UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2006

A.S.V., Inc.

(Exact name of registrant as specified in its charter)

Minnesota		41-1459569
(State or other jurisdiction of		(I.R.S. Employer Identification No.)
incorporation or organization)
840 Lily Lane
P.O. Box 5160
Grand Rapids, MN 55744		(218) 327-3434
(Address of principal executive offices,		(Registrant’s telephone number,
including zip code)		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 July 31, 2006, 26,667,020 shares of the issuer’s Common Stock were issued and outstanding.

 

 

PART I — FINANCIAL INFORMATION

ITEM 1 — FINANCIAL STATEMENTS

A.S.V., INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(In thousands, except share data)

		June 30,				December 31,
		2006				2005
ASSETS
CURRENT ASSETS
Cash and cash equivalents		$	19,027			$	35,517
Short-term investments			217				1,224
Accounts receivable, net
Trade			41,012				33,706
Caterpillar Inc.			10,245				10,087
Inventories			64,953				52,362
Deferred income taxes			3,860				3,545
Other current assets			2,287				1,083
Total current assets			141,601				137,524
PROPERTY AND EQUIPMENT, net			22,605				20,907
LONG-TERM INVESTMENTS			14,185				7,995
OTHER NON-CURRENT ASSET			426				535
INTANGIBLES, net			7,823				7,874
GOODWILL			8,386				8,386
		$	195,026			$	183,221
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES
Current portion of long-term liabilities		$	40			$	71
Accounts payable			18,162				15,498
Accrued liabilities
Warranties			6,013				5,077
Other			2,871				2,195
Income taxes payable			—				855
Total current liabilities			27,086				23,696
LONG-TERM LIABILITIES, less current portion			53				138
DEFERRED INCOME TAXES			1,230				1,300
COMMITMENTS AND CONTINGENCIES			—				—
SHAREHOLDERS’ EQUITY
Capital stock, $.01 par value:
Preferred stock, 5,000,000 shares authorized; no shares issued or outstanding			—				—
Common stock, 70,000,000 shares authorized; shares issued and outstanding — 26,664,895 in 2006; 26,988,187 in 2005			267				270
Additional paid-in capital			86,363				92,327
Retained earnings			80,027				65,490
			166,657				158,087
		$	195,026			$	183,221

See notes to consolidated financial statements.

A.S.V., INC.

CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
(In thousands, except earnings per share data)

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2006				2005				2006				2005
Net sales
Trade		$	49,550			$	37,565			$	91,686			$	67,807
Caterpillar			22,599				19,127				45,340				42,065
Total net sales			72,149				56,692				137,026				109,872
Cost of goods sold			55,133				42,826				103,726				83,247
Gross profit			17,016				13,866				33,300				26,625
Operating expenses:
Selling, general and administrative			5,221				3,900				10,747				7,684
Research and development			431				440				779				868
Operating income			11,364				9,526				21,774				18,073
Other income (expense)
Interest income			438				326				903				629
Interest expense			—				(28	)			—				(56	)
Other, net			(6	)			5				10				51
Income before income taxes			11,796				9,829				22,687				18,697
Income taxes			4,195				3,645				8,150				6,970
NET EARNINGS		$	7,601			$	6,184			$	14,537			$	11,727
Net earnings per common share
Basic		$	.28			$	.23			$	.54			$	.44
Diluted		$	.28			$	.22			$	.52			$	.42
Weighted average number of common shares outstanding
Basic			26,996,267				26,787,204				27,042,771				26,757,140
Diluted			27,526,027				27,610,372				27,700,623				27,626,082

See notes to consolidated financial statements.

A.S.V., INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)

