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ACAT > SEC Filings for ACAT > Form 10-Q on 6-Feb-2014All Recent SEC Filings

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Form 10-Q for ARCTIC CAT INC


6-Feb-2014

Quarterly Report


MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

Arctic Cat Inc. (the "Company" or "Arctic Cat," or "we," "our" or "us") is a Minnesota corporation with principal executive offices in Plymouth, Minnesota. We design, engineer, manufacture and market snowmobiles, all-terrain vehicles ("ATVs") and recreational off-highway vehicles ("side-by-sides" or "ROVs") 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 more than 50 years and is among the most widely recognized and respected names in the snowmobile, ATV and side-by-side industry. We were incorporated in 1982. Our common stock trades on the NASDAQ Global Select Market under the symbol ACAT.


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Executive Overview

The following discussion pertains to our results of operations and financial position for the quarter and nine-month period ended December 31, 2013. Due to the seasonality of the snowmobile, ATV and PG&A businesses, and due 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, 2013, we reported net sales of $225.8 million and net earnings of $12.1 million, or $0.89 per diluted share, compared to third quarter ended December 31, 2012 net sales of $218.0 million and net earnings of $17.9 million, or $1.30 per diluted share. We reported revenue growth in the third quarter that met our expectations, as we achieved double-digit sales gains in our ATV/side-by-side and our parts, garments and accessories businesses. We did see our Canadian sales decrease by 32.1% in the third quarter, primarily due to lower snowmobile shipments, however this was timing related as year-to-date Canadian sales are down only 4.0%. As we stated last quarter, however, we expected the second half of our fiscal year to be challenging. Profitability in the 2014 third quarter was reduced, chiefly due to anticipated lower gross margins on snowmobile models built for Yamaha, as part of our new partnership this year, and ATV product mix. The Yamaha gross margin impact was primarily absorbed in the fiscal 2014 third quarter compared to record earnings in the prior-year third quarter.

For the nine months ended December 31, 2013, we reported net sales of $585.1 million and net earnings of $41.0 million, or $2.99 per diluted share, compared to net sales of $558.4 million and net earnings of $44.8 million, or $3.25 per diluted share, for the same period last year. We are expecting strong fourth-quarter sales and earnings compared to the fourth quarter last year driven by the launch of our new WildcatTM Trail model. Additionally, we continue to focus on operational excellence and cost controls to maximize our efficiency.

Our snowmobile sales in the fiscal 2014 third quarter decreased 3.5% to $118.1 million, down from $122.4 million in the prior-year third quarter. We remain pleased with consumers' retail response to our 2014 model year snowmobile line-up and engine choices. Year-to-date, we have gained the most market share in the industry and lowered dealer inventory by 14%, which positions us well for future snowmobile sales. For the 2014 model year, Arctic Cat launched 10 new snowmobile models, including the all-new ZR 6000 El Tigre performance sled, and new snowmobile engine options from Arctic Cat and Yamaha through an engine supply agreement. Arctic Cat's first designed and built snowmobile engine - the 6000 C-TEC2 - is a powerful, lightweight and fuel efficient 2-stroke that enables the Company to enter the large 600cc snowmobile market segment that now accounts for 18% of the snowmobile industry. We are committed to investing in research and development in order to remain an industry innovation leader. We expect fiscal 2014 North American industry retail snowmobile sales to continue their growth and expect the market to grow between 5 to 8%.

Our ATV/side-by-side sales for the third quarter increased 12.4% to $78.2 million versus $69.6 million in the prior-year quarter, led by strong contributions from our Wildcat X and the four-seat Wildcat 4X pure sport side-by-side vehicles. We expect fiscal 2014 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.

Third quarter PG&A sales increased 13.5% to $29.5 million versus $26.0 million in the prior-year quarter. Contributing to the increased sales were strong sales of snow-related parts and accessories, due to favorable winter snowmobile riding conditions and Arctic Cat's expanded line of side-by-sides, which led to higher sales of side-by-side accessories. Arctic Cat continues to expect its PG&A business to grow in fiscal 2014 through the expansion of its Wildcat accessories and continued growth of the parts business.

