NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Unless the context otherwise requires, the use of the terms Arctic Cat, we, our, or
us in these Notes to Consolidated Financial Statements refers to Arctic Cat Inc. and, as applicable, its consolidated subsidiaries.
Description of Business
Arctic Cat designs, engineers, manufactures and markets snowmobiles, all-terrain vehicles (ATVs), recreational off-highway vehicles (side-by-sides or ROVs) and related parts,
garments and accessories (PG&A) under the Arctic Cat
®
and MotorFist
®
brand names. We market our products through a network of independent dealers located throughout the United States,
Canada, and Europe and through distributors in Europe, the Middle East, Asia and other international markets.
Our business is
organized into three operating segments based on our product lines: (1) snowmobile; (2) ATV/ROV and (3) PG&A. We aggregate the snowmobile and ATV/ROV segments into one operating segment, as the segments have similar economic
characteristics. Accordingly, we have two reportable segments: (1) snowmobiles and ATV/ROV and (2) PG&A. See Note 11,
Segment Reporting
, for additional detail on our segments.
Basis of Presentation
The consolidated financial statements include the accounts of Arctic Cat Inc. and its consolidated subsidiaries. We also consolidate,
regardless of our ownership percentage, variable interest entitys (VIEs) for which we are deemed to have a controlling financial interest. All intercompany accounts and transactions are eliminated upon consolidation.
When we obtain an economic interest in an entity, we evaluate the entity to determine if the entity is a VIE, and if we are
deemed to be a primary beneficiary. As a part of our evaluation, we are required to qualitatively assess if we are the primary beneficiary of the VIE based on whether we hold the power to direct those matters that most significantly impacted the
activities of the VIE and the obligation to absorb losses or the right to receive the benefits of the VIE that could potentially be significant. Refer to Note 12,
New Market Tax Credit Transaction
, for a description of the VIE included in our
consolidated financial statements.
In preparing the accompanying consolidated financial statements, we evaluated the period
from April 1, 2016, through the date the financial statements were issued for material subsequent events requiring recognition or disclosure. No such events were identified for this period.
Use of Estimates
The
preparation of our consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect reported amounts of assets and
liabilities, related revenues and expenses and disclosure about contingent assets and liabilities at the date of the financial statements. We base our estimates on historical experience and on other various assumptions believed to be reasonable
under the circumstances. We believe that such estimates are established using consistent, reasonable and appropriate methods. Accordingly, actual results could differ from the estimates used by management.
Reclassifications
Certain prior period Consolidated Balance Sheet and Notes to Consolidated Financial Statement amounts have been reclassified to conform to
the fiscal 2016 financial statement presentation. The reclassifications had no effect on previously reported operating results.
36
Cash and Cash Equivalents
We consider highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents. At times, certain bank deposits may be in excess of federally insured limits.
As of March 31, 2016 and 2015, Arctic Cat had approximately $7.2 and $19.2 million, respectively, of cash located in foreign banks primarily in Europe and Canada.
Accounts Receivable and Allowance for Uncollectible Accounts
Our accounts
receivable balance consists of amounts due from our dealers and finance companies. We extend credit to our dealers based on an evaluation of the dealers financial condition. Our collection exposure relating to accounts receivable amounts due
from dealer floorplan finance institutions is limited due to the financial strength of the finance institutions and provisions of our existing agreements. Accounts receivable is presented net of an allowance for estimated uncollectible amounts due
from our dealers. We estimate uncollectible amounts considering numerous factors, mainly the length of time the receivables are past due, the historical collection experience and existing economic conditions. Our allowance for uncollectible accounts
was $1.8 and $1.9 million at March 31, 2016 and 2015, respectively. Account balances are charged off against the allowance when all collection efforts have been exhausted. Amounts which are considered to be uncollectible are written off and
recoveries of amounts previously written off are credited to the allowance upon recovery. Accounts receivable amounts written off have been within managements expectations.
The activity in the allowance for uncollectible accounts for accounts receivable is as follows ($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
Balance at beginning of period
|
|
$
|
1,897
|
|
|
$
|
1,988
|
|
Provisions charged to expense
|
|
|
40
|
|
|
|
287
|
|
Deductions for amounts written-off
|
|
|
(143
|
)
|
|
|
(378
|
)
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
1,794
|
|
|
$
|
1,897
|
|
|
|
|
|
|
|
|
|
|
Inventories
Inventories are valued at the lower of cost or market, with cost determined using the first-in, first-out method. Manufacturing costs include materials, labor, freight-in, and manufacturing overhead.
Unallocated overhead and abnormal costs are expensed as incurred. Market represents the estimated selling price in the ordinary course of business less cost to sell and considers general market and economic conditions, reviews of current
profitability of products, product warranty costs and the effect of current and expected incentive offers as of the balance sheet date. We establish a reserve for excess, slow-moving, and obsolete inventory that is equal to the difference between
the cost and estimated net realizable value for that inventory. These reserves are based on a review and comparison of current inventory levels to planned production, as well as planned and historical sales of the inventory. Additionally, due to
significant movements of partially-manufactured components and parts between manufacturing plants, we do not internally measure, nor do our accounting systems provide, a meaningful segregation between raw materials and work-in-process.
Inventories consist of the following at March 31 ($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
Raw materials and sub-assemblies
|
|
$
|
35,770
|
|
|
$
|
41,045
|
|
Finished goods
|
|
|
64,127
|
|
|
|
77,763
|
|
Parts, garments and accessories
|
|
|
40,110
|
|
|
|
33,635
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
140,007
|
|
|
$
|
152,443
|
|
|
|
|
|
|
|
|
|
|
37
Losses resulting from the application of lower of cost or market accounting were not
material for the years ended March 31, 2016, 2015 and 2014, respectively.
Derivative Instruments and Hedging Activities
We enter into forward exchange contracts to protect against exposure to currency fluctuations on transactions denominated
in foreign currencies, namely the Canadian dollar and Japanese yen. The contracts are designated as, and meet the criteria for, cash flow hedges. We do not enter into forward contracts for the purpose of trading or speculative purposes. Derivatives
are recognized on the Consolidated Balance Sheets at fair value, and the effective portion of the change in the fair value of the derivative is recorded in accumulated other comprehensive income (loss), net of tax, and subsequently reclassified into
operating expense upon completing transfers of Canadian dollar or Japanese yen funds when the hedged item affects earnings.
Fair Value
Measurements
We record certain assets and liabilities at fair value in the financial statements; some of these are
measured on a recurring basis while others are measured on a non-recurring basis. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous
market for the asset or liability in an orderly transaction between market participants on the measurement date. Assets and liabilities measured on a recurring basis are those that are adjusted to fair value each time a financial statement is
prepared. Assets and liabilities measured on a non-recurring basis are those that are adjusted to fair value when required by particular events or circumstances. A fair value hierarchy has been established, which requires classification based on
observable and unobservable inputs when measuring fair value. Refer to Note 2,
Fair Value Measurements
, for additional information.
Property and Equipment, Net
Property and equipment is stated at cost. Major improvements that extend the useful life or add functionality are capitalized and repairs and maintenance cost that are considered not to extend the useful
life of the property and equipment are expensed as incurred. Depreciation is provided in amounts sufficient to relate the cost of depreciable assets to operations over their estimated service lives, using the straight-line method for all property,
equipment and tooling. Tooling is depreciated over the life of the product, generally 3-5 years. Estimated service lives range from 15-39 years for buildings and improvements and 5-15 years for machinery and equipment. Accelerated and straight-line
methods are used for income tax reporting. Upon disposal of property and equipment, the cost and accumulated depreciation are removed from the Consolidated Balance Sheets and the resulting gain or loss is reflected in earnings.
Impairment of Long-Lived Assets
Long-lived assets include property and equipment and definite-life intangible assets. We evaluate the carrying value of long-lived assets for impairment when events or changes in business circumstances
indicate that the carrying amount of an asset, or asset group, may not be fully recoverable. If impairment indicators are present and the estimated future undiscounted cash flows are less than the carrying value of the assets, the carrying value is
reduced to the estimated fair value as measured by quoted market prices or other valuation techniques (e.g., discounted cash flow analysis) and an accompanying impairment loss is recognized within earnings. Fair value is primarily determined using
discounted cash flow analyses; however, other methods may be used to determine the fair value, including third party valuations when necessary. We recognized no impairment of long-lived assets in fiscal years 2016, 2015 and 2014.
