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Table of Contents

 

 

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 September 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 November 1, 2013, the registrant had 13,446,302 shares of Common Stock outstanding.

 

 

 


Table of Contents

ARCTIC CAT INC.

TABLE OF CONTENTS

 

PART I FINANCIAL INFORMATION

  

ITEM 1.

  FINANCIAL STATEMENTS      3   
  UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS      3   
  UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS      4   
  UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME      5   
  UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS      6   
  NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS      7   

ITEM 2.

  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS      15   

ITEM 3.

  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK      19   

ITEM 4.

  CONTROLS AND PROCEDURES      19   

PART II OTHER INFORMATION

  

ITEM 2.

  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS      21   

ITEM 6.

  EXHIBITS      21   

 

- 2 -


Table of Contents

Part I – FINANCIAL INFORMATION

ITEM 1 – FINANCIAL STATEMENTS

Arctic Cat Inc.

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited)

 

     September 30,
2013
    March 31,
2013
 

ASSETS

    

Current Assets

    

Cash and cash equivalents

   $ 40,074,000      $ 35,566,000   

Short-term investments

     —          77,241,000   

Accounts receivable, less allowances

     105,071,000        30,296,000   

Inventories

     171,174,000        96,389,000   

Prepaid expenses

     1,588,000        3,032,000   

Deferred income taxes

     15,776,000        16,820,000   
  

 

 

   

 

 

 

Total current assets

     333,683,000        259,344,000   

Property and Equipment

    

Machinery, equipment and tooling

     166,577,000        160,674,000   

Land, buildings and improvements

     29,468,000        29,243,000   
  

 

 

   

 

 

 
     196,045,000        189,917,000   

Less accumulated depreciation

     149,212,000        144,378,000   
  

 

 

   

 

 

 
     46,833,000        45,539,000   

Other Assets

     1,273,000        1,262,000   
  

 

 

   

 

 

 
   $ 381,789,000      $ 306,145,000   
  

 

 

   

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

    

Current Liabilities

    

Accounts payable

   $ 112,382,000      $ 66,599,000   

Accrued expenses

     56,208,000        55,736,000   

Income taxes payable

     6,770,000        4,957,000   
  

 

 

   

 

 

 

Total current liabilities

     175,360,000        127,292,000   

Deferred Income Taxes

     4,571,000        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: 13,446,302 at September 30, 2013 and 13,203,682 at March 31, 2013

     134,000        132,000   

Additional paid-in-capital

     9,816,000        10,945,000   

Accumulated other comprehensive loss

     (1,809,000     (4,166,000

Retained earnings

     193,717,000        167,561,000   
  

 

 

   

 

 

 

Total shareholders’ equity

     201,858,000        174,472,000   
  

 

 

   

 

 

 
   $ 381,789,000      $ 306,145,000   
  

 

 

   

 

 

 

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

 

- 3 -


Table of Contents

Arctic Cat Inc.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

 

     Three Months Ended
September 30,
    Six Months Ended
September 30,
 
     2013     2012     2013     2012  

Net sales

        

Snowmobile & ATV units

   $ 208,076,000      $ 198,274,000      $ 306,990,000      $ 289,227,000   

Parts, garments & accessories

     30,449,000        30,756,000        52,303,000        51,114,000   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net sales

     238,525,000        229,030,000        359,293,000        340,341,000   

Cost of goods sold

        

Snowmobile & ATV units

     157,748,000        146,000,000        235,656,000        221,556,000   

Parts, garments & accessories

     19,103,000        19,000,000        32,803,000        32,276,000   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of goods sold

     176,851,000        165,000,000        268,459,000        253,832,000   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     61,674,000        64,030,000        90,834,000        86,509,000   

Operating expenses

        

Selling & marketing

     12,116,000        12,018,000        19,110,000        18,825,000   

Research & development

     6,286,000        4,867,000        11,568,000        9,345,000   

General & administrative

     7,019,000        8,391,000        15,430,000        16,465,000   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     25,421,000        25,276,000        46,108,000        44,635,000   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating profit

     36,253,000        38,754,000        44,726,000        41,874,000   

Other income (expense)

        

Interest income

     7,000        4,000        16,000        17,000   

Interest expense

     (37,000     (62,000     (40,000     (82,000
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other expense

     (30,000     (58,000     (24,000     (65,000
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings before income taxes

     36,223,000        38,696,000        44,702,000        41,809,000   

Income tax expense

     12,858,000        13,737,000        15,869,000        14,842,000   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings

   $ 23,365,000      $ 24,959,000      $ 28,833,000      $ 26,967,000   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings per share

        

Basic

   $ 1.75      $ 1.90      $ 2.17      $ 2.06   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

   $ 1.70      $ 1.80      $ 2.10      $ 1.95   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares outstanding

        

Basic

     13,379,000        13,152,000        13,297,000        13,106,000   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

     13,726,000        13,828,000        13,718,000        13,852,000   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

