The accompanying notes are an integral part of these consolidated statements.
The accompanying notes are an integral part of these consolidated statements.
The accompanying notes are an integral part of these consolidated statements.
The accompanying notes are an integral part of these consolidated statements.
Notes to Consolidated Financial Statements
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements include the accounts of Arctic Cat Inc., its wholly-owned subsidiaries and certain
variable interest entities (VIEs). Unless the context otherwise requires, the use of the terms Arctic Cat, we, our, or us in these unaudited Notes to Consolidated Financial Statements
refers to Arctic Cat Inc. and, as applicable, its consolidated subsidiaries. All intercompany accounts and transactions are eliminated upon consolidation.
The unaudited consolidated financial statements of Arctic Cat Inc. have been prepared in accordance with Regulation S-X pursuant to the rules and regulations
of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been
condensed or omitted pursuant to such rules and regulations, although we believe that the disclosures are adequate to make the information presented not misleading. Accordingly, such statements should be read in conjunction with our Annual Report on
Form 10-K for the fiscal year ended March 31, 2016.
In the opinion of management, the unaudited consolidated financial statements contain all
adjustments (consisting of only normal recurring adjustments) necessary for the fair presentation of our financial position as of June 30, 2016 and results of operations and cash flows for the three-month periods ended June 30, 2016 and
2015. Results of operations for the interim periods are not necessarily indicative of results for the full year due to the seasonality of snowmobiles, all-terrain vehicles (ATVs) and recreational off-highway vehicles (ROVs)
and related parts, garments and accessories (PG&A). The consolidated balance sheet as of March 31, 2016 is derived from the audited balance sheet as of that date.
Preparation of our consolidated financial statements requires management to make estimates and assumptions that affect reported amounts of assets and
liabilities and related revenues and expenses. Accordingly, actual results could differ from those estimates.
Certain fiscal 2016 amounts have been
reclassified to conform to the fiscal 2017 financial statement presentation. The reclassifications had no effect on previously reported operating results
In preparing the accompanying consolidated financial statements, we have evaluated the period from July 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.
Recently Adopted
Accounting Standards
In April 2016, we retrospectively adopted Accounting Standard Update (ASU) 2015-17,
Income Taxes
, which is
effective prospectively or retrospectively for annual periods beginning after December 15, 2016, and interim periods therein, with early adoption permitted. The ASU modifies the existing guidance for classifying deferred tax assets and liabilities,
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 requires entities to classify deferred tax assets and liabilities as
noncurrent in a classified statement of financial position. However, 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 early adoption of the ASU resulted in the reclassification of previously recorded current deferred tax assets of $17.2 million and noncurrent deferred tax liabilities of $13.2 million into noncurrent deferred income taxes of $4.0
million on the Consolidated Balance Sheet as of March 31, 2016.
Recent Accounting Pronouncements
In March 2016, the Financial Accounting Standards Board (FASB) issued 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
7
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 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 and 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 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 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
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:
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 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.
Recurring Fair Value Measurements
The following tables present, by level within the fair value hierarchy, our financial assets and liabilities that were accounted for at fair value on a
recurring basis at June 30, 2016 and March 31, 2016, according to the valuation technique utilized to determine their fair values ($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using Inputs Considered as
|
|
|
|
Fair Value at
June 30, 2016
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency contracts
(1)
|
|
$
|
50
|
|
|
$
|
|
|
|
$
|
50
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency contracts
(1)
|
|
$
|
2,866
|
|
|
$
|
|
|
|
$
|
2,866
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
We utilize the income approach to measure fair value of foreign currency contracts, which is based on significant other observable inputs.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using Inputs Considered as
|
|
|
|
Fair Value at
March 31, 2016
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency contracts
(1)
|
|
$
|
100
|
|
|
$
|
|
|
|
$
|
100
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency contracts
(1)
|
|
$
|
3,937
|
|
|
$
|
|
|
|
$
|
3,937
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
We utilize the income approach to measure fair value of foreign currency contracts, which is based on significant other observable inputs.
|
8
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 other 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 the three months ended June 30, 2016 and 2015.
Other Fair Value Disclosures
Our financial instruments
that approximate fair value due to their short-term nature and are not measured at fair value on a recurring basis include cash and cash equivalents, accounts receivable and accounts payable. At June 30, 2016, the carrying value of our revolving
credit agreement approximates fair value and would be considered a Level 2 measurement.
