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(Address of principal executive offices,
including zip code)
(Registrant’s telephone number,
including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
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. þ Yes o No
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. (Check one):
Large accelerated filer o Accelerated filer þ Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). o Yes þ No
As of October 31, 2007, 26,717,522 shares of the issuer’s Common Stock were issued and
outstanding.
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies consistently applied in the preparation of
the accompanying unaudited, consolidated financial statements follows:
Principles of Consolidation
The consolidated financial statements include the accounts of A.S.V., Inc. and our
wholly-owned subsidiaries, collectively referred to herein as “ASV”, the “Company”, “we”, “us”, or
“our.” All intercompany accounts and transactions have been eliminated in consolidation.
Revenue Recognition
ASV recognizes revenue on its product sales when persuasive evidence of an arrangement exists,
product has shipped from our plant to the customer, the price is fixed or determinable and
collectibility is reasonably assured. We obtain verbal or written purchase authorizations from
customers for a specified amount of product at a specified price and consider delivery to have
occurred at the time of shipment to the customer.
Research and Development
All research and development costs are expensed as incurred.
Interim Financial Information
The accompanying unaudited, consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America (US GAAP) for interim
financial information. Accordingly, they do not include all of the footnotes required by US GAAP
for complete financial statements. In the opinion of management, all adjustments (consisting of
normal, recurring adjustments) considered necessary for a fair presentation have been included.
Results for the interim periods are not necessarily indicative of the results for an entire year.
The balance sheet at December 31, 2006 has been derived from the audited financial statements
at that date, but does not include all of the information and notes required by US GAAP for
complete financial statements. For further information, refer to the consolidated financial
statements and notes included in our Annual Report on Form 10-K for the fiscal year ended
December 31, 2006.
Warranties
We provide a limited warranty to our customers. A provision for estimated warranty costs is
recorded when revenue is recognized based on estimated product failure rates, material usage and
service delivery costs incurred in correcting a product failure. Should actual failure rates,
material usage or service delivery costs differ from our estimates, revision to the warranty
liability may be required.
A.S.V., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
(UNAUDITED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES – Continued
Stock-Based Compensation
We account for stock-based compensation in accordance with the fair value recognition
provisions of SFAS No. 123 (Revised 2004), Share-Based Payment (SFAS 123(R)). Accordingly,
compensation expense includes the estimated expense for stock options granted on, and subsequent
to, January 1, 2006. Estimated expense recognized for the options granted prior to, but not vested
as of January 1, 2006, was calculated based on the grant date fair value estimated in accordance
with the provisions of SFAS No. 123, Accounting for Stock-Based Compensation (SFAS 123).
The fair value of each option award is estimated on the date of grant using the Black-Scholes
option pricing model. Expected volatilities are based on an historical measure of the volatility of
our common stock. The risk-free rate for the contractual life of the option is based on the
U.S. Treasury yield curve in effect at the time of grant. We use historical data to estimate option
exercise and employee termination activity within the valuation model. The expected term of stock
options granted is based on historical data and represents the period of time that stock options
granted are expected to be outstanding. The dividend yield is zero as we have not paid dividends
and do not anticipate paying any dividends in the future. Forfeitures are estimated based on
historical experience and current demographics. See Note 3 for additional information regarding
stock-based compensation.
Net Earnings per Common Share
Basic net earnings per common share is computed by dividing net earnings by the weighted
average number of common shares outstanding. Diluted net earnings per share is computed by
dividing net earnings by the weighted average number of common shares outstanding and common stock
equivalents relating to stock options, when dilutive.
Summarized below is the number of common stock equivalents that were included in the
computation of diluted net earnings per share, along with the number of anti-dilutive options for
the periods presented.
A.S.V., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
(UNAUDITED)
NOTE 3. STOCK-BASED COMPENSATION
At September 30, 2007, we had three stock-based compensation plans, all previously approved by
our shareholders. Stock options granted under these plans generally vest ratably over four years of
service, have a contractual life of five or seven years and provide for accelerated vesting if
there is a change in control, as defined. At September 30, 2007, we had 3,119,000 shares available
for future grant under our three stock option plans.
