Table of Contents

 

 

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 quarterly period ended September 30, 2016

or

 

¨ Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission File Number: 000-18607

 

 

ARCTIC CAT INC.

(Exact name of registrant as specified in its charter)

 

 

 

Minnesota   41-1443470

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

500 North 3 rd Street

Minneapolis, Minnesota

  55401
(Address of principal executive offices)   (Zip Code)

Registrant’s telephone number, including area code:

(612) 350-1800

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed 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   ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   x     No   ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   ¨    Accelerated filer   x
Non-accelerated filer   ¨    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   ¨     No   x

At November 2, 2016, the registrant had 13,047,660 shares of Common Stock outstanding.

 

 

 


Table of Contents

ARCTIC CAT INC.

TABLE OF CONTENTS

 

PART I – FINANCIAL INFORMATION

  

ITEM 1.

  

FINANCIAL STATEMENTS

     3   
  

CONSOLIDATED BALANCE SHEETS

     3   
  

CONSOLIDATED STATEMENTS OF OPERATIONS

     4   
  

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

     5   
  

CONSOLIDATED STATEMENTS OF CASH FLOWS

     6   
  

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     7   

ITEM 2.

  

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     16   

ITEM 3.

  

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     21   

ITEM 4.

  

CONTROLS AND PROCEDURES

     21   

PART II – OTHER INFORMATION

  

ITEM 1.

  

LEGAL PROCEEDINGS

     22   

ITEM 1A.

  

RISK FACTORS

     22   

ITEM 6.

  

EXHIBITS

     22   

SIGNATURES

     23   

 

2


Table of Contents

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

Arctic Cat Inc.

Consolidated Balance Sheets

($ in thousands, except per share amounts)

(Unaudited)

 

     September 30, 2016     March 31, 2016  

ASSETS

    

Current assets

    

Cash and cash equivalents

   $ 9,151      $ 17,730   

Accounts receivable, less allowances

     93,321        35,760   

Inventories

     195,703        140,007   

Prepaid expenses

     4,010        6,456   

Income taxes receivable

     8,360        11,765   

Other current assets

     284        100   
  

 

 

   

 

 

 

Total current assets

     310,829        211,818   

Property and equipment

    

Machinery, equipment and tooling

     222,044        214,372   

Land, buildings and improvements

     34,277        33,259   
  

 

 

   

 

 

 
     256,321        247,631   

Less accumulated depreciation

     173,918        166,144   
  

 

 

   

 

 

 
     82,403        81,487   

Goodwill

     3,342        3,342   

Intangible assets, net

     2,861        2,855   

Deferred income taxes

     17,345        4,036   

Other assets

     1,130        1,163   
  

 

 

   

 

 

 
   $ 417,910      $ 304,701   
  

 

 

   

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

    

Current liabilities

    

Accounts payable

   $ 130,876      $ 72,012   

Accrued expenses:

    

Marketing

     7,173        9,087   

Compensation

     5,505        5,634   

Warranties

     27,620        24,809   

Insurance

     5,711        3,538   

Other

     6,741        8,950   
  

 

 

   

 

 

 

Total current liabilities

     183,626        124,030   

Long-term debt

     73,857        —     

Other liabilities

     13,156        13,280   

Commitments and contingencies

    

Shareholders’ equity

    

Preferred stock, par value $1.00; 2,050,000 shares authorized; none issued

     —          —     

Preferred stock – Series B Junior Participating, par value $1.00; 450,000 shares authorized; none issued

     —          —     

Common stock, par value $0.01; 37,440,000 shares authorized; shares issued and outstanding: 13,047,992 at September 30, 2016 and 13,038,249 at March 31, 2016

     130        130   

Additional paid-in-capital

     8,018        6,105   

Accumulated other comprehensive loss

     (8,892     (10,184

Retained earnings

     148,015        171,340   
  

 

 

   

 

 

 

Total shareholders’ equity

     147,271        167,391   
  

 

 

   

 

 

 
   $ 417,910      $ 304,701   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

3


Table of Contents

Arctic Cat Inc.

Consolidated Statements of Operations

($ in thousands, except per share amounts)

(Unaudited)

 

     Three Months Ended
September 30,
    Six Months Ended
September 30,
 
     2016     2015     2016     2015  

Net sales

        

Snowmobile and ATV/ROV units

   $ 139,702      $ 180,676      $ 223,979      $ 291,781   

Parts, garments and accessories

     24,908        30,481        45,503        53,757   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net sales

     164,610        211,157        269,482        345,538   

Cost of goods sold

        

Snowmobile and ATV/ROV units

     133,269        147,739        213,947        244,696   

Parts, garments and accessories

     17,798        19,500        30,235        34,362   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of goods sold

     151,067        167,239        244,182        279,058   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     13,543        43,918        25,300        66,480   

Operating expenses

        

Selling and marketing

     11,188        11,842        20,380        20,797   

Research and development

     8,421        6,222        16,279        12,225   

General and administrative

     13,035        7,202        25,050        16,353   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     32,644        25,266        61,709        49,375   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating profit (loss)

     (19,101     18,652        (36,409     17,105   

Other income (expense)

        

Interest income

     23        12        25        12   

Interest expense

     (457     (394     (669     (508
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other expense

     (434     (382     (644     (496
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (loss) before income taxes

     (19,535     18,270        (37,053     16,609   

Income tax expense (benefit)

     (6,762     7,099        (13,728     6,494   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings (loss)

   $ (12,773   $ 11,171      $ (23,325   $ 10,115   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings (loss) per share

        

Basic

   $ (0.98   $ 0.86      $ (1.79   $ 0.78   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

   $ (0.98   $ 0.85      $ (1.79   $ 0.77   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares outstanding (in thousands)

        

Basic

     13,048        12,985        13,047        12,972   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

     13,048        13,145        13,047        13,149   
  

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

4


Table of Contents

Arctic Cat Inc.

Consolidated Statements of Comprehensive Income (Loss)

($ in thousands)

(Unaudited)

 

     Three Months Ended
September 30,
    Six Months Ended
September 30,
 
     2016     2015     2016     2015  

Net earnings (loss)

   $ (12,773   $ 11,171      $ (23,325   $ 10,115   

Other comprehensive income (loss):

        

Foreign currency translation adjustments

     227        (64     (423     1,043   

Unrealized gain (loss) on derivative instruments, net of tax

     1,072        669        1,715        (213
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

   $ (11,474   $ 11,776      $ (22,033   $ 10,945   
  

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

5


Table of Contents

Arctic Cat Inc.