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 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 June 30, 2016 and March 31, 2016 ($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
|
March 31, 2016
|
|
|
|
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)
|
|
$
|
81,295
|
|
|
$
|
(2,816
|
)
|
|
$
|
87,875
|
|
|
$
|
(3,837
|
)
|
(1)
|
Assets are included in other current assets and liabilities are included in other 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.
|
9
The following table presents the effects of derivative instruments on other comprehensive income
(OCI) and on our Consolidated Statements of Operations for the three months ended June 30, 2016 and 2015 ($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
|
June 30, 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)
|
|
$
|
(97
|
)
|
|
$
|
(1,118
|
)
|
|
$
|
431
|
|
|
$
|
1,988
|
|
Japanese Yen
(1)
|
|
|
|
|
|
|
|
|
|
|
(236
|
)
|
|
|
(393
|
)
|
(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 three months ended June 30, 2016 and 2015.
4. GOODWILL AND INTANGIBLE ASSETS
There were no changes
in the carrying values of goodwill and indefinite-lived intangible assets during the three months ended June 30, 2016. The following provides the gross carrying amount of goodwill and indefinite-lived intangible assets as of June 30, 2016 and March
31, 2016 ($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
|
March 31, 2016
|
|
|
|
Gross Carrying
Amount
|
|
|
Gross Carrying
Amount
|
|
Goodwill
(1)
|
|
$
|
3,342
|
|
|
$
|
3,342
|
|
Indefinite-lived intangible assets
|
|
$
|
436
|
|
|
$
|
436
|
|
(1)
|
The entirety of our goodwill balance as of June 30, 2016 and March 31, 2016 resides in our PG&A operating segment. Refer to Note 10,
Segment Reporting
, for additional information on our operating segments.
|
There was no cumulative impairment related to goodwill or indefinite-lived intangibles assets at June 30, 2016 or March 31, 2016.
For definite-lived intangible assets, the changes in the net carrying amount for the three months ended June 30, 2016 and 2015 are as follows ($ in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
|
Gross Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Gross Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
Definite-lived intangible assets, beginning
|
|
$
|
4,315
|
|
|
$
|
(1,896
|
)
|
|
$
|
4,312
|
|
|
$
|
(1,511
|
)
|
Amortization expense
|
|
|
|
|
|
|
(95
|
)
|
|
|
|
|
|
|
(96
|
)
|
Adjustments
(1)
|
|
|
169
|
|
|
|
31
|
|
|
|
|
|
|
|
|
|
Currency translation effect on foreign balances
|
|
|
(20
|
)
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Definite-lived intangible assets, ending
|
|
$
|
4,464
|
|
|
$
|
(1,945
|
)
|
|
$
|
4,312
|
|
|
$
|
(1,607
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Adjustment to correct gross carrying amount and accumulated amortization for certain intangible assets related to our previous acquisition of our European business.
|
Amortization expense is expected to be approximately $0.3 million for the remainder of fiscal 2017, $0.4 million for each of fiscal 2018, 2019 and 2020 and
$0.2 million for fiscal 2021 and thereafter. The preceding 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 have a line of credit
pursuant to a senior secured revolving credit agreement, which is scheduled to expire in March 2021. Under the agreement, we may borrow up to $130.0 million during May through November and up to $75.0 million during all other months of the fiscal
year. The amount of permissible borrowings under the credit facility is 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.
10
All borrowings are collateralized by substantially all of our assets including all real estate, accounts
receivable and inventory. As of June 30, 2016, we have $50.0 million of outstanding borrowings under the line of credit. No borrowings from the line of credit were outstanding at March 31, 2016. The outstanding letters of credit balances were $7.6
million and $14.1 million at June 30, 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 June 30, 2016. Outstanding letters of credit will be repaid over the following six months in accordance with the credit agreement and any such renewal.
6. 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. 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. We record stock-based compensation expense related to cash-settled stock appreciation rights (SARs) over the requisite service period based on the fair
value of the awards at the end of each reporting period.
For the three months ended June 30, 2016 and 2015, we recorded stock-based compensation
expense of $1.2 million and $1.1 million, respectively, which has been included in general and administrative expenses. At June 30, 2016, we had $11.2 million of unrecognized compensation costs related to non-vested stock options, restricted
stock awards and cash-settled SARs that are expected to be recognized over a weighted average period of approximately two years.
Stock Options
The following table summarizes the stock option transactions under the Plans for the three months ended June 30, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Weighted
Average
Exercise Price
|
|
|
Weighted
Average
Contractual Life
|
|
|
Aggregate
Intrinsic Value
($ in thousands)
(1)
|
|
|
|
|
|
|
Options outstanding at March 31, 2016
|
|
|
678,209
|
|
|
$
|
30.08
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
326,754
|
|
|
|
16.74
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(14,120
|
)
|
|
|
34.57
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(6,970
|
)
|
|
|
47.52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at June 30, 2016
|
|
|
983,873
|
|
|
$
|
25.46
|
|
|
|
8.06 years
|
|
|
$
|
281
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at June 30, 2016
|
|
|
402,747
|
|
|
$
|
28.21
|
|
|
|
6.31 years
|
|
|
$
|
281
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The aggregate intrinsic value is based on the difference between the exercise price and our June 30, 2016 common share market value for in-the-money options.