Goodwill and Indefinite-Lived Intangible Assets
Goodwill represents the excess of the purchase price over the fair value of identifiable net assets acquired in a business combination. We test goodwill for impairment annually or more frequently if an
event occurs or
38
circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. An impairment charge for goodwill is recognized only when the estimated
fair value of a reporting unit, including goodwill, is less than its carrying amount.
Our impairment testing for goodwill is
performed separately from our impairment testing of indefinite-lived intangible assets, but the income approach is utilized for both in determining fair value. We test goodwill and indefinite-lived intangible assets for impairment at the reporting
unit level and individual indefinite-lived intangible asset level, respectively. Under the income approach, we calculate the fair value of our four reporting units and indefinite-lived intangible assets using the present value of future cash flows.
Individual indefinite-lived intangible assets are tested by comparing the book values of each asset to the estimated fair value. Our estimate of fair value for indefinite-lived intangible assets uses projected revenues from our forecasting process,
assumed royalty rates, and a discount rate. Assumptions in our impairment evaluations, such as forecasted growth rates and cost of capital, are consistent with internal projections and operating plans. Materially different assumptions regarding
future performance of our businesses or a different weighted-average cost of capital could result in impairment losses or additional amortization expense.
We perform a two-step quantitative test for goodwill impairment. First, we compare the carrying value of a reporting unit, including goodwill, to its fair value. The fair value of each reporting unit is
estimated using a discounted cash flow model. Where available, and as appropriate, comparable market multiples and our companys market capitalization are also utilized to corroborate the results of the discounted cash flow models. If the first
step indicates the carrying value exceeds the fair value of the reporting unit, then a second step must be completed in order to determine the amount of goodwill impairment that should be recorded. In the second step, the implied fair value of the
reporting units goodwill is determined by allocating the reporting units fair value to all of its assets and liabilities other than goodwill. The implied fair value of the goodwill that results from the application of this second step is
then compared to the carrying amount of the goodwill and an impairment charge is recorded for the difference.
Identifiable
intangible assets are amortized over their useful lives on a straight-line basis, unless the useful life is determined to be indefinite. The useful life of an identifiable definite-lived intangible asset is based on an analysis of several factors,
including contractual, regulatory or legal obligations, demand, competition, and industry trends. Refer to Note 4,
Goodwill and Intangible Assets
, for additional information.
Product Warranties
We generally provide a limited warranty on snowmobiles
for 12 months from the date of consumer registration and for six months from the date of consumer registration on ATVs and ROVs. We may provide longer warranties in certain geographical markets as determined by local regulations and market
conditions, as well as related to certain promotional programs. We provide for estimated warranty costs at the time of sale based on historical rates and trends. Subsequent adjustments are made to the warranty reserve as actual claims become known
or the amounts are determinable, including costs associated with safety recalls, which may occur after the standard warranty period.
The following represents changes in our accrued warranty liability for the fiscal years 2016, 2015 and 2014 ($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Balance at beginning of period
|
|
$
|
23,062
|
|
|
$
|
19,357
|
|
|
$
|
18,709
|
|
Warranty provision
|
|
|
13,864
|
|
|
|
21,499
|
|
|
|
16,770
|
|
Warranty claim payments
|
|
|
(12,117
|
)
|
|
|
(17,794
|
)
|
|
|
(16,122
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
24,809
|
|
|
$
|
23,062
|
|
|
$
|
19,357
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39
Insurance
We are self-insured for certain losses relating to employee medical, workers compensation, and certain product liability claims. Specific stop loss coverages are provided for catastrophic claims in
order to mitigate our exposure. Under these plans, liabilities are recognized for claims incurred, including those incurred but not reported. Losses and claims are charged to operations when it is probable a loss has been incurred and the amount can
be reasonably estimated.
Revenue Recognition
We recognize revenue and provide for estimated marketing and sales incentive costs when persuasive evidence of an arrangement exists; delivery has occurred and ownership has transferred to the customer;
the price to the customer is fixed or determinable; and collectability is reasonably assured. These criteria are generally met when title passes at the time product is shipped to dealers in accordance with shipping terms, which are primarily
freight-on-board shipping point. Most sales are made to dealers financing their purchases under flooring arrangements with financial institutions.
At the time of revenue recognition, shipping and handling costs are recorded as a component of costs of goods sold and shipping charges to the dealers are recorded as revenue. Return allowances for parts,
garments and accessories are recorded as a reduction of revenue when the revenue is recognized based on our return allowance program and historical experience.
Sales tax collected from customers is remitted to the appropriate taxing jurisdictions and is excluded from sales revenue as we consider ourselves a pass-through conduit for collecting and remitting sales
taxes.
Marketing and Sales Incentive Costs
We provide for various marketing and sales incentive costs that are offered to our dealers and consumers at the later of when the revenue is recognized or when the marketing and sales incentive program is
approved and communicated for products previously shipped. Examples of these costs, which are recognized as a reduction of revenue when the products are sold, include dealer and consumer rebates, dealer floorplan financing assistance and other
incentive and promotional programs. Sales incentives that involve a free product or service delivered to the consumer, such as extended warranties, are recorded as a component of cost of goods sold.
We estimate the costs of these various marketing and sales incentive programs based on expected usage considering current program
parameters, historical experience, dealer inventory levels, the terms of arrangements with dealers and expectations for changes in relevant trends in the future. Actual results may differ from these estimates if market conditions dictate the need to
enhance or reduce sales promotion and incentive programs or if the current market trends vary from historical trends. To the extent current experience differs with previous estimates, the accrued liability for marketing and sales incentives is
adjusted accordingly. Historically, marketing and sales incentive accruals have been within our expectations and differences have not been material.
Dealer Holdback
We provide for a dealer holdback program on product sales
to our dealer network. The dealer holdback represents a portion of the invoiced sales price that is held by us and is expected to be subsequently returned to the dealer or distributor as a sales incentive upon the ultimate retail sale of the product
to the end customer. Holdback amounts reduce the definitive net price of the products purchased by the dealers or distributors and ultimately reduce the amount of sales we recognize at the time of shipment. At the time product revenue is recognized,
the portion of the invoiced sales price estimated as the holdback is accrued for as dealer holdback liability within accounts payable on our balance sheet. If the products subject to the holdback program are sold within the programs term, we
refund the holdback to the dealer. Any remaining holdback balances at the
40
expiration of the programs term are refunded to the dealer or distributor. Our dealer holdback program liability, included within accounts payable, was $17.2 million and $19.8 million as of
March 31, 2016 and 2015, respectively.
Research and Development
Research and development costs and are expensed as incurred. Research and development expense was $27.2 million, $24.3 million and $24.0
million during fiscal 2016, 2015 and 2014, respectively.
Advertising
We expense advertising costs as incurred, except for cooperative advertising obligations arising related to the sale of our products to
our dealers. The estimated cost of cooperative advertising, which the dealer is required to support, is recorded as marketing expense at the time the product is sold. Cooperative advertising was $3.0 million, $3.6 million and $3.4 million in fiscal
2016, 2015 and 2014, respectively. Total advertising expense, including cooperative advertising, was $19.5 million, $18.6 million and $17.6 million in fiscal 2016, 2015 and 2014, respectively.
Stock-Based Compensation
Our stock-based compensation awards are generally granted to executive officers, other employees, and non-employee members of the Board of
Directors of Arctic Cat (the Board), and may include performance share awards that are contingent upon the achievement of performance goals of Arctic Cat. Compensation expense equal to the grant date fair value is recognized for these
awards on a straight-line basis over the vesting period and is recorded within general and administrative expense. Refer to Note 7,
Shareholders Equity
, for additional information regarding our stock-based compensation plans.