For the fiscal year ending March 31, 2014, we are lowering our sales and earnings guidance due to a less rich ATV/side-by-side product mix and a weaker Canadian dollar. We now estimate full-year net earnings to be in the range of $2.90 to $3.00 per diluted share on anticipated sales in the range of $740 million to $750 million. Previously, the Company estimated full-year earnings in the range of $3.27 to $3.37 per diluted share on sales in the range of $754 million to $768 million.


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Results of Operations

Product Line Sales



                                 Three Months Ended December 31,                                      Nine Months Ended December 31,
                              Percent                   Percent         Change                     Percent                   Percent        Change
                               of Net                    of Net        2013 vs.                     of Net                    of Net       2013 vs.
($ in millions)    2013        Sales         2012        Sales           2012           2013        Sales         2012        Sales          2012
Snowmobile        $ 118.1         52.3 %    $ 122.4         56.2 %          (3.5 )%    $ 276.1         47.2 %    $ 269.0         48.2 %          2.6 %
ATV                  78.2         34.6 %       69.6         31.9 %          12.4 %       227.2         38.8 %      212.2         38.0 %          7.1 %
PG&A                 29.5         13.1 %       26.0         11.9 %          13.5 %        81.8         14.0 %       77.2         13.8 %          6.0 %

Net Sales         $ 225.8        100.0 %    $ 218.0        100.0 %           3.6 %     $ 585.1        100.0 %    $ 558.4        100.0 %          4.8 %

During the third quarter of fiscal 2014, net sales increased 3.6% to $225.8 million from $218.0 million in the third quarter of fiscal 2013 due to sales increases for ATV/side-by-side and PG&A businesses. Snowmobile unit volume increased 9.6% and; net sales decreased 3.5% due to anticipated lower selling prices on snowmobile models built for Yamaha and a weaker Canadian dollar. ATV unit volume increased 7.4% and; net sales increased 12.4%, and PG&A sales increased $3.5 million or 13.5%. PG&A sales increases were driven by snow related parts, garments and accessories and side-by-side accessory sales. Net sales for the nine months ended December 31, 2013 increased 4.8% to $585.1 million from $558.4 million for the same period in fiscal 2013. Snowmobile unit volume increased 10.3% and; net sales increased 2.6% due to anticipated lower selling prices on snowmobile models built for Yamaha and a weaker Canadian dollar. ATV unit volume increased 4.4% and; net sales increased 7.1%, and PG&A sales increased $4.6 million. The increase in snowmobile unit volume was driven by Yamaha produced snowmobiles in third quarter shipments. Increased ATV unit volume for the quarter resulted from shipments of Wildcat and core ATV vehicles.

Cost of Goods Sold



                                                      Three Months Ended December 31,                                       Nine Months Ended December 31,
                                                   Percent                    Percent         Change                     Percent                    Percent        Change
                                                   of Net                     of Net         2013 vs.                    of Net                     of Net        2013 vs.
($ in millions)                        2013         Sales         2012         Sales           2012          2013         Sales         2012         Sales          2012
Snowmobile & ATV units                $ 167.0          74.0 %    $ 150.2          68.9 %          11.2 %    $ 402.6          68.8 %    $ 371.7          66.6 %          8.3 %
PG&A                                     18.6           8.2 %       17.0           7.8 %           9.4 %       51.4           8.8 %       49.3           8.8 %          4.3 %

Total Cost of Goods Sold              $ 185.6          82.2 %    $ 167.2          76.7 %          11.0 %    $ 454.0          77.6 %    $ 421.0          75.4 %          7.8 %