We use the Black-Scholes option pricing model to determine the fair value of our options
granted. The weighted average fair values of the options granted during the nine months ended
September 30, 2007 and 2006 were $5.10 and $10.32, respectively. The assumptions used to determine
such values are indicated in the following table:
The expected term of the options is based on evaluations of historical and expected future
employee exercise behavior. The risk-free interest rate is based on the U.S. Treasury rate as of
the date of grant with maturity dates approximately equal to the expected life at the grant date.
Volatility is based on an historical measure of the volatility of our common stock. We have not
historically issued any dividends and do not expect to do so in the future. In 2006, we reduced the
contractual life of all newly granted stock options to our employees from seven years to five
years.
We recorded stock-based compensation expense of $2,045,000 and $2,198,000 for the nine months
ended September 30, 2007 and 2006, respectively.
Option transactions under the plans during, 2007 are summarized as follows:
The total intrinsic value of stock options exercised during the nine months ended September30, 2007 and 2006 was $1,005,000 and $3,261,000, respectively.
NOTE 4. STOCK BUYBACK PLAN
In October 2006, our Board of Directors approved a $50 million stock buyback plan. Under this
plan, we may repurchase up to $50 million of our common stock over a three year period beginning in
October 2006. We anticipate that share purchases may be made from time to time, depending on market
conditions and other factors. Shares may be purchased in the open market, including block
purchases, or through privately negotiated transactions. Under this authorization, we will not
repurchase any shares from our directors, officers or affiliates. The buyback program does not
obligate us to acquire any specific number of shares and may be discontinued at any time.
We intend to fund the repurchases with available cash and investments, as well as cash
generated from future operations. The repurchase program is expected to be in effect through the
earlier of October 31, 2009 or until $50 million of our stock is repurchased. For the nine months
ended September 30, 2007, we repurchased 100,000 shares of our common stock at an aggregate cost of
$1.5 million.
A.S.V., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
(UNAUDITED)
NOTE 5. ADOPTION OF NEW ACCOUNTING STANDARD
Accounting for Uncertainty in Income Taxes: In July 2006, the FASB issued FASB Interpretation
No. 48, Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109 (FIN
48), which clarified the accounting for uncertainty in tax positions. FIN 48 requires that we
recognize in our financial statements the impact of a tax position if that position is more likely
than not to be sustained upon audit, based on the technical merits of the position. We adopted FIN
48 effective January 1, 2007, with the cumulative effect of the change in accounting principle
recorded as an adjustment to opening retained earnings. Accordingly, we have recorded an increase
in income taxes payable and a corresponding decrease to retained earnings at January 1, 2007 in the
amount of $1,835,000.
During the third quarter of 2007, we had a net favorable settlement of an uncertain tax
position in the amount of $460,000, which has been recorded as a reduction of income taxes payable
and income tax expense. Also during the third quarter of 2007, we reclassified $475,000 from
current to long-term income taxes payable to reflect its expected payment. Included in income taxes
payable at September 30, 2007 is $587,000 of interest and penalties related to more likely than not
uncertain tax positions.
We file income tax returns in the U.S. and various states, for which we are generally no
longer subject to income tax examinations by tax authorities for years before 2004.
NOTE 6. NEW ACCOUNTING PRONOUNCEMENTS
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair
Value Measurement (SFAS 157). This standard clarifies the principle that fair value should be based
on the assumptions that market participants would use when pricing an asset or liability.
Additionally, it establishes a fair value hierarchy that prioritizes the information used to
develop those assumptions. SFAS 157 is effective for financial statements issued for fiscal years
beginning after November 15, 2007. We do not expect the implementation of SFAS 157 to have an
effect on our results of operations or financial condition.
In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, The
Fair Value Option for Financial Assets and Financial Liabilities (SFAS 159). SFAS 159 allows
entities the option to measure eligible financial instruments at fair value as of specified dates.
Such election, which may be applied on an instrument by instrument basis, is typically irrevocable
once elected. SFAS 159 is effective for fiscal years beginning after November 15, 2007, and early
application is allowed under certain circumstances. We do not expect the implementation of SFAS 159
to have an effect on our results of operations or financial condition.