Foreign Currency
Our activities with Canadian dealers are denominated in Canadian dollars and our activities with European on-road ATV/ROV dealers and distributors are denominated in the Euro. In addition, we have certain
supply contracts that are denominated in Japanese yen. Assets and liabilities denominated in foreign currency are translated using the exchange rates in effect at the balance sheet date. Revenues and expenses are translated at the weighted-average
foreign exchange rates in effect for the period. Translation gains and losses relating to the Canadian dollar and Japanese yen are reflected in the results of operations and Euro currency are reflected as a component of other comprehensive income.
Income Taxes
Deferred income tax assets and liabilities are recognized for the expected future income tax consequences of events attributable to
differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Under this method, deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to
taxable income in the years that those temporary differences are expected to be recovered or settled. Judgment is required in assessing the future tax consequences of events that have been recognized in our financial statements or tax returns.
Fluctuations in the ultimate outcome of these tax consequences could materially impact our financial position or results of operations. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income tax expense in
the period in which the enactment takes place. Valuation allowances are provided when, in managements judgment, it is more likely than not that some portion or all of the benefit of the deferred tax asset will not be recognized.
We recognize the effect of uncertain income tax positions only if the weight of available evidence of those positions indicates that it
is more likely than not that the position will be sustained on audit, including resolution
41
of related appeals or litigation processes, if any. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized upon settlement. Changes
in recognition or measurement are reflected in the period in which the change in judgment occurs. It is inherently difficult and subjective to estimate such amounts, as we have to determine the probability of various possible outcomes. We reevaluate
these uncertain tax positions on a quarterly basis. This evaluation is based on factors including, but not limited to, changes in facts or circumstances, changes in tax law, effectively settled issues under audit, voluntary settlements and new audit
activity. Such a change in recognition or measurement would result in the recognition of a tax benefit or an additional charge to the tax provision. We also record interest and penalties related to unrecognized tax benefits in income tax expense.
Recent Accounting Pronouncements
In March 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update (ASU) 2016-09,
Improvements to Employee Share-Based Payment Accounting
,
which simplifies several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes and statutory tax withholding requirements and classification within the statement of cash flows. The ASU is
effective for fiscal years beginning after December 15, 2016. We are currently in the process of evaluating the impact of the adoption of this ASU on our consolidated results.
In February 2016, the FASB issued ASU 2016-02,
Lease Accounting
, which requires lessees to recognize on the balance sheet certain
operating and financing lease liabilities and corresponding right-of-use assets that have lease terms of greater than 12 months. This topic retains the distinction between finance leases and operating leases. The ASU is effective on a modified
retrospective approach for annual periods beginning after December 15, 2018, and interim periods therein, with early adoption permitted. We are currently in the process of evaluating the impact of the adoption of this ASU on our consolidated
results, noting that we currently expect the majority of our operating lease commitments will be subject to the new standard and recognized as operating lease liabilities and right-of-use assets upon our adoption of ASU 2016-02.
In November 2015, the FASB issued ASU 2015-17,
Income Taxes
, which provides guidance for the presentation of deferred tax assets
and liabilities within the statement of financial position. The ASU requires companies to classify deferred tax assets and liabilities as noncurrent in a classified statement of financial position. The current requirement that deferred tax assets
and liabilities of a tax-paying component of an entity be offset and presented as a single amount is not affected by the amendments in this ASU. The ASU simplifies the current guidance, which requires entities to separate deferred income tax assets
and liabilities into current and noncurrent amounts in a classified statement of financial position. The ASU is effective prospectively or retrospectively for annual periods beginning after December 15, 2016, and interim periods therein, with
early adoption permitted. The adoption of the ASU will change the classification of deferred income taxes within our Consolidated Balance Sheets; however, we do not expect the adoption of the ASU to have a material impact on our results of
operations or cash flows.
In July 2015, the FASB issued ASU 2015-11,
Inventory
, which provides guidance for the
measurement of inventory. The ASU requires entities to measure most inventory at the lower of cost or net realizable value. The ASU simplifies the current guidance, which requires entities to measure inventory at the lower of cost or market (with
market defined as one of three different measures). The ASU is effective prospectively for annual and interim periods beginning after December 15, 2016, and interim periods therein. We are currently in the process of evaluating the impact of
the adoption of this ASU on our consolidated results.
In May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts
with Customers
, which provides guidance for revenue recognition that supersedes existing revenue recognition guidance (but does not apply to nor supersede accounting guidance for lease contracts). The ASUs core principle is that an entity
will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The ASU also requires more detailed
disclosures to enable users of financial statements to understand the nature, amount, timing and
42
uncertainty of revenue and cash flows arising from contracts with customers. In July 2015, the FASB approved a proposal to defer the effective date of the ASU by one year to reporting periods
beginning after December 15, 2018. The ASU should be applied retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying the ASU recognized at the date of initial application. We
are currently in the process of evaluating the impact of the adoption of this ASU on our consolidated results.
2. FAIR VALUE MEASUREMENTS
We record certain assets and liabilities at fair value in the financial statements; some of these are measured on a
recurring basis while others are measured on a non-recurring basis. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the
asset or liability in an orderly transaction between market participants on the measurement date. Assets and liabilities measured on a recurring basis are those that are adjusted to fair value each time a financial statement is prepared. Assets and
liabilities measured on a non-recurring basis are those that are adjusted to fair value when required by particular events or circumstances. A fair value hierarchy has been established, which requires classification based on observable and
unobservable inputs when measuring fair value. There are three levels of inputs that may be used to measure fair value:
Level
1Quoted prices in active markets for identical assets or liabilities.
Level 2
Observable inputs other than
Level 1 prices such as quoted prices for similar assets and liabilities; quoted prices in markets that are not active; or inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or
liabilities.
Level 3
Unobservable inputs that are supported by little or no market activity and that are
significant to the fair value of the assets or liabilities.
In determining the fair value of assets and liabilities, we
utilize various valuation techniques. The availability of inputs observable in the market varies from instrument to instrument and depends on a variety of factors including the type of instrument, whether the instrument is actively traded, and other
characteristics particular to the transaction. For many financial instruments, pricing inputs are readily observable in the market, the valuation methodology used is widely accepted by market participants, and the valuation does not require
significant management discretion. For other financial instruments, pricing inputs are less observable in the market and may require management judgment. In making fair value measurements, observable market data must be used when available. When
inputs used to measure fair value fall within different levels of the hierarchy, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement. Financial
instruments are transferred in and/or out of Level 1, 2 or 3 at the beginning of the accounting period in which there is a change in the valuation inputs.
Recurring Fair Value Measurements
We utilize the income approach to
measure the fair value of our foreign currency contracts, which is based on significant other observable inputs. As such, our foreign currency contracts are considered a Level 2 measurement. As of March 31, 2016, our Canadian dollar foreign
currency contracts fair value represented a foreign exchange asset of $0.1 million and a foreign exchange liability of $3.9 million. As of March 31, 2015, our Canadian dollar foreign currency contracts fair value represented a foreign exchange
asset totaling $3.6 million, and our Japanese yen foreign currency contract fair value was a foreign exchange liability totaling $0.4 million.
Nonrecurring Fair Value Measurements
Our assets and liabilities that are measured at fair value on a nonrecurring basis primarily relate to tangible fixed assets, goodwill and intangible assets, which are generally recorded at fair value as
a result of an impairment charge. We did not record any significant charges to assets measured at fair value on a nonrecurring basis during fiscal 2016 and 2015.
43
Other Fair Value Disclosures
Our financial instruments not measured at fair value on a recurring basis include cash and cash equivalents, accounts receivable and accounts payable and approximate fair value due to their short-term
nature.
3. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
We use foreign currency derivative instruments to manage our exposure to currency fluctuations on transactions
denominated in foreign currencies primarily the Canadian dollar and Japanese yen. Our foreign currency management objective is to reduce earnings volatility related to movements in foreign exchange rates and limit the risk of loss in value of
certain of our foreign currency-denominated cash flows. We do not enter into forward contracts for trading or speculative purposes. We have no derivatives that have credit risk-related contingent features and we mitigate our risk by engaging with
major financial institutions as counterparties.
