UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

 

ý	Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
for the quarter ended September 30, 2003 or
o	Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Commission File Number:  0-18607

 

 

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     ý     No     o

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

 

Yes     ý     No     o

 

At November 12, 2003, 14,280,014 shares of Common Stock and 6,717,000 shares of Class B Common Stock of the Registrant were outstanding.

 

 

Part I - - FINANCIAL INFORMATION

ITEM I     FINANCIAL STATEMENTS

Arctic Cat Inc.

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited)

 

		September 30, 2003			March 31, 2003
ASSETS
CURRENT ASSETS
Cash and equivalents		$	8,270,000		$	33,081,000
Short-term investments		32,429,000			58,214,000
Accounts receivable, less allowances		75,639,000			29,018,000
Inventories		108,229,000			71,723,000
Prepaid expenses		822,000			3,829,000
Income taxes receivable		—			5,009,000
Deferred income taxes		16,374,000			14,417,000
Total current assets		241,763,000			215,291,000
PROPERTY AND EQUIPMENT - at cost
Machinery, equipment and tooling		120,850,000			110,924,000
Land, buildings and improvements		20,897,000			20,428,000
		141,747,000			131,352,000
Less accumulated depreciation		76,985,000			68,352,000
		64,762,000			63,000,000
		$	306,525,000		$	278,291,000
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable		$	59,127,000		$	35,865,000
Accrued expenses		45,002,000			42,462,000
Income taxes payable		8,941,000			—
Total current liabilities		113,070,000			78,327,000
DEFERRED INCOME TAXES		12,177,000			12,678,000
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, 14,284,274 at September 30, 2003; 14,487,849 at March 31, 2003		143,000			144,000
Class B common stock, par value $.01; 7,560,000 shares authorized; issued, and outstanding, 6,717,000 at September 30, 2003; 7,560,000 at March 31, 2003.		67,000			76,000
Accumulated other comprehensive loss		(1,342,000		)	(336,000		)
Retained earnings		182,410,000			187,402,000
		181,278,000			187,286,000
		$	306,525,000		$	278,291,000

 

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

 

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Arctic Cat Inc.

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(unaudited)

 

		Three Months Ended September 30,						Six Months Ended September 30,
		2003			2002			2003			2002
Net sales		$	237,650,000		$	211,242,000		$	314,839,000		$	289,525,000
Cost of goods sold		181,478,000			158,272,000			240,141,000			217,712,000
Gross profit		56,172,000			52,970,000			74,698,000			71,813,000
Selling, general and administrative expenses		24,616,000			23,032,000			43,241,000			39,357,000
Operating profit		31,556,000			29,938,000			31,457,000			32,456,000
Other income
Interest income		162,000			238,000			411,000			616,000
Earnings before income taxes		31,718,000			30,176,000			31,868,000			33,072,000
Income tax expense		10,149,000			9,656,000			10,197,000			10,583,000
Net earnings		$	21,569,000		$	20,520,000		$	21,671,000		$	22,489,000
Net earnings per share
Basic		$	0.99		$	0.92		$	0.99		$	0.99
Diluted		$	0.98		$	0.91		$	0.98		$	0.98
Weighted average shares outstanding
Basic		21,707,000			22,414,000			21,838,000			22,708,000
Diluted		21,999,000			22,600,000			22,125,000			22,962,000

 

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

 

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Arctic Cat Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

 

