10-Q 1 0001.txt 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 quarter ended September 30, 2000 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 (I.R.S. Employer of incorporation or organization) Identification No.) 601 Brooks Avenue South, Thief River Falls, Minnesota 56701 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (218) 681-8558 Indicate by check mark whether the registrant (1) has filed all reports required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No At November 13, 2000, 16,416,003 shares of Common Stock and 7,560,000 shares of Class B Common Stock of the Registrant were outstanding. PART I - FINANCIAL INFORMATION Arctic Cat Inc. CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited) September 30, March 31, ASSETS 2000 2000 CURRENT ASSETS ___________ ___________ Cash and equivalents $ 37,163,000 $ 60,028,000 Short-term investments 25,823,000 48,249,000 Accounts receivable, less allowances 73,521,000 18,348,000 Inventories 73,976,000 61,669,000 Prepaid expenses 957,000 2,880,000 Deferred income taxes 19,501,000 18,975,000 ___________ ___________ Total current assets 230,941,000 210,149,000 PROPERTY & EQUIPMENT - at cost Machinery, equipment and tooling 80,147,000 71,936,000 Land, buildings and improvements 17,474,000 16,861,000 __________ __________ 97,621,000 88,797,000 Less accumulated depreciation 57,522,000 52,411,000 __________ __________ 40,099,000 36,386,000 __________ __________ $271,040,000 $246,535,000 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 33,923,000 $ 27,318,000 Accrued expenses 52,524,000 49,777,000 Income tax payable 8,699,000 982,000 __________ __________ Total current liabilities 95,146,000 78,077,000 DEFERRED INCOME TAXES 5,712,000 5,900,000 COMMITMENTS AND CONTINGENCIES - - SHAREHOLDERS' EQUITY Preferred stock, par value $1.00; 2,050,000 shares authorized; none issued - - Preferred stock - Series A Junior Participating, par value $1.00; 450,000 shares authorized; none issued - - Common stock, par value $.01; 37,440,000 shares authorized; shares issued and outstanding, 16,500,483 at September 30, 2000; 17,327,975 at March 31, 2000 165,000 173,000 Class B common stock, par value $.01; 7,560,000 shares authorized, issued, and outstanding 76,000 76,000 Additional paid-in-capital 1,176,000 - Retained earnings 168,765,000 162,309,000 __________ ___________ 170,182,000 162,558,000 __________ ___________ $271,040,000 $246,535,000 =========== =========== The accompanying notes are an integral part of these condensed statements. Arctic Cat Inc. CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (unaudited) Three Months Six Months Ended September 30, Ended September 30, __________________________ ______________________ 2000 1999 2000 1999 ______ ______ ______ ______ Net sales $192,854,000 $205,507,000 $278,815,000 $292,435,000 Cost of goods sold 141,206,000 153,866,000 205,593,000 219,079,000 Watercraft inventory writedown - 2,835,000 - 2,835,000 ___________ ___________ ___________ ___________ Gross profit 51,648,000 48,806,000 73,222,000 70,521,000 Selling, general and administrative expenses 24,682,000 27,671,000 44,301,000 47,271,000 Watercraft exit costs - 15,147,000 - 15,147,000 Watercraft asset impairment - 3,480,000 - 3,480,000 ___________ ___________ ___________ ___________ Operating profit 26,966,000 2,508,000 28,921,000 4,623,000 Other income Interest income 804,000 859,000 1,911,000 1,629,000 Interest expense - - - - __________ ___________ ___________ ___________ 804,000 859,000 1,911,000 1,629,000 Earnings before income taxes 27,770,000 3,367,000 30,832,000 6,252,000 Income tax expense 9,164,000 1,195,000 10,174,000 2,219,000 ___________ ___________ ___________ ___________ Net earnings $18,606,000 $ 2,172,000 $20,658,000 $ 4,033,000 =========== =========== =========== =========== Net earnings per share Basic $0.77 $0.08 $0.84 $0.16 Diluted $0.76 $0.08 $0.84 $0.16 =========== =========== =========== =========== Weighted average shares outstanding Basic 24,294,000 25,705,000 24,550,000 25,828,000 Diluted 24,544,000 25,740,000 24,724,000 25,862,000 =========== =========== =========== =========== The accompanying notes are an integral part of these condensed statements. Arctic Cat Inc. CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) Six Months Ended September 30, _____________________________ 2000 1999 Cash flows from operating activities ________ ________ Net earnings $20,658,000 $ 4,033,000 Adjustments to reconcile net earnings to net cash used in operating activities Depreciation 5,121,000 6,245,000 Deferred income taxes (714,000) (11,369,000) Watercraft inventory writedown exit costs and asset impairment - 21,462,000 Changes in operating assets and liabilities, net effect of watercraft charges: Trading securities 21,781,000 (6,069,000) Accounts receivable (55,173,000) (52,979,000) Inventories (12,307,000) 734,000 Prepaid expenses 1,923,000 1,416,000 Accounts payable 6,605,000 10,738,000 Accrued expenses 2,747,000 16,626,000 Income taxes 7,717,000 7,794,000 Net cash used in __________ __________ operating activities (1,642,000) (1,369,000) Cash flows from investing activities Purchase of property and equipment (8,834,000) (3,061,000) Sale and maturity of available-for-sale securities 645,000 - Net cash used in __________ __________ investing activities (8,189,000) (3,061,000) Cash flows from financing activities Proceeds from issuance of common stock 1,177,000 - Dividends paid (2,939,000) (3,097,000) Repurchase of common stock (11,272,000) (7,480,000) Net cash used in __________ __________ financing activities (13,034,000) (10,577,000) __________ __________ Net decrease in cash and equivalents (22,865,000) (15,007,000) Cash and equivalents at the beginning of period 60,028,000 51,413,000 __________ __________ Cash and equivalents at the end of period $37,163,000 $36,406,000 ========== ========== Supplemental disclosure of cash payments for income taxes $3,172,000 $5,794,000 ========== ========== The accompanying notes are an integral part of these condensed statements. Arctic Cat Inc. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) NOTE A--BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements 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 generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although management believes that the disclosures are adequate to make the information presented not misleading. In the opinion of management, the unaudited condensed consolidated financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the financial position as of September 30, 2000, the results of operations for the three and six month periods ended September 30, 2000 and 1999 and cash flows for the six month periods ended September 30, 2000 and 1999. Results of operations for the interim periods are not necessarily indicative of results for the full year. Preparation of the Company's consolidated financial statements requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and related revenues and expenses. Actual results could differ from those estimates. NOTE B--NET EARNINGS PER SHARE The Company's basic net earnings per share is computed by dividing net earnings by the weighted average number of outstanding common shares. The Company's diluted net earnings per share is computed by dividing net earnings by the weighted average number of outstanding common shares and common share equivalents relating to stock options, when dilutive. Options to purchase 194,344 and 1,434,869 shares of common stock with weighted average exercise prices of $16.37 and $11.47 were outstanding during the three months ended September 30, 2000 and 1999 and options to purchase 468,011 and 1,523,994 shares of common stock with weighted average exercises prices of $14.19 and $11.35 were outstanding during the six months ended September 30, 2000 and 1999, all of which were excluded from the computation of common share equivalents because they were anti-dilutive. NOTE C--SHORT-TERM INVESTMENTS Short-term investments consist of the following: September 30, March 31, 2000 2000 ___________ __________ Trading securities $ 14,614,000 $36,395,000 Available-for-sale debt securities 11,209,000 11,854,000 ___________ __________ $25,823,000 $48,249,000 =========== ========== NOTE D--INVENTORIES Inventories consist of the following: September 30, March 31, 2000 2000 ___________ __________ Raw materials and sub-assemblies $17,531,000 $20,669,000 Finished goods 23,531,000 15,607,000 Parts, garments and accessories 32,914,000 25,393,000 ___________ __________ $73,976,000 $61,669,000 =========== ========== NOTE E--ACCRUED EXPENSES Accrued expenses as of September 30, 2000 consisted of marketing, $11,506,000, warranties, $15,867,000, PWC exit costs, $8,512,000 and other $16,639,000. Accrued expenses as of September 30, 1999 consisted of marketing, $10,492,000, warranties, $17,748,000, PWC exit costs, $13,326,000 and other $21,629,000. Accrued expenses as of March 31, 2000 consisted of marketing, $12,158,000, warranties, $11,097,000, PWC exit costs, $10,893,000 and other $15,629,000. NOTE F--DISCONTINUED PERSONAL WATERCRAFT BUSINESS AND RELATED COSTS On October 7, 1999, the Company announced that it was exiting the personal watercraft (PWC) business effective September 30, 1999 and recorded a charge of $21,462,000. The charge included $8,961,000 for consumer incentives to aid Company dealers in the disposition of their current inventory. Additionally, the Company analyzed all long-lived watercraft assets in connection with this exit that indicated an impaired carrying value. The Company expects to utilize a portion of these assets in other production areas. All