		Six months ended June 30,
		2006				2005
Cash flows from operating activities:
Net earnings		$	14,537			$	11,727
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation			1,368				909
Amortization			51				51
Deferred income taxes			(385	)			(550	)
Stock-based compensation expense			1,423				—
Tax benefit from stock option exercises			1,175				630
Changes in assets and liabilities
Accounts receivable			(7,464	)			395
Inventories			(12,591	)			(17,413	)
Other assets			(1,095	)			370
Accounts payable			2,664				3,000
Accrued liabilities			1,612				1,296
Income taxes payable			(855	)			(328	)
Net cash provided by operating activities			440				87
Cash flows from investing activities:
Purchase of property and equipment			(3,066	)			(10,371	)
Purchase of short-term investments			(113	)			(108	)
Purchase of long-term investments			(6,190	)			(2,080	)
Redemption of short-term investments			1,120				9,461
Net cash used in investing activities			(8,249	)			(3,098	)
Cash flows provided by financing activities:
Principal payments on long-term liabilities			(116	)			(97	)
Costs from issuance of common stock			—				(36	)
Proceeds from exercise of stock options, net			1,486				1,160
Retirement of common stock			(10,051	)			(110	)
Net cash provided by (used in) financing activities			(8,681	)			917
Net decrease in cash and cash equivalents			(16,490	)			(2,094	)
Cash and cash equivalents at beginning of period			35,517				27,438
Cash and cash equivalents at end of period		$	19,027			$	25,344
Supplemental disclosure of cash flow information:
Cash paid for interest		$	—			$	57
Cash paid for income taxes		$	9,767			$	7,236

See notes to consolidated financial statements.

A.S.V., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

June 30, 2006

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.

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.

Warranties

     We provide a limited warranty to our customers. 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.

     Changes in our warranty liability are as follows:

		June 30,
		2006				2005
		(In thousands)
Balance, beginning of period		$	5,431			$	3,006
Expense for new warranties issued			1,922				1,018
Warranty claims			(1,340	)			(538	)
Balance, end of period		$	6,013			$	3,486

A.S.V., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
(UNAUDITED)

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — continued

Reclassification

     Certain 2005 balance sheet amounts have been reclassified to conform with the 2006 financial statement presentation, with no effect on previously reported operating results.

NOTE 2. INVENTORIES

     Inventories consist of the following:

		June 30,				December 31,
		2006				2005
		(In thousands)
Raw materials, service parts and work-in-process		$	51,864			$	42,122
Finished goods			11,840				8,922
Used equipment held for resale			1,249				1,318
		$	64,953			$	52,362

NOTE 3. STOCK-BASED COMPENSATION

     At June 30, 2006, 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 to seven years and provide for accelerated vesting if there is a change in control, as defined. At June 30, 2006, we had 3,346,000 shares available for future grant under our three stock option plans.

     On January 1, 2006, we adopted Statement of Financial Accounting Standard No. 123R, Share-Based Payment (SFAS 123R), which requires the fair value of all share-based payment transactions, including stock options, be recognized in the income statement as an operating expense based on their fair value over the requisite service period. For the three and six months ended June 30, 2006, we recorded compensation expense of $776,000 and $1,423,000 ($500,000 and $912,000 net of income taxes) related to the adoption of SFAS 123R, which has been included in selling, general and administrative expenses. In addition, our executive officers and certain members of management no longer receive stock options as part of their compensation package but instead will be eligible to receive a bonus in 2006 if certain financial performance measures are attained. For the three and six months ended June 30, 2006, we accrued $82,000 and $163,000 ($52,000 and $104,000 net of income taxes) towards these bonuses, which has been included in selling, general and administrative expenses. Our total stock-based compensation related expense reduced both basic and diluted earnings per share by $.02 and $.04 for the three and six months ended June 30, 2006.

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

     Prior to adopting SFAS 123R, we presented all tax benefits resulting from the exercise of stock options as operating cash flows in the Consolidated Statement of Cash Flows. SFAS 123R requires that cash flows from the exercise of stock options resulting from tax benefits in excess of recognized cumulative compensation cost (excess tax benefits) be classified as cash flows from financing activities. For the six months ended June 30, 2006, there were no such excess tax benefits that were required to be classified as cash flows from financing activities. The total income tax benefit from the exercise of stock options was $1,175,000 and $630,000 for the six months ended June 30, 2006 and 2005.

A.S.V., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
(UNAUDITED)

NOTE 3. STOCK-BASED COMPENSATION-continued

     We have elected the modified prospective transition method in applying SFAS 123R. Accordingly, periods prior to adoption have not been restated. Under this transition method, we will apply the provisions of SFAS 123R to new awards and to awards modified, repurchased or cancelled after January 1, 2006. Additionally, we will recognize compensation cost for the portion of awards for which the requisite service has not been rendered (unvested awards) that are outstanding as of January 1, 2006, as the remaining service is rendered. The compensation cost recorded for these awards will be based on their grant-date fair value as calculated for the pro forma disclosures required by FAS 123. At June 30, 2006, we had $6,647,000 of unrecognized compensation costs related to non-vested stock options that are expected to be recognized over a weighted average period of 1.8 years.

