currently anticipate our future spending on research and development activities will focus on additional product offerings and additional applications of our track technology and will be in the range of 1.0-1.1% of net sales for fiscal 2007.

Other Income.For the nine months ended September 30, 2007, other income (primarily interest income) was $1.4 million, compared with $1.3 million for the same period in 2006. This increase was due primarily to greater interest income from higher short-term interest rates on greater investable cash balances during 2007 compared with 2006.

Income Taxes.Our effective income tax rate was 34.0% for the nine months ended September 30, 2007 compared to 36.1% for the same period in 2006. The decrease was due primarily to the favorable settlement of an uncertain tax position during the third quarter of 2007 in the amount of $460,000. Exclusive of this settlement, our tax rate would have been 37.4%, with the increase due to a combination of lower taxable income during 2007 and non-deductible expenses which occur evenly throughout the year.

Net Earnings.For the nine months ended September 30, 2007, net earnings were $8.8 million, compared with net earnings of $19.6 million for the same period in 2006. The decrease was primarily a result of decreased sales with a decreased gross profit percentage, increased operating expenses in the first half of the year, slightly offset by a lower effective income tax rate. Based on our anticipated sales, gross profit and expense levels for 2007, we anticipate our diluted earnings per share will be in the range of $0.41-$0.47 for fiscal 2007.

Liquidity and Capital Resources

For the nine months ended September 30, 2007, we generated $16.9 million of cash and cash equivalents compared with using $15.6 million of cash and cash equivalents for the nine months ended September 30, 2006. During 2007, we generated $19.4 million of cash from operations, primarily from decreased inventory levels, profitability adjusted for non-cash expenses, offset in part by increased accounts receivable. We used $1.6 million of cash in investing activities during 2007 to purchase equipment as part of our $3 million planned capital expenditures for fiscal 2007. Financing activities used $0.9 million of cash as we repurchased $1.5 million of our common stock during the first quarter of 2007 as part of our $50 million stock buyback program authorized in October 2006. Partially offsetting this was cash generated by the exercise of employee stock options.

Our accounts receivable increased from $44.2 million at December 31, 2006 to $51.2 at September 30, 2007. This increase was due primarily to the timing of shipments during the third quarter of 2007, as a greater percentage of our shipments occurred in the last month of the quarter. Caterpillar’s model changeover, which began in the second quarter of 2007, was also a factor in the increase in our accounts receivable balance at September 30, 2007.

Our inventory levels decreased from $71.4 million at December 31, 2006 to $59.2 million at September 30, 2007. The decrease in inventory during the quarter reflected our efforts to better align the incoming flow of materials with production levels that are in line with incoming orders. Our goal is to increase our inventory turns from 2.75 turns at September 30, 2007 to 3.5 turns at December 31, 2007 through better management of incoming raw materials and decreased finished goods levels, although our inventory levels may fluctuate during the balance of 2007 to meet expected production requirements.

Our Board of Directors approved a $50 million stock buyback plan in October 2006. Under this plan, we may repurchase up to $50 million of our common stock over a three year period beginning in October 2006. We anticipate that we may repurchase $10-15 million of our common stock under this plan in 2007, balanced with assessing acquisition opportunities. We intend to fund any share repurchases with available cash and investments, as well as cash generated from operations. For the nine months ended September 30, 2007, we repurchased 100,000 shares of our common stock at an aggregate cost of $1.5 million.

Relationship with Finance Companies

We have an agreement with Wells Fargo & Company (Wells Fargo, formerly CIT Group, Inc.) to operate ASV Capital, a private label finance program, to offer wholesale and retail financing options on the sale of our Posi-Track products. Under this agreement, representatives of ASV and Wells Fargo make joint credit decisions, with Wells Fargo retaining the risk of the credit portfolio. We have no ownership in ASV Capital and do not share in the profit or loss of ASV Capital. We also have a relationship with one other finance company that finances the sale of our products.

By using these finance companies, we receive payment for our products shortly after their shipment. We pay a portion of the interest cost associated with financing these shipments that would normally be paid by the customer, over a period generally ranging from three to twelve months depending on the amount of down payment made by the customer. We are also providing twelve-month terms for one machine to be used for demonstration purposes for each qualifying dealer. In addition, we offer, from time to time, extended term financing on the sale of certain products to our dealers for periods ranging from 90 days to one year.

Adoption of New Accounting Standard

New Accounting Pronouncements

See Note 6 to our consolidated financial statements for a discussion of new accounting pronouncements.

Cash Requirements

We believe that the cash expected to be generated from operations, combined with our existing cash, cash equivalents and investments (which totaled $48.3 million at September 30, 2007), will satisfy our projected cash requirements for the next twelve months.