We record all foreign currency forward contracts at fair value in our
Consolidated Balance Sheets. The forward contracts are designated as, and meet the criteria for, cash flow hedges. We evaluate hedge effectiveness prospectively and retrospectively, and we formally document all hedging relationships at inception, as
well as the risk management objectives for undertaking the hedge transaction. Our Canadian dollar and Japanese yen forward contracts generally have terms of up to 12 months. Gains and losses on forward contracts are recorded in accumulated other
comprehensive income (loss), net of tax, and subsequently reclassified into cost of goods sold or operating expenses during the same period in which the hedged transaction affects the Consolidated Statements of Operations. Gains and losses on the
derivative representing hedge ineffectiveness, if any, are recognized in the Consolidated Statements of Operations.
The
following table presents the notional amounts and gross carrying values of derivative instruments as of March 31, 2016 and March 31, 2015 ($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2016
|
|
|
March 31, 2015
|
|
|
|
Notional Amount
(in US Dollars)
|
|
|
Fair Value
Asset
(Liability),
Net (2)
|
|
|
Notional Amount
(in US Dollars)
|
|
|
Fair Value
Asset
(Liability),
Net (2)
|
|
Canadian Dollar (1)
|
|
$
|
87,875
|
|
|
$
|
(3,837
|
)
|
|
$
|
76,328
|
|
|
$
|
3,628
|
|
Japanese Yen (1)
|
|
|
|
|
|
|
|
|
|
|
19,046
|
|
|
|
(434
|
)
|
(1)
|
Assets are included in other current assets and liabilities are included in accrued expenses in the accompanying Consolidated Balance Sheets.
|
(2)
|
Refer to Note 2,
Fair Value Measurements
, for additional information on the fair value of our derivative instruments.
|
The following table presents the effects of derivative instruments on other comprehensive income (OCI) and on our Consolidated Statements
of Operations for the years ended March 31, 2016, 2015 and 2014 ($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2016
|
|
|
March 31, 2015
|
|
|
|
Pre-Tax
Gain (Loss)
Recognized
in OCI
|
|
|
Pre-Tax Gain
(Loss) Reclassified
from Accumulated
OCI to Earnings
(Effective
Portion)
|
|
|
Pre-Tax
Gain (Loss)
Recognized
in OCI
|
|
|
Pre-Tax Gain
(Loss) Reclassified
from Accumulated
OCI to Earnings
(Effective
Portion)
|
|
Canadian Dollar (1)
|
|
$
|
(111
|
)
|
|
$
|
7,354
|
|
|
$
|
6,047
|
|
|
$
|
1,996
|
|
Japanese Yen (1)
|
|
|
(374
|
)
|
|
|
(808
|
)
|
|
|
|
|
|
|
|
|
(1)
|
Canadian Dollar contracts are included in general and administrative expenses and Japanese Yen contracts are included in cost of goods sold in the accompanying
Consolidated Statements of Operations.
|
The ineffective portion of foreign currency contracts was not material
for the years ended March 31, 2016 and 2015.
44
4. GOODWILL AND INTANGIBLE ASSETS
We do not amortize goodwill or intangible assets with indefinite useful lives, but instead we review these assets for
impairment at least annually, or more frequently if events or changes in circumstances indicate that the carrying amount may not be recoverable through future cash flows. An impairment charge for goodwill is recognized only when the estimated fair
value of a reporting unit, including goodwill, is less than its carrying amount. We conducted our annual assessment for goodwill impairment during the fourth quarter of fiscal 2016 and concluded that goodwill was not impaired.
The changes in the carrying amount of goodwill for the years ended March 31, 2016 and 2015 are as follows ($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
|
Gross Carrying
Amount
|
|
|
Gross Carrying
Amount
|
|
Balance as of beginning of year
|
|
$
|
3,342
|
|
|
$
|
|
|
Goodwill acquired during the period
|
|
|
|
|
|
|
3,342
|
|
|
|
|
|
|
|
|
|
|
Balance as of end of year
|
|
$
|
3,342
|
|
|
$
|
3,342
|
|
|
|
|
|
|
|
|
|
|
The carrying amount of indefinite-lived intangible assets as of March 31, 2016 and 2015 are as
follows ($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
|
Gross Carrying
Amount
|
|
|
Gross Carrying
Amount
|
|
Indefinite-lived intangible asset balance as of end of year
|
|
$
|
436
|
|
|
$
|
436
|
|
For definite-lived intangible assets, the changes in the net carrying amount for the years ended
March 31, 2016 and 2015 are as follows ($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
Balance as of beginning of year
|
|
$
|
4,312
|
|
|
$
|
(1,511
|
)
|
|
$
|
2,058
|
|
|
$
|
(1,428
|
)
|
Intangible assets acquired during the period
|
|
|
|
|
|
|
|
|
|
|
2,255
|
|
|
|
|
|
Amortization expense
|
|
|
|
|
|
|
(385
|
)
|
|
|
|
|
|
|
(83
|
)
|
Currency translation effect on foreign balances
|
|
|
3
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of end of year
|
|
$
|
4,315
|
|
|
$
|
(1,896
|
)
|
|
$
|
4,312
|
|
|
$
|
(1,511
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Definite-lived intangible assets include trademarks/tradenames, dealer network, customer relationships,
non-compete
agreements and in-process research and development. Amortization expense is expected to be approximately $0.4 million for fiscal 2017, 2018, 2019 and 2020 and approximately $0.3 million for fiscal 2021.
The expected amortization expense is an estimate and actual amounts could differ due to additional intangible asset acquisitions, changes in foreign currency rates or impairment of intangible assets.
5. FINANCING
We rely on a senior secured revolving credit facility for documentary and stand-by letters of credit, working capital
needs and general corporate purposes. On March 10, 2016, we amended our credit facility to extend the maturity date from November 10, 2017 to March 10, 2021 and increase our maximum permissible borrowings from $100.0 million to $130.0
million during May through November and from $50.0 million to $75.0 million
45
during all other months of the fiscal year. The amount of permissible borrowings under the credit facility are dependent upon adequate levels of underlying collateral. Borrowings under the credit
facility bear interest at either the base rate plus the applicable margin or the LIBOR rate plus the applicable margin, depending on the type of loan. The applicable margin is calculated based on Arctic Cats leverage ratio and amount available
for borrowing under the credit facility and ranges from 0.0% to 0.5% for base rate loans and from 1.0% to 1.5% for LIBOR loans. Arctic Cats leverage ratio is its ratio of debt to EBITDA, calculated quarterly.
All borrowings are collateralized by substantially all of our assets including all real estate, accounts receivable and inventory. No
borrowings from the line of credit were outstanding at March 31, 2016 and 2015. The outstanding letters of credit balances were $3.5 million and $7.9 million at March 31, 2016 and 2015, respectively, and borrowings under the line are
subject to certain covenants and restrictions on indebtedness, financial guarantees, business combinations and other related items. We were in compliance with the terms of the credit agreement as of March 31, 2016.
6. LEASES
We lease buildings and equipment under non-cancelable operating leases. Certain of our lease agreements contain
provisions for escalating rent payments over the initial terms of the lease. We account for these leases by recognizing rent expense on a straight-line basis and adjusting the deferred rent expense liability for the difference between the
straight-line rent expense and the amount of rent paid. Total rent expense under our lease agreements was $1.4 million, $1.9 million and $1.4 million for fiscal 2016, 2015 and 2014, respectively.
Future minimum lease payments, exclusive of other costs required under non-cancelable operating leases are as follows ($ in thousands):
|
|
|
|
|
Fiscal year
|
|
|
|
2017
|
|
$
|
1,490
|
|
2018
|
|
|
1,383
|
|
2019
|
|
|
1,248
|
|
2020
|
|
|
1,234
|
|
2021
|
|
|
1,182
|
|
Thereafter
|
|
|
9,042
|
|
|
|
|
|
|
Total future minimum payments
|
|
$
|
15,579
|
|
|
|
|
|
|
7. SHAREHOLDERS EQUITY
Stock Compensation Plans
We have outstanding equity awards under a 2013 Omnibus Stock and Incentive Plan (the 2013 Plan) and a 2007 Omnibus Stock and Incentive Plan (the 2007 Plan, and along with the 2013
Plan, the Plans), previously approved by our shareholders. The Plans provide for incentive and non-qualified stock options, restricted stock and restricted stock unit awards and other incentive awards to be granted to directors,
officers, other key employees and consultants. The stock options granted generally vest over a period of one to three years, have an exercise price equal to the fair market value of the stock on the date of grant and expire after a five to ten year
life. The stock options are generally subject to accelerated vesting if there is a change in control, as defined in the plans. The restricted stock awards generally vest over a period of two to three years and do not require cash payments from
restricted stock award recipients. Stock appreciation rights (SARs) generally vest over a period of three years. At March 31, 2016, we had 620,703 shares of common stock available for grant under the plans.
