UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549

FORM 10-Q

 

Commission File Number:     0-18607

ARCTIC CAT INC.
(Exact name of registrant as specified in its charter)

 

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  o

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

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes  o    No  x

At February 7, 2007, 12,259,423 shares of Common Stock and 6,102,000 shares of Class B Common Stock of the Registrant were outstanding.

Part I – FINANCIAL INFORMATION

ITEM I – FINANCIAL STATEMENTS

Arctic Cat Inc.

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited)

		December 31,			March 31,
		2006			2006
ASSETS
CURRENT ASSETS
Cash and equivalents		$	30,118,000		$	40,075,000
Short-term investments		21,513,000			29,818,000
Accounts receivable, less allowances		46,786,000			42,295,000
Inventories		131,349,000			92,289,000
Prepaid expenses		2,117,000			5,463,000
Deferred income taxes		12,291,000			8,810,000
Total current assets		244,174,000			218,750,000
PROPERTY AND EQUIPMENT - at cost
Machinery, equipment and tooling		185,761,000			170,536,000
Land, buildings and improvements		28,577,000			24,556,000
		214,338,000			195,092,000
Less accumulated depreciation		127,410,000			106,145,000
		86,928,000			88,947,000
OTHER ASSETS
Goodwill and other intangibles		3,378,000			3,539,000
Total other assets		3,378,000			3,539,000
		$334,480,000			$	311,236,000
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable		$	58,328,000		$	65,613,000
Accrued expenses		56,420,000			43,775,000
Income taxes payable		13,385,000			1,014,000
Total current liabilities		128,133,000			110,402,000
DEFERRED INCOME TAXES		11,882,000			11,469,000
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, 12,259,423 at December 31, 2006; 12,708,365 at March 31, 2006		123,000			127,000
Class B common stock, par value $.01; 7,560,000 shares authorized; issued, and outstanding, 6,102,000 at December 31, 2006; 6,717,000 at March 31, 2006.		61,000			67,000
Additional paid in capital		—			1,010,000
Accumulated other comprehensive income (loss)		2,191,000			(440,000		)
Retained earnings		192,090,000			188,601,000
		194,465,000			189,365,000
		$334,480,000			$	311,236,000

 

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

2

---

Arctic Cat Inc.

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(unaudited)

		Three Months						Nine Months
		Ended December 31,						Ended December 31,
		2006			2005			2006			2005
Net sales		$	228,114,000		$	195,301,000		$	609,857,000		$	579,495,000
Cost of goods sold		188,335,000			159,229,000			494,188,000			466,061,000
Gross profit		39,779,000			36,072,000			115,669,000			113,434,000
Selling, general and administrative expenses		28,917,000			29,754,000			81,534,000			78,512,000
Operating Profit		10,862,000			6,318,000			34,135,000			34,922,000
Other income (expense)
Interest income		289,000			553,000			616,000			974,000
Interest expense		—			—			(1,026,000		)	(105,000		)
		289,000			553,000			(410,000		)	869,000
Earnings before income taxes		11,151,000			6,871,000			33,725,000			35,791,000
Income tax expense		2,970,000			2,198,000			10,100,000			11,453,000
Net earnings		$	8,181,000		$	4,673,000		$	23,625,000		$	24,338,000
Net earnings per share
Basic		$	0.43		$	0.24		$	1.23		$	1.23
Diluted		$	0.43		$	0.24		$	1.22		$	1.22
Weighted average shares outstanding
Basic		19,042,000			19,378,000			19,252,000			19,722,000
Diluted		19,124,000			19,520,000			19,349,000			19,893,000

 

