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 September 30, 1999 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 November 10, 1999, 18,071,975 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.
CONSOLIDATED BALANCE SHEETS
(unaudited)
September 30, March 31,
ASSETS 1999 1999
CURRENT ASSETS ___________ ___________
Cash and equivalents $ 36,406,000 $ 51,413,000
Short-term investments 49,864,000 43,795,000
Accounts receivable, less allowances 76,242,000 23,263,000
Inventories 62,624,000 68,644,000
Deferred income taxes 23,939,000 12,220,000
Prepaid expenses 809,000 2,925,000
___________ ___________
Total current assets 249,884,000 202,260,000
PROPERTY & EQUIPMENT - at cost
Machinery, equipment and tooling 68,065,000 75,500,000
Land, buildings and improvements 15,620,000 15,548,000
__________ __________
83,685,000 91,048,000
Less accumulated depreciation 51,133,000 53,162,000
__________ __________
32,552,000 37,886,000
__________ __________
$282,436,000 $240,146,000
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 34,403,000 $ 23,665,000
Accrued expenses 63,196,000 33,244,000
Income tax payable 11,106,000 3,312,000
__________ __________
Total current liabilities 108,705,000 60,221,000
DEFERRED INCOME TAXES 4,796,000 4,446,000
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, 18,071,975 at September 30,
1999; 18,828,775 at March 31, 1999 180,000 188,000
Class B common stock, par value $.01;
7,560,000 shares authorized, issued,
and outstanding 76,000 76,000
Retained earnings 168,679,000 175,215,000
__________ ___________
168,935,000 175,479,000
__________ ___________
$282,436,000 $240,146,000
=========== ===========
The accompanying notes are an integral part of these statements.
Arctic Cat Inc.
CONSOLIDATED STATEMENTS OF EARNINGS
(unaudited)
Three Months Six Months
Ended September 30, Ended September 30,
__________________________ ______________________
1999 1998 1999 1998
______ ______ ______ ______
Net sales $205,507,000 $193,382,000 $292,435,000 $282,033,000
Cost of goods sold 153,866,000 140,118,000 219,079,000 206,818,000
Watercraft inventory
writedown 2,835,000 - 2,835,000 -
___________ ___________ ___________ ___________
Gross profit 48,806,000 53,264,000 70,521,000 75,215,000
Selling, general and
administrative expenses 27,671,000 24,189,000 47,271,000 44,168,000
Watercraft exit costs 18,627,000 - 18,627,000 -
___________ ___________ ___________ ___________
Operating profit 2,508,000 29,075,000 4,623,000 31,047,000
Other income
Interest income 859,000 442,000 1,629,000 867,000
Interest expense - - - (26,000)
__________ ___________ ___________ ___________
859,000 442,000 1,629,000 841,000
Earnings before
income taxes 3,367,000 29,517,000 6,252,000 31,888,000
Income tax expense 1,195,000 10,478,000 2,219,000 11,320,000
___________ ___________ ___________ ___________
Net earnings $ 2,172,000 $19,039,000 $ 4,033,000 $20,568,000
=========== =========== =========== ===========
Net earnings
per share
Basic $0.08 $0.68 $0.16 $0.73
Diluted $0.08 $0.68 $0.16 $0.73
=========== =========== =========== ===========
Weighted average
shares outstanding
Basic 25,705,000 27,828,000 25,828,000 27,992,000
Diluted 25,740,000 27,861,000 25,862,000 28,030,000
=========== =========== =========== ===========
The accompanying notes are an integral part of these statements.