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

		Three months ended				Six months ended
		June 30, 2005				June 30, 2005
		(In thousand, except share data)
Net earnings, as reported		$	6,184			$	11,727
Less total stock-based employee compensation determined under fair value methods for all awards, net of income taxes			(418	)			(820	)
Pro forma net earnings		$	5,766			$	10,907
Earnings per share:
Basic — as reported		$	.23			$	.44
Basic — pro forma		$	.22			$	.41
Diluted — as reported		$	.22			$	.42
Diluted — pro forma		$	.21			$	.39

     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 six months ended June 30, 2006 and 2005 were $10.32 and $8.73, respectively. The fair value of options at the date of grant and the assumptions used to determine such values are indicated in the following table:

		Six months ended
		June 30,
		2006				2005
Risk-free interest rate			4.73	%			4.09	%
Expected volatility			34.95	%			39.45	%
Expected life (in years)			3.75				6.05
Dividend yield			—				—

     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 US 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 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.

A.S.V., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
(UNAUDITED)

NOTE 3. STOCK-BASED COMPENSATION-continued

     Option transactions under the plans during 2006 are summarized as follows:

						Weighted-
						Average
						Exercise
		Shares				Price
Outstanding at December 31, 2005			1,950,520			$	10.14
Granted			197,500				30.61
Exercised			(168,670	)			8.23
Canceled			(7,000	)			17.25
Outstanding at March 31, 2006			1,972,350			$	12.33
Granted			75,000				29.59
Exercised			(8,887	)			11.49
Canceled			(500	)			32.22
Outstanding at June 30, 2006			2,037,963			$	13.07

     The following information applies to grants that were outstanding at June 30, 2006:

		Options Outstanding
						Weighted-
		Number				average				Weighted-
Range of		outstanding				remaining				average
exercise		at				contractual				exercise
prices		period end				life				price
$    4.04—6.06			860,050				3.37			$	4.56
$    6.13—9.19			90,300				1.24				6.67
$14.45—21.67			779,613				4.94				16.73
$22.60—32.22			308,000				4.58				29.41
			2,037,963							$	13.07

		Options exercisable
Range of		Number				Weighted-
exercise		exercisable at				average
prices		period end				exercise price
$    4.04—6.06			621,311			$	4.62
$    6.13—9.19			90,300				6.67
$14.45—21.67			252,738				16.55
$22.60—32.22			9,000				22.60
			973,349			$	8.08

NOTE 4. BUILDING EXPANSION PROJECT

     In March 2006, we announced our plan to expand our Grand Rapids, Minnesota production facility. Under the plan, we intend to approximately double the size of our current machine production facility with a 120,000 square foot addition. The projected cost to construct and equip the facility is currently estimated at $6.0 to $6.5 million. Site work for the addition began in early May with completion expected to be in late 2006. We anticipate funding this expenditure with available cash.

A.S.V., INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
(UNAUDITED)

NOTE 5. STOCK BUYBACK PROGRAM

     In May 2006, we announced the implementation of a $10 million stock buyback program. As of June 30, 2006, the full $10 million had been expended, as we repurchased 499,000 shares under the program. We used existing cash to fund the buyback program.

ITEM 2 — MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

     We design, manufacture and sell rubber-tracked, all-season vehicles and related accessories and attachments. We also manufacture rubber-tracked undercarriages, which are a primary component on Caterpillar Inc.’s Multi-Terrain Loaders (MTLs). Our products are able to traverse nearly any terrain with minimal damage to the ground, making them useful in industries such as construction, landscaping, forestry and agriculture. We distribute our products through an independent dealer network in the United States, Canada, Australia and New Zealand. The undercarriages sold to Caterpillar Inc. (Caterpillar) are incorporated by Caterpillar in its MTL products and sold exclusively through the Caterpillar dealer network, primarily in North America.

     We experienced increased sales for the six months ended June 30, 2006 due primarily to the reasons as explained below:

	•		We believe there is a greater acceptance of rubber track machines in the marketplace as users experience the benefits that a rubber track machine can provide over a standard wheeled machine.
	•		The number of companies entering into the rubber track machine market has increased in the last few years, thereby contributing to the increased awareness and market acceptance of the products.
	•		We have increased our number of product offerings over the past few years thereby making it easier to attract prospective dealers to carry our Posi-Track product line. In addition, the number of dealers selling our Posi-Track product line has increased over the past few years.

