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 June 30, 2004 or
o		Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

Commission File Number:   0-18607

 

ARCTIC CAT INC.

(Exact name of registrant as specified in its charter)

 

 

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 August 3, 2004, 14,018,122 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)

 

		June 30, 2004			March 31, 2004
ASSETS
CURRENT ASSETS
Cash and equivalents		$	12,035,000		$	44,045,000
Short-term investments		25,188,000			62,395,000
Accounts receivable, less allowances		37,565,000			28,274,000
Inventories		106,924,000			61,127,000
Prepaid expenses		3,204,000			3,592,000
Income taxes receivable		1,104,000			4,607,000
Deferred income taxes		12,821,000			12,020,000
Total current assets		198,841,000			216,060,000
PROPERTY AND EQUIPMENT - at cost
Machinery, equipment and tooling		129,173,000			125,584,000
Land, buildings and improvements		22,253,000			22,213,000
		151,426,000			147,797,000
Less accumulated depreciation		82,120,000			78,295,000
		69,306,000			69,502,000
		$	268,147,000		$	285,562,000
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable		$	42,584,000		$	48,148,000
Accrued expenses		30,296,000			34,900,000
Total current liabilities		72,880,000			83,048,000
DEFERRED INCOME TAXES		17,264,000			16,561,000
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, 13,956,165 at June 30, 2004; 14,285,882 at March 31, 2004		140,000			143,000
Class B common stock, par value $.01; 7,560,000 shares authorized; issued, and outstanding, 6,717,000 at June 30, 2004; and at March 31, 2004		67,000			67,000
Accumulated other comprehensive income (loss)		779,000			(221,000		)
Retained earnings		177,017,000			185,964,000
		178,003,000			185,953,000
		$	268,147,000		$	285,562,000

 

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 June 30,
		2004			2003
Net sales		$	102,594,000		$	77,189,000
Cost of goods sold		83,638,000			58,663,000
Gross profit		18,956,000			18,526,000
Selling, general and administrative expenses		18,982,000			18,625,000
Operating loss		(26,000		)	(99,000		)
Other income
Interest income		209,000			249,000
Earnings before income taxes		183,000			150,000
Income tax expense		59,000			48,000
Net earnings		$	124,000		$	102,000
Net earnings per share
Basic		$	0.01		$	0.00
Diluted		$	0.01		$	0.00
Weighted average shares outstanding
Basic		20,873,000			21,969,000
Diluted		21,146,000			22,251,000

 

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

 

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Arctic Cat Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

 

		Three Months Ended June 30,
		2004			2003
Cash flows from operating activities
Net earnings		$	124,000		$	102,000
Adjustments to reconcile net earnings To net cash used in operating activities
Depreciation		4,280,000			3,800,000
Deferred income taxes		(684,000		)	1,585,000
Tax benefit from stock option exercises		38,000			499,000
Changes in operating assets and liabilities:
Trading securities		35,699,000			39,594,000
Accounts receivable		(8,253,000		)	(9,711,000		)
Inventories		(45,797,000		)	(46,672,000		)
Prepaid expenses		388,000			867,000
Accounts payable		(4,909,000		)	(830,000		)
Accrued expenses		(4,604,000		)	(11,479,000		)
Income taxes		3,503,000			1,760,000
Net cash used in operating activities		(20,215,000		)	(20,485,000		)
Cash flows from investing activities
Purchase of property and equipment		(4,084,000		)	(3,945,000		)
Sale and maturity of available-for-sale securities		1,401,000			—
Net cash used in investing activities		(2,683,000		)	(3,945,000		)
Cash flows from financing activities
Proceeds from issuance of common stock		24,000			2,153,000
Dividends paid		(1,466,000		)	(1,322,000		)
Repurchase of common stock		(7,670,000		)	(7,047,000		)
Net cash used in financing activities		(9,112,000		)	(6,216,000		)
Net decrease in cash and equivalents		(32,010,000		)	(30,646,000		)
Cash and equivalents at the beginning of period		44,045,000			33,081,000
Cash and equivalents at the end of period		$	12,035,000		$	2,435,000
Supplemental disclosure of cash payments for income taxes		$	161,000		$	134,000

 

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 June 30, 2004 and, the results of operations for the three month periods ended June 30, 2004 and 2003 and cash flows for the three month periods ended June 30, 2004 and 2003.  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, 2004 is derived from the audited balance sheet as of that date.

 

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 months ended June 30, 2004 and 2003, would have been as follows had the fair value method been used for valuing stock options granted to employees:

 

		Three months ended June 30,
		2004			2003
Net earnings:
As reported		$	124,000		$	102,000
Additional compensation expense, net of tax		313,000			254,000
Proforma		$	(189,000	)	$	(152,000	)
Net earnings per share
As reported
Basic		$	0.01		$	0.00
Diluted		0.01			0.00
Proforma
Basic		$	(0.01	)	$	(0.01	)
Diluted		(0.01		)	(0.01		)

 

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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.  There were no anti-dilutive shares during the three months ended June 30, 2004. Options to purchase 24,721 shares of common stock with weighted average exercise prices of $19.74 were outstanding during the three months ended June 30, 2003 all of which were excluded from the computation of common share equivalents because they were anti-dilutive.

