10-Q 1 hog-03262017x10q.htm 10-Q Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
 
FORM 10-Q
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 26, 2017
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                     to                    
Commission file number 1-9183
 
 
Harley-Davidson, Inc.
(Exact name of registrant as specified in its charter)
 
Wisconsin
 
39-1382325
(State of organization)
 
(I.R.S. Employer Identification No.)
 
 
 
3700 West Juneau Avenue
Milwaukee, Wisconsin
 
53208
(Address of principal executive offices)
 
(Zip code)
Registrants telephone number: (414) 342-4680
None
(Former name, former address and former fiscal year, if changed since last report)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such requirements for the past 90 days.    Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x   No   ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company,” and emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
x
Accelerated filer
 
¨
 
 
 
 
 
Non-accelerated filer
 
¨
Smaller reporting company
 
¨
 
 
 
 
 
 
 
 
 
Emerging growth company
 
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the exchange act. ¨
Indicate by check mark whether the registrant is a shell company as defined in Rule 12b-2 of the Exchange Act.    Yes ¨ No  x
Number of shares of the registrant’s common stock outstanding at April 28, 2017: 175,038,246 shares



Harley-Davidson, Inc.

Form 10-Q

For The Quarter Ended March 26, 2017
 



PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
HARLEY-DAVIDSON, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)
 
 
Three months ended
 
March 26,
2017
 
March 27,
2016
Revenue:
 
 
 
Motorcycles and Related Products
$
1,328,711

 
$
1,576,610

Financial Services
173,221

 
173,358

Total revenue
1,501,932

 
1,749,968

Costs and expenses:
 
 
 
Motorcycles and Related Products cost of goods sold
851,226

 
986,330

Financial Services interest expense
43,289

 
45,919

Financial Services provision for credit losses
43,589

 
37,123

Selling, administrative and engineering expense
272,350

 
291,768

Total costs and expenses
1,210,454

 
1,361,140

Operating income
291,478

 
388,828

Investment income
879

 
766

Interest expense
7,673

 
7,168

Income before provision for income taxes
284,684

 
382,426

Provision for income taxes
98,315

 
131,937

Net income
$
186,369

 
$
250,489

Earnings per common share:
 
 
 
Basic
$
1.06

 
$
1.37

Diluted
$
1.05

 
$
1.36

Cash dividends per common share
$
0.365

 
$
0.350

The accompanying notes are an integral part of the consolidated financial statements.


3


HARLEY-DAVIDSON, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
 
 
Three months ended
 
March 26,
2017
 
March 27,
2016
Net income
$
186,369

 
$
250,489

Other comprehensive income (loss), net of tax:
 
 
 
  Foreign currency translation adjustments
15,557

 
12,693

  Derivative financial instruments
(9,052
)
 
(8,352
)
  Marketable securities
(10
)
 
(45
)
  Pension and postretirement benefit plans
7,256

 
7,571

Total other comprehensive income, net of tax
13,751

 
11,867

Comprehensive income
$
200,120

 
$
262,356

The accompanying notes are an integral part of the consolidated financial statements.



4


HARLEY-DAVIDSON, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
 
(Unaudited)
 
 
 
(Unaudited)
 
March 26,
2017
 
December 31,
2016
 
March 27,
2016
ASSETS
 
 
 
 
 
Current assets:
 
 
 
 
 
Cash and cash equivalents
$
839,700

 
$
759,984

 
$
694,013

Marketable securities
5,004

 
5,519

 
45,122

Accounts receivable, net
335,578

 
285,106

 
311,960

Finance receivables, net
2,354,095

 
2,076,261

 
2,564,608

Inventories
485,476

 
499,917

 
553,750

Restricted cash
75,705

 
52,574

 
93,192

Deferred income taxes

 

 
115,585

Other current assets
142,362

 
174,491

 
113,520

Total current assets
4,237,920

 
3,853,852

 
4,491,750

Finance receivables, net
4,792,027

 
4,759,197

 
4,811,958

Property, plant and equipment, net
953,044

 
981,593

 
932,836

Goodwill
53,967

 
53,391

 
54,585

Deferred income taxes
165,196

 
167,729

 
82,188

Other long-term assets
79,701

 
74,478

 
94,354

 
$
10,281,855

 
$
9,890,240

 
$
10,467,671

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
 
Current liabilities:
 
 
 
 
 
Accounts payable
$
358,684

 
$
235,318

 
$
348,289

Accrued liabilities
547,637

 
486,652

 
587,504

Short-term debt
953,357

 
1,055,708

 
870,073

Current portion of long-term debt, net
697,061

 
1,084,884

 
782,140

Total current liabilities
2,556,739

 
2,862,562

 
2,588,006

Long-term debt, net
5,320,797

 
4,666,975

 
5,460,553

Pension liability
52,559

 
84,442

 
134,679

Postretirement healthcare liability
171,143

 
173,267

 
191,704

Other long-term liabilities
187,208

 
182,836

 
199,909

Commitments and contingencies (Note 15)

 

 

Shareholders’ equity:
 
 
 
 
 
Preferred stock, none issued

 

 

Common stock
1,813

 
1,806

 
3,452

Additional paid-in-capital
1,397,172

 
1,381,862

 
1,333,947

Retained earnings
1,459,431

 
1,337,673

 
9,148,017

Accumulated other comprehensive loss
(551,630
)
 
(565,381
)
 
(603,338
)
Treasury stock, at cost
(313,377
)
 
(235,802
)
 
(7,989,258
)
Total shareholders’ equity
1,993,409

 
1,920,158

 
1,892,820

 
$
10,281,855

 
$
9,890,240

 
$
10,467,671



5


HARLEY-DAVIDSON, INC.
CONSOLIDATED BALANCE SHEETS (continued)
(In thousands)
 
(Unaudited)
 
 
 
(Unaudited)
 
March 26,
2017
 
December 31,
2016
 
March 27,
2016
Balances held by consolidated variable interest entities (Note 10)
 
 
 
 
 
Current finance receivables, net
$
218,001

 
$
225,289

 
$
305,806

Other assets
$
3,204

 
$
2,781

 
$
4,471

Non-current finance receivables, net
$
825,825

 
$
643,047

 
$
1,080,365

Restricted cash - current and non-current
$
79,254

 
$
57,057

 
$
102,594

Current portion of long-term debt, net
$
253,070

 
$
241,396

 
$
343,127

Long-term debt, net
$
718,509

 
$
554,879

 
$
943,602

The accompanying notes are an integral part of the consolidated financial statements.