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 and warranty obligations. 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 and other outside sources and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. 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. Revenue is recognized 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 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. 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 our inventories are subject to rapid obsolescence. We evaluate the adequacy of the inventories’ carrying value quarterly.

     Warranties. We provide limited warranties to purchasers of our products which vary by product. The 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 income taxes using an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in our financial statements or tax returns.

     Stock-Based Compensation. On January 1, 2006, we adopted Statement of Financial Accounting Standard No. 123R, Share-Based Payment (SFAS 123R), which requires the fair value of all share-based payment transactions, including stock options, be recognized in the income statement as an operating expense based on their fair value over the requisite service period. For the three and six months ended June 30, 2006, we recorded compensation expense of $776,000 and $1,423,000 ($500,000 and $912,000 net of income taxes) related to the adoption of SFAS 123R, which has been included in selling, general and administrative expenses. In addition, our executive officers and certain members of management no longer receive stock options as part of their compensation package but instead will be eligible to receive a bonus in 2006 if certain financial performance measures are attained. For the three and six months ended June 30, 2006, we accrued $82,000 and $163,000 ($52,000 and $104,000 net of income taxes) towards these bonuses, which has been included in selling, general and administrative expenses. Our total stock-based compensation related expense reduced both basic and diluted earnings per share by $.02 and $.04 for the three and six months ended June 30, 2006.

Results of Operations

     The following table sets forth certain Statements of Earnings data as a percentage of net sales:

          The following table sets forth certain Statement of Earnings data as a percentage of net sales:

		Three Months Ended June 30,								Six Months Ended June 30,
		2006				2005				2006				2005
Net sales			100.0	%			100.0	%			100.0	%			100.0	%
Gross profit			23.6				24.5				24.3				24.2
Selling, general and administrative			7.2				6.9				7.8				7.0
Research and development			0.6				0.8				0.6				0.8
Operating income			15.8				16.8				15.9				16.4
Net earnings			10.5				10.9				10.6				10.7

     For the three months ended June 30, 2006 and 2005.

     Net Sales. For the three months ended June 30, 2006, net sales increased 27% to $72.1 million, compared with $56.7 million for the same period in 2005. This increase was primarily the result of four factors. First, sales of our machines increased 36% due to the addition of the SR-70 to the ASV product line in May 2006, a full quarter of sales of the SR-80 machine, a 25% increase in the number of ASV dealers at June 30, 2006 as compared to June 30, 2005 and a greater concentration of larger machines sold in the second quarter of 2006 compared to the same period in 2005. Sales of ASV machines represented 54.1%, or $39.0 million, of our sales in the second quarter of 2006, compared with 50.6%, or $28.7 million, in the second quarter of 2005. Second, sales of service parts and other items increased 34% in the second quarter of 2006, to $8.5 million, or 11.8% of net sales, compared with $6.4 million, or 11.2% of net sales, in the similar period last year. Driving this increase was a combination of a greater number of ASV machines in the field and the timing of original equipment manufacturer (OEM) blanket orders, offset in part by greater longevity of our undercarriage components and the implementation of lower Caterpillar parts pricing

effective November 2005. Third, sales of products of Loegering Mfg. Inc. (Loegering) totaled $7.1 million for the second quarter of 2006, or 9.8% of net sales, compared with $4.9 million, or 8.6% of net sales, for the second quarter of 2005. This increase was due to Versatile Track System (VTS) product line sales which more than doubled and offset an expected decline in the sale of over-the-tire steel tracks. The VTS rubber track undercarriage product line accounted for 79% of Loegering’s net sales in the second quarter of 2006, compared with 55% of Loegering’s net sales in the second quarter of 2005. Finally, our OEM undercarriage sales, which include sales to both Caterpillar and Vermeer Manufacturing Inc. (Vermeer), increased 4% for the second quarter of 2006, totaling $17.5 million, or 24.3% of net sales, compared with $16.8 million, or 29.6% of net sales, for the second quarter of 2005. Second quarter 2006 OEM undercarriage sales increased even with the planned price reduction on one model of Caterpillar MTL undercarriage on January 1, 2006.

