UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarter ended September 30, 1998 or
Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Number: 0-18607
ARCTIC CAT INC.
(Exact name of registrant as specified in its charter)
Minnesota 41-1443470
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
601 Brooks Avenue South, Thief River Falls, Minnesota 56701
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (218) 681-8558
Indicate by check mark whether the registrant (1) has filed all reports required
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
At November 11, 1998, 19,996,789 shares of Common Stock and 7,560,000 shares of
Class B Common Stock of the Registrant were outstanding.
PART I - FINANCIAL INFORMATION
Arctic Cat Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(unaudited)
September 30, March 31,
ASSETS 1998 1998
CURRENT ASSETS ___________ ___________
Cash and equivalents $ 28,696,000 $ 24,764,000
Short-term investments 14,432,000 33,781,000
Accounts receivable, less allowances 80,181,000 30,217,000
Inventories 91,123,000 88,149,000
Prepaid expenses 1,061,000 1,771,000
Income tax receivable - 2,111,000
Deferred income taxes 12,095,000 9,088,000
___________ ___________
Total current assets 227,588,000 189,881,000
PROPERTY, PLANT AND EQUIPMENT - at cost
Machinery, equipment and tooling 74,085,000 70,611,000
Land, buildings and improvements 15,356,000 14,568,000
__________ __________
89,441,000 85,179,000
Less accumulated depreciation 52,059,000 45,342,000
__________ __________
37,382,000 39,837,000
__________ __________
$264,970,000 $229,718,000
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 28,148,000 $ 20,671,000
Accrued expenses 35,748,000 26,967,000
Income tax payable 9,391,000 -
__________ __________
Total current liabilities 73,287,000 47,638,000
DEFERRED INCOME TAXES 4,706,000 4,575,000
COMMITMENTS AND CONTINGENCIES - -
SHAREHOLDERS' EQUITY
Preferred stock, par value $1.00;
2,050,000 shares authorized; none issued - -
Preferred stock - Series A Junior
Participating, par value $1.00;
450,000 shares authorized; none issued - -
Common stock, par value $.01; 37,440,000
shares authorized; shares issued and
outstanding, 20,047,289 at September 30,
1998; 20,857,909 at March 31, 1998 200,000 209,000
Class B common stock, par value $.01;
7,560,000 shares authorized, issued,
and outstanding 76,000 76,000
Additional paid-in capital 1,634,000 9,356,000
Retained earnings 185,067,000 167,864,000
__________ ___________
186,977,000 177,505,000
__________ ___________
$264,970,000 $229,718,000
=========== ===========
The accompanying notes are an integral part of these statements.
Arctic Cat Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF EARNINGS
(unaudited)
Three Months Six Months
Ended September 30, Ended September 30,
__________________________ _____________________
1998 1997 1998 1997
______ ______ ______ ______
Net sales $193,382,000 $196,846,000 $282,033,000 $282,313,000
Cost of goods sold 140,118,000 141,531,000 206,818,000 205,606,000
___________ ___________ ___________ ___________
Gross profit 53,264,000 55,315,000 75,215,000 76,707,000
Selling, general and
administrative expenses 24,189,000 24,683,000 44,168,000 45,057,000
___________ ___________ ___________ ___________
Operating profit 29,075,000 30,632,000 31,047,000 31,650,000
Other income (expense)
Interest income 442,000 238,000 867,000 619,000
Interest expense - (11,000) (26,000) (58,000)
__________ ___________ ___________ ___________
442,000 227,000 841,000 561,000
Earnings before
income taxes 29,517,000 30,859,000 31,888,000 32,211,000
Income tax expense 10,478,000 10,955,000 11,320,000 11,435,000
___________ ___________ ___________ ___________
Net earnings $19,039,000 $19,904,000 $20,568,000 $20,776,000
=========== =========== =========== ===========
Net earnings
per share
Basic $0.68 $0.68 $0.73 $0.71
=========== =========== =========== ===========
Diluted $0.68 $0.68 $0.73 $0.71
=========== =========== =========== ===========
Weighted average
shares outstanding
Basic 27,828,000 29,151,000 27,992,000 29,164,000
=========== =========== =========== ===========
Diluted 27,861,000 29,249,000 28,030,000 29,258,000
=========== =========== =========== ===========
The accompanying notes are an integral part of these statements.
