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ACAT > SEC Filings for ACAT > Form 10-K on 14-Jun-2013All Recent SEC Filings

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Form 10-K for ARCTIC CAT INC


14-Jun-2013

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following management's discussion and analysis of financial condition and results of operations should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere in this Annual Report on Form 10-K.

Executive Level Overview

Arctic Cat delivered the highest net earnings in our company's history in fiscal 2013 and we expect to report another year of record earnings and increased sales in fiscal 2014. Fiscal 2013 net sales increased 14.7% to $671.6 million from $585.3 million in fiscal 2012. Fiscal 2013 net earnings increased 32.7% to $39.7 million or $2.89 per diluted share compared to net earnings of $29.9 million or $1.72 per diluted share in fiscal 2012. The increase in net sales was driven by increased net sales of side-by-sides, ATVs and snowmobiles. During the fiscal year, gross margins improved to 22.5% from 22.3%, operating expenses as a percent of sales decreased to 13.4% and operating profits increased 32.3% to $60.7 million from $45.9 million.

During fiscal year 2013, snowmobile sales increased 5.3%, driven primarily by increased shipments to Canada and other international markets. North American snowmobile industry retail sales for the year increased 4%, driven primarily by improved snow conditions. For the year, Arctic Cat North American retail sales underperformed the market; however we did face difficult comparisons from the previous year where we launched 23 new snowmobile models. Arctic Cat did experience strong retail sales in our March-ending quarter, with sales up 18% from the previous year-ending quarter. North American dealer inventory increased 16% year-over-year as retail sales were not as strong as expected during the early part of the snowmobile season. As we look forward to next year, we remain excited about our snowmobile business. At our February Snowmobile Dealer Show, we launched 10 new snowmobile models, and also announced the first phase of our engine strategy which included two new snowmobile engines. One of these new engines is the first Arctic Cat built snowmobile engine that will be built in our St. Cloud, Minnesota, engine plant. This new 600cc 2-stroke engine will allow us to enter a new snowmobile market segment that today accounts for 18% of the North American snowmobile industry. In addition, we also announced a partnership with Yamaha where we will gain access to select Yamaha engines and we will manufacture select snowmobiles for them. For fiscal year 2014, we are expecting North American snowmobile industry retail sales to continue their growth and expect the market will grow up to 3%. With the expected increase in retail sales, and the launch of 10 new snowmobile models and two new engines, our expectations are that we will see our retail sales grow between 3% and 5%.

Sales for our ATV and side-by-side business increased 32% for the year driven primarily by our Wildcat sport side-by-sides as well as our existing ATV and Prowler models. Additionally, we continued to experience growth in both the North American and international markets. Regarding industry retail sales, core ATV industry retail sales for North America decreased by 2% during fiscal year 2013 while the North American side-by-side market grew in excess of 20%. As we look forward to fiscal year 2014, we remain well positioned with new products that were introduced in the last quarter of fiscal year 2013, as well as a strong product pipeline of new products under development. One of these new products is the all new 50-inch trail-legal version of the Wildcat. This new model will allow us to enter a new segment of the side-by-side industry that accounted for roughly 9% of the side-by-side market. We expect to start shipping this model in the later part of fiscal year 2014. For fiscal year 2014, we believe the 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.

Reviewing fiscal 2013 net sales: Snowmobile sales increased 5.3% in fiscal 2013 to $263.7 million from $250.4 million in fiscal 2012, primarily due to increased Canadian and other international markets. Snowmobiles comprised 39% of our net sales in fiscal 2013. ATV and side-by-side sales increased 32.1% in fiscal 2013 to $299.8 million from $226.9 million in fiscal 2012. ATV and side-by-side net sales comprised 45% of our net sales in fiscal 2013. Parts, garments and accessories sales increased 0.2% in fiscal 2013 to $108.1 million from


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$107.9 million in fiscal 2012, primarily due to increased snowmobile related parts, as well as Wildcat parts and accessories. Parts, garments and accessories sales were 16% of our net sales in fiscal 2013.