     Gross Profit. Gross profit for the three months ended June 30, 2006 increased to $17.0 million, compared with $13.9 million for the same period in 2005, while the gross profit percentage decreased to 23.6% in the second quarter of 2006 compared with 24.5% in the second quarter of 2005. The increase in gross profit was due primarily to the increased sales experienced during the first half of 2006. We believe the decrease in gross profit percentage was primarily due to increased retail finance incentives offered during the quarter, normal start-up inefficiencies experienced during the initial production of the SR-70 and SR-80 and changes in the mix of Loegering sales. In addition, our gross profit percentage was negatively affected by planned decreases in the selling price (and ultimately the gross profit percentage) of one model undercarriage we sell to Caterpillar on January 1, 2006 and service parts we sell to Caterpillar as of November 1, 2005.

     Selling, General and Administrative. Selling, general and administrative expenses increased from $3.9 million, or 6.9% of net sales, in the second quarter of 2005, to $5.2 million, or 7.2% of net sales, in the second quarter of 2006. The increase was due primarily to the inclusion of $858,000 of stock-based compensation related expenses due to the adoption of SFAS 123R on January 1, 2006. In addition, we experienced increases in sales-related expenses, the addition of personnel to facilitate our increased growth and an increase in the overall level of expenses due to higher volumes in 2006.

     Research and Development. Research and development expenses remained relatively constant at $431,000 in the second quarter of 2006 compared to $440,000 in the second quarter of 2005 as we shifted focus from the new SR machines and smaller VTS model to the upcoming launch of the Scout utility vehicle and other research and development related efforts.

     Other Income (Expense). For the three months ended June 30, 2006, other income was $432,000, compared with $303,000 for the second quarter of 2005. This increase was due primarily to greater interest income from increased short-term interest rates in 2006. In addition, we had no interest expense in 2006 as we paid off all our interest-bearing debt in late 2005 and early 2006 with available funds.

     Net Earnings. For the second quarter of 2006, net earnings were $7.6 million, compared with $6.2 million for the second quarter of 2005. The increase was primarily a result of increased sales, increased non-operating income and a slightly lower income tax rate, offset in part by a decreased gross profit percentage and increased operating expenses.

     For the six months ended June 30, 2006 and 2005.

     Net Sales. Net sales for the six months ended June 30, 2006 increased 25% to $137.0 million, compared with $109.9 million for the same period in 2005. This increase was primarily the result of three factors. First, sales of our machines increased 40% due to the addition of the SR-70 and SR-80 to the ASV product line in 2006, a 25% increase in the number of ASV dealers at June 30, 2006 as compared to June 30, 2005 and a greater concentration of larger machines sold in 2006 as compared to 2005. Sales of ASV machines represented 51.4%, or $70.4 million, of our sales in the first half of 2006, compared with 45.8%, or $50.3 million, in the first half of 2005. Second, sales of Loegering’s products totaled $15.6 million for the first half of 2006, or 11.4% of net sales, compared with $11.3 million, or 10.2% of net sales, for the first half of 2005. This increase was due to VTS product line sales which more than doubled and offset an expected decline in the sale of over-the-tire steel tracks. The VTS rubber track undercarriage product line accounted for 75% of Loegering’s net sales in the first half of 2006, compared with 46% of Loegering’s net sales in the first half of 2005. Finally, our OEM undercarriage sales, which include sales to both Caterpillar and Vermeer, increased 8% for the first half of 2006, totaling $37.0 million, or 27.0% of net sales, compared with $34.2 million, or 31.1% of net sales, for the first half of 2005. OEM undercarriage sales in 2006

increased even with the planned price reduction on one model of Caterpillar MTL undercarriage on January 1, 2006. Sales of service parts and other items were $14.0 million for the six months ended June 30, 2006 and 2005 due to a combination of a greater number of ASV machines in the field and the timing of OEM blanket orders, offset in part by greater longevity of our undercarriage components and the implementation of lower Caterpillar parts pricing effective November 2005. We anticipate our net sales for 2006 will be in the range of $280-300 million based on our current and projected level of orders for our machines, OEM undercarriages, Loegering products and projected future service parts demand.