6


HARLEY-DAVIDSON, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
Three months ended
 
March 26,
2017
 
March 27,
2016
Net cash provided by operating activities (Note 3)
$
159,939

 
$
41,131

Cash flows from investing activities:
 
 
 
Capital expenditures
(23,967
)
 
(39,011
)
Origination of finance receivables
(844,692
)
 
(815,697
)
Collections on finance receivables
781,154

 
771,910

Other
52

 
95

Net cash used by investing activities
(87,453
)
 
(82,703
)
Cash flows from financing activities:
 
 
 
Proceeds from issuance of medium-term notes
497,406

 
1,193,396

Repayments of medium-term notes
(400,000
)
 
(450,000
)
Repayments of securitization debt
(111,359
)
 
(173,363
)
Borrowings of asset-backed commercial paper
305,209

 
5,814

Repayments of asset-backed commercial paper
(29,383
)
 
(15,740
)
Net decrease in credit facilities and unsecured commercial paper
(101,702
)
 
(331,090
)
Net change in restricted cash
(23,132
)
 
(4,282
)
Dividends paid
(64,611
)
 
(64,457
)
Purchase of common stock for treasury
(79,753
)
 
(150,369
)
Excess tax benefits from share-based payments

 
110

Issuance of common stock under employee stock option plans
7,336

 
276

Net cash provided by financing activities
11

 
10,295

Effect of exchange rate changes on cash and cash equivalents
7,219

 
3,081

Net increase (decrease) in cash and cash equivalents
$
79,716

 
$
(28,196
)
Cash and cash equivalents:
 
 
 
Cash and cash equivalents—beginning of period
$
759,984

 
$
722,209

Net increase (decrease) in cash and cash equivalents
79,716

 
(28,196
)
Cash and cash equivalents—end of period
$
839,700

 
$
694,013

The accompanying notes are an integral part of the consolidated financial statements.


7


HARLEY-DAVIDSON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation and Use of Estimates
The consolidated financial statements include the accounts of Harley-Davidson, Inc. and its wholly-owned subsidiaries (the Company), including the accounts of the groups of companies doing business as Harley-Davidson Motor Company (HDMC) and Harley-Davidson Financial Services (HDFS). In addition, certain variable interest entities (VIEs) related to secured financing are consolidated as the Company is the primary beneficiary. All intercompany accounts and material intercompany transactions are eliminated.
In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the consolidated balance sheets as of March 26, 2017 and March 27, 2016, the consolidated statements of income for the three month periods then ended, the consolidated statements of comprehensive income for the three month periods then ended and the consolidated statements of cash flows for the three month periods then ended.
Certain information and footnote disclosures normally included in complete financial statements have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) and U.S. generally accepted accounting principles (U.S. GAAP) for interim financial reporting. These consolidated financial statements should be read in conjunction with the audited financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.
The Company operates in two reportable segments: Motorcycles & Related Products (Motorcycles) and Financial Services.
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. Actual results could differ from those estimates.
2. New Accounting Standards
Accounting Standards Recently Adopted
In March 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-09 Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (ASU 2016-09). ASU 2016-09 amends the guidance on several aspects of accounting for share-based payment transactions, including income tax consequences, classification of awards as either equity or liabilities, accounting for forfeitures, and classification on the statement of cash flows. The Company adopted ASU 2016-09 on January 1, 2017. The Company elected to apply the amendments related to the classification of excess tax benefits on the statement of cash flows on a prospective basis, and prior periods were not adjusted. The adoption of ASU 2016-09 did not have a material impact on the Company's consolidated financial statements.
In July 2015, the FASB issued ASU No. 2015-11 Inventory (Topic 330): Simplifying the Measurement of Inventory (ASU 2015-11). ASU 2015-11 simplifies the subsequent measurement of inventory by using only the lower of cost or net realizable value. ASU 2015-11 does not apply to inventory measured using the last-in, first-out method. The Company adopted ASU 2015-11 on January 1, 2017. The adoption of ASU 2015-11 did not have a material impact on the Company’s consolidated financial statements.
Accounting Standards Not Yet Adopted
In May 2014, the FASB issued ASU No. 2014-09 Revenue from Contracts with Customers (ASU 2014-09). ASU 2014-09 is a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In August 2015, the FASB issued ASU No. 2015-14 Revenue from Contracts with Customers: Deferral of Effective Date (ASU 2015-14) to defer the effective date of the new revenue recognition standard by one year to fiscal years beginning after December 15, 2017 and interim periods therein. The guidance may be adopted using either a full retrospective or modified retrospective approach. The Company expects to adopt the new revenue recognition guidance using the modified retrospective method. The Company's efforts to evaluate the impact of and to prepare for its adoption on January 1, 2018 are well underway. Based on the work completed to date (which includes the review of significant domestic revenue sources), the Company expects that the recognition of revenue for domestic sales of motorcycles, parts and accessories and

8


general merchandise products under the new revenue recognition guidance will occur at a point in time, which is consistent with current practice. The Company is continuing to evaluate its international revenue sources for potential impact but, based on the work completed to date, expects its conclusions will be consistent with those reached for domestic revenue sources. Interest income, which makes up the vast majority of revenue in the Financial Services segment, is not within the scope of the new standard. The Company is also assessing its process for accumulating the required information for enhanced disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from its contracts with customers.
In January 2016, the FASB issued ASU No. 2016-01 Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities (ASU 2016-01). ASU 2016-01 enhances the existing financial instruments reporting model by modifying fair value measurement tools, simplifying impairment assessments for certain equity instruments, and modifying overall presentation and disclosure requirements. The Company is required to adopt ASU 2016-01 for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2017 on a prospective basis. The Company is currently evaluating the impact of adoption of ASU 2016-01.
In February 2016, the FASB issued ASU No. 2016-02 Leases (Topic 842) (ASU 2016-02). ASU 2016-02 amends the existing lease accounting model by requiring a lessee to recognize the rights and obligations resulting from certain leases as assets and liabilities on the balance sheet. ASU 2016-02 also requires a company to disclose key information about their leasing arrangements. The Company is required to adopt ASU 2016-02 for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018 using a modified retrospective approach. Early adoption is permitted. The Company is currently evaluating the impact of adoption of ASU 2016-02.
In July 2016, the FASB issued ASU No. 2016-13 Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (ASU 2016-13). ASU 2016-13 changes how to recognize expected credit losses on financial assets. The standard requires a more timely recognition of credit losses on loans and other financial assets and also provides additional transparency about credit risk. The current credit loss standard generally requires that a loss actually be incurred before it is recognized, while the new standard will require recognition of full lifetime expected losses upon initial recognition of the financial instrument. The Company is required to adopt ASU 2016-13 for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2019 on a modified retrospective basis. Early adoption is permitted for fiscal years beginning after December 15, 2018. An entity should apply the standard by recording a cumulative effect adjustment to retained earnings upon adoption. Adoption of this standard will impact how the Company recognizes credit losses on its financial instruments. The Company is currently evaluating the impact of adoption of ASU 2016-13 but anticipates the adoption of ASU 2016-13 will result in an increase in the annual provision for credit losses and the related allowance for credit losses.
In August 2016, the FASB issued ASU No. 2016-15 Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (ASU 2016-15). ASU 2016-15 addresses eight specific cash flow issues with the objective of reducing diversity in practice regarding how certain cash receipts and cash payments are presented in the statement of cash flows. The standard provides guidance on the classification of the following items: (1) debt prepayment or debt extinguishment costs, (2) settlement of zero-coupon debt instruments, (3) contingent consideration payments made after a business combination, (4) proceeds from the settlement of insurance claims, (5) proceeds from the settlement of corporate-owned life insurance policies, (6) distributions received from equity method investments, (7) beneficial interests in securitization transactions, and (8) separately identifiable cash flows. The Company is required to adopt ASU 2016-15 for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2017 on a retrospective basis. Early adoption is permitted, including adoption in an interim period. The Company is currently evaluating the impact of adoption of ASU 2016-15.
In October 2016, the FASB issued ASU No. 2016-16 Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory (ASU 2016-16). ASU 2016-16 states that an entity should recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. Two common assets included in the scope of the ASU are intellectual property and property, plant and equipment. The Company is required to adopt ASU 2016-16 for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2017 using a modified retrospective approach with a cumulative-effect adjustment to retained earnings. The Company does not expect the adoption of ASU 2016-16 to have a material impact on its financial statements.

