10-Q 1 hog-03312019x10q.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 31, 2019
¨
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 every Interactive Data File required to be submitted 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 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
Securities Registered Pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol
Name of each exchange on which registered
COMMON STOCK PAR VALUE $.01 PER SHARE
HOG
NEW YORK STOCK EXCHANGE
Number of shares of the registrant’s common stock outstanding at May 3, 2019: 159,072,779 shares



Harley-Davidson, Inc.

Form 10-Q

For The Quarter Ended March 31, 2019
 



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 31,
2019
 
April 1,
2018
Revenue:
 
 
 
Motorcycles and Related Products
$
1,195,637

 
$
1,363,947

Financial Services
188,743

 
178,174

Total revenue
1,384,380

 
1,542,121

Costs and expenses:
 
 
 
Motorcycles and Related Products cost of goods sold
848,198

 
890,174

Financial Services interest expense
52,324

 
48,450

Financial Services provision for credit losses
34,491

 
30,052

Selling, administrative and engineering expense
268,625

 
290,186

Restructuring expense
13,630

 
46,842

Total costs and expenses
1,217,268

 
1,305,704

Operating income
167,112

 
236,417

Other income (expense), net
4,660

 
220

Investment income
6,358

 
1,203

Interest expense
7,731

 
7,690

Income before provision for income taxes
170,399

 
230,150

Provision for income taxes
42,454

 
55,387

Net income
$
127,945

 
$
174,763

Earnings per common share:
 
 
 
Basic
$
0.80

 
$
1.04

Diluted
$
0.80

 
$
1.03

Cash dividends per common share
$
0.375

 
$
0.370

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 31,
2019
 
April 1,
2018
Net income
$
127,945

 
$
174,763

Other comprehensive income, net of tax:
 
 
 
  Foreign currency translation adjustments
331

 
6,915

  Derivative financial instruments
(441
)
 
765

  Pension and postretirement benefit plans
7,743

 
85,765

Total other comprehensive income, net of tax
7,633

 
93,445

Comprehensive income
$
135,578

 
$
268,208

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



4


HARLEY-DAVIDSON, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
 
(Unaudited)
 
 
 
(Unaudited)
 
March 31,
2019
 
December 31,
2018
 
April 1,
2018
ASSETS
 
 
 
 
 
Current assets:
 
 
 
 
 
Cash and cash equivalents
$
749,600

 
$
1,203,766

 
$
753,517

Marketable securities
10,003

 
10,007

 

Accounts receivable, net
353,541

 
306,474

 
355,107

Finance receivables, net
2,443,899

 
2,214,424

 
2,341,918

Inventories
595,806

 
556,128

 
564,571

Restricted cash
43,471

 
49,275

 
54,569

Other current assets
177,761

 
144,368

 
150,472

Total current assets
4,374,081

 
4,484,442

 
4,220,154

Finance receivables, net
4,994,693

 
5,007,507

 
4,784,524

Property, plant and equipment, net
876,003

 
904,132

 
934,645

Prepaid pension costs

 

 
122,230

Goodwill
64,131

 
55,048

 
56,524

Deferred income taxes
132,988

 
141,464

 
77,624

Lease assets
55,305

 

 

Other long-term assets
83,412

 
73,071

 
81,920

 
$
10,580,613

 
$
10,665,664

 
$
10,277,621

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
 
Current liabilities:
 
 
 
 
 
Accounts payable
$
380,918

 
$
284,861

 
$
319,040

Accrued liabilities
644,171

 
601,130

 
566,408

Short-term debt
1,192,925

 
1,135,810

 
1,036,976

Current portion of long-term debt, net
1,372,050

 
1,575,799

 
1,872,679

Total current liabilities
3,590,064

 
3,597,600

 
3,795,103

Long-term debt, net
4,744,694

 
4,887,667

 
4,108,511

Lease liabilities
39,516

 

 

Pension liabilities
98,862

 
107,776

 
54,921

Postretirement healthcare liabilities
93,897

 
94,453

 
113,031

Other long-term liabilities
215,969

 
204,219

 
210,106

Commitments and contingencies (Note 17)

 

 

Shareholders’ equity:
 
 
 
 
 
Preferred stock, none issued

 

 

Common stock
1,826

 
1,819

 
1,818

Additional paid-in-capital
1,465,581

 
1,459,620

 
1,432,692

Retained earnings
2,074,669

 
2,007,583

 
1,725,626

Accumulated other comprehensive loss
(622,051
)
 
(629,684
)
 
(406,604
)
Treasury stock, at cost
(1,122,414
)
 
(1,065,389
)
 
(757,583
)
Total shareholders’ equity
1,797,611

 
1,773,949

 
1,995,949

 
$
10,580,613

 
$
10,665,664

 
$
10,277,621



5


HARLEY-DAVIDSON, INC.
CONSOLIDATED BALANCE SHEETS (continued)
(In thousands)
 
(Unaudited)
 
 
 
(Unaudited)
 
March 31,
2019
 
December 31,
2018
 
April 1,
2018
Balances held by consolidated variable interest entities (Note 13)
 
 
 
 
 
