| SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | 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 ® ®
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 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
entity’s (“VIE’s”) 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
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.
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 $1.9 million
at March 31, 2016 and 2015, respectively. Account balances are
charged off against the allowance when all collection efforts have
been exhausted. Amounts which are considered to be uncollectible
are written off and recoveries of amounts previously written off
are credited to the allowance upon recovery. Accounts receivable
amounts written off have been within management’s
expectations.
The activity in
the allowance for uncollectible accounts for accounts receivable is
as follows ($ 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
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 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 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 company’s
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 unit’s goodwill is
determined by allocating the reporting unit’s 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 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
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
program’s term, we refund the holdback to the dealer. Any
remaining holdback balances at the expiration of the
program’s 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 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
management’s 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 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
In February
2016, the FASB issued ASU 2016-02, Lease Accounting
In November
2015, the FASB issued ASU 2015-17, Income Taxes
In July 2015,
the FASB issued ASU 2015-11, Inventory
In May 2014,
the FASB issued ASU 2014-09, Revenue from Contracts with
Customers |
