10-Q 1 a601-10q.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 June 30, 2001 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 August 10, 2001, 16,358,601 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) June 30, March 31, ASSETS 2001 2001 CURRENT ASSETS ___________ ___________ Cash and equivalents $ 18,585,000 $ 42,881,000 Short-term investments 14,377,000 56,947,000 Accounts receivable, less allowances 46,176,000 24,897,000 Inventories 108,214,000 60,939,000 Prepaid expenses 3,334,000 2,401,000 Deferred income taxes 18,556,000 18,045,000 ___________ ___________ Total current assets 209,242,000 206,110,000 PROPERTY & EQUIPMENT - at cost Machinery, equipment and tooling 87,469,000 86,799,000 Land, buildings and improvements 18,318,000 18,319,000 __________ __________ 105,787,000 105,118,000 Less accumulated depreciation 58,538,000 55,570,000 __________ __________ 47,249,000 49,548,000 __________ __________ $256,491,000 $255,658,000 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 36,197,000 $ 29,309,000 Accrued expenses 43,505,000 49,585,000 __________ __________ Total current liabilities 79,702,000 78,894,000 DEFERRED INCOME TAXES 6,322,000 6,322,000 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, 16,376,975 at June 30, 2001; 16,228,412 at March 31, 2001 163,000 162,000 Class B common stock, par value $.01; 7,560,000 shares authorized, issued, and outstanding 76,000 76,000 Additional paid-in capital 366,000 - Accumulated other comprehensive income (loss) (550,000) 320,000 Retained earnings 170,412,000 169,884,000 __________ ___________ 170,467,000 170,442,000 __________ ___________ $256,491,000 $255,658,000 =========== =========== The accompanying notes are an integral part of these condensed statements. Arctic Cat Inc. CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (unaudited) Three Months Ended June 30, __________________________ 2001 2000 ______ ______ Net sales $ 79,234,000 $ 87,965,000 Cost of goods sold 58,822,000 66,391,000 ___________ ___________ Gross profit 20,412,000 21,574,000 Selling, general and administrative expenses 18,268,000 19,619,000 ___________ ___________ Operating profit 2,144,000 1,955,000 Other income Interest income 726,000 1,107,000 ----------- ----------- Earnings before income taxes 2,870,000 3,062,000 Income tax expense 913,000 1,010,000 ___________ ___________ Net earnings $ 1,957,000 $ 2,052,000 =========== =========== Net earnings per share Basic $0.08 $0.08 Diluted $0.08 $0.08 =========== =========== Weighted average shares outstanding Basic 23,823,000 24,807,000 Diluted 24,188,000 24,903,000 =========== =========== The accompanying notes are an integral part of these condensed statements. Arctic Cat Inc. CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) Three Months Ended June 30, _____________________________ 2001 2000 Cash flows from operating activities ________ ________ Net earnings $ 1,957,000 $ 2,052,000 Adjustments to reconcile net earnings to net cash provided by operating activities Depreciation 2,973,000 2,065,000 Deferred income taxes - 318,000 Changes in operating assets and liabilities: Trading securities 42,561,000 19,805,000 Accounts receivable (21,279,000) (18,811,000) Inventories (48,201,000) (26,810,000) Prepaid expenses (933,000) 1,041,000 Accounts payable 6,888,000 2,279,000 Accrued expenses (6,535,000) (4,315,000) Income taxes - (968,000) Net cash provided by __________ __________ operating activities (22,569,000) (23,344,000) Cash flows from investing activities Purchase of property and equipment (674,000) (4,499,000) Sale and maturity of available-for-sale securities 9,000 5,000 Net cash used in __________ __________ investing activities (665,000) (4,494,000) Cash flows from financing activities Proceeds from issuance of common stock 3,121,000 - Dividends paid (1,429,000) (1,487,000) Repurchase of common stock (2,754,000) (1,780,000) Net cash used in __________ __________ financing activities (1,062,000) (3,267,000) __________ __________ Net decrease in cash and equivalents (24,296,000) (31,105,000) Cash and equivalents at the beginning of period 42,881,000 60,028,000 __________ __________ Cash and equivalents at the end of period $18,585,000 $28,923,000 ========== ========== Supplemental disclosure of cash payments for income taxes $ 329,000 $ 650,000 ========== ========== 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 accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations, although management believes that the disclosures are adequate to make the information presented not misleading. In the opinion of management, the unaudited condensed consolidated financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the financial position as of June 30, 2001, and the results of operations and the cash flows for the three month periods ended June 30, 2001 and 2000. Results of operations for the three