In November 2016, the FASB issued ASU No. 2016-18 Statement of Cash Flows (Topic 230): Restricted Cash (ASU 2016-18). ASU 2016-18 requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. As such, restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and ending-of-period total amounts shown on the statement of cash flows. The Company is required to adopt ASU 2016-18 for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2017 on a retrospective basis. Early

9


adoption is permitted, including adoption in an interim period. Subsequent to the adoption of ASU 2016-18, the change in restricted cash would be excluded from the change in cash flows from financing activities and included in the change in total cash, restricted cash and cash equivalents as reported in the statement of cash flows.

In January 2017, the FASB issued ASU No. 2017-04 Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (ASU 2017-04). ASU 2017-04 simplifies the subsequent measurement of goodwill by eliminating the requirement to calculate the implied fair value of goodwill. Rather, the goodwill impairment is calculated by comparing the fair value of a reporting unit to its carrying value, and an impairment loss is recognized for the amount by which the carrying amount exceeds the fair value, limited to the total goodwill allocated to the reporting unit. All reporting units apply the same impairment test under the new standard. The Company is required to adopt ASU 2017-04 for its annual and any interim goodwill impairment tests in fiscal years beginning after December 15, 2019 on a prospective basis. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company is currently evaluating the impact of adoption of ASU 2017-04.

In March 2017, the FASB issued ASU No. 2017-07 Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost (ASU 2017-07). ASU 2017-07 amends ASC 715, Compensation - Retirement Benefits by requiring employers to present the service cost component of net periodic benefit cost in the same income statement line item as other employee compensation costs arising from services rendered during the period. Other components of the net periodic benefit cost will be presented separately from the line item that includes the service cost and outside of any subtotal of operating income. The guidance also limits the components that are eligible for capitalization in assets. The Company is required to adopt ASU 2017-07 for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted as of the beginning of an annual period for which interim or annual financial statements have not been issued or made available for issuance. The amendments related to the presentation of the components of net periodic benefit cost should be applied retrospectively. The amendments related to the capitalization of certain components in assets should be applied prospectively. The Company's net periodic benefit cost components are disclosed in Note 13.
3. Additional Balance Sheet and Cash Flow Information
Marketable Securities
The Company’s marketable securities consisted of the following (in thousands):
 
March 26,
2017
 
December 31,
2016
 
March 27,
2016
Available-for-sale securities: corporate bonds
$
5,004

 
$
5,519

 
$
45,122

Trading securities: mutual funds
41,674

 
38,119

 
38,567

Total marketable securities
$
46,678

 
$
43,638

 
$
83,689

The Company’s available-for-sale securities are carried at fair value with any unrealized gains or losses reported in other comprehensive income. During the first three months of 2017 and 2016, the Company recognized gross unrealized losses of approximately $16,000 and $71,000, respectively, or losses of approximately $10,000 and $45,000, net of tax, respectively, to adjust amortized cost to fair value. The marketable securities have contractual maturities that come due in the second quarter of 2017.
The Company's trading securities relate to investments held by the Company to fund certain deferred compensation obligations. The trading securities are carried at fair value with gains and losses recorded in net income, and investments are included in other long-term assets on the consolidated balance sheets.
Inventories
Inventories are valued at the lower of cost or net realizable value. Substantially all inventories located in the United States are valued using the last-in, first-out (LIFO) method. Other inventories are valued at the lower of cost or net realizable value using the first-in, first-out (FIFO) method. Inventories consisted of the following (in thousands):

10


 
March 26,
2017
 
December 31,
2016
 
March 27,
2016
Components at the lower of FIFO cost or net realizable value
 
 
 
 
 
Raw materials and work in process
$
153,195

 
$
140,639

 
$
158,632

Motorcycle finished goods
263,408

 
285,281

 
291,834

Parts and accessories and general merchandise
117,140

 
122,264

 
152,552

Inventory at lower of FIFO cost or net realizable value
533,743

 
548,184

 
603,018

Excess of FIFO over LIFO cost
(48,267
)
 
(48,267
)
 
(49,268
)
Total inventories, net
$
485,476

 
$
499,917

 
$
553,750

Operating Cash Flow
The reconciliation of net income to net cash provided by operating activities is as follows (in thousands):
 
Three months ended
 
March 26,
2017
 
March 27,
2016
Cash flows from operating activities:
 
 
 
Net income
$
186,369

 
$
250,489

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization of intangibles
54,900

 
50,027

Amortization of deferred loan origination costs
20,078

 
21,546

Amortization of financing origination fees
2,076

 
2,802

Provision for long-term employee benefits
7,475

 
9,503

Employee benefit plan contributions and payments
(29,957
)
 
(29,641
)
Stock compensation expense
6,992

 
7,053

Net change in wholesale finance receivables related to sales
(317,087
)
 
(507,731
)
Provision for credit losses
43,589

 
37,123

Deferred income taxes
3,989

 
3,636

Other, net
(5,334
)
 
(7,302
)
Changes in current assets and liabilities:
 
 
 
Accounts receivable, net
(39,230
)
 
(57,885
)
Finance receivables - accrued interest and other
5,142

 
685

Inventories
23,476

 
40,539

Accounts payable and accrued liabilities
182,928

 
222,800

Derivative instruments
3,120

 
1,196

Other
11,413

 
(3,709
)
Total adjustments
(26,430
)
 
(209,358
)
Net cash provided by operating activities
$
159,939

 
$
41,131

4. Finance Receivables
The Company provides retail financial services to customers of the Company’s independent dealers in the United States and Canada. The origination of retail loans is a separate and distinct transaction between the Company and the retail customer, unrelated to the Company’s sale of product to its dealers. Retail finance receivables consist of secured promissory notes and secured installment sales contracts. The Company holds either titles or liens on titles to vehicles financed by promissory notes and installment sales contracts.
The Company offers wholesale financing to the Company’s independent dealers. Wholesale loans to dealers are generally secured by financed inventory or property and are originated in the U.S. and Canada.
Finance receivables, net, consisted of the following (in thousands):

11


 
March 26,
2017
 
December 31,
2016
 
March 27,
2016
Retail
$
6,002,550

 
$
5,982,211

 
$
6,012,804

Wholesale
1,327,602

 
1,026,590

 
1,519,946

Total finance receivables
7,330,152

 
7,008,801

 
7,532,750

Allowance for credit losses
(184,030
)
 
(173,343
)
 