Arctic Cat Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Six Months Ended September 30,
_____________________________
1998 1997
Cash flows from operating activities ________ ________
Net earnings $20,568,000 $20,776,000
Adjustments to reconcile net earnings
to net cash provided by (used in)
operating activities
Depreciation 6,728,000 6,530,000
Deferred income taxes (2,876,000) (1,660,000)
Changes in operating assets
and liabilities:
Trading securities 18,832,000 32,100,000
Accounts receivable (49,964,000) (67,791,000)
Inventories (2,974,000) (10,806,000)
Prepaid expenses 710,000 368,000
Accounts payable 7,477,000 16,100,000
Accrued expenses 8,781,000 3,491,000
Income taxes 11,502,000 15,947,000
Net cash provided by (used in) __________ __________
operating activities 18,784,000 15,055,000
Cash flows from investing activities
Additions to property, plant and
equipment (4,273,000) (6,709,000)
Sales and maturities of available-for-sale
securities 765,000 1,033,000
Purchases of available-for-sale
securities (248,000) (1,317,000)
Net cash provided by (used in) __________ __________
investing activities (3,756,000) (6,993,000)
Cash flows from financing activities
Dividends paid (3,365,000) (3,500,000)
Proceeds from issuance of common stock - 1,385,000
Repurchase of common stock (7,731,000) (2,266,000)
Net cash used in __________ __________
financing activities (11,096,000) (4,381,000)
__________ __________
Net increase (decrease) in cash and
equivalents 3,932,000 3,681,000
Cash and equivalents at the beginning
of period 24,764,000 5,540,000
__________ __________
Cash and equivalents at the end of
period $28,696,000 $ 9,221,000
========== ==========
Supplemental disclosure of cash payments
for income taxes $4,293,000 $ 148,000
The accompanying notes are an integral part of these statements.
Arctic Cat Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE A--BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
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 generally accepted accounting principles 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
September 30, 1998, the results of operations for the three and six month
periods ended September 30, 1998 and 1997 and cash flows for the six month
periods ended September 30, 1998 and 1997. Results of operations for the
interim periods are not necessarily indicative of results for the full year.
Preparation of the Company's consolidated financial statements requires
management to make estimates and assumptions that affect reported amounts of
assets and liabilities and related revenues and expenses. Actual results could
differ from those estimates.
NOTE B--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
1,342,692 and 553,192 shares of common stock with weighted average exercise
prices of $11.71 and $13.67 were outstanding during the three months ended
September 30, 1998 and 1997 and options to purchase 1,248,567 and 836,817
shares of common stock with weighted average exercises prices of $11.89 and
$12.62 were outstanding during the six months ended September 30, 1998 and
1997, all of which were excluded from the computation of common share
equivalents because they were anti-dilutive.
NOTE C--SHORT-TERM INVESTMENTS
Short-term investments consist of the following:
September 30, March 31,
1998 1998
___________ __________
Trading securities $ 1,988,000 $20,820,000
Available-for-sale debt securities 12,444,000 12,961,000
___________ __________
$14,432,000 $33,781,000
=========== ==========
NOTE D--INVENTORIES
Inventories consist of the following:
September 30, March 31,
1998 1998
___________ __________
Raw materials and sub-assemblies $25,521,000 $30,154,000
Finished goods 33,324,000 31,756,000
Parts, garments and accessories 32,278,000 26,239,000
___________ __________
$91,123,000 $88,149,000
=========== ==========
NOTE E--OTHER MATTERS
Dividend Declaration
On October 29, 1998, the Company announced that its Board of Directors
had declared a regular quarterly cash dividend of $0.06 per share, payable on
December 2, 1998 to shareholders of record on November 17, 1998.