We record stock-based compensation expense related to stock options, restricted stock and restricted stock units over the requisite
service period based on the fair value of the awards on the grant date. The fair value of restricted stock awards is based on the closing price of our common shares on the grant date. We record
46
stock-based
compensation expense related to cash-settled SARs over the requisite service period based on the fair value of the awards at the end of each
reporting period. The fair value of restricted stock awards is based on the closing price of our common shares on the grant date. The fair value of stock option and SARs is estimated on the grant date using the Black-Scholes options pricing model,
which includes assumptions regarding the
risk-free
interest rate, dividend yield, life of the award and the volatility of our common shares.
For the fiscal years ended March 31, 2016, 2015 and 2014, we recorded stock-based compensation expense for stock options, restricted
stock and SAR awards of $4.3 million, $4.1 million and $2.6 million, respectively, which have been included in general and administrative expenses. At March 31, 2016, we had $9.3 million of unrecognized compensation costs related to non-vested
stock options, restricted stock and SARs awards that are expected to be recognized over a weighted average period of approximately two years.
Stock Options
The
following tables summarize the stock option transactions under the Plans during fiscal 2016:
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares Under
Option
|
|
|
Weighted
Average
Exercise
Price
|
|
Outstanding at March 31, 2015
|
|
|
604,218
|
|
|
$
|
29.39
|
|
Granted
|
|
|
121,819
|
|
|
|
29.57
|
|
Cancelled
|
|
|
(10,356
|
)
|
|
|
36.39
|
|
Expired
|
|
|
(30
|
)
|
|
|
13.59
|
|
Exercised
|
|
|
(37,442
|
)
|
|
|
15.52
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2016
|
|
|
678,209
|
|
|
$
|
30.08
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at March 31, 2016
|
|
|
262,734
|
|
|
$
|
17.83
|
|
|
|
|
|
|
|
|
|
|
Options expected to vest at March 31, 2016
|
|
|
266,806
|
|
|
$
|
20.30
|
|
|
|
|
|
|
|
|
|
|
Stock options outstanding had an aggregate intrinsic value of $0.5 million, $5.3 million and $10.9
million and a weighted-average contractual life of 7.48 years, 8.03 years and 5.09 years at March 31, 2016, 2015 and 2014, respectively. Exercisable stock options had an aggregate intrinsic value of $0.4 million at March 31, 2016 and a
weighted-average contractual life of 6.32 years. The aggregate intrinsic value is based on the difference between the exercise price and our March 31, 2016 common share market value for in-the-money options.
The following tables summarize information concerning currently outstanding and exercisable stock options at March 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Range of Exercise Prices
|
|
Number
Outstanding
|
|
|
Weighted
Average
Remaining
Contractual
Life
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Number
Exercisable
|
|
|
Weighted
Average
Exercise
Price
|
|
$6.26 - 9.57
|
|
|
3,827
|
|
|
|
3.34 years
|
|
|
$
|
6.28
|
|
|
|
3,827
|
|
|
$
|
6.28
|
|
10.79
-
16.45
|
|
|
145,762
|
|
|
|
5.09 years
|
|
|
|
13.97
|
|
|
|
132,180
|
|
|
|
13.71
|
|
17.78
-
27.69
|
|
|
63,051
|
|
|
|
7.40 years
|
|
|
|
21.29
|
|
|
|
48,029
|
|
|
|
21.72
|
|
28.81 - 43.79
|
|
|
432,035
|
|
|
|
8.32 years
|
|
|
|
35.65
|
|
|
|
160,645
|
|
|
|
38.21
|
|
47.52 - 47.52
|
|
|
33,534
|
|
|
|
7.63 years
|
|
|
|
47.52
|
|
|
|
12,228
|
|
|
|
47.52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
678,209
|
|
|
|
7.48 years
|
|
|
$
|
30.08
|
|
|
|
356,909
|
|
|
$
|
26.90
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The fair value of each stock option award was estimated on the date of grant using the
Black-Scholes
options pricing model. The expected term of options granted is the safe harbor period. The volatility is based on historic volatilities from the traded shares of Arctic Cat over the past six years. The
risk-free interest rate for
47
periods matching the expected life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. Expected dividend is based on the historic dividend of Arctic Cat, as
well as our expectation of future dividends as of the grant date of each stock option award. We have analyzed the forfeitures of stock and option grants and have used a 10% forfeiture rate in the expense calculation.
The weighted average fair value of options granted and the assumptions used to estimate the fair value of options for fiscal 2016, 2015
and 2014 are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Fair value of options granted
|
|
$
|
13.35
|
|
|
$
|
15.24
|
|
|
$
|
16.91
|
|
|
|
|
|
Assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividend yield
|
|
|
1.2
|
%
|
|
|
1.0
|
%
|
|
|
1.0
|
%
|
Average term
|
|
|
6 years
|
|
|
|
6 years
|
|
|
|
5 years
|
|
Volatility
|
|
|
51.0
|
%
|
|
|
49.0
|
%
|
|
|
49.0
|
%
|
Risk-free rate of return
|
|
|
1.7
|
%
|
|
|
0.8
|
%
|
|
|
0.8
|
%
|
Restricted Stock
The shares of restricted common stock awarded have voting rights and participate equally in all dividends and other distributions duly declared by the Board.
The following tables summarize restricted stock and restricted stock unit award activity under the Plans for fiscal 2016 and 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
Restricted Shares
|
|
Shares
|
|
|
Weighted-
Average
Grant
Date
Fair Value
|
|
|
Shares
|
|
|
Weighted-
Average
Grant
Date
Fair Value
|
|
Non-vested shares at March 31,
|
|
|
22,500
|
|
|
$
|
40.12
|
|
|
|
16,200
|
|
|
$
|
43.45
|
|
Awarded
|
|
|
29,063
|
|
|
|
18.53
|
|
|
|
20,200
|
|
|
|
33.67
|
|
Vested
|
|
|
(9,800
|
)
|
|
|
48.75
|
|
|
|
(10,900
|
)
|
|
|
33.81
|
|
Forfeited
|
|
|
(1,900
|
)
|
|
|
24.84
|
|
|
|
(3,000
|
)
|
|
|
37.60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested shares at March 31,
|
|
|
39,863
|
|
|
$
|
22.98
|
|
|
|
22,500
|
|
|
$
|
40.12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
Restricted Stock Units
|
|
Shares
|
|
|
Weighted-
Average
Grant
Date
Fair Value
|
|
|
Shares
|
|
|
Weighted-
Average
Grant
Date
Fair Value
|
|
Non-vested shares at March 31,
|
|
|
116,439
|
|
|
$
|
35.67
|
|
|
|
40,103
|
|
|
$
|
35.35
|
|
Granted
|
|
|
124,558
|
|
|
|
18.09
|
|
|
|
135,564
|
|
|
|
34.81
|
|
Vested
|
|
|
(44,722
|
)
|
|
|
36.15
|
|
|
|
(57,295
|
)
|
|
|
33.14
|
|
Forfeited
|
|
|
(10,017
|
)
|
|
|
16.59
|
|
|
|
(1,933
|
)
|
|
|
43.81
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested shares at March 31,
|
|
|
186,258
|
|
|
$
|
24.79
|
|
|
|
116,439
|
|
|
$
|
35.67
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash-Settled Stock Appreciation Rights
In February 2016, we granted 175,000 cash-settled SARs with an exercise price equal to the closing price of Arctic Cat common stock on the date of grant. The cash-settled SARs vest in three equal annual
installments beginning on the first anniversary of the grant date and have a five-year term. Upon exercise, the holder is entitled to receive cash proceeds in an amount equal to the difference between (i) the lower of $33.00 and the
48
then-current market value of Arctic Cat common stock and (ii) the fair market value of Arctic Cat common stock on the grant date of February 5, 2016, multiplied by the number of SARs
exercised on such date. The cash-settled SARs are included in other liabilities in our Consolidated Balance Sheets and are recorded at fair value at the reporting date.
