Item 2. Managements 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 Managements 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.
Pending Merger with Textron
On January 24, 2017
(the Agreement Date), we entered into an Agreement and Plan of Merger (the Merger Agreement) with Textron Inc. (Textron), a Delaware corporation, and Aces Acquisition Corp. (Purchaser), a Minnesota
corporation and an indirect wholly owned subsidiary of Textron. The Merger Agreement provides that, subject to the terms therein, Purchaser will commence a tender offer (the Offer) to purchase all of the issued and outstanding shares of
Arctic Cat Inc.s common stock, par value $0.01 per share (the Shares), at a price of $18.50 per share in cash (the Offer Price), without interest and subject to any withholding taxes required by applicable law.
The consummation of the Offer, and the obligation of Purchaser to accept for payment and pay for Shares tendered pursuant to the Offer, is subject to various
conditions set forth in the Merger Agreement, including, but not limited to, (i) at least one Share more than 50% of the Shares (determined on a fully diluted basis) being validly tendered in the Offer and not properly withdrawn, (ii) the
receipt of required regulatory approvals in the United States and Germany or the expiration or termination of the applicable waiting period with respect thereto, (iii) the absence of a material adverse effect on Arctic Cat (as defined in the
Merger Agreement) and (iv) the satisfaction or, to the extent permitted by applicable law, waiver by Textron or Purchaser of the other conditions and requirements set forth in Annex I to the Merger Agreement.
The Merger Agreement contains customary representations and warranties by Textron, Purchaser and Arctic Cat. The Merger Agreement also contains customary
covenants and agreements, including with respect to the operations of the business of Arctic Cat and its subsidiaries between signing and closing, restrictions on Arctic Cat regarding soliciting and responding to alternative business combination
transactions, governmental filings and approvals and other matters. Subject to certain limited exceptions, the Merger Agreement prohibits our solicitation of proposals relating to alternative business combination transactions and restricts our
ability to furnish
non-public
information to, or participate in any discussions or negotiations with, any third party with respect to any such transaction.
The Merger Agreement includes a remedy of specific performance for Arctic Cat, Textron and Purchaser. The Merger Agreement also contains termination rights
for each of Textron, Purchaser and Arctic Cat and further provides that upon termination of the Merger Agreement under specified circumstances, including termination by Arctic Cat in order to accept and enter into a definitive agreement with respect
to an unsolicited superior proposal, Arctic Cat will be required to pay a termination fee of $7,400,000 (the Arctic Cat Termination Fee). A superior proposal is a bona fide written proposal made by a third party after the Agreement Date,
which did not result from a material breach of the Merger Agreement, (i) pursuant to which such third party would acquire, directly or indirectly, 50% or more of the outstanding Shares or all, or substantially all, the assets of Arctic Cat and
its subsidiaries, taken as a whole, (ii) is on terms that the board of directors of Arctic Cat has determined in good faith (after consultation with its financial advisor and outside legal counsel and after taking into account all the terms and
conditions of such bona fide written proposal) are more favorable to Arctic Cats shareholders from a financial point of view than the terms and conditions of the Merger Agreement (accounting for any amendment thereto proposed by Parent in
accordance with the terms thereof), and (iii) that the board of directors of Arctic Cat has determined (after consultation with its financial advisor and outside legal counsel) is reasonably capable of being consummated in accordance with the
terms proposed in a reasonable period of time, taking into account all financial, regulatory, legal and other aspects (including certainty of closing and certainty of financing) of such proposal. Any such termination of the Merger Agreement by
Arctic Cat is subject to certain conditions, including our compliance with certain procedures set forth in the Merger Agreement and a determination by the board of directors of Arctic Cat that the failure to take such action would be inconsistent
with its fiduciary duties under applicable law, the entrance into a definitive agreement by Arctic Cat with a third party with respect to such alternative business combination transaction and payment of the Arctic Cat Termination Fee by us to
Textron.
17
The foregoing description does not purport to be complete and is subject to, and is qualified in its entirety by
reference to, the Merger Agreement. The representations, warranties and covenants contained in the Merger Agreement were made only for purposes of such agreement and as of specific dates, were made solely for the benefit of the parties to the Merger
Agreement, and are intended not as statements of fact, but rather as a way of allocating risk to one of the parties if those statements prove to be inaccurate. In addition, such representations, warranties and covenants may have been qualified by
certain disclosures not reflected in the text of the Merger Agreement and may apply standards of materiality in a way that is different from what may be viewed as material by shareholders of, or other investors in, Arctic Cat. Investors are not
third-party beneficiaries under the Merger Agreement and should not rely on the representations, warranties and covenants or any descriptions thereof as characterizations of the actual state of facts or condition of Arctic Cat, Parent, Purchaser or
any of their respective subsidiaries or affiliates.