Given our strong cash flow, our Board of Directors announced in May 2013 the reinstatement of a $0.10 per share quarterly cash dividend. The board also authorized a share repurchase program of up to $30 million of the Company's common stock. The reinstatement of a quarterly dividend and the share repurchase program demonstrates our continuing commitment to increase shareholder value and reflects our belief that the Company common stock represents a good investment opportunity.

Results of Operations

Product Line Sales for the Fiscal Year Ended March 31,

                                                   Percent of                        Percent of             Change                            Percent of             Change
($ in thousands)                     2013          Net Sales           2012          Net Sales          2013 vs.  2012          2011          Net Sales          2012 vs.  2011
Snowmobile                         $ 263,693              39.3 %     $ 250,438              42.8 %                  5.3 %     $ 181,965              39.2 %                 37.6 %
ATV                                  299,771              44.6 %       226,891              38.8 %                 32.1 %       181,050              39.0 %                 25.3 %
Parts, garments & accessories        108,124              16.1 %       107,939              18.4 %                  0.2 %       101,636              21.8 %                  6.2 %

Net Sales                          $ 671,588             100.0 %     $ 585,268             100.0 %                 14.7 %     $ 464,651             100.0 %                 26.0 %

Product Line Sales. During fiscal 2013, net sales increased 14.7% to $671.6 million from $585.3 million in fiscal 2012. Snowmobile unit volume increased 3.6%, ATV unit volume increased 22.6%, and parts, garments and accessories sales increased $185,000. The increase in net sales is mainly due to increased sales of snowmobiles, Wildcat side-by-sides, and international ATVs. In addition, increased sales of ATV parts, Wildcat side-by-sides and snowmobile accessories contributed to the sales increase. During fiscal 2012, net sales increased 26.0% to $585.3 million from $464.7 million in fiscal 2011. Snowmobile unit volume increased 27.5%, ATV unit volume increased 16.2%, and parts, garments and accessories sales increased $6.3 million. The increase in net sales is mainly due to U.S. and international sales increases on snowmobiles and related parts, garments and accessories.

Cost of Goods Sold for the Fiscal Year Ended March 31,

                                                   Percent of                       Percent of            Change                           Percent of            Change
($ in thousands)                      2013          Net Sales          2012          Net Sales         2013 vs. 2012          2011          Net Sales         2012 vs. 2011
Snowmobiles & ATV units             $ 450,291             67.0 %     $ 388,523             66.4 %                15.9 %     $ 302,783             65.2 %                28.3 %
Parts, garments & accessories          70,401             10.5 %        66,126             11.3 %                 6.5 %        60,359             13.0 %                 9.6 %

Total Cost of Goods Sold            $ 520,692             77.5 %     $ 454,649             77.7 %                14.5 %     $ 363,142             78.2 %                25.2 %

Cost of Goods Sold. During fiscal 2013 cost of sales increased 14.5% to $520.7 million from $454.6 million for fiscal 2012. Fiscal 2013 snowmobile and ATV unit cost of sales increased 15.9% to $450.3 million from $388.5 million due primarily to increased sales. The unit cost of sales as a percentage of sales improved to 79.9% from 81.4% primarily due to increased unit volume, pricing and product mix. The fiscal 2013 cost of sales for parts, garments and accessories increased to $70.4 million from $66.1 million for fiscal 2012 due primarily to product mix and increased distribution costs. Fiscal 2012 cost of sales increased 25.2% to $454.6 million from $363.1 million for fiscal 2011. Fiscal 2012 snowmobile and ATV unit cost of sales


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increased 28.3% to $388.5 million from $302.8 million due primarily to increased sales. The fiscal 2012 cost of sales for parts, garments and accessories increased to $66.1 million from $60.4 million for fiscal 2011 due primarily to increased sales.

Gross Profit for the Fiscal Year Ended March 31,

                                                                       Change                                  Change
($ in thousands)                   2013             2012            2013 vs. 2012           2011            2012 vs. 2011
Gross Profit Dollars             $ 150,896        $ 130,619                   15.5 %      $ 101,509                   28.7 %
Percentage of Net Sales               22.5 %           22.3 %                  0.2 %           21.8 %                  0.5 %

Gross Profit. Gross profit increased 15.5% to $150.9 million in fiscal 2013 from $130.6 million in fiscal 2012. The gross profit percentage for fiscal 2013 increased to 22.5% versus 22.3% in fiscal 2012. The increase in the fiscal 2013 gross profit percentage was primarily due to increased unit volume, pricing and product mix. Gross profit increased 28.7% to $130.6 million in fiscal 2012 from $101.5 million in fiscal 2011. The gross profit percentage for fiscal 2012 increased to 22.3% versus 21.8% in fiscal 2011. The increase in the fiscal 2012 gross profit percentage was primarily due to product cost reductions, price increases and a favorable Canadian dollar exchange rate.