Consolidated Statements of Cash Flows

($ in thousands)

(Unaudited)

 

     Six Months Ended September 30,  
     2016     2015  

Cash flows from operating activities:

    

Net earnings (loss)

   $ (23,325   $ 10,115   

Adjustments to reconcile net earnings (loss) to net cash used in operating activities:

    

Depreciation and amortization

     9,837        9,385   

Deferred income taxes

     (14,402     534   

Stock-based compensation expense

     2,277        2,037   

Changes in operating assets and liabilities:

    

Trading securities

     —          1,009   

Accounts receivable

     (57,918     (42,797

Inventories

     (55,993     (18,263

Accounts payable

     58,884        9,210   

Accrued expenses

     3,508        (5,253

Income taxes

     3,420        5,913   

Prepaid expenses and other

     2,124        477   
  

 

 

   

 

 

 

Net cash used in operating activities

     (71,588     (27,633

Cash flows from investing activities:

    

Purchases of property and equipment

     (10,806     (19,269
  

 

 

   

 

 

 

Net cash used in investing activities

     (10,806     (19,269

Cash flows from financing activities:

    

Proceeds from long-term borrowings

     160,690        148,323   

Payments on long-term borrowings

     (86,833     (132,529

Checks written in excess of bank balances

     —          3,361   

Proceeds from issuance of common stock

     —          497   

Payments for income taxes on net-settled option exercises

     (32     (50

Tax benefit from stock option exercises

     —          45   

Dividends paid

     —          (3,275

Repurchase of common stock

     —          (120
  

 

 

   

 

 

 

Net cash provided by financing activities

     73,825        16,252   

Effect of exchange rate changes on cash and cash equivalents

     (10     1,110   
  

 

 

   

 

 

 

Net decrease in cash and cash equivalents

     (8,579     (29,540

Cash and cash equivalents at beginning of period

     17,730        40,253   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 9,151      $ 10,713   
  

 

 

   

 

 

 

Supplemental disclosure of cash payments for:

    

Income taxes

   $ 64      $ 123   
  

 

 

   

 

 

 

Interest

   $ 669      $ 508   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

6


Table of Contents

Arctic Cat Inc.

Notes to Consolidated Financial Statements

(Unaudited)

1. BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements include the accounts of Arctic Cat Inc., its wholly-owned subsidiaries and certain variable interest entities (“VIEs”). Unless the context otherwise requires, the use of the terms “Arctic Cat,” “we,” “our,” or “us” in these unaudited Notes to Consolidated Financial Statements refers to Arctic Cat Inc. and, as applicable, its consolidated subsidiaries. All intercompany accounts and transactions are eliminated upon consolidation.

The unaudited consolidated financial statements of Arctic Cat Inc. 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 accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations, although we believe that the disclosures are adequate to make the information presented not misleading. Accordingly, such statements should be read in conjunction with our Annual Report on
Form 10-K for the fiscal year ended March 31, 2016.

In the opinion of management, the unaudited consolidated financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary for the fair presentation of our financial position, results of operations and cash flows for the periods presented. Results of operations for the interim periods are not necessarily indicative of results for the full year due to the seasonality of snowmobiles, all-terrain vehicles (“ATVs”) and recreational off-highway vehicles (“ROVs”) and related parts, garments and accessories (“PG&A”). The consolidated balance sheet as of March 31, 2016 is derived from the audited balance sheet as of that date.

Preparation of our consolidated financial statements requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and related revenues and expenses. Accordingly, actual results could differ from those estimates.

For the six months ended September 30, 2016, we realized a loss before income taxes and have recognized a deferred tax asset, significantly as a result of that loss. We performed an analysis to estimate the extent to which the deferred tax assets will be realized and determined that there was no material change to the valuation allowance during the six months ended September 30, 2016. However, due to the sensitivity in the analysis, changes to the assumptions in subsequent periods could have a material effect on the valuation allowance.

Certain fiscal 2016 amounts have been reclassified to conform to the fiscal 2017 financial statement presentation. The reclassifications had no effect on previously reported operating results.

In preparing the accompanying consolidated financial statements, we have evaluated the period from October 1, 2016, through the date the financial statements were issued, for material subsequent events requiring recognition or disclosure. Other than as disclosed in Note 5, Financing , no such events were identified for this period.

Recently Adopted Accounting Standards

In April 2016, we retrospectively adopted Accounting Standard Update (“ASU”) 2015-17, Income Taxes , which is effective prospectively or retrospectively for annual periods beginning after December 15, 2016, and interim periods therein, with early adoption permitted. The ASU modifies the existing guidance for classifying deferred tax assets and liabilities, which requires entities to separate deferred income tax assets and liabilities into current and noncurrent amounts in a classified statement of financial position. The ASU requires entities to classify deferred tax assets and liabilities as noncurrent in a classified statement of financial position. However, the current requirement that deferred tax assets and liabilities of a tax-paying component of an entity be offset and presented as a single amount is not affected by the amendments in this ASU. The early adoption of the ASU resulted in the reclassification of previously recorded current deferred tax assets of $17.2 million and noncurrent deferred tax liabilities of $13.2 million into noncurrent deferred income taxes of $4.0 million on the Consolidated Balance Sheet as of March 31, 2016.

 

7


Table of Contents

Recent Accounting Pronouncements

In March 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting , which simplifies several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes and statutory tax withholding requirements and classification within the statement of cash flows. The ASU is effective for fiscal years beginning after December 15, 2016. We are currently in the process of evaluating the impact of the adoption of this ASU on our consolidated results.

In February 2016, the FASB issued ASU 2016-02, Lease Accounting , which requires lessees to recognize on the balance sheet certain operating and financing lease liabilities and corresponding right-of-use assets that have lease terms of greater than 12 months. This topic retains the distinction between finance leases and operating leases. The ASU is effective on a modified retrospective approach for annual periods beginning after December 15, 2018, and interim periods therein, with early adoption permitted. We are currently in the process of evaluating the impact of the adoption of this ASU on our consolidated results, but we currently expect the majority of our operating lease commitments will be subject to the new standard and recognized as operating lease liabilities and right-of-use assets upon our adoption of ASU 2016-02.

In July 2015, the FASB issued ASU 2015-11, Inventory , which provides guidance for the measurement of inventory. The ASU requires entities to measure most inventory at the lower of cost or net realizable value and simplifies the current guidance, which requires entities to measure inventory at the lower of cost or market (with market defined as one of three different measures). The ASU is effective prospectively for annual periods beginning after December 15, 2016, and interim periods therein. We do not expect the adoption of this ASU will have a material impact on our consolidated results.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers , which provides guidance for revenue recognition that supersedes existing revenue recognition guidance (but does not apply to nor supersede accounting guidance for lease contracts). The ASU’s core principle is that an entity will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The ASU also requires more detailed disclosures to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. In July 2015, the FASB approved a proposal to defer the effective date of the ASU by one year to reporting periods beginning after December 15, 2018. The ASU should be applied retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying the ASU recognized at the date of initial application. We are currently in the process of evaluating the impact of the adoption of this ASU on our consolidated results.

2. FAIR VALUE MEASUREMENTS

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. A fair value hierarchy has been established which requires classification based on observable and unobservable inputs when measuring fair value. There are three levels of inputs that may be used to measure fair value:

Level 1 – Quoted prices in active markets for identical assets or liabilities.

Level 2 – Observable inputs other than Level 1 prices such as quoted prices for similar assets and liabilities; quoted prices in markets that are not active; or inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

 

8


Table of Contents

Recurring Fair Value Measurements

The following tables present, by level within the fair value hierarchy, our financial assets and liabilities that were accounted for at fair value on a recurring basis at September 30, 2016 and March 31, 2016, according to the valuation technique utilized to determine their fair values ($ in thousands):

 

            Fair Value Measurements Using
Inputs Considered as
 
     Fair Value at
September 30, 2016
     Level 1      Level 2      Level 3  

Assets:

           

Foreign currency contracts(1)

   $ 284       $ —         $ 284       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

           

Foreign currency contracts(1)

   $ 1,398       $ —         $ 1,398       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) We utilize the income approach to measure fair value of foreign currency contracts, which is based on significant other observable inputs.

 

            Fair Value Measurements Using
Inputs Considered as
 
     Fair Value at
March 31, 2016
     Level 1      Level 2      Level 3  

Assets:

           

Foreign currency contracts(1)

   $ 100       $ —         $ 100       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

           

Foreign currency contracts(1)

   $ 3,937       $ —         $ 3,937       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) We utilize the income approach to measure fair value of foreign currency contracts, which is based on significant other observable inputs.

