SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | 12 Months Ended |
Mar. 31, 2015 |
Accounting Policies [Abstract] | |
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
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Arctic Cat Inc. (the “Company”) designs, engineers, manufactures and markets snowmobiles and all-terrain vehicles (ATVs) and recreational off-highway vehicles (“side-by-sides” or “ROVs”) under the Arctic Cat® and MotorFist® brand names, and related parts, garments and accessories principally through its facilities in Thief River Falls, Minnesota. The Company’s products are sold through a network of independent dealers located throughout the United States, Canada, and Europe and through distributors in Europe, Russia, South America, the Middle East, Asia and other international markets. |
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Use of Estimates |
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Preparation of the Company’s 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. Actual results could differ from the estimates used by management. |
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Principles of Consolidation |
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The consolidated financial statements include the accounts of Arctic Cat Inc. and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. |
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Cash and Cash Equivalents |
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The Company considers 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, 2015 and 2014, the Company had approximately $19,212,000 and $14,948,000, respectively, of cash located in foreign banks primarily in Europe and Canada. |
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Fair Values of Financial Instruments |
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Except where noted, the carrying value of current financial assets and liabilities approximates their fair value, due to their short-term nature. |
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Short-Term Investments |
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Short-term investments are reported at fair value. The Company utilizes the specific identification method in accounting for its short-term investments. |
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Accounts Receivable |
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The Company’s accounts receivable balance consists of amounts due from its dealers and finance companies. The Company extends credit to its dealers based on an evaluation of the dealers’ financial condition. The Company’s collection exposure relating to accounts receivable amounts due from dealer floorplan finance companies is limited due to the financial strength of the finance companies and provisions of its existing agreements. Accounts receivable is presented net of an allowance for estimated uncollectible amounts due from its dealers. The Company estimates the uncollectible amounts considering numerous factors, mainly historical trends as well as current available information. The Company’s allowance for uncollectible accounts was $1,897,000 and $1,988,000 at March 31, 2015 and 2014, respectively. The activity within the allowance for uncollectible accounts for the three years ended March 31, 2015 was not significant. Accounts receivable amounts written off have been within management’s expectations. |
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The activity in the allowance for uncollectible accounts for accounts receivable is as follows: |
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| | 2015 | | | 2014 | | | | | |
Balance at beginning of period | | $ | 1,988,000 | | | $ | 2,759,000 | | | | | |
Provisions charged to expense | | | 287,000 | | | | (872,000 | ) | | | | |
Deductions for amounts written-off | | | (378,000 | ) | | | 101,000 | | | | | |
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Balance at end of period | | $ | 1,897,000 | | | $ | 1,988,000 | | | | | |
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Inventories |
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Inventories are stated at the lower of cost or market, with cost determined using the first-in, first-out method. |
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Derivative Instruments and Hedging Activities |
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The Company enters into forward exchange contracts to protect against exposure to currency fluctuations on transactions denominated in foreign currencies, namely Canadian dollar and Japanese yen. The contracts are designated as, and meet the criteria for, cash flow hedges. The Company does not enter into forward contracts for the purpose of trading. Gains and losses on forward contracts are 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. |
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As of March 31, 2015, the Company had open Canadian dollar forward exchange contracts, maturing through March 2016, with notional amounts totaling $76,328,000 and the total net fair value of $3, 628,000 is included in accounts receivable. As of March 31, 2015, the Company had open Japanese yen forward exchange contracts, maturing through August 2015, with notional amounts totaling $19,046,000 and the total net fair value of $434,000 is included in accounts payable. As of March 31, 2014, the Company had open Canadian dollar forward exchange contracts, maturing through March 2014, with notional amounts totaling $89,649,000 and the total net fair value of $424,000 is included in accounts payable. The Company did not enter into any forward contracts in currencies other than the Canadian dollar in the year ended March 31, 2014 and the Canadian dollar and Japanese yen in the year ended March 31, 2015. |
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Fair Value Measurements |
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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. 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: |