(156,184
)
Finance receivables, net
$
7,146,122

 
$
6,835,458

 
$
7,376,566

A provision for credit losses on finance receivables is charged or credited to earnings in amounts that the Company believes are sufficient to maintain the allowance for credit losses at a level that is adequate to cover losses of principal inherent in the existing portfolio. The allowance for credit losses represents management’s estimate of probable losses inherent in the finance receivable portfolio as of the balance sheet date. However, due to the use of projections and assumptions in estimating the losses, the amount of losses actually incurred by the Company could differ from the amounts estimated.
Changes in the allowance for credit losses on finance receivables by portfolio were as follows (in thousands):
 
Three months ended March 26, 2017
 
Retail
 
Wholesale
 
Total
Balance, beginning of period
$
166,810

 
$
6,533

 
$
173,343

Provision for credit losses
42,160

 
1,429

 
43,589

Charge-offs
(45,924
)
 

 
(45,924
)
Recoveries
13,022

 

 
13,022

Balance, end of period
$
176,068

 
$
7,962

 
$
184,030

 
 
 
 
 
 
 
Three months ended March 27, 2016
 
Retail
 
Wholesale
 
Total
Balance, beginning of period
$
139,320

 
$
7,858

 
$
147,178

Provision for credit losses
35,524

 
1,599

 
37,123

Charge-offs
(39,644
)
 

 
(39,644
)
Recoveries
11,527

 

 
11,527

Balance, end of period
$
146,727

 
$
9,457

 
$
156,184

Finance receivables are considered impaired when management determines it is probable that the Company will be unable to collect all amounts due according to the terms of the loan agreement. Portions of the allowance for credit losses are established to cover estimated losses on finance receivables specifically identified for impairment. The unspecified portion of the allowance for credit losses covers estimated losses on finance receivables which are collectively reviewed for impairment.
The retail portfolio primarily consists of a large number of small balance, homogeneous finance receivables. The Company performs a periodic and systematic collective evaluation of the adequacy of the retail allowance for credit losses. The Company utilizes loss forecast models which consider a variety of factors including, but not limited to, historical loss trends, origination or vintage analysis, known and inherent risks in the portfolio, the value of the underlying collateral, recovery rates, and current economic conditions including items such as unemployment rates. Retail finance receivables are not evaluated individually for impairment prior to charge-off and, therefore, are not reported as impaired loans.
The wholesale portfolio is primarily composed of large balance, non-homogeneous loans. The Company’s evaluation for the wholesale allowance for credit losses is first based on a loan-by-loan review. A specific allowance for credit losses is established for wholesale finance receivables determined to be individually impaired when management concludes that the borrower will not be able to make full payment of the contractual amounts due based on the original terms of the loan agreement. The impairment is determined based on the cash that the Company expects to receive discounted at the loan’s original interest rate or the fair value of the collateral, if the loan is collateral-dependent. Finance receivables in the wholesale portfolio that are not considered impaired on an individual basis are segregated, based on similar risk characteristics, according to the Company’s internal risk rating system and collectively evaluated for impairment. The related allowance for credit losses is based on factors such as the specific borrower’s financial performance and ability to repay, the Company’s past loan loss experience, current economic conditions, and the value of the underlying collateral.

12


Generally, it is the Company’s policy not to change the terms and conditions of finance receivables. However, to minimize the economic loss, the Company may modify certain finance receivables in troubled debt restructurings. Total restructured finance receivables are not significant.
The allowance for credit losses and finance receivables by portfolio, segregated by those amounts that are individually evaluated for impairment and those that are collectively evaluated for impairment, was as follows (in thousands):
 
March 26, 2017
 
Retail
 
Wholesale
 
Total
Allowance for credit losses, ending balance:
 
 
 
 
 
Individually evaluated for impairment
$

 
$

 
$

Collectively evaluated for impairment
176,068

 
7,962

 
184,030

Total allowance for credit losses
$
176,068

 
$
7,962

 
$
184,030

Finance receivables, ending balance:
 
 
 
 
 
Individually evaluated for impairment
$

 
$

 
$

Collectively evaluated for impairment
6,002,550

 
1,327,602

 
7,330,152

Total finance receivables
$
6,002,550

 
$
1,327,602

 
$
7,330,152

 
 
 
 
 
 
 
December 31, 2016
 
Retail
 
Wholesale
 
Total
Allowance for credit losses, ending balance:
 
 
 
 
 
Individually evaluated for impairment
$

 
$

 
$

Collectively evaluated for impairment
166,810

 
6,533

 
173,343

Total allowance for credit losses
$
166,810

 
$
6,533

 
$
173,343

Finance receivables, ending balance:
 
 
 
 
 
Individually evaluated for impairment
$

 
$

 
$

Collectively evaluated for impairment
5,982,211

 
1,026,590

 
7,008,801

Total finance receivables
$
5,982,211

 
$
1,026,590

 
$
7,008,801

 
 
 
 
 
 
 
March 27, 2016
 
Retail
 
Wholesale
 
Total
Allowance for credit losses, ending balance:
 
 
 
 
 
Individually evaluated for impairment
$

 
$

 
$

Collectively evaluated for impairment
146,727

 
9,457

 
156,184

Total allowance for credit losses
$
146,727

 
$
9,457

 
$
156,184

Finance receivables, ending balance:
 
 
 
 
 
Individually evaluated for impairment
$

 
$

 
$

Collectively evaluated for impairment
6,012,804

 
1,519,946

 
7,532,750

Total finance receivables
$
6,012,804

 
$
1,519,946

 
$
7,532,750


There were no wholesale finance receivables at March 26, 2017, December 31, 2016, or March 27, 2016 that were individually deemed to be impaired under ASC Topic 310, “Receivables.”
Retail finance receivables are contractually delinquent if the minimum payment is not received by the specified due date. Retail finance receivables are generally charged-off when the receivable is 120 days or more delinquent, the related asset is repossessed or the receivable is otherwise deemed uncollectible. All retail finance receivables accrue interest until either collected or charged-off. Accordingly, as of March 26, 2017December 31, 2016 and March 27, 2016, all retail finance receivables were accounted for as interest-earning receivables, of which $28.5 million, $40.4 million and $22.9 million, respectively, were 90 days or more past due.