- 4 -


Table of Contents

Arctic Cat Inc.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

 

     Three Months Ended
September 30,
    Six Months Ended
September 30,
 
     2013     2012     2013      2012  

Net earnings

   $ 23,365,000      $ 24,959,000      $ 28,833,000       $ 26,967,000   

Other comprehensive income (loss):

         

Foreign currency translation adjustments

     1,088,000        656,000        1,726,000         (907,000

Unrealized gain (loss) on derivative instruments, net of tax

     (2,500,000     (2,513,000     631,000         (1,194,000
  

 

 

   

 

 

   

 

 

    

 

 

 

Comprehensive income

   $ 21,953,000      $ 23,102,000      $ 31,190,000       $ 24,866,000   
  

 

 

   

 

 

   

 

 

    

 

 

 

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

 

- 5 -


Table of Contents

Arctic Cat Inc.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

     Six Months Ended
September 30,
 
     2013     2012  

Cash flows from operating activities:

    

Net earnings

   $ 28,833,000      $ 26,967,000   

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

    

Depreciation and amortization

     7,017,000        6,970,000   

Deferred income tax expense (benefit)

     863,000        (1,532,000

Stock-based compensation expense

     1,921,000        1,530,000   

Loss on disposal of fixed assets

     1,000        48,000   

Changes in operating assets and liabilities:

    

Trading securities

     77,240,000        38,438,000   

Accounts receivable

     (73,322,000     (61,304,000

Inventories

     (73,407,000     (46,345,000

Prepaid expenses

     1,450,000        1,551,000   

Accounts payable

     45,740,000        26,248,000   

Accrued expenses

     335,000        1,970,000   

Income taxes

     1,438,000        12,319,000   
  

 

 

   

 

 

 

Net cash provided by operating activities

     18,109,000        6,860,000   

Cash flows from investing activities:

    

Purchases of property and equipment

     (8,326,000     (5,585,000
  

 

 

   

 

 

 

Net cash used in investing activities

     (8,326,000     (5,585,000

Cash flows from financing activities:

    

Proceeds from issuance of common stock

     18,000        11,000   

Payments for income taxes on net-settled option exercises

     (7,627,000     (6,029,000

Tax benefit from stock options exercises

     7,493,000        6,525,000   

Dividends paid

     (2,677,000     —     

Repurchase of common stock

     (2,933,000     (1,643,000
  

 

 

   

 

 

 

Net cash used in financing activities

     (5,726,000     (1,136,000

Effect of exchange rate changes on cash and cash equivalents

     451,000        (305,000
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     4,508,000        (166,000

Cash and cash equivalents at beginning of period

     35,566,000        24,138,000   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 40,074,000      $ 23,972,000   
  

 

 

   

 

 

 

Supplemental disclosure of cash payments for:

    

Income taxes

   $ 5,722,000      $ 1,884,000   
  

 

 

   

 

 

 

Interest

   $ 40,000      $ 66,000   
  

 

 

   

 

 

 

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

 

- 6 -


Table of Contents

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 September 30, 2013, and results of operations for the three-month and six-month periods ended September 30, 2013 and 2012 and cash flows for the six-month periods ended September 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

In August 2013, the Company’s shareholders adopted the 2013 Omnibus Stock and Incentive Plan (the “2013 Plan”). Under the 2013 Plan, 1,100,000 shares are available for grant. The 2013 Plan permits the granting of stock options, stock appreciation rights, restricted stock and restricted stock units, performance awards, other stock awards and dividend and dividend equivalents. At September 30, 2013, 1,099,500 shares of common stock remain available for issuance under the 2013 Plan.

In August 2007, the Company’s shareholders adopted the 2007 Omnibus Stock and Incentive Plan (the “2007 Plan”, and along with the 2013 Plan, “the Plans”). As of September 30, 2013, 491,395 stock options, 16,200 shares of restricted stock, and 41,723 restricted stock units issued from the 2007 Plan are outstanding and 500 shares of restricted stock from the 2013 Plan are outstanding. The terms of the 2007 Plan are substantially identical to those of the 2013 Plan. With the adoption of the 2013 Plan, the Company’s Board of Directors determined no further awards will be granted from the 2007 Plan, of which 945,363 shares were available for grant at September 30, 2013.

Option transactions under the plans during the six months ended September 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

     (606,393     15.73         

Cancelled

     (9,071     25.68         
  

 

 

   

 

 

       

Outstanding at September 30, 2013

     491,395      $ 24.75         8.03 years       $ 15,872,000   
  

 

 

   

 

 

    

 

 

    

 

 

 

Exercisable at September 30, 2013

     265,659      $ 17.80         7.61 years       $ 10,427,000   
  

 

 

   

 

 

    

 

 

    

 

 

 

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

 

- 7 -


Table of Contents

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

Options Outstanding

 

Range of Exercise Prices

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

$6.26-9.38

     7,800         3.29 years       $ 6.26   

9.57-13.84

     57,164         6.34 years         10.91   

14.68-21.03

     238,507         7.64 years         15.99   

21.96-27.69

     24,000         10.00 years         24.83   

33.67-43.79

     163,924         9.10 years         43.19   
  

 