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

3

---

Arctic Cat Inc.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

		Nine Months Ended December 31,
		2006			2005
Cash flows from operating activities
Net earnings		$	23,625,000		$	24,338,000
Adjustments to reconcile net earnings to net cash provided by operating activities
Depreciation		22,609,000			17,680,000
Loss on the disposal of fixed assets		414,000			—
Deferred income taxes		(3,641,000		)	(2,992,000		)
Stock based compensation expense		1,508,000			—
Changes in operating assets and liabilities:
Trading securities		6,838,000			46,653,000
Accounts receivable, net		(2,936,000		)	3,275,000
Inventories		(37,991,000		)	(28,711,000		)
Prepaid expenses		3,369,000			2,413,000
Accounts payable		(6,648,000		)	(11,507,000		)
Accrued expenses		12,572,000			9,518,000
Income taxes		12,371,000			7,209,000
Net cash provided by operating activities		32,090,000			67,876,000
Cash flows from investing activities
Purchase of property and equipment		(20,781,000		)	(23,314,000		)
Net assets acquired, net of cash acquired		—			(3,464,000		)
Sale and maturity of available-for-sale securities		1,451,000			502,000
Net cash used in investing activities		(19,330,000		)	(26,276,000		)
Cash flows from financing activities
Proceeds from short-term borrowings		120,776,000			47,625,000
Payments on short-term borrowings		(120,776,000		)	(47,625,000		)
Proceeds from issuance of common stock		1,075,000			36,000
Tax benefit from stock option exercises		89,000			3,000
Dividends paid		(4,055,000		)	(4,139,000		)
Repurchase of common stock		(19,774,000		)	(14,931,000		)
Net cash used in financing activities		(22,665,000		)	(19,031,000		)
Effect of exchange rate changes on cash and cash equivalents		(52,000		)	(34,000		)
Net increase (decrease) in cash and equivalents		(9,957,000		)	22,535,000
Cash and equivalents at the beginning of period		40,075,000			20,765,000
Cash and equivalents at the end of period		$	30,118,000		$	43,300,000
Supplemental disclosure of cash payments for income taxes		$	1,286,000		$	7,395,000

 

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

4

Arctic Cat Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

NOTE A-BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements of Arctic Cat Inc. (the “Company”) 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 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 December 31, 2006 and the results of operations for the three and nine month periods ended December 31, 2006 and 2005 and cash flows for the nine month periods ended December 31, 2006 and 2005.  Results of operations for the interim periods are not necessarily indicative of results for the full year. The condensed consolidated balance sheet as of March 31, 2006 is derived from the audited balance sheet as of that date.

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.

Certain 2005 amounts have been reclassified to conform with the 2006 financial statement presentation. The reclassification had no effect on previously reported operating results.

NOTE B—STOCK BASED COMPENSATION

At December 31, 2006, the Company had stock based compensation plans, all previously approved by the shareholders. Stock options granted under these plans generally vest ratably over one to three years of service, have a contractual life of five to ten years and provide for accelerated vesting if there is a change in control, as defined. At December 31, 2006, the Company had approximately 252,000 shares available for future grant under its stock option plans.

On April 1, 2006, the Company adopted Statement of Financial Accounting Standard No. 123(R), Share Based Payments (SFAS 123(R)), which requires the fair value of all share-based payment transactions, including stock options, be recognized in the income statement as an operating expense, based on their fair value over the requisite service period. The Company has elected the modified prospective transition method in applying SFAS 123(R). Accordingly, periods prior to adoption have not been restated. Under this transition method, the Company applies the provisions of SFAS 123(R) to new awards modified, repurchased, or cancelled after April 1, 2006. Additionally, the Company recognizes compensation cost for the portion of awards for which the requisite service has not been rendered (unvested awards) that are outstanding as of April 1, 2006, as the remaining service is rendered. The compensation cost recorded for these awards will be based on their grant-date fair value as calculated for the pro forma disclosures required by SFAS 123(R). At December 31, 2006, the Company had $3,092,000 of unrecognized compensation costs related to non-vested stock options that are expected to be recognized over a weighted average period of approximately two years.

5

---

For the three and nine months ended December 31, 2006, the Company recorded compensation expense of $554,000 and $1,508,000 related to the adoption of SFAS 123(R), which has been included in selling, general and administrative expenses. The Company’s total stock-based compensation related expense reduced both basic and diluted earnings per share by $0.02 and $0.05 for the three and nine months ended December 31, 2006.

Prior to adopting SFAS 123(R), the Company accounted for these plans under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. No stock-based employee compensation cost was reflected in net earnings, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of the grant.

Additionally, prior to adopting SFAS 123(R), the Company presented all tax benefits resulting from the exercise of stock options as operating cash flows in the Consolidated Statement of Cash Flows. SFAS 123(R) requires that cash flows from the exercise of stock options resulting from tax benefits in excess of recognized cumulative compensation cost (excess tax benefits) be classified as financing cash flow. For the nine months ended December 31, 2006, the total income tax benefit from the exercise of stock options classified as financing cash flows was $89,000.

