Overview

Arctic Cat Inc., a Minnesota corporation, (the "Company" or "Arctic Cat," or "we," "our" or "us"), is based in Thief River Falls, Minnesota with principal executive offices in Plymouth, Minnesota. We operate in a single industry segment and design, engineer, manufacture and market snowmobiles and all-terrain vehicles (ATVs) under the Arctic CatŪ 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 50 years and is among the most widely recognized and respected names in the motorsports industry. 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, 2011. Due to the seasonality of the snowmobile, ATV and 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 full year.

For the third quarter ended December 31, 2011, we reported net sales of $207.0 million and net earnings of $17.0 million, or $0.92 per diluted share, compared to third quarter ended December 31, 2010 net sales of $152.0 million and net earnings of $9.3 million, or $0.50 per diluted share. An increase in net sales for all product lines, a 154 basis point improvement in gross margin and a 307 basis point improvement in operating expenses as a percent of sales contributed to improved quarterly results compared to the same period in the prior year. For the nine months ended December 31, 2011, we reported net sales of $486.8 million and net earnings of $36.1 million, or $1.94 per diluted share, compared to net sales of $391.2 million and net earnings of $22.6 million, or $1.22 per diluted share, for the same period last year.

Our ATV sales for the first three quarters are up 14% year-over-year resulting from increased side-by-side and international sales. Also during the third quarter we began shipping limited quantities of our new Wildcat sport side-by-side model, our first entry into the growing sport side-by-side market. During the fourth quarter we will be ramping up production to meet dealer and consumer demand. Looking ahead, despite our expectation that North American ATV retail sales will decline 10 to 15 percent, we continue to expect growth in fiscal 2012 in our ATV business, due to the competitive strength of our core ATV and Prowler side-by-side vehicle offerings, and sales of our new Wildcat sport side-by-side model.

Our 2012 snowmobile line-up was unveiled in March 2011, with 23 models representing 75 percent of our current offerings. The breadth of our new models and innovative technologies is having a positive impact on fiscal 2012 worldwide snowmobile sales. Our snowmobile sales for three quarters of this fiscal year are up 38% year over year. Regarding fiscal 2012 industry retail snowmobile sales, we expect North American retail sales to increase approximately 3 to 5 percent.

For the fiscal year ending March 31, 2012, based on results year-to-date and expected fourth quarter performance, we now anticipate sales in the range of $568 million to $575 million, an increase of 22 percent to 24 percent versus fiscal 2011. We estimate that fiscal 2012 earnings per diluted share will be in the range of $1.60 to $1.70, an increase of 129 percent to 143 percent over fiscal 2011.

Near the end of third quarter, we repurchased all of Suzuki Motor Corporation's 6.1 million share ownership of our Class B common stock. The $79.3 million stock buyback was funded entirely with existing cash from our balance sheet and reduced our outstanding shares 33% from 18.4 million to 12.3 million while leaving our public share float unchanged. Following the share repurchase from Suzuki, we still expect to end our fiscal year with over $60 million in cash and short-term investments. As previously announced, Suzuki will continue to supply snowmobile engines to us through the 2014 model year, as well as engine parts to service engines for seven years after that. Following the 2014 model year, we plan to manufacture snowmobile engines at our St. Cloud, Minnesota facility, where we have manufactured ATV engines since 2007.

Results of Operations

Product Line Sales



                                                         Three Months Ended December 31,                                      Nine Months Ended December 31,
                                                      Percent                    Percent                                   Percent                    Percent
                                                        of                         of           Change                       of                         of           Change
                                                       Total                      Total         2011 vs                     Total                      Total         2011 vs
($ in millions)                           2011         Sales         2010         Sales          2010          2011         Sales         2010         Sales          2010
Snowmobile                               $ 125.2            61 %    $  77.8            51 %           61 %    $ 257.3            53 %    $ 186.5            48 %           38 %
ATV                                         54.4            26 %       48.6            32 %           12 %      151.1            31 %      133.0            34 %           14 %
Parts, garments & accessories               27.4            13 %       25.6            17 %            7 %       78.4            16 %       71.7            18 %            9 %

Net Sales                                $ 207.0           100 %    $ 152.0           100 %           36 %    $ 486.8           100 %    $ 391.2           100 %           24 %

During the third quarter of fiscal 2012, net sales increased 36% to $207.0 million from $152.0 million in the third quarter of fiscal 2011 primarily due to sales increases for all product lines. Snowmobile unit volume increased 24%, ATV unit volume increased 7%, and parts, garments and accessories sales increased $1.8 million. Net sales for the nine months ended December 31, 2011 increased 24% to $486.8 million from $391.2 million for the same period in fiscal 2011. Snowmobile unit volume increased 28%, ATV unit volume increased 11%, and parts, garments and accessories sales increased $6.7 million. Increases in snowmobile unit volume for the quarter and year-to-date were driven primarily by increased shipments of our extensive new 2012 snowmobile line-up. Increased ATV unit volume for the quarter and year-to-date resulted from increased international sales. PG&A sales increases during the quarter and year-to-date were primarily due to increased preseason snowmobile parts, garments and accessories sales.