The following table summarizes the activity during fiscal 2016 for SARs awarded pursuant to the Plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
SARs
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Contractual
Term
|
|
Outstanding at March 31, 2015
|
|
|
|
|
|
$
|
|
|
|
|
|
|
Granted
|
|
|
175,000
|
|
|
|
14.16
|
|
|
|
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2016
|
|
|
175,000
|
|
|
$
|
14.16
|
|
|
|
4.9 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SARs exercisable at March 31, 2016
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SARs expected to vest at March 31, 2016
|
|
|
144,468
|
|
|
$
|
14.16
|
|
|
|
4.9 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The fair value of the SAR grant was estimated using the Black-Scholes option pricing model and
assumptions analogous to our stock option awards, as set forth in the table below:
|
|
|
|
|
|
|
2016
|
|
Fair value of SARs granted
|
|
$
|
6.40
|
|
Assumptions:
|
|
|
|
|
Dividend yield
|
|
|
0.0
|
%
|
Average term
|
|
|
5 years
|
|
Volatility
|
|
|
51.0
|
%
|
Risk-free rate of return
|
|
|
1.4
|
%
|
Preferred Stock
Our Board is authorized to issue 2,500,000 shares of $1.00 par value preferred stock in one or more series, 450,000 shares of which were designated Series B Junior Participating preferred stock in
connection with the previous Shareholder Rights Plan. The Board can determine voting, conversion, dividend and redemption rights and other preferences of each series. No shares have been issued.
Share Repurchase Authorization
On August 7, 2014, the Board authorized the repurchase of an additional $25.0 million in shares of common stock, which supplemented the $1.1 million remaining under the program previously approved in
May 2013. We paid $0.1 million, $1.0 million and $28.2 million during fiscal 2016, 2015, and 2014, respectively, to repurchase and cancel 5,162, 27,925 and 633,816 shares of common stock, respectively, pursuant to the Board authorizations. At
March 31, 2016, we have remaining authorization to repurchase $25.9 million in shares of common stock.
Net Earnings (Loss) Per Share
Our basic net earnings (loss) per share is computed by dividing net earnings (loss) by the weighted average number of
outstanding common shares. Our diluted weighted average shares outstanding include common shares and common share equivalents relating to stock options and restricted stock units, when dilutive. Options to purchase 449,432 and 156,432 shares of
common stock with weighted average exercise prices of $35.50 and
49
$44.14 were outstanding during fiscal 2016 and 2015, respectively, but were excluded from the computation of common share equivalents because they were anti-dilutive. No options outstanding were
excluded from the computation of common share equivalents during fiscal 2014.
Weighted average shares outstanding consist of
the following for the fiscal 2016, 2015 and 2014 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Weighted average number of common shares outstanding
|
|
|
12,995
|
|
|
|
12,926
|
|
|
|
13,275
|
|
Dilutive effect of option plan
|
|
|
|
|
|
|
163
|
|
|
|
323
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common and potential shares outstandingdiluted
|
|
|
12,995
|
|
|
|
13,089
|
|
|
|
13,598
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Other Comprehensive Loss
The components of the changes in accumulated other comprehensive loss during fiscal 2016, 2015 and 2014 were as follows ($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Balance at beginning of period
|
|
$
|
(7,142
|
)
|
|
$
|
(2,110
|
)
|
|
$
|
(4,166
|
)
|
Unrealized gain (loss) on derivative instruments, net of tax
|
|
|
(4,429
|
)
|
|
|
2,279
|
|
|
|
(241
|
)
|
Foreign currency translation adjustment
|
|
|
1,387
|
|
|
|
(7,311
|
)
|
|
|
2,297
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
(10,184
|
)
|
|
$
|
(7,142
|
)
|
|
$
|
(2,110
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The unrealized gains on derivatives instruments in fiscal 2016, 2015 and 2014 were net of tax expense of
$2.6 million, $1.3 million and $0.1 million, respectively. There is no tax impact on foreign currency translation adjustments, as the earnings are considered permanently reinvested.
8. RETIREMENT SAVINGS PLAN
We sponsor a 401(k) defined contribution plan that covers substantially all full-time employees who are at least 18
years of age and who have completed at least three months of service. Plan participants may make before tax elective contributions up to 50% of their compensation with Arctic Cat matching 50% of the employee contributions, up to a maximum of 5% of
the employees cash compensation capped at $255,000. Matching contributions of $1.3 million, $1.2 million, and $1.0 million were made in fiscal 2016, 2015 and 2014, respectively. We can elect to make additional contributions at our discretion.
9. INCOME TAXES
Our income (loss) before income taxes was generated from our United States and foreign operations as follows ($ in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended March 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
United States
|
|
$
|
(17,156
|
)
|
|
$
|
5,532
|
|
|
$
|
58,655
|
|
Foreign
|
|
|
109
|
|
|
|
678
|
|
|
|
1,749
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
$
|
(17,047
|
)
|
|
$
|
6,210
|
|
|
$
|
60,404
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50
Income tax expense (benefit) consists of the following for the fiscal years ended
March 31 ($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Current
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(5,935
|
)
|
|
$
|
2,610
|
|
|
$
|
13,345
|
|
State
|
|
|
(339
|
)
|
|
|
149
|
|
|
|
900
|
|
Foreign
|
|
|
27
|
|
|
|
168
|
|
|
|
436
|
|
Deferred
|
|
|
(1,613
|
)
|
|
|
(1,637
|
)
|
|
|
6,319
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax expense (benefit)
|
|
$
|
(7,860
|
)
|
|
$
|
1,290
|
|
|
$
|
21,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following is a reconciliation of the federal statutory income tax rate to the effective tax rate for
the fiscal years ended March 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Statutory income tax rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
State taxes
|
|
|
1.8
|
|
|
|
1.9
|
|
|
|
1.7
|
|
Research and other tax credit
|
|
|
5.6
|
|
|
|
(16.5
|
)
|
|
|
(1.0
|
)
|
Domestic manufacturers deduction
|
|
|
(0.1
|
)
|
|
|
(0.9
|
)
|
|
|
(1.4
|
)
|
Uncertain tax positions
|
|
|
6.0
|
|
|
|
(2.3
|
)
|
|
|
(0.1
|
)
|
US subpart F adjustments
|
|
|
0.7
|
|
|
|
11.1
|
|
|
|
0.4
|
|
Foreign tax rate difference
|
|
|
(1.4
|
)
|
|
|
(9.1
|
)
|
|
|
(0.2
|
)
|
Stock options
|
|
|
(0.5
|
)
|
|
|
1.3
|
|
|
|
(0.1
|
)
|
Other
|
|
|
(1.1
|
)
|
|
|
0.3
|
|
|
|
0.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
46.0
|
%
|
|
|
20.8
|
%
|
|
|
34.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
51
We utilize the liability method of accounting for income taxes whereby deferred taxes are
determined based on the estimated future tax effects of differences between the financial statement and tax bases of assets and liabilities given the provisions of enacted tax laws. The cumulative temporary differences between the tax bases of
assets and liabilities and their carrying amounts for financial reporting purposes under the liability method are as follows at March 31 ($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
Current deferred income tax assets
|
|
|
|
|
|
|
|
|
Accrued expenses
|
|
$
|
3,788
|
|
|
$
|
3,934
|
|
Accrued warranty
|
|
|
8,855
|
|
|
|
8,045
|
|
Inventory related items
|
|
|
4,269
|
|
|
|
4,152
|
|
Net operating loss carryforwards
|
|
|
1,628
|
|
|
|
|
|
Other
|
|
|
1,560
|
|
|
|
313
|
|
Less: valuation allowance
|
|
|
(351
|
)
|
|
|
(235
|
)
|
|
|
|
|
|
|
|
|
|
Current deferred income tax asset
|
|
|
19,749
|
|
|
|
16,209
|
|
Current deferred income tax liabilities
|
|
|
|
|
|
|
|
|
Prepaid expenses
|
|
|
2,043
|
|
|
|
1,463
|
|
Other
|
|
|
477
|
|
|
|
1,696
|
|
|
|
|
|
|
|
|
|
|
Current deferred income tax liability
|
|
|
2,520
|
|
|
|
3,159
|
|
|
|
|
|
|
|
|
|
|
Net current deferred tax asset
|
|
$
|
17,229
|
|
|
$
|
13,050
|
|
|
|
|
|
|
|
|
|
|
Non-current deferred income tax assets
|
|
|
|
|
|
|
|
|
Compensation payable in common stock
|
|
$
|
1,927
|
|
|
$
|
1,200
|
|
State research and development credits
|
|
|
1,393
|
|
|
|
1,043
|
|
Less: valuation allowance
|
|
|
(1,042
|
)
|
|
|
(808
|
)
|
|
|
|
|
|
|
|
|
|
Non-current deferred income tax asset
|
|
|
2,278
|
|
|
|
1,435
|
|
Non-current deferred income tax liability
|
|
|
|
|
|
|
|
|
Property and equipment
|
|
|
15,471
|
|
|
|
11,151
|
|
|
|
|
|
|
|
|
|
|
Non-current deferred tax liability
|
|
|
15,471
|
|
|
|
11,151
|
|
|
|
|
|
|
|
|
|
|
Net non-current deferred tax liability
|
|
$
|
13,193
|
|
|
$
|
9,716
|
|
|
|
|
|
|
|
|
|
|
Arctic Cat recognizes the financial statement benefit of a tax position only after determining that the
relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than
50% likelihood of being realized upon ultimate settlement with the relevant tax authority. We recognize potential interest and penalties related to income tax positions as a component of the provision for income taxes on the consolidated statements
of operations.
