ARCTIC CAT INC - FORM 10-Q - February 6, 2014

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EX-31.1 - EX-31.1 - ARCTIC CAT INC	d662206dex311.htm
EX-31.2 - EX-31.2 - ARCTIC CAT INC	d662206dex312.htm
EX-32.2 - EX-32.2 - ARCTIC CAT INC	d662206dex322.htm
EX-32.1 - EX-32.1 - ARCTIC CAT INC	d662206dex321.htm
EXCEL - IDEA: XBRL DOCUMENT - ARCTIC CAT INC	Financial_Report.xls

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 December 31, 2013

¨	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.

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 February 3, 2014, the registrant had 13,143,625 shares of Common Stock outstanding.

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	20
ITEM 4.	CONTROLS AND PROCEDURES	20
PART II OTHER INFORMATION
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	22
ITEM 6.	EXHIBITS	22

Part I – FINANCIAL INFORMATION

ITEM 1 – FINANCIAL STATEMENTS

Arctic Cat Inc.

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited)


	December 31,			March 31,
	2013			2013
ASSETS
Current Assets
Cash and cash equivalents	$	56,032,000		$	35,566,000
Short-term investments		6,504,000			77,241,000
Accounts receivable, less allowances		74,123,000			30,296,000
Inventories		137,189,000			96,389,000
Prepaid expenses		2,761,000			3,032,000
Deferred income taxes		15,730,000			16,820,000

Total current assets		292,339,000			259,344,000
Property and Equipment
Machinery, equipment and tooling		171,082,000			160,674,000
Land, buildings and improvements		29,660,000			29,243,000

		200,742,000			189,917,000
Less accumulated depreciation		153,696,000			144,378,000

		47,046,000			45,539,000
Other Assets		1,257,000			1,262,000

	$	340,642,000		$	306,145,000

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities
Accounts payable	$	61,997,000		$	66,599,000
Accrued expenses		54,452,000			55,736,000
Income taxes payable		4,006,000			4,957,000

Total current liabilities		120,455,000			127,292,000
Deferred Income Taxes		8,272,000			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: 13,409,531 at December 31, 2013 and 13,203,682 at March 31, 2013		134,000			132,000
Additional paid-in-capital		8,251,000			10,945,000
Accumulated other comprehensive loss		(961,000	)		(4,166,000	)
Retained earnings		204,491,000			167,561,000

Total shareholders’ equity		211,915,000			174,472,000

	$	340,642,000		$	306,145,000

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

Arctic Cat Inc.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)


	Three Months Ended December 31,						Nine Months Ended December 31,
	2013			2012			2013			2012
Net sales
Snowmobile & ATV units	$	196,295,000		$	191,986,000		$	503,285,000		$	481,213,000
Parts, garments & accessories		29,495,000			26,030,000			81,798,000			77,144,000

Total net sales		225,790,000			218,016,000			585,083,000			558,357,000
Cost of goods sold
Snowmobile & ATV units		166,994,000			150,177,000			402,650,000			371,733,000
Parts, garments & accessories		18,583,000			17,041,000			51,386,000			49,317,000

Total cost of goods sold		185,577,000			167,218,000			454,036,000			421,050,000

Gross profit		40,213,000			50,798,000			131,047,000			137,307,000
Operating expenses
Selling & marketing		9,726,000			10,041,000			28,836,000			28,866,000
Research & development		5,723,000			5,084,000			17,291,000			14,429,000
General & administrative		6,372,000			8,002,000			21,802,000			24,467,000

Total operating expenses		21,821,000			23,127,000			67,929,000			67,762,000

Operating profit		18,392,000			27,671,000			63,118,000			69,545,000
Other income (expense)
Interest income		6,000			10,000			22,000			27,000
Interest expense		(96,000	)		(2,000	)		(136,000	)		(84,000	)

Total other expense		(90,000	)		8,000			(114,000	)		(57,000	)

Earnings before income taxes		18,302,000			27,679,000			63,004,000			69,488,000
Income tax expense		6,182,000			9,826,000			22,051,000			24,668,000

