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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 quarterly period ended June 30, 2013

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 of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

505 Hwy 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  ¨

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  x    No  ¨

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   ¨    Accelerated filer   x
Non-accelerated filer   ¨    Smaller reporting company   ¨

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

At August 2, 2013, the registrant had 13,454,507 shares of Common Stock outstanding.

 

 

 


Part I – FINANCIAL INFORMATION

ITEM 1 – FINANCIAL STATEMENTS

Arctic Cat Inc.

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited)

 

     June 30,     March 31,  
     2013     2013  

ASSETS

    

Current Assets

    

Cash and cash equivalents

   $ 48,051,000      $ 35,566,000   

Short-term investments

     843,000        77,241,000   

Accounts receivable, less allowances

     43,734,000        30,296,000   

Inventories

     149,736,000        96,389,000   

Prepaid expenses

     3,654,000        3,032,000   

Income taxes receivable

     567,000        —     

Deferred income taxes

     13,511,000        16,820,000   
  

 

 

   

 

 

 

Total current assets

     260,096,000        259,344,000   

Property and Equipment

    

Machinery, equipment and tooling

     161,451,000        160,674,000   

Land, buildings and improvements

     29,243,000        29,243,000   
  

 

 

   

 

 

 
     190,694,000        189,917,000   

Less accumulated depreciation

     145,838,000        144,378,000   
  

 

 

   

 

 

 
     44,856,000        45,539,000   

Other Assets

     1,267,000        1,262,000   
  

 

 

   

 

 

 
   $ 306,219,000      $ 306,145,000   
  

 

 

   

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

    

Current Liabilities

    

Accounts payable

     75,236,000      $ 66,599,000   

Accrued expenses

     44,047,000        55,736,000   

Income taxes payable

     —          4,957,000   
  

 

 

   

 

 

 

Total current liabilities

     119,283,000        127,292,000   

Deferred Income Taxes

     4,476,000        4,381,000   

Commitments and Contingencies

     —         —     

Shareholders’ Equity

    

Preferred stock, par value $1.00; 2,050,000 shares authorized; none issued

     —         —     

Preferred stock – Series B 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: 13,243,005 at June 30, 2013 and 13,203,682 at March 31, 2013

     132,000        132,000   

Additional paid-in-capital

     11,022,000        10,945,000   

Accumulated other comprehensive loss

     (397,000     (4,166,000

Retained earnings

     171,703,000        167,561,000   
  

 

 

   

 

 

 

Total shareholders’ equity

     182,460,000        174,472,000   
  

 

 

   

 

 

 
   $ 306,219,000      $ 306,145,000   
  

 

 

   

 

 

 

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

 

2


Arctic Cat Inc.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

 

 

     Three Months Ended June 30,  
     2013     2012  

Net sales

    

Snowmobile & ATV units

   $ 98,914,000      $ 90,953,000   

Parts, garments & accessories

     21,854,000        20,358,000   
  

 

 

   

 

 

 

Total net sales

     120,768,000        111,311,000   

Cost of goods sold

    

Snowmobile & ATV units

     77,908,000        75,556,000   

Parts, garments & accessories

     13,700,000        13,276,000   
  

 

 

   

 

 

 

Total cost of goods sold

     91,608,000        88,832,000   
  

 

 

   

 

 

 

Gross profit

     29,160,000        22,479,000   

Operating expenses

    

Selling & marketing

     6,994,000        6,807,000   

Research & development

     5,282,000        4,478,000   

General & administrative

     8,411,000        8,074,000   
  

 

 

   

 

 

 

Total operating expenses

     20,687,000        19,359,000   
  

 

 

   

 

 

 

Operating profit

     8,473,000        3,120,000   

Other income (expense)

    

Interest income

     9,000        13,000   

Interest expense

     (3,000     (20,000
  

 

 

   

 

 

 

Total other income (expense)

     6,000        (7,000
  

 

 

   

 

 

 

Earnings before income taxes

     8,479,000        3,113,000   

Income tax expense

     3,011,000        1,105,000   
  

 

 

   

 

 

 

Net earnings

   $ 5,468,000      $ 2,008,000   
  

 

 

   

 

 

 

Net earnings per share

    

Basic

   $ 0.41      $ 0.15   
  

 

 

   

 

 

 

Diluted

   $ 0.40      $ 0.14   
  

 

 

   

 

 

 

Weighted average shares outstanding

    

Basic

     13,215,000        13,060,000   
  

 

 

   

 

 

 

Diluted

     13,711,000        13,877,000   
  

 

 

   

 

 

 

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

 

3


Arctic Cat Inc.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

 

 

     Three Months Ended June 30,  
     2013      2012  

Net earnings

   $ 5,468,000       $ 2,008,000   

Other comprehensive income (loss):

     