13


Wholesale finance receivables are delinquent if the minimum payment is not received by the contractual due date. Wholesale finance receivables are written down once management determines that the specific borrower does not have the ability to repay the loan in full. Interest continues to accrue on past due finance receivables until the date the finance receivable becomes uncollectible and the finance receivable is placed on non-accrual status. The Company will resume accruing interest on these accounts when payments are current according to the terms of the loans and future payments are reasonably assured. While on non-accrual status, all cash received is applied to principal or interest as appropriate. There were no wholesale receivables on non-accrual status at March 26, 2017, December 31, 2016 or March 27, 2016. At March 26, 2017December 31, 2016 and March 27, 2016, $0.6 million, $0.3 million, and $0.5 million of wholesale finance receivables were 90 days or more past due and accruing interest, respectively.
An analysis of the aging of past due finance receivables was as follows (in thousands):
 
March 26, 2017
 
Current
 
31-60 Days
Past Due
 
61-90 Days
Past Due
 
Greater than
90 Days
Past Due
 
Total
Past Due
 
Total
Finance
Receivables
Retail
$
5,840,164

 
$
100,471

 
$
33,403

 
$
28,512

 
$
162,386

 
$
6,002,550

Wholesale
1,325,575

 
1,129

 
273

 
625

 
2,027

 
1,327,602

Total
$
7,165,739

 
$
101,600

 
$
33,676

 
$
29,137

 
$
164,413

 
$
7,330,152

 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2016
 
Current
 
31-60 Days
Past Due
 
61-90 Days
Past Due
 
Greater than
90 Days
Past Due
 
Total
Past Due
 
Total
Finance
Receivables
Retail
$
5,760,818

 
$
131,302

 
$
49,642

 
$
40,449

 
$
221,393

 
$
5,982,211

Wholesale
1,024,995

 
1,000

 
319

 
276

 
1,595

 
1,026,590

Total
$
6,785,813

 
$
132,302

 
$
49,961

 
$
40,725

 
$
222,988

 
$
7,008,801

 
 
 
 
 
 
 
 
 
 
 
 
 
March 27, 2016
 
Current
 
31-60 Days
Past Due
 
61-90 Days
Past Due
 
Greater than
90 Days
Past Due
 
Total
Past Due
 
Total
Finance
Receivables
Retail
$
5,864,850

 
$
94,984

 
$
30,094

 
$
22,876

 
$
147,954

 
$
6,012,804

Wholesale
1,517,926

 
1,407

 
135

 
478

 
2,020

 
1,519,946

Total
$
7,382,776

 
$
96,391

 
$
30,229

 
$
23,354

 
$
149,974

 
$
7,532,750

A significant part of managing the Company's finance receivable portfolios includes the assessment of credit risk associated with each borrower. As the credit risk varies between the retail and wholesale portfolios, the Company utilizes different credit risk indicators for each portfolio.
The Company manages retail credit risk through its credit approval policy and ongoing collection efforts. The Company uses FICO scores, a standard credit rating measurement, to differentiate the expected default rates of retail credit applicants enabling the Company to better evaluate credit applicants for approval and to tailor pricing according to this assessment. Retail loans with a FICO score of 640 or above at origination are considered prime, and loans with a FICO score below 640 are considered sub-prime. These credit quality indicators are determined at the time of loan origination and are not updated subsequent to the loan origination date.
The recorded investment in retail finance receivables, by credit quality indicator, was as follows (in thousands):
 
March 26, 2017
 
December 31, 2016
 
March 27, 2016
Prime
$
4,806,730

 
$
4,768,420

 
$
4,798,394

Sub-prime
1,195,820

 
1,213,791

 
1,214,410

Total
$
6,002,550

 
$
5,982,211

 
$
6,012,804

The Company's credit risk on the wholesale portfolio is different from that of the retail portfolio. Whereas the retail portfolio represents a relatively homogeneous pool of retail finance receivables that exhibit more consistent loss patterns, the wholesale portfolio exposures are less consistent. The Company utilizes an internal credit risk rating system to manage credit risk exposure consistently across wholesale borrowers and individually evaluates credit risk factors for each borrower. The Company uses the following internal credit quality indicators, based on an internal risk rating system, listed from highest level

14


of risk to lowest level of risk for the wholesale portfolio: Doubtful, Substandard, Special Mention, Medium Risk and Low Risk. Based upon management’s review, the dealers classified in the Doubtful category are the dealers with the greatest likelihood of being charged-off, while the dealers classified as Low Risk are least likely to be charged-off. The internal rating system considers factors such as the specific borrower's ability to repay and the estimated value of any collateral. Dealer risk rating classifications are reviewed and updated on a quarterly basis.
The recorded investment in wholesale finance receivables, by internal credit quality indicator, was as follows (in thousands):
 
March 26, 2017
 
December 31, 2016
 
March 27, 2016
Doubtful
$
1,133

 
$
1,333

 
$

Substandard
9,213

 
1,773

 
24,391

Special Mention
19,898

 
30,152

 
7,220

Medium Risk
14,648

 
14,620

 
11,610

Low Risk
1,282,710

 
978,712

 
1,476,725

Total
$
1,327,602

 
$
1,026,590

 
$
1,519,946

5. Fair Value Measurements
Certain assets and liabilities are recorded 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. 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. In determining the fair value of assets and liabilities, the Company uses 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.
The Company assesses the inputs used to measure fair value using a three-tier hierarchy. The hierarchy indicates the extent to which inputs used in measuring fair value are observable in the market. Level 1 inputs include quoted prices for identical instruments and are the most observable.
Level 2 inputs include quoted prices for similar assets and observable inputs such as interest rates, foreign currency exchange rates and commodity prices. The Company uses the market approach to derive the fair value for its level 2 fair value measurements. Forward contracts for foreign currency and commodities are valued using current quoted forward rates and prices; investments in marketable securities and cash equivalents are valued using publicly quoted prices.
Level 3 inputs are not observable in the market and include management’s judgments about the assumptions market participants would use in pricing the asset or liability. The use of observable and unobservable inputs is reflected in the hierarchy assessment disclosed in the following tables.

15


Recurring Fair Value Measurements
The following tables present information about the Company’s assets and liabilities measured at fair value on a recurring basis (in thousands):
 
March 26, 2017
 
Balance
 
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Assets:
 
 
 
 
 
 
 
Cash equivalents
$
628,895

 
$
370,084

 
$
258,811

 
$

Marketable securities
46,678

 
41,674

 
5,004

 

Derivatives
12,446

 

 
12,446

 

Total
$
688,019

 
$
411,758

 
$
276,261

 
$

Liabilities:
 
 
 
 
 
 
 
Derivatives
$
1,052

 
$

 
$
1,052

 
$

 
 
 
 
 
 
 
 
 
December 31, 2016
 
Balance
 
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Assets:
 
 
 
 
 
 
 
Cash equivalents
$
531,519

 
$
426,266

 
$
105,253

 
$

Marketable securities
43,638

 
38,119

 
5,519

 

Derivatives
29,034

 

 
29,034

 

Total
$
604,191

 
$
464,385

 
$
139,806

 
$

Liabilities:
 
 
 
 
 
 
 
Derivatives
$
142

 
$

 
$
142

 
$

 
 
 
 
 
 
 
 
 
March 27, 2016
 
Balance
 
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Assets:
 
 
 
 
 
 
 
Cash equivalents
$
531,823

 
$
426,700

 
$
105,123

 
$

Marketable securities
83,689

 
38,567

 
45,122

 

Derivatives
3,651

 

 
3,651

 

Total
$
619,163

 
$
465,267

 
$
153,896

 
$

Liabilities:
 
 
 
 
 
 
 
Derivatives
$
3,176

 
$

 
$
3,176

 
$

Nonrecurring Fair Value Measurements
Repossessed inventory is recorded at the lower of cost or net realizable value through a nonrecurring fair value measurement. Repossessed inventory was $20.1 million, $19.3 million and $18.6 million at March 26, 2017, December 31, 2016 and March 27, 2016, for which the fair value adjustment was $6.3 million, $9.3 million and $6.5 million, respectively. Fair value is estimated using Level 2 inputs based on the recent market values of repossessed inventory.