Additional Information and Where to Find It
The description of the Offer contained herein is neither an offer to purchase nor a solicitation of an offer to sell any securities of Arctic Cat. The Offer is
only being made through a Tender Offer Statement on Schedule TO filed with the SEC on February 2, 2017, which contains an offer to purchase, form of letter transmittal and other documents relating to the Offer (the Tender Offer
Materials). For additional information regarding the Merger, please refer to our Current Report on Form
8-K
filed on January 25, 2017 along with the Merger Agreement, which is attached as Exhibit
2.1 thereto. In addition, we filed a Solicitation/Recommendation Statement on Schedule
14D-9
on February 2, 2017 with respect to the Offer. Textron and Purchaser have mailed the Tender Offer Materials and
the Schedule
14D-9
to our shareholders. These documents contain important information about the Offer, and the shareholders of Arctic Cat are urged to read them carefully and review these and other documents
relating to the transactions contemplated by the Merger Agreement. These materials will be made available free of charge on the Investor Relations section of our website at www.arcticcat.com when available. In addition, all of these
materials (and all other materials filed by Arctic Cat with the SEC) will be available at no charge from the SEC through its website at www.sec.gov. Shareholders may also obtain free copies of the documents filed by Arctic Cat with the SEC by
contacting Investor Relations/CFO at Arctic Cat Inc., 500 North 3rd Street, Minneapolis, MN 55401; telephone number (612)
350-1791.
Results of Operations
Executive Overview
We reported a net loss of $37.2 million, or $2.85 per share, on net sales of $117.4 million in the third quarter of fiscal 2017. For the
nine months ended December 31, 2016, we reported a net loss of $60.5 million, or $4.64 per share, on net sales of $386.9 million. The net loss in both fiscal 2017 periods included the impact of recording a $26.9 million valuation
allowance against our deferred tax assets as further described under the heading
Income Tax Expense (Benefit)
below. The income tax expense impact of the $26.9 million valuation allowance increased our net loss by $2.06 per share in both
fiscal 2017 periods.
In the third quarter of fiscal 2016, we reported a net loss of $2.4 million, or $0.18 per diluted share, on net sales of
$166.0 million, and we reported net earnings of $7.7 million, or $0.59 per diluted share, on net sales of $511.5 million for the nine months ended December 31, 2015.
We continued to encounter a challenging powersports market in the third quarter of fiscal 2017. Macroeconomic trends in key demographic markets and
unfavorable weather trends have continued to have a negative impact on retail sales leading to higher dealer inventory. As a result, dealers have continued to be cautious and wholesale orders have continued to be below expectations, which led to
lower net sales, particularly near the end of the third quarter of fiscal 2017. In addition, we have faced a highly-promotional retail environment that negatively impacted net sales and gross margins as we and our competitors look to combat lower
retail sales and incentivize customers to purchase products.
Despite this challenging operating environment, we continued to pursue our strategic growth
initiatives in the third quarter of fiscal 2017. We signed a second strategic partnership to complement the strategic partnership we signed in the second quarter of fiscal 2017 with the goal of enhancing our future revenues in fiscal 2018 and
beyond. We continue to develop new products for expected market introductions in fiscal 2018. In addition, we remain focused on pursuing strategic partnerships; ramping up
end-user
focused new products;
creating a brand marketing powerhouse and improving Arctic Cats dealer network.