 

    

 

 

    

 

 

 
     491,395         8.03 years       $ 24.75   
  

 

 

    

 

 

    

 

 

 

Options Exercisable

 

Range of Exercise Prices

   Number Exercisable      Weighted-Average
Exercise Price
 

$6.26-9.38

     7,800       $ 6.26   

9.57-13.84

     54,826         10.79   

14.68-21.03

     157,170         16.13   

21.96-27.69

     24,000         24.83   

33.67-43.79

     21,863         43.79   
  

 

 

    

 

 

 
     265,659       $ 17.80   
  

 

 

    

 

 

 

Stock Options

The Company accounts for stock option-based compensation by estimating the fair value of options granted using a Black-Scholes option valuation model. The Company recognizes the expense for grants of stock options on a straight-line basis in the statement of operations as general and administrative expense based on their fair value over their requisite service periods. At September 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 September 30, 2013, the Company had 1,099,500 shares available for future grant under its stock option plans. Stock options awarded to Directors generally have the same terms and valuation as those awarded to employees of the Company. For stock options issued during the three months ended September 30, 2013 and September 30, 2012, the following assumptions were used to determine fair value:

 

     Three Months Ended September 30, 2013  

Assumptions used:

   2013     2012  

Expected term (in years)

     5 years        5 years   

Expected volatility

     49.0     47.0

Risk free interest rate

     0.81     1.30

Expected dividend

     1.0     1.0

Fair Value

   $ 21.68      $ 23.74   

At September 30, 2013, the Company had $3,819,000 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 September 30, 2013 and 2012, the Company recorded stock-based compensation expense for stock options and restricted stock awards of $592,000 and $458,000, respectively, and for the six months ended September 30, 2013 and 2012, the Company recorded stock-based compensation expense for stock options and restricted stock awards of $1,921,000 and $1,530,000, respectively,

 

- 8 -


Table of Contents

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 $0.03 and $0.02 for each of the three months ended September 30, 2013 and 2012, respectively, and by $0.09 and $0.07 for the six months ended September 30, 2013 and 2012, respectively.

The expected term of options granted is the safe harbor period. The volatility is based on historic volatilities from the traded shares of the Company over the past two and one-half years. The risk-free interest rate for periods matching the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. Expected dividend is based on the historic dividend of the Company. The Company has analyzed the forfeitures of stock and option grants and has used a ten percent forfeiture rate in the expense calculation.

Restricted Stock

The 2013 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 September 30, 2013, the Company had 16,200 shares of restricted common stock issued and outstanding and 41,723 unvested restricted stock units outstanding under the 2007 Plan and 500 shares of restricted common stock were issued and outstanding under the 2013 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.

Compensation expenses associated with restricted stock awards totaled $175,000 and $192,000 for the three months ended September 30, 2013 and 2012, respectively, and $262,000 and $319,000 for the six months ended September 30, 2013 and 2012, respectively. Compensation expenses associated with restricted stock units totaled $115,000 and $120,000 for the three months ended September 30, 2013 and 2012, respectively, and $404,000 and $333,000 for the six months ended September 30, 2013 and 2012, respectively. The Company recognizes the expense for grants of restricted stock and restricted stock units on a straight-line basis in the statement of operations as general and administrative expense based on their fair value over their requisite service periods. At September 30, 2013, unamortized compensation expense of restricted stock totaled $516,000 and of restricted stock units totaled $987,000. The unamortized expense as of September 30, 2013 is expected to be recognized over a weighted-average period of 1.5 years for restricted stock and 2.0 years for restricted stock units.

Restricted stock and restricted stock unit award activity under the Plans during the six months ended September 30, 2013 and 2012 is summarized as follows:

 

     2013      2012  

Restricted Shares

   Shares     Weighted-
Average
Grant
Date Fair Value
     Shares     Weighted-
Average
Grant Date Fair
Value
 

Non-vested shares at March 31,

     42,820      $ 19.33         100,899      $ 11.61   

Awarded

     8,000        53.91         8,700        33.73   

Vested

     (34,120     15.66         (65,654     9.42   

Forfeited

     —          —           (1,125     12.45   
  

 

 

   

 

 

    

 

 

   

 

 

 

Non-vested shares at September 30,

     16,700      $ 43.40         42,820      $ 19.33   
  

 

 

   

 

 

    

 

 

   

 

 

 

 

- 9 -


Table of Contents
     2013     2012  

Restricted Stock Units

   Shares     Weighted-
Average
Grant Date Fair
Value
     Shares     Weighted-
Average
Grant Date Fair
Value
 

Non-vested shares at March 31,

     41,607      $ 27.35         39,729      $ 18.31   

Granted

     17,976        42.99         14,243        43.79   

Vested

     (16,643     23.75         (11,899     15.77   

Forfeited

     (1,217     27.60         —          —     
  

 

 

   

 

 

    

 

 

   

 

 

 

Non-vested shares at September 30,

     41,723      $ 35.52         42,073      $ 27.65   
  

 

 

   

 

 

    

 

 

   

 

 

 

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 and six month periods ended September 30, 2013. Options to purchase 70,470 shares of common stock with a weighted average exercise price of $43.79 outstanding during the three and six month periods ended September 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.