16


6. Fair Value of Financial Instruments
The Company’s financial instruments consist primarily of cash and cash equivalents, marketable securities, finance receivables, net, debt, foreign currency exchange and commodity contracts (derivative instruments are discussed further in Note 7).
The following table summarizes the fair value and carrying value of the Company’s financial instruments (in thousands):
 
March 26, 2017
 
December 31, 2016
 
March 27, 2016
 
Fair Value
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
 
Carrying Value
Assets:
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
839,700

 
$
839,700

 
$
759,984

 
$
759,984

 
$
694,013

 
$
694,013

Marketable securities
$
46,678

 
$
46,678

 
$
43,638

 
$
43,638

 
$
83,689

 
$
83,689

Derivatives
$
12,446

 
$
12,446

 
$
29,034

 
$
29,034

 
$
3,651

 
$
3,651

Finance receivables, net
$
7,225,210

 
$
7,146,122

 
$
6,921,037

 
$
6,835,458

 
$
7,462,125

 
$
7,376,566

Restricted cash
$
90,279

 
$
90,279

 
$
67,147

 
$
67,147

 
$
114,924

 
$
114,924

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
Derivatives
$
1,052

 
$
1,052

 
$
142

 
$
142

 
$
3,176

 
$
3,176

Unsecured commercial paper
$
953,357

 
$
953,357

 
$
1,055,708

 
$
1,055,708

 
$
869,972

 
$
869,972

Global credit facilities
$

 
$

 
$

 
$

 
$
101

 
$
101

Asset-backed U.S. commercial paper conduit facilities
$
286,205

 
$
286,205

 
$

 
$

 
$

 
$

Asset-backed Canadian commercial paper conduit facility
$
141,013

 
$
141,013

 
$
149,338

 
$
149,338

 
$
153,311

 
$
153,311

Medium-term notes
$
4,234,664

 
$
4,163,797

 
$
4,139,462

 
$
4,064,940

 
$
4,217,449

 
$
4,061,832

Senior unsecured notes
$
755,646

 
$
741,469

 
$
744,552

 
$
741,306

 
$
777,336

 
$
740,821

Asset-backed securitization debt
$
685,953

 
$
685,374

 
$
797,688

 
$
796,275

 
$
1,288,292

 
$
1,286,729

Cash and Cash Equivalents and Restricted Cash – With the exception of certain cash equivalents, the carrying value of these items in the financial statements is based on historical cost. The historical cost basis for these amounts is estimated to approximate their respective fair values due to the short maturity of these instruments. Fair value is based on Level 1 or Level 2 inputs.
Marketable Securities – The carrying value of marketable securities in the financial statements is based on fair value. The fair value of marketable securities is determined primarily based on quoted prices for identical instruments or on quoted market prices of similar financial assets. Fair value is based on Level 1 or Level 2 inputs.
Finance Receivables, Net – The carrying value of retail and wholesale finance receivables in the financial statements is amortized cost less an allowance for credit losses. The fair value of retail finance receivables is generally calculated by discounting future cash flows using an estimated discount rate that reflects current credit, interest rate and prepayment risks associated with similar types of instruments. Fair value is determined based on Level 3 inputs. The amortized cost basis of wholesale finance receivables approximates fair value because they either are short-term or have interest rates that adjust with changes in market interest rates.
Derivatives – Forward contracts for foreign currency exchange and commodities are derivative financial instruments and are carried at fair value on the balance sheet. The fair value of these contracts is determined using quoted forward rates and prices. Fair value is calculated using Level 2 inputs.
Debt – The carrying value of debt in the financial statements is generally amortized cost, net of discounts and debt issuance costs. The carrying value of unsecured commercial paper approximates fair value due to its short maturity. Fair value is calculated using Level 2 inputs.
The carrying value of debt provided under the U.S. conduit facilities and Canadian conduit facility approximates fair value since the interest rates charged under the facility are tied directly to market rates and fluctuate as market rates change. Fair value is calculated using Level 2 inputs.

17


The fair values of the medium-term notes and senior unsecured notes are estimated based upon rates available at the end of the period for debt with similar terms and remaining maturities. Fair value is calculated using Level 2 inputs.
The fair value of the debt related to on-balance sheet asset-backed securitization transactions is estimated based on pricing available at the end of the period for transactions with similar terms and maturities. Fair value is calculated using Level 2 inputs.
7. Derivative Instruments and Hedging Activities
The Company is exposed to certain risks such as foreign currency exchange rate risk, interest rate risk and commodity price risk. To reduce its exposure to such risks, the Company selectively uses derivative financial instruments. All derivative transactions are authorized and executed pursuant to regularly reviewed policies and procedures, which prohibit the use of financial instruments for speculative trading purposes.
All derivative instruments are recognized on the balance sheet at fair value (see Note 6). In accordance with ASC Topic 815, “Derivatives and Hedging,” the accounting for changes in the fair value of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and, further, on the type of hedging relationship. Changes in the fair value of derivatives that are designated as fair value hedges, along with the gain or loss on the hedged item, are recorded in current period earnings. For derivative instruments that are designated as cash flow hedges, the effective portion of gains and losses that result from changes in the fair value of derivative instruments is initially recorded in other comprehensive income (OCI) and subsequently reclassified into earnings when the hedged item affects income. The Company assesses, both at the inception of each hedge and on an on-going basis, whether the derivatives that are used in its hedging transactions are highly effective in offsetting changes in cash flows of the hedged items. Any ineffective portion is immediately recognized in earnings. No component of a hedging derivative instrument’s gain or loss is excluded from the assessment of hedge effectiveness. Derivative instruments that do not qualify for hedge accounting are recorded at fair value, and any changes in fair value are recorded in current period earnings.
The Company sells its products internationally, and in most markets those sales are made in the foreign country’s local currency. As a result, the Company’s earnings can be affected by fluctuations in the value of the U.S. dollar relative to foreign currency. The Company utilizes foreign currency exchange contracts to mitigate the effects of the Euro, the Australian dollar, the Japanese yen, the Brazilian real, the Canadian dollar, and the Mexican peso. The foreign currency exchange contracts are entered into with banks and allow the Company to exchange a specified amount of foreign currency for U.S. dollars at a future date, based on a fixed exchange rate.
The Company utilizes commodity contracts to hedge portions of the cost of certain commodities consumed in the Company’s motorcycle production and distribution operations.
The Company’s foreign currency exchange contracts and commodity contracts generally have maturities of less than one year.
During the second quarter of 2015, the Company entered into treasury rate locks to fix the interest rate on a portion of the principal related to its anticipated issuance of senior unsecured debt during the third quarter of 2015. The treasury rate lock contracts were settled in July 2015. The loss at settlement was recorded in accumulated other comprehensive loss and will be reclassified into earnings over the life of the debt.