Nonrecurring Fair Value Measurements

Our assets and liabilities that are measured at fair value on a nonrecurring basis primarily relate to tangible fixed assets, goodwill and other intangible assets, which are generally recorded at fair value as a result of an impairment charge. We did not record any significant charges to assets measured at fair value on a nonrecurring basis during the six months ended September 30, 2016 and 2015.

Other Fair Value Disclosures

Our financial instruments that approximate fair value due to their short-term nature and are not measured at fair value on a recurring basis include cash and cash equivalents, accounts receivable and accounts payable. At September 30, 2016, the carrying value of our revolving credit agreement approximates fair value and would be considered a Level 2 measurement.

3. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

We use foreign currency derivative instruments to manage our exposure to currency fluctuations on transactions denominated in foreign currencies – primarily the Canadian dollar and Japanese yen. Our foreign currency management objective is to reduce earnings volatility related to movements in foreign exchange rates and limit the risk of loss in value of certain of our foreign currency-denominated cash flows. We do not enter into forward contracts for trading or speculative purposes. We have no derivatives that have credit risk-related contingent features and we mitigate our risk by engaging with major financial institutions as counterparties.

We record all foreign currency forward contracts at fair value in our Consolidated Balance Sheets. The forward contracts are designated as, and meet the criteria for, cash flow hedges. We evaluate hedge effectiveness prospectively and retrospectively, and we formally document all hedging relationships at inception, as well as the risk management objectives for undertaking the hedge transaction. Our Canadian dollar and Japanese yen forward contracts generally have terms of up to 12 months. Gains and losses on forward contracts are recorded in accumulated other comprehensive loss, net of tax, and subsequently reclassified into cost of goods sold or operating expenses during the same period in which the hedged transaction affects the Consolidated Statements of Operations. Gains and losses on the derivative representing hedge ineffectiveness, if any, are recognized in the Consolidated Statements of Operations.

 

9


Table of Contents

The following tables summarize the notional amounts and carrying values of our derivative instruments as of September 30, 2016 and March 31, 2016 ($ in thousands):

 

     Derivative Instruments as of
September 30, 2016
 
     Notional
Value
     Asset Fair
Value (1)
     Liability Fair
Value (1)
 

Foreign currency contracts:

        

Canadian dollar

   $ 59,892       $ 284       $ 1,267   

Japanese yen

     26,737         —           131   
  

 

 

    

 

 

    

 

 

 

Total foreign currency contracts

   $ 86,629       $ 284       $ 1,398   
  

 

 

    

 

 

    

 

 

 

 

(1) Assets are included in other current assets and liabilities are included in other accrued expenses in the accompanying Consolidated Balance Sheets.

 

     Derivative Instruments as of
March 31, 2016
 
     Notional
Value
     Asset Fair
Value (1)
     Liability Fair
Value (1)
 

Foreign currency contracts:

        

Canadian dollar

   $ 87,875       $ 100       $ 3,937   
  

 

 

    

 

 

    

 

 

 

Total foreign currency contracts

   $ 87,875       $ 100       $ 3,937   
  

 

 

    

 

 

    

 

 

 

 

(1) Assets are included in other current assets and liabilities are included in other accrued expenses in the accompanying Consolidated Balance Sheets.

The following table presents the effects of derivative instruments on other comprehensive income (“OCI”) and on our Consolidated Statements of Operations for the six months ended September 30, 2016 and 2015 ($ in thousands):

 

     September 30, 2016      September 30, 2015  
     Pre-Tax
Gain
(Loss)
Recognized
in OCI
     Pre-Tax Gain
(Loss)
Reclassified from
Accumulated
OCI to Earnings
(Effective
Portion)
     Pre-Tax
Gain
(Loss)
Recognized
in OCI
     Pre-Tax Gain
(Loss)
Reclassified from
Accumulated
OCI to Earnings
(Effective
Portion)
 

Canadian dollar (1)

   $ 544       $ (2,634    $ 4,901       $ 5,673   

Japanese yen (1)

     (131      —           (374      (808

 

(1) Canadian dollar contracts are included in general and administrative expenses and Japanese yen contracts are included in cost of goods sold in the accompanying Consolidated Statements of Operations.

The ineffective portion of foreign currency contracts was not material for the six months ended September 30, 2016 and 2015.

4. GOODWILL AND INTANGIBLE ASSETS

There were no changes in the carrying values of goodwill and indefinite-lived intangible assets during the six months ended September 30, 2016. The following table provides the gross carrying amount of goodwill and indefinite-lived intangible assets as of September 30, 2016 and March 31, 2016 ($ in thousands):

 

     September 30, 2016      March 31, 2016  
     Gross Carrying
Amount
     Gross Carrying
Amount
 

Goodwill (1)

   $ 3,342       $ 3,342   

Indefinite-lived intangible assets

   $ 436       $ 436   

 

(1) The entirety of our goodwill balance as of September 30, 2016 and March 31, 2016 resides in our PG&A operating segment. Refer to Note 10, Segment Reporting , for additional information on our operating segments.

 

10


Table of Contents

There was no cumulative impairment related to goodwill or indefinite-lived intangibles assets at September 30, 2016 or March 31, 2016.

For definite-lived intangible assets, the changes in the net carrying amount for the six months ended September 30, 2016 and 2015 are as follows ($ in thousands):

 

     2016      2015  
     Gross Carrying
Amount
     Accumulated
Amortization
     Gross Carrying
Amount
     Accumulated
Amortization
 

Definite-lived intangible assets, beginning

   $ 4,315       $ (1,896    $ 4,312       $ (1,511

Amortization expense

     —           (190      —           (193

Adjustments (1)

     169         31         —           —     

Currency translation effect on foreign balances

     (15      11         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Definite-lived intangible assets, ending

   $ 4,469       $ (2,044    $ 4,312       $ (1,704
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Adjustment to correct gross carrying amount and accumulated amortization for certain intangible assets related to our previous acquisition of our European business.

Amortization expense is expected to be approximately $0.2 million for the remainder of fiscal 2017, $0.4 million for each of fiscal 2018, 2019 and 2020 and $0.2 million for fiscal 2021 and thereafter. The preceding expected amortization expense is an estimate and actual amounts could differ due to additional intangible asset acquisitions, changes in foreign currency rates or impairment of intangible assets.

5. FINANCING

We have a line of credit pursuant to a senior secured revolving credit agreement, which is scheduled to expire in March 2021. Under the agreement, we may borrow up to $130.0 million during May through November and up to $75.0 million during all other months of the fiscal year. The amount of permissible borrowings under the credit facility is dependent upon adequate levels of underlying collateral. Borrowings under the credit facility bear interest at either the base rate plus the applicable margin or the LIBOR rate plus the applicable margin, depending on the type of loan. The applicable margin is calculated based on Arctic Cat’s leverage ratio and amount available for borrowing under the credit facility and ranges from 0.0% to 0.5% for base rate loans and from 1.0% to 1.5% for LIBOR loans. Arctic Cat’s leverage ratio is its ratio of debt to EBITDA, calculated quarterly.

All borrowings are collateralized by substantially all of our assets including all real estate, accounts receivable and inventory. As of September 30, 2016, we have $73.9 million of outstanding borrowings under the line of credit. No borrowings from the line of credit were outstanding at March 31, 2016. The outstanding letters of credit balances were $0.2 million and $3.5 million at September 30, 2016 and 2015, respectively, and borrowings under the line are subject to certain covenants and restrictions on indebtedness, financial guarantees, business combinations and other related items. We were in compliance with the terms of the credit agreement as of September 30, 2016. Outstanding letters of credit will be repaid over the following six months in accordance with the credit agreement and any such renewal.