		Six Months Ended September 30,
		2003			2002
Cash flows from operating activities
Net earnings		$	21,671,000		$	22,489,000
Adjustments to reconcile net earnings to net cash provided by (used in) operating activities
Depreciation		9,486,000			7,787,000
Deferred income taxes		(1,866,000		)	(2,438,000		)
Tax benefit from stock option exercises		1,112,000			675,000
Changes in operating assets and liabilities:
Trading securities		25,107,000			4,308,000
Accounts receivable		(46,621,000		)	(46,332,000		)
Inventories		(36,506,000		)	(32,368,000		)
Prepaid expenses		3,007,000			2,245,000
Accounts payable		21,768,000			16,044,000
Accrued expenses		2,540,000			3,032,000
Income taxes		13,950,000			13,630,000
Net cash provided by (used in) operating activities		13,648,000			(10,928,000		)
Cash flows from investing activities
Purchase of property and equipment		(11,248,000		)	(7,913,000		)
Sale and maturity of available-for-sale securities		574,000			1,235,000
Net cash used in investing activities		(10,674,000		)	(6,678,000		)
Cash flows from financing activities
Proceeds from issuance of common stock		4,031,000			2,340,000
Dividends paid		(2,631,000		)	(2,732,000		)
Repurchase of common stock		(29,185,000		)	(22,357,000		)
Net cash used in financing activities		(27,785,000		)	(22,749,000		)
Net decrease in cash and equivalents		(24,811,000		)	(40,355,000		)
Cash and equivalents at the beginning of period		33,081,000			43,466,000
Cash and equivalents at the end of period		$	8,270,000		$	3,111,000
Supplemental disclosure of cash payments for income taxes		$	301,000		$	2,665,000

 

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

 

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Arctic Cat Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

NOTE A—BASIS OF PRESENTATION

 

The accompanying unaudited condensed consolidated financial statements of Arctic Cat Inc. (the “Company”) have been prepared in accordance with Regulation S-X pursuant to the rules and regulations of the Securities and Exchange Commission.  Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations, although management believes that the disclosures are adequate to make the information presented not misleading.

 

In the opinion of management, the unaudited condensed consolidated financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the financial position as of September 30, 2003 and, the results of operations for the three and six month periods ended September 30, 2003 and 2002 and cash flows for the six month period ended September 30, 2003 and 2002.  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–STOCK BASED COMPENSATION

 

The Company utilizes the intrinsic value method of accounting for its employee stock-based compensation plans.

 

The Company’s reported net earnings and basic and diluted net earnings per share for the three and six months ended September 30, 2003 and 2002, would have been as follows had the fair value method been used for valuing stock options granted to employees.

 

		Three months ended September 30,
		2003			2002
Net earnings:
As reported		$	21,569,000		$	20,520,000
Additional compensation expense, net of tax		331,000			381,000
Proforma		$	21,238,000		$	20,139,000
Net earnings per share
As reported
Basic		$	0.99		$	0.92
Diluted		$	0.98		$	0.91
Proforma
Basic		$	0.98		$	0.90
Diluted		$	0.97		$	0.89

 

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		Six months ended September 30,
		2003			2002
Net earnings:
As reported		$	21,671,000		$	22,489,000
Additional compensation expense, net of tax		585,000			592,000
Proforma		$	21,086,000		$	21,897,000
Net earnings per share
As reported
Basic		$	0.99		$	0.99
Diluted		$	0.98		$	0.98
Proforma
Basic		$	0.97		$	0.96
Diluted		$	0.95		$	0.95

 

NOTE C—NET EARNINGS PER SHARE

 

The Company’s basic net earnings per share is computed by dividing net earnings by the weighted average number of outstanding common shares.  The Company’s diluted net earnings per share is computed by dividing net earnings by the weighted average number of outstanding common shares and common share equivalents relating to stock options, when dilutive.  Options to purchase 316,000 and 621,486 shares of common stock with weighted average exercise prices of $21.03 and $15.48 were outstanding during the three months ended September 30, 2003 and 2002 and options to purchase 170,360 and 323,104 shares of common stock with weighted average exercise prices of $20.94 and $15.64 were outstanding during the six months ended September 30, 2003 and 2002, all of which were excluded from the computation of common share equivalents because they were anti-dilutive.