Weighted average shares outstanding consist of the following for the three and six months ended September 30, 2013 and 2012:

 

     Three Months Ended
September 30,
     Six Months Ended
September 30,
 
     2013      2012      2013      2012  

Weighted average number of common shares outstanding

     13,379,000         13,152,000         13,297,000         13,106,000   

Dilutive effect of option plan

     347,000         676,000         421,000         746,000   
  

 

 

    

 

 

    

 

 

    

 

 

 

Common and potential shares outstanding–diluted

     13,726,000         13,828,000         13,718,000         13,852,000   
  

 

 

    

 

 

    

 

 

    

 

 

 

NOTE D–SHORT-TERM INVESTMENTS

Trading securities consists of $77,241,000, invested in various money market funds at March 31, 2013. There were no short-term investments held at September 30, 2013. All of the trading securities are deemed to be Level 1 investments.

NOTE E–INVENTORIES

Inventories consist of the following:

 

     September 30, 2013      March 31, 2013  

Raw materials and sub-assemblies

   $ 57,922,000       $ 29,310,000   

Finished goods

     79,287,000         41,084,000   

Parts, garments and accessories

     33,965,000         25,995,000   
  

 

 

    

 

 

 
   $ 171,174,000       $ 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 and an amended credit facility extending and increasing the current credit agreement is in process. Under the current agreement, 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 September 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 September 30, 2013 and March 31, 2013. The outstanding letters of credit balances were $4,583,000 and $7,130,000 at September 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 September 30, 2013. Outstanding letters of credit will be repaid over the following six months in accordance with the credit agreement.

 

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NOTE G–ACCRUED EXPENSES

Accrued expenses consist of the following:

 

     September 30, 2013      March 31, 2013  

Marketing

   $ 11,086,000       $ 11,971,000   

Compensation

     9,409,000         10,682,000   

Warranties

     20,653,000         18,709,000   

Insurance

     6,878,000         9,254,000   

Other

     8,182,000         5,120,000   
  

 

 

    

 

 

 
   $ 56,208,000       $ 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 six-month periods ended September 30:

 

     2013     2012  

Balance at April 1

   $ 18,709,000      $ 18,521,000   

Warranty provision

     7,228,000        2,284,000   

Warranty claim payments

     (5,284,000     (2,137,000
  

 

 

   

 

 

 

Balance at September 30

   $ 20,653,000      $ 18,668,000   
  

 

 

   

 

 

 

NOTE I–SHAREHOLDERS’ EQUITY

Share Repurchase Authorization

During the six months ended September 30, 2013 and 2012, the Company invested $2,933,000 and $1,643,000, respectively, to repurchase and cancel 59,059 and 44,231 shares of common stock, respectively, pursuant to the Board of Directors’ prior share repurchase program authorizations. At September 30, 2013 and 2012, the Company has remaining authorization to repurchase up to $27,339,000 and $4,029,000 of its common stock, or approximately 479,000 and 97,000 shares based on the per share closing price of $57.05 and $41.46 as of September 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:

 

     Six Months Ended September 30,  
     2013     2012  

Balance at beginning of period

   $ 10,945,000      $ 13,233,000   

Exercise of stock options

     9,535,000        5,520,000   

Tax benefits from stock options exercised

     7,493,000        6,525,000   

Repurchase of common stock

     (20,078,000     (13,184,000

Stock-based compensation expense

     1,921,000        1,530,000   
  

 

 

   

 

 

 

Balance at end of period

   $ 9,816,000      $ 13,624,000   
  

 

 

   

 

 

 

Accumulated Other Comprehensive Income (Loss)

 

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

 

     Six Months Ended September 30,  
     2013     2012  

Balance at beginning of period

   $ (4,166,000   $ (2,708,000

Unrealized gain (loss) on derivative instruments, net of tax

     631,000        (1,194,000

Foreign currency translation adjustment

     1,726,000        (907,000
  

 

 

   

 

 

 

Balance at end of period

   $ (1,809,000   $ (4,809,000
  

 

 

   

 

 

 

Retained Earnings

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

 

     Six Months Ended September 30,  
     2013     2012  

Balance at beginning of period

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

Net earnings

     28,833,000        26,966,000   

Dividends paid

     (2,677,000     —     
  

 

 

   

 

 

 

Balance at end of period

   $ 193,717,000      $ 154,782,000   
  

 

 

   

 

 

 

NOTE J–COMMITMENTS AND CONTINGENCIES

Dealer Financing

Finance companies provide the Company’s North American dealers with floorplan financing. The Company has agreements with these finance companies to repurchase certain repossessed products sold to its dealers. At September 30, 2013, the Company was contingently liable under these agreements for a maximum repurchase amount of approximately $76,162,000. 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 September 30, 2013.