ITEM 2 — MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
We design, manufacture and sell rubber track machines, related accessories, attachments and
traction products. We also manufacture rubber track undercarriages, which are a primary component
on Multi-Terrain Loaders (MTL) sold by Caterpillar Inc. (Caterpillar). Our products are able to
traverse nearly any terrain with minimal damage to the ground, making them useful in industries
such as construction, landscaping, rental, forestry and agriculture. We distribute our products
through an independent dealer network in the United States, Canada, Australia, New Zealand and
Kuwait. The undercarriages sold to Caterpillar are utilized by Caterpillar in its MTL products and
are sold exclusively through the Caterpillar dealer network. We also sell undercarriages to Vermeer
Manufacturing Company (Vermeer) for use on certain Vermeer machines which are sold exclusively
through the Vermeer dealer network. Our wholly-owned subsidiary, Loegering Mfg. Inc. (Loegering),
sells its products primarily through independent equipment dealers in North America.
Nine Month Overview
Our overall sales decreased 23% for the nine months ended September 30, 2007, compared to the
same period in 2006. We believe this was due primarily to a decrease in domestic construction
activity, particularly residential housing construction, along with increased competition as more
equipment manufacturers offer rubber track products than in prior years. Included in our sales for
the nine months ended September 30, 2007 was a 32% reduction in the sale of original equipment
manufacturer (OEM) undercarriages, primarily to Caterpillar, due to a decrease in construction
activity and lower production schedules by Caterpillar in anticipation of model changeovers which
began in the second quarter of 2007. We currently anticipate that our net sales for 2007 will be
in the range of $200-210 million based on our current and projected level of orders for our
machines, OEM undercarriages, Loegering products and expected future service parts demand.
Critical Accounting Policies
The following discussion and analysis of our financial condition and results of operations is
based upon our consolidated financial statements, which have been prepared in accordance with US
GAAP. The preparation of these financial statements requires management to make estimates and
judgments that affect the reported amounts of assets, liabilities and expenses, and related
disclosures. On an on-going basis, management evaluates its estimates and judgments, including
those related to accounts receivable, inventories, warranty obligations, income taxes and
stock-based compensation. By their nature, these estimates and judgments are subject to an inherent
degree of uncertainty. Management bases its estimates and judgments on historical experience,
observance of trends in the industry, information provided by customers as well as other outside
sources and on various other factors that it believes to be reasonable under the circumstances. The
factors listed above form the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources and actual results may differ from
these estimates under different assumptions or conditions.
Management believes the following critical accounting policies, among others, affect our more
significant judgments and estimates used in the preparation of our consolidated financial
statements.
Revenue Recognition and Accounts Receivable. ASV recognizes revenue on its product sales when
persuasive evidence of an arrangement exists, product has shipped from our plant to the customer,
the price is fixed or determinable and collectibility is reasonably assured. We have determined
that the time of shipment is the most appropriate point to recognize revenue as the risk of loss
passes to the customer when product is placed with a carrier for delivery (i.e., upon shipment).
Any post-sale obligations on our part, consisting primarily of warranty obligations, are estimated
and accrued for at the time of shipment. We obtain verbal or written purchase authorizations from
customers for a specified amount of product at a specified price and consider delivery to have
occurred at the time of shipment. We maintain an allowance for doubtful accounts for estimated
losses resulting from the inability of our customers to make required payments. If the financial
condition of our customers were to deteriorate, resulting in an impairment of their ability to make
payments, additional allowances may be required.
Inventories. Inventories are stated at the lower of cost or market, cost being determined on
the first-in, first-out method. Adjustments to slow moving and obsolete inventories to the lower of
cost or market are provided based on historical experience and current product demand. We do not
believe that our inventories are subject to rapid obsolescence. We evaluate the adequacy of our
inventories’ carrying value quarterly.
Intangible Assets. Our intangible assets include patents granted, patent applications, trade
name, trade dress and trademarks. All of the intangibles represent the value assigned to the
respective assets from our 2004 acquisition of Loegering. Patents granted are being amortized over
the remaining life of the patents. All other intangibles are not being amortized as they are
believed to have an indefinite life.
We periodically review the carrying value of our intangible assets to determine whether
current events or circumstances indicate that such carrying value may not be recoverable. If the
tests indicate that the carrying value of the asset is greater than the expected undiscounted cash
flows to be generated by such asset, an impairment loss would be recognized. The impairment loss is
determined by the amount by which the carrying value of such asset exceeds its fair value. We
generally measure fair value by considering sale prices for similar assets or by discounting
estimated future cash flows from such assets using an appropriate discount rate. Assets to be
disposed of are carried at the lower of their carrying value or fair value, less costs to sell.