In November 2016, subsequent to the end of the second quarter of fiscal 2017, we signed a commitment letter to amend our senior secured revolving credit agreement. The amendment would extend the term of the agreement to November 2021 and permit borrowings up to $130.0 million year round. We currently expect the amendment to be finalized prior to December 1, 2016.

6. SHAREHOLDERS’ EQUITY

Stock Compensation Plans

We have outstanding equity awards under a 2013 Omnibus Stock and Incentive Plan (the “2013 Plan”) and a 2007 Omnibus Stock and Incentive Plan (the “2007 Plan,” and along with the 2013 Plan, the “Plans”), previously approved by our shareholders. We record stock-based compensation expense related to stock options, restricted stock and restricted stock units over the requisite service period based on the fair value of the awards on the grant date. We record stock-based compensation expense related to cash-settled stock appreciation rights (“SARs”) over the requisite service period based on the fair value of the awards at the end of each reporting period.

For the three months ended September 30, 2016 and 2015, we recorded stock-based compensation expense of $0.9 million and $0.9 million, respectively, and for the six months ended September 30, 2016 and 2015, we recorded stock-based compensation expense of $2.2 million and $2.0 million, respectively, which has been included in general and administrative expenses in the accompanying Consolidated Statements of Operations. At September 30, 2016, we had $9.5 million of unrecognized compensation costs related to

 

11


Table of Contents

non-vested stock options, restricted stock awards and cash-settled SARs that are expected to be recognized over a weighted average period of approximately two years.

Stock Options

The following table summarizes the stock option transactions under the Plans for the six months ended September 30, 2016:

 

     Shares      Weighted
Average
Exercise Price
     Weighted
Average
Contractual Life
     Aggregate
Intrinsic Value
($ in thousands) (1)
 

Options outstanding at March 31, 2016

     678,209       $ 30.08         

Granted

     344,169         16.62         

Cancelled

     (42,980      26.26         

Expired

     (13,939      43.44         
  

 

 

    

 

 

    

 

 

    

 

 

 

Options outstanding at September 30, 2016

     965,459       $ 25.26         7.80 years       $ 310   
  

 

 

    

 

 

    

 

 

    

 

 

 

Exercisable at September 30, 2016

     396,549       $ 28.01         6.03 years       $ 290   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) The aggregate intrinsic value is based on the difference between the exercise price and our September 30, 2016 common share market value for in-the-money options.

Restricted Stock

The following tables summarize restricted stock and restricted stock unit award activity under the Plans for the six months ended September 30, 2016:

 

Restricted Shares

   Shares      Weighted
Average Grant
Date Fair Value
 

Non-vested shares at March 31, 2016

     39,863       $ 22.98   

Granted

     1,179         16.74   

Forfeited

     (2,200      27.30   
  

 

 

    

 

 

 

Non-vested shares at September 30, 2016

     38,842       $ 22.50   
  

 

 

    

 

 

 

Restricted Stock Units

   Shares      Weighted
Average Grant
Date Fair Value
 

Non-vested shares at March 31, 2016

     186,258       $ 24.79   

Granted

     59,993         16.56   

Vested

     (12,749      39.60   

Forfeited

     (39,140      19.20   
  

 

 

    

 

 

 

Non-vested shares at September 30, 2016

     194,362       $ 22.29   
  

 

 

    

 

 

 

Cash-Settled Stock Appreciation Rights

Cash-settled SARs are valued using the Black-Scholes option-pricing model on the date of grant and are subsequently remeasured at each reporting period based on a revised Black-Scholes value until they are exercised. There were no cash-settled SARs granted or forfeited during the six months ended September 30, 2016. We recognized $0.1 million and $0.2 million of stock-based compensation expense related to previously granted cash-settled SARs during the three and six months ended September 30, 2016, respectively. Accrued expense for these awards was $0.2 million at September 30, 2016, which was recorded within other liabilities in the accompanying Consolidated Balance Sheets.

Net Earnings (Loss) Per Share

Our basic net earnings (loss) per share is computed by dividing net earnings (loss) by the weighted average number of outstanding common shares. Our diluted weighted average shares outstanding includes common shares and common share equivalents relating to

 

12


Table of Contents

stock options and restricted stock units, when dilutive. Options to purchase 883,987 and 475,925 shares of common stock with weighted average exercise prices of $26.71 and $36.53 were outstanding during the three month periods ended September 30, 2016 and 2015, respectively, and options to purchase 865,927 and 335,807 shares of common stock with weighted average exercise prices of $27.04 and $38.16 were outstanding during the six months periods ended September 30, 2016 and 2015, respectively, but were excluded from the computation of common share equivalents because they were anti-dilutive.

Weighted average shares outstanding consists of the following for the three and six months ended September 30, 2016 and 2015 (in thousands):

 

     Three Months Ended
September 30,
     Six Months Ended
September 30,
 
     2016      2015      2016      2015  

Weighted average number of common shares outstanding

     13,048         12,985         13,047         12,972   

Dilutive effect of option plan

     —           160         —           177   
  

 

 

    

 

 

    

 

 

    

 

 

 

Common and potential shares outstanding – diluted

     13,048         13,145         13,047         13,149   
  

 

 

    

 

 

    

 

 

    

 

 

 

Accumulated Other Comprehensive Loss

The components of the changes in accumulated other comprehensive loss during the following periods were as follows ($ in thousands):

 

     Six Months Ended
September 30,
 
     2016      2015  

Accumulated other comprehensive loss, beginning

   $ (10,184    $ (7,142

Foreign currency translation adjustments

     (423      1,043   

Unrealized gain (loss) on derivative instruments, net of tax

     1,715         (213
  

 

 

    

 

 

 

Accumulated other comprehensive loss, ending

   $ (8,892    $ (6,312
  

 

 

    

 

 

 

The unrealized gain (loss) on derivative instruments for the six months ended September 30, 2016 and 2015 were net of tax expense of $1.0 million and tax benefit of $0.1 million, respectively. There is no tax impact on foreign currency translation adjustments, as the earnings are considered permanently reinvested.

7. COMMITMENTS AND CONTINGENCIES

Product Liability and Litigation

We are subject to product liability and intellectual property legal proceedings and claims, as well as other litigation, arising in the normal course of business. Such matters are generally subject to uncertainties and to outcomes that are not predictable and that may not be known for extended periods of time. Litigation occasionally involves claims for punitive, as well as compensatory, damages arising out of the use of our products. We are self-insured to some extent, though we maintain insurance against certain classes and levels of product liability losses. We are regularly involved in patent litigation cases with, for example, competitors and non-practicing entities in which we are asserting, or defending against, patent infringement claims. Such cases are at varying stages in the litigation process. We take appropriate steps to help minimize our risk of being a defendant in patent infringement litigation.

We record a reserve within accrued expenses in the Consolidated Balance Sheets based on our estimated range of potential exposures related to claims, including future legal expenditures, settlements and judgments of which we are aware, where we have assessed that a loss is probable and an amount can be reasonably estimated. We utilize historical trends and other analysis to assist in determining the appropriate loss reserve estimate. Should any settlement occur that exceeds our estimate or a new claim arise, we may need to adjust our overall reserve and, depending on the amount, such adjustment could be material. We are not involved in any legal proceedings that we believe will have a materially adverse impact on our business or financial condition, results of operations or cash flows.