We had liabilities recorded related to unrecognized tax benefits totaling $1.1 and $2.2 million at
March 31, 2016 and 2015, including reserves related to potential interest and penalties of $0.1 and $0.4 million, respectively. The amount of the liability, net of federal benefits for uncertain state tax positions, at March 31, 2016, if
recognized, would affect our effective tax rate. Arctic Cat currently anticipates approximately $0.3 million of unrecognized tax benefits will be recognized during the next twelve months. We have state research and development credit carryforwards
of $1.4 and $1.0 million offset by valuation allowances as of March 31, 2016 and 2015, respectively, with expiration dates to March 2031. With few exceptions, we are no longer subject to federal, state, or foreign income tax examinations for
years prior to March 31, 2012.
52
A reconciliation of the amount of unrecognized tax benefits excluding interest and penalties
is as follows ($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
Balance at beginning of period
|
|
$
|
1,828
|
|
|
$
|
1,707
|
|
Increases related to prior year tax positions
|
|
|
50
|
|
|
|
72
|
|
Decreases related to prior year tax positions
|
|
|
(1,033
|
)
|
|
|
(143
|
)
|
Increases related to current year tax positions
|
|
|
200
|
|
|
|
192
|
|
Settlements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
1,045
|
|
|
$
|
1,828
|
|
|
|
|
|
|
|
|
|
|
Arctic Cat is subject to income taxes in the U.S. federal jurisdiction, and various state jurisdictions,
as well as various European jurisdictions. Tax regulations within each jurisdiction are subject to the interpretation of the relevant tax laws and regulations and require significant judgment to apply.
10. COMMITMENTS AND CONTINGENCIES
Product Liability and Litigation
We are subject to product liability and intellectual property legal proceedings and claims, as well as other litigation, arising in the normal course of business. Such matters are generally subject to
uncertainties and to outcomes that are not predictable and that may not be known for extended periods of time. Litigation occasionally involves claims for punitive, as well as compensatory, damages arising out of the use of our products. Although we
are self-insured to some extent, we maintain insurance against certain product liability losses. We are also typically involved in patent litigation cases in which we are asserting, or defending, against patent infringement claims. To prevent
possible future infringement of our patents by competitors, we periodically review competitors products. To avoid potential liability with respect to competitors patents, we regularly review certain patents issued by the United States
Patent and Trademark Office and foreign patent offices. Management believes these activities help minimize our risk of being a defendant in patent infringement litigation. We are currently involved in patent litigation cases, including cases by or
against competitors, where we are asserting and defending against claims of patent infringement. Such cases are at varying stages in the litigation process.
We record a reserve in accrued expenses in the Consolidated Balance Sheets based on our estimated range of potential exposures related to claims, including future legal expenditures, settlement and
judgments, for which we are aware of, have assessed that a loss is probable and an amount can be reasonably estimated. We utilize historical trends and other analysis to assist in determining the appropriate loss reserve estimate. Should any
settlement occur that exceeds our estimate or a new claim arise, we may need to adjust our overall reserve and, depending on the amount, such adjustment could be material. We are not involved in any legal proceedings which we believe will have a
materially adverse impact on our business or financial condition, results of operations or cash flows.
Dealer Financing
Finance companies provide our North American dealers with floorplan financing. We have agreements with these finance companies to
repurchase certain repossessed products sold to our dealers. At March 31, 2016, we are contingently liable under these agreements for a maximum repurchase amount of approximately $68.5 million. Our financial exposure under these agreements is
limited to the difference between the amount paid to the finance companies for repurchases and the amount received upon the resale of the repossessed product. Losses incurred under these agreements during the periods presented have not been
material. The financing agreements also have loss sharing provisions should any dealer default, whereby we share certain losses with the finance companies. The maximum liability to us under these provisions is approximately $2.2 million at
March 31, 2016.
53
Purchase Obligations
We enter into non-cancelable purchase commitments with certain of our suppliers for materials and supplies as part of the normal course of business. As of March 31, 2016, our purchase obligation
under the non-cancelable purchase commitments was $45.1 million.
11. SEGMENT REPORTING
The presentation of segment information represents our method of internal reporting for making operating decisions and
assessing performance, which generally segregates the operating segments by product line. The internal reporting of these operating segments is based, in part, on the management process utilized by our President and Chief Executive Officer, who is
our chief operating decision maker. Based on this management process, we have two operating segments: (1) Snowmobile and ATV/ROV and (2) PG&A, which also represent our two reportable segments.
We aggregate our snowmobile and ATV/ROV operating segments into one operating segment, as the segments have similar economic
characteristics. Given the crossover of customers, manufacturing and asset management, we do not maintain separate balance sheets for each segment. Accordingly, the segment information presented below is limited to sales and gross profit data ($ in
thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended March 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Net sales
|
|
|
|
|
|
|
|
|
|
|
|
|
Snowmobile and ATV/ROV units
|
|
$
|
534,600
|
|
|
$
|
584,873
|
|
|
$
|
615,608
|
|
PG&A
|
|
|
98,295
|
|
|
|
113,883
|
|
|
|
114,883
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales
|
|
|
632,895
|
|
|
|
698,756
|
|
|
|
730,491
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
|
|
|
|
|
|
|
|
|
|
|
Snowmobile and ATV/ROV units
|
|
|
476,194
|
|
|
|
505,383
|
|
|
|
506,707
|
|
PG&A
|
|
|
66,034
|
|
|
|
73,924
|
|
|
|
72,705
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of goods sold
|
|
|
542,228
|
|
|
|
579,307
|
|
|
|
579,412
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
|
|
|
|
|
|
|
|
|
|
Snowmobile and ATV/ROV units
|
|
|
58,406
|
|
|
|
79,490
|
|
|
|
108,901
|
|
PG&A
|
|
|
32,261
|
|
|
|
39,959
|
|
|
|
42,178
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross profit
|
|
$
|
90,667
|
|
|
$
|
119,449
|
|
|
$
|
151,079
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended March 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Net sales by product line
|
|
|
|
|
|
|
|
|
|
|
|
|
Snowmobile units
|
|
$
|
258,788
|
|
|
$
|
300,731
|
|
|
$
|
282,442
|
|
ATV/ROV units
|
|
|
275,812
|
|
|
|
284,142
|
|
|
|
333,166
|
|
PG&A
|
|
|
98,295
|
|
|
|
113,883
|
|
|
|
114,883
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales
|
|
$
|
632,895
|
|
|
$
|
698,756
|
|
|
$
|
730,491
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended March 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Net sales by geography, based on location of the customer
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
395,684
|
|
|
$
|
420,687
|
|
|
$
|
404,347
|
|
Canada
|
|
|
174,658
|
|
|
|
192,524
|
|
|
|
215,631
|
|
Europe and other
|
|
|
62,553
|
|
|
|
85,545
|
|
|
|
110,513
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales
|
|
$
|
632,895
|
|
|
$
|
698,756
|
|
|
$
|
730,491
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
54
During fiscal 2016, no individual customer accounted for greater than 10% of our net sales.