Net earnings	$	12,120,000		$	17,853,000		$	40,953,000		$	44,820,000

Net earnings per share
Basic	$	0.90		$	1.35		$	3.07		$	3.41

Diluted	$	0.89		$	1.30		$	2.99		$	3.25

Weighted average shares outstanding
Basic		13,420,000			13,220,000			13,338,000			13,144,000

Diluted		13,657,000			13,684,000			13,698,000			13,796,000

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

Arctic Cat Inc.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)


	Three Months Ended December 31,				Nine Months Ended December 31,
	2013		2012		2013		2012
Net earnings	$	12,120,000	$	17,853,000	$	40,953,000	$	44,820,000
Other comprehensive income (loss):
Foreign currency translation adjustments		545,000		668,000		2,271,000		(239,000	)
Unrealized gain (loss) on derivative instruments, net of tax		303,000		838,000		934,000		(356,000	)

Comprehensive income	$	12,968,000	$	19,359,000	$	44,158,000	$	44,225,000

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

Arctic Cat Inc.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	Nine Months Ended December 31,
	2013			2012
Cash flows from operating activities:
Net earnings	$	40,953,000		$	44,820,000
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization		12,230,000			9,925,000
Deferred income tax expense (benefit)		4,432,000			(1,275,000	)
Stock-based compensation expense		2,193,000			1,932,000
Loss on disposal of fixed assets		1,000			48,000
Changes in operating assets and liabilities:
Trading securities		70,736,000			(40,562,000	)
Accounts receivable		(41,744,000	)		(23,283,000	)
Inventories		(39,153,000	)		1,725,000
Prepaid expenses		278,000			835,000
Accounts payable		(4,825,000	)		(5,663,000	)
Accrued expenses		(1,461,000	)		5,163,000
Income taxes		(1,231,000	)		15,217,000

Net cash provided by operating activities		42,409,000			8,882,000
Cash flows from investing activities:
Purchases of property and equipment		(13,717,000	)		(10,410,000	)
Proceeds from the sale of assets		5,000			—

Net cash used in investing activities		(13,712,000	)		(10,410,000	)
Cash flows from financing activities:
Checks written in excess of bank balances		143,000			—
Proceeds from issuance of common stock		18,000			11,000
Payments for income taxes on net-settled option exercises		(7,626,000	)		(6,136,000	)
Tax benefit from stock options exercises		7,495,000			6,629,000
Dividends paid		(4,023,000	)		—
Repurchase of common stock		(4,772,000	)		(5,401,000	)

Net cash used in financing activities		(8,765,000	)		(4,897,000	)
Effect of exchange rate changes on cash and cash equivalents		534,000			(113,000	)

Net increase (decrease) in cash and cash equivalents		20,466,000			(6,538,000	)
Cash and cash equivalents at beginning of period		35,566,000			24,138,000

Cash and cash equivalents at end of period	$	56,032,000		$	17,600,000

Supplemental disclosure of cash payments for:
Income taxes	$	11,088,000		$	8,265,000

Interest	$	127,000		$	84,000

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

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 December 31, 2013, and results of operations for the three-month and nine-month periods ended December 31, 2013 and 2012 and cash flows for the nine-month periods ended December 31, 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 were 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 December 31, 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 December 31, 2013, 491,395 stock options, 15,700 shares of restricted stock, and 41,435 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 944,863 shares were available for grant at December 31, 2013.

Stock Options

Option transactions under the plans during the nine months ended December 31, 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 December 31, 2013		491,395		$	24.75		7.77 years	$	15,838,000

Exercisable at December 31, 2013		266,345		$	17.84		7.37 years	$	10,424,000

The aggregate intrinsic value is based on the difference between the exercise price and the Company’s December 31, 2013 common share market value for in-the-money options.