In October 2014, we filed a lawsuit captioned Arctic Cat Inc. v. Bombardier Recreational Products, Inc., and BRP U.S. Inc. in the United States District Court for the Southern District of Florida. We alleged the defendant infringed certain of our personal watercraft (“PWC”) patents. On June 1, 2016, a jury found the defendants willfully infringed all asserted claims in two of our patents for off-throttle assisted steering technology, which is an important safety mechanism designed to prevent on-water collisions and accidents in PWCs. The jury initially awarded us $15.5 million in damages. On June 14, 2016, a federal court judge trebled the damages and awarded us $46.7 million. Following post-trial motions, we were awarded an additional $1.5 million in post-trial damages in the second quarter of fiscal 2017. Although we were awarded damages, at this stage of the proceedings we can provide no assurance as to

 

13


Table of Contents

the timing or outcome of any appeal, nor the amount, if any, that might ultimately be recovered. Accordingly, no benefit has been recorded within our Consolidated Financial Statements as a result of the damages verdict.

Dealer Financing

Finance companies provide our North American dealers with floorplan financing. We have agreements with these finance companies to repurchase certain repossessed products sold to our dealers should such repossessions occur. At September 30, 2016, we are contingently liable under dealer financing agreements for a maximum repurchase amount of up to approximately $78.3 million. Our ultimate financial exposure under these agreements is limited to the difference between the amount paid to the finance companies for repurchases and the amount received upon the subsequently anticipated resale of the repossessed product. Losses incurred under these agreements during the periods presented have not been material. The financing agreements also have loss sharing provisions should any dealer default, whereby we share certain losses with the finance companies. The maximum liability to us under these provisions is approximately $4.2 million at September 30, 2016.

8. INVENTORIES

Inventories are valued at the lower of cost or market, with cost determined using the first-in, first-out method. Manufacturing costs include materials, labor, freight-in and manufacturing overhead. As of September 30, 2016 and March 31, 2016, inventories consist of the following ($ in thousands):

 

     September 30, 2016      March 31, 2016  

Raw materials and sub-assemblies

   $ 59,674       $ 35,770   

Finished goods

     90,820         64,127   

Parts, garments and accessories

     45,209         40,110   
  

 

 

    

 

 

 
   $ 195,703       $ 140,007   
  

 

 

    

 

 

 

9. PRODUCT WARRANTIES

We generally provide a limited warranty for 12 months from the date of consumer registration on snowmobiles and for six months from the date of consumer registration on ATVs and ROVs. We may provide longer warranties in certain geographical markets as determined by local regulations and market conditions, as well as related to certain promotional programs. We provide for estimated warranty costs at the time of sale based on historical rates and trends. Subsequent adjustments are made to the warranty reserve as actual claims become known or the amounts are determinable, including costs associated with safety recalls, which may occur after the standard warranty period.

The following table represents changes in our accrued warranty liability for the six month periods ended September 30, 2016 and 2015 ($ in thousands):

 

     Six Months Ended
September 30,
 
     2016      2015  

Accrued warranty, beginning

   $ 24,809       $ 23,062   

Warranty provision

     7,448         6,659   

Warranty claim payments

     (4,637      (5,049
  

 

 

    

 

 

 

Accrued warranty, ending

   $ 27,620       $ 24,672   
  

 

 

    

 

 

 

In the fourth quarter of fiscal 2016, we switched from offering a third-party extended warranty program as a promotional incentive to consumers to offering an in-house extended factory warranty promotional program. As a result, our accrued warranty balance and related provision and claim payments include the impact of these extended warranty programs in the consolidated financial statements. As of September 30, 2016 and March 31, 2016, we had accrued $3.3 million and $1.7 million, respectively, within accrued warranty for our in-house extended warranty program. For the six months ended September 30, 2016, our warranty provision included $1.6 million for our in-house extended warranty program, compared to $1.7 million of third-party extended warranty recorded as incentive expense in the six months ended September 30, 2015. The warranty claim payments for in-house extended warranty programs were immaterial for the six months ended September 30, 2016.

10. SEGMENT REPORTING

The presentation of segment information represents our method of internal reporting for making operating decisions and assessing performance, which generally segregates the operating segments by product line. The internal reporting of these operating segments is based, in part, on the management process utilized by our President and Chief Executive Officer, who is our chief operating decision maker. Based on this management process, we have two operating segments: (1) Snowmobile and ATV/ROV and (2) PG&A, which also represent our two reportable segments.

 

14


Table of Contents

We aggregate our snowmobile and ATV/ROV operating segments into one operating segment, as the segments have similar economic characteristics. Given the crossover of customers, manufacturing and asset management, we do not maintain separate balance sheets for each segment. Accordingly, the segment information presented below is limited to sales and gross profit data ($ in thousands):

 

     Three Months Ended
September 30,
     Six Months Ended
September 30,
 
     2016      2015      2016      2015  

Net sales

           

Snowmobile and ATV/ROV units

   $ 139,702       $ 180,676       $ 223,979       $ 291,781   

Parts, garments and accessories

     24,908         30,481         45,503         53,757   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total net sales

     164,610         211,157         269,482         345,538   
  

 

 

    

 

 

    

 

 

    

 

 

 

Gross profit

           

Snowmobile and ATV/ROV units

     6,433         32,937         10,032         47,085   

Parts, garments and accessories

     7,110         10,981         15,268         19,395   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total gross profit

   $ 13,543       $ 43,918       $ 25,300       $ 66,480   
  

 

 

    

 

 

    

 

 

    

 

 

 

11. NEW MARKET TAX CREDIT TRANSACTION

As more fully described within our Annual Report on Form 10-K for the fiscal year ended March 31, 2016, during February 2016, we received approximately $5.3 million in net proceeds from a financing arrangement related to an investment in equipment at our manufacturing facility in Thief River Falls, Minnesota. This financing arrangement was structured with Wells Fargo Community Development Enterprises, Inc. (“Wells Fargo”), WF Paint & Assembly Investment Fund, LLC (the “Investment Fund”), and Arctic Cat Production Support LLC, our direct, wholly-owned subsidiary, in connection with our participation in transactions qualified under the federal New Market Tax Credit (“NMTC”) program, pursuant to the Community Renewal Tax Relief Act of 2000. In exchange for its contribution to the Investment Fund, Wells Fargo is entitled to substantially all of the tax benefits derived from the NMTC arrangement, while we effectively received net proceeds equal to Wells Fargo’s contributions to the Investment Fund less direct and incremental transaction costs.

The NMTC arrangement is subject to 100% recapture for a period of seven years as provided in the Internal Revenue Code. We are required to be in compliance with various regulations and contractual provisions that apply to the NMTC arrangement. As of September 30, 2016 and March 31, 2016, Wells Fargo’s net $5.3 million contribution is recorded within other liabilities on our Consolidated Balance Sheets. The benefit of this net contribution will be recognized as earnings at the end of the seven year recapture period, when our performance obligation of regulatory and contractual compliance is relieved. As of September 30, 2016 and March 31, 2016, the direct costs incurred in structuring the arrangement of $0.9 million have been deferred within other assets on the Consolidated Balance Sheets and will be recognized in proportion to the recognition of the related profits. Incremental costs to maintain the structure during the compliance period are recognized as incurred and were immaterial for the six months ended September 30, 2016.

