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Arctic Cat reports Q3 earnings

Arctic Cat Inc. (NASDAQ:ACAT) reported a net loss of $2.4 million, or $0.18 per share, on net sales of $166.0 million for the fiscal 2016 third quarter ended December 31, 2015. In the prior-year quarter, Arctic Cat reported net earnings of $7.5 million, or $0.57 per diluted share, on net sales of $193.7 million.

Christopher Metz, Arctic Cat’s president and chief executive officer, stated: “Despite a very challenging marketplace and difficult third-quarter comparison, Arctic Cat made continued progress and again executed well on our strategies to reposition the business for a return to growth in fiscal 2017 and beyond. Contributing to the lower year-over-year fiscal 2016 third-quarter results was the timing of shipments, as we lapped the introduction of several new ATV products and pipeline fill of the Wildcat Sport and Wildcat Trail ROV models that shipped in the prior-year third quarter. This year, our new mid-year ATV/ROV model shipments will occur in our fiscal 2016 fourth quarter. In total, we expect sales for the second half of fiscal 2016 to be up.”

Commenting further, Metz stated: “Among our fiscal 2016 third-quarter highlights, we began to strengthen our dealer network and activate sales through important marketing sponsorships with our new event marketing team, resulting in positive retail growth. We maintained tight inventory control to allow a return to greater wholesale and retail growth of new products next fiscal year. In addition, the company generated $27 million in operating cash flow that enabled us to strengthen the company’s balance sheet and eliminate long-term debt, as planned.”

The company’s key strategies to reinvigorate growth include: dramatically improving Arctic Cat’s dealer network; ramping up end-user focused new products; pursuing OEM partnerships and bolt-on acquisitions; and creating a brand marketing powerhouse.

Added Metz: “We are lowering our outlook for the remainder of the fiscal year, chiefly due to the intensifying impact of unfavorable foreign currency exchange rates, a softening ATV/ROV retail market industry-wide and the lack of early season snowfall on snow-related product sales. Still, we expect that fiscal 2016 fourth-quarter sales will increase approximately 40 percent compared to the prior fiscal year’s fourth quarter and that we anticipate cutting the fourth-quarter net loss almost in half. In fiscal 2017, we expect to begin accelerating our sales and earnings power. We remain committed to achieving our stated goal of reaching $1 billion in sales by the end of fiscal 2020.”

Operating Review

Arctic Cat’s fiscal 2016 third-quarter net sales of $166.0 million were down 14.3 percent compared to prior-year sales of $193.7 million. Unfavorable foreign currency exchange reduced net sales by approximately 4.9 percent. Year-over year sales also reflect the timing of new ATV/ROV product shipments and the company’s continued efforts to lower non-current inventory by curtailing wholesale shipments to dealers. Sequentially, Arctic Cat succeeded in reducing its inventory by $25 million from the end of the fiscal 2016 second quarter, primarily in core ATVs. This inventory reduction enabled the company to sell new products to dealers, without a corresponding rise in overall dealer inventory.

Gross profit and gross profit margin in the fiscal 2016 third quarter were approximately $24.3 million and 14.6 percent, respectively, compared to $34.9 million and 18.0 percent, respectively, in the prior-year quarter, chiefly due to lower sales volumes and unfavorable foreign currency exchange impact. Approximately $8.2 million, or $0.38 per share, of the year-over-year reduction in gross profit was due to unfavorable foreign currency exchange rates. Operating loss in the fiscal 2016 third quarter was $5.8 million versus operating profit of $5.9 million in the same quarter last year.

Arctic Cat ended the fiscal 2016 third quarter with cash, cash equivalents and short-term investments totaling approximately $11.0 million, as planned, compared to $67.5 million a year ago. The company continued to make investments in the business to lay the foundation for future growth and to improve efficiency.

For the nine months ended December 31, 2015, Arctic Cat’s net earnings were $7.7 million, or $0.59 per diluted share, compared to $26.4 million, or $2.02 per diluted share, in the prior-year period. Year to date, the company’s net sales totaled $511.5 million versus $599.9 million in the year-ago first nine months.

Business Line Results

Snowmobiles – Snowmobile sales in the fiscal 2016 third quarter rose 2.0 percent to $83.1 million versus $81.5 million in the prior-year quarter. Snowmobile sales increased despite the second consecutive year of low snowfall in key regions and unfavorable foreign currency exchange. In the fiscal 2016 third quarter, Arctic Cat snowmobiles won industry recognition, with the 2016 Cross Tour named the most innovative product of the year, and the 2016 Pantera 3000 named the best luxury 2-up sled.

Commented Metz: “We will be launching a larger new snowmobile product lineup for the 2017 model year at our snow dealer show in March, including our SVX™ 450 single-ski snow vehicle, which is the industry’s first purpose-built OEM snow bike.”

ATVs/ROVs – Sales of Arctic Cat’s all-terrain vehicles (ATVs) and side-by-side recreational off-road vehicles (ROVs) in the fiscal 2016 third quarter totaled $60.0 million compared to prior-year sales of $83.9 million. Compared to the prior fiscal year’s third-quarter, total ATV/ROV unit retail sales were up. However, wholesale shipments versus the prior year were down, as the fiscal 2015 third quarter included the shipment of several new ATV products and pipeline fill of the Wildcat Sport and Wildcat Trail ROV models. In comparison, Arctic Cat’s new mid-year ATV/ROV model shipments will occur this year in the fiscal 2016 fourth quarter.

“In early February, we will begin shipping several exciting models in our ATV/ROV business, as part of our aggressive new product development plans,” said Metz. “Our growth plans for the ATV/ROV business also include expanding our engine facility in St. Cloud, Minnesota. The expansion will enable us to move our dirt products’ engineering team into this state-of-the-art research and design center this summer, and create a larger testing track, as well. We see significant growth opportunities ahead for this business.”

Parts, Garments & Accessories – Sales of parts, garments and accessories (PG&A) in the fiscal 2016 third quarter were $22.9 million versus $28.3 million in the prior-year quarter. The decline is primarily attributable to unfavorable foreign currency exchange and lower sales of snow-related items, stemming from low snowfall in key regions during the early winter season.

Dividend Suspended

In order to preserve cash for continued investment in returning the company to growth, Arctic Cat’s board of directors has voted to suspend regular quarterly cash dividends on its common stock, effective immediately. Suspending the dividend will conserve approximately $6.5 million in cash annually.

“The board’s decision to suspend the dividend is prudent, given the current macroeconomic and foreign currency headwinds,” said Metz. “While we cannot predict when these will improve, we expect that as conditions normalize, our future earnings levels would permit resumption of dividend payments.”

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