Foreign currency translation adjustments

     638,000         (1,563,000

Unrealized gain on derivative instruments, net of tax of $1,919,000 and $808,000

     3,131,000         1,319,000   
  

 

 

    

 

 

 

Comprehensive income

   $ 9,237,000       $ 1,764,000   
  

 

 

    

 

 

 

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

 

4


Arctic Cat Inc.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

     Three Months Ended June 30,  
     2013     2012  

Cash flows from operating activities:

    

Net earnings

   $ 5,468,000      $ 2,008,000   

Adjustments to reconcile net earnings to net cash provided by (used in) operating activities:

    

Depreciation and amortization

     3,440,000        3,247,000   

Deferred income tax expense (benefit)

     1,485,000        (287,000

Stock-based compensation expense

     1,329,000        1,072,000   

Changes in operating assets and liabilities:

    

Trading securities

     76,396,000        38,438,000   

Accounts receivable

     (8,316,000     (10,162,000

Inventories

     (52,367,000     (42,485,000

Prepaid expenses

     (619,000     (275,000

Accounts payable

     8,640,000        6,751,000   

Accrued expenses

     (11,742,000     (10,304,000

Income taxes

     (6,125,000     4,527,000   
  

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     17,589,000        (7,470,000

Cash flows from investing activities:

    

Purchases of property and equipment

     (2,815,000     (2,129,000
  

 

 

   

 

 

 

Net cash used in investing activities

     (2,815,000     (2,129,000

Cash flows from financing activities:

    

Proceeds from short-term borrowings

     —          4,214,000   

Proceeds from issuance of common stock

     19,000        5,000   

Payments for income taxes on net-settled option exercises

     (1,354,000     (185,000

Tax benefit from stock options exercises

     1,522,000        916,000   

Dividends paid

     (1,326,000     —     

Repurchase of common stock

     (1,438,000     (1,612,000
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     (2,577,000     3,338,000   

Effect of exchange rate changes on cash and cash equivalents

     288,000        (514,000
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     12,485,000        (6,775,000

Cash and cash equivalents at beginning of period

     35,566,000        24,138,000   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 48,051,000      $ 17,363,000   
  

 

 

   

 

 

 

Supplemental disclosure of cash payments for:

    

Income taxes

   $ 5,539,000      $ 25,000   
  

 

 

   

 

 

 

Interest

   $ 3,000      $ 20,000   
  

 

 

   

 

 

 

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

 

5


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 Company’s financial position as of June 30, 2013, and results of operations and cash flows for the three-month periods ended June 30, 2013 and 2012. 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, 2013 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 June 30, 2013, the Company had stock-based compensation plans, all previously approved by the Company’s shareholders. Stock options and restricted stock awards granted under these plans generally vest ratably over one to three years of service. Stock options have a contractual life of five to ten years and provide for accelerated vesting if there is a change in control, as defined in the plans. At June 30, 2013, the Company had 944,999 shares available for future grant under its stock option plans.

At June 30, 2013, the Company had $4,047,000 of unrecognized compensation costs related to non-vested stock options and restricted stock awards that are expected to be recognized over a weighted average period of approximately two years.

For the three months ended June 30, 2013 and 2012, the Company recorded stock-based compensation expense of $1,329,000 and $1,072,000, respectively, which has been included in general and administrative expenses. The Company’s total stock-based compensation related expense reduced both basic and diluted earnings per share by $0.06 and $0.05 for each of the three months ended June 30, 2013 and 2012, respectively.

The fair value of each stock option award was estimated on the date of grant using the Black-Scholes options pricing model. The following assumptions were used to estimate the fair value of options granted during the three months ended June 30, 2013.

Dividend Yield: 1%

Average Term: 5 years

Volatility: 49%

Risk free rate of return: 0.81%

Option transactions under the plans during the three months ended June 30, 2013, are summarized as follows:

 

     Shares     Weighted-
Average
Exercise
Price
     Weighted-
Average
Contractual
Life
     Aggregate
Intrinsic Value
 

Outstanding at March 31, 2013

     1,010,650      $ 17.61         

Granted

     96,209        42.99         

Exercised

     (114,930     11.17         
  

 

 

   

 

 

       

Outstanding at June 30, 2013

     991,929      $ 20.82         5.96 years       $ 23,726,000   
  

 

 

   

 

 

    

 

 

    

 

 

 

Exercisable at June 30, 2013

     757,112      $ 17.15         5.11 years       $ 21,068,000   
  

 

 

   

 

 

    

 

 

    

 

 

 

The aggregate intrinsic value is based on the difference between the exercise price and the Company’s June 30, 2013 common share market value for in-the-money options.