 

15


Table of Contents

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Arctic Cat Inc. (“Arctic Cat,” or “we,” “our” or “us”) is a Minnesota corporation incorporated in 1982 with principal executive offices in Minneapolis, Minnesota. We design, engineer, manufacture and market snowmobiles, all-terrain vehicles (“ATVs”) and recreational off-highway vehicles (“side-by-sides” or “ROVs”), as well as related parts, garments and accessories (“PG&A”) under the Arctic Cat ® and Motorfist ® brand names. 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, China, Asia and other international markets. The Arctic Cat brand is among the most widely recognized and respected names in the recreational vehicle industry.

This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with the MD&A included in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended March 31, 2016. This discussion contains various “Forward-Looking Statements” within the meaning of the Private Securities Litigation Reform Act of 1995, and we refer readers to Part I, Item 2, Forward-Looking Statements, of this report for additional information.

Results of Operations

Executive Overview

We reported a net loss of $12.8 million, or $0.98 per share, on net sales of $164.6 million in the second quarter of fiscal 2017. We estimate the unfavorable impact of foreign currency year-over-year was $0.17 per share. The second quarter of fiscal 2017 included a $1.4 million after-tax product liability settlement, which reduced earnings per share by $0.10. In the prior-year period, we reported net earnings of $11.2 million, or $0.85 per diluted share, on net sales of $211.2 million. For the six months ended September 30, 2016, we reported a net loss of $23.3 million, or $1.79 per share, on net sales of $269.5 million, compared to net earnings of $10.1 million, or $0.77 per diluted share, on net sales of $345.5 million for the six months ended September 30, 2015.

We expected that our second quarter would be challenging as we continued to implement our turnaround strategies. However, we encountered a softer than anticipated powersports market in the quarter, with both Arctic Cat’s and the overall industry’s sales down. We are disappointed in our second quarter results, which were impacted by lower sales volumes, unfavorable product mix and a heightened promotional environment.

We made further progress on implementing our strategic growth initiatives in the second quarter of fiscal 2017. We recently signed two strategic partnerships – one during the second quarter of fiscal 2017 and the other after quarter end – that we anticipate will contribute meaningfully to our future revenues in fiscal 2018 and beyond. We continue to expect reporting stronger financial results in the second half of fiscal 2017 driven by planned product launches and an improved product mix. In addition, we remain focused on our growth strategies, including pursuing strategic partnerships; ramping up end-user focused new products; creating a brand marketing powerhouse and improving Arctic Cat’s dealer network.

We continue to face ongoing challenges in fiscal 2017, with a soft and increasingly competitive powersports marketplace and continued headwinds from foreign currency. We are positioning Arctic Cat to capitalize on tremendous growth opportunities through new product innovation and strategic partnerships. We are highly encouraged by our progress in these areas and we expect future contributions from each. As we invest to support our strategic initiatives, we are cutting costs and manufacturing output to improve free cash flow and earnings. We believe that our balanced approach, along with our expected amendment of our credit facility, will enable us to realize Arctic Cat’s long-term growth potential.

For the fiscal year ending March 31, 2017, we are lowering our estimated full-year net sales and earnings range, reflecting a weakened powersports market, unfavorable macroeconomic trends, unfavorable product mix and a highly competitive promotional environment. We now anticipate fiscal 2017 net sales of $600 million to $640 million, and fiscal 2017 net earnings to range from a loss of $1.00 per share to $1.40 per share, which reflects a return to profitability in the second half of the fiscal year. Previously, we estimated our fiscal 2017 full-year net earnings to range from a loss of $0.70 per share to a loss of $1.00 per share. Continued foreign currency exchange headwinds in fiscal 2017, driven by the year-over-year impact of foreign currency exchange hedge losses, are estimated to reduce net earnings in the range of $0.44 to $0.47 per share compared to fiscal 2016. For the prior fiscal 2016 full year, our loss per share totaled $0.71 on net sales of $632.9 million.

 

16


Table of Contents

Product Line Sales

 

     Three Months Ended September 30,     Six Months Ended September 30,  

($ in thousands)

   2016      Percent of
Total Net
Sales
    2015      Percent of
Total Net
Sales
    2016      Percent of
Total Net
Sales
    2015      Percent of
Total Net
Sales
 

Snowmobile

   $ 95,685         58.1   $ 109,918         52.1   $ 136,222         50.5   $ 168,149         48.6

ATV/ROV

     44,017         26.8     70,758         33.5     87,757         32.6     123,632         35.8

PG&A

     24,908         15.1     30,481         14.4     45,503         16.9     53,757         15.6
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total net sales

   $ 164,610         100.0   $ 211,157         100.0   $ 269,482         100.0   $ 345,538         100.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

In the first half of fiscal 2017, we faced a weak powersports market impacted by macroeconomic trends in the oil and gas and agricultural sectors, as well as a highly-competitive retail environment, which have contributed to a decrease in net sales. During the second quarter of fiscal 2017, net sales decreased 22.0% to $164.6 million from $211.2 million in the second quarter of fiscal 2016. Snowmobile net sales decreased 12.9% due to lower North American sales volume and an increase in incentives, partially offset by increased sales to our OEM partner due to timing of production and shipments. ATV/ROV net sales decreased 37.8% as we continued to curtail wholesale shipments and increase incentives to support our efforts to reduce inventory at our North America dealers. PG&A net sales decreased 18.3%, which was primarily attributable to a sluggish powersports market and lower pre-season sales of snow-related items resulting from elevated dealer inventory due to poor snowfall in key geographies in consecutive years.

Net sales for the six months ended September 30, 2016 decreased 22.0% to $269.5 million from $345.5 million. The decrease in net sales was largely the result of our efforts to reduce dealer inventory, which resulted in lower wholesale sales volumes and increased sales incentives. Snowmobile net sales decreased 19.0% primarily due to lower North American sales volume and an increase in incentives, partially offset by an increase in sales to our OEM partner. ATV/ROV net sales decreased 29.0% driven by lower sales volume and an increase in incentives, as we continue to focus on reducing dealer inventory. We also experienced an unfavorable mix into lower-priced ATV/ROV models, which we do not expect to continue in the second half of fiscal 2017. PG&A net sales decreased 15.4%, primarily due to a continuing impact from poor snowfall in key geographies in consecutive years and lower in-season ATV/ROV sales due to changes in the timing of the ordering process.

Cost of Goods Sold

 

     Three Months Ended September 30,     Six Months Ended September 30,  

($ in thousands)

   2016      Percent of
Total
Cost of
Goods
Sold
    2015      Percent of
Total
Cost of
Goods
Sold
    2016      Percent of
Total
Cost of
Goods
Sold
    2015      Percent of
Total
Cost of
Goods
Sold
 

Snowmobile and ATV/ROV

   $ 133,269         88.2   $ 147,739         88.3   $ 213,947         87.6   $ 244,696         87.7

PG&A

     17,798         11.8     19,500         11.7     30,235         12.4     34,362         12.3
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total cost of goods sold

   $ 151,067         100.0   $ 167,239         100.0   $ 244,182         100.0   $ 279,058         100.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

During the second quarter of fiscal 2017, cost of goods sold decreased 9.7% to $151.1 million from $167.2 million for the second quarter of fiscal 2016. During the six months ended September 30, 2016, cost of goods sold decreased 12.5% to $244.2 million from $279.1 million for the six months ended September 30, 2015. The overall decrease in net sales was the primary driver of the decrease in costs of goods sold, which was partially offset by an increase in cost of goods sold due to an unfavorable foreign currency exchange impact on engine purchases.