The following tables summarize information concerning currently outstanding and exercisable stock options at December 31, 2013:

Options Outstanding


Range of Exercise Prices	Number Outstanding		Weighted-Average Remaining Contractual Life		Weighted-Average Exercise Price
$6.26-9.38		7,800		3.03 years	$	6.26
9.57-13.84		57,164		6.09 years		10.91
14.68-21.03		238,507		7.38 years		15.99
21.96-27.69		24,000		9.85 years		24.83
33.67-43.79		163,924		8.85 years		43.19

		491,395		7.77 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		22,549		43.48

		266,345	$	17.84

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. Stock options and restricted stock awards granted under the 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 December 31, 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 nine months ended December 31, 2013 and December 31, 2012, the following assumptions were used to determine fair value:


	Nine Months Ended December 31, 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	$	17.71		$	23.74

At December 31, 2013, the Company had $3,032,000 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 December 31, 2013 and 2012, the Company recorded stock-based compensation expense for stock options and restricted stock awards of $272,000 and $402,000, respectively, and for the nine months ended December 31, 2013 and 2012, the Company recorded stock-based compensation expense for stock options and restricted stock awards of $2,193,000 and $1,932,000, respectively, which have 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 $0.01 and $0.02 for each of the three months ended December 31, 2013 and 2012, respectively, and by $0.10 and $0.09 for the nine months ended December 31, 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 December 31, 2013, the Company had 15,700 shares of restricted common stock issued and outstanding and 41,435 unvested restricted stock units outstanding under the 2007 Plan and 500 shares of restricted common stock 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 $68,000 and $85,000 for the three months ended December 31, 2013 and 2012, respectively, and $330,000 and $404,000 for the nine months ended December 31, 2013 and 2012, respectively. Compensation expenses associated with restricted stock units totaled $117,000 and $74,000 for the three months ended December 31, 2013 and 2012, respectively, and $521,000 and $407,000 for the nine months ended December 31, 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 December 31, 2013, unamortized compensation expense of restricted stock totaled $435,000 and of restricted stock units totaled $870,000. The unamortized expense as of December 31, 2013 is expected to be recognized over a weighted-average period of 1.3 years for restricted stock and 1.8 years for restricted stock units.

Restricted stock and restricted stock unit award activity under the Plans during the nine months ended December 31, 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		(500	)		41.52		(1,125	)		12.45

Non-vested shares at December 31,		16,200		$	43.45		42,820		$	19.33


	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		(16,931	)		23.92		(11,899	)		15.77
Forfeited		(1,217	)		27.60		—			—

Non-vested shares at December 31,		41,435		$	35.53		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 nine month periods ended December 31, 2013. Options to purchase 70,470 shares of common stock with a weighted average exercise price of $43.79 outstanding during the three and nine month periods ended December 31, 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 nine months ended December 31, 2013 and 2012:


	Three Months Ended December 31,				Nine Months Ended December 31,
	2013		2012		2013		2012
Weighted average number of common shares outstanding		13,420,000		13,220,000		13,338,000		13,144,000
Dilutive effect of option plan		237,000		464,000		360,000		652,000

Common and potential shares outstanding—diluted		13,657,000		13,684,000		13,698,000		13,796,000

NOTE D–SHORT-TERM INVESTMENTS

Trading securities consisted of $6,504,000 and $77,241,000, invested in various money market funds at December 31, 2013 and March 31, 2013, respectively. All of the trading securities are deemed to be Level 1 investments.

NOTE E–INVENTORIES

Inventories consist of the following:


	December 31, 2013		March 31, 2013
Raw materials and sub-assemblies	$	37,617,000	$	29,310,000
Finished goods		62,556,000		41,084,000
Parts, garments and accessories		37,016,000		25,995,000

	$	137,189,000	$	96,389,000

NOTE F–LINE OF CREDIT

The Company entered into a $100,000,000 senior secured revolving credit agreement in November 2013 for documentary and stand-by letters of credit, working capital needs and general corporate purposes, which amended and restated the Company’s prior $60,000,000 senior secured revolving credit agreement. This agreement is scheduled to expire in November 2017. Under the agreement, the Company may borrow up to $100,000,000 during May through November and up to $50,000,000 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 plus 0.75%, the federal funds rate plus 0.50% or LIBOR for a 30 day interest period plus 1.00%. As of December 31, 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 December 31, 2013 and March 31, 2013. The outstanding letters of credit balances were $4,074,000 at December 31, 2013 and 2012, 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 December 31, 2013. Outstanding letters of credit will be repaid over the following six months in accordance with the credit agreement.