 

6


The following tables summarize information concerning currently outstanding and exercisable stock options at June 30, 2013:

Options Outstanding

 

Range of Exercise Prices

   Number Outstanding      Weighted-Average
Remaining Contractual Life
     Weighted-Average
Exercise Price
 

$6.26-9.38

     58,034         5.77 years       $ 6.26   

9.57-13.84

     222,492         6.69 years         10.83   

14.68-21.03

     338,483         6.52 years         16.40   

21.96-27.69

     205,783         1.60 years         24.84   

33.67-43.79

     167,137         9.35 years         43.19   
  

 

 

    

 

 

    

 

 

 
     991,929         5.96 years       $ 20.82   
  

 

 

    

 

 

    

 

 

 

Options Exercisable

 

Range of Exercise Prices

   Number Exercisable      Weighted-Average Exercise Price  

$6.26-9.38

     58,034       $ 6.26   

9.57-13.84

     220,154         10.80   

14.68-21.03

     251,278         16.62   

21.96-27.69

     205,783         24.84   

33.67-43.79

     21,863         43.79   
  

 

 

    

 

 

 
     757,112       $ 17.15   
  

 

 

    

 

 

 

The Company’s 2007 Omnibus Stock and Incentive plan provides for grants of restricted common stock and restricted stock units to executives and key employees of the Company. The restricted common stock and restricted stock units are 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 to three 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 June 30, 2013, the Company had 39,146 shares of restricted common stock issued and outstanding and 51,874 unvested restricted stock units outstanding under the plan. The shares of restricted common stock awarded have voting rights and participate equally in all dividends and other distributions duly declared by the Company’s Board of Directors.

Restricted stock award and restricted stock unit activity under the plans during the three months ended June 30, 2013 is summarized as follows:

 

     Restricted
Stock Awards
    Restricted
Stock Units
 

Outstanding at March 31, 2013

     42,820        45,409   

Awarded

     —         17,976   

Vested

     (3,674     (11,511
  

 

 

   

 

 

 

Outstanding at June 30, 2013

     39,146        51,874   
  

 

 

   

 

 

 

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. None of the outstanding options to purchase shares of common stock were excluded from the computation of common share equivalents during the three months ended June 30, 2013. Options to purchase 70,470 shares of common stock with a weighted average exercise price of $43.79 outstanding during the three months ended June 30, 2012, 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.

 

7


NOTE D–SHORT-TERM INVESTMENTS

Trading securities consists of $843,000 and $77,241,000, invested in various money market funds at June 30, 2013, and March 31, 2013, respectively. All of the trading securities are deemed to be Level 1 investments.

NOTE E–INVENTORIES

Inventories consist of the following:

     June 30, 2013      March 31, 2013  

Raw materials and sub-assemblies

   $ 40,970,000       $ 29,310,000   

Finished goods

     78,673,000         41,084,000   

Parts, garments and accessories

     30,093,000         25,995,000   
  

 

 

    

 

 

 
   $ 149,736,000       $ 96,389,000   
  

 

 

    

 

 

 

NOTE F–LINE OF CREDIT

The Company entered into a $60,000,000 senior secured revolving credit agreement in November 2009 for documentary and stand-by letters of credit, working capital needs and general corporate purposes. This agreement is scheduled to expire in November 2013. The Company may borrow up to $60,000,000 during June through November and up to $45,000,000 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, the federal funds rate plus 0.50% or LIBOR for a 30 day interest period plus 1.00%. As of June 30, 2013 the effective rate was 4.00%. 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 June 30, 2013 and March 31, 2013. The outstanding letters of credit balances were $11,145,000 and $14,481,000 at June 30, 2013 and 2012, 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 June 30, 2013. The issued letters of credit outstanding, as of June 30, 2013 and 2012, included $7,713,000 and $11,391,000, respectively, issued to Suzuki Motor Corporation “Suzuki” for engine and service parts purchases. Outstanding letters of credit will be repaid over the following six months in accordance with the credit agreement and any such renewal.

NOTE G–ACCRUED EXPENSES

Accrued expenses consist of the following:

 

     June 30, 2013      March 31, 2013  

Marketing

   $ 7,934,000       $ 11,971,000   

Compensation

     4,359,000         10,682,000   

Warranties

     18,032,000         18,709,000   

Insurance

     6,663,000         9,254,000   

Other

     7,059,000         5,120,000   
  

 

 

    

 

 

 
   $ 44,047,000       $ 55,736,000   
  

 

 

    

 

 

 

NOTE H–PRODUCT WARRANTIES

The Company generally provides a limited warranty to the owner of snowmobiles for twelve months from the date of consumer registration and for six months from the date of consumer registration on all-terrain vehicles (“ATVs”) and recreational off-highway vehicles (“ROVs”). The Company provides for estimated warranty costs at the time of sale based on historical rates and trends and makes subsequent adjustments to its estimate as actual claims become known or the amounts are determinable. The following represents changes in the Company’s accrued warranty liability for the three-month periods ended June 30:

