Arctic Cat Inc.

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Arctic Cat Inc.

600 Brooks Avenue South
Thief River Falls, Minnesota 56701
U.S.A.
Telephone: (218) 681-8558
Fax: (218) 681-3162
Web site: http://www.arctic-cat.com

Public Company
Incorporated: 1983 as Arctco, Inc.
Employees: 1,700
Sales: $484.01 million (2000)
Stock Exchanges: NASDAQ
Ticker Symbol: ACAT
NAIC: 336999 All Other Transportation Equipment; 315211 Men’s and Boys Cut and Sew Apparel Contractors; 315239 Women and Girls Cut and Sew Other Outwear

One of the pioneers as well as leaders in its field, Arctic Cat Inc. designs, manufactures, and sells Arctic Cat snowmobiles, all-terrain vehicles (ATVs), and generators, as well as related parts, accessories, and garments. Based in Thief River Falls, Minnesota, Arctic Cat was formed in 1983 under the name Arctco, Inc. to continue the legacy of snowmobile manufacturer Arctic Enterprises, Inc., which went bankrupt in 1981. In August 1996 Arctic Cat officially renamed itself after its most widely known product, the Arctic Cat snowmobile. Arctic Cat has firmly established itself as a leading producer of snowmobiles and ATVs, ranking third in market share in snowmobile sales and fifth in market share in ATV sales. Arctic Cat maintains production facilities in Thief River Falls, Minnesota, and Madison, South Dakota. In early 1996, the company entered the market for ATVs and has steadily become an industry leader, predicting that by the end of fiscal 2001 ATV sales will be equal to the company’s snowmobile sales. Arctic Cat closed its Personal Watercraft Division in 1999 after steadily declining sales. The company manufactured the Tigershark brand of personal watercraft and despite discontinuing the production of new units, it still provides Tigershark parts, accessories, and service through its 1,200 North American dealerships and its 40 distributors worldwide.

Origins

When Edgar Hetteen saw his first snowmobile, his reaction was immediate, leaving no question about his feelings. “I wouldn’t have anything to do with the thing at first,” he later recalled, “I told my brother-in-law, David [Johnson], he had wasted our time and money building it and I wanted no more of it.” For someone who would spend nearly every waking hour for the next ten years trying to arouse widespread enthusiasm in snowmobiles, Hetteen’s words marked a decidedly chilly beginning to what would become a lifelong love affair. Hetteen, who would go on to found the predecessor company to Arctic Cat and, by doing so, position himself among the handful of pioneers in the U.S. snowmobile industry, was more concerned at the time about his farming equipment fabrication company than the curious sled that greeted him upon his arrival in Roseau, Minnesota. The year was 1955 and Hetteen had just returned from a sales trip, his latest effort at turning his company, Hetteen Hoist and Derrick, into a flourishing concern. It was proving to be a difficult task. Far removed from more populated, lucrative markets, Hetteen Hoist and Derrick was struggling in its eighth year of business, scoring only a modicum of success as a custom fabricator of specialized farm implements and tools. Hetteen’s latest business trip had achieved lackluster results, and he initially was unimpressed with Johnson’s snowmobile. Before long, however, one of the world’s preeminent snowmobile manufacturers was established, spawning the creation of Arctic Cat snowmobiles and a new form of winter recreation for millions of people.

Johnson’s prototype had been built at the request of a local resident, Pete Peterson, who asked the manufacturer to fabricate a “gas-powered sled.” The proceeds from the sale of Peterson’s snowmobile enabled Hetteen Hoist and Derrick to make payroll, tempering Hetteen’s view considerably, and shortly thereafter another Roseau local placed an order for a gas-powered sled, as demand for the novel snow machines began to build. By the end of the winter of 1955-56, Hetteen’s company had constructed five snowmobiles; the following winter 75 machines were built, and during the winter of 1957-58, more than 300 snowmobiles were produced by Hetteen and his workers. In the space of a few short years, the primary business of Hetteen’s company had switched from fabricating farm equipment to building and testing machines designed for snow travel. Hetteen, by this point, was hooked.

For years, Hetteen had endeavored to sell the straw cutters, post setters, and other equipment his company made to markets outside Roseau, but had found little success. With snowmobiles, he sensed the opportunity to achieve the success that had eluded him with agricultural machinery. Early on he realized that to make his new product a success in distant markets it would have to be marketed as a recreational device, but during the late 1950s public interest in snowmobiles was essentially nonexistent, a hurdle Hetteen would overcome by launching an ambitious public relations campaign. In March 1960, Hetteen and three of his cohorts took their snowmobiles to Alaska and completed an 1,100-mile trek from Bethel to Fairbanks in 18 days, drawing the attention of newspaper reporters, magazine writers, and ham radio operators.