The fair value of each stock option award was estimated on the date of grant using the Black-Scholes option pricing model. The following assumptions were used to estimate the fair value of options granted during the nine months ended December 31, 2006:

Assumptions:
Dividend yield		1.3	%
Average term		5 years
Volatility		30	%
Risk-free rate of return		5	%

 

The following table illustrates the effect on net earnings and earnings per share had the fair value based method been applied to the comparable period in the prior fiscal year.

		Three months ended December 31,			Nine months ended December 31,
		2005			2005
Net earnings, as reported		$	4,673,000		$	24,338,000
Less total stock-based employee compensation determined under fair value methods for all awards, net of income taxes		(360,000		)	(1,262,000		)
Pro forma net earnings		$	4,313,000		$	23,076,000
Earnings per share
Basic - as reported		$	0.24		$	1.23
Basic – pro forma		$	0.22		$	1.17
Diluted – as reported		$	0.24		$	1.22
Diluted – pro forma		$	0.22		$	1.16

 

6

---

Option transactions under the plans during the nine months ended December 31, 2006 are summarized as follows:

		Shares		Weighted- Average Exercise Price			Weighted- Average Contractual Life		Aggregate Intrinsic value
Outstanding at March 31, 2006		1,568,349		$	19.30
Granted		306,000		17.81
Exercised		(70,817	)	15.18
Cancelled		(137,500	)	22.70
Outstanding at December 31, 2006		1,666,032		$	18.92		6.17		$	2,327,000
Exercisable at December 31, 2006		1,153,371		$	18.24		5.90		$	2,327,000

 

The aggregate intrinsic value is based on the Company’s December 31, 2006 common share market value for in-the-money options.

The following information applies to options outstanding at December 31, 2006.

Options Outstanding

Range of exercise prices			Number outstanding at period end		Weighted- average remaining contractual life		Weighted- average exercise price
$  6.11			11,814		1.60		$	6.11
9.38-13.33			225,906		2.44		11.04
15.33-21.03			945,812		6.88		18.00
21.96-28.00			482,500		6.64		24.75
			1,666,032		6.17		$	18.92

 

Options Exercisable

Range of exercise price			Number exercisable at period end		Weighted- average exercise price
$  6.11			11,814		$	6.11
9.38-13.33			225,906		11.04
15.33-21.03			640,479		17.91
21.96-28.00			275,172		25.44
			1,153,371		$	18.24

 

NOTE C-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

7

---

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 1,095,980 and 870,500 shares of common stock with weighted average exercise prices of $21.74 and $23.40 were outstanding during the three months ended December 31, 2006 and 2005, and options to purchase 991,375 and 670,667 shares of common stock with weighted average exercise prices of $22.14 and $23.98 were outstanding during the nine months ended December 31, 2006 and  2005, all of which were excluded from the computation of common share equivalents because they were anti-dilutive.

Weighted average shares outstanding consist of the following:

		Three Months Ended				Nine Months Ended
		December 31,				December 31,
		2006		2005		2006		2005
Number of common shares outstanding		19,042,000		19,378,000		19,252,000		19,722,000
Dilutive effect of option plan		82,000		142,000		97,000		171,000
Common and potential common shares outstanding - diluted		19,124,000		19,520,000		19,349,000		19,893,000

 

NOTE D-SHORT-TERM INVESTMENTS

Short-term investments consist of the following:

		December 31,			March 31,
		2006			2006
Trading securities		$	20,607,000		$	27,445,000
Available-for-sale debt securities		906,000			2,373,000
		$	21,513,000		$	29,818,000

 

NOTE E-INVENTORIES

Inventories consist of the following:

		December 31,			March 31,
		2006			2006
Raw materials and sub-assemblies		$	36,973,000		$	27,214,000
Finished goods		61,788,000			36,193,000
Parts, garments and accessories		32,588,000			28,882,000
		$	131,349,000		$	92,289,000

 

8

 

NOTE F-ACCRUED EXPENSES

Accrued expenses consist of the following:

		December 31,			March 31,
		2006			2006
Marketing		$	21,553,000		$	14,388,000
Compensation		8,615,000			8,871,000
Warranties		20,249,000			14,203,000
Insurance		4,420,000			4,446,000
Other		1,583,000			1,867,000
		$	56,420,000		$	43,775,000

 