Gross Profit

 

     Three Months Ended
September 30,
    Six Months Ended
September 30,
 

($ in thousands)

   2016     2015     Change
2016 vs.
2015
    2016     2015     Change
2016 vs.
2015
 

Gross profit

   $ 13,543      $ 43,918        (69.2 )%    $ 25,300      $ 66,480        (61.9 )% 

Percentage of total net sales

     8.2     20.8     (60.6 )%      9.4     19.2     (51.0 )% 

Gross profit decreased 69.2% to $13.5 million in the second quarter of fiscal 2017 from $43.9 million in the second quarter of fiscal 2016. Gross profit as a percentage of net sales for the second quarter of fiscal 2017 decreased to 8.2% versus 20.8% in fiscal 2016. Gross profit was negatively impacted by lower sales volume, an unfavorable snowmobile mix due to an increase in lower-margin sales to our OEM partner, increased sales incentives as a result of a highly-promotional retail environment and an unfavorable foreign currency exchange impact on engine purchases.

 

17


Table of Contents

Gross profit decreased 61.9% to $25.3 million from $66.5 million for the six months ended September 30, 2016 and 2015, respectively. Gross profit as a percentage of net sales for the six months ended September 30, 2016 decreased to 9.4% versus 19.2% in fiscal 2016. Gross profit was negatively impacted by lower sales volume, increased sales incentives as a result of a promotional retail environment and an increased mix of Yamaha snowmobile sales and lower margin ATV/ROV sales due to an unfavorable mix into lower-priced ATV/ROV models.

Operating Expenses

 

     Three Months Ended
September 30,
    Six Months Ended
September 30,
 

($ in thousands)

   2016     2015     Change
2016 vs.
2015
    2016     2015     Change
2016 vs.
2015
 

Selling and marketing

   $ 11,188      $ 11,842        (5.5 )%    $ 20,380      $ 20,797        (2.0 )% 

Research and development

     8,421        6,222        35.3     16,279        12,225        33.2

General and administrative

     13,035        7,202        81.0     25,050        16,353        53.2
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

   $ 32,644      $ 25,266        29.2   $ 61,709      $ 49,375        25.0
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Percentage of total net sales

     19.8     12.0       22.9     14.3  

Operating expenses increased 29.2% to $32.6 million in the second quarter of fiscal 2017 from $25.3 million in the prior-year quarter. Operating expenses increased 25.0% to $61.7 million from $49.4 million for the six months ended September 30, 2016 and 2015, respectively. The increase in both periods was due to an increase in general and administrative and research and development expenses. The increase in general and administrative expenses was due to a year-over-year unfavorable impact from our foreign currency hedging activities of $3.9 million and $6.6 million in the second quarter of fiscal 2017 and six months ended September 30, 2016, respectively. In addition, legal expenses increased primarily due to a $2.2 million product liability settlement in the second quarter of fiscal 2017. The increase in research and development expenses was driven by continued investments in developing new end-user focused products as part of our new product roadmap.

Other Income (Expense)

Interest expense increased to $0.5 million during the second quarter of fiscal 2017 from $0.4 million in the second quarter of fiscal 2016. For the six months ended September 30, 2016 and 2015, interest expense increased to $0.7 million from $0.5 million, respectively. The quarter and year-to-date increase is primarily due to increased borrowings under our line of credit compared to the prior-year comparative periods. We recognized an immaterial amount of interest income during the second quarter of fiscal 2017 and 2016 and for the six months ended September 30, 2016 and 2015.

Income Tax Expense (Benefit)

In the second quarter of fiscal 2017, we recognized an income tax benefit of $6.8 million compared to the income tax expense of $7.1 million in the second quarter of fiscal 2016, primarily due to the $19.5 million pre-tax loss incurred in the second quarter of fiscal 2017 compared to $18.3 million of pre-tax earnings for the prior-year comparative period. During the six months ended September 30, 2016, we recognized an income tax benefit of $13.7 million compared to the income tax expense of $6.5 million for the six months ended September 30, 2015, primarily due to the $37.1 million pre-tax loss incurred for the six months ended September 30, 2016 compared to $16.6 million of pre-tax earnings for the prior year comparative period. Our effective tax rate was 34.6% and 38.9% in the second quarter of fiscal 2017 and 2016, respectively, and 37.0% and 39.1% for the six months ended September 30, 2016 and 2015, respectively. The higher effective tax rate in the prior-year periods was mainly due to the rate impact of non-deductible expenses and other discrete items, which had a larger impact due to a lower pre-tax earnings (loss) forecast.

Net Earnings (Loss)

Net loss was $12.8 million, or $0.98 per share, in the second quarter of fiscal 2017 compared with net earnings of $11.2 million, or $0.85 per diluted share, in the prior year comparative period. For the six months ended September 30, 2016, net loss was $23.3 million, or $1.79 per share, compared with net earnings of $10.1 million, or $0.77 per diluted share, in the prior year comparative period. The quarter and year-to-date net loss, as compared to net earnings for the prior year comparative periods, is primarily attributable to a decrease in net sales, a lower gross profit rate and an increase in operating expenses in fiscal 2017 as described above.

Liquidity and Capital Resources

We closely manage our liquidity and capital resources. Our liquidity requirements depend on a number of variables, including the level of investment to support our business strategies, the performance of our business, capital expenditures and working capital

 

18


Table of Contents

requirements. Capital expenditures are a significant use of our capital resources. These investments are intended to enable sales growth in new and expanding markets, help us to meet product demand and increase our manufacturing efficiencies and capacity.

The seasonality of our production cycles generates significant fluctuations in our working capital requirements during the year. Historically, we have financed our working capital requirements out of available cash balances at the beginning and end of the production cycle and with borrowings under our line of credit 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 and for at least the next 12 months. 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 Flow

The following table summarizes the cash flows from operating, investing and financing activities for the six months ended September 30, 2016 and 2015 ($ in thousands):

 

     2016      2015  

Total cash provided by (used in):

     

Operating activities

   $ (71,588    $ (27,633

Investing activities

     (10,806      (19,269

Financing activities

     73,825         16,252   

Effects of exchange rate changes on cash and cash equivalents

     (10      1,110   
  

 

 

    

 

 

 

Decrease in cash and cash equivalents

   $ (8,579    $ (29,540
  

 

 

    

 

 

 

Operating Activities

During the six months ended September 30, 2016, cash used in operating activities increased to $71.6 million from $27.6 million for the six months ended September 30, 2015. The increase in cash used in operating activities was primarily due to an increase in cash used for inventory, an increase in our net loss and an increase in cash used for accounts receivable due to the timing of snowmobile shipments to our OEM partner. These increases were partially offset by an increase in cash from accounts payable due to changes in the timing of receipts and payments for engines year-over-year and more efficient management of our vendor payments.

Investing Activities

Cash used in investing activities for the six months ended September 30, 2016 decreased to $10.8 million from $19.3 million for the six months ended September 30, 2015 due to a reduction in cash used for purchases of property and equipment primarily resulting from the completion of our new paint line during the first quarter of fiscal 2017.

Financing Activities

During the six months ended September 30, 2016, cash provided by financing activities increased to $73.8 million from $16.2 million for the six months ended September 30, 2015. The increase in cash provided by financing activities is primarily due to increased net borrowings under our revolving credit agreement due to lower sales and a decrease in cash used for dividend payments due to the suspension of our quarterly cash dividend in the fourth quarter of fiscal 2016.