Operating Expenses for the Fiscal Year Ended March 31,

                                                                       Change                                  Change
($ in thousands)                    2013            2012           2013 vs.  2012           2011           2012 vs.  2011
Selling & Marketing               $ 37,402        $ 36,549                     2.3 %      $ 33,540                     9.0 %
Research & Development              20,693          17,862                    15.8 %        15,029                    18.9 %
General & Administrative            32,087          30,318                     5.8 %        34,805                   (12.9 )%

Total Operating Expenses          $ 90,182        $ 84,729                     6.4 %      $ 83,374                     1.6 %

Percentage of Net Sales               13.4 %          14.5 %                                  17.9 %

Operating Expenses. Selling and Marketing expenses increased 2.3% to $37.4 million in fiscal 2013 from $36.5 million in fiscal 2012, primarily due to increased snowmobile and ATV selling and marketing expenses. Selling and Marketing expenses increased 9.0% to $36.5 million in fiscal 2012 from $33.5 million in fiscal 2011, primarily due to increased snowmobile and ATV selling and marketing expenses. Research and Development expenses increased 15.8% to $20.7 million in fiscal 2013 compared to $17.9 million in fiscal 2012, due primarily to higher compensation and development expenses. Research and Development expenses increased 18.9% to $17.9 million in fiscal 2012 compared to $15.0 million in fiscal 2011, due primarily to higher compensation and development expenses. General and Administrative expenses increased 5.8% to $32.1 million in fiscal 2013 from $30.3 million in fiscal 2012, due primarily to decreased Canadian hedge benefits and higher compensation costs. General and Administrative expenses decreased 12.9% to $30.3 million in fiscal 2012 from $34.8 million in fiscal 2011, due primarily to increased Canadian hedge benefits which were offset by higher compensation costs.

Other Income/Expense. Interest income decreased to $49,000 in fiscal 2013 from $86,000 in fiscal 2012. Interest expense increased to $84,000 in fiscal 2013 from $8,000 in fiscal 2012. Interest expense is higher due to higher borrowing levels primarily driven by our lower cash levels at the beginning of the year. Interest income decreased to $86,000 in fiscal 2012 from $107,000 in fiscal 2011. Interest expense decreased to $8,000 in fiscal 2012 from $11,000 in fiscal 2011. Interest income was primarily affected by the lower cash levels at the end of the 2012 fiscal year compared to last year due to the $79.3 million repurchase of our stock from Suzuki in December 2011. Interest expense is lower due to lower borrowing levels primarily driven by our improved cash levels.

Net Earnings. Fiscal 2013 net earnings were $39.7 million, or $2.89 per diluted share, versus net earnings of $29.9 million, or $1.72 per diluted share, for fiscal 2012. Net earnings as a percentage of net sales were 5.9%


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and 5.1% in fiscal 2013 and 2012, respectively. The increased earnings are attributable to improved gross margin and continued efforts to control operating expenses. Fiscal 2012 net earnings were $29.9 million, or $1.72 per diluted share, compared to net earnings of $13.0 million, or $0.70 per share, for fiscal 2011. Net earnings as a percentage of net sales were 5.1% and 2.8% in fiscal 2012 and 2011, respectively. The increased earnings are attributable to improved gross margin and continued efforts to control operating expenses.

Inflation

Inflation historically has not significantly impacted our business. We generally have been able to offset the impact of increasing costs through a combination of productivity gains and product price increases.

Critical Accounting Policies

The preparation of the consolidated financial statements in accordance with accounting principles generally accepted in the United States requires management to make certain estimates and assumptions that affect the amount of reported assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and revenues and expenses during the periods reported. Actual results may differ from those estimates. We reviewed the development and selection of the critical accounting policies and believe the following are the most critical accounting policies that could have an effect on our reported results. These critical accounting policies and estimates have been reviewed with the Audit Committee of the Board of Directors.