Hetteen returned to Roseau pleased by his success in piquing public interest in snowmobiles, but his arrival home did not meet with applause or congratulatory pats on the back. Hetteen Hoist and Derrick had since been renamed Polaris Industries, Inc. and capitalized by local investors, who were somewhat miffed that Hetteen had abandoned his duties at Polaris and gone to Alaska. As this dispute over the future course of the company was being played out, Hetteen was approached by a group of investors from Thief River Falls, Minnesota. Led by L.B. Hartz, a successful food broker and supermarket owner, the group offered to financially back Hetteen if he moved his company to Thief River Falls; Hetteen declined, and in May 1960, two months after completing his successful trek in Alaska, Hetteen sold his controlling interest in Polaris and returned to Alaska, where he hoped to start a new career as a bush pilot and frontiersman.

Hetteen’s second visit to Alaska was not as successful as his first. After several months of working at isolated airstrips as a pilot and mechanic, Hetteen decided to accept Hartz’s offer and renew his interest in designing, building, and testing snowmobiles. By Christmas 1960, when Hetteen arrived in Thief River Falls, financial arrangements already had been made to provide him with a co-signed note for $10,000, which he used to rent a vacant 30- by 70-foot grocery warehouse and start his new business, Polar Manufacturing Company.

1962: Birth of Arctic Cat

Polar Manufacturing opened its doors on January 2, 1961, and initially manufactured electric steam cleaners and a device to kill insects called “Bug-O-Vac” to raise enough money to begin snowmobile production in earnest. The first snowmobile, the “New Polar 500,” was completed by the end of the year and marketed as a utility model for use by forestry, power and light, telephone, and oil exploration companies. Although Hetteen had wanted to develop snowmobiles as a recreational product nearly from the outset of his involvement with the machines, he knew he needed to develop a need for snowmobiles before he could begin to inspire a desire for them. In 1962, after its inaugural year of business, Polar Manufacturing was renamed Arctic Enterprises, Inc.. That year it introduced the red “Arctic Cat 100,” the first front-engined sport sled in the United States, which Hetteen referred to as the “Tin Lizzie.” Concurrent with the introduction of the Arctic Cat 100, a distribution network was established to carry the machine to distant markets, as Hetteen had always hoped. Although the New Polar 500 had been the first model produced, the Arctic Cat 100 represented the beginning of an era for both Arctic Enterprises and snowmobile enthusiasts across the country, ushering in a new winter sport and launching the Arctic Cat tradition.

Distributor relationships were forged throughout a wide territory ranging from New York to Idaho, as the fledgling company sought to secure a foothold in distant markets. There were 19 distributors signed up for the 1963-64 winter season and 13 Arctic Cat models, up from the six offered the previous year. During the first half of the decade, the company’s sales climbed encouragingly, propelled by the increasing number of models produced each year and supported by a steadily growing distribution network, but annual profits were not demonstrating the same vibrancy. This inability to post consistent profit growth— the company lost $20,000 in 1964 on $750,000 in sales—was part of the reason Hetteen decided to step down from his leadership position in 1965 and hand the reins of command to Lowell Swenson. Hetteen, literally, had spent nearly all of his time during the previous decade trying to make a successful snowmobile manufacturing company; now as his company was on the brink of success he decided that a new leader was required to push Arctic Enterprises over the edge. Hetteen receded from the bustling activity pervading Arctic Enterprises but he did not disappear altogether. Years later, Hetteen would return, but during the interim, Arctic Enterprises would grow into the flourishing concern he had long sought.

When Swenson became president of Arctic Enterprises in 1966 he made one goal of the company’s future clear: “We [will] concentrate on one machine,” he vowed, “and make it a damn good one.” True to his word, Swenson spearheaded the effort toward designing a snowmobile that could carry the company into the future, putting to an end the era of the red Arctic Cats after the 1965-66 winter season to make room for the black “Panther.” Debuting in 1966, the Panther possessed technological breakthroughs that drove sales and, most importantly, profits upward for the remainder of the 1960s.

Company Perspectives:

The Arctic Cat brand name has existed for more than 30 years and is among the most widely recognized and respected names in the snowmobile industry.