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 September 30, 2013, we have notional Canadian dollar denominated cash flow hedges of approximately $115,753,000 (USD) with a weighted average contract exchange rate of 97.68 USD to CAD. The Company’s foreign currency contract fair value was an asset totaling $961,000 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. See Note M for additional information regarding the Company’s Derivative Instruments and Hedging Activities.

 

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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
September 30,
     Six Months Ended
September 30,
 
     2013      2012      2013      2012  

Net sales

           

Snowmobile & ATV units

   $ 208,076,000       $ 198,274,000       $ 306,990,000       $ 289,227,000   

Parts, garments, & accessories

     30,449,000         30,756,000         52,303,000         51,114,000   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total net sales

     238,525,000         229,030,000         359,293,000         340,341,000   
  

 

 

    

 

 

    

 

 

    

 

 

 

Cost of goods sold

           

Snowmobile & ATV units

     157,748,000         146,000,000         235,656,000         221,556,000   

Parts, garments, & accessories

     19,103,000         19,000,000         32,803,000         32,276,000   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total cost of goods sold

     176,851,000         165,000,000         268,459,000         253,832,000   
  

 

 

    

 

 

    

 

 

    

 

 

 

Gross profit

           

Snowmobile & ATV units

     50,328,000         52,274,000         71,334,000         67,671,000   

Parts, garments, & accessories

     11,346,000         11,756,000         19,500,000         18,838,000   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total gross profit

   $ 61,674,000       $ 64,030,000       $ 90,834,000       $ 86,509,000   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     Three Months Ended
September 30,
     Six Months Ended
September 30,
 
     2013      2012      2013      2012  

Net sales by product line

           

Snowmobile units

   $ 135,425,000       $ 128,599,000       $ 157,999,000       $ 146,586,000   

ATV units

     72,651,000         69,675,000         148,991,000         142,641,000   

Parts, garments, & accessories

     30,449,000         30,756,000         52,303,000         51,114,000   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total net sales

   $ 238,525,000       $ 229,030,000       $ 359,293,000       $ 340,341,000   
  

 

 

    

 

 

    

 

 

    

 

 

 

Sales by geographic region were as follows:

 

     Three Months Ended
September 30,
     Six Months Ended
September 30,
 
     2013      2012      2013      2012  

Net sales by geography

           

United States

   $ 105,505,000       $ 105,485,000       $ 167,389,000       $ 162,505,000   

Canada

     82,946,000         75,371,000         124,167,000         108,002,000   

Europe and other

     50,074,000         48,174,000         67,737,000         69,834,000   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total net sales

   $ 238,525,000       $ 229,030,000       $ 359,293,000       $ 340,341,000   
  

 

 

    

 

 

    

 

 

    

 

 

 

The Company has identifiable long-lived assets with total carrying values of approximately $991,000 and $1,533,000 at September 30, 2013 and March 31, 2013, respectively, outside the United States in Canada and Europe.

 

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NOTE M–DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

The Company is exposed to certain risks relating to its ongoing business operations. Foreign currency risk is the primary risk that is managed. Forward contracts are entered into in order to manage the foreign exchange risk associated with the forecasted revenue denominated in a foreign currency.

The Company’s foreign currency management objective is to reduce earnings volatility related to movements in foreign exchange rates and limit the risk of loss in value of certain of its foreign currency-denominated cash flows. The Company actively manages certain forecasted foreign currency exposures, principally its exports sales to Canada. To protect against the reduction in value of forecasted foreign currency cash flows resulting from export sales, the Company hedges portions of its forecasted revenue denominated in foreign currencies with forward contracts. When the dollar strengthens against the foreign currency, the decline in present value of future foreign currency revenue is offset by gains in the fair value of the forward contracts designated as hedges. Conversely, when the dollar weakens, the increase in the present value of future foreign currency cash flows is offset by losses in the fair value of the forward contracts. The duration is linked to the timing of the underlying exposure, with the connection between the two being regularly monitored. The Company does not use any financial contracts for trading purposes.

At September 30, 2013, the Company had the following open foreign currency contracts:

 

Foreign Currency

   Notional Amounts
(in US Dollars)
     Net Unrealized
Gain (Loss)
 

Canadian Dollar

   $ 115,753,000       $ 961,000   
  

 

 

    

 

 

 

Total

   $ 115,753,000       $ 961,000   
  

 

 

    

 

 

 

These contracts, with maturities through March 31, 2014, met the criteria for cash flow hedges and the unrealized gains or losses, after tax, are recorded as a component of accumulated other comprehensive income in shareholders’ equity.