Considerable management judgment is necessary to estimate the fair value of assets, and
accordingly, actual results could vary significantly from such estimates.
Goodwill. Goodwill represents the excess of the purchase price over the fair value of net
assets acquired from Loegering. Goodwill is not amortized but is tested for impairment annually.
Goodwill will be tested for impairment between annual tests if a triggering event occurs or
circumstances change that would indicate the carrying amount may be impaired. An impairment loss
generally would be recognized when the carrying amount of Loegering’s net assets exceeds their
estimated fair value. The estimated fair value is determined by using a discounted cash flow
analysis. We completed our annual goodwill impairment test most recently as of September 30, 2006.
Warranties. We provide limited warranties to purchasers of our products which vary by product.
Our warranties generally cover defects in materials and workmanship for one year from the delivery
date to the first end-user. The rubber tracks used on our products carry a pro-rated warranty up to
1,500 hours of usage. While we engage in extensive product quality programs and processes,
including actively monitoring and evaluating the quality of our component suppliers, our warranty
obligation is affected by product failure rates, material usage and service delivery costs incurred
in correcting a product failure. Should actual product failure rates, material usage or service
delivery costs differ from our estimates, revisions to the estimated warranty liability may be
required.
Income Taxes. We record deferred income taxes using the liability method whereby deferred tax
assets are recognized for deductible temporary differences and deferred tax liabilities are
recognized for taxable temporary differences. Temporary differences are the differences between the
reported amounts of assets and liabilities and their income tax bases. Deferred tax assets are
reduced by a valuation allowance when, in our opinion, it is more likely than not that some portion
or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are
adjusted for the effects of changes in tax laws and rates on the date of enactment.
When tax returns are filed, it is highly certain that some positions taken would be sustained
upon examination by the taxing authorities, while others are subject to uncertainty about the
merits of the position taken or the amount of the position that would ultimately be sustained. The
outcome of a tax position is recognized in the financial statements in the period during which,
based on all available evidence, we believe that it is more likely than not that the position will
be sustained upon examination, including the resolution of appeals or litigation processes, if any.
Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the
more likely than not recognition threshold are measured as the largest amount of tax that is more
than 50% likely of being realized upon settlement with the applicable taxing authority. The
portion of the tax associated with tax positions taken that exceeds the amount measured above is
included in income taxes payable in the accompanying balance sheet along with any associated
interest and penalties that would be payable to the taxing authorities upon examination. Such
interest and penalties, if any, would be classified as additional income taxes in our statement of
earnings.
Stock-Based Compensation. We record stock-based compensation in accordance with the fair value
recognition provisions of SFAS 123(R). Compensation expense for stock-based compensation includes
the estimated expense for stock options granted on, and subsequent to, January 1, 2006. Estimated
expense recognized for the options granted prior to, but not vested as of January 1, 2006, was
calculated based on the grant date fair value estimated in accordance with the provisions of
SFAS 123. At September 30, 2007, we had $4.2 million of unrecognized compensation costs related to
non-vested stock options that are expected to be recognized over a weighted average period of 1.0
years.
The fair value of each option award is estimated on the date of grant using the Black-Scholes
option pricing model. Expected volatilities are based on an historical measure of the volatility of
our common stock. The risk-free rate for the contractual life of the option is based on the
U.S. Treasury yield curve in effect at the time of grant. We use historical data to estimate option
exercise and employee termination activity within the valuation model. The expected term of stock
options granted is based on historical data and represents the period of time that stock options
granted are expected to be outstanding. The dividend yield is zero as we have not paid dividends.
Forfeitures are estimated based on historical experience and current demographics. In 2006, we
reduced the contractual life of all newly granted stock options to our employees from seven years
to five years.