18


The following tables summarize the fair value of the Company’s derivative financial instruments (in thousands):
 
 
March 26, 2017
 
December 31, 2016
 
March 27, 2016
Derivatives Designated As Hedging
Instruments Under ASC Topic 815
 
Notional
Value
 
Asset
Fair  Value(a)
 
Liability
Fair  Value(b)
 
Notional
Value
 
Asset
Fair  Value(a)
 
Liability
Fair  Value(b)
 
Notional
Value
 
Asset
Fair  Value(a)
 
Liability
Fair  Value(b)
Foreign currency contracts(c)
 
$
534,652

 
$
12,195

 
$
1,015

 
$
554,551

 
$
28,528

 
$
142

 
$
488,193

 
$
3,592

 
$
2,222

Commodity
contracts(c)
 
1,027

 
23

 

 
992

 
177

 

 
895

 

 
135

Total
 
$
535,679

 
$
12,218

 
$
1,015


$
555,543

 
$
28,705

 
$
142


$
489,088

 
$
3,592

 
$
2,357

 
 
March 26, 2017
 
December 31, 2016
 
March 27, 2016
Derivatives Not Designated As Hedging
Instruments Under ASC Topic 815
 
Notional
Value
 
Asset
Fair  Value(a)
 
Liability
Fair  Value(b)
 
Notional
Value
 
Asset
Fair  Value(a)
 
Liability
Fair  Value(b)
 
Notional
Value
 
Asset
Fair  Value(a)
 
Liability
Fair  Value(b)
Commodity contracts
 
$
5,046

 
$
228

 
$
37

 
$
5,025

 
$
329

 
$

 
$
6,004

 
$
59

 
$
819

Total
 
$
5,046


$
228

 
$
37

 
$
5,025

 
$
329

 
$

 
$
6,004

 
$
59

 
$
819

 
(a)
Included in other current assets
(b)
Included in accrued liabilities
(c)
Derivative designated as a cash flow hedge
The following tables summarize the amount of gains and losses related to derivative financial instruments designated as cash flow hedges (in thousands):
 
 
Amount of Gain/(Loss) Recognized in OCI, before tax
 
 
Three months ended
Cash Flow Hedges
 
March 26,
2017
 
March 27,
2016
Foreign currency contracts
 
$
(11,797
)
 
$
(12,523
)
Commodity contracts
 
(106
)
 
(192
)
Total
 
$
(11,903
)
 
$
(12,715
)
 
 
Amount of Gain/(Loss) Reclassified from AOCL into Income
 
 
 
 
Three months ended
 
Expected to be Reclassified
Cash Flow Hedges
 
March 26,
2017
 
March 27,
2016
 
Over the Next Twelve Months
Foreign currency contracts(a)
 
$
2,516

 
$
856

 
$
12,270

Commodity contracts(a)
 
48

 
(215
)
 
23

Treasury rate locks(b)
 
(90
)
 
(90
)
 
(362
)
Total
 
$
2,474

 
$
551

 
$
11,931

(a)
Gain/(loss) reclassified from accumulated other comprehensive loss (AOCL) to income is included in cost of goods sold
(b)
Gain/(loss) reclassified from AOCL to income is included in interest expense
For the three months ended March 26, 2017 and March 27, 2016, the cash flow hedges were highly effective and, as a result, the amount of hedge ineffectiveness was not material. No amounts were excluded from effectiveness testing.

19


The following table summarizes the amount of gains and losses related to derivative financial instruments not designated as hedging instruments (in thousands):
 
 
Amount of Gain/(Loss) Recognized in Income on Derivative
 
 
Three months ended
Derivatives Not Designated As Hedges
 
March 26,
2017
 
March 27,
2016
Commodity contracts(a)
 
$
20

 
$
(292
)
Total
 
$
20

 
$
(292
)
(a)
Gain/(loss) recognized in income is included in cost of goods sold
The Company is exposed to credit loss risk in the event of non-performance by counterparties to these derivative financial instruments. Although no assurances can be given, the Company does not expect any of the counterparties to these derivative financial instruments to fail to meet its obligations. To manage credit loss risk, the Company evaluates counterparties based on credit ratings and, on a quarterly basis, evaluates each hedge’s net position relative to the counterparty’s ability to cover its position.
8. Accumulated Other Comprehensive Loss
The following tables set forth the changes in accumulated other comprehensive loss (AOCL) (in thousands):
 
 
 
Three months ended March 26, 2017
 
 
Foreign currency translation adjustments
 
Marketable securities
 
Derivative financial instruments
 
Pension and postretirement benefit plans
 
Total
Balance, beginning of period
 
$
(68,132
)
 
$
(1,194
)
 
$
12,524

 
$
(508,579
)
 
$
(565,381
)
Other comprehensive income (loss) before reclassifications
 
15,633

 
(16
)
 
(11,903
)
 

 
3,714

Income tax (benefit) expense
 
(76
)
 
6

 
4,409

 

 
4,339

Net other comprehensive income (loss) before reclassifications
 
15,557

 
(10
)
 
(7,494
)
 

 
8,053

Reclassifications:
 
 
 
 
 
 
 
 
 
 
Realized (gains) losses - foreign currency contracts(a)
 

 

 
(2,516
)
 

 
(2,516
)
Realized (gains) losses - commodity contracts(a)
 

 

 
(48
)
 

 
(48
)
Realized (gains) losses - treasury rate lock(c)
 

 

 
90

 

 
90

Prior service credits(b)
 

 

 

 
(289
)
 
(289
)
Actuarial losses(b)
 

 

 

 
11,813

 
11,813

Total reclassifications before tax
 

 

 
(2,474
)
 
11,524

 
9,050

Income tax expense (benefit)
 

 

 
916

 
(4,268
)
 
(3,352
)
Net reclassifications
 

 

 
(1,558
)
 
7,256

 
5,698

Other comprehensive income (loss)
 
15,557

 
(10
)
 
(9,052
)
 
7,256

 
13,751

Balance, end of period
 
$
(52,575
)
 
$
(1,204
)
 
$
3,472

 
$
(501,323
)
 
$
(551,630
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

20


 
 
Three months ended March 27, 2016
 
 
Foreign currency translation adjustments
 
Marketable securities
 
Derivative financial instruments
 
Pension and postretirement benefit plans
 
Total
Balance, beginning of period
 
$
(58,844
)
 
$
(1,094
)
 
$
5,886

 
$
(561,153
)
 
$
(615,205
)
Other comprehensive income (loss) before reclassifications
 
14,571

 
(71
)
 
(12,715
)
 

 
1,785

Income tax (benefit) expense
 
(1,878
)
 
26

 
4,710

 

 
2,858

Net other comprehensive income (loss) before reclassifications
 
12,693

 
(45
)
 
(8,005
)
 

 
4,643

Reclassifications:
 
 
 
 
 
 
 
 
 
 
Realized (gains) losses - foreign currency contracts(a)
 

 

 
(856
)
 

 
(856
)
Realized (gains) losses - commodity contracts(a)
 

 

 
215

 

 
215

Realized (gains) losses - treasury rate lock(c)
 

 

 
90

 

 
90

Prior service credits(b)
 

 

 

 
(446
)
 
(446
)
Actuarial losses(b)
 

 

 

 
12,471

 
12,471

Total reclassifications before tax
 

 