 

     2013     2012  

Balance at April 1

   $ 18,709,000      $ 18,521,000   

Warranty provision

     2,347,000        2,284,000   

Warranty claim payments

     (3,024,000     (2,137,000
  

 

 

   

 

 

 

Balance at June 30

   $ 18,032,000      $ 18,668,000   
  

 

 

   

 

 

 

 

8


NOTE I–SHAREHOLDERS’ EQUITY

Share Repurchase Authorization

During the three months ended June 30, 2013 and 2012, the Company invested $1,438,000 and $1,612,000, respectively, to repurchase and cancel 31,364 and 43,508 shares of common stock, respectively, pursuant to the Board of Directors’ prior share repurchase program authorizations. At June 30, 2013 and 2012, the Company has remaining authorization to repurchase up to $28,833,000 and $4,060,000 of its common stock, or approximately 641,000 and 111,000 shares based on the per share closing price of $44.98 and $36.56 as of June 30, 2013 and 2012, respectively.

Additional Paid-in-Capital

The components of the changes in additional paid-in-capital during the following periods were as follows:

 

     Three Months Ended June 30,  
     2013     2012  

Balance at beginning of period

   $ 10,945,000      $ 13,233,000   

Exercise of stock options

     1,282,000        228,000   

Tax benefits from stock options exercised

     1,522,000        916,000   

Repurchase of common stock

     (4,056,000     (2,020,000

Stock-based compensation expense

     1,329,000        1,072,000   
  

 

 

   

 

 

 

Balance at end of period

   $ 11,022,000      $ 13,429,000   
  

 

 

   

 

 

 

Accumulated Other Comprehensive Income (Loss)

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

 

     Three Months Ended June 30,  
     2013     2012  

Balance at beginning of period

   $ (4,166,000   $ (2,708,000

Unrealized gain on derivative instruments, net of tax

     3,131,000        1,319,000   

Foreign currency translation adjustment

     638,000        (1,563,000
  

 

 

   

 

 

 

Balance at end of period

   $ (397,000   $ (2,952,000
  

 

 

   

 

 

 

Retained Earnings

The components of the changes in retained earnings during the following periods were as follows:

 

     Three Months Ended June 30,  
     2013     2012  

Balance at beginning of period

   $ 167,561,000      $ 127,816,000   

Net earnings

     5,468,000        2,008,000   

Dividends paid

     (1,326,000     —     
  

 

 

   

 

 

 

Balance at end of period

   $ 171,703,000      $ 129,824,000   
  

 

 

   

 

 

 

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 June 30, 2013, the Company was contingently liable under these agreements for a maximum repurchase amount of approximately $74,978,000. The Company’s financial exposure under these agreements is limited to the difference between the amount paid to the finance companies for repurchases and the amount received upon the resale of the repossessed product. Losses incurred under these agreements during the periods presented have not been material. The financing agreements also have loss sharing provisions should any dealer default whereby the Company shares certain losses with the finance companies. The maximum liability to the Company under these provisions is approximately $6,700,000 at June 30, 2013.

 

9


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 may occur in the use of snowmobiles, ATVs and ROVs. Claims have been made against the Company from time to time relating to these accidents, and from time to time, parties assert claims relating to their intellectual property. It is the Company’s policy to vigorously defend against these actions. 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. The Company has recorded a reserve based on its estimated range of potential exposures based on the legal proceedings and claims that it is aware of. Should any settlement occur that exceeds the Company’s estimate or a new claim arise, the Company may need to adjust its overall reserve and, depending on the amount, such adjustment could be material.

NOTE K–FAIR VALUE MEASUREMENTS

As of June 30, 2013, the Company’s foreign currency contract fair value was an asset totaling $5,009,000 and considered a Level 2 measurement. As of March 31, 2013, the Company’s foreign currency contract fair value was a liability totaling $41,000 and considered a Level 2 measurement.

NOTE L–SEGMENT REPORTING

The Company manages each segment based on gross margin and there are no material transactions between the segments. Operating, general and administrative, tax and other expenses are not allocated to individual segments. Additionally, given the crossover of customers, manufacturing and asset management, the Company does not maintain separate balance sheets for each segment. Accordingly, the segment information presented below is limited to sales and margin data.