Results of Operations
The following table sets forth certain Statement of Earnings data as a percentage of net
sales:
Net Sales. For the three months ended September 30, 2007, net sales decreased 11% to $56.3
million, compared with $63.0 million for the same period in 2006. This decrease was primarily the
result of a significantly weaker U.S. economic climate in 2007, particularly residential housing
construction, which resulted in lower sales of our ASV machines. Sales of ASV machines decreased
33% and represented 42%, or $23.7 million, of our sales in the third quarter of 2007, compared with
56%, or $35.2 million, in the third quarter of 2006. This decrease was also due to caution on the
part of our dealers to carry inventory from the weakened U.S. economic climate. Partially
offsetting this decrease was a 24% increase in the sale of OEM undercarriages in the third quarter
of 2007 compared with the same period in 2006. This increase was due primarily to increased orders
for our undercarriages used on Caterpillar’s MTLs due to a model changeover by Caterpillar which
began in the second quarter of 2007. Sales of OEM undercarriages represented 31%, or $17.3 million,
of our sales in the third quarter of 2007, compared with 22%, or $14.0 million, in the third
quarter of 2006. Sales of Loegering’s products increased 42% in the third quarter of 2007 compared
with the same period in 2006. This increase was due to sales of its QTS™ product, which was
introduced in the first quarter of 2007, along with increased sales of its VTS™ product from
greater market acceptance and an increase in VTS parts sales as the population of VTS products in
the field continues to grow. Finally, sales of ASV parts and other items decreased 3% to $9.3
million, or 17% of net sales, compared with $9.6 million, or 15% of net sales, for the same period
in 2006. We believe this decrease was due to lower levels of machine usage in 2007 resulting from
decreased construction activity.
Gross Profit. Gross profit for the three months ended September 30, 2007 decreased to $10.4
million, compared with $13.9 million for the same period in 2006, and the gross profit percentage
decreased to 18.5% in the third quarter of 2007 compared with 22.0% for the same period in 2006.
The decrease in gross profit was due to the decreased sales and decreased gross profit percentage
experienced during the third quarter of 2007. The decrease in gross profit percentage reflected a
number of factors including one-time costs resulting from the return and rework of a limited
quantity of OEM undercarriage product which included overtime and freight, a greater concentration
of lower gross margin products, increased use of sales incentive programs during the period, the
effects of lower
production throughput, and one-time production start-up costs as ASV began implementation of
its new brand and nomenclature strategy. The rollout included several new product enhancements
across all machine models, including major engineering upgrades to the RC-60 (now known as the
“PT-60”).
Selling, General and Administrative. Selling, general and administrative expenses decreased
from $5.8 million, or 9.2% of net sales, in the third quarter of 2006, to $5.5 million, or 9.9% of
net sales, in the third quarter of 2007. The absolute dollar decrease was due primarily to no
increase in our allowance for bad debts as was required in 2006, along with the a reduction in
short-term incentive compensation expense and lower stock option and advertising expenses.
Research and Development. Research and development expenses increased from $406,000 in the
third quarter of 2006 to $551,000 in the third quarter of 2007. The increase was due to the
addition of engineering and product testing personnel to enhance new product development and
product quality.
Other Income. For the three months ended September 30, 2007, other income (primarily interest
income) was $537,000, compared with $396,000 for same period in 2006. This increase was due
primarily to greater interest income from higher short-term interest rates on greater investable
cash balances during the third quarter of 2007 compared with the third quarter of 2006.
Income Taxes. Our effective income tax rate was 27.9% for the three months ended September 30,2007 compared to 36.7% for the same period in 2006. The decrease was due primarily to the favorable
settlement of an uncertain tax position during the third quarter of 2007 in the amount of $460,000.
Exclusive of this settlement, our tax rate would have been 37.4%, with the increase due to a
combination of lower taxable income during 2007 and non-deductible expenses which occur evenly
throughout the year.
Net Earnings. For the third quarter of 2007, net earnings were $3.5 million, compared with
net earnings of $5.1 million for the third quarter of 2006. The decrease was primarily a result of
decreased sales with a decreased gross profit percentage, offset in part by decreased operating
expenses and a lower effective income tax rate.
Net Sales. For the nine months ended September 30, 2007, net sales decreased 23% to $153.8
million, compared with $200.0 million for the same period in 2006. This decrease was primarily the
result of a significantly weaker U.S. economic climate in 2007, particularly residential housing
construction, which affected all four categories of our sales. First, sales of ASV machines
decreased 25% and represented 52%, or $79.6 million, of our sales for the nine months ended
September 30, 2007, compared with 53%, or $105.6 million, for the same period in 2006. This
decrease was also due to caution on the part of our dealers to carry inventory from the weakened
U.S. economic climate. Second, sales of OEM undercarriages decreased 32% for the nine months ended
September 30, 2007, compared with the same period in 2006. This decrease was due primarily to
reduced orders for our undercarriages used on Caterpillar’s MTLs. In addition to the economic
effects experienced in 2007, the reduced orders were also due in part to lower production schedules
by Caterpillar in anticipation of model changeovers which began in the second quarter of 2007.