During the third quarter of fiscal 2014, cost of sales increased 11.0% to $185.6 million from $167.2 million for the third quarter of fiscal 2013. Fiscal 2014 snowmobile and ATV unit cost of sales increased 11.2% to $167.0 million from $150.2 million, which was directionally in line with increases in unit sales during the third quarter of fiscal 2014 compared to the third quarter of fiscal 2013. The third quarter of fiscal 2014 cost of sales for PG&A increased 9.4% to $18.6 million from $17.0 million for the third quarter of fiscal 2013 due to increased sales. During the first nine months of fiscal 2014, cost of sales increased 7.8% to $454.0 million from $421.0 million for the first nine months of fiscal 2013. Fiscal 2014 snowmobile and ATV unit cost of sales for the first nine months increased 8.3% to $402.6 million, which was directionally in line with sales increases for the nine months of fiscal 2014 compared to the same period of fiscal 2013. The first nine months of fiscal 2014 cost of sales for PG&A increased 4.3% to $51.4 million compared to $49.3 million for fiscal 2013 due to increased sales offset by decreased freight and product costs and a richer sales mix.

Gross Profit



                                                  Three Months Ended December 31,                         Nine Months Ended December 31,
                                                                               Change                                                  Change
($ in millions)                             2013             2012           2013 vs. 2012           2013              2012          2013 vs. 2012
Gross Profit Dollars                      $    40.2        $    50.8                 (20.9 )%    $    131.1        $    137.3                 (4.5 )%
Percentage of Net Sales                        17.8 %           23.3 %                (5.5 )%          22.4 %            24.6 %               (2.2 )%


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Gross profit decreased 20.9% to $40.2 million in the third quarter of fiscal 2014 from $50.8 million in the third quarter of fiscal 2013. The gross profit percentage for the third quarter of fiscal 2014 decreased to 17.8% versus 23.3% in fiscal 2013. Gross profit decreased 4.5% to $131.1 million in the first nine months of fiscal 2014 from $137.3 million in the first nine months of fiscal 2013. The gross profit percentage for the first nine months of fiscal 2014 decreased to 22.4% versus 24.6% in fiscal 2014. The decreases in the third quarter and year-to-date fiscal 2014 gross profit percentages were primarily due to anticipated lower gross margins on snowmobile models built for Yamaha, product mix, and a weaker Canadian dollar.

Operating Expenses



                                                     Three Months Ended December 31,                          Nine Months Ended December 31,
                                                                                  Change                                                  Change
($ in millions)                               2013             2012            2013 vs. 2012           2013             2012           2013 vs. 2012
Selling & Marketing                         $     9.7        $    10.0                   (3.0 )%     $    28.8        $    28.9                  (0.3 )%
Research & Development                            5.7              5.1                   11.8 %           17.3             14.4                  20.1 %
General & Administrative                          6.4              8.0                  (20.0 )%          21.8             24.5                 (11.0 )%

Total Operating Expenses                    $    21.8        $    23.1                   (5.6 )%     $    67.9        $    67.8                   0.1 %

Percentage of Net Sales                           9.7 %           10.6 %                                  11.6 %           12.1 %

Selling and Marketing expenses decreased 3.0% to $9.7 million in the third quarter of fiscal 2014 from $10.0 million in the third quarter of fiscal 2013. Research and Development expenses increased 11.8% to $5.7 million in the third quarter of fiscal 2014 compared to $5.1 million in the third quarter of fiscal 2013 primarily due to higher product development expenses. General and Administrative expenses decreased 20.0% to $6.4 million in the third quarter of fiscal 2014 from $8.0 million in the third quarter of fiscal 2013 primarily due to the Canadian hedge benefit and a $0.6 million reduction in our bad debt reserve. Selling and Marketing expenses decreased 0.3% to $28.8 million in the first nine months of fiscal 2013 from $28.9 million in the same period of fiscal 2013. Research and Development expenses increased 20.1% to $17.3 million in the first nine months of fiscal 2014 compared to $14.4 million in the same period of the fiscal 2013 primarily due to higher product development expenses. General and Administrative expenses decreased 11.0% to $21.8 million in the first nine months of fiscal 2014 from $24.5 million in the same period of fiscal 2013 primarily due to the Canadian hedge benefit and a $1.2 million reduction in our bad debt reserve.