 

     Three Months Ended June 30,  
     2013      2012  

Net sales

     

Snowmobile & ATV units

   $ 98,914,000       $ 90,953,000   

Parts, garments, & accessories

     21,854,000         20,358,000   
  

 

 

    

 

 

 

Total net sales

     120,768,000         111,311,000   
  

 

 

    

 

 

 

Cost of goods sold

     

Snowmobile & ATV units

     77,908,000         75,556,000   

Parts, garments, & accessories

     13,700,000         13,276,000   
  

 

 

    

 

 

 

Total cost of goods sold

     91,608,000         88,832,000   
  

 

 

    

 

 

 

Gross profit

     

Snowmobile & ATV units

     21,006,000         15.397,000   

Parts, garments, & accessories

     8,154,000         7,082,000   
  

 

 

    

 

 

 

Total gross profit

   $ 29,160,000       $ 22,479,000   
  

 

 

    

 

 

 

 

     Three Months Ended June 30,  
     2013      2012  

Net sales by product line

     

Snowmobile units

   $ 22,574,000       $ 17,987,000   

ATV units

     76,340,000         72,966,000   

Parts, garments, & accessories

     21,854,000         20,358,000   
  

 

 

    

 

 

 

Total net sales

   $ 120,768,000       $ 111,311,000   
  

 

 

    

 

 

 

 

     Three Months Ended June 30,  
     2013      2012  

Net sales by geography, based on location of the customer

     

United States

   $ 61,884,000       $ 57,020,000   

Canada

     41,220,000         32,631,000   

Europe and other

     17,664,000         21,660,000   
  

 

 

    

 

 

 

Total net sales

   $ 120,768,000       $ 111,311,000   
  

 

 

    

 

 

 

The Company has identifiable long-lived assets with total carrying values of approximately $1,042,000 and $1,533,000 at June 30, 2013 and March 31, 2013, respectively, outside the United States in Canada and Europe.

 

10


Item 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

Arctic Cat Inc. (the “Company” or “Arctic Cat,” or “we,” “our” or “us”) is a Minnesota corporation with principal executive offices in Plymouth, Minnesota. We design, engineer, manufacture and market snowmobiles, all-terrain vehicles (“ATVs”) and recreational off-highway vehicles (“side-by-sides” or “ROVs”) under the Arctic Cat® brand name, as well as related parts, garments and accessories (“PG&A”). We market our products through a network of independent dealers located throughout the United States, Canada, and Europe and through distributors representing dealers in Europe, Russia, South America, the Middle East, Asia and other international markets. The Arctic Cat brand name has existed for more than 50 years and is among the most widely recognized and respected names in the snowmobile, ATV and side-by-side industry. We were incorporated in 1982. Our common stock trades on the NASDAQ Global Select Market under the symbol ACAT.

Executive Overview

The following discussion pertains to our results of operations and financial position for the quarter ended June 30, 2013. Due to the seasonality of the snowmobile, ATV and PG&A businesses, and due 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 first quarter ended June 30, 2013, we reported net sales of $120.8 million and a net earnings of $5.5 million, or $0.40 per diluted share, compared to first quarter ended June 30, 2012 net sales of $111.3 million and net earnings of $2.0 million, or $0.14 per diluted share. An increase in net sales for all product lines, a 395 basis point gross margin improvement and lower operating expenses as a percent of sales contributed to improved quarterly results compared to the same period in the prior year.

Our snowmobile sales in the fiscal 2014 first quarter increased 26% to $22.6 million, up from $18.0 million in the prior-year quarter. For the 2014 model year, Arctic Cat launched 10 new snowmobile models, including the all-new ZR 6000 El Tigre high-performance sled, and new snowmobile engine options from Arctic Cat and Yamaha through an engine supply agreement. Of these, Arctic Cat’s first designed and built snowmobile engine – the 6000 C-Tec2 – is a powerful, lightweight and fuel efficient 2-stroke that enables the Company to enter the large 600cc snowmobile market segment that now accounts for 18% of the snowmobile industry. We are committed to investing in research and development in order to remain an industry innovation leader. We expect fiscal 2014 North American industry retail snowmobile sales to continue their growth and expect the market will grow up to 3%.

Our ATV sales for the first quarter increased 5% to $76.3 million versus $73.0 million in the prior-year quarter, led by strong contributions from our Wildcat X and the four-seat Wildcat 4 pure sport side-by-side vehicles, which are the Company’s two newest Wildcat offerings. We expect fiscal 2014 North American core ATV industry retail sales will grow up to 5%, and the side-by-side industry will continue to show strong growth in the 15 to 25% range.

Sales of parts, garments and accessories in the fiscal 2014 first quarter increased 7% to $21.9 million versus $20.4 million in the prior-year quarter. Arctic Cat’s growing line of Wildcat accessories now includes more than 79 wide-ranging options for riding enjoyment and vehicle customization.

For the fiscal year ending March 31, 2014, based on results year-to-date and expected performance, we now anticipate sales in the range of $754 million to $768 million, an increase of 12 percent to 14 percent versus fiscal 2013. We estimate that fiscal 2014 earnings per diluted share will be in the range of $3.27 to $3.37, an increase of 13 percent to 17 percent over fiscal 2013.