Revenue Recognition

We recognize revenue and provide for estimated marketing and sales incentive costs when products are shipped to dealers and distributors pursuant to their order, the price is fixed and collection is reasonably assured. We have agreements with finance companies to repurchase products repossessed up to certain limits. Our financial exposure to repurchase products is limited to the difference between the amount paid to the finance company and the resale value of the repossessed products. Historically, we have not incurred material losses as a result of repurchases nor have we provided a financial reserve for repurchases. Adverse changes in retail sales could cause this situation to change.

Marketing and Sales Incentive Costs

We provide for various marketing and sales incentive costs which are offered to our dealers and consumers at the later of when the revenue is recognized or when the marketing and sales incentive program is approved and communicated. Examples of these costs include: dealer and consumer rebates, dealer floorplan financing assistance and other incentive and promotion programs. Adverse market conditions resulting in lower than expected retail sales or the matching of competitor programs could cause accrued marketing and incentive costs to materially increase if we authorize and communicate new programs to our dealers. We estimate marketing and sales incentive costs based on expected usage and historical experience. The accrual for marketing and sales incentive costs at March 31, 2013 and 2012 was $12.0 million and $11.0 million, respectively, and is included in accrued expenses in our balance sheet. The increase in this accrual was a result of announced and communicated marketing and sales incentive programs and retail market conditions. Historically, marketing and sales incentive program expenses have been within our expectations. To the extent current experience differs with previous estimates the accrued liability for marketing and sales incentives is adjusted accordingly.

Product Warranties

We generally provide a limited warranty to the owner of snowmobiles for 12 months from the date of consumer registration and for six months from the date of consumer registration on ATVs and ROVs. We provide for estimated warranty costs at the time of sale based on historical rates and trends and make subsequent


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adjustments to this estimate as actual claims become known or the amounts are determinable. Adverse changes in actual warranty costs compared to our initial estimates could cause accrued warranty costs to materially change. The accrual for warranty costs was $18.7 million and $18.5 million at March 31, 2013 and 2012, respectively. Historically, actual warranty costs have been within our expectations.

Inventories

Our inventories are recorded at the lower of cost or market, with cost based on a first-in, first-out basis. We periodically assess inventories for obsolescence and potential excess. This assessment is based primarily on assumptions and estimates regarding future production demands, anticipated changes in technology or design, historical and expected future sales patterns. Our inventories consist of materials and products that are subject to changes in our planned production of future snowmobile and ATV products and competitive market conditions which may cause lower of cost or market adjustments to our finished goods inventory. If market conditions or future demand are less favorable than our current expectations, additional inventory write downs or reserves may be required, which could have an adverse effect on our reported results in the period the adjustments are made. Inventory items that are identified as obsolete or excess are fully reserved on our balance sheet and are generally scrapped. Historically, inventory obsolescence and potential excess costs adjustments have been within our expectations.

Product Liability and Litigation

We are subject to product liability claims and other litigation in the normal course of business. We maintain insurance for product liability claims although we retain a self-insured retention accrual within the balance sheet caption "Insurance" within accrued expenses. The estimated costs resulting from any losses not covered by insurance are charged to operating expenses when it is probable a loss has been incurred and the amount of the loss is reasonably determinable.

We utilize historical trends and other analysis to assist in determining the appropriate loss estimate. Adverse changes in the final determination of product liability or other claims made against us could have a material impact on our financial condition. Historically, actual product liability and litigation costs have been within our expectations.

Stock-Based Compensation

We recognize stock-based compensation based on certain assumption inputs within the Black-Scholes Model. These assumption inputs are used to determine an estimated fair value of stock-based payment awards on the date of grant and require subjective judgment. We assess the assumptions and methodologies used to calculate estimated fair value of stock-based compensation on a regular basis.


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Liquidity and Capital Resources

The seasonality of our snowmobile and ATV production cycles generates significant fluctuations in our working capital requirements during the year. The following table represents net sales and ending inventories by each quarter in the fiscal years ended March 31, 2013 and 2012.