In 1968, Arctic Enterprises generated $7.5 million in sales, three times the amount collected the year before, and posted $379,000 in net income or eight times the figure recorded in 1967, ending the nagging worries about profitability. In 1969, annual sales continued their exponential march upward, reaching $21.7 million, while net income eclipsed the $1 million plateau, climbing to $1.2 million. Business was booming, with the company holding a firm grip on nearly 12 percent of the U.S. market for snowmobiles, a percentage that perhaps could have been higher, but the two shifts working the production lines at the Thief River Falls facilities were not enough to satisfy the mounting demand for Panther snowmobiles. As the company prepared for the 1970s, it exited the 1960s with a full head of steam and high expectations for future growth. Production facilities were expanded greatly in anticipation of rising demand and a line of snowmobile clothing was introduced to give the company a more diversified footing in the rapidly expanding snowmobile industry.

1970s Collapse

The 1970s began as expected, with the company’s annual sales soaring 113 percent to reach $46.5 million, its market share rising to 13 percent, and its net income jumping to $2.9 million. Prosperous times gave Arctic Enterprises the ability to diversify further, providing the financial means to acquire boat manufacturer Silverline, Inc. of Moorhead, Minnesota, the company’s first major cross-seasonal acquisition, and to introduce mini-bikes on the market, both of which became part of the company’s operations in 1970. The following year, Arctic Enterprises moved farther afield, acquiring lawn and garden manufacturer General Leisure, and then, in 1973, introducing a line of French-made bicycles. By this point, however, the luster of Arctic Enterprises operations had dulled considerably. The years of robust growth were over as quickly as they started.

The line of bicycles proved to be unsuccessful and General Leisure proved to be a costly mistake, leading to its divestiture in 1973. But these ancillary businesses were the least of Arctic Enterprises’ problems. The demand for snowmobiles tapered off during the early years of the 1970s, beginning their downward path in 1971 and resulting in Arctic Enterprises’ most disastrous year in 1974. If it was any consolation for the employees and management in Thief River Falls, who in the space of a few months had watched their prolific rise screech to a halt, Arctic Enterprises was not alone in its downward free-fall. Across the country, snowmobile manufacturers were reeling from the debilitative effects of depressed demand, with many going out of business. In 1970, when the snowmobile industry was thriving, there were more than 100 brands of snowmobiles on the market; by 1976, when the worst of the harsh economic times was over, the number of brands on the market had plunged precipitously to a mere 13.

As harmful as waning snowmobile demand had been to Arctic Enterprises’ business, however, conditions in the industry after the shakeout was completed placed the Thief River Falls concern in what could be regarded as a stronger position. Much of the competition in the United States had been weeded out, and Arctic Enterprises continued to reign as the largest producer of snowmobiles in the country. Recovery was quick in the late 1970s, sufficient enough to enable the company to finance the acquisition of its second boat manufacturer in 1977, when Arctic Enterprises purchased the Lund Boat Company and gained control of its manufacturing facilities in Minnesota, Wisconsin, and Manitoba, Canada. Sales by the end of the year flirted with $100 million, reaching $99 million, while the company’s market share had been bolstered by the departure of many of its competitors, rising to an impressive 25 percent. The following year, in 1979, sales soared 61 percent to $175 million, by which point the number of snowmobile manufacturers in the country had been whittled down to six. Once again business was booming, and the company was exiting the 1970s much as it had ended the 1960s, with its business interests moving forward on all fronts.

1980s: Reincarnation of Arctic Cat

To the chagrin of the workers and management at Thief River Falls, history continued to repeat itself in the decade ahead, as the early 1980s paralleled the early 1970s and rampant growth quickly disappeared. This time, however, the effects were much more devastating. Sales in 1980 climbed to $185 million, despite a decline in snowmobile sales throughout the country, but by far the most telling and most depressing financial figure for the year was the company’s profit total. Arctic Enterprises lost $11.5 million during the year, a staggering blow that was followed by another $10 million loss the following year. As production totals in 1981 fell to their lowest levels since 1969, the bankers who had granted the company loans over the years became disgruntled and alarmed. Worried that the company would not be able to make good on its financial promises, the bankers called for the payment of $48.5 million in loans on February 6,1981. Eleven days later, Arctic Enterprises filed for protection under Chapter 11 of the U.S. Bankruptcy Act. In a year that otherwise would have been celebrated as the company’s 20th anniversary year, Arctic Enterprises was ruined financially.