 

Weighted average shares outstanding consist of the following:

 

		Three Months Ended June 30,
		2004		2003
Weighted average number of common shares outstanding		20,873,000		21,969,000
Dilutive effect of option plan		273,000		282,000
Common and potential common shares outstanding - diluted		21,146,000		22,251,000

 

 

NOTE D—SHORT-TERM INVESTMENTS

 

Short-term investments consist of the following:

 

		June 30, 2004			March 31, 2004
Trading securities		$	19,583,000		$	55,282,000
Available-for-sale debt securities		5,605,000			7,113,000
		$	25,188,000		$	62,395,000

 

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NOTE E—INVENTORIES

 

Inventories consist of the following:

 

		June 30, 2004			March 31, 2004
Raw materials and sub-assemblies		$	23,602,000		$	16,942,000
Finished goods		49,687,000			14,719,000
Parts, garments and accessories		33,635,000			29,466,000
		$	106,924,000		$	61,127,000

 

NOTE F—ACCRUED EXPENSES

 

Accrued expenses consist of the following:

 

		June 30, 2004			March 31, 2004
Marketing		$	8,868,000		$	8,566,000
Compensation		4,112,000			9,206,000
Warranties		10,322,000			10,331,000
Insurance		5,508,000			5,061,000
Other		1,486,000			1,736,000
		$	30,296,000		$	34,900,000

 

NOTE G-PRODUCT WARRANTIES

 

The Company generally provides a limited warranty to the original owner of snowmobiles for twelve months from the date of consumer registration and for six months on ATVs. The Company provides for estimated warranty costs at the time of sale based on historical rates and trends and makes subsequent adjustments to its estimate as actual claims become known or the amounts are determinable. The following represents changes in accrued warranty for the three month periods ended June 30:

 

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		2004			2003
Balance at beginning of period		$	10,331,000		$	12,205,000
Warranty provision		2,025,000			1,334,000
Warranty claim payments		(2,034,000		)	(3,497,000		)
Balance at end of period		$	10,322,000		$	10,042,000

 

NOTE H—Shareholders’ Equity

 

Dividend Declaration

 

On August 4, 2004, the Company announced that it’s Board of Directors had declared a regular quarterly cash dividend of $0.07 per share, payable on September 2, 2004 to shareholders of record on August 18, 2004.

 

Share Repurchase

 

During the three months ended June 30, 2004 and 2003, the Company invested $7,670,000 and $7,047,000, respectively, to repurchase and cancel 336,000 and 393,000, shares respectively, pursuant to the Board of Directors’ authorizations. In June, 2004, the Company’s Board of Director’s approved an additional $20 million repurchase program. At June 30, 2004 authorization to repurchase $22,969,950 or approximately 834,361 shares remain outstanding.

 

Additional Paid-in-Capital

 

During the three months ended June 30, 2004 and 2003, additional paid-in-capital increases of $62,000 and $2,650,000 from the exercise of stock options were offset by share repurchases.

 

Accumulated Other Comprehensive Income

 

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

 

		Three months ended
		June 30, 2004			June 30, 2003
Total Accumulated Other Comprehensive
Income (Loss)
Balance at beginning of period		$	(221,000	)	$	(336,000	)
Unrealized loss on securities available-for-sale, net of tax		(67,000		)	(25,000		)
Unrealized gain (loss) on derivative instruments, net of tax		1,067,000			(3,124,000		)
Balance at end of period		$	779,000		$	(3,485,000	)

 

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Other Comprehensive Income

 

Other comprehensive income was as follows:

 

		Three months ended
		June 30, 2004			June 30, 2003
Net earnings		$	124,000		$	102,000
Unrealized loss on securities available-for-sale, net of tax		(67,000		)	(25,000		)
Unrealized gain on derivative instruments, net of tax		1,067,000			(3,124,000		)
Total Other Comprehensive Income		$	1,124,000		$	(3,047,000	)

 

Note I—COMMITMENTS AND CONTINGENCIES

 

Dealer Financing

 

Finance companies provide certain of the Company’s dealers and distributors with floor plan financing. The Company has agreements with these finance companies to repurchase certain repossessed products sold to its dealers. At June 30, 2004 the Company’s contingent maximum repurchase obligation was approximately $25,000,000. 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.

 

Litigation

 

The Company is subject to legal proceedings and claims which arise in the ordinary course of business.  Accidents involving personal injury and property damage occur in the use of snowmobiles and ATVs. Claims have been made against the Company from time to time. It is the Company’s policy to vigorously defend against these actions. The Company believes that the cases in discovery are adequately covered by reserves and product liability insurance. The Company is not involved in any legal proceedings which it believes will have the potential for a materially adverse impact on the Company’s business or financial condition, results of operations or cash flows.

 

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 dealers in Alaska, Europe, the Middle East, Asia, and other international markets. The Arctic Cat brand name has existed for more than 40 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.

 

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Results of Operations

 

THREE MONTHS ENDED JUNE 30, 2004 COMPARED TO THE THREE MONTHS ENDED JUNE 30, 2003.