The table below summarizes the carrying values of derivative instruments as of September 30, 2013 and March 31, 2013:

 

     Carrying Values of Derivative Instruments as of September 30, 2013  
     Fair Value
Assets
     Fair Value
(Liabilities)
     Derivative Net
Carrying Value
 

Derivatives designated as hedging instruments

        

Foreign exchange contracts (1)

   $ 975,000       $ 14,000       $ 961,000   
  

 

 

    

 

 

    

 

 

 
   $ 975,000       $ 14,000       $ 961,000   
  

 

 

    

 

 

    

 

 

 
     Carrying Values of Derivative Instruments as of March 31, 2013  
     Fair Value
Assets
     Fair Value
(Liabilities)
     Derivative Net
Carrying Value
 

Derivatives designated as hedging instruments

        

Foreign exchange contracts (1)

     —         $ 41,000       $ (41,000
  

 

 

    

 

 

    

 

 

 
     —         $ 41,000       $ (41,000
  

 

 

    

 

 

    

 

 

 

 

(1) Assets are included in Accounts Receivable and liabilities are included in Accounts Payable on the accompanying consolidated balance sheets.

 

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For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative is reported as a component of accumulated other comprehensive income and reclassified into the income statement in the same period during which the hedged transaction affects the income statement. Gains and losses on the derivative representing hedge ineffectiveness are recognized in the current income statement. The table below provides data about the amount of gains and losses, net of tax, related to derivative instruments designated as cash flow hedges included in accumulated other comprehensive income for the three and six months ended September 30, 2013 and 2012:

 

Derivatives in Cash

Flow Hedging Relationships

   Three Months Ended
September 30,
    Six Months Ended
September 30,
 
   2013     2012     2013      2012  

Foreign currency contracts

   $ (2,500,000   $ (2,512,000   $ 631,000       $ (1,194,000
  

 

 

   

 

 

   

 

 

    

 

 

 
   $ (2,500,000   $ (2,512,000   $ 631,000       $ (1,194,000
  

 

 

   

 

 

   

 

 

    

 

 

 

See Note I for information about the amount of gains and losses, net of tax, reclassified from accumulated other comprehensive income into the income statement for derivative instruments designated as hedging instruments. The ineffective portion of foreign currency contracts was not material for the three and six month periods ended September 30, 2013 and 2012.

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 and six-month period ended September 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 second quarter ended September 30, 2013, we reported net sales of $238.5 million and net earnings of $23.4 million, or $1.70 per diluted share, compared to second quarter ended September 30, 2012 net sales of $229.0 million and net earnings of $25.0 million, or $1.80 per diluted share. We had strong double-digit sales gains in side-by-sides and snowmobiles that led to record second-quarter sales. However, ATV sales in North America and Europe fell short of our expectations in the quarter, and the lower volume reduced our profitability. For the six months ended September 30, 2013, we reported net sales of $359.3 million and net earnings of $28.8 million, or $2.10 per diluted share, compared to net sales of $340.3 million and net earnings of $27.0 million, or $1.95 per diluted share, for the same period last year. We reported good results in the first fiscal quarter, which is reflected in the first-half sales growth of 6 percent and earnings increase of 7 percent. We anticipate continued strong dealer demand for side-by-sides and snowmobiles, and the new Wildcat models that we expect to introduce in our fiscal second half. Based on first half results and the new products being launched in the 2nd half of the fiscal year we are maintaining our full-year outlook for fiscal 2014, but expect a challenging second half of the year.

 

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Our snowmobile sales in the fiscal 2014 second quarter increased 5% to $135.4 million, up from $128.6 million in the prior-year second 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 second quarter increased 4% to $72.7 million versus $69.7 million in the prior-year quarter, led by strong contributions from our Wildcat X and the four-seat Wildcat 4 and Wildcat 4X pure sport side-by-side vehicles. 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 PG&A in the fiscal 2014 second quarter decreased 1% to $30.4 million versus $30.7 million in the prior-year quarter. Strong growth in parts and ATV accessories was offset by lower snowmobile accessories and garment sales. Arctic Cat expects its PG&A business to grow the remainder of fiscal 2014 through further expansion of its Wildcat accessory offerings.

For the fiscal year ending March 31, 2014, we are maintaining our sales and earnings guidance, but are targeting the lower end of the guidance range. We continue to expect net earnings in the range of $3.27 to $3.37 per diluted share. We anticipate sales in the range of $754 million to $768 million.