                           First        Second         Third        Fourth          Total
       2013
       Net Sales
       Snowmobile        $  17,987     $ 128,599     $ 122,425     $  (5,318 )    $ 263,693
       ATV                  72,966        69,675        69,561        87,569        299,771
       PG&A                 20,358        30,756        26,030        30,980        108,124

       Total Net Sales   $ 111,311     $ 229,030     $ 218,016     $ 113,231      $ 671,588

       Inventories       $ 140,776     $ 144,736     $  97,027     $  96,389

       2012
       Net Sales
       Snowmobile        $  17,361     $ 114,670     $ 125,227     $  (6,820 )    $ 250,438
       ATV                  37,899        58,789        54,432        75,771        226,891
       PG&A                 19,670        31,370        27,363        29,536        107,939

       Total Net Sales   $  74,930     $ 204,829     $ 207,022     $  98,487      $ 585,268

       Inventories       $  86,521     $ 103,649     $  87,867     $  98,702

As a result of increased fourth quarter net sales and fiscal 2014 first quarter production, our finished goods inventory balance decreased as of March 31, 2013 compared with March 31, 2012. 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. 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. However, there can be no assurance that adequate working capital financing arrangements will remain available or that the costs and other terms of such new financing arrangements will not be significantly less favorable to us than has historically been available.

Cash and Short-Term Investments

Cash and short-term investments increased to $112,807,000 at March 31, 2013 from $62,597,000 at March 31, 2012 because of improved profitability and working capital management. Our cash balances traditionally peak early in the fourth quarter and then decrease as working capital requirements increase when our snowmobile and spring ATV production cycles begin. Our investment objectives are first, safety of principal and second, rate of return.

Financing Arrangements and Cash Flows

We have operated since November 2009 under a $60,000,000 secured bank credit agreement for the documentary and stand-by letters of credit and for working capital purposes. We may borrow up to $60,000,000 during June through November and up to $45,000,000 during all other months of the fiscal year. The total letters of credit issued at March 31, 2013 were $17,275,000 of which $14,272,000 was issued to Suzuki for engine and service parts purchases.

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


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agreements improve our liquidity by financing dealer purchases of products without requiring substantial use of our working capital. We are paid by the floorplan company's 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.

The financing agreements require repurchase of repossessed new and unused units and set limits upon our potential liability for annual repurchases. The aggregate potential liability was approximately $74,562,000 at March 31, 2013. We have incurred no material losses under these agreements. We believe current available cash and cash generated from operations provide sufficient funding in the event there is a requirement to perform under these guarantee and repurchase agreements. The financing agreements also have loss sharing provisions should any dealer default whereby the Company shares certain losses with the floorplan finance companies. The potential liability to the Company under these provisions is approximately $6,700,000 at March 31, 2013.

In fiscal 2013, we invested $16,275,000 in capital expenditures. We expect that capital expenditures will increase to approximately $23,000,000 in fiscal 2014. Since 1996, we have repurchased over 17,000,000 shares of our common stock. There is approximately $271,000 remaining on the January 2008 share repurchase authorization. In May 2013, the Company's Board of Directors authorized a share repurchase program of up to $30,000,000 of the Company's common stock. We believe that cash generated from operations and available cash will be sufficient to meet our working capital, capital expenditure, and common stock repurchase requirements on a short and long-term basis.

Contractual Obligations

The following table summarizes our significant future contractual obligations at
March 31, 2013 (in millions):



                                                                 Payment Due by Period
                                                    Less than                                           More than
Contractual Obligations               Total          1 Year           1-3 years        3-5 Years         5 years
Operating Lease Obligations           $  0.4       $       0.2       $       0.2               -                -
Purchase Obligations(1)                 69.1              69.1                -                -                -

Total Contractual Obligations         $ 69.5       $      69.3       $       0.2               -                -

(1) We have outstanding purchase obligations with suppliers and vendors at March 31, 2013 for raw materials and other supplies as part of the normal course of business.

Certain Information Concerning Off-Balance Sheet Arrangements

As of March 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.

Forward-Looking Statements

The Private Securities Litigation Reform Act of 1995 provides a safe harbor for . . .

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