NOTE G–ACCRUED EXPENSES

Accrued expenses consist of the following:


	December 31, 2013		March 31, 2013
Marketing	$	9,628,000	$	11,971,000
Compensation		9,052,000		10,682,000
Warranties		22,019,000		18,709,000
Insurance		6,945,000		9,254,000
Other		6,808,000		5,120,000

	$	54,452,000	$	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 nine-month periods ended December 31:


	2013			2012
Balance at beginning of period	$	18,709,000		$	18,521,000
Warranty provision		12,369,000			14,659,000
Warranty claim payments		(9,059,000	)		(11,587,000	)

Balance at end of period	$	22,019,000		$	21,593,000

NOTE I–SHAREHOLDERS’ EQUITY

Share Repurchase Authorization

During the nine months ended December 31, 2013 and 2012, the Company invested $4,772,000 and $5,401,000, respectively, to repurchase and cancel 95,618 and 149,424 shares of common stock, respectively, pursuant to the Board of Directors’ prior share repurchase program authorizations. At December 31, 2013 and 2012, the Company has remaining authorization to repurchase up to $25,499,000 and $271,000 of its common stock, or approximately 448,000 and 8,100 shares based on the per share closing price of $56.98 and $33.39 as of December 31, 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:


	Nine Months Ended December 31,
	2013			2012
Balance at beginning of period	$	10,945,000		$	13,233,000
Proceeds from issuance of common stock		18,000			11,000
Payment for income taxes on net-settled option exercises		(7,629,000	)		(6,138,000	)
Tax benefits from stock options exercised		7,495,000			6,629,000
Repurchase of common stock		(4,771,000	)		(5,399,000	)
Stock-based compensation expense		2,193,000			1,932,000

Balance at end of period	$	8,251,000		$	10,268,000

Accumulated Other Comprehensive Income (Loss)

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


	Nine Months Ended December 31,
	2013			2012
Balance at beginning of period	$	(4,166,000	)	$	(2,708,000	)
Unrealized gain (loss) on derivative instruments, net of tax		934,000			(356,000	)
Foreign currency translation adjustment		2,271,000			(239,000	)

Balance at end of period	$	(961,000	)	$	(3,303,000	)

Retained Earnings

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


	Nine Months Ended December 31,
	2013			2012
Balance at beginning of period	$	167,561,000		$	127,816,000
Net earnings		40,953,000			44,820,000
Dividends paid		(4,023,000	)		—

Balance at end of period	$	204,491,000		$	172,636,000

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 December 31, 2013, the Company was contingently liable under these agreements for a maximum repurchase amount of approximately $76,224,000. 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 $1,900,000 at December 31, 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 December 31, 2013, we have notional Canadian dollar denominated cash flow hedges of approximately $37,612,000 (USD) with a weighted average contract exchange rate of 97.69 USD to CAD. The Company’s foreign currency contract fair value was an asset totaling $1,442,000 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 L for additional information regarding the Company’s Derivative Instruments and Hedging Activities.

NOTE L–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 December 31, 2013, the Company had the following open foreign currency contracts:


Foreign Currency	Notional Amounts (in US Dollars)		Net Unrealized Gain (Loss)
Canadian Dollar	$	37,612,000	$	1,442,000

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 December 31, 2013 and March 31, 2013:


	Carrying Values of Derivative Instruments as of December 31, 2013
Derivatives designated as hedging instruments	Fair Value Assets		Fair Value (Liabilities)		Derivative Net Carrying Value
Foreign exchange contracts (1)	$	1,442,000	$	—	$	1,442,000


	Carrying Values of Derivative Instruments as of March 31, 2013
Derivatives designated as hedging instruments	Fair Value Assets		Fair Value (Liabilities)		Derivative Net Carrying Value
Foreign exchange contracts (1)		—	$	41,000	$	(41,000	)

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

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 nine months ended December 31, 2013 and 2012:


Derivatives in Cash Flow Hedging Relationships	Three Months Ended December 31,				Nine Months Ended December 31,
Derivatives in Cash Flow Hedging Relationships	2013		2012		2013		2012
Foreign currency contracts	$	303,000	$	838,000	$	934,000	$	(356,000	)

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 nine month periods ended December 31, 2013 and 2012.