     Gross Profit. For the six months ended June 30, 2006, gross profit increased to $33.3 million, compared with $26.6 million for the same period in 2005, and the gross profit percentage increased to 24.3% in 2006 compared with 24.2% in 2005. The increase in gross profit was due primarily to the increased sales experienced during the first half of 2006. The increase in gross profit percentage was due to several offsetting factors. First, we believe the 3% list price increase that was put in place for all ASV R-Series machines ordered after January 1, 2006 contributed to the increase in gross profit percentage for the first half of 2006. Second, we believe a change in the sales mix of machines sold in 2006 caused our gross profit percentage to increase. We experienced a greater concentration of sales of higher priced machines in 2006 as compared to 2005. In addition, more of these machines were sold with additional accessories, such as cabs and air conditioning, in 2006 as compared to 2005. Both of these factors increased our gross profit percentage, as these machines and accessories carry a greater than average gross profit percentage. Offsetting these increases was a greater use of retail finance incentives offered during the first half of 2006, normal start-up inefficiencies experienced during the initial production of the SR-70 and SR-80 and changes in the mix of Loegering sales. In addition, gross profit percentage was negatively affected by planned decreases in the selling price (and ultimately the gross profit percentage) of one model undercarriage we sell to Caterpillar on January 1, 2006 and service parts we sell to Caterpillar as of November 1, 2005. Based on our anticipated sales levels for 2006, we anticipate our gross profit percentage for fiscal 2006 to be in the range of 23.8-24.3%.

     Selling, General and Administrative. For the six months ended June 30, 2006, selling, general and administrative expenses increased to $10.7 million, or 7.8% of net sales, compared with $7.7 million, or 7.0% of net sales, for the same period in 2005. The increase was due primarily to the inclusion of $1.6 of stock-based compensation related expenses due to the adoption of SFAS 123R on January 1, 2006. In addition, we experienced increases in sales-related expenses, the addition of personnel to facilitate our increased growth and an increase in the overall level of expenses due to higher volumes in 2006. We anticipate our selling, general and administrative expenses, including stock-based compensation related expenses, will be in the range 7.55-7.85% of net sales for fiscal 2006.

     Research and Development. Research and development expenses decreased to $779,000 for the six months ended June 30, 2006, compared with $868,000 for the six months ended June 30, 2005. The decrease was due to our shift in focus from the new SR machines and smaller VTS model to the upcoming launch of the Scout utility vehicle and other research and development related efforts. We anticipate our future spending on research and development activities will focus on additional product offerings and additional applications of our track technology and will approximate 0.7% of net sales for fiscal 2006.

     Other Income (Expense). For the six months ended June 30, 2006, other income (expense) was $913,000, compared with $624,000 for the same period in 2005. This increase was due primarily to greater interest income from increased short-term interest rates in 2006. In addition, we had no interest expense in 2006 as we paid off all our interest-bearing debt in late 2005 and early 2006 with available funds.

     Net Earnings. Net earnings were $14.5 million for the six months ended June 30, 2006, compared with $11.7 million for the six months ended June 30, 2005. The increase was primarily a result of increased sales, increased non-operating income and a lower income tax rate, offset in part by a slightly lower gross profit percentage and increased operating expenses. Based on our anticipated sales, gross profit and expense levels for 2006, we anticipate our diluted earnings per share will be in the range of $1.05-$1.15. This estimate includes stock-based compensation related expenses of $.08 per diluted share.

Liquidity and Capital Resources

     For the six months ended June 30, 2006, our cash and cash equivalents decreased $16.5 million, compared with a decrease of $2.1 million for the six months ended June 30, 2005. During 2006, we generated $440,000 of cash and cash equivalents from operations as increased profitability, non-cash expenses and current liabilities were offset by increases in accounts receivable and inventories. In 2006, we used $8.2 million of cash and cash equivalents in investing activities as we purchased long-term investments and increased our investment in property and equipment. This compares to using $3.1 million of cash and cash equivalents in 2005 in investing activities, as the proceeds generated from the sale of our auction-rate securities in our investment portfolio were used to invest in property and equipment and long-term investments. In 2006, we used $8.7 million of cash and cash equivalents in financing activities as we repurchased $10.0 million of our stock, offset in part by proceeds received from exercise of employee and director stock options. This compares to generating $917,000 of cash and cash equivalents in 2005 primarily from proceeds received from exercise of employee and director stock options.

Customer Note Receivable

     Included in accounts receivable and other non-current assets at June 30, 2006 are the current and long-term portions of a note receivable totaling $636,000 from a customer. The note bears interest at 6% and is due in monthly installments through January 2009. As of June 30, 2006, the customer had not made its payment due June 30, 2006 but subsequently made this payment in July 2006 within the allowed grace period.