 

Net sales for the first quarter of fiscal 2005 increased 32.9% to $102,594,000 from $77,189,000 for the first quarter of fiscal 2004. ATV sales increased 24.4% to $39,172,000 for the first quarter of 2005 from $31,492,000 for the same quarter in fiscal 2004. Snowmobile sales increased 45.8% to $50,698,000 for the first quarter of 2005 from $34,766,000 for the same quarter in fiscal 2004. Parts, garments and accessory sales increased 16.4% to $12,724,000 for the first quarter of 2005 from $10,931,000 in the same quarter in fiscal 2004. ATV unit volume increased 26.9% and snowmobile unit volume increased 25.4% for the first quarter of fiscal 2005 compared to the same quarter last year. For fiscal 2005, the Company expects snowmobile sales to be flat to down 4% 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 2005.

 

Gross profit for the first quarter of fiscal 2005 increased 2.3% to $18,956,000 from $18,526,000 for the same quarter in fiscal 2004.  The quarterly gross profit percentage for the first quarter in fiscal 2005 was 18.5%, compared to 24.0% for the first quarter in fiscal 2004. The decrease in the gross profit percentage was primarily due to increased ATV sales incentives and higher costs for snowmobile and ATV engines caused by a stronger yen.

 

Operating expenses for the first quarter of fiscal 2005 increased slightly to $18,982,000 from $18,625,000 for the first quarter of last year. As a percent of sales, operating expenses were 18.5% for the first quarter of fiscal 2005 versus 24.1% for the same quarter last year.

 

Other income for the first quarter of fiscal 2005 decreased 1.6% to $209,000 from $249,000 for the first quarter of last year, as a result of lower interest income earned on investments due to lower interest rates.

 

Net earnings for the first quarter of fiscal 2005 increased 21.6% to $124,000 from $102,000 for the same quarter last year. Diluted earnings per share were $0.01 and $0.00 for the first quarters of fiscal 2005 and 2004.

 

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 quarter ended June 30, 2004, the Company repurchased $7,670,000 of common shares compared to $7,047,000 for the same quarter of the prior year. Cash and short-term investments were $37,223,000 and $21,015,000 at June 30, 2004 and 2003 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.

 

10

 

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.

 

Contractual Obligations

 

The following table summarizes the Company’s significant future contractual obligations at June 30, 2004 (in millions):

 

 

(1)    The Company has outstanding purchase obligations with suppliers and vendors at June 30,   2004 for raw materials and other supplies as part of the normal course of business.

 

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 inflation, foreign currency exchange rates and interest rates. These market risks have not changed significantly since March 31, 2004. As of June 30, 2004 the Company has notional yen denominated cash flow hedges of approximately $47 million (USD) with a weighted average contract exchange rate of 109. Information regarding inflation,  foreign currency exchange rates and interest rates, is discussed within “Management’s Discussion and Analysis – Inflation, Exchange Rate and interest rate” and footnote A to the Financial Statements in the 2004 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.

 

PART II - OTHER INFORMATION

 

Item 2 -  Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities.

 

Period		Total Number of Shares Purchased		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
April 1, 2004 – April 30, 2004		0		$	—		0		446,487
May 1, 2004 – May 30, 2004		229,400		$	22.76		229,400		233,740
June 1, 2004 – June 30, 2004		105,000		$	23.03		105,000		834,361

 

The Company purchases Company common stock primarily to offset the dilution created by employee stock option programs and as an alternative in returning excess cash to shareholders.

 

The Company has a publicly announced stock repurchase stock purchase program which has been approved by the Board of Directors. The Board approved a $20 million repurchase program in August 2002. In June 2004, the Board of Directors approved an additional $20 million repurchase program. Pricing under these programs has been delegated to management. There is no expiration date for these programs.

 

The Company has executed the Company stock purchases in accordance with Rule 10b-18 of the Securities Exchange Act of 1934. There have been no other purchases of the Company’s common stock.

 

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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)
10 (a)		Program Agreement, dated as of January 20, 2003, by and between Arctic Cat Sales Inc. and Textron Financial Corporation (Confidential treatment pursuant to 17 CFR Sections 200.80(b) and 240.246-2 has been granted for certain portions of this exhibit. Such portions have been omitted herein and have been filed separately with the SEC.)		(5)
10 (b)		Repurchase Agreement, dated as of January 20, 2003, by and between Arctic Cat Sales Inc. and Textron Financial Corporation.		(5)
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.
(5)				Incorporated herein by reference to The Company’s Form 10-Q for the quarter ended December 31, 2003.
(b)		Reports on Form 8-K
		On May 13, 2004, the Company filed a Form 8-K under item 12 to furnish its results of operations for the fiscal year ended March 31, 2004.
		On July 21, 2004, the Company filed a Form 8-K under item 12 to furnish its results of operations for the three months ended June 30, 2004.

 

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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:	August 9, 2004			By	s/ Christopher A. Twomey
					Christopher A. Twomey
					Chief Executive Officer
Date:	August 9, 2004			By	s/ Timothy C. Delmore
					Timothy C. Delmore
					Chief Financial Officer

 

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