NOTE M–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 December 31,				Nine Months Ended December 31,
	2013		2012		2013		2012
Net sales
Snowmobile & ATV units	$	196,295,000	$	191,986,000	$	503,285,000	$	481,213,000
Parts, garments, & accessories		29,495,000		26,030,000		81,798,000		77,144,000

Total net sales		225,790,000		218,016,000		585,083,000		558,357,000

Cost of goods sold
Snowmobile & ATV units		166,994,000		150,177,000		402,650,000		371,733,000
Parts, garments, & accessories		18,583,000		17,041,000		51,386,000		49,317,000

Total cost of goods sold		185,577,000		167,218,000		454,036,000		421,050,000
Gross profit
Snowmobile & ATV units		29,301,000		41,809,000		100,635,000		109,480,000
Parts, garments, & accessories		10,912,000		8,989,000		30,412,000		27,827,000

Total gross profit	$	40,213,000	$	50,798,000	$	131,047,000	$	137,307,000


	Three Months Ended December 31,				Nine Months Ended December 31,
	2013		2012		2013		2012
Net sales by product line
Snowmobile units	$	118,061,000	$	122,425,000	$	276,060,000	$	269,011,000
ATV units		78,234,000		69,561,000		227,225,000		212,202,000
Parts, garments, & accessories		29,495,000		26,030,000		81,798,000		77,144,000

Total net sales	$	225,790,000	$	218,016,000	$	585,083,000	$	558,357,000

Sales by geographic region were as follows:


	Three Months Ended December 31,				Nine Months Ended December 31,
	2013		2012		2013		2012
Net sales by geography
United States	$	151,966,000	$	112,944,000	$	319,355,000	$	275,449,000
Canada		49,684,000		73,184,000		173,851,000		181,186,000
Europe and other		24,140,000		31,888,000		91,877,000		101,722,000

Total net sales	$	225,790,000	$	218,016,000	$	585,083,000	$	558,357,000

The Company has identifiable long-lived assets with total carrying values of approximately $843,000 and $1,533,000 at December 31, 2013 and March 31, 2013, respectively, outside the United States in Canada and Europe.

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 nine-month period ended December 31, 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 third quarter ended December 31, 2013, we reported net sales of $225.8 million and net earnings of $12.1 million, or $0.89 per diluted share, compared to third quarter ended December 31, 2012 net sales of $218.0 million and net earnings of $17.9 million, or $1.30 per diluted share. We reported revenue growth in the third quarter that met our expectations, as we achieved double-digit sales gains in our ATV/side-by-side and our parts, garments and accessories businesses. We did see our Canadian sales decrease by 32.1% in the third quarter, primarily due to lower snowmobile shipments, however this was timing related as year-to-date Canadian sales are down only 4.0%. As we stated last quarter, however, we expected the second half of our fiscal year to be challenging. Profitability in the 2014 third quarter was reduced, chiefly due to anticipated lower gross margins on snowmobile models built for Yamaha, as part of our new partnership this year, and ATV product mix. The Yamaha gross margin impact was primarily absorbed in the fiscal 2014 third quarter compared to record earnings in the prior-year third quarter.

For the nine months ended December 31, 2013, we reported net sales of $585.1 million and net earnings of $41.0 million, or $2.99 per diluted share, compared to net sales of $558.4 million and net earnings of $44.8 million, or $3.25 per diluted share, for the same period last year. We are expecting strong fourth-quarter sales and earnings compared to the fourth quarter last year driven by the launch of our new Wildcat^TM Trail model. Additionally, we continue to focus on operational excellence and cost controls to maximize our efficiency.

Our snowmobile sales in the fiscal 2014 third quarter decreased 3.5% to $118.1 million, down from $122.4 million in the prior-year third quarter. We remain pleased with consumers’ retail response to our 2014 model year snowmobile line-up and engine choices. Year-to-date, we have gained the most market share in the industry and lowered dealer inventory by 14%, which positions us well for future snowmobile sales. For the 2014 model year, Arctic Cat launched 10 new snowmobile models, including the all-new ZR 6000 El Tigre performance sled, and new snowmobile engine options from Arctic Cat and Yamaha through an engine supply agreement. 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 to grow between 5 to 8%.