Off-Balance Sheet Arrangements

     We have guaranteed the repayment of a note made by a customer to a non-affiliated finance company for payment of amounts owed to us by this customer. To determine the value of the financing guarantee, the lending institution provided us with the cost of the financing both with and without the guarantee. This differential was used to determine the amount of the financing guarantee of $35,000. This amount was recorded as a reduction of net sales for the year ended December 31, 2003, when the note and guarantee were entered into. A similar amount has been included in other accrued liabilities since December 31, 2003. As of June 30, 2006, the customer is current on the amount owed to the finance company under this note of approximately $210,000.

Relationship with Finance Companies

     In October 2005, we announced we had entered into an agreement with CIT Group Inc. (CIT) to form ASV Capital, a private label finance program to offer wholesale and retail financing options on the sale of our Posi-Track products. Representatives of ASV and CIT make joint credit decisions, with CIT retaining the risk of the credit portfolio. We have no ownership in ASV Capital and have no share in the profit or loss of ASV Capital. We have also affiliated ourselves 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 two years.

Facility Expansion

     In March 2006, we announced our plan to expand our Grand Rapids, Minnesota production facility. Under the plan, we intend to approximately double the size of our current machine production facility with a 120,000 square foot addition. The projected cost to construct and equip the facility is currently estimated at $6.0 to $6.5 million. Site work for the addition began in early May with completion expected to be in late 2006. We anticipate funding this expenditure with available cash.

Stock Buyback Program

     In May 2006, we announced the implementation of a $10 million stock buyback program. As of June 30, 2006, the full $10 million had been expended, as we repurchased 499,000 shares under the program. We used existing cash to fund the buyback program.

Stock-Based Compensation

     At June 30, 2006, 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 to seven years and provide for accelerated vesting if there is a change in control, as defined. At June 30, 2006, we had 3,346,000 shares available for future grant under our three stock option plans.

     On January 1, 2006, we adopted Statement of Financial Accounting Standard No. 123R, Share-Based Payment (SFAS 123R), which requires the fair value of all share-based payment transactions, including stock options, be recognized in the income statement as an operating expense based on their fair value over the requisite service period. For the three and six months ended June 30, 2006, we recorded compensation expense of $776,000 and $1,423,000 ($500,000 and $912,000 net of income taxes) related to the adoption of SFAS 123R, which has been included in selling, general and administrative expenses. In addition, our executive officers and certain members of management no longer receive stock options as part of their compensation package but instead will be eligible to receive a bonus in 2006 if certain financial performance measures are attained. For the three and six months ended June 30, 2006, we accrued $82,000 and $163,000 ($52,000 and $104,000 net of income taxes) towards these bonuses, which has been included in selling, general and administrative expenses. Our total stock-based compensation related expense reduced both basic and diluted earnings per share by $.02 and $.04 for the three and six months ended June 30, 2006.

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

     Prior to adopting SFAS 123R, we presented all tax benefits resulting from the exercise of stock options as operating cash flows in the Consolidated Statement of Cash Flows. SFAS 123R requires that cash flows from the exercise of stock options resulting from tax benefits in excess of recognized cumulative compensation cost (excess tax benefits) be classified as cash flows from financing activities. For the six months ended June 30, 2006, there were no such excess tax benefits that were required to be classified as cash flows from financing activities. The total income tax benefit from the exercise of stock options was $1,175,000 and $630,000 for the six months ended June 30, 2006 and 2005.

     We have elected the modified prospective transition method in applying SFAS 123R. Accordingly, periods prior to adoption have not been restated. Under this transition method, we will apply the provisions of SFAS 123R to new awards and to awards modified, repurchased or cancelled after January 1, 2006. Additionally, we will recognize compensation cost for the portion of awards for which the requisite service has not been rendered (unvested awards) that are outstanding as of January 1, 2006, as the remaining service is rendered. The compensation cost recorded for these awards will be based on their grant-date fair value as calculated for the pro forma disclosures required by FAS 123. At June 30, 2006, we had $6,647,000 of unrecognized compensation costs related to non-vested stock options that are expected to be recognized over a weighted average period of 1.8 years.

Cash Requirements

     We believe cash expected to be generated from operations and our existing cash, cash equivalents and investments will satisfy our projected working capital needs and other cash requirements for the next twelve months and the foreseeable future.