NOTE G-PRODUCT WARRANTIES

The Company generally provides a limited warranty to the original owner of snowmobiles for twelve months from the date of consumer registration and for six months on ATVs. The Company provides for estimated warranty costs at the time of sale based on historical rates and trends and makes subsequent adjustments to its estimate as actual claims become known or the amounts are determinable. The following represents changes in accrued warranty for the nine month periods ended December 31:

		2006			2005
Balance at beginning of period		$	14,203,000		$	12,053,000
Warranty provision		14,186,000			12,048,000
Warranty claim payments		(8,140,000		)	(6,054,000		)
Balance at end of period		$	20,249,000		$	18,047,000

 

NOTE H–SHAREHOLDERS’ EQUITY

Dividend Declaration

On January 23, 2007, the Company announced that it’s Board of Directors declared a regular quarterly cash dividend of $0.07 per share, payable on or about March 1, 2007 to shareholders of record on February 14, 2007.

Share Repurchase

In May 2005, the Company’s Board of Director’s approved a $20,000,000 repurchase program and in October 2006 the Board of Directors approved an additional $20,000,000 for the share repurchase program. During the nine months ended December 31, 2006 and 2005, the Company invested $19,774,000 and $14,931,000, respectively, to repurchase and cancel 1,127,500 and 726,500 shares, respectively, pursuant to the Board of Directors’ authorizations. Included in the share repurchases for December 31, 2006, the Company repurchased 615,000 shares of class B common stock from Suzuki Motor Corporation. As a result of the buyback, Suzuki owns 33 percent or 6.1 million shares of Arctic Cat’s common stock. At December 31, 2006, authorization to repurchase up to $10,763,000, or approximately 612,000 shares, remains outstanding.

Additional Paid-in-Capital

During the nine months ended December 31, 2006 and 2005 additional paid-in-capital increases of $2,672,000 and $39,000 from the exercise of stock options and the

9

---

expensing of stock based compensation under the SFAS 123(R) were offset by share repurchases of $3,682,000 and $27,000. During the nine months ended December 31, 2006 additional paid-in capital increases of $1,508,000 were recorded under SFAS 123(R).

Accumulated Other Comprehensive Income (Loss)

The components and changes in accumulated other comprehensive income(loss), net of taxes, during the following periods were as follows:

		Nine months ended December 31,
		2006			2005
Total Accumulated Other Comprehensive
Income (Loss)
Balance at beginning of period		$	(440,000	)	$	60,000
Unrealized loss on securities available-for-sale, net of tax		(10,000		)	(36,000		)
Unrealized gain (loss) on derivative instruments, net of tax		988,000			(1,773,000		)
Foreign currency translation adjustment		1,653,000			(34,000		)
Balance at end of period		$	2,191,000		$	(1,783,000	)

 

Other Comprehensive Income

 

		Nine months ended December 31,
		2006			2005
Other comprehensive income was as follows:
Net earnings		$	23,625,000		$	24,338,000
Unrealized loss on securities available-for-sale, net of tax		(10,000		)	(36,000		)
Unrealized gain (loss) on derivative instruments, net of tax		988,000			(1,773,000		)
Foreign currency translation adjustment		1,653,000			(34,000		)
Total Other Comprehensive Income		$	26,256,000		$	22,495,000

 

Note I–COMMITMENTS AND CONTINGENCIES

Dealer Financing

Finance companies provide certain of the Company’s dealers and distributors with floor plan financing. The Company has agreements with these finance companies to repurchase certain repossessed products sold to its dealers. At December 31, 2006 the Company’s contingent maximum repurchase obligation was approximately $45,353,000. The Company’s 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 resale of the repossessed product. Losses incurred under these agreements during the periods presented have not been material.

Litigation

The Company is subject to legal proceedings and claims which arise in the ordinary course of business.  Accidents involving personal injury and property damage occur in the use of snowmobiles and ATVs. Claims have been made against the Company from time to time.

10

---

It is the Company’s policy to vigorously defend against these actions. The Company believes that the cases in discovery are adequately covered by reserves and product liability insurance. The Company is not involved in any legal proceedings which it believes will have the potential for a materially adverse impact on the Company’s business or financial condition, results of operations or cash flows.