Financing Arrangements

We have a line of credit pursuant to a senior secured revolving credit agreement, which is scheduled to expire in March 2021. Under the agreement, we may borrow up to $130.0 million during May through November and up to $75.0 million during all other months of the fiscal year. The amount of permissible borrowings under the credit facility are dependent upon adequate levels of underlying collateral. As of September 30, 2016, we have $73.9 million of outstanding borrowings under the line of credit. Borrowings under the line are subject to certain covenants and restrictions on indebtedness, financial guarantees, business combinations and other related items. We were in compliance with the terms of the credit agreement as of September 30, 2016.

In November 2016, subsequent to the end of the second quarter of fiscal 2017, we signed a commitment letter to amend our senior secured revolving credit agreement. The amendment would extend the term of the agreement to November 2021 and permit borrowings up to $130.0 million year round. We currently expect the amendment to be finalized prior to December 1, 2016. See Note 5, Financing , of the Notes to Consolidated Financial Statements herein for additional information about our senior secured revolving credit agreement.

 

19


Table of Contents

We have agreements with Wells Fargo Commercial Distribution Finance in the United States and Canada to provide snowmobile, ATV and ROV floorplan financing for our North American 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 subsidize the floorplan financing of our dealers for certain set time periods depending on the magnitude of qualifying purchases.

The financing agreements require repurchase of repossessed new and unused units should such repossessions occur and set limits upon our potential liability for annual repurchases. The aggregate potential liability was up to approximately $78.3 million at September 30, 2016. We have incurred no material losses under these agreements. We believe current available cash, cash generated from operations and working capital funding through our line of credit arrangement 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 we share certain losses with the floorplan finance companies. The maximum potential liability to Arctic Cat under these provisions was approximately $4.2 million at September 30, 2016.

Certain Information Concerning Off-Balance Sheet Arrangements

As of September 30, 2016, 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.

Contractual Obligations

We have $73.9 million of outstanding borrowings under our credit facility as of September 30, 2016. There were no other material changes outside the ordinary course of business with respect to our contractual obligations during the first six months of fiscal 2017. See Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations , within our most recent Annual Report on Form 10-K for the year ended March 31, 2016 for a discussion of our contractual obligations.

Critical Accounting Policies

See Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations , within our most recent Annual Report on Form 10-K for the year ended March 31, 2016 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,” “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan” and other expressions that indicate future events and trends identify forward-looking statements, including statements related to our fiscal 2017 outlook, business strategy, market position and product development. In particular, these include, among others, statements relating to our anticipated capital expenditures and capital improvement programs, research and development expenditures, strategic partnerships, product introductions and demand, the effect of weather conditions and dealer ordering processes on our net sales, legal proceedings, access to debt and/or equity markets, our expectations regarding financing arrangements, our wholesale and retail sales and market share expectations, performance opportunities, inventory levels, industry wholesale and retail sales and demand expectations, depreciation and amortization expense, dividends, the effect of foreign currency exchange rates, 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 those factors set forth in our Annual Report on Form 10-K for the year ended March 31, 2016, 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.

 

20


Table of Contents

Item 3. Quantitative and Qualitative Disclosures about Market Risk

There have been no material changes to the market risk information included in our Annual Report on Form 10-K for the year ended March 31, 2016. Refer to Part II, Item 7A, titled “Quantitative and Qualitative Disclosures about Market Risk” within the Company’s Annual Report on Form 10-K for the year ended March 31, 2016 for a complete discussion of the Company’s market risk.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As required by Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated, as of the end of the period covered by this report, the effectiveness of our disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e). In designing and evaluating our disclosure controls and procedures, we recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply judgment in evaluating the cost-benefit relationship of possible internal controls.

Based upon the evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this Quarterly Report on Form 10-Q, our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934, as amended, is (1) recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (2) accumulated and communicated to our management including our Chief Executive Officer and Chief Financial Officer, in a manner that allows timely decisions regarding required disclosure. No changes have occurred during the period covered by this report or since the evaluation date that would have a material effect on the disclosure controls and procedures.

Changes in Internal Control over Financial Reporting

There have been no changes in our internal controls over financial reporting during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

 

21


Table of Contents

Part II – OTHER INFORMATION

Item 1. Legal Proceedings

For a description of our legal proceedings, see Note 7, Commitments and Contingencies , of the Notes to Consolidated Financial Statements herein for further discussion.

Item 1A. Risk Factors

There have been no changes to the risk factors included in Part I, Item 1A, Risk Factors , within our most recent Annual Report on Form 10-K for the year ended March 31, 2016, other than the following:

We may experience negative or unforeseen tax consequences.

We review the probability of the realization of our net deferred tax assets each reporting period based on forecasts of taxable income in both the U.S. and foreign jurisdictions. This review uses historical results, projected future operating results based upon approved business plans, eligible carryforward periods, tax planning opportunities and other relevant considerations. Adverse changes in the profitability and financial outlook in U.S. or foreign jurisdictions may require the establishment of a valuation allowance to reduce our net deferred tax assets. Such changes could result in a material non-cash expense in the period in which the changes are made and could have a material adverse impact on our results of operations and financial condition.

Item 6. Exhibits

 

Exhibit

Number

  

Description

      
  3.1   

Amended and Restated Articles of Incorporation of Arctic Cat Inc.

     (1)   
  3.2   

Amended and Restated By-Laws of Arctic Cat Inc.

     (2)   
  4.1   

Form of specimen common stock certificate

     (3)   
10.1   

Fifth Amendment to the Amended and Restated Loan and Security Agreement, dated April 12, 2016, among Arctic Cat, the subsidiaries of Arctic Cat Inc., certain financial institutions as lenders, and Bank of America, N.A., as lender and administrative agent for the lenders.

     (4)   
10.2   

Arctic Cat Inc. 2013 Omnibus Stock and Incentive Plan, as amended.

     (5)   
31.1   

Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

     (4)   
31.2   

Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

     (4)   
32.1   

Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

     (4)   
32.2   

Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

     (4)   
101   

Financial statements from the quarterly report on Form 10-Q of Arctic Cat Inc. for the quarter and six months ended September 30, 2016, formatted in XBRL: (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations, (iii) the Condensed Consolidated Statements of Comprehensive Income (Loss), (iv) the Condensed Consolidated Statements of Cash Flows, and (v) the Notes to the Condensed Consolidated Financial Statements.

     (4)   

 

(1) Incorporated herein by reference to our Annual Report on Form 10-K for the fiscal year ended March 31, 1997 and our Current Report on Form 8-K filed August 11, 2014.
(2) Incorporated herein by reference to our Current Report on Form 8-K filed January 16, 2013, our Current Report on Form 8-K filed August 11, 2014 and our Current Report on Form 8-K filed October 27, 2016.
(3) Incorporated herein by reference to our Form S-1 Registration Statement. (File Number 33-34984)
(4) Filed with this Quarterly Report on Form 10-Q.
(5) Incorporated herein by reference to the Definitive Proxy Statement filed by the registrant on June 20, 2016.

 

22


Table of Contents

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 9, 2016

   

By

 

/s/ Christopher T. Metz

     

Christopher T. Metz

     

President and Chief Executive Officer

(principal executive officer)

 

Date: November 9, 2016

   

By

 

/s/ Christopher J. Eperjesy

     

Christopher J. Eperjesy

     

Chief Financial Officer

(principal financial and accounting officer)

 

 

23

Arctic Cat Inc. (NASDAQ:ACAT)
Historical Stock Chart
From Feb 2024 to Mar 2024 Click Here for more Arctic Cat Inc. Charts.
Arctic Cat Inc. (NASDAQ:ACAT)
Historical Stock Chart
From Mar 2023 to Mar 2024 Click Here for more Arctic Cat Inc. Charts.