 

NOTE D—SHORT-TERM INVESTMENTS

 

Short-term investments consist of the following:

 

		September 30, 2003			March 31, 2003
Trading securities		$	24,020,000		$	49,127,000
Available-for-sale debt securities		8,409,000			9,087,000
		$	32,429,000		$	58,214,000

 

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NOTE E—INVENTORIES

 

Inventories consist of the following:

 

		September 30, 2003			March 31, 2003
Raw materials and sub-assemblies		$	22,728,000		$	17,575,000
Finished goods		48,835,000			22,293,000
Parts, garments and accessories		36,666,000			31,855,000
		$	108,229,000		$	71,723,000

 

NOTE F—ACCRUED EXPENSES

 

Accrued expenses as of September 30, 2003 consisted of marketing $15,117,000, compensation $6,289,000, warranties $13,943,000, insurance $5,466,000, PWC exit costs $877,000 and other $3,310,000.  Accrued expenses as of September 30, 2002 consisted of marketing $16,207,000, compensation $5,935,000, warranties $16,076,000, insurance $3,973,000, PWC exit costs $7,360,000 and other $3,295,000. Accrued expenses as of March 31, 2003 consisted of marketing $13,275,000, compensation $8,389,000, warranties $12,205,000, insurance $5,619,000, PWC exit costs $877,000 and other $2,097,000. The change in the Company’s accrued warranty from March 31, 2003 through September 30, 2003 is a result of expense of $6,716,000 less cash payments of $4,978,000.

 

NOTE G—Shareholders’ Equity

 

Dividend Declaration

 

On October 22, 2003, the Company announced that its Board of Directors had declared a regular quarterly cash dividend of $0.07 per share, payable on December 2, 2003 to shareholders of record on November 11, 2003.

 

Share Repurchase

 

During the six months ended September 30, 2003 and 2002, the Company invested $29,185,000 and $22,257,000, respectively, to repurchase and cancel 1,419,000 and 1,246,000, respectively, shares pursuant to the Board of Directors’ authorizations.  Included in the 2003 repurchases are 843,000 share of Class B stock from Suzuki Motor Corporation, repurchased for $18,259,000 or $21.66 per share.

 

Additional Paid in Capital

 

During the six months ended September 30, 2003 and 2002, additional paid in capital increases of $5,140,000 and $3,013,000 from the exercise of stock options were offset by share repurchases.

 

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Accumulated Other Comprehensive Income

 

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

 

		Six months ended
		September 30, 2003			September 30, 2002
Total Accumulated Other Comprehensive
Income (Loss)
Balance at beginning of period		$	(336,000	)	$	(122,000	)
Unrealized gain (loss) on securities available-for-sale, net of tax		(65,000		)	124,000
Unrealized gain (loss) on derivative instruments, net of tax		(941,000		)	579,000
Balance at end of period		$	(1,342,000	)	$	581,000

 

Other Comprehensive Income

 

Other comprehensive income was as follows:

 

		Six months ended
		September 30, 2003			September 30, 2002
Net earnings		$	21,671,000		$	22,489,000
Unrealized gain (loss) on securities available-for-sale, net of tax		(65,000		)	124,000
Unrealized gain (loss) on derivative instruments, net of tax		(941,000		)	579,000
Total Other Comprehensive Income		$	20,665,000		$	23,192,000

 

Note H–COMMITMENTS AND CONTINGENCIES

 

Litigation

 

The Company is subject to legal proceedings and claims which arise in the ordinary course of business.  In the opinion of management, the ultimate outcome of these matters will not be material to the Company’s consolidated financial position, results of operations or cash flows.

 

Item 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Overview

 

Arctic Cat Inc. (the “Company”) designs, engineers, manufactures and markets snowmobiles and all-terrain vehicles (ATVs) under the Arctic Cat brand name, as well as related parts, garments and accessories 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

 

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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 National Market under the symbol ACAT.

 

Results of Operations

 

THREE AND SIX MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO THE THREE AND SIX MONTHS ENDED SEPTEMBER 30, 2002.