Arctic Cat Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Six Months Ended September 30,
_____________________________
1999 1998
Cash flows from operating activities ________ ________
Net earnings $ 4,033,000 $20,568,000
Adjustments to reconcile net earnings
to net cash provided by (used in)
operating activities
Depreciation 6,245,000 6,728,000
Deferred income taxes (11,369,000) (2,876,000)
Watercraft inventory writedown and
watercraft exit costs 21,462,000 -
Changes in operating assets
and liabilities:
net effect of watercraft inventory
writedown and exit costs
Trading securities (6,069,000) 18,832,000
Accounts receivable (52,979,000) (49,964,000)
Inventories 734,000 (2,974,000)
Prepaid expenses 1,416,000 710,000
Accounts payable 10,738,000 7,477,000
Accrued expenses 16,626,000 8,781,000
Income taxes 7,794,000 11,502,000
Net cash provided by (used in) __________ __________
operating activities (1,369,000) 18,784,000
Cash flows from investing activities
Purchase of property and equipment (3,061,000) (4,273,000)
Sale and maturity of available-for-sale
securities - 765,000
Purchase of available-for-sale
securities - (248,000)
Net cash used in __________ __________
investing activities (3,061,000) (3,756,000)
Cash flows from financing activities
Dividends paid (3,097,000) (3,365,000)
Repurchase of common stock (7,480,000) (7,731,000)
Net cash used in __________ __________
financing activities (10,577,000) (11,096,000)
__________ __________
Net increase (decrease) in cash and
equivalents (15,007,000) 3,932,000
Cash and equivalents at the beginning
of period 51,413,000 24,764,000
__________ __________
Cash and equivalents at the end of
period $36,406,000 $28,696,000
========== ==========
Supplemental disclosure of cash payments
for income taxes $5,794,000 $4,293,000
========== ==========
The accompanying notes are an integral part of these statements.
Arctic Cat Inc.
NOTES TO 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 generally accepted accounting principles 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
September 30, 1999, the results of operations for the three and six month
periods ended September 30, 1999 and 1998 and cash flows for the six month
periods ended September 30, 1999 and 1998. Results of operations for the
interim periods 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
1,434,869 and 1,342,692 shares of common stock with weighted average exercise
prices of $11.47 and $11.71 were outstanding during the three months ended
September 30, 1999 and 1998 and options to purchase 1,523,994 and 1,248,567
shares of common stock with weighted average exercises prices of $11.35 and
$11.89 were outstanding during the six months ended September 30, 1999 and
1998, 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:
September 30, March 31,
1999 1999
___________ __________
Trading securities $ 37,480,000 $31,386,000
Available-for-sale debt securities 12,384,000 12,409,000
___________ __________
$49,864,000 $43,795,000
=========== ==========
NOTE D--INVENTORIES
Inventories consist of the following:
September 30, March 31,
1999 1999
___________ __________
Raw materials and sub-assemblies $20,323,000 $22,067,000
Finished goods 17,571,000 24,291,000
Parts, garments and accessories 24,730,000 22,286,000
___________ __________
$62,624,000 $68,644,000
=========== ==========
NOTE E--ACCRUED EXPENSES
Significant increases in accrued expenses at September 30, 1999,
compared with March 31, 1999, included warranties of $12,188,000, self-
insured retention of $3,162,000 and PWC exit costs of $13,326,000.
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 and recorded
a charge of $21,462,000. The charge included $8,961,000 for consumer
incentives to aid Company dealers in the disposition of their current
inventory. Additionally, the Company analyzed all long-lived watercraft assets
in connection with this exit that indicated an impaired carrying value. The
Company expects to utilize a portion of these assets in other production areas.
All long-lived assets with no alternative use, totaling $3,480,000, were
taken out of service and written off. Costs to dispose as well as any gain
on sale of long-lived assets are expected not to be significant. The Company
also analyzed inventories and determined a charge of $2,835,000 to reduce the
current carrying value to a net realizable value. The Company will not produce
additional PWC units beyond the completed production of the 1999 model.
Therefore, the Company identified inventories of $2,451,000 that will not be
used beyond September 30, 1999 and were written off. The Company also accrued
$2,400,000 relating to other dealer matters. The Company has written off
certain PWC technology of $700,000. The remaining $635,000 represent charges
for other costs. The Company anticipates the majority of the PWC exit plan
will conclude on September 30, 2001.
The approximate net sales of the watercraft product line was $615,000
for six month period ended September 30, 1999.
NOTE G--SECOND QUARTER ADJUSTMENTS
During the three month period ended September 30, 1999, the Company
recorded charges of $2,835,000 to cost of goods sold to write-down watercraft
inventories and $18,627,000 of watercraft exit costs to operating expenses
(see NOTE F).
The Company also recorded a change in estimate of $3,062,000 for
product line warranty expense to cost of goods sold and $2,410,000 for costs
related to legal and other matters to operating expenses.