NOTE J – RECENT ACCOUNTING PRONOUNCEMENTS

In June 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No 109, (FIN 48). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements and prescribes a recognition threshold and measurement attribute for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This Interpretation also provides related guidance on derecognition, classification, interest and penalties, accounting in interim periods and disclosure. FIN 48 is effective for the Company for the year beginning April 1, 2007. The Company is currently evaluating the impact of this standard.

Item 2. – 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 United States, Canada, and Europe and through distributors representing dealers in Europe, the Middle East, Asia, and other international markets. The Arctic Cat brand name has existed for more than 40 years and is among the most widely recognized and respected names in the snowmobile industry.  The Company trades on the NASDAQ Global Select Market under the symbol “ACAT”.

Results of Operations

THREE AND NINE MONTHS ENDED DECEMBER 31, 2006 COMPARED TO THE THREE AND NINE MONTHS ENDED DECEMBER 31, 2005.

Net sales for the third quarter of fiscal 2007 increased 16.8% to $228,114,000 from $195,301,000 for the third quarter of fiscal 2006. Snowmobile sales increased 42.7% to $106,352,000 for the third quarter of 2007 from $74,519,000 for the same quarter in fiscal 2006. ATV sales increased 1.1% to $91,823,000 for the third quarter of 2007 from $90,806,000 for the same quarter in fiscal 2006. Parts, garments and accessory sales decreased to $29,939,000 for the third quarter of 2007 from $29,976,000 in the same quarter in fiscal 2006. Snowmobile unit volume increased 40.7% and ATV unit volume decreased 9.5% for the third quarter of fiscal 2007 compared to the same quarter last year. Net sales for the first nine months of fiscal 2007 increased 5.2% to $609,857,000 from $579,495,000 for the first nine months of fiscal 2006. Year-to-date snowmobile sales increased 4.5% to $248,794,000 from $237,973,000 compared to the first nine months of fiscal 2006, ATV sales increased 6.6% to $285,798,000 from $268,075,000 compared to the first nine months of fiscal 2006,and parts, garments and accessory sales increased 2.5% to $75,265,000 from $73,447,000 compared to the first nine months of fiscal 2006. Year-to-date snowmobile unit volume decreased 4.4% and ATV unit volume decreased by 3.3% compared to the same period last year. For fiscal 2007, the Company expects snowmobile sales to increase 1%-3%, ATV sales to increase 7%-10%, and parts, garments, and accessories sales to increase 1%-2% resulting in a modest increase in net sales for fiscal 2007.

11

---

Gross profit for the third quarter of fiscal 2007 increased 10.3% to $39,779,000 from $36,072,000 for the same quarter in fiscal 2006.  The quarterly gross profit percentage for the third quarter in fiscal 2007 was 17.4%, compared to 18.5% for the third quarter in fiscal 2006. The year-to-date gross profit percentage was 19.0% compared to 19.6% for the same period last year. The quarterly decrease in gross profit percentage was primarily due to increased sales incentives for snowmobiles and lower snow related parts, garments and accessories sales which yield higher margins. The year-to-date gross profit percentage decreased primarily due to increased snowmobile sales incentives.

Operating expenses for the third quarter of fiscal 2007 decreased 2.8% to $28,917,000 from $29,754,000 for the third quarter of last year. As a percent of sales, operating expenses were 12.7% for the third quarter of fiscal 2007 versus 15.2% for the same quarter last year. Year-to-date operating expense for the period ended December 31, 2006 increased 3.8% to $81,534,000 from $78,512,000 for the same period last year. As a percent of sales, operating expenses were 13.4% for the first nine months of fiscal 2007 compared to 13.5% for the first nine months of fiscal 2006. The quarterly decrease in operating expenses resulted primarily from Canadian currency exchange gains versus losses in the same period last year offset by increased selling, general and administrative costs related to our European subsidiary and SFAS 123(R) stock based compensation expense, which the Company adopted this fiscal year. The year-to-date increases in operating expenses resulted primarily from increased selling, general and administrative expenses related to our European subsidiary and SFAS 123(R) stock based compensation expense offset by favorable Canadian currency exchange gains.

Interest income for the third quarter of fiscal 2007 decreased to $289,000 from $553,000 for the third quarter of last year. No interest expense was incurred during the current or prior year third quarters. Year-to-date interest income decreased to $616,000 from $974,000, and year-to-date interest expense increased to $1,026,000 from $105,000. Interest income was primarily affected by the lower cash levels at the beginning of our fiscal year compared to last year. Interest expense was also affected by the lower cash balances that resulted in increased borrowings from the Company’s line of credit during the first and second quarters of fiscal 2007 compared to the same period last year.