18
Product Line Sales
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|
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|
|
|
|
|
|
Three Months Ended December 31,
|
|
|
Nine Months Ended December 31,
|
|
($ 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
|
|
$
|
70,180
|
|
|
|
59.8
|
%
|
|
$
|
83,113
|
|
|
|
50.1
|
%
|
|
$
|
206,402
|
|
|
|
53.4
|
%
|
|
$
|
251,262
|
|
|
|
49.1
|
%
|
ATV/ROV
|
|
|
26,151
|
|
|
|
22.3
|
%
|
|
|
60,022
|
|
|
|
36.1
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%
|
|
|
113,908
|
|
|
|
29.4
|
%
|
|
|
183,654
|
|
|
|
35.9
|
%
|
PG&A
|
|
|
21,052
|
|
|
|
17.9
|
%
|
|
|
22,865
|
|
|
|
13.8
|
%
|
|
|
66,555
|
|
|
|
17.2
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%
|
|
|
76,622
|
|
|
|
15.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales
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|
$
|
117,383
|
|
|
|
100.0
|
%
|
|
$
|
166,000
|
|
|
|
100.0
|
%
|
|
$
|
386,865
|
|
|
|
100.0
|
%
|
|
$
|
511,538
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
|
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|
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|
We have faced a challenging operating environment throughout fiscal 2017 driven by a weak powersports market impacted by
macroeconomic trends in the oil and gas and agricultural sectors, as well as a highly competitive retail environment. In addition, the prior two years of low snowfall in key geographies led to higher dealer inventory of snowmobiles and related
PG&A products, which has contributed to lower wholesale sales and increased incentives, as our dealers work to reduce their inventory. In the third quarter of fiscal 2017, net sales decreased 29.3% compared to the prior year. Snowmobile net
sales decreased $12.9 million, or 15.6%, due to lower North American sales volume and a shift in the timing of sales to our OEM partner, as well as due to increased sales incentives. ATV/ROV net sales decreased $33.9 million, or 56.4%,
primarily driven by lower sales volume and an increased mix of lower-priced units. PG&A net sales decreased 7.9%, which was primarily attributable to a sluggish powersports market and the continued impact of lower snowfall in the prior two
years.
Net sales for the nine months ended December 31, 2016 decreased 24.4% to $386.9 million from $511.5 million. The decrease in net
sales was largely the result of the challenging operating environment described above, as well as our efforts to reduce dealer inventory, which resulted in lower wholesale sales volumes and increased sales incentives. Snowmobile net sales decreased
17.9% primarily due to lower North American sales volume and an increase in incentives. ATV/ROV net sales decreased 38.0% driven by lower sales volume and an increase in incentives, as we continue to focus on reducing dealer inventory and remain
competitive in a highly-promotional retail landscape. We also experienced an unfavorable mix into lower-priced ATV/ROV models. PG&A net sales decreased 13.1%, primarily due to a continuing impact from poor snowfall in key geographies in
consecutive years and lower
in-season
ATV/ROV sales due to changes in the timing of the ordering process.
Cost of Goods Sold
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|
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|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31,
|
|
|
Nine Months Ended December 31,
|
|
($ 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
|
|
$
|
92,849
|
|
|
|
86.2
|
%
|
|
$
|
125,703
|
|
|
|
88.7
|
%
|
|
$
|
306,796
|
|
|
|
87.2
|
%
|
|
$
|
370,399
|
|
|
|
88.0
|
%
|
PG&A
|
|
|
14,824
|
|
|
|
13.8
|
%
|
|
|
16,047
|
|
|
|
11.3
|
%
|
|
|
45,059
|
|
|
|
12.8
|
%
|
|
|
50,409
|
|
|
|
12.0
|
%
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
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|
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|
|
|
|
|
|
|
|
|
Total cost of goods sold
|
|
$
|
107,673
|
|
|
|
100.0
|
%
|
|
$
|
141,750
|
|
|
|
100.0
|
%
|
|
$
|
351,855
|
|
|
|
100.0
|
%
|
|
$
|
420,808
|
|
|
|
100.0
|
%
|
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|
|
|
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|
During the third quarter of fiscal 2017, cost of goods sold decreased 24.0% to $107.7 million from $141.7 million
for the third quarter of fiscal 2016. During the nine months ended December 31, 2016, cost of goods sold decreased 16.4% to $351.9 million from $420.8 million for the nine months ended December 31, 2015. The decrease in cost of
goods sold was primarily due to the decrease in net sales, and to a lesser extent, a mix shift into lower-priced products. These decreases were partially offset by an increase in cost of goods sold due to an unfavorable foreign currency exchange
impact on engine purchases and a warranty charge related to a snowmobile warranty bulletin.
Gross Profit
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|
|
|
|
|
|
|
Three Months Ended December 31,
|
|
|
Nine Months Ended December 31,
|
|
($ in thousands)
|
|
2016
|
|
|
2015
|
|
|
Change
2016 vs.
2015
|
|
|
2016
|
|
|
2015
|
|
|
Change
2016 vs.