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Level 1: Quoted 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 or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and 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. As of March 31, 2015, the Company’s Canadian dollar foreign currency contracts fair value was an asset totaling $3,628,000 and considered a Level 2 measurement. As of March 31, 2015, the Company’s Japanese yen foreign currency contracts fair value was a liability totaling $434,000 and considered a Level 2 measurement. As of March 31, 2014, Company’s Canadian dollar foreign currency contract fair value was a liability totaling $424,000 and considered a Level 2 measurement. There were no open Japanese yen foreign currency contracts at March 31, 2014. The Company utilizes the income approach to measure fair value of foreign currency contracts which is based on significant other observable inputs. The asset or liability is measured at fair value on a recurring basis each reporting period end. |
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Property and Equipment |
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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. Repairs and maintenance cost that are considered not to extend the useful life of the property and equipment are expensed as incurred. Tooling is amortized over the life of the product, generally 3-5 years. Estimated service lives range from 15 - 39 years for buildings and improvements and 5 - 7 years for machinery and equipment. Accelerated and straight-line methods are used for income tax reporting. |
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Impairment of Long-Lived Assets |
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The Company evaluates the carrying value of long-lived assets for impairment when events or changes in circumstances indicate that the carrying amount of an asset may not be 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 the associated discounted cash flows. Based on impairment indicators not being present, the Company determined the carrying value of long-lived assets was not impaired. |
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Goodwill and Other Intangible Assets |
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ASC Topic 350 prohibits the amortization of goodwill and intangible assets with indefinite useful lives. 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. The Company has not performed the annual impairment test, since the acquisition of MotorFist occurred on February 25, 2015. In accordance with Topic 350, the Company will continue to complete an impairment analysis on an annual basis or more frequently if an event or circumstance that would more likely than not reduce the fair value of a reporting unit below its carrying amount occurs. Identified intangible assets are acquired customer relationships, homologation licenses, and a non-compete agreement. Goodwill, intangibles and other assets, consist of $6,579,000 net of accumulated amortization, for the period ended March 31, 2015. Goodwill, intangibles and other assets, consist $1,067,000 net of accumulated amortization, for the period ended March 31, 2014. Other assets consist of $436,000, net of accumulated amortization for period ended March 31, 2015 and 2014. |
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Additions to goodwill and other intangible assets in fiscal year 2015 relate primarily to the acquisition of MotorFist, LLC, (“MotorFist”), in February 2015. MotorFist is an innovative growing company in the power sports apparel market with a strong reputation as a provider of technical snowmobile riding gear. |
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For the acquisition, the aggregate purchase price was allocated to the assets acquired and liabilities assumed based on their fair values at the date of acquisition. MotorFist’s financial results are included in the Company’s consolidated results from the date of acquisition. |
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The changes in the carrying amount of goodwill and other identified intangible assets for the fiscal years ended March 31, 2015 and 2014 are as follows: |
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| | 2015 | | | 2014 | | | | | |
Balance at beginning of period | | $ | 631,000 | | | $ | 659,000 | | | | | |
Goodwill acquired during the period | | | 3,342,000 | | | | — | | | | | |
Intangible assets acquired during the period | | | 2,255,000 | | | | 56,000 | | | | | |
Currency translation effect on foreign balances | | | (2,000 | ) | | | (1,000 | ) | | | | |
Current year amortization | | | (83,000 | ) | | | (83,000 | ) | | | | |
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Balance at end of period | | $ | 6,143,000 | | | $ | 631,000 | | | | | |
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Identified intangible assets are acquired customer relationships, homologation licenses, non-compete agreements, trademarks/names, dealer network and in-process research and development. Intangible assets before accumulated amortization were $4,314,000 at March 31, 2015 and $2,060,000 at March 31, 2014. Accumulated amortization was $1,511,000 and $1,428,000 at March 31, 2015 and 2014, respectively. Amortization expense is expected to be approximately $383,000 in each of fiscal 2016, 2017, 2018, 2019 and 2020. |
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Product Warranties |
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The Company generally provides a limited warranty to the owner of snowmobiles for twelve months from the date of consumer registration and for six months from the date of consumer registration on ATVs and ROVs. The Company provides for estimated warranty costs at the time of sale based on historical rates and trends and makes subsequent adjustments to its estimate 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 the Company’s accrued warranty liability for the fiscal years ended March 31, |
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| | 2015 | | | 2014 | | | 2013 | |
Balance at beginning of period | | $ | 19,357,000 | | | $ | 18,709,000 | | | $ | 18,521,000 | |
Warranty provision | | | 21,499,000 | | | | 16,770,000 | | | | 19,449,000 | |
Warranty claim payments | | | (17,794,000 | ) | | | (16,122,000 | ) | | | (19,261,000 | ) |
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Balance at end of period | | $ | 23,062,000 | | | $ | 19,357,000 | | | $ | 18,709,000 | |
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Insurance |
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The Company is self-insured for employee medical, workers’ compensation, and product liability claims. Specific stop loss coverages are provided for catastrophic claims. Losses and claims are charged to operations when it is probable a loss has been incurred and the amount can be reasonably estimated. |
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Revenue Recognition |