Cost of Goods Sold



                                                          Three Months Ended December 31,                                      Nine Months Ended December 31,
                                                       Percent                    Percent                                   Percent                    Percent
                                                         of                         of           Change                       of                         of           Change
                                                        Total                      Total         2011 vs                     Total                      Total         2011 vs
($ in millions)                            2011         Sales         2010         Sales          2010          2011         Sales         2010         Sales          2010
Snowmobile & ATV units                    $ 142.5          68.8 %    $ 104.7          68.9 %         36.1 %    $ 320.5          65.8 %    $ 254.3          65.0 %         26.0 %
Parts, garments & accessories                16.7           8.1 %       14.5           9.5 %         15.2 %       47.1           9.7 %       42.2          10.8 %         11.6 %

Total Cost of Goods Sold                  $ 159.2          76.9 %    $ 119.2          78.4 %         33.6 %    $ 367.6          75.5 %    $ 296.5          75.8 %         24.0 %

During the third quarter of fiscal 2012, cost of sales increased 33.6% to $159.2 million from $119.2 million for the third quarter of fiscal 2011. Fiscal 2012 snowmobile and ATV unit cost of sales increased 36.1% to $142.5 million from $104.7 million directionally in line with increases in unit sales during the third quarter of fiscal 2012 compared to the third quarter of fiscal 2011. The third quarter of fiscal 2012 cost of sales for PG&A increased 15.2% to $16.7 million from $14.5 million for the third quarter of fiscal 2011, in line with increased sales and increased freight, packaging and product costs. During the first nine months of fiscal 2012, cost of sales increased 24.0% to $367.6 million from $296.5 million for the first nine months of fiscal 2011. Fiscal 2012 snowmobiles and ATV unit cost of sales for the first nine months increased 26.0% to $320.5 million from $254.3 million due to the higher product and freight costs during the period compared to the same period of fiscal 2011. The first nine months of fiscal 2012 cost of sales for PG&A increased 11.6% to $47.1 million compared to $42.2 million for fiscal 2011, in line with increased sales.

Gross Profit



                                                    Three Months Ended December 31,                       Nine Months Ended December 31,
                                                                                  Change                                            Change 2011
($ in millions)                               2011             2010            2011 vs 2010          2011             2010            vs 2010
Gross Profit Dollars                        $    47.8        $    32.7                  46.2 %    $    119.2        $    94.8               25.7 %
Percentage of Sales                              23.1 %           21.5 %                                24.5 %           24.2 %

Gross profit increased 46.2% to $47.8 million in the third quarter of fiscal 2012 from $32.7 million in the third quarter of fiscal 2011. The gross profit percentage for the third quarter of fiscal 2012 increased to 23.1% versus 21.5% in 2011. Gross profit increased 25.7% to $119.2 million in the first nine months of fiscal 2012 from $94.8 million in the first nine months of fiscal 2011. The gross profit percentage for the first nine months of fiscal 2012 increased to 24.5% versus 24.2% in 2011. The increases in the quarterly and year-to-date 2012 gross profit percentages were primarily due to higher volumes, improved product mix and lower sales incentives.

Operating Expenses



                                                  Three Months Ended December 31,                      Nine Months Ended December 31,
                                                                               Change                                              Change
($ in millions)                              2011             2010          2011 vs 2010          2011             2010         2011 vs 2010
Selling & Marketing                        $    10.2        $     8.9                14.6 %     $    28.4        $    25.8               10.1 %
Research & Development                           4.8              3.8                26.3 %          12.6             10.7               17.8 %
General & Administrative                         6.6              7.8               (15.4 )%         22.7             25.6              (11.3 )%

Total Operating Expenses                   $    21.6        $    20.5                 5.4 %     $    63.7        $    62.1                2.6 %

Percentage of Sales                             10.4 %           13.5 %                              13.1 %           15.9 %