|
Restricted Stock
The following tables summarize
restricted stock and restricted stock unit award activity under the Plans for the three months ended June 30, 2016:
|
|
|
|
|
|
|
|
|
Restricted Shares
|
|
Shares
|
|
|
Weighted
Average Grant
Date Fair Value
|
|
Non-vested shares at March 31, 2016
|
|
|
39,863
|
|
|
$
|
22.98
|
|
Granted
|
|
|
1,179
|
|
|
|
16.74
|
|
Forfeited
|
|
|
(600
|
)
|
|
|
33.46
|
|
|
|
|
|
|
|
|
|
|
Non-vested shares at June 30, 2016
|
|
|
40,442
|
|
|
$
|
22.65
|
|
|
|
|
|
|
|
|
|
|
11
|
|
|
|
|
|
|
|
|
Restricted Stock Units
|
|
Shares
|
|
|
Weighted
Average Grant
Date Fair Value
|
|
Non-vested shares at March 31, 2016
|
|
|
186,258
|
|
|
$
|
24.79
|
|
Granted
|
|
|
55,627
|
|
|
|
16.74
|
|
Vested
|
|
|
(12,402
|
)
|
|
|
39.90
|
|
Forfeited
|
|
|
(19,669
|
)
|
|
|
19.21
|
|
|
|
|
|
|
|
|
|
|
Non-vested shares at June 30, 2016
|
|
|
209,814
|
|
|
$
|
22.18
|
|
|
|
|
|
|
|
|
|
|
Cash-Settled Stock Appreciation Rights
Cash-settled SARs are valued using the Black-Scholes option-pricing model on the date of grant and are subsequently remeasured at each reporting period based
on a revised Black-Scholes value until they are exercised. There were no cash-settled SARs granted or forfeited during the three months ended June 30, 2016. We recognized $0.1 million of compensation expense related to previously granted
cash-settled SARs during the three months ended June 30, 2016. Accrued expense for these awards was $0.2 million at June 30, 2016, which was recorded within other liabilities in the accompanying Consolidated Balance Sheets.
Net Loss Per Share
Our basic net loss per share is
computed by dividing net loss by the weighted average number of outstanding common shares. Our diluted weighted average shares outstanding includes common shares and common share equivalents relating to stock options and restricted stock units, when
dilutive. Options to purchase 847,866 and 195,688 shares of common stock with weighted average exercise prices of $27.38 and $42.13 were outstanding during the three months ended June 30, 2016 and 2015, respectively, but were excluded from the
computation of common share equivalents because they were anti-dilutive.
Weighted average shares outstanding consists of the following for the three
months ended June 30, 2016 and 2015 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
2016
|
|
|
2015
|
|
Weighted average number of common shares outstanding
|
|
|
13,047
|
|
|
|
12,958
|
|
Dilutive effect of option plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common and potential shares outstandingdiluted
|
|
|
13,047
|
|
|
|
12,958
|
|
|
|
|
|
|
|
|
|
|
Accumulated Other Comprehensive Loss
The components of the changes in accumulated other comprehensive loss during the following periods were as follows ($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
2016
|
|
|
2015
|
|
Accumulated other comprehensive loss, beginning
|
|
$
|
(10,184
|
)
|
|
$
|
(7,142
|
)
|
Foreign currency translation adjustments
|
|
|
(650
|
)
|
|
|
1,107
|
|
Unrealized gain (loss) on derivative instruments, net of tax
|
|
|
643
|
|
|
|
(882
|
)
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive loss, ending
|
|
$
|
(10,191
|
)
|
|
$
|
(6,917
|
)
|
|
|
|
|
|
|
|
|
|
The unrealized losses on derivatives instruments for the three months ended June 30, 2016 and 2015 were net of taxes of $0.4
million and $0.5 million, respectively. There is no tax impact on foreign currency translation adjustments, as the earnings are considered permanently reinvested.
7. 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. We are self-insured to some extent, though we maintain insurance against certain classes and levels of product liability losses. We are regularly involved in patent litigation cases with,
for example, competitors and non-practicing entities in which we are asserting, or defending against, patent infringement claims. Such cases are at varying stages in the litigation process. We take appropriate steps to help minimize our risk of
being a defendant in patent infringement litigation.
12
We record a reserve within accrued expenses in the Consolidated Balance Sheets based on our estimated range of
potential exposures related to claims, including future legal expenditures, settlements and judgments of which we are aware, where we 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 that we believe will have a materially adverse impact on our business or financial condition, results of operations or cash flows.