2015
|
|
Gross profit
|
|
$
|
9,710
|
|
|
$
|
24,250
|
|
|
|
(60.0
|
)%
|
|
$
|
35,010
|
|
|
$
|
90,730
|
|
|
|
(61.4
|
)%
|
Percentage of total net sales
|
|
|
8.3
|
%
|
|
|
14.6
|
%
|
|
|
(43.2
|
)%
|
|
|
9.0
|
%
|
|
|
17.7
|
%
|
|
|
(49.2
|
)%
|
Gross profit decreased 60.0% to $9.7 million in the third quarter of fiscal 2017 from $24.3 million in the third
quarter of fiscal 2016. Gross profit as a percentage of net sales for the third quarter of fiscal 2017 decreased to 8.3% versus 14.6% in the third quarter of fiscal 2016. Gross profit was negatively impacted by lower sales volume and increased sales
incentives as a result of a highly-promotional retail environment.
19
Gross profit decreased 61.4% to $35.0 million from $90.7 million for the nine months ended
December 31, 2016 and 2015, respectively. Gross profit as a percentage of net sales for the nine months ended December 31, 2016 decreased to 9.0% versus 17.7% in the prior year comparative period. Gross profit was negatively impacted by
lower sales volume, increased sales incentives as a result of a promotional retail environment and an increased mix of lower margin ATV/ROV sales due to an unfavorable mix into lower-priced ATV/ROV models.
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31,
|
|
|
Nine Months Ended December 31,
|
|
($ in thousands)
|
|
2016
|
|
|
2015
|
|
|
Change
2016 vs.
2015
|
|
|
2016
|
|
|
2015
|
|
|
Change
2016 vs.
2015
|
|
Selling and marketing
|
|
$
|
11,214
|
|
|
$
|
12,223
|
|
|
|
(8.3
|
)%
|
|
$
|
31,594
|
|
|
$
|
33,020
|
|
|
|
(4.3
|
)%
|
Research and development
|
|
|
7,422
|
|
|
|
7,236
|
|
|
|
2.6
|
%
|
|
|
23,701
|
|
|
|
19,461
|
|
|
|
21.8
|
%
|
General and administrative
|
|
|
11,623
|
|
|
|
10,607
|
|
|
|
9.6
|
%
|
|
|
36,673
|
|
|
|
26,960
|
|
|
|
36.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
$
|
30,259
|
|
|
$
|
30,066
|
|
|
|
0.6
|
%
|
|
$
|
91,968
|
|
|
$
|
79,441
|
|
|
|
15.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of total net sales
|
|
|
25.8
|
%
|
|
|
18.1
|
%
|
|
|
|
|
|
|
23.8
|
%
|
|
|
15.5
|
%
|
|
|
|
|
Operating expenses increased 0.6% to $30.3 million in the third quarter of fiscal 2017 from $30.1 million in the
prior-year quarter. Operating expenses increased 15.8% to $92.0 million from $79.4 million for the nine months ended December 31, 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 $2.0 million and $8.6 million in the
third quarter of fiscal 2017 and nine months ended December 31, 2016, respectively. In addition, legal expenses increased during the nine months ended December 31, 2016 due to a $2.2 million product liability settlement. 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 third quarter of fiscal 2017 from $0.2 million in the third quarter of fiscal 2016. For the nine months ended December 31, 2016, interest expense increased to $1.2 million from $0.7 million in the
nine months ended December 31, 2015. 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 and a higher interest rate on borrowings. We recognized an immaterial amount of interest income during the third quarter of fiscal 2017 and 2016 and for the nine months ended December 31, 2016 and 2015.
Income Tax Expense (Benefit)
In the third quarter
of fiscal 2017, we recognized income tax expense of $16.2 million compared to an income tax benefit of $3.6 million in the third quarter of fiscal 2016. During the nine months ended December 31, 2016, we recognized income tax expense
of $2.4 million compared to income tax expense of $2.9 million for the nine months ended December 31, 2015. Despite the loss before income taxes for the third quarter of fiscal 2017 and nine months ended December 31, 2016, we
recognized income tax expense as a result of recording a valuation allowance of $26.9 million, primarily on net operating loss carryforwards and research and development tax credit carryforwards, during the third quarter of fiscal 2017. We
established the valuation allowance based on the weight of available evidence, both positive and negative, including results of recent and current operations and our estimates of future taxable income or loss.
Our effective tax rate was 76.7% and 60.1% in the third quarter of fiscal 2017 and 2016, respectively, and 4.2% and 27.2% for the nine months ended
December 31, 2016 and 2015, respectively. In addition to the rate impact of the $26.9 million valuation allowance, the change in the effective tax rate in both periods was primarily due to the rate impact of
non-deductible
expenses, year-over-year operational results and the rate impact of other discrete items.