months ended June 30, 2001 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 170,502 and 936,021 shares of common stock with weighted average exercise prices of $16.69 and $12.00 were outstanding during the three months ended June 30, 2001 and 2000, 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: June 30, March 31, 2001 2001 ___________ __________ Trading securities $ 2,690,000 $45,251,000 Available-for-sale debt securities 11,687,000 11,696,000 ___________ __________ $14,377,000 $56,947,000 =========== ========== NOTE D--INVENTORIES Inventories consist of the following: June 30, March 31, 2001 2001 ___________ __________ Raw materials and sub-assemblies $17,796,000 $20,948,000 Finished goods 55,302,000 16,147,000 Parts, garments and accessories 35,116,000 23,844,000 ___________ __________ $108,214,000 $60,939,000 =========== ========== NOTE E--ACCRUED EXPENSES Accrued expenses as of June 30, 2001 consisted of marketing, $12,210,000, warranties, $13,996,000, PWC exit costs, $7,895,000 and other $9,404,000. Accrued expenses as of June 30, 2000 consisted of marketing, $10,730,000, warranties, $12,838,000, PWC exit costs, $9,545,000 and other $12,349,000. Accrued expenses as of March 31, 2001 consisted of marketing, $16,596,000, warranties, $11,922,000, PWC exit costs, $7,958,000 and other $13,109,000. 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. The Company did not produce additional PWC units beyond the completed production of the 1999 models. 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 $99,000 for the three month period ended June 30, 2001 and $184,000 for the three months ended June 30, 2000. At June 30, 2001 $5,047,000 is accrued for consumer incentives and $2,848,000 for other exit costs in connection with this discontinued product line. There were no adjustments to the initial recorded accrual in conjunction with the PWC exit plan for the period ending June 30, 2001. NOTE G--ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES The Company adopted SFAS No. 133 Accounting for Derivative Instruments and Hedging Activities, and No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities, on April 1, 2001. These standards require entities to recognize derivatives in their financial statements as either assets or liabilities measured at fair value. The accounting for changes in the fair value of a derivative is recognized into earnings unless certain criteria are met. These Standards also require formal documentation, designation and effectiveness assessment of transactions receiving hedge accounting. The Company enters into forward exchange contracts to hedge the variability in foreign exchange rates related to purchase commitments denominated in Japanese yen for ATV engines. The Japanese yen contracts are designated as and meet the criteria for cash flow hedges. The Company does not enter into forward exchange contracts for trading purposes. Gains and losses on forward exchange contracts are recorded in accumulated other comprehensive income, net of tax, and subsequently reclassified into cost of goods sold upon the sale of ATV units. During the three month period ending June 30, 2001, there were were no amounts reclassified from accumulated other comprehensive income into costs of goods sold. The Company estimates amounts recorded within accumulated other comprehensive income will be reclassified into cost of goods sold within 12 months. At April 1, 2001, the Company had open Japanese yen forward exchange contracts with notional amounts totaling $21,495,000 maturing through June 2001. The adoption of SFAS 133 resulted in a liability of $1,176,000 for the open Japanese yen forward exchange contracts, accumulated other comprehensive income net of tax of $741,000 and current deferred tax assets of $435,000. As of June 30, 2001, the Company had open Japanese yen forward exchange contracts, maturing through August 2001, with notional amounts totaling $18,943,000 and a fair value liability of $455,000. There were no open forward contracts relating to Canadian currency transfers at June 30, 2001. NOTE H--OTHER MATTERS Dividend Declaration On July 26, 2001, the Company announced that its Board of Directors had declared a regular quarterly cash dividend of $0.06 per share, payable on September 3, 2001 to shareholders of record on August 17, 2001. Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview Arctic Cat Inc. (the "Company") designs, engineers, manufactures and markets snowmobiles and all-terrain vehicles (ATVs) under the Arctic Cat brand name, as well as related parts, garments and accessories principally through its facilities in Thief River Falls, Minnesota. The Company markets its products through a network of independent dealers located throughout the contiguous United States and Canada, and through distributors representing dealers in Alaska, Europe, the Middle East, Asia, and other international markets. The Arctic Cat brand name has existed for more than 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 ENDED JUNE 30, 2001 COMPARED TO THE THREE MONTHS ENDED JUNE 30, 2000. Net sales and earnings slightly declined in the first quarter primarily due to the timing of shipments of ATVs. As planned, some first-quarter shipments were moved into the second quarter to better match the retail selling season for 2002 models. The Company continues to expect that ATV revenues will increase during this fiscal year and that Arctic Cat retail sales will again outpace the industry. Arctic Cat also anticipates that fiscal 2002 snowmobile revenues will increase based on orders already received. As a result, the Company expects record-breaking revenues and increased earnings in fiscal 2002. Net sales for the quarter decreased 9.9% to $79,234,000 from $87,965,000 for the same quarter in fiscal 2001. This decrease is due to a 28.2% decrease in ATV unit volume, and a 4.0% decrease in parts, garments and accessories sales due to the timing of shipments. Snowmobile sales in dollars increased 4.0% to $46,277,000 due to higher priced units in the sales mix while snowmobile unit volume decreased 6.5%. Gross profits decreased 5.4% to $20,412,000 from $21,574,000 for the same quarter in fiscal 2001. This decrease is primarily due to decreased sales. As a percent of net sales, the gross profit percentage for the quarter increased to 25.8% from 24.5% due to a higher percentage of snowmobiles in the sales mix. Operating expenses for the quarter decreased 6.9%, in line with decreased sales, to $18,268,000 from $19,619,000 for the same quarter of fiscal 2001. As a percent of sales, operating expenses for the first quarter were 23.1% versus 22.3% for the same period a year ago. Net earnings for the first quarter of fiscal 2002 were $1,957,000 or $0.08 per share on a diluted basis, compared to net earnings of $2,052,000 or $0.08 per diluted share, for the first quarter of fiscal 2001. 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 $32,962,000 at June 30, 2001. 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. New Pronouncements In July 2001, the Financial Accounting Standards Board issued two new pronouncements: Business Combinations and Goodwill and Intangible Assets. These pronouncements, among other things, eliminate the pooling-of-interest method of accounting for business combinations and require that the purchase method be used. In addition, they eliminate the amortization of goodwill arising from purchase business combinations but require annual tests for impairment. The implementation of these statements in April 2002 should not have a material effect on the Company as it has no goodwill or intangible assets on its balance sheet. Forward Looking Statements The Private Securities Litigation Reform Act of 1995 provides a safe harbor for certain forward-looking statements. This form 10-Q contains forward-looking statements that reflect the Company's current views with respect to future events and financial performance. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results or those anticipated. The words "aim," "believe," "expect," "anticipate," "intend," "estimate," and other expressions that indicate future events and trends identify forward-looking statements. Actual future results and trends may differ materially from historical results or those anticipated depending on a variety of factors, including, but not limited to: product mix and volume; competitive pressure on sales and pricing; increase in material or production cost which cannot be recouped in product pricing; changes in the sourcing of engines from Suzuki; warranty expenses; foreign currency exchange rate fluctuations; product liability claims and other legal proceedings in excess of insured amounts; environmental and product safety regulatory activity; effects of the weather; overall economic conditions and consumer demand and confidence. Item 3. Quantitative and Qualitative Disclosures about Market Risk The Company is subject to certain market risk relating to changes in interest rates and foreign currency exchange rates. Information regarding foreign currency exchange rates is discussed within "Management's Discussion and Analysis -- Inflation and Exchange Rate" in the 2001 Annual Report on Form 10-K and Note G of the June 30, 2001 Form 10-Q. 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) None (b) There were no reports on Form 8-K filed during the Quarter ended June 30, 2001. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ARCTIC CAT INC. Date: August 14, 2001 By s/Christopher A. Twomey __________________ _________________________ Christopher A. Twomey Chief Executive Officer Date: August 14, 2001 By s/Timothy C. Delmore __________________ _________________________ Timothy C. Delmore Chief Financial Officer