long-lived assets with no alternative use, totaling $3,480,000, were taken out of service and written off. Costs to dispose as well as any gain on sale of long-lived assets are not expected to be significant. The Company also analyzed inventories and recorded a charge of $2,835,000 to reduce the current carrying value to a net realizable value. The Company has not produced additional PWC units beyond the completed production of the 1999 model. The Company identified and wrote off inventories of $2,451,000 that would not be used beyond September 30, 1999. The Company also accrued $3,735,000 relating to other exit costs. The Company anticipates the majority of the PWC exit plan will conclude by September 30, 2001. Net sales of the watercraft product line was approximately $184,000 for six month period ended September 30, 2000. As of September 30, 2000, cumulative charges related to accrued consumer incentives and other accrued exit costs were $4,204,000 and $610,000. The remaining accrued expenses, included within the balance sheet caption accrued expenses, for these items at September 30, 2000 were $4,757,000 and $3,755,000. There were no adjustments to the initial recorded accrual in conjunction with the PWC exit plan for the period ending September 30, 2000. NOTE G--OTHER MATTERS Dividend Declaration On October 31, 2000, the Company announced that its Board of Directors had declared a regular quarterly cash dividend of $0.06 per share, payable on December 4, 2000 to shareholders of record on November 17, 2000. Share Repurchase The Company invested $14,411,000, $18,493,000 and $8,392,000 during 2000, 1999 and 1998 to repurchase and cancel 1,500,800, 2,049,114, and 834,900 shares pursuant to two Board of Directors' authorizations for the repurchase of up to 4,500,000 shares and additional shares with a value of up to $30,000,000. Cumulative shares repurchased through September 30, 2000 under these authorizations were 5,939,222 for a total of $58,273,532. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview Arctic Cat Inc. (the "Company") designs, engineers, manufactures and markets snowmobiles and all-terrain vehicles (ATVs) under the Arctic Cat brand name, as well as related parts, garments and accessories principally through its facilities in Thief River Falls, Minnesota. The Company markets its products through a network of independent dealers located throughout the contiguous United States and Canada, and through distributors representing dealers in Alaska, Europe, the Middle East, Asia, and other international markets. The Arctic Cat brand name has existed for more than 30 years and is among the most widely recognized and respected names in the snowmobile industry. The Company trades on the Nasdaq National Market under the symbol ACAT. Results of Operations THREE MONTHS AND SIX MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THE THREE MONTHS AND SIX MONTHS ENDED SEPTEMBER 30, 1999. Net sales were down slightly from the comparable three months and six month period last year. The Company continues to cycle out the discontinuation of its personal watercraft (PWC) business and anticipates growth in the ATV business will more than offset the weather-related decrease in snowmobile sales and as a result Arctic Cat expects record-breaking revenues in fiscal 2001. Net sales for the second quarter decreased 6.2% to $192,854,000 from $205,507,000 for the same quarter in fiscal 2000. This decrease is primarily due to a 12.0% decrease in snowmobile unit volume as discussed above, and a $615,000 decrease in discontinued PWC sales. Offsetting these decreases is a 3.5% ATV unit volume increase or $3,447,000 increase. Parts, garments and accessories sales decreased 8.0% or $2,587,000 due to comparatively lower preseason parts, garments and accessories sales. Year-to-date sales decreased 4.7% to $278,815,000 from $292,435,000 for the same period in fiscal 2000. This decrease is due to a 17.9% decrease in snowmobile unit volume as discussed above, and a $2,095,000 decrease in discontinued PWC sales. Offsetting these decreases is a 33.7% ATV unit volume increase or $27,577,000. Based on ATV orders received from dealers, the Company continues to expect to outpace the ATV industry's double-digit growth again this year. Parts, garments and accessories sales decreased 9.8% to $37,313,000 versus $41,383,000 for the same period a year ago due to lower sales of generators related to last years successful one-time Y2K sales program and lower sales of snowmobile related parts, garments and accessories. Gross profits increased 5.8% to $51,648,000 from $48,806,000 for the same quarter in fiscal 2000. As a percent, gross profits were 26.8% of sales versus 23.7% for the same quarter a year ago. Year-to-date gross profits were $73,222,000 versus $70,521,000 for the same quarter a year