Sales to Yamaha and its subsidiaries in the aggregate accounted for 10.4% of net sales in fiscal year 2015. No sales to an individual customer accounted for more than 10% of fiscal year 2014 net sales.
Property and equipment, net, by geography are presented in the table below ($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
Years ended March 31,
|
|
|
|
2016
|
|
|
2015
|
|
Long-lived assets by geography
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
88,623
|
|
|
$
|
69,113
|
|
Canada and Europe
|
|
|
223
|
|
|
|
336
|
|
|
|
|
|
|
|
|
|
|
Total long-lived assets
|
|
$
|
88,846
|
|
|
$
|
69,449
|
|
|
|
|
|
|
|
|
|
|
12. NEW MARKET TAX CREDIT TRANSACTION
In February 2016, we entered into a transaction with Wells Fargo Community Development Enterprises, Inc. (Wells
Fargo or investors), related to an investment in equipment at our manufacturing facility in Thief River Falls, Minnesota (the project). As part of the transaction, Wells Fargo made a contribution to and Arctic Cat Sales
Inc. made a loan to, WF Paint & Assembly Investment Fund, LLC (the Investment Fund) under the New Market Tax Credit (NMTC) program. The NMTC program was provided for in the Community Renewal Tax Relief Act of 2000
(the Act) and is intended to induce investment in low-income communities. The Act permits taxpayers, whether companies or individuals, to claim credits against their federal income taxes for up to 39% of qualified investments in the
equity of community development entities (CDEs). CDEs are privately managed investment institutions that are certified to make qualified low-income community investments.
In connection with the transaction, Arctic Cat Sales Inc. loaned $10.8 million to the Investment Fund at an interest rate of
3.75% per year and with a maturity of June 30, 2032. The Investment Fund then contributed the loan to certain CDEs, which, in turn, loaned the funds to Arctic Cat Production Support LLC, our direct, wholly-owned subsidiary at an interest
rate of 3.106%. The proceeds of the loans from the CDEs (including loans representing the capital contribution made by the investors, net of syndication fees) will be used to fund the equipment investments.
In exchange for its $5.3 million contribution to the Investment Fund, Wells Fargo is entitled to substantially all of the tax benefits
derived from the NMTC transaction, while we effectively received net proceeds equal to Wells Fargos contributions to the Investment Fund less direct and incremental transaction costs. This transaction includes a put/call provision whereby we
may be obligated or entitled to repurchase Wells Fargos interest in the Investment Fund. We believe that the investor will exercise the put option in February 2023 at the end of the recapture period. If the investor does not exercise the put
option, we have a call option to purchase the Investment Fund at fair value. The value attributed to the put/call is de minimis. The NMTC is subject to 100% recapture for a period of seven years as provided in the Internal Revenue Code. We are
required to be in compliance with various regulations and contractual provisions that apply to the NMTC arrangement. Non-compliance with applicable requirements could result in projected tax benefits not being realized and, therefore, could require
us to indemnify Wells Fargo for any loss or recapture of NMTCs until such time as our obligation to deliver tax benefits is relieved. We do not anticipate any tax credit recaptures will be required in connection with this arrangement.
We have determined that the Investment Fund is a VIE, of which we are the primary beneficiary and, as such, we have
consolidated the Investment Fund. The ongoing activities of the Investment Fundcollecting and remitting interest and fees and NMTC compliancewere all considered in the initial design and are not expected to significantly affect economic
performance throughout the life of the Investment Fund. We also considered the contractual arrangements that obligate us to deliver tax benefits and provide various other guarantees to the structure; Wells Fargos lack of a material interest in
the underlying economics of the project; and the fact that we are obligated to absorb losses of the Investment Fund in determining we are the primary beneficiary.
55
Based on the contractual arrangements that obligate us to deliver tax benefits to Wells
Fargo, we have included Wells Fargos contribution within other liabilities in our Consolidated Balance Sheets. The benefit of this net $5.3 million contribution will be recognized as earnings at the end of the seven year recapture period, when
our performance obligation is relieved. Direct and incremental costs incurred in structuring the financing arrangement of $0.9 million have been deferred within other assets in the Consolidated Balance Sheets and will be recognized in proportion to
the recognition of the related profits. Incremental costs to maintain the structure during the compliance period will be recognized as incurred.
13. QUARTERLY FINANCIAL DATA (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in thousands, except per share
amounts)
|
|
Total Year
|
|
|
First Quarter
|
|
|
Second Quarter
|
|
|
Third Quarter
|
|
|
Fourth Quarter
|
|
Net Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
$
|
632,895
|
|
|
$
|
134,381
|
|
|
$
|
211,157
|
|
|
$
|
166,000
|
|
|
$
|
121,357
|
|
2015
|
|
|
698,756
|
|
|
|
143,639
|
|
|
|
262,479
|
|
|
|
193,735
|
|
|
|
98,903
|
|
2014
|
|
|
730,491
|
|
|
|
120,768
|
|
|
|
238,525
|
|
|
|
225,790
|
|
|
|
145,408
|
|
Gross Profit (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
$
|
90,667
|
|
|
$
|
22,562
|
|
|
$
|
43,918
|
|
|
$
|
24,250
|
|
|
$
|
(63
|
)
|
2015
|
|
|
119,449
|
|
|
|
30,801
|
|
|
|
55,081
|
|
|
|
34,913
|
|
|
|
(1,346
|
)
|
2014
|
|
|
151,079
|
|
|
|
29,160
|
|
|
|
61,674
|
|
|
|
40,213
|
|
|
|
20,032
|
|
Net Earnings (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
$
|
(9,187
|
)
|
|
$
|
(1,056
|
)
|
|
$
|
11,171
|
|
|
$
|
(2,397
|
)
|
|
$
|
(16,905
|
)
|
2015
|
|
|
4,920
|
|
|
|
3,569
|
|
|
|
15,389
|
|
|
|
7,487
|
|
|
|
(21,525
|
)
|
2014
|
|
|
39,404
|
|
|
|
5,468
|
|
|
|
23,365
|
|
|
|
12,120
|
|
|
|
(1,549
|
)
|
Net Earnings (Loss) Per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016 Basic
|
|
$
|
(0.71
|
)
|
|
$
|
(0.08
|
)
|
|
$
|
0.86
|
|
|
$
|
(0.18
|
)
|
|
$
|
(1.30
|
)
|
Diluted
|
|
|
(0.71
|
)
|
|
|
(0.08
|
)
|
|
|
0.85
|
|
|
|
(0.18
|
)
|
|
|
(1.30
|
)
|
2015 Basic
|
|
|
0.38
|
|
|
|
0.28
|
|
|
|
1.19
|
|
|
|
0.58
|
|
|
|
(1.66
|
)
|
Diluted
|
|
|
0.38
|
|
|
|
0.27
|
|
|
|
1.18
|
|
|
|
0.57
|
|
|
|
(1.66
|
)
|
2014 Basic
|
|
|
2.97
|
|
|
|
0.41
|
|
|
|
1.75
|
|
|
|
0.90
|
|
|
|
(0.12
|
)
|
Diluted
|
|
|
2.90
|
|
|
|
0.40
|
|
|
|
1.70
|
|
|
|
0.89
|
|
|
|
(0.12
|
)
|
56