Summary of ARCTIC CAT INC - Yahoo! Finance

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 United States, Canada, and Europe and through distributors representing dealers in Europe, the Middle East, Asia, and other international markets. The Arctic Cat brand name has existed for more than 45 years and is among the most widely recognized and respected names in the snowmobile industry. The Company trades on the NASDAQ Global Select Market under the symbol "ACAT."

Executive Overview

The following discussion pertains to the results of operations and financial position of the Company for the quarter and year-to-date periods ended September 30, 2008. Due to the seasonality of the snowmobile, ATV and parts, garments and accessories ("PG&A") businesses, and to certain changes in production and shipping cycles, results of such periods are not necessarily indicative of the results to be expected for the complete year.

For the second quarter ended September 30, 2008 the Company reported net sales of $204.3 million, earnings of $16.9 million and diluted earnings per share of $0.93 compared to September 30, 2007 quarterly net sales of $205.2 million, net earnings of $13.9 million and diluted earnings per share of $0.77. While the Company's second quarter operating income was flat, the Company's quarterly net income improved because of a lower effective tax rate of 16% versus 31% for the same quarter last year. Net sales for the quarter remained relatively flat due to increased sales of snowmobile and related parts, garments and accessories offset by decreased ATV sales. The Company believes that ATV sales have been adversely impacted by a weak U.S. economy.

Results of Operations

THREE AND SIX MONTHS ENDED SEPTEMBER 30, 2008 COMPARED TO THE THREE AND SIX MONTHS ENDED SEPTEMBER 30, 2007.

Net sales for the second quarter of fiscal 2009 decreased 0.4% to $204,314,000 from $205,210,000 for the second quarter of fiscal 2008. Snowmobile sales increased 1.4% to $98,379,000 for the second quarter of 2009 from $97,034,000 for the same quarter in fiscal 2008. ATV sales decreased 7.6% to $71,646,000 for the second quarter of 2009 from $77,547,000 for the same quarter in fiscal 2008. Parts, garments and accessory sales increased 11.9% to $34,289,000 for the second quarter of 2009 from $30,629,000 in the same quarter in fiscal 2008. Snowmobile unit volume increased 5.1% and ATV unit volume decreased 14.5% for the second quarter of fiscal 2009 compared to the same quarter last year. Net sales for the first six months of fiscal 2009 increased 1.7% to $298,191,000 from $293,072,000 for the first six months of fiscal 2008, Year-to-date snowmobile sales increased 10.0% to $119,795,000 from $108,922,000 compared to the first six months of fiscal 2008. Quarterly and year-to-date increases in snowmobile sales are due to orders received based on new models and last year's favorable snow season. ATV sales decreased 8.6% to $125,421,000 from $137,263,000 compared to the first six months of fiscal 2008, and parts, garments and accessory sales increased 13.0% to $52,975,000 from $46,887,000 compared to the first six months of fiscal 2008. Quarterly and year-to-date decreases in ATV sales are related to weaker U.S. demand in the core ATV market. Quarterly and year-to-date increase in parts, garments and accessories sales are mainly related to increases in preseason sales of snowmobile parts, garments and accessories. Year-to-date snowmobile unit volume increased 12.1% compared to the same period last year, while ATV unit volume decreased 15.2%.

Gross profit for the second quarter of fiscal 2009 decreased 10.6% to $48,410,000 from $54,179,000 for the same quarter in fiscal 2008. The quarterly gross profit percentage for the second quarter in fiscal 2009 was 23.7%, compared to 26.4% for the second quarter in fiscal 2008. The year-to-date gross profit percentage was 20.9% compared to 22.9% for the same period last year. The quarterly and year-to-date decreases in gross profit percentages were primarily due to a weaker Canadian dollar exchange rate.

Operating expenses for the second quarter of fiscal 2009 decreased 17.1% to $27,890,000 from $33,662,000 for the same quarter of last year. As a percent of sales, operating expenses were 13.7% for the second quarter of fiscal 2009 versus 16.4% for the same quarter last year. Year-to-date operating expense for the period ended September 30, 2008 decreased 12.0% to $50,043,000 from $56,885,000 for the same period last year. As a percent of sales, operating expenses were 16.8% for the first six months of fiscal 2009 compared to 19.4% for the first six months of fiscal 2008. Both the quarterly and year-to-date decreases in operating expenses resulted primarily from decreased Canadian currency hedge costs and legal expenses compared to the same periods last year.

Interest income for the second quarter of fiscal 2009 decreased to $27,000 from $69,000 for the second quarter of last year and interest expense increased to $414,000 from $391,000 for the second quarter of fiscal 2009 compared to the second quarter of last year. Year-to-date interest income decreased to $99,000 from $499,000 and year-to-date interest expense increased to $618,000 from $452,000. Interest income was primarily affected by the lower cash levels at the beginning of our fiscal year compared to last year. Interest expense was also affected by the lower cash balances that resulted in increased borrowings from the Company's line of credit during the first and second quarters of fiscal 2009 compared to the same period last year.