Forward-Looking Statements

     The statements set forth above under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this report regarding our future sales levels, gross profit percentage, earnings per share, expense levels, liquidity and facility expansion 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 our ability to successfully manufacture our machines and undercarriages, unanticipated delays, costs or other difficulties in the manufacture of the machines and undercarriages, unanticipated problems or delays experienced by Caterpillar or Vermeer relating to the manufacturing or marketing of their machines, market acceptance of the machines, deterioration of the general market and economic conditions, corporate developments at ASV, Caterpillar or Vermeer, our ability to realize the anticipated benefits from our relationships with Caterpillar and Vermeer, unanticipated problems or delays in our facility expansion and the other factors discussed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2005. 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. Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective.

     Changes in Internal Controls. 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 second fiscal quarter of 2006, 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 SEC filings, 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, 2005, which could have a material impact on our business, financial condition or results of operations. The risks described 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.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

     The following table provides information about repurchases by us of our Common Stock during the quarter ended June 30, 2006:

										Total Number of				Approximate Dollar
										Shares Purchased				Value of Shares that
		Total Number								as Part of Publicly				May Yet Be Purchased
		of Shares				Average Price Paid				Announced Plans				Under the Plans or
Period		Purchased				per Share				or Programs				Programs
4/1/06 — 4/30/06			—				—				—				—
5/1/06 — 5/31/06			282,300			$	21.15				282,300			$	4,029,561
6/1/06 — 6/30/06			216,700			$	18.59				216,700			$	1,844
Total			499,000			$	20.04				499,000			$	1,844

     On May 24, 2006, we announced the implementation of a stock buyback program up to a maximum of $10 million over the next 12 months. As of June 30, 2006, the full $10 million had been expended, as we repurchased 499,000 shares under the program. We used existing cash to fund the buyback program.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

          None

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     The annual meeting of shareholders of A.S.V., Inc. was held on June 2, 2006. Matters submitted at the meeting for vote by the shareholders were as follows:

	(a)		Election of Directors.
			The following directors were elected at the Annual Meeting, each with the following votes:

		For				Withheld
Richard A. Benson			26,052,246				103,841
James H. Dahl			26,093,927				62,160
Bruce D. Iserman			26,098,015				58,072
Leland T. Lynch			20,149,323				6,006,764
Jerome T. Miner			26,050,640				105,447
Karlin S. Symons			26,097,321				58,766
R. E. “Teddy” Turner, IV			26,093,176				62,911
Kenneth J. Zika			26,098,060				58,027

	(b)		Approval of Amendment to the Second Restated Articles of Incorporation.
			Shareholders approved the amendment to the Second Restated Articles of Incorporation to increase the number of authorized shares of common stock from 33,750,000 shares to 70,000,000 shares and decrease the number of authorized shares of preferred stock from 11,250,000 shares to 5,000,000 shares with a vote of 21,005,140 shares for, 578,549 shares against, 158,342 shares abstaining and 4,415,056 broker non-votes.
	(c)		Ratification of Appointment of Independent Registered Public Accounting Firm.
			Shareholders ratified the appointment of Grant Thornton LLP as our independent registered public accounting firm for the fiscal year ending December 31, 2006 with a vote of 26,046,819 shares for, 95,661 shares against and 13,607 shares abstaining.

ITEM 5. OTHER INFORMATION

          None

ITEM 6. EXHIBITS

Exhibit
Number				Description
	3.1			Third Restated Articles of Incorporation of the Company
	3.2			Bylaws of the Company (a)
	3.3			Amendment to Bylaws of the Company adopted April 13, 1999 (b)
	4.1			Specimen form of the Company’s Common Stock Certificate (a)
	10.1			Agreement between Caterpillar Inc. and Richard A. Benson, effective as of May 3, 2006 (c)
	10.2			Employment and Supplement Executive Retirement Pay Agreement between Mark Glasnapp and the Company, effective as of July 12, 2004 (d)
	11			Statement re: Computation of Per Share Earnings
	31.1			Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
	31.2			Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
	32.1			Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
	32.2			Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		A.S.V., Inc.
Dated: August 9, 2006		By /s/ Richard A. Benson   Richard A. Benson
		Chief Executive Officer
		(duly authorized officer)
Dated: August 9, 2006		By /s/ Thomas R. Karges
		Thomas R. Karges
		Chief Financial Officer
		(principal financial and accounting officer)