Net Earnings (Loss)
Net loss increased to
$37.2 million, or $2.85 per share, in the third quarter of fiscal 2017 from a net loss of $2.4 million, or $0.18 per share, in the prior year comparative period. For the nine months ended December 31, 2016, net loss was
$60.5 million, or $4.64 per share, compared with net earnings of $7.7 million, or $0.59 per diluted share, in the prior year comparative period. The third quarter net loss increase and
year-to-date
net loss, as compared to net earnings for the prior year comparative period, 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.
20
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 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 with available cash balances, augmented by borrowings under our credit facility in the early to
middle portion of our production cycle. Given recent industry and operating challenges, our historical borrowing patterns have been disrupted. We believe current available cash and cash generated from operations, together with working capital
financing through our available line of credit and other available capital resources, 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 nine months ended December 31, 2016 and 2015 ($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
Total cash provided by (used in):
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
(68,821
|
)
|
|
$
|
(825
|
)
|
Investing activities
|
|
|
(19,624
|
)
|
|
|
(27,242
|
)
|
Financing activities
|
|
|
81,267
|
|
|
|
(2,145
|
)
|
Effects of exchange rate changes on cash and cash equivalents
|
|
|
(72
|
)
|
|
|
936
|
|
|
|
|
|
|
|
|
|
|
Decrease in cash and cash equivalents
|
|
$
|
(7,250
|
)
|
|
$
|
(29,276
|
)
|
|
|
|
|
|
|
|
|
|
Operating Activities
During the nine months ended December 31, 2016, cash used in operating activities increased to $68.8 million from $0.8 million for the nine
months ended December 31, 2015. The increase in cash used in operating activities was primarily due to an increase in cash used for inventory and an increase in our net loss, as compared to net earnings in the prior year comparative period.
These increases were partially offset by an increase in cash from accounts payable due to more efficient management of our vendor payments.
Investing Activities
Cash used in investing
activities for the nine months ended December 31, 2016 decreased to $19.6 million from $27.2 million for the nine months ended December 31, 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 nine months ended December 31, 2016, cash provided by financing activities was $81.3 million as compared to cash used in financing
activities of $2.1 million for the prior year comparative period. 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 higher inventories,
as well as 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 rely on a senior
secured revolving credit facility for working capital needs and general corporate purposes, including documentary and
stand-by
letters of credit. On November 29, 2016, we entered into a Second Amended and
Restated Loan and Security Agreement with Bank of America, N.A. as lender and agent. We amended our credit facility to increase our permissible borrowings to $130.0 million year round (formerly only $75.0 million was permitted during the
December to April months). Further, we extended the maturity date from March 10, 2021 to November 29, 2021. The amount of permissible borrowings under the credit facility is dependent upon adequate levels of underlying collateral. As of
December 31, 2016, we have $79.1 million of outstanding borrowings under the line of credit and the maximum permissible borrowings under the credit facility were $104.1 million. 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 December 31, 2016.
21
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 repurchase liability was up to approximately $81.0 million at December 31, 2016. 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 $4.6 million at December 31, 2016. Historically, we have not incurred material losses under these
agreements; therefore, we believe current available cash, cash generated from operations and working capital funding through our line of credit arrangement should provide sufficient funding in the event there is a requirement to perform under these
guarantee and repurchase agreements. 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.
Certain Information Concerning
Off-Balance
Sheet
Arrangements
As of December 31, 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 $79.1 million of
outstanding borrowings under our credit facility as of December 31, 2016. There were no other material changes outside the ordinary course of business with respect to our contractual obligations during the first nine months of fiscal 2017. See
Part II, Item 7,
Managements 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,
Managements 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, product development, and anticipated Merger. 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, the effect of regulations on us and our industry and our compliance with such regulations, and our intent to complete the transactions contemplated by the Merger Agreement.
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 Part I, Item 1A,
Risk Factors
, and those factors related to the Merger Agreement, such as the satisfaction of
closing conditions for the acquisition, including the tender of a number of shares that, when added to the shares owned by Textron and its affiliates, constitutes a majority of Arctic Cats outstanding shares on a fully-diluted basis and the
possibility that the transaction will not be completed, or if completed, not
22
completed on a timely basis. Arctic Cat cannot give any assurance that any of the transactions contemplated by the agreement will be completed or that the conditions to the tender offer will be
satisfied. Many factors that will determine the outcome of the Merger are beyond our ability to predict. 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.