Our ATV/side-by-side sales for the third quarter increased 12.4% to $78.2 million versus $69.6 million in the prior-year quarter, led by strong contributions from our Wildcat X and the four-seat 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.

Third quarter PG&A sales increased 13.5% to $29.5 million versus $26.0 million in the prior-year quarter. Contributing to the increased sales were strong sales of snow-related parts and accessories, due to favorable winter snowmobile riding conditions and Arctic Cat’s expanded line of side-by-sides, which led to higher sales of side-by-side accessories. Arctic Cat continues to expect its PG&A business to grow in fiscal 2014 through the expansion of its Wildcat accessories and continued growth of the parts business.

For the fiscal year ending March 31, 2014, we are lowering our sales and earnings guidance due to a less rich ATV/side-by-side product mix and a weaker Canadian dollar. We now estimate full-year net earnings to be in the range of $2.90 to $3.00 per diluted share on anticipated sales in the range of $740 million to $750 million. Previously, the Company estimated full-year earnings in the range of $3.27 to $3.37 per diluted share on sales in the range of $754 million to $768 million.

Results of Operations

Product Line Sales


	Three Months Ended December 31,													Nine Months Ended December 31,
($ 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	$	118.1		52.3	%	$	122.4		56.2	%		(3.5	)%	$	276.1		47.2	%	$	269.0		48.2	%		2.6	%
ATV		78.2		34.6	%		69.6		31.9	%		12.4	%		227.2		38.8	%		212.2		38.0	%		7.1	%
PG&A		29.5		13.1	%		26.0		11.9	%		13.5	%		81.8		14.0	%		77.2		13.8	%		6.0	%

Net Sales	$	225.8		100.0	%	$	218.0		100.0	%		3.6	%	$	585.1		100.0	%	$	558.4		100.0	%		4.8	%

During the third quarter of fiscal 2014, net sales increased 3.6% to $225.8 million from $218.0 million in the third quarter of fiscal 2013 due to sales increases for ATV/side-by-side and PG&A businesses. Snowmobile unit volume increased 9.6% and; net sales decreased 3.5% due to anticipated lower selling prices on snowmobile models built for Yamaha and a weaker Canadian dollar. ATV unit volume increased 7.4% and; net sales increased 12.4%, and PG&A sales increased $3.5 million or 13.5%. PG&A sales increases were driven by snow related parts, garments and accessories and side-by-side accessory sales. Net sales for the nine months ended December 31, 2013 increased 4.8% to $585.1 million from $558.4 million for the same period in fiscal 2013. Snowmobile unit volume increased 10.3% and; net sales increased 2.6% due to anticipated lower selling prices on snowmobile models built for Yamaha and a weaker Canadian dollar. ATV unit volume increased 4.4% and; net sales increased 7.1%, and PG&A sales increased $4.6 million. The increase in snowmobile unit volume was driven by Yamaha produced snowmobiles in third quarter shipments. Increased ATV unit volume for the quarter resulted from shipments of Wildcat and core ATV vehicles.

Cost of Goods Sold


	Three Months Ended December 31,													Nine Months Ended December 31,
($ 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	$	167.0		74.0	%	$	150.2		68.9	%		11.2	%	$	402.6		68.8	%	$	371.7		66.6	%		8.3	%
PG&A		18.6		8.2	%		17.0		7.8	%		9.4	%		51.4		8.8	%		49.3		8.8	%		4.3	%

Total Cost of Goods Sold	$	185.6		82.2	%	$	167.2		76.7	%		11.0	%	$	454.0		77.6	%	$	421.0		75.4	%		7.8	%

During the third quarter of fiscal 2014, cost of sales increased 11.0% to $185.6 million from $167.2 million for the third quarter of fiscal 2013. Fiscal 2014 snowmobile and ATV unit cost of sales increased 11.2% to $167.0 million from $150.2 million, which was directionally in line with increases in unit sales during the third quarter of fiscal 2014 compared to the third quarter of fiscal 2013. The third quarter of fiscal 2014 cost of sales for PG&A increased 9.4% to $18.6 million from $17.0 million for the third quarter of fiscal 2013 due to increased sales. During the first nine months of fiscal 2014, cost of sales increased 7.8% to $454.0 million from $421.0 million for the first nine months of fiscal 2013. Fiscal 2014 snowmobile and ATV unit cost of sales for the first nine months increased 8.3% to $402.6 million, which was directionally in line with sales increases for the nine months of fiscal 2014 compared to the same period of fiscal 2013. The first nine months of fiscal 2014 cost of sales for PG&A increased 4.3% to $51.4 million compared to $49.3 million for fiscal 2013 due to increased sales offset by decreased freight and product costs and a richer sales mix.