Net earnings for the third quarter of fiscal 2007 were $8,181,000, or $0.43 per diluted share, including $0.02 per diluted share for the non-cash expensing of stock options as required by SFAS 123(R), which the Company adopted in the first quarter of fiscal 2007. The Company reported net earnings for the third quarter of fiscal 2006 of $4,673,000, or $0.24 per diluted share, which did not include the non-cash expensing of stock options. Net earning for the first nine months of fiscal 2007 were $23,625,000 or $1.22 per diluted share including $0.05 per diluted share for the non-cash expensing of stock options, compared to $24,338,000 or $1.22 per diluted share for the same periods last year, which again did not include the non-cash expensing of stock options. Earnings for the three and nine months ended December 31, 2006 included favorable tax benefits of $0.03 per diluted share resulting from a greater than expected research and development tax credit and export tax deduction.

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. 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.  During the nine months ended December 31, 2006, the Company paid $19,774,000 to repurchase its common shares compared to $14,931,000 for the same nine month period of the prior year. Cash and short-term investments were $51,631,000 and $63,717,000 at December 31, 2006 and 2005, respectively. The Company’s investment objectives are first, safety of principal and second, rate of return.

12

---

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 on a short and long-term basis.

Line of Credit

The Company has an unsecured credit agreement with a bank for the issuance of up to $60,000,000 of documentary and stand-by letters of credit and for working capital (this portion was increased to $70,000,000 for the period of September 15, 2006 through October 31, 2006) and in addition has a $15,000,000 seasonal credit agreement for the Company’s peak production period.

Significant Accounting Policies

See the Company’s most recent Annual Report on Form 10-K for the year ended March 31, 2006 for a discussion of its critical accounting policies. The following represents an additional critical accounting policy as of December 31, 2006.

Stock based Compensation: For purposes of determining estimated fair value of stock-based payment awards on the date of grant under Statement of Financial Accounting Standard No. 123(R), Share Based Payments (SFAS 123(R)), the Company used the Black-Scholes Model. The Black-Scholes Model requires the input of certain assumptions that require subjective judgment. Because employee stock options have characteristics significantly different from those of traded options, and because changes in the input assumptions can materially affect the fair value estimate, the existing models may not provide a reliable single measure of the fair value of the employee stock options. Management will continue to assess the assumptions and methodologies used to calculate estimated fair value of stock-based compensation. Circumstances may change and additional data may become available over time, which could result in changes to these assumptions and methodologies and thereby materially impact our fair value determination. If factors change and the Company employs different assumptions in the application of SFAS 123(R) the amount of compensation expense associated with SFAS 123(R) may differ significantly from what was recorded in the current period. Refer to Note B “Stock-Based Compensation” in this Form 10-Q for additional information regarding stock-based compensation.

Recent Accounting Pronouncement

In June 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No 109, (FIN 48). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements and prescribes a recognition threshold and measurement attribute for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This Interpretation also provides related guidance on derecognition, classification, interest and penalties, accounting in interim periods and disclosure. FIN 48 is effective for the Company for the year beginning April 1, 2007. The Company is currently evaluating the impact of this standard.

Forward Looking Statements

The Private Securities Litigation Reform Act of 1995 provides a safe harbor for certain forward-looking statements.  This Form 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

13

---

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 reserves  or insured amounts; environmental and product safety regulatory activity; effects of the weather; overall economic conditions and consumer demand and confidence. The Company does not undertake any obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.

Item 3.  Quantitative and Qualitative Disclosures about Market Risk

The Company is subject to certain market risk relating to changes in inflation, foreign currency exchange rates and interest rates. These market risks have not changed significantly since March 31, 2006. As of December 31, 2006 the Company has notional Japanese yen and Canadian dollar denominated cash flow hedges of approximately $8.7 million (USD) and $28.6 million (USD), respectively, with a weighted average contract exchange rate of 115 and 1.12 respectively. The fair values of the Japanese yen and Canadian dollar hedge contracts at December 31, 2006 represent an unrealized gain of $858,000. A ten percent fluctuation in the currency rates as of December 31, 2006 would have resulted in a change in the fair value of the Japanese yen and Canadian dollar hedge contracts of approximately $872,000 and $2,857,000, respectively. However, since these contracts hedge foreign currency denominated transactions, any change in the fair value of the contracts would be offset by changes in the underlying value of the transaction being hedged.