Share Repurchase
During fiscal 1996, the Company's Board of Directors authorized the
repurchase of 1,500,000 shares of common stock. During March of 1998, the
Company's Board of Directors authorized the repurchase of an additional
1,500,000 shares of common stock. Since the inception of the share repurchase
programs, through October 16, 1998, the Company has invested $22,771,128 to
repurchase and cancel 2,368,500 shares.
NOTE F--RECLASSIFICATIONS
Certain 1997 amounts have been reclassified to conform to the 1998
presentation.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
Arctic Cat Inc. and Subsidiaries (the "Company") design, engineer,
manufacture and market snowmobiles and all-terrain vehicles (ATVs) under the
Arctic Cat brand name, and personal watercraft (PWC) under the Tigershark brand
name, as well as related parts, garments and accessories principally through
its facilities in Thief River Falls, Minnesota. The Company markets its
products through a network of independent dealers located throughout the
contiguous United States and Canada, and through distributors representing
dealers in Alaska, Europe, the Middle East, Asia, and other international
markets. The Arctic Cat brand name has existed for more than 30 years and is
among the most widely recognized and respected names in the snowmobile
industry. The Company trades on the Nasdaq Stock Market under the symbol ACAT.
Results of Operations
THREE MONTHS AND SIX MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THE
THREE MONTHS AND SIX MONTHS ENDED SEPTEMBER 30, 1997.
Net sales for the second quarter decreased 1.8% to $193,382,000 from
$196,846,000 for the same quarter in fiscal 1998. As anticipated, this
decrease was primarily due to a 14.1% decrease in snowmobile unit volume based
on moderately lower orders from dealers and a 15.2% decrease in parts,
garments and accessory sales due to a higher percentage of preseason orders
being shipped in the first quarter of fiscal 1999 as compared to fiscal 1998.
As planned, these decreases were offset by a 70.9% ATV unit volume increase as
the Company's ATV sales continue to grow and represent a higher portion of our
overall sales. Year-to-date sales were relatively flat with sales of
$282,033,000 compared to $282,313,000 for the same period last year. Year-to-
date snowmobile unit volume decreased 13.1%, PWC unit volume decreased 59.7% as
again this season, a higher percentage of the summer season's build was shipped
prior to the start of the fiscal year. Year-to-date ATV unit volume increased
38.7% and parts, garments and accessories sales decreased 10.0%.
Gross profits decreased 3.7% to $53,264,000 from $55,315,000 for the
same quarter in fiscal 1998. As a percent, gross profits for the quarter
decreased to 27.5% as compared to 28.1% for the same period last year.
Year-to-date gross profit percentage was 26.7% compared to 27.2% for the same
period last year. The quarterly and year-to-date gross profit percentage
decline was primarily due to decreased sales of higher margin snowmobiles and
parts, garments and accessories and increased sales of ATVs which yield a lower
margin.
Operating expenses for the quarter decreased 2.0% to $24,189,000 from
$24,683,000 compared to the same quarter in fiscal 1998. As a percent of net
sales, operating expenses for the quarter remained flat at 12.5%. Year-to-date
operating expenses decreased 2.0% to $44,168,000 as compared to $45,057,000 for
the same period last year. The quarterly and year-to-date decrease is mainly
due to decreased PWC marketing expenses which were offset by increased ATV
marketing expenses related to higher sales levels.
Net earnings for the second quarter of fiscal 1999 were $19,039,000,
or $0.68 per share, as compared to net earnings of $19,904,000, or $0.68 per
share, for the second quarter of fiscal 1998. Year-to-date net earnings were
$20,568,000, or $0.73 per share, as compared to net earnings of $20,776,000,
or $0.71 per share, for the same period last year.
Liquidity and Capital Resources
The seasonality of the Company's snowmobile production cycle and the
lead time between the commencement of snowmobile and ATV production in the
early spring and commencement of shipments late in the first quarter have
resulted in significant fluctuations in the Company's working capital
requirements during the year. Historically, the Company has financed its
working capital requirements out of available cash balances at the beginning
and end of the production cycle and with short-term bank borrowings during the
middle of the cycle. Cash and short-term investments were $43,128,000 at
September 30, 1998. The Company's cash balances traditionally peak early in
the fourth quarter and decrease as working capital requirements increase when
the Company's snowmobile production cycle begins. 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 cash
availability under its credit facility will be sufficient to meet its working
capital, regular quarterly dividend, share repurchase program, and capital
expenditure requirements in the foreseeable future.