Gross Profit


	Three Months Ended December 31,									Nine Months Ended December 31,
($ in millions)	2013			2012			Change 2013 vs. 2012			2013			2012			Change 2013 vs. 2012
Gross Profit Dollars	$	40.2		$	50.8			(20.9	)%	$	131.1		$	137.3			(4.5	)%
Percentage of Net Sales		17.8	%		23.3	%		(5.5	)%		22.4	%		24.6	%		(2.2	)%

Gross profit decreased 20.9% to $40.2 million in the third quarter of fiscal 2014 from $50.8 million in the third quarter of fiscal 2013. The gross profit percentage for the third quarter of fiscal 2014 decreased to 17.8% versus 23.3% in fiscal 2013. Gross profit decreased 4.5% to $131.1 million in the first nine months of fiscal 2014 from $137.3 million in the first nine months of fiscal 2013. The gross profit percentage for the first nine months of fiscal 2014 decreased to 22.4% versus 24.6% in fiscal 2014. The decreases in the third quarter and year-to-date fiscal 2014 gross profit percentages were primarily due to anticipated lower gross margins on snowmobile models built for Yamaha, product mix, and a weaker Canadian dollar.

Operating Expenses


	Three Months Ended December 31,									Nine Months Ended December 31,
($ in millions)	2013			2012			Change 2013 vs. 2012			2013			2012			Change 2013 vs. 2012
Selling & Marketing	$	9.7		$	10.0			(3.0	)%	$	28.8		$	28.9			(0.3	)%
Research & Development		5.7			5.1			11.8	%		17.3			14.4			20.1	%
General & Administrative		6.4			8.0			(20.0	)%		21.8			24.5			(11.0	)%

Total Operating Expenses	$	21.8		$	23.1			(5.6	)%	$	67.9		$	67.8			0.1	%

Percentage of Net Sales		9.7	%		10.6	%					11.6	%		12.1	%

Selling and Marketing expenses decreased 3.0% to $9.7 million in the third quarter of fiscal 2014 from $10.0 million in the third quarter of fiscal 2013. Research and Development expenses increased 11.8% to $5.7 million in the third quarter of fiscal 2014 compared to $5.1 million in the third quarter of fiscal 2013 primarily due to higher product development expenses. General and Administrative expenses decreased 20.0% to $6.4 million in the third quarter of fiscal 2014 from $8.0 million in the third quarter of fiscal 2013 primarily due to the Canadian hedge benefit and a $0.6 million reduction in our bad debt reserve. Selling and Marketing expenses decreased 0.3% to $28.8 million in the first nine months of fiscal 2013 from $28.9 million in the same period of fiscal 2013. Research and Development expenses increased 20.1% to $17.3 million in the first nine months of fiscal 2014 compared to $14.4 million in the same period of the fiscal 2013 primarily due to higher product development expenses. General and Administrative expenses decreased 11.0% to $21.8 million in the first nine months of fiscal 2014 from $24.5 million in the same period of fiscal 2013 primarily due to the Canadian hedge benefit and a $1.2 million reduction in our bad debt reserve.

Other Income / Expense

We had $6,000 in interest income in the third quarter of fiscal 2014 compared to $10,000 in the third quarter of fiscal 2013. Interest expense increased to $96,000 in the third quarter of fiscal 2014 from $2,000 in the third quarter of fiscal 2013. Interest income decreased to $22,000 in the first nine months of fiscal 2014 from $27,000 in the same period of fiscal 2013. Interest expense increased to $136,000 in the first nine months of fiscal 2014 from $84,000 in the same period of fiscal 2013. Interest expense was higher due to increased borrowing levels due primarily to higher average inventory levels during the first nine months of fiscal 2014.