The net earnings for the second quarter of fiscal 2009 were $16,915,000, or $0.93 per diluted share. The Company reported net earnings for the second quarter of fiscal 2008 of $13,944,000, or $ 0.76 per diluted share. Net earnings for the first six months of fiscal 2009 were $9,952,000 or $0.55 per diluted share, compared to $6,789,000 or $0.37 per diluted share for the same periods last year. Both the quarterly and the year-to-date increases in net earnings are due primarily to the lower effective tax rate of 16% versus 31% on flat operating income for the second quarter of fiscal 2009 compared to the same period last year.

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. Historically, the Company has financed its working capital requirements out of available cash balances at the beginning and end of the production cycle and with short-term bank borrowings during the middle of the cycle. The Company's cash balances traditionally peak early in the fourth quarter and then decrease as working capital requirements increase when the Company's snowmobile and spring ATV production cycles begin. The increase in the Company's inventory and receivable balances as of September 30, 2008 as compared to March 31, 2008 is due to the seasonality of the Company's snowmobile and ATV business. Inventory was $172.3 million at September 30, 2008 compared to $175.8 at September 30, 2007 and $127.0 million on March 31, 2008. Accounts receivable was $78.6 million at September 30, 2008 compared to $63.8 million at September 30, 2007. The increase is due to increased International snowmobile sales and North American parts, garments and accessory sales. The accounts receivable balance at March 31, 2008 was $ 39.7 million. During the six months ended September 30, 2008, the Company had no repurchases of its common shares compared to $8,387,000 for the same six month period of the prior year. Cash and short-term investments were $3,733,000 and $6,400,000 at September 30, 2008 and 2007, respectively. The Company's investment objectives are first, safety of principal and second, rate of return.

The Company believes that the cash generated from operations and available cash will be sufficient to meet its working capital, regular quarterly dividend, share repurchase program, and capital expenditure requirements on a short and long-term basis.

Line of Credit

The Company has a secured 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, reduced to $60,000,000 at October 31, 2008 and $40,000,000 at December 31, 2008. This agreement will expire March 31, 2009, by which time the Company expects to have a new $75 million credit facility in place. The Company was in compliance with the credit agreement or obtained non-compliance waivers as of September 30, 2008.

Significant Accounting Policies

See the Company's most recent Annual Report on Form 10-K for the year ended March 31, 2008 for a discussion of its critical accounting policies.

In September of 2006, the Financial Accounting Standards Board ("FASB") issued SFAS No. 157, "Fair Value Measurement." SFAS 157 clarifies the principle that fair value should be based on the assumptions that market participants would use when pricing an asset or liability, and establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. SFAS 157 is effective for financial statements issued for the fiscal years beginning after November 15, 2007, and the Company has adopted the standard for those assets and liabilities as of April 1, 2008. The impact of the Company's adoption of SFAS 157 was not significant.

In February 2008, the FASB issued FSP FAS 157-2, Effective Date of FASB Statement No. 157 ("FSP FAS 157-2"). FSP 157-2 delays the effective date of SFAS 157 for non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). The Company will adopt SFAS 157 for non-financial assets and non-financial liabilities on December 31, 2008, and does not anticipate this adoption will have a material impact on our financial statements.

In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities," which permits entities to measure most financial instruments at fair value if desired. SFAS 159 may be applied on a contract by contract basis, and is irrevocable once applied to these contracts. SFAS 159 may be applied at the time of adoption for existing eligible items, or at initial recognition of eligible items. After election of this option, changes in fair value are reported as earnings. The items measured at fair value must be shown separately on the balance sheet. The effective date for SFAS 159 is for fiscal years beginning after November 15, 2007. The cumulative effect of adoption would be reported as an adjustment to beginning retained earnings. The Company did not elect to apply the provisions of SFAS 159 to any financial assets or liabilities.

In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB statement No. 133," which will require increased disclosure about the Company's strategies and objectives for using derivative instruments; the location and amounts of derivative instruments in the Company's financial statements; how derivative instruments and related hedged items are accounted for under SFAS No 133, "Accounting for Derivative Instruments and Hedging Activities;" and how derivative instruments and related hedged items affect the Company's financial position, financial performance, and cash flows. Certain disclosures will also be required with respect to derivative features that are credit-risk related. SFAS No 161 is effective for the Company beginning January 1, 2009 on a prospective basis. The Company does not expect this standard to have a material impact on its consolidated results of operations or financial condition.

In December 2007, the FASB issued SFAS No 141(R), "Business Combinations." SFAS 141(R) establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any non-controlling interest in the acquired Company and the goodwill acquired. SFAS 141(R) also establishes disclosure requirements to enable the evaluation of the nature and financial effects of the business combination. SFAS 141(R) is effective for fiscal years beginning after December 15, 2008. The Company does not expect the adoption of SFAS 141(R) to have any significant impact on the Company's accounting treatment for business combinations on a prospective basis beginning in the period it is adopted.

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, pricing and sales incentives; increase in material or production cost which cannot be recouped in product pricing; changes in the sourcing of engines from Suzuki; 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 and consumer demand and confidence. The Company does not undertake any obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.