Sales of OEM undercarriages represented 22%, or $34.5 million, of our sales for the nine months
ended September 30, 2007, compared with 25%, or $50.9 million, for the same period in 2006. Third,
sales of Loegering’s products totaled $17.8 million for the nine months ended September 30, 2007,
or 12% of our net sales, compared with $19.8 million, or 10% of our net sales, for the same period
in 2006. This change was due primarily to decreased demand for Loegering’s VTS products, which are
sold to the skid-steer market, offset in part by sales of its QTS product, which was introduced in
the first quarter of 2007. We believe the skid-steer market continues to be impacted by the
slumping U.S. housing market as stated above. Finally, sales of parts and other items decreased 8%
in the nine months ended September 30, 2007 to $21.8 million, or 14% of net sales, compared with
$23.7 million, or 12% of net sales, for the same period in 2006. We believe this decrease was due
to lower levels of machine usage in 2007 resulting from decreased activity.
Gross Profit. Gross profit for the nine months ended September 30, 2007 decreased to $31.7
million, compared with $47.2 million for the same period in 2006, and the gross profit percentage
decreased to 20.6% the nine months ended September 30, 2007, compared with 23.6% for the same
period in 2006. The decrease in gross profit was due primarily to the decreased sales experienced
during 2007. The decrease in gross profit percentage was due primarily to the increased use of
sales incentive programs during 2007, lower production throughput levels, one-time costs resulting
from the return and rework of a limited quantity of OEM undercarriage product which included
overtime and freight and one-time production start-up costs as ASV began implementation of its
new brand and nomenclature strategy. Based on our anticipated sales levels for 2007, we currently
anticipate our gross profit percentage for fiscal 2007 to be in the range of 20.4-20.8%.
Selling, General and Administrative. Selling, general and administrative expenses increased
from $16.6 million, or 8.3% of net sales, for the nine months ended September 30, 2006, to $18.0
million, or 11.7% of net sales, for the same period in 2007. The increase was due primarily to
personnel additions made during 2006 and 2007 to support our strategic priorities, including
increased marketing support. The increase in percent was due to the combination of increased
expenses and lower overall sales. We currently anticipate our selling, general and administrative
expenses will be in the range of 11.4-11.8% of net sales for fiscal 2007.
Research and Development. Research and development expenses increased from $1.2 million for
the nine months ended September 30, 2006 to $1.7 million for the same period in 2007. The increase
was due to the addition of engineering and product testing personnel to enhance new product
development and product quality. We currently anticipate our future spending on research and
development activities will focus on additional product offerings and additional applications of
our track technology and will be in the range of 1.0-1.1% of net sales for fiscal 2007.
Other Income. For the nine months ended September 30, 2007, other income (primarily interest
income) was $1.4 million, compared with $1.3 million for the same period in 2006. This increase was
due primarily to greater interest income from higher short-term interest rates on greater
investable cash balances during 2007 compared with 2006.
Income Taxes. Our effective income tax rate was 34.0% for the nine months ended September 30,2007 compared to 36.1% for the same period in 2006. The decrease was due primarily to the favorable
settlement of an uncertain tax position during the third quarter of 2007 in the amount of $460,000.
Exclusive of this settlement, our tax rate would have been 37.4%, with the increase due to a
combination of lower taxable income during 2007 and non-deductible expenses which occur evenly
throughout the year.
Net Earnings. For the nine months ended September 30, 2007, net earnings were $8.8 million,
compared with net earnings of $19.6 million for the same period in 2006. The decrease was
primarily a result of decreased sales with a decreased gross profit percentage, increased operating
expenses in the first half of the year, slightly offset by a lower effective income tax rate. Based
on our anticipated sales, gross profit and expense levels for 2007, we anticipate our diluted
earnings per share will be in the range of $0.41-$0.47 for fiscal 2007.