Forward-Looking Statements

Some of the statements set forth above under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this report including, among other things, the statements regarding our expectations regarding sales levels, gross profit percentage, expense levels, earnings per share, inventory levels and liquidity for fiscal 2007 are forward-looking statements based on current expectations and assumptions, and entail various risks and uncertainties that could cause actual results to differ materially from those expressed in such forward-looking statements. Certain factors may affect whether these anticipated events occur, including Caterpillar’s desire to continue purchasing undercarriage products from us, the state of the U.S.

construction markets, our ability to successfully maintain, upgrade and expand our dealer network, our ability to secure European distribution for our products, our ability to obtain needed certifications to distribute our products in foreign markets, our ability to successfully manufacture our machines, unanticipated delays, costs or other difficulties in the manufacture of our machines and undercarriages, unanticipated problems or delays experienced by Caterpillar or Vermeer relating to the manufacturing or marketing of their machines utilizing our undercarriage systems, market acceptance of our machines, deterioration of the general market and adverse economic conditions, corporate developments at ASV, Caterpillar or Vermeer, our ability to realize the anticipated benefits from our relationships with Caterpillar and Vermeer and the other factors described in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2006. Any forward-looking statements provided from time-to-time by us represent only management’s then-best current estimate of future results or trends.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We have no history of investing in derivative financial instruments, derivative commodity instruments or other such financial instruments, and do not anticipate making such investments in the future. Transactions with international customers are entered into in U.S. dollars, precluding the need for foreign currency hedges. Additionally, we invest in money market funds and fixed rate U.S. government and corporate obligations, which experience minimal volatility. Thus, the exposure to market risk is not material.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures. As of the end of the period covered by this report (the Evaluation Date), we carried out an evaluation, under the supervision and with the participation of management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) of the Securities Exchange Act of 1934, as amended (the Exchange Act).

Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that, as of the Evaluation Date, our disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in applicable rules and forms, and (ii) accumulated and communicated to our management, including our Chief Executive Officer and the Chief Financial Officer, to allow timely decisions regarding required disclosures.

Changes in Internal Controls Over Financial Reporting. There were no changes in our internal control over financial reporting (as defined in Rule 13(a)-15(f) under the Exchange Act) during the third fiscal quarter of 2007, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II — OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

None

ITEM 1A. RISK FACTORS

In addition to the other information set forth in this report and our other filings with the Securities and Exchange Commission, you should carefully consider the factors discussed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2006, which could have a material impact on our business, financial condition or results of operations. We are updating the risk factors discussed in our Annual Report on Form 10-K by including the risk factor set forth below. The risks described below and in our Annual Report on Form 10-K are not the only risks we face. Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial may also adversely affect our business, financial condition or results of operations.

Our business would be adversely affected if we are not able to retain our existing dealer network or find alternative dealers for those dealers who choose to no longer represent our products.

We sell our products to a dealer network primarily located in North America. The majority of these dealers also sell products of other manufacturers, some of whom have much greater resources than us and can exert significant influence over the actions of these dealers. If these manufacturers chose to impose restrictions on the products these dealers are able to sell, our business could be materially harmed.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

We made no purchases of our common stock during the three months ended September 30, 2007. For the nine months ended September 30, 2007, we repurchased 100,000 shares of our common stock at an aggregate cost of $1.5 million. As of September 30, 2007, we had remaining authorization of $48,512,000 for repurchasing our shares under our stock buyback plan.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

�� None

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None

ITEM 5. OTHER INFORMATION

None

ITEM 6. EXHIBITS


Exhibit
Number		Description
3.1		Third Restated Articles of Incorporation of the Company (a)

3.2		Second Amended and Restated Bylaws of the Company adopted October 23, 2007 (b)

4.1		Specimen form of the Company’s Common Stock Certificate (c)

11		Statement re: Computation of Per Share Earnings

31.1		Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1		Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2		Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002


(a)		Incorporated by reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2006 (File No. 0-25620) filed electronically August 9, 2006.


(b)		Incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K (file No. 0-25620) filed electronically October 29, 2007.

(c)		Incorporated by reference to Exhibit 3.2 to the Company’s Registration Statement on Form SB-2 (File No. 33-61284C) filed July 7, 1994.

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.


	A.S.V., Inc.
Dated: November 9, 2007	By	/s/ Richard A. Benson
		Richard A. Benson
		Chief Executive Officer (principal executive officer)


Dated: November 9, 2007	By	/s/ Thomas R. Karges
		Thomas R. Karges
		Chief Financial Officer (principal financial and accounting officer)

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Readability	H.S. freshman Good

ASV Inactive 10-Q2007 Q3 Quarterly report

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