Results of Operations

Product Line Sales

 

     Three Months Ended
September 30,
    Six Months Ended
September 30,
 

($ in millions)

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

Snowmobile

   $ 135.4         56.8   $ 128.6         56.2     5.3   $ 158.0         44.0   $ 146.6         43.1     7.8

ATV

     72.7         30.5     69.7         30.4     4.3     149.0         41.4     142.6         41.9     4.5

PG&A

     30.4         12.7     30.7         13.4     (1.0 )%      52.3         14.6     51.1         15.0     2.3
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Net Sales

   $ 238.5         100.0   $ 229.0         100.0     4.1   $ 359.3         100.0   $ 340.3         100.0     5.6
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

During the second quarter of fiscal 2014, net sales increased 4.1% to $238.5 million from $229.0 million in the second quarter of fiscal 2013 due to sales increases for snowmobiles and ATVs. Snowmobile unit volume increased 8.2% and; net sales increased 5.3% due to a weaker Canadian dollar and higher sales programs and incentives. ATV unit volume increased 2.5% and; net sales increased 4.3%, and PG&A sales decreased $307,000. Net sales for the six months ended September 30, 2013 increased 5.6% to $359.3 million from $340.3 million for the same period in fiscal 2013. Snowmobile unit volume increased 10.8% and; net sales increased 7.8% due to a weaker Canadian dollar and higher sales programs and incentives. ATV unit volume increased 2.7% and; net sales increased 4.5%, and PG&A sales increased $1,189,000. The increase in snowmobile unit volume was driven by a planned increase in second quarter shipments. Increased ATV unit volume for the quarter resulted from shipments of Wildcat and Prowler side-by-side vehicles.

Cost of Goods Sold

 

     Three Months Ended
September 30,
    Six Months Ended
September 30,
 

($ in millions)

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

Snowmobile & ATV units

   $ 157.7         66.1   $ 146.0         63.8     8.0   $ 235.7         65.6   $ 221.5         65.1     6.4

PG&A

     19.1         8.0     19.0         8.3     0.5     32.8         9.1     32.3         9.5     1.5
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total Cost of Goods Sold

   $ 176.8         74.1   $ 165.0         72.1     7.2   $ 268.5         74.7   $ 253.8         74.6     5.8
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

 

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During the second quarter of fiscal 2014, cost of sales increased 7.2% to $176.8 million from $165.0 million for the second quarter of fiscal 2013. Fiscal 2014 snowmobile and ATV unit cost of sales increased 8.0% to $157.7 million from $146.0 million, which was directionally in line with increases in unit sales during the second quarter of fiscal 2014 compared to the second quarter of fiscal 2013. The second quarter of fiscal 2014 cost of sales for PG&A increased 0.5% to $19.1 million from $19.0 million for the second quarter of fiscal 2013 due to increased sales. During the first six months of fiscal 2014, cost of sales increased 5.8% to $268.5 million from $253.8 million for the first six months of fiscal 2013. Fiscal 2014 snowmobile and ATV unit cost of sales for the first six months increased 6.4% to $235.7 million, which was directionally in line with sales increases for the six months of fiscal 2014 compared to the same period of fiscal 2013. The first six months of fiscal 2014 cost of sales for PG&A increased 1.5% to $32.8 million compared to $32.3 million for fiscal 2013 due to increased freight and product costs and a less rich sales mix.

Gross Profit

 

     Three Months Ended
September 30,
    Six Months Ended
September 30,
 

($ in millions)

   2013     2012     Change
2013 vs. 2012
    2013     2012     Change
2013 vs. 2012
 

Gross Profit Dollars

   $ 61.7      $ 64.0        (3.6 )%    $ 90.8      $ 86.5        5.0

Percentage of Net Sales

     25.9     28.0     (2.1 )%      25.3     25.4     (0.1 )% 

Gross profit decreased 3.6% to $61.7 million in the second quarter of fiscal 2014 from $64.0 million in the second quarter of fiscal 2013. The gross profit percentage for the second quarter of fiscal 2014 decreased to 25.9% versus 28.0% in fiscal 2013. The decreases in the second quarter of fiscal 2014 gross profit percentages were primarily due to product mix, a weaker Canadian dollar, increased freight, sales programs and incentives. Gross profit increased 5.0% to $90.8 million in the first six months of fiscal 2014 from $86.5 million in the first six months of fiscal 2013. The gross profit percentage for the first six months of fiscal 2014 decreased to 25.3% versus 25.4% in fiscal 2014.

Operating Expenses

 

     Three Months Ended
September 30,
    Six Months Ended September 30,  

($ in millions)

   2013     2012     Change
2013 vs. 2012
    2013     2012     Change
2013 vs. 2012
 

Selling & Marketing

   $ 12.1      $ 12.0        0.8   $ 19.1      $ 18.8        1.6

Research & Development

     6.3        4.9        28.6     11.6        9.3        24.7

General & Administrative

     7.0        8.4        (16.7 )%      15.4        16.5        (6.7 )% 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Operating Expenses

   $ 25.4      $ 25.3        0.4   $ 46.1      $ 44.6        3.4
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Percentage of Net Sales

     10.6     11.0       12.8     13.1  

Selling and Marketing expenses increased 0.8% to $12.1 million in the second quarter of fiscal 2014 from $12.0 million in the second quarter of fiscal 2013. Research and Development expenses increased 28.6% to $6.3 million in the second quarter of fiscal 2014 compared to $4.9 million in the second quarter of fiscal 2013 primarily due to higher product development expenses. General and Administrative expenses decreased 16.7% to $7.0 million in the second quarter of fiscal 2014 from $8.4 million in the second quarter of fiscal 2013 primarily due to the Canadian hedge benefit. Selling and Marketing expenses increased 1.6% to $19.1 million in the first six months of fiscal 2013 from $18.8 million in the same period of fiscal 2013 primarily due to increased advertising expenses. Research and Development expenses increased 24.7% to $11.6 million in the first six months of fiscal 2014 compared to $9.3 million in the same period of the fiscal 2013 primarily due to higher product development expenses. General and Administrative expenses decreased 6.7% to $15.4 million in the first six months of fiscal 2014 from $16.5 million in the same period of fiscal 2013 primarily due to the Canadian hedge benefit.