Liquidity and Capital Resources
For the nine months ended September 30, 2007, we generated $16.9 million of cash and cash
equivalents compared with using $15.6 million of cash and cash equivalents for the nine months
ended September 30, 2006. During 2007, we generated $19.4 million of cash from operations,
primarily from decreased inventory levels, profitability adjusted for non-cash expenses, offset in
part by increased accounts receivable. We used $1.6 million of cash in investing activities during
2007 to purchase equipment as part of our $3 million planned capital expenditures for fiscal 2007.
Financing activities used $0.9 million of cash as we repurchased $1.5 million of our common stock
during the first quarter of 2007 as part of our $50 million stock buyback program authorized in
October 2006. Partially offsetting this was cash generated by the exercise of employee stock
options.
Our accounts receivable increased from $44.2 million at December 31, 2006 to $51.2 at
September 30, 2007. This increase was due primarily to the timing of shipments during the third
quarter of 2007, as a greater percentage of our shipments occurred in the last month of the
quarter. Caterpillar’s model changeover, which began in the second quarter of 2007, was also a
factor in the increase in our accounts receivable balance at September 30, 2007.
Our inventory levels decreased from $71.4 million at December 31, 2006 to $59.2 million at
September 30, 2007. The decrease in inventory during the quarter reflected our efforts to better
align the incoming flow of materials with production levels that are in line with incoming orders.
Our goal is to increase our inventory turns from 2.75 turns at September 30, 2007 to 3.5 turns at
December 31, 2007 through better management of incoming raw materials and decreased finished goods
levels, although our inventory levels may fluctuate during the balance of 2007 to meet expected
production requirements.
Our Board of Directors approved a $50 million stock buyback plan in October 2006. Under this
plan, we may repurchase up to $50 million of our common stock over a three year period beginning in
October 2006. We anticipate that we may repurchase $10-15 million of our common stock under this
plan in 2007, balanced with assessing acquisition opportunities. We intend to fund any share
repurchases with available cash and investments, as well as cash generated from operations. For the
nine months ended September 30, 2007, we repurchased 100,000 shares of our common stock at an
aggregate cost of $1.5 million.
Relationship with Finance Companies
We have an agreement with Wells Fargo & Company (Wells Fargo, formerly CIT Group, Inc.) to
operate ASV Capital, a private label finance program, to offer wholesale and retail financing
options on the sale of our Posi-Track products. Under this agreement, representatives of ASV and
Wells Fargo make joint credit decisions, with Wells Fargo retaining the risk of the credit
portfolio. We have no ownership in ASV Capital and do not share in the profit or loss of ASV
Capital. We also have a relationship with one other finance company that finances the sale of our
products.
By using these finance companies, we receive payment for our products shortly after their
shipment. We pay a portion of the interest cost associated with financing these shipments that
would normally be paid by the customer, over a period generally ranging from three to twelve months
depending on the amount of down payment made by the customer. We are also providing twelve-month
terms for one machine to be used for demonstration purposes for each qualifying dealer. In
addition, we offer, from time to time, extended term financing on the sale of certain products to
our dealers for periods ranging from 90 days to one year.
Adoption of New Accounting Standard
Accounting for Uncertainty in Income Taxes: In July 2006, the FASB issued FASB Interpretation
No. 48, Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109 (FIN
48), which clarified the accounting for uncertainty in tax positions. FIN 48 requires that we
recognize in our financial statements the impact of a tax position if that position is more likely
than not to be sustained upon audit, based on the technical merits of the position. We adopted FIN
48 effective January 1, 2007, with the cumulative effect of the change in accounting principle
recorded as an adjustment to opening retained earnings. Accordingly, we have recorded an increase
in income taxes payable and a corresponding decrease to retained earnings at January 1, 2007 in the
amount of $1,835,000.
During the third quarter of 2007, we had a net favorable settlement of an uncertain tax
position in the amount of $460,000, which has been recorded as a reduction of income taxes payable
and income tax expense. Also during the third quarter of 2007, we reclassified $475,000 from
current to long-term income taxes payable to reflect its expected payment.
New Accounting Pronouncements
See Note 6 to our consolidated financial statements for a discussion of new accounting
pronouncements.
Cash Requirements
We believe that the cash expected to be generated from operations, combined with our existing
cash, cash equivalents and investments (which totaled $48.3 million at September 30, 2007), will
satisfy our projected cash requirements for the next twelve months.