Key Dates:

1955:: Pete Peterson commissions “gas-powered” sled from Hetteen Hoist and Derrick.
1958:: Snowmobiles become primary business of Hetteen Hoist and Derrick, later renamed Polaris Industries.
1960:: Hetteen sells controlling interest in Polaris Industries.
1961:: Hetteen moves operations to Thief River Falls, Minnesota, and founds Polar Manufacturing Company.
1962:: Polar Manufacturing is renamed Arctic Enterprises, Inc.; Arctic Cat 100, the first front-engined sport sled, is introduced.
1969:: Annual sales reach $21.7 million.
1970:: Arctic Enterprises acquires Silverline Inc. of Moor-head, Minnesota.
1977:: Lund Boat Company is acquired.
1981:: Sales plummet and bankers call Arctic Enterprises’ $48.5 million in loans; company files for bankruptcy.
1983:: Arctco, Inc. is founded by Edgar Hetteen and investors.
1990:: Arctco, Inc. goes public.
1993:: Company enters personal watercraft industry.
1996:: Company produces the first of its all-terrain vehicles (ATVs); Arctco changes its name to Arctic Cat Inc.
1997:: Arctic Cat opens a distribution center in Bucyrus, Ohio.
1999:: Arctic Cat closes its Personal Watercraft Division.

The news could not have been worse, but even as steps were being taken to liquidate the snowmobile operations and the rest of the company was being sold piecemeal, there were some encouraging reports that at least seemed to underscore the strength of the Arctic Cat name in snowmobile circles across the country. Even though the company’s production facilities had been shuttered, the demand for Arctic Cat snowmobiles had increased. Remarkably, sales were up high enough for the company to capture 38 percent of the U.S. market one year after production had stopped, providing ample evidence that loyalty to and confidence in Arctic Enterprises’ products remained high.

Dead but not forgotten, Arctic Enterprises was etched in the memories of its loyal customers, some of whom vowed never to ride a snowmobile again. The memory of the company also was etched in the hearts of its former employees, the pangs of which led a small group of former managers to attend the auction of Arctic Enterprises’ various properties. Included in this group was Edgar Hetteen, who returned to witness the dismemberment of the company he had left nearly 20 years earlier; by the end of the day the group had acquired enough of Arctic Enterprises’ properties to establish a new snowmobile manufacturing company, which was incorporated as Arctco, Inc. in 1983. As company advertisements would soon announce, the Cat was back, and for the legions of faithful customers the return of the popular Arctic Cat snowmobiles was welcome news.

After acquiring the production rights and the exclusive use of the Arctic Cat brand name, Arctco made preparations to get its product to market, beginning production of its snowmobiles in August 1983. The less than 3,000 snowmobiles made for the 1984 model year sold out quickly, enabling the company to generate $7.3 million in sales and post $600,000 in profit. All of Arctic Cat’s trademarks, equipment, and manufacturing properties were acquired subsequently in 1986 and 1987, restoring much of the luster formerly radiated by Arctic Enterprises. Sales and profits rose energetically throughout the remainder of the decade, reaching an encouraging $138.8 million and $12.5 million, respectively, by the end of 1990, the year Arctco became a publicly traded company.

During the first half of the 1990s, Arctco continued to enjoy impressive success, making its entry into the personal watercraft market and recording 21.5 percent annual growth in sales and 21.7 percent annual growth in net income. By 1994, when the company generated $268.1 million in sales, Arctco had surpassed the revenue volume recorded by Arctic Enterprises before its death knell had reverberated throughout Thief River Falls in 1981. As the company planned for the late 1990s and the new century ahead, prospects for future growth were encouraging, bolstering confidence that the coming years would bring continued success to the thriving company.

During the mid-1990s the North American snowmobile industry was expanding at a 20 percent annual clip, while the market for personal watercraft (PWC), the company’s other primary business area, was recording annual gains in excess of 30 percent. In 1993 when Arctco began its PWC division by introducing its Tigershark brand, earnings remained strong and the company infrastructure looked very solid once again. In addition, Arctco had established a new company presence in the South, where dealers agreed to carry the Tigershark brand of PWC and its line of accessories. The next few years, however, found the PWC division unable to establish a solid foothold in the industry and by 1998 PWC earnings were down by 7 percent and the company’s watercraft future appeared uncertain.

While Arctco’s watercraft division was floundering, further opportunities for financial growth were opened to the company when it made its first foray into the market for all-terrain vehicles, a $1.2 billion industry during the mid-1990s that was recording nearly 20 percent annual growth. In January 1996, Arctco’s first four-wheel-drive recreational and utility vehicle, the Bearcat 454, rolled off the company’s production line, giving Arctco a diversified, cross-seasonal product line to drive its growth in the years ahead. Although finding it difficult to assert itself in the competitive field of PWC, Arctco seemed to have found its niche in the ATV arena. Following an aggressive marketing campaign targeted at its ATV products, Arctco posted a net earnings figure up 39 percent for 1997.