NOTE H--OTHER MATTERS
Dividend Declaration
On October 27, 1999, the Company announced that its Board of Directors
had declared a regular quarterly cash dividend of $0.06 per share, payable on
December 2, 1999 to shareholders of record on November 17, 1999.
Share Repurchase
During fiscal 1996 and 1998, the Company's Board of Directors
authorized the repurchase of a total of 3,000,000 shares of common stock.
During March of 1999, the Company's Board of Directors authorized the
repurchase of an additional 1,500,000 shares of common stock. In April of
1999, the Company's Board of Directors authorized the repurchase of up to
$30,000,000 in additional shares. Since April 1, 1996 through November 2, 1999
the Company has invested $40,224,000 to repurchase and cancel 4,284,000 shares.
NOTE I--RISKS AND UNCERTAINTIES
The Year 2000 issue relates to limitations in computer systems and
applications that may prevent proper recognition of the year 2000. The
potential effect of the Year 2000 issue on the Company and its business
partners will not be fully determinable until 2000 and thereafter. If Year
2000 modifications are not properly completed either by the Company, or
entities the Company conducts business with, the Company's net sales and
financial condition could be adversely effected.
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 AND SIX MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THE
THREE MONTHS AND SIX MONTHS ENDED SEPTEMBER 30, 1998.
Net sales for the second quarter increased 6.3% to $205,507,000 from
$193,382,000 for the same quarter in fiscal 1999. This increase is primarily
due to a 57.1% increase in ATV unit volume through continued product line
expansion. Also effecting net sales is a 10.4% decrease in snowmobile unit
volume based on moderately lower orders from dealers due to last year's mild
winter, and a 15.0% increase in parts, garments and accessory sales. Year-to-
date sales increased 3.7% to $292,435,000 from $282,033,000 for the same
period in fiscal 1999. Year-to-date snowmobile unit volume decreased 11.1%,
PWC unit volume decreased 43.1% and parts, garments and accessories sales
increased 22.1%. Year-to-date ATV unit volume increased 44.8% as the Company
continued to outpace the industries double digit growth again this year.
Gross profits decreased 8.4% to $48,806,000 from $53,264,000 for the
same quarter in fiscal 1999. This decrease is mainly due to the non-recurring
charge of $2,835,000 of PWC inventories write-down associated with the
previously announced exit from the PWC business effective September 30, 1999
and a $3,062,000 change in accounting estimate for the warranty reserve. As
a percent, gross profits for the quarter decreased to 23.7% as compared with
27.5% for the same period last year. Year-to-date gross profit percentage
was 24.1% compared to 26.7% for the same period last year. The quarterly
and year-to-date decrease is mainly due to the exit costs associated with the
discontinued PWC business, change in estimated warranty and increased ATV
sales. Without the exit costs associated with the discontinued PWC business,
gross profits would have decreased 3.0% to $51,641,000 from $53,264,000 for
the same quarter in fiscal 1999 and as percent, gross profits for the quarter
would have been 25.1% as compared with 27.5% for the same period last year.
Operating expenses for the quarter increased 91.4% to $46,298,000 from
$24,189,000 compared to the same quarter in fiscal 1999. As a percent of net
sales, operating expenses for the quarter increased to 22.5% as compared to
12.5%. Year-to-date operating expenses increased 49.2% to $65,898,000 as
compared to $44,168,000 for the same period last year. As a percent of net
sales, year-to-date operating expenses were 22.5% compared to 15.7% for the
same period in fiscal 1999. The quarterly and year-to-date increase is mainly
due to $18,627,000 of exit costs associated with the discontinued PWC business.
These charges mainly consist of items such as consumer incentive programs,
write-offs of equipment and tooling and inventories, and costs related to the
Company's dealers. Operating expenses for the quarter and year-to-date also
increased due to charges of $2,410,000 relating to legal and other matters.
Without the exit costs associated with the discontinued PWC business operating
expenses would have increased 14.4% to $27,671,000 from $24,189,000 compared to
the same quarter in fiscal 1999. As a percent of net sales, operating expenses
for the quarter would have been 13.5% as compared to 12.5%. Year-to-date
operating expenses would have increased 7.0% to $47,271,000 as compared with
$44,168,000 for the same period last year. As a percent of net sales, year-
to-date operating expenses would have been 16.2% compared with 15.7% for the
same period in fiscal 1999.