Information regarding inflation,  foreign currency exchange rates and interest rates, is discussed within “Quantitative and Qualitative Disclosures About Market Risk – Inflation, Foreign Exchange Rates and Interest Rates” and Footnote A to the Financial Statements in the 2006 Annual Report on Form 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 and is not deemed to be significant.

Item 4. Controls and Procedures

The Company’s management, including the Chief Executive Officer and Chief Financial Officer, have conducted an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined under Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “1934 Act”))as of the end of the period covered by this report. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective in ensuring that information required to be disclosed by the Company in the reports it files or submits under the 1934 Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

There were no changes in internal control over financial reporting during the fiscal quarter ended December 31,2006 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II - OTHER INFORMATION

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Period		Total Number of Shares Purchased		Average Price Paid per Share			Total number of Shares Purchased as Part of Publicly Announced Plans or Programs		Maximum Number of Shares that May Yet be Purchased Under the Plans or Programs
October 1, 2006 – October 31, 2006		0		$	—		0		1,495,436
November 1, 2006 – November 30, 2006		300,000		$	17.46		300,000		1,300,973
December 1, 2006 – December 31, 2006		615,000		$	17.53		615,000		611,891

 

14

---

 

The Company purchases Company common stock to offset the dilution created by employee stock option programs and because the Board of Directors believes investment in the Company’s common stock is an excellent use of its excess cash. During December, the Company repurchased 615,000 shares of class B common stock from Suzuki Motor Corporation. As a result of the buyback, Suzuki owns 33 percent, or 6.1 million shares of Arctic Cat’s common stock.

The Company has a publicly announced stock purchase program which has been approved by the Board of Directors. On May 12, 2005, the Company announced that its Board of Directors had approved a $20,000,000 repurchase program. On October 30, 2006 the Company announced that its Board of Directors had approved an additional $20,000,000 repurchase program. Pricing under these programs has been delegated to management. There is no expiration date for these programs.

The Company has executed the Company stock purchases in accordance with Rule 10b-18 of the Securities Exchange Act of 1934. There have been no other purchases of the Company’s common stock.

Item 6.    Exhibits

Exhibit
Number		Description
3 (a)		Amended and Restated Articles of Incorporation of Company		(3)
3 (b)		Restated By-Laws of the Company		(1)
4 (a)		Form of Specimen Common Stock Certificate		(1)
4 (b)		Rights Agreement by and between the Company and Wells
		Fargo Bank Minnesota, N.A., dated September 17, 2001		(4)
31.1		CEO Certification pursuant to section 302 of the
		Sarbanes-Oxley Act of 2002.		(2)
31.2		CFO Certification pursuant section 302 of the
		Sarbanes-Oxley Act Of 2002.		(2)
32.1		CEO Certification pursuant to section 906 of the
		Sarbanes-Oxley Act of 2002.		(2)
32.2		CFO Certification pursuant to section 906 of the
		Sarbanes-Oxley Act of 2002.		(2)

 

 

15

---

 

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:	February 9, 2007		By	/s/ CHRISTOPHER A. TWOMEY
				Christopher A. Twomey
				Chief Executive Officer
Date:	February 9, 2007		By	/s/ TIMOTHY C. DELMORE
				Timothy C. Delmore
				Chief Financial Officer

 

16

---

 

EXHIBIT INDEX TO FORM 10-Q

Exhibit
Number		Description
3 (a)		Amended and Restated Articles of Incorporation of Company		(3)
3 (b)		Restated By-Laws of the Company		(1)
4 (a)		Form of Specimen Common Stock Certificate		(1)
4 (b)		Rights Agreement by and between the Company and Wells
		Fargo Bank Minnesota, N.A., dated September 17, 2001		(4)
31.1		CEO Certification pursuant to section 302 of the
		Sarbanes-Oxley Act of 2002.		(2)
31.2		CFO Certification pursuant section 302 of the
		Sarbanes-Oxley Act Of 2002.		(2)
32.1		CEO Certification pursuant to section 906 of the
		Sarbanes-Oxley Act of 2002.		(2)
32.2		CFO Certification pursuant to section 906 of the
		Sarbanes-Oxley Act of 2002.		(2)

 

 

17