Selling and Marketing expenses increased 14.6% to $10.2 million in the third quarter of fiscal 2012 from $8.9 million in the third quarter of fiscal 2011, primarily due to increased advertising expenses. Research and Development expenses increased 26.3% to $4.8 million in the third quarter of fiscal 2012 compared to $3.8 million in the third quarter of fiscal 2011 due primarily to higher product development expenses. General and Administrative expenses decreased 15.4% to $6.6 million in the third quarter of fiscal 2012 from $7.8 million in the third quarter of fiscal 2011 due primarily to higher compensation costs offset by lower Canadian hedge costs. Selling and Marketing expenses increased 10.1% to $28.4 million in the first nine months of fiscal 2012 from $25.8 million in the same period of fiscal 2011, primarily due to higher advertising expenses. Research and Development expenses increased 17.8% to $12.6 million in the first nine months of fiscal 2012 compared to $10.7 million in the same period of fiscal 2011, due primarily to higher development expenses. General and Administrative expenses decreased 11.3% to $22.7 million in the first nine months of fiscal 2012 from $25.6 million in the same period of fiscal 2011 primarily due to higher compensation costs offset by lower Canadian hedge costs.

We had $23,000 in interest income in the third quarter of fiscal 2012 compared to $28,000 in the third quarter of fiscal 2011. Interest income decreased to $68,000 in the first nine months of fiscal 2012 from $72,000 in the same period of fiscal 2011. Interest expense decreased to $7,000 in the first nine months of fiscal 2012 from $11,000 in fiscal 2011.

Liquidity and Capital Resources

The seasonality of our snowmobile production cycle and the lead time between the commencement of snowmobile and ATV production and commencement of shipments late in the first quarter have resulted in significant fluctuations in our working capital requirements. Historically, we have financed our working capital requirements out of available cash balances at the beginning and end of the production cycle and with short-term bank borrowings during the middle of the cycle. Our cash balances traditionally peak early in the fourth quarter and then decrease as working capital requirements increase when our snowmobile and ATV production cycles begin in the spring. Accounts receivable increased to $52.2 million at December 31, 2011 from $50.2 million at December 31, 2010. The accounts receivable balance at March 31, 2011 was $23.7 million. The increase in our accounts receivable balance as of December 31, 2011 compared to March 31, 2011 is due to the seasonality of our snowmobile, ATV and PG&A businesses. Inventory was $87.9 million at December 31, 2011 compared to $77.2 million at December 31, 2010 and $61.5 million at March 31, 2011. During the nine months ended December 31, 2011, we repurchased 119,087 shares of our common stock at a total cost of $1.9 million. Near the end of third quarter, we repurchased all of Suzuki Motor Corporation's 6.1 million share ownership of our Class B common stock. The $79.3 million stock buyback was funded entirely with existing cash from our balance sheet and reduced our outstanding shares 33% from 18.4 million to 12.3 million while leaving our public share float unchanged. Following the share repurchase from Suzuki, we still expect to end our fiscal year with over $60 million in cash and short-term investments. Cash and short-term investments were $76.3 million and $107.1 million at December 31, 2011 and 2010, respectively, and $125.1 million at March 31, 2011. Our investment objectives are first, safety of principal, and second, rate of return.

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 operate under a multi-year senior secured credit agreement that allows borrowings of up to $60 million for working capital during June through November and up to $35 million during December through May. We were in compliance with the terms of the credit agreement as of December 31, 2011.

Dealer Floorplan Financing

We entered into a multi-year agreement in October 2009 for GE Commercial Distribution Finance to become the exclusive provider of floorplan financing for our U.S. dealers.

Certain Information Concerning Off-Balance Sheet Arrangements

As of December 31, 2011, 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.

Significant Accounting Policies

See our most recent Annual Report on Form 10-K for the year ended March 31, 2011 for a discussion of our critical accounting policies.

In June 2011, the FASB issued ASU No. 2011-05, "Presentation of Comprehensive Income," which requires comprehensive income to be reported in either a single statement or in two consecutive statements reporting net income and other comprehensive income. The amendment does not change what items are reported in other comprehensive income. Additionally, in December 2011, the FASB issued ASU No. 2011-12, "Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05," which indefinitely defers the requirement in ASU No. 2011-05 to present reclassification adjustments out of accumulated other comprehensive income by component in both the statement in which net income is presented and the statement in which other comprehensive income is presented. During the deferral period, the existing requirements in U.S. GAAP for the presentation of reclassification adjustments must continue to be followed. These standards are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011 and are to be applied retrospectively, with early adoption permitted. As these standards impact presentation requirements only, the adoption of this guidance is not expected to have a material impact on the Company's consolidated financial statements.

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 contains 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 future product shipments, sales growth expectations, industry conditions, engine supply and manufacturing expectations, our sales outlook for fiscal year 2012, our estimated earnings for fiscal year 2012, our cash and short-term investments expectations for fiscal year 2012, and the sufficiency of available funds to finance future operations. 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; 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 and consumer demand and confidence. 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.