ago. The increase in gross profits for the quarter and year-to-date primarily relate to the $2,835,000 watercraft inventory writedown recorded last year related to the discontinued PWC business. Operating expenses for the quarter decreased 46.7% to $24,682,000 from $46,298,000 a year ago. As a percent of sales, operating expenses were 12.8% of sales versus 22.5% of sales for the same period a year ago. Year-to-date operating expenses were $44,301,000 versus $65,898,000. The decrease in operating expenses for the quarter and year-to-date was mainly due to watercraft exit costs of $18,627,000 recorded for the same period last year and no PWC marketing expenses due to the discontinuation of the PWC business. Net earnings for the second quarter were $18,606,000 or $0.76 per diluted share compared to net earnings of $2,172,000 or $0.08 per diluted share a year ago. Without the exit costs associated with the discontinued PWC business, the year-to-date net earnings for the six month period ended September 30, 1999 would have been $20,932,000 or $0.81 per diluted share. Liquidity and Capital Resources The seasonality of the Company's snowmobile production cycle and the lead time between the commencement of snowmobile and ATV production in the early spring and commencement of shipments late in the first quarter have resulted in significant fluctuations in the Company's working capital requirements during the year. Historically, the Company has financed its working capital requirements out of available cash balances at the beginning and end of the production cycle and with short-term bank borrowings during the middle of the cycle. Cash and short-term investments were $62,986,000 at September 30, 2000. The Company's cash balances traditionally peak early in the fourth quarter and then decrease as working capital requirements increase when the Company's snowmobile and spring ATV production cycles begin. The Company's investment objectives are first, safety of principal and second, rate of return. The Company believes that the cash generated from operations and available cash will be sufficient to meet its working capital, regular quarterly dividend, share repurchase program, and capital expenditure requirements for the short and long-term basis. Line of Credit The Company has an unsecured credit agreement with a bank for the issuance of up to $75,000,000 of documentary and stand-by letters of credit and for working capital. Total working capital borrowings under the credit agreement are limited to $30,000,000. Forward Looking Statements The Private Securities Litigation Reform Act of 1995 provides a safe harbor for certain forward-looking statements. This 10-Q contains forward- looking statements that reflect the Company's current views with respect to future events and financial performance. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results or those anticipated. The words "aim," "believe," "expect," "anticipate," "intend," "estimate," and other expressions that indicate future events and trends identify forward-looking statements. Actual future results and trends may differ materially from historical results or those anticipated depending on a variety of factors, including, but not limited to: product mix and volume; competitive pressure on sales and pricing; increase in material or production cost which cannot be recouped in product pricing; changes in the sourcing of engines from Suzuki; warranty expenses; foreign currency exchange rate fluctuations; product liability claims and other legal proceedings in excess of insured amounts; environmental and product safety regulatory activity; effects of the weather; overall economic conditions and consumer demand and confidence. Item 3. Quantitative and Qualitative Disclosures about Market Risk The Company is subject to certain market risk relating to changes in interest rates and foreign currency exchange rates. Information regarding foreign currency exchange rates is discussed within "Management's Discussion and Analysis -- Inflation and Exchange Rate" in the 2000 Annual Report and 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. The carrying amount of available-for-sale debt securities approximate related fair value and the associated market risk is not deemed to be significant. PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K ________________________________________ (a) Exhibits 27.1 financial data schedule (b) There were no reports on Form 8-K filed during the Quarter ended September 30, 2000. 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 13, 2000 By s/Christopher A. Twomey __________________ _________________________ Christopher A. Twomey Chief Executive Officer Date: November 13, 2000 By s/Timothy C. Delmore __________________ _________________________ Timothy C. Delmore Chief Financial Officer