 

11


Results of Operations

Product Line Sales

 

     Three Months Ended June 30,  

($ in thousands)

   2013      Percent of
Net Sales
    2012      Percent of
Net Sales
    Change
2013 vs. 2012
 

Snowmobile

   $ 22,574         18.7   $ 17,987         16.2     25.5

ATV

     76,340         63.2     72,966         65.5     4.6

Parts, garments & accessories

     21,854         18.1     20,358         18.3     7.3
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Net Sales

   $ 120,768         100.0   $ 111,311         100.0     8.5
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

During the first quarter of fiscal 2014, net sales increased 8.5% to $120.8 million from $111.3 million in the first quarter of fiscal 2013 due to sales increases for all product lines. Snowmobile unit volume increased 24.2% and; net sales increased 25.5% due to a richer product mix and lower sales incentives. ATV unit volume increased 3.0% and net sales increased 4.6%, and parts, garments and accessories sales increased $1,496,000. The increase in snowmobile unit volume was driven by a planned increase in first quarter shipments. Increased ATV unit volume for the quarter resulted from shipments of our Wildcat X and the four-seat Wildcat 4 pure sport side-by-side vehicles.

Cost of Goods Sold

 

     Three Months Ended June 30,  

($ in thousands)

   2013      Percent of
Net Sales
    2012      Percent of
Net Sales
    Change
2013 vs. 2012
 

Snowmobile & ATV units

   $ 77,908         64.5   $ 75,556         67.9     3.1

Parts, garments & accessories

     13,700         11.3     13,276         11.9     3.2
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total Cost of Goods Sold

   $ 91,608         75.8   $ 88,832         79.8     3.1
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

During the first quarter of fiscal 2014, cost of sales increased 3.1% to $91.6 million from $88.8 million for the first quarter of fiscal 2013. Fiscal 2014 snowmobile and ATV unit cost of sales increased 3.1% to $77.9 million from $75.6 million directionally in line with increases in unit sales during the first quarter of fiscal 2014 compared to the first quarter of fiscal 2013. The first quarter of fiscal 2014 cost of sales for PG&A increased 3.2% to $13.7 million from $13.3 million for the first quarter of fiscal 2013, due to increased sales.

Gross Profit

 

     Three Months Ended June 30,  

($ in thousands)

   2013     2012     Change
2013 vs. 2012
 

Gross Profit Dollars

   $ 29,160      $ 22,479        29.7

Percentage of Net Sales

     24.1     20.2     3.9

Gross profit increased 29.7% to $29.2 million in the first quarter of fiscal 2014 from $22.5 million in the first quarter of fiscal 2013. The gross profit percentage for the first quarter of fiscal 2014 increased to 24.1% versus 20.2% in fiscal 2013. The increases in the first quarter of fiscal 2014 gross profit percentages were primarily due to higher volumes, product mix and improved efficiency.

 

12


Operating Expenses

 

     Three Months Ended June 30,  

($ in thousands)

   2013     2012     Change
2013 vs. 2012
 

Selling & Marketing

   $ 6,994      $ 6,807        2.7

Research & Development

     5,282        4,478        18.0

General & Administrative

     8,411        8,074        4.2
  

 

 

   

 

 

   

 

 

 

Total Operating Expenses

   $ 20,687      $ 19,359        6.9
  

 

 

   

 

 

   

 

 

 

Percentage of Net Sales

     17.1     17.4  

Selling and Marketing expenses increased 2.7% to $7.0 million in the first quarter of fiscal 2014 from $6.8 million in the first quarter of fiscal 2013, primarily due to increased advertising expenses. Research and Development expenses increased 18.0% to $5.3 million in the first quarter of fiscal 2014 compared to $4.5 million in the first quarter of fiscal 2013 due primarily to higher product development expenses. General and Administrative expenses increased 4.2% to $8.4 million in the first quarter of fiscal 2014 from $8.1 million in the first quarter of fiscal 2013 primarily due to higher compensation expenses.

Other Income / Expense

We had $9,000 in interest income in the first quarter of fiscal 2014 compared to $13,000 in the first quarter of fiscal 2013. Interest expense decreased to $3,000 in the first quarter of fiscal 2014 from $20,000 in the first quarter of fiscal 2013. Interest expense was lower due to decreased borrowing levels owing primarily to higher cash levels at the beginning of the fiscal year compared to last year.