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 create 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 $74.1 million at December 31, 2013 from $50.8 million at December 31, 2012 primarily due to increased receivables related to snowmobiles supplied to Yamaha and timing of ATV/side-by-side

shipments. The accounts receivable balance at March 31, 2013 was $30.3 million. Inventory increased to $137.2 million at December 31, 2013 from $97.0 million at December 31, 2012 primarily due to increased ATV/side-by-side and PG&A inventory to support expected fourth quarter sales. Inventory was $96.4 million at March 31, 2013. The increases in our accounts receivable and inventory balances as of December 31, 2013 compared to March 31, 2013 are due to the seasonality of our snowmobile, ATV and PG&A businesses as well as the items discussed above. During the nine months ended December 31, 2013, we repurchased 95,618 shares of our common stock at a total cost of $4.8 million under the share repurchase program previously approved by the Board of Directors in May 2013, and we repurchased an additional 324,225 shares of our common stock at a total cost of $17.1 million for the exercise and related income taxes for net-settled stock options. Cash and short-term investments were $62.5 million and $96.6 million at December 31, 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 December 31, 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 entered into a $100,000,000 senior secured revolving credit agreement in November 2013 for documentary and stand-by letters of credit, working capital needs and general corporate purposes, which amended and restated our prior $60,000,000 senior secured revolving credit agreement. We may borrow up to $100,000,000 during May through November and up to $50,000,000 during all other months of the fiscal year. We were in compliance with the terms of the credit agreement as of December 31, 2013. See note F of the notes to condensed consolidated financial statements herein for further discussion.

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 December 31, 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.

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 December 31, 2013, we have notional Canadian dollar denominated cash flow hedges of approximately $37,612,000 (USD) with a weighted average contract exchange rate of 97.69 USD to CAD. The fair values of the Canadian dollar contracts at December 31, 2013 represent an unrealized gain of $1,442,000. A ten percent fluctuation in the currency rates as of December 31, 2013 would have resulted in a change in the fair value of the Canadian dollar hedge contracts of approximately $3,761,000. 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 December 31, 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 December 31, 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.

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 are improving the segregation of duties with the combination of increasing finance personnel, if or where appropriate, and reassigning certain responsibilities within the group. We brought 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 redesigned 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 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 began during the Company’s fiscal quarter ended June 30, 2013 and continued during the fiscal quarter ended December 31, 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.

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 third 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 third 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)
October 1, 2013 – October 31, 2013		36,559	$	50.32		36,559		486,623
November 1, 2013 – November 30, 2013		0		—		0		453,156
December 1, 2013 – December 31, 2013		0		—		0		447,509

Total		36,559	$	50.32		36,559		447,509

(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 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	Amended and Restated Loan and Security Agreement, dated as of November 8, 2013, among the Company, certain financial institutions as lenders and Bank of America, N.A., as lender and administrative agent for the lenders.	(4	)

31.1	CEO Certification pursuant to section 302 of the Sarbanes-Oxley Act of 2002	(5	)

31.2	CFO Certification pursuant to section 302 of the Sarbanes-Oxley Act of 2002	(5	)

32.1	CEO Certification pursuant to section 906 of the Sarbanes-Oxley Act of 2002	(5	)

32.2	CFO Certification pursuant to section 906 of the Sarbanes-Oxley Act of 2002	(5	)

101	Financial statements from the quarterly report on Form 10-Q of the Company for the quarter ended December 31, 2013, formatted in XBRL: (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations, (iii) the Condensed Consolidated Statements of Comprehensive Income (Loss), (iv) the Condensed Consolidated Statements of Cash Flows, and (v) the Notes to the Condensed Consolidated Financial Statements.	(5	)

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

(2)	Incorporated herein by reference to the Company’s Current Report on Form 8-K filed January 16, 2013.

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

(4)	Incorporated herein by reference to the Company’s Current Report on form 8-K filed November 15, 2013.

(5)	Filed with this Quarterly Report on Form 10-Q.

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: February 6, 2014	By	/s/ Claude J. Jordan
		Claude J. Jordan
		Chief Executive Officer

Date: February 6, 2014	By	/s/ Timothy C. Delmore
		Timothy C. Delmore
		Chief Financial Officer

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