By the end of 1998 PWC sales for the company were significantly down and, faced with increasing competition and a significant loss of market share, Arctco announced its plans to exit the watercraft industry beginning in September 1999. The company’s decision to pull out of PWC manufacturing came at the high pretax cost of $26.2 million, or $0.66 per share; the total cost amounted to a hefty $16.9 million after taxes.

In the midst of its expansion from snowmobiles into cross-seasonal products such as PWC and ATVs, Arctco changed its name in August 1996 to Arctic Cat Inc. The company had been urged by its dealers to rename itself. The more than 1,200 independent dealers nationwide were convinced that the Arctic Cat brand name had stronger name recognition with both customers and potential shareholders than did the previously used Arctco. With high customer brand loyalty in recreational and utility vehicles, the dealers reasoned that products produced by Arctic Cat Inc. would meet with greater enthusiasm than those manufactured by the little known Arctco.

In 1997 the newly named Arctic Cat continued its strong push into the ATV market. The company attributed its success to producing vehicles with competitive features while maintaining the lowest sticker price in each class. Arctic Cat continued to produce significant numbers of new ATV models and in 1997 it produced its line of 300s, offering both two-wheel-drive and four-wheel-drive vehicles. When asked about the company’s plans to expand production for the ATV market, company spokesperson Mark Blackwell told Dealernews, “The new 300’s are not the last of it. We will introduce additional new models…even during the next year. We are a market driven company and will respond to what the customers are asking for.”

In keeping with its market-driven approach Arctic Cat surveyed ATV consumers and its research indicated that the primary uses of ATVs were for general recreation. The company’s own figures from the D.J Brown Composite Index and Arctic Cat Inc. indicated that 41 percent of ATV buyers used their vehicles for recreation, 23 percent for hunting or fishing, 12 percent for farm or ranch use, 7 percent for hauling and towing, 7 percent for transportation, and 1 percent for commercial use. The numbers further indicated that the typical buying cycle was 3.6 years. Arctic Cat continued to diversify its line of vehicles accordingly, manufacturing ATVs and snowmobiles to meet the diverse needs of its customers.

In 1997 Arctic Cat reconfigured its means of supplying dealers by establishing a new distribution center in Bucyrus, Ohio. The new distribution center’s location was chosen in part because it was located near a United Parcel Service (UPS) hub in Columbus, Ohio. The new 225,000-square-foot center allowed the company to move its products out quickly and efficiently and also to free up much needed production space at its Thief River Falls manufacturing facility.

In 1997 Arctic Cat faced litigation. Injection Research Specialists Inc. and Pacer Industries filed suit against the snowmobile manufacturer, maintaining that Arctic Cat, in purchasing engines from Fuji Heavy Industries, a Japanese supplier of a two-stroke electronic fuel injection system, had violated trade secrets. A similar suit had been filed against Arctic Cat’s major competitor Polaris a year earlier but with differing results. The suit against Arctic Cat was dismissed in December 1998, whereas the suit against Polaris resulted in the defendant being ordered to pay $33.8 million, with a total pretax litigation cost to Polaris of $61.4 million.

Although fortunate in its legal battle Arctic Cat suffered big losses toward the end of the 1990s. Snowfall was significantly down in 1998 and 1999 and company earnings fell from $25 million in 1998 to $7.6 million in 2000.

Despite heavy losses Arctic Cat invested in new manufacturing technology in 2000. The CAD/CAM/CAE technology was as sophisticated as those technologies used by aerospace and automotive companies and allowed Arctic Cat to make major improvements in design and manufacturing. Company engineers could now achieve greater precision when building a machine and the company saved money in producing its pre-production molds. The result was that the company improved its design ability, its production capability, and, therefore, customer satisfaction.

While working on better technology for the snowmobile division, Arctic Cat launched a million-dollar safety campaign for young riders of ATVs. According to the U.S. Consumer Product Safety Commission (CPSC), more than 3,400 ATVrelated deaths had occurred since 1982. “Four out of every 10 involved children under the age of 16.” The new safety campaign utilized an interactive CD-ROM game and was sent free of charge to schools and libraries and was available to families who purchased ATVs.

With early snowfall in the closing months of 2000, Arctic Cat’s quarterly net income quintupled to $21 million. The new century saw Arctic Cat introducing a new line of four-stroke snowmobiles to meet with consumer and government interest in snowmobiles that were quieter and more environmentally friendly. The top-of-the-line sleds were given a trial at Yellowstone National Park during the 2000-01 season. The U.S. Department of the Interior announced that snowmobiles would be banned from use in Yellowstone starting in 2003. The four-stroke technology was aimed to address the environmental concerns and put Arctic Cat Inc. once more on the cutting edge of product development.