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The Company recognizes revenue and provides for estimated marketing and sales incentive costs when products are shipped to dealers and distributors pursuant to their order, the price is fixed and collection is reasonably assured. Shipping and handling costs are recorded as a component of costs of goods sold and shipping charges to the dealers are recorded as revenue at the time products are shipped. |
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Return allowances for parts and accessories are recorded as a reduction of revenue when the products are sold based on the company’s return allowance program and historical experience. |
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Sales tax collected from customers is remitted to the appropriate taxing jurisdictions and is excluded from sales revenue as the Company considers itself a pass-through conduit for collecting and remitting sales taxes. |
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Marketing and Sales Incentive Costs |
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At the time product revenue is recognized the Company provides for various marketing and sales incentive costs that are offered to its dealers and consumers. Examples of these costs, which are recognized as a reduction of revenue when the products are sold, include dealer and consumer rebates, dealer floor plan financing assistance and other incentive and promotion programs. Generally, the Company records provisions for these marketing programs at the later of when the revenue is recognized or when the sales incentive or marketing program is approved and communicated for products previously shipped. Sales incentives that involve a free product or service delivered to the consumer are recorded as a component of cost of goods sold. The Company estimates the costs of these various incentive and marketing programs at the time of sale or subsequently when programs are approved and communicated based on historical experience. To the extent current experience differs with previous estimates the accrued liability for marketing and sales incentives is adjusted accordingly. |
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Dealer Holdback |
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The Company records a dealer holdback program liability at the time certain products are shipped to its dealers. If the products subject to the holdback program are sold within the program time period, the Company refunds a portion of the original sale price, referred to as dealer holdback, to the dealer within the program time period and refunds any remaining balances to its dealers when the program time periods end. The Company’s dealer holdback program liability, included within accounts payable, was $19,751,000 and $19,448,000 as of March 31, 2015 and 2014, respectively. |
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Research and Development |
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Research and development costs are expensed as incurred. Research and development expense was $24,341,000, $23,998,000 and $20,693,000 during fiscal 2015, 2014 and 2013, respectively. |
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Advertising |
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The Company expenses advertising costs as incurred, except for cooperative advertising obligations arising related to the sale of the Company’s products to its 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 $3,566,000, $3,440,000 and $3,556,000 in fiscal 2015, 2014 and 2013, respectively. Total advertising expense, including cooperative advertising, was $18,588,000, $17,562,000 and $17,232,000 in fiscal 2015, 2014 and 2013, respectively. |
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Net Earnings Per Share |
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The Company’s diluted weighted average shares outstanding include common shares and common share equivalents relating to stock options, when dilutive. Options to purchase 156,432 shares of common stock with weighted average exercise prices of $44.14 were outstanding during fiscal 2015 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. Options to purchase 70,470 shares of common stock with weighted average exercise prices of $43.79 were outstanding during fiscal 2013 but were excluded from the computation of common share equivalents because they were anti-dilutive. |
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Weighted average shares outstanding consist of the following for the fiscal years ended March 31: |
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| | 2015 | | | 2014 | | | 2013 | |
Weighted average number of common shares outstanding | | | 12,926,000 | | | | 13,275,000 | | | | 13,155,000 | |
Dilutive effect of option plan | | | 163,000 | | | | 323,000 | | | | 606,000 | |
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Common and potential shares outstanding—diluted | | | 13,089,000 | | | | 13,598,000 | | | | 13,761,000 | |
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Foreign Currency Translation |
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The Company’s activities with Canadian dealers are denominated in Canadian currency. The Company’s activities with European on-road ATV dealers and distributors are denominated in the Euro. Assets and liabilities denominated in Canadian currency and the Euro are translated using the exchange rates in effect at the balance sheet date. Revenues and expenses are translated at the average foreign exchange rates in effect for the period. Translation gains and losses relating to the Canadian currency are reflected in the results of operations and Euro currency are reflected as a component of other comprehensive income. |
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Comprehensive Income (Loss) |
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Comprehensive income (loss) represents net earnings adjusted for the unrealized gain or loss on derivative instruments, and foreign currency translation adjustments and is shown in the consolidated statements of comprehensive income (loss). |
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Segment Reporting |
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The Company’s operations include three operating segments based on its product lines – snowmobile; ATV; and parts, garments and accessories (“PG&A). For purposes of segment reporting the Company aggregates the snowmobile and ATV segments as the segments have similar economic characteristics. Detailed segment information is reported in Note J. |