Forward-Looking Statements
Some of the statements set forth above under “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” and elsewhere in this report including, among other
things, the statements regarding our expectations regarding sales levels, gross profit percentage,
expense levels, earnings per share, inventory levels and liquidity for fiscal 2007 are
forward-looking statements based on current expectations and assumptions, and entail various risks
and uncertainties that could cause actual results to differ materially from those expressed in such
forward-looking statements. Certain factors may affect whether these anticipated events occur,
including Caterpillar’s desire to continue purchasing undercarriage products from us, the state of
the U.S.
construction markets, our ability to successfully maintain, upgrade and expand our dealer
network, our ability to secure European distribution for our products, our ability to obtain needed
certifications to distribute our products in foreign markets, our ability to successfully
manufacture our machines, unanticipated delays, costs or other difficulties in the manufacture of
our machines and undercarriages, unanticipated problems or delays experienced by Caterpillar or
Vermeer relating to the manufacturing or marketing of their machines utilizing our undercarriage
systems, market acceptance of our machines, deterioration of the general market and adverse
economic conditions, corporate developments at ASV, Caterpillar or Vermeer, our ability to realize
the anticipated benefits from our relationships with Caterpillar and Vermeer and the other factors
described in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31,2006. Any forward-looking statements provided from time-to-time by us represent only management’s
then-best current estimate of future results or trends.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have no history of investing in derivative financial instruments, derivative commodity
instruments or other such financial instruments, and do not anticipate making such investments in
the future. Transactions with international customers are entered into in U.S. dollars, precluding
the need for foreign currency hedges. Additionally, we invest in money market funds and fixed rate
U.S. government and corporate obligations, which experience minimal volatility. Thus, the exposure
to market risk is not material.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures. As of the end of the period covered by this
report (the Evaluation Date), we carried out an evaluation, under the supervision and with the
participation of management, including the Chief Executive Officer and the Chief Financial Officer,
of the effectiveness of the design and operation of our disclosure controls and procedures (as
defined in Rules 13a-15(e) of the Securities Exchange Act of 1934, as amended (the Exchange Act).
Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer
concluded that, as of the Evaluation Date, our disclosure controls and procedures were effective to
ensure that information required to be disclosed in the reports that we file or submit under the
Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified
in applicable rules and forms, and (ii) accumulated and communicated to our management, including
our Chief Executive Officer and the Chief Financial Officer, to allow timely decisions regarding
required disclosures.
Changes in Internal Controls Over Financial Reporting. There were no changes in
our internal control over financial reporting (as defined in Rule 13(a)-15(f) under the Exchange
Act) during the third fiscal quarter of 2007, that have materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting.
PART II — OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 1A. RISK FACTORS
In addition to the other information set forth in this report and our other filings with the
Securities and Exchange Commission, you should carefully consider the factors discussed in Part I,
Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2006, which could have a
material impact on our business, financial condition or results of operations. We are updating the
risk factors discussed in our Annual Report on Form 10-K by including the risk factor set forth
below. The risks described below and in our Annual Report on Form 10-K are not the only risks we
face. Additional risks and uncertainties not presently known to us or that we currently believe to
be immaterial may also adversely affect our business, financial condition or results of operations.
Our business would be adversely affected if we are not able to retain our existing dealer network
or find alternative dealers for those dealers who choose to no longer represent our products.
We sell our products to a dealer network primarily located in North America. The majority of
these dealers also sell products of other manufacturers, some of whom have much greater resources
than us and can exert significant influence over the actions of these dealers. If these
manufacturers chose to impose restrictions on the products these dealers are able to sell, our
business could be materially harmed.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Our Board of Directors approved a $50 million stock buyback plan in October 2006. Under this
plan, we may repurchase up to $50 million of our common stock over a three year period beginning in
October 2006. We anticipate that we may repurchase $10-15 million of our common stock under this
plan in 2007. We intend to fund any repurchases with available cash and investments, as well as
cash generated from operations.
We made no purchases of our common stock during the three months ended September 30, 2007. For
the nine months ended September 30, 2007, we repurchased 100,000 shares of our common stock at an
aggregate cost of $1.5 million. As of September 30, 2007, we had remaining authorization of
$48,512,000 for repurchasing our shares under our stock buyback plan.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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.