 

Net sales for the second quarter of fiscal 2004 increased 12.5% to $237,650,000 from $211,242,000 for the second quarter of fiscal 2003 due to a 16.8%, or $16,928,000, increase in snowmobile sales and a 14.2% or $11,412,000 increase in ATV sales. These increases were offset by a 6.4% or $1,932,000 decrease in parts, garments and accessory sales. Snowmobile unit volume increased 7.3% and ATV unit volume decreased 4.3% for the second quarter of fiscal 2004 compared to the same quarter last year. Quarter-to-quarter sales mix and units shipped is determined primarily by production cycles for snowmobiles and by production cycles and orders received for ATV sales. Year-to-date net sales increased 8.7% to $314,839,000 from $289,525,000 for the first six months of fiscal 2004 due to a 22.1% increase in ATV sales and a 3.2% increase in snowmobile sales, which offset a 4.0% decrease in parts, garments and accessory sales. Year-to-date snowmobile unit volume decreased 4.9% while ATV unit volume increased 3.3%. For fiscal 2004, the Company expects snowmobile sales to decline by approximately 2 percent but expects this decline to be offset by increased sales of ATVs and parts, garments, and accessories resulting in a modest increase in net sales for fiscal 2004 compared to fiscal 2003.

 

Gross profit for the second quarter of fiscal 2004 increased 6.0% to $56,172,000 from $52,970,000 for the same quarter in fiscal 2003.  The quarterly gross profit percentage for the second quarter in fiscal 2004 was 23.6%, compared to 25.1% for the second quarter in fiscal 2003. Year-to-date gross profit increased 4.0% to $74,698,000 from $71,813,000 for the same period last year. The year-to-date gross profit percentage was 23.7% compared to 24.8% for the same period last year. Both the quarterly and year-to-date decreases in the gross profit percentages were primarily due to increased ATV sales and less parts, garments and accessories in the sales mix than a year ago.

 

Operating expenses for the second quarter of fiscal 2004 increased 6.9% to $24,616,000 from $23,032,000 for the second quarter of last year. As a percent of sales, operating expenses were 10.4% for the second quarter of fiscal 2004 versus 10.9% for the same quarter last year. Year-to-date operating expenses for the period ended September 30, 2003 were $43,241,000 compared to $39,357,000 for the same period last year. As a percent of sales, operating expenses were 13.7% for the first six months of fiscal 2004 compared to 13.6% for the first six months of fiscal 2003. Both the quarterly and year-to-date increases in operating expenses resulted from increased operating expenses related to increased sales levels.

 

Other income for the second quarter of fiscal 2004 decreased 31.9% to $162,000 from $238,000 for the second quarter of last year. Year-to-date other income decreased 33.3% to $411,000 from $616,000. Both the quarterly and year-to-date decreases resulted from lower interest income earned on investments due to lower interest rates and lower average cash balances.

 

Net earnings for the second quarter of fiscal 2004 increased 5.1% to $21,569,000 from $20,520,000 for the same quarter last year. Diluted earnings per share were $0.98 and $0.91 for the second quarters of fiscal 2004 and 2003. Year-to-date net earnings decreased 3.6% to $21,671,000 from $22,489,000. Year-to-date diluted net earnings per share for the first six months of fiscal 2004 were $0.98 compared to $0.98 per share for the same period last year.

 

9

 

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. The Company’s cash balances traditionally peak early in the fourth quarter and then decrease as working capital requirements increase when the Company’s snowmobile and spring ATV production cycles begin.  During the six months ended September 30, 2003, the Company repurchased $29,185,000 of common shares compared to $22,357,000 for the same six month period of the prior year. Cash and short-term investments were $40,699,000 and $56,338,000 at September 30, 2003 and 2002 respectively. The Company’s investment objectives are first, safety of principal and second, rate of return.