Liquidity and Capital Resources

The seasonality of our 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 our working capital requirements. Historically, we have financed our 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. Our cash balances traditionally peak early in the fourth quarter and then decrease as working capital requirements increase when our snowmobile and ATV production cycles begin in the spring. Accounts receivable increased to $43.7 million at June 30, 2013 from $39.9 million at June 30, 2012. The accounts receivable balance at March 31, 2013 was $30.3 million. Inventory was $149.7 million at June 30, 2013 compared to $140.8 million at June 30, 2012 and $96.4 million at March 31, 2013. The increases in our accounts receivable and inventory balances as of June 30, 2013 compared to March 31, 2013 are due to the seasonality of our snowmobile, ATV and PG&A businesses. During the three months ended June 30, 2013, we repurchased 31,364 shares of our common stock at a total cost of $1.4 million, including shares purchased under the share repurchase program previously approved by the Board of Directors in May 2013. Cash and short-term investments were $48.9 million and $17.4 million at June 30, 2013 and 2012, respectively, and $112.8 million at March 31, 2013. Cash and short-term investments decreased from March 31, 2013, due to the seasonality of our business. Our investment objectives are first, safety of principal, and second, rate of return. No short-term bank borrowings were outstanding at June 30, 2013 and March 31, 2013, compared to $4.2 million at June 30, 2012.

We believe current available cash and cash generated from operations together with working capital financing through our available line of credit will provide sufficient funds to finance operations on a short and long-term basis.

Line of Credit

We have operated since November 2009 under a $60,000,000 secured bank credit agreement for the documentary and stand-by letters of credit and for working capital purposes. We may borrow up to $60,000,000 during June through November and up to $45,000,000 during all other months of the fiscal year. We were in compliance with the terms of the credit agreement as of June 30, 2013.

 

13


Dealer Floorplan Financing

We have agreements with GE Commercial Distribution Finance in the United States and TCF Commercial Finance Canada in Canada to provide snowmobile, ATV and ROV floorplan financing for our dealers. These agreements improve our liquidity by financing dealer purchases of products without requiring substantial use of our working capital. We are paid by the floorplan companies shortly after shipment and as part of our marketing programs, we pay the floorplan financing of our dealers for certain set time periods depending on the size of a dealer’s order.

Certain Information Concerning Off-Balance Sheet Arrangements

As of June 30, 2013, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. We are, therefore, not exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in these relationships.

Significant Accounting Policies

See our most recent Annual Report on Form 10-K for the year ended March 31, 2013 for a discussion of our critical accounting policies.

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, and future filings with the Securities and Exchange Commission, our press releases and oral statements made with the approval of an authorized executive officer, contain forward-looking statements that reflect our 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, including statements related to our fiscal 2014 outlook. In particular, these include, among others, statements relating to our anticipated capital expenditures, research and development expenditures, product introductions, the effect of weather conditions and dealer ordering processes on our net sales, legal proceedings, our expectations regarding material weakness remediation, our expectations regarding financing arrangements, our wholesale and retail sales and market share expectations, inventory levels, industry wholesale and retail sales expectations, depreciation and amortization expense, dividends, sufficiency of funds to finance our operations and capital expenditures, raw material and component supply expectations, adequacy of insurance, and the effect of regulations on us and our industry and our compliance with such regulations. 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 the following: product mix and volume; competitive pressure on sales, pricing and sales incentives; increases 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; consumer demand and confidence; and those factors set forth in the Company’s Annual Report on Form 10-K for the year ended March 31, 2013, under heading “Item 1A. Risk Factors.” We do 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

We are 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, 2013. As of June 30, 2013, we have notional Canadian dollar denominated cash flow hedges of approximately $152,412,000 (USD) with a weighted average contract exchange rate of 98.01 USD to CAD. The fair values of the Canadian dollar contracts at June 30, 2013 represent an unrealized gain of $5,009,000. A ten percent fluctuation in the currency rates as of June 30, 2013 would have resulted in a change in the fair value of the Canadian dollar hedge contracts of approximately $15,241,000. 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.

Information regarding inflation, foreign currency exchange rates and interest rates is discussed within “Quantitative and Qualitative Disclosures About Market Risk-Foreign Exchange Rates and Interest Rates” and Footnote A to the Financial Statements in the Company’s 2013 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 are not deemed to be significant.

 

14


Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, including our Chief Executive Officer and Chief Financial Officer, has conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) pursuant to Rule 13a-15 under the Exchange Act as of June 30, 2013. Based on management’s identification of the previously reported deficiencies in internal control over financial reporting that it considers to be material weaknesses, management has concluded that disclosure controls and procedures were not effective at June 30, 2013. Steps being undertaken to remediate these weaknesses are discussed below. Steps being undertaken to remediate the material weakness are discussed below. We expect the material weakness to be fully remediated before the end of our fiscal year.

Notwithstanding the identified material weakness described below, our management does not believe that these deficiencies had an adverse effect on our reported operating results or financial condition and management has determined that the financial statements and other information included in this report and other periodic filings present fairly in all material respects our financial condition, results of operations and cash flows at and for the periods presented in accordance with accounting principles generally accepted in the United States (“GAAP”).

Changes in Internal Control over Financial Reporting

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis.