Net earnings for the second quarter of fiscal 2000 were $2,172,000 or
$0.08 per diluted share, compared to net earnings of $19,039,000 or $0.68 per
diluted share, for the second quarter of fiscal 1999. Year-to-date net
earnings were $4,033,000 or $0.16 per diluted share, compared to net earnings
of $20,568,000 or $0.73 per diluted share, for the same period. Without the
exit costs associated with the discontinued PWC business net earnings for the
second quarter of fiscal 2000 would have been $16,015,000 or $0.62 per diluted
share, as compared to net earnings of $19,039,000 or $0.68 per diluted share,
for the second quarter of fiscal 1999. Year-to-date net earnings would have
been $17,876,000 or $0.69 per diluted share, as compared to net earnings of
$20,568,000 or $0.73 per diluted share, for the same period.
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 $86,270,000 at
September 30, 1999. 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 foreseeable future.
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.
Year 2000
The Company continues to assess and address the impact of the Year 2000
issue on its business. This issue affects computer systems that have date-
sensitive programs that may not properly recognize the year 2000. The Company
uses software and related technologies throughout its business. The Company
has completed its assessment of the information systems (IS) used in its
internal business operations and its procurement and production processes. In
addition, the Company has completed its assessments of the Year 2000 readiness
of its non-IS systems, as well as supplier and customer readiness.
The Company's Year 2000 initiative is being managed by a team of
internal staff with the assistance of outside consultants. The team's
activities are designed to ensure that there is no adverse effect on the
Company's business operations and that transactions with suppliers, financial
institutions and customers are fully supported. The Company believes it has
completed all critical Year 2000 activities and corrections required and the
majority of issues deemed non-critical to business operations; any remaining
non-critical issues identified are scheduled to be addressed before year-end.
While the Company believes its planning efforts are adequate to address its
Year 2000 concerns, there can be no guarantee that the systems of other
companies on which the Company's systems and operations rely will be converted
on a timely basis and will not have a material adverse effect on the Company's
results of operation and financial condition. The most reasonably likely
effects of non-Year 2000 compliance by third parties includes the disruption or
inaccuracy of data and business disruption caused by failure of suppliers to
provide key component parts.
The cost of the Year 2000 initiatives is estimated at less than
$500,000 with $227,000 expensed in fiscal 1999, and all remaining Year 2000
costs to be expensed in fiscal 2000. At the present time there are no
contingency plans being developed in the event of a worst case scenario. If
it becomes apparent during the remainder of 1999 that essential internal and
third party systems relied on by the Company will not be Year 2000 compliant
prior to the end of 1999, the Company will develop contingency plans. Factors
that could influence the amount and timing of costs include the success of the
Company in identifying systems and programs that are not Year 2000 compliant,
the nature and amount of programming required to upgrade or replace each of the
affected programs or systems, and the availability, cost and magnitude of
related labor and consulting costs.
Forward Looking Statements
The Private Securities Litigation Reform Act of 1995 provides a safe
harbor for certain forward-looking statements. This 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 1999 Annual Report and
10-K. 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) Exhibits
27.1 financial data schedule
(b) There were no reports on Form 8-K filed during the Quarter
ended September 30, 1999.
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: November 10, 1999 By s/Christopher A. Twomey
__________________ _________________________
Christopher A. Twomey
Chief Executive Officer
Date: November 10, 1999 By s/Timothy C. Delmore
__________________ _________________________
Timothy C. Delmore
Chief Financial Officer
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<ARTICLE> 5
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<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-END> SEP-30-1999
<CASH> 36,406,000
<SECURITIES> 49,864,000
<RECEIVABLES> 77,324,000
<ALLOWANCES> 1,082,000
<INVENTORY> 62,624,000
<CURRENT-ASSETS> 249,884,000
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<DEPRECIATION> 51,133,000
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0
<COMMON> 256,000
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<TOTAL-LIABILITY-AND-EQUITY> 282,436,000
<SALES> 292,435,000
<TOTAL-REVENUES> 292,435,000
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