 

The Company believes that the cash generated from operations and available cash will be sufficient to meet its working capital, regular quarterly dividend, share repurchase program, and capital expenditure requirements on a short and long-term basis.

 

Line of Credit

 

The Company has an unsecured credit agreement with a bank for the issuance of up to $45,000,000 of documentary and stand-by letters of credit and for working capital and in addition has a $15,000,000 seasonal credit agreement for the Company’s peak production period.

 

Forward Looking Statements

 

The Private Securities Litigation Reform Act of 1995 provides a safe harbor for certain forward-looking statements.  This form 10-Q contains forward-looking statements that reflect the Company’s current views with respect to future events and financial performance.  These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results or those anticipated.  The words “aim,” “believe,” “expect,” “anticipate,” “intend,” “estimate,” and other expressions that indicate future events and trends identify forward-looking statements.  Actual future results and trends may differ materially from historical results or those anticipated depending on a variety of factors, including, but not limited to: product mix and volume; competitive pressure on sales 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 and consumer demand and confidence.

 

Item 3.     Quantitative and Qualitative Disclosures about Market Risk

 

The Company is subject to certain market risk relating to changes in interest rates and foreign currency exchange rates.  Information regarding foreign currency exchange rates is discussed within “Management’s Discussion and Analysis — Inflation and Exchange Rate” and footnote A to the Financial Statements in the 2003 Annual Report on Form 10-K. Interest rate market risk is managed for cash and short-term investments by investing in a diversified frequently maturing portfolio consisting of municipal bonds and money market funds that experience minimal volatility and is not deemed to be significant.

 

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Item 4. Controls and Procedures

 

The Company’s management, including the Chief Executive Officer, have conducted an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934 (the “1934 Act”)as of the end of the period covered by this report. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective in ensuring that information required to be disclosed by the Company in the reports it files or submits under the 1934 Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

 

There have been no changes in internal control over financial reporting that has materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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PART II - OTHER INFORMATION

 

Item 6.  Exhibits and Reports on Form 8-K

 

Exhibit Number		Description
3 (a)		Amended and Restated Articles of Incorporation of Company (3)
3 (b)		Restated By-Laws of the Company (1)
4 (a)		Form of Specimen Common Stock Certificate (1)
4 (b)		Rights Agreement by and between the Company and Wells Fargo Bank Minnesota, N.A., dated September 17, 2001 (4)
31.1		CEO Certification pursuant to section 302 of the Sarbanes-Oxley Act of 2002. (2)
31.2		CFO Certification pursuant section 302 of the Sarbanes-Oxley Act Of 2002. (2)
32.1		CEO Certification pursuant to section 906 of the Sarbanes-Oxley Act of 2002. (2)
32.2		CFO Certification pursuant to section 906 of the Sarbanes-Oxley Act of 2002. (2)

 

(1)                                                          Incorporated herein by reference to the Company’s Form S-1 Registration Statement (File Number 33-34984).

(2)                                                          Filed with this Form 10-Q.

(3)                                                          Incorporated herein by reference to the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 1997.

(4)                                                          Incorporated by reference to Exhibit 1 to the Company’s Registration on Form 8-A filed with the SEC on September 20, 2001.

 

(b)		Reports on Form 8-K
		On July 22, 2003 the Company furnished a Form 8-K under Item 9 (for Item 12 as permitted by SEC guidance) regarding its results of operations and also furnished a transcript of a related conference call for the three months ended June 30, 2003.
		On October 21, 2003, the Company furnished a Form 8-k under item 12 regarding its results of operations and also furnished a transcript of a related conference call for the six months ended September 30, 2003.

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

			ARCTIC CAT INC.
Date:	November 14, 2003		By s/Christopher A. Twomey
			Christopher A. Twomey
			Chief Executive Officer
Date:	November 14, 2003		By s/Timothy C. Delmore
			Timothy C. Delmore
			Chief Financial Officer

 

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