As reported in our assessment of the effectiveness of our internal control over financial reporting as of March 31, 2013, included in “Item 9A. Controls and Procedures” of Form 10-K for the year ended March 31, 2013, a material weakness existed due to a number of deficiencies in internal controls in the areas outlined below, when considered in the aggregate. We are continuing to implement remedial actions as outlined in our remediation plan overseen by our audit committee.

Segregation of Duties: We did not maintain effective internal controls over the information technology environment that would enforce appropriate segregation of duties. Specifically, security access controls within our financial reporting application did not appropriately restrict access based on job responsibilities. We intend to improve the segregation of duties with the combination of increasing finance personnel, if or where appropriate, and reassign certain responsibilities within the group. We are also bringing in external experts to assess and improve our financial application security roles to optimize appropriate segregation of duties.

Review Procedures: Our internal controls over journal entries were not designed effectively enough to provide reasonable assurance that the entries were appropriately recorded and reviewed for precision, accuracy and completeness for key accounts and disclosures. We will install information technology controls related to dual journal entry approval. In addition we will redesign processes and controls to ensure a more precise review is performed for manual journal entries and reconciliations, where appropriate, relating to critical calculations and estimates.

Risk Assessment and Control Monitoring: We have hired an independent internal audit firm to assist us in strengthening our internal controls in the risk assessment area, as well as internal control policy and review areas and to provide additional assurance that internal control monitoring is in place and is effective.

The planned changes in the Company’s internal control noted above were begun during the Company’s most recent fiscal quarter ended June 30, 2013, but the changes are not yet complete.

 

15


Part II – OTHER INFORMATION

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Company Purchases of Company Equity Securities

On May 15, 2013, the Company’s Board of Directors approved a $30,000,000 share repurchase program. The share repurchase program does not have an expiration date. The following table presents the total number of shares repurchased during the first quarter of fiscal 2014 by fiscal month, the average price paid per share, the number of shares that were purchased as part of a publicly announced repurchase plan, and the approximate dollar value of shares that may yet be purchased pursuant to our stock repurchase program as of the end of the first quarter of fiscal 2014:

 

Period

   Total
Number
of Shares
Purchased (2)
     Average
Price
Paid per
Share
     Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
     Maximum Number
of Shares that May
Yet be Purchased
Under the Plans or
Programs (1)
 

April 1, 2013 – April 30, 2013

     4,325       $ 42.85         0         6,028   

May 1, 2013 – May 31, 2013

     —           —           0         645,579   

June 1, 2013 – June 30, 2013

     82,803         46.76         31,364         641,028   
  

 

 

    

 

 

       

Total

     87,128       $ 46.57         31,364         641,028   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) The Maximum Number of Shares Yet to Be Purchased for the April period represents the number of shares purchasable at the closing price of the Company’s common stock on the last day of the month under the January 2008 share repurchase program. On May 15, 2013, the Company’s Board of Directors authorized a share repurchase program of up to $30,000,000 of the Company’s common stock. The maximum number of Shares Yet to Be Purchased for the May and June periods represents the number of shares purchasable at the closing price of the Company’s common stock on the last day of the month under the May 2013 share repurchase program.
(2) All shares purchased were for the exercise and related income taxes for net-settled stock options, except 31,364 shares in June purchased under the share repurchase program.

We have historically purchased our common stock primarily to offset the dilution created by employee stock option plans and because the Board of Directors believed investment in our common stock was a good use of our excess cash.

Item 6. Exhibits

 

Exhibit
Number

 

Description

      
3 (a)   Amended and Restated Articles of Incorporation of the Company      (1
3 (b)   Amended and Restated By-Laws of the Company      (2
4 (a)   Form of specimen common stock certificate      (3
31.1   CEO Certification pursuant to section 302 of the Sarbanes-Oxley Act of 2002      (4
31.2   CFO Certification pursuant to 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
101   Financial statements from the quarterly report on Form 10-Q of the Company for the quarter ended June 30, 2013, formatted in XBRL: (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations, (iii) the Condensed Consolidated Statements of Comprehensive Income (Loss), (iv) the Condensed Consolidated Statements of Cash Flows, and (v) the Notes to the Condensed Consolidated Financial Statements.      (5

 

(1) Incorporated herein by reference to the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 1997.
(2) Incorporated herein by reference to the Company’s Current Report on Form 8-K filed January 16, 2013.
(3) Incorporated herein by reference to the Company’s Form S-1 Registration Statement. (File Number 33-34984)
(4) Filed with this Quarterly Report on Form 10-Q.
(5) Furnished with this Quarterly Report on Form 10-Q.

 

16


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: August 9, 2013     By  

/s/ Claude J. Jordan

      Claude J. Jordan
      Chief Executive Officer
Date: August 9, 2013     By  

/s/ Timothy C. Delmore

      Timothy C. Delmore
      Chief Financial Officer

 

17