Line of Credit
The Company has a $75,000,000 unsecured credit agreement with a bank
for documentary and stand-by letters of credit and for working capital
purposes. Total working capital borrowings under the credit agreement are
limited to $30,000,000. The credit agreement is due on demand and expires
July 30, 1999.
Year 2000
The Company continues to assess and address the impact of the Year 2000
issue on its business. This issue affects computer systems that have date-
sensitive programs that may not properly recognize the year 2000. The Company
uses software and related technologies throughout its business. The Company
has completed its assessment of the information systems (IS) used in its
internal business operations, its procurement and production processes. In
addition, the Company is beginning its assessments of the Year 2000 readiness
of its non-IS systems, as well as supplier and customer readiness.
The Company's Year 2000 initiative is being managed by a team of
internal staff with the assistance of outside consultants. The team's
activities are designed to ensure that there is no adverse effect on the
Company's business operations and that transactions with suppliers, financial
institutions and customers are fully supported. The Company is under way with
these efforts, which are scheduled to be completed during the Summer of 1999.
While the Company believes its planning efforts are adequate to address its
Year 2000 concerns, there can be no guarantee that the systems of other
companies on which the Company's systems and operations rely will be converted
on a timely basis and will not have a material adverse effect on the Company's
results of operation and financial condition. The most reasonably likely
effects of non-Year 2000 compliance by third parties includes the disruption or
inaccuracy of data and business disruption caused by failure of suppliers to
provide key component parts.
The cost of the Year 2000 initiatives is estimated at less than
$500,000 and will be funded out of current operations and expensed in fiscal
1999. At the present time there are no contingency plans being developed in
the event of a worst case scenario. If it becomes apparent during the Summer
of 1999 that essential internal and third party systems relied on by the
Company will not be Year 2000 compliant prior to the end of 1999, the Company
will develop contingency plans. Factors that could influence the amount and
timing of costs include the success of the Company in identifying systems and
programs that are not Year 2000 compliant, the nature and amount of programming
required to upgrade or replace each of the affected programs or systems, and
the availability, cost and magnitude of related labor and consulting costs.
Forward Looking Statements
The Private Securities Litigation Reform Act of 1995 provides a safe
harbor for certain forward-looking statements. This 10-Q contains forward-
looking statements that reflect the Company's current views with respect to
future events and financial performance. These forward-looking statements are
subject to certain risks and uncertainties that could cause actual results to
differ materially from historical results or those anticipated. The words
"aim," "believe," "expect," "anticipate," "intend," "estimate," and other
expressions that indicate future events and trends identify forward-looking
statements. Actual future results and trends may differ materially from
historical results or those anticipated depending on a variety of factors,
including, but not limited to: product mix and volume; competitive pressure on
sales and pricing; increase in material or production cost which cannot be
recouped in product pricing; changes in the sourcing of engines from Suzuki;
warranty expenses; foreign currency exchange rate fluctuations; product
liability claims and other legal proceedings in excess of insured amounts;
environmental and product safety regulatory activity; effects of the weather;
overall economic conditions; consumer demand and confidence; and inability to
successfully address year 2000 computer system issues. Further information
concerning the Company and its business, including factors that potentially
could materially affect the Company's financial results, is contained in the
Company's other filings with the Securities and Exchange Commission.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
________________________________________
(a) Exhibits
27.1 financial data schedule
(b) There were no reports on Form 8-K filed during the Quarter
ended September 30, 1998.
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: November 11, 1998 By s/Christopher A. Twomey
__________________ _________________________
Christopher A. Twomey
Chief Executive Officer
Date: November 11, 1998 By s/Timothy C. Delmore
__________________ _________________________
Timothy C. Delmore
Chief Financial Officer