Other Income / Expense

We had $6,000 in interest income in the third quarter of fiscal 2014 compared to $10,000 in the third quarter of fiscal 2013. Interest expense increased to $96,000 in the third quarter of fiscal 2014 from $2,000 in the third quarter of fiscal 2013. Interest income decreased to $22,000 in the first nine months of fiscal 2014 from $27,000 in the same period of fiscal 2013. Interest expense increased to $136,000 in the first nine months of fiscal 2014 from $84,000 in the same period of fiscal 2013. Interest expense was higher due to increased borrowing levels due primarily to higher average inventory levels during the first nine months of fiscal 2014.

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 create 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 $74.1 million at December 31, 2013 from $50.8 million at December 31, 2012 primarily due to increased receivables related to snowmobiles supplied to Yamaha and timing of ATV/side-by-side


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shipments. The accounts receivable balance at March 31, 2013 was $30.3 million. Inventory increased to $137.2 million at December 31, 2013 from $97.0 million at December 31, 2012 primarily due to increased ATV/side-by-side and PG&A inventory to support expected fourth quarter sales. Inventory was $96.4 million at March 31, 2013. The increases in our accounts receivable and inventory balances as of December 31, 2013 compared to March 31, 2013 are due to the seasonality of our snowmobile, ATV and PG&A businesses as well as the items discussed above. During the nine months ended December 31, 2013, we repurchased 95,618 shares of our common stock at a total cost of $4.8 million under the share repurchase program previously approved by the Board of Directors in May 2013, and we repurchased an additional 324,225 shares of our common stock at a total cost of $17.1 million for the exercise and related income taxes for net-settled stock options. Cash and short-term investments were $62.5 million and $96.6 million at December 31, 2013 and 2012, respectively, and $112.8 million at March 31, 2013. Cash and short-term investments decreased from March 31, 2013, due to the seasonality of our business. Our investment objectives are first, safety of principal, and second, rate of return. No short-term bank borrowings were outstanding at December 31, 2013 and 2012 and March 31, 2013.

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 entered into a $100,000,000 senior secured revolving credit agreement in November 2013 for documentary and stand-by letters of credit, working capital needs and general corporate purposes, which amended and restated our prior $60,000,000 senior secured revolving credit agreement. We may borrow up to $100,000,000 during May through November and up to $50,000,000 during all other months of the fiscal year. We were in compliance with the terms of the credit agreement as of December 31, 2013. See note F of the notes to condensed consolidated financial statements herein for further discussion.

Dealer Floorplan Financing

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

Certain Information Concerning Off-Balance Sheet Arrangements

As of December 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.

Critical Accounting Policies

See our most recent Annual Report on Form 10-K for the year ended March 31, 2013 for a discussion of our critical accounting policies.

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, and future filings with the Securities and Exchange Commission, our press releases and oral statements made with the approval of an authorized executive officer, contain 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,


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including statements related to our fiscal 2014 outlook, business strategy and product development. In particular, these include, among others, statements relating to our anticipated capital expenditures, research and development expenditures, product introductions, the effect of weather conditions and dealer ordering processes on our net sales, legal proceedings, our expectations regarding material weakness remediation, our expectations regarding financing arrangements, our wholesale and retail sales and market share expectations, inventory levels, industry wholesale and retail sales and demand expectations, depreciation and amortization expense, dividends, sufficiency of funds to finance our operations and capital expenditures, raw material and component supply expectations, adequacy of insurance, and the effect of regulations on us and our industry and our compliance with such regulations. 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 the following:
product mix and volume; competitive pressure on sales, pricing and sales incentives; increases in material or production cost which cannot be recouped in product pricing; unexpected delays in the introduction of new products; 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; consumer demand and confidence; and those factors set forth in the Company's Annual Report on Form 10-K for the year ended March 31, 2013, under heading "Item 1A. Risk Factors." 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.

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