 

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Other Income / Expense

We had $7,000 in interest income in the second quarter of fiscal 2014 compared to $4,000 in the second quarter of fiscal 2013. Interest expense decreased to $37,000 in the second quarter of fiscal 2014 from $62,000 in the second quarter of fiscal 2013. Interest income decreased to $16,000 in the first six months of fiscal 2014 from $17,000 in the same period of fiscal 2013. Interest expense decreased to $40,000 in the first six months of fiscal 2014 from $82,000 in the same period of fiscal 2013. Interest expense was lower due to decreased borrowing levels owing primarily to higher cash levels at the beginning of fiscal 2014 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 $105.1 million at September 30, 2013 from $88.6 million at September 30, 2012. The accounts receivable balance at March 31, 2013 was $30.3 million. Inventory was $171.2 million at September 30, 2013 compared to $144.7 million at September 30, 2012 and $96.4 million at March 31, 2013. The increases in our accounts receivable and inventory balances as of September 30, 2013 compared to March 31, 2013 are due to the seasonality of our snowmobile, ATV and PG&A businesses. During the six months ended September 30, 2013, we repurchased 59,059 shares of our common stock at a total cost of $2.9 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 $40.1 million and $24.0 million at September 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 September 30, 2013 and 2012 and March 31, 2013.

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 September 30, 2013.

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 September 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.

Critical 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.

 

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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, business strategy and product development. 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 and demand 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; unexpected delays in the introduction of new products; 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 September 30, 2013, we have notional Canadian dollar denominated cash flow hedges of approximately $115,753,000 (USD) with a weighted average contract exchange rate of 97.68 USD to CAD. The fair values of the Canadian dollar contracts at September 30, 2013 represent an unrealized gain of $961,000. A ten percent fluctuation in the currency rates as of September 30, 2013 would have resulted in a change in the fair value of the Canadian dollar hedge contracts of approximately $11,575,000. 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.

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 September 30, 2013. Based on management’s identification of the previously reported deficiencies in internal control over financial reporting that it considers to be a material weakness, management has concluded that disclosure controls and procedures were not effective at September 30, 2013. Steps being undertaken to remediate these deficiencies are discussed below. We expect the material weakness to be fully remediated and testing to be completed to confirm elimination of the material weakness as of the end of this fiscal year.

 

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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 at the end of fiscal 2013 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 and expect testing of our updated internal controls to be completed and elimination of our material weakness confirmed as of the end of this fiscal year.

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 reassigning 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 to review areas and provide additional assurance that effective internal control monitoring is in place.

The planned changes in the Company’s internal control noted above were begun during the Company’s fiscal quarter ended June 30, 2013 and continued during the fiscal quarter ended September 30, 2013. To date we have made progress in resolving this material weakness and believe that this will be resolved by the end of the fiscal year.

 

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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 common stock 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 second 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 second 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)
 

July 1, 2013 – July 31, 2013

     248,510       $ 53.95         0         523,864   

August 1, 2013 – August 31, 2013

     34,649         54.52         27,695         509,289   

September 1, 2013 – September 30, 2013

     12,997         56.03         0         479,205   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     296,156       $ 54.11         27,695         479,205   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) The Maximum Number of Shares that May Yet Be Purchased for the 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 share repurchase program.
(2) All shares purchased were for the exercise and related income taxes for net-settled stock options, except 27,695 shares in August purchased under the share repurchase program.

We have historically purchased our common stock primarily to offset the dilution created by employee stock option exercises and because the Board of Directors believes investment in our common stock is 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)
10.1    Form of Director Non-Qualified Stock Option Agreement    (4)
10.2    Form of Executive Officer Non-Qualified Stock Option Agreement    (4)
10.3    Form of Executive Officer Incentive Stock Option Agreement    (4)
10.4    Form of Restricted Stock Unit Agreement for Non-Employee Directors    (4)
10.5    Form of Restricted Stock Unit Agreement for Executive Officers    (4)
10.6    Form of Stock-Settled Appreciation Rights Agreement    (4)
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)

 

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101    Financial statements from the quarterly report on Form 10-Q of the Company for the quarter ended September 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.      (4

 

(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.

 

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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 8, 2013     By   /s/ Claude J. Jordan
      Claude J. Jordan
      Chief Executive Officer
Date: November 8, 2013     By   /s/ Timothy C. Delmore
      Timothy C. Delmore
      Chief Financial Officer

 

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