In October 2014, we filed a lawsuit captioned
Arctic Cat Inc. v. Bombardier Recreational Products, Inc., and BRP U.S. Inc.
in the United States
District Court for the Southern District of Florida. We alleged the defendant infringed certain of our personal watercraft (PWC) patents. On June 1, 2016, a jury found the defendants willfully infringed all asserted claims in two of our
patents for off-throttle assisted steering technology, which is an important safety mechanism designed to prevent on-water collisions and accidents in PWCs. The jury initially awarded us $15.5 million in damages. On June 14, 2016, a federal court
judge trebled the damages and awarded us $46.7 million. Although the jury awarded damages, at this stage of the proceedings we can provide no assurance as to the timing or outcome of any appeal, nor the amount, if any, that might ultimately be
recovered. Accordingly, no benefit has been recorded within our consolidated financial statements as a result of the damages verdict.
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 June 30, 2016, we are contingently liable under dealer financing agreements for a maximum repurchase amount of approximately $72.4 million. Our ultimate 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 subsequently anticipated 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
$2.8 million at June 30, 2016.
8. INVENTORIES
Inventories are valued at the lower of cost or market, with cost determined using the first-in, first-out method. Manufacturing costs include materials, labor,
freight-in and manufacturing overhead. As of June 30, 2016 and March 31, 2016, inventories consist of the following ($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
|
March 31, 2016
|
|
Raw materials and sub-assemblies
|
|
$
|
48,865
|
|
|
$
|
35,770
|
|
Finished goods
|
|
|
88,715
|
|
|
|
64,127
|
|
Parts, garments and accessories
|
|
|
41,976
|
|
|
|
40,110
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
179,556
|
|
|
$
|
140,007
|
|
|
|
|
|
|
|
|
|
|
9. 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 three-month periods ended June 30, 2016 and 2015 ($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
2016
|
|
|
2015
|
|
Accrued warranty, beginning
|
|
$
|
24,809
|
|
|
$
|
23,062
|
|
Warranty provision
|
|
|
3,189
|
|
|
|
2,762
|
|
Warranty claim payments
|
|
|
(2,414
|
)
|
|
|
(2,595
|
)
|
|
|
|
|
|
|
|
|
|
Accrued warranty, ending
|
|
$
|
25,584
|
|
|
$
|
23,229
|
|
|
|
|
|
|
|
|
|
|
13
10. 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):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
2016
|
|
|
2015
|
|
Net sales
|
|
|
|
|
|
|
|
|
Snowmobile and ATV/ROV units
|
|
$
|
84,277
|
|
|
$
|
111,105
|
|
Parts, garments and accessories
|
|
|
20,595
|
|
|
|
23,276
|
|
|
|
|
|
|
|
|
|
|
Total net sales
|
|
|
104,872
|
|
|
|
134,381
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
|
|
|
|
|
|
Snowmobile and ATV/ROV units
|
|
|
3,599
|
|
|
|
14,148
|
|
Parts, garments and accessories
|
|
|
8,158
|
|
|
|
8,414
|
|
|
|
|
|
|
|
|
|
|
Total gross profit
|
|
$
|
11,757
|
|
|
$
|
22,562
|
|
|
|
|
|
|
|
|
|
|
11. NEW MARKET TAX CREDIT TRANSACTION
As more fully described within our Annual Report on Form 10-K for the fiscal year ended March 31, 2016, during February 2016, we received approximately $5.3
million in net proceeds from a financing arrangement related to an investment in equipment at our manufacturing facility in Thief River Falls, Minnesota. This financing arrangement was structured with Wells Fargo Community Development Enterprises,
Inc. (Wells Fargo), WF Paint & Assembly Investment Fund, LLC (the Investment Fund), and Arctic Cat Production Support LLC, our direct, wholly-owned subsidiary, in connection with our participation in transactions
qualified under the federal New Market Tax Credit (NMTC) program, pursuant to the Community Renewal Tax Relief Act of 2000. In exchange for its contribution to the Investment Fund, Wells Fargo is entitled to substantially all of the tax
benefits derived from the NMTC arrangement, while we effectively received net proceeds equal to Wells Fargos contributions to the Investment Fund less direct and incremental transaction costs.
The NMTC arrangement 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. As of June 30, 2016 and March 31, 2016, Wells Fargos net $5.3 million contribution is recorded within other liabilities on our Consolidated Balance Sheets.
The benefit of this net contribution will be recognized as earnings at the end of the seven year recapture period, when our performance obligation of regulatory and contractual compliance is relieved. As of June 30, 2016 and March 31, 2016, the
direct costs incurred in structuring the arrangement of $0.9 million have been deferred within other assets on 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 are recognized as incurred and were immaterial for the three months ended June 30, 2016.
14