 
(551
)
 
12,025

 
11,474

Income tax expense (benefit)
 

 

 
204

 
(4,454
)
 
(4,250
)
Net reclassifications
 

 

 
(347
)
 
7,571

 
7,224

Other comprehensive income (loss)
 
12,693

 
(45
)
 
(8,352
)
 
7,571

 
11,867

Balance, end of period
 
$
(46,151
)
 
$
(1,139
)
 
$
(2,466
)
 
$
(553,582
)
 
$
(603,338
)
(a)
Amounts reclassified to net income are included in Motorcycles and Related Products cost of goods sold.
(b)
Amounts reclassified are included in the computation of net periodic benefit cost. See Note 13 for information related to pension and postretirement benefit plans.
(c)
Amounts reclassified to net income are included in interest expense.
9. Debt
Debt with a contractual term less than one year is generally classified as short-term debt and consisted of the following (in thousands):
 
 
March 26,
2017
 
December 31,
2016
 
March 27,
2016
Unsecured commercial paper
 
$
953,357

 
$
1,055,708

 
$
869,972

Bank borrowings - global credit facilities
 

 

 
101

          Total short-term debt
 
$
953,357

 
$
1,055,708

 
$
870,073


21


Debt with a contractual term greater than one year is generally classified as long-term debt and consisted of the following (in thousands): 
 
 
March 26,
2017
 
December 31,
2016
 
March 27,
2016
Secured debt (Note 10)
 
 
 
 
 
 
Asset-backed Canadian commercial paper conduit facility
 
$
141,013

 
$
149,338

 
$
153,311

Asset-backed U.S. commercial paper conduit facilities
 
286,205

 

 

Asset-backed securitization debt
 
686,396

 
797,755

 
1,289,792

Less: unamortized discount and debt issuance costs
 
(1,022
)
 
(1,480
)
 
(3,063
)
Total secured debt
 
1,112,592

 
945,613

 
1,440,040

 
 
 
 
 
 
 
Unsecured notes
 
 
 
 
 
 
2.70% Medium-term notes due in 2017 par value, issued January 2012
 

 
400,000

 
400,000

1.55% Medium-term notes due in 2017 par value, issued November 2014
 
400,000

 
400,000

 
400,000

6.80% Medium-term notes due in 2018 par value, issued May 2008
 
877,488

 
877,488

 
878,708

2.25% Medium-term notes due in 2019 par value, issued January 2016
 
600,000

 
600,000

 
600,000

Floating-rate Medium-term notes due in 2019 par value, issued March 2017
 
150,000

 

 

2.40% Medium-term notes due in 2019 par value, issued September 2014
 
600,000

 
600,000

 
600,000

2.15% Medium-term notes due in 2020 par value, issued February 2015
 
600,000

 
600,000

 
600,000

2.40% Medium-term notes due in 2020 par value, issued March 2017
 
350,000

 

 

2.85% Medium-term notes due in 2021 par value, issued January 2016
 
600,000

 
600,000

 
600,000

3.50% Senior unsecured notes due in 2025 par value, issued July 2015
 
450,000

 
450,000

 
450,000

4.625% Senior unsecured notes due in 2045 par value, issued July 2015
 
300,000

 
300,000

 
300,000

Less: unamortized discount and debt issuance costs
 
(22,222
)
 
(21,242
)
 
(26,055
)
Gross long-term debt
 
6,017,858

 
5,751,859

 
6,242,693

Less: current portion of long-term debt, net of unamortized discount and debt issuance costs
 
(697,061
)
 
(1,084,884
)
 
(782,140
)
Total long-term debt
 
$
5,320,797

 
$
4,666,975

 
$
5,460,553

10. Asset-Backed Financing
The Company participates in asset-backed financing both through asset-backed securitization transactions and through asset-backed commercial paper conduit facilities. In the Company's asset-backed financing programs, the Company transfers retail motorcycle finance receivables to special purpose entities (SPE), which are considered VIEs under U.S. GAAP. Each SPE then converts those assets into cash, through the issuance of debt. The Company retains servicing rights for all of the retail motorcycle finance receivables transferred to SPEs as part of an asset-backed financing. The accounting treatment for asset-backed financings depends on the terms of the related transaction and the Company’s continuing involvement with the VIE.
In transactions where the Company has power over the significant activities of the VIE and has an obligation to absorb losses or the right to receive benefits from the VIE that are potentially significant to the VIE, the Company is the primary beneficiary of the VIE and consolidates the VIE within its consolidated financial statements. On a consolidated basis, the asset-backed financing is treated as a secured borrowing in this type of transaction and is referred to as an on-balance sheet asset-backed financing.
In transactions where the Company is not the primary beneficiary of the VIE, the Company must determine whether it can achieve a sale for accounting purposes under ASC Topic 860, "Transfers and Servicing". To achieve a sale for accounting purposes, the assets being transferred must be legally isolated, not be constrained by restrictions from further transfer, and be deemed to be beyond the Company’s control. If the Company does not meet all these criteria for sale accounting, then the transaction is accounted for as a secured borrowing and is referred to as an on-balance sheet asset-backed financing.
If the Company meets all three of the sale criteria above, the transaction is recorded as a sale for accounting purposes and is referred to as an off-balance sheet asset-backed financing. Upon sale, the retail motorcycle finance receivables are removed from the Company’s balance sheet and a gain or loss is recognized for the difference between the cash proceeds received, the assets derecognized, and the liabilities recognized as part of the transaction. The gain or loss on sale is included in Financial Services revenue in the Consolidated Statement of Income.

22


The Company is not required, and does not currently intend, to provide any additional financial support to the on or off-balance sheet VIEs associated with these transactions. Investors and creditors in these transactions only have recourse to the assets held by the VIEs.
The following tables show the assets and liabilities related to the on-balance sheet asset-backed financings included in the financial statements (in thousands):
 
March 26, 2017
 
Finance receivables
 
Allowance for credit losses
 
Restricted cash
 
Other assets
 
Total assets
 
Asset-backed debt
On-balance sheet assets and liabilities
 
 
 
 
 
 
 
 
 
 
 
Consolidated VIEs
 
 
 
 
 
 
 
 
 
 
 
Asset-backed securitizations
$
772,152

 
$
(23,239
)
 
$
63,473

 
$
2,532

 
$
814,918

 
$
685,374

Asset-backed U.S. commercial paper conduit facilities
304,091

 
(9,178
)
 
15,781

 
672

 
311,366

 
286,205

Unconsolidated VIEs
 
 
 
 
 
 
 
 
 
 
 
Asset-backed Canadian commercial paper conduit facility
155,240

 
(3,048
)
 
11,025

 
382

 
163,599

 
141,013

Total on-balance sheet assets and liabilities
$
1,231,483

 
$
(35,465
)
 
$
90,279

 
$
3,586

 
$
1,289,883

 
$
1,112,592

 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2016
 
Finance receivables
 
Allowance for credit losses
 
Restricted cash
 
Other assets
 
Total assets
 
Asset-backed debt
On-balance sheet assets and liabilities
 
 
 
 
 
 
 
 
 
 
 
Consolidated VIEs