Current finance receivables, net
$
130,454

 
$
175,043

 
$
182,033

Other assets
$
1,416

 
$
1,563

 
$
2,175

Non-current finance receivables, net
$
480,936

 
$
591,839

 
$
464,185

Restricted cash - current and non-current
$
39,764

 
$
47,203

 
$
55,140

Current portion of long-term debt, net
$
137,488

 
$
189,693

 
$
205,055

Long-term debt, net
$
408,153

 
$
488,191

 
$
361,049

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 31,
2019
 
April 1,
2018
Net cash provided by operating activities (Note 8)
$
32,671

 
$
191,594

Cash flows from investing activities:
 
 
 
Capital expenditures
(35,255
)
 
(28,436
)
Origination of finance receivables
(851,372
)
 
(798,067
)
Collections on finance receivables
815,824

 
809,800

Acquisition of business
(7,000
)
 

Other
603

 
(4,948
)
Net cash used by investing activities
(77,200
)
 
(21,651
)
Cash flows from financing activities:
 
 
 
Proceeds from issuance of medium-term notes
546,655

 
347,553

Repayments of medium-term notes
(750,000
)
 

Repayments of securitization debt
(76,505
)
 
(67,955
)
Borrowings of asset-backed commercial paper

 
35,504

Repayments of asset-backed commercial paper
(72,401
)
 
(45,907
)
Net increase (decrease) in credit facilities and unsecured commercial paper
58,527

 
(234,145
)
Dividends paid
(60,859
)
 
(62,731
)
Purchase of common stock for treasury
(61,712
)
 
(72,968
)
Issuance of common stock under employee stock option plans
616

 
1,719

Net cash used by financing activities
(415,679
)
 
(98,930
)
Effect of exchange rate changes on cash, cash equivalents and restricted cash
(409
)
 
2,034

Net (decrease) increase in cash, cash equivalents and restricted cash
$
(460,617
)
 
$
73,047

Cash, cash equivalents and restricted cash:
 
 
 
Cash, cash equivalents and restricted cash—beginning of period
$
1,259,748

 
$
746,210

Net (decrease) increase in cash, cash equivalents and restricted cash
(460,617
)
 
73,047

Cash, cash equivalents and restricted cash—end of period
$
799,131

 
$
819,257

 
 
 
 
Reconciliation of cash, cash equivalents and restricted cash to the Consolidated Balance Sheet:
Cash and cash equivalents
$
749,600

 
$
753,517

Restricted cash
43,471

 
54,569

Restricted cash included in other long-term assets
6,060

 
11,171

Total cash, cash equivalents and restricted cash shown in the Statement of Cash Flows
$
799,131

 
$
819,257

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


7


HARLEY-DAVIDSON, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands, except share amounts)
(Unaudited)
 
 
Common Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Loss
 
Treasury
Balance
 
Total
 
 
Issued
Shares
 
Balance
 
Balance December 31, 2018
 
181,931,225

 
$
1,819

 
$
1,459,620

 
$
2,007,583

 
$
(629,684
)
 
$
(1,065,389
)
 
$
1,773,949

Net income
 

 

 

 
127,945

 

 

 
127,945

Total other comprehensive income, net of tax (Note 18)
 

 

 

 

 
7,633

 

 
7,633

Dividends
 

 

 

 
(60,859
)
 

 

 
(60,859
)
Repurchase of common stock
 

 

 

 

 

 
(61,712
)
 
(61,712
)
Share-based compensation
 
702,687

 
7

 
5,961

 

 

 
4,687

 
10,655

Balance March 31, 2019
 
182,633,912

 
$
1,826

 
$
1,465,581

 
$
2,074,669

 
$
(622,051
)
 
$
(1,122,414
)
 
$
1,797,611

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Loss
 
Treasury
Balance
 
Total
 
 
Issued
Shares
 
Balance
 
Balance December 31, 2017
 
181,286,547

 
$
1,813

 
$
1,422,808

 
$
1,607,570

 
$
(500,049
)
 
$
(687,865
)
 
$
1,844,277

Net income
 

 

 

 
174,763

 

 

 
174,763

Total other comprehensive income, net of tax (Note 18)
 

 

 

 

 
93,445

 

 
93,445

Dividends
 

 

 

 
(62,731
)
 

 

 
(62,731
)
Repurchase of common stock
 

 

 

 

 

 
(72,968
)
 
(72,968
)
Share-based compensation
 
489,896

 
5

 
9,884

 

 

 
3,250

 
13,139

Cumulative effect of change in accounting
 

 

 

 
6,024

 

 

 
6,024

Balance April 1, 2018
 
181,776,443

 
$
1,818

 
$
1,432,692

 
$
1,725,626

 
$
(406,604
)
 
$
(757,583
)
 
$
1,995,949



8


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 31, 2019 and April 1, 2018, 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, the consolidated statements of cash flows for the three month periods then ended, and the consolidated statements of shareholders' equity 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, 2018.
The Company operates in two reportable segments: Motorcycles and 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 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 adopted ASU 2016-02 on January 1, 2019 using a modified retrospective approach. Pursuant to ASU 2018-11, Leases (Topic 842): Targeted Improvements, the Company applied the new leases standard at the adoption date and recognized a cumulative effect adjustment to the opening balance sheet on January 1, 2019.
The Company elected the package of practical expedients upon transition that allows entities not to reassess lease identification, classification and initial direct costs for leases that existed prior to adoption. The Company also elected the short-term lease practical expedient that allows entities to recognize lease payments on a straight-line basis over the lease term for leases with a term of 12 months or less. The Company has elected the practical expedient allowing entities to not separate non-lease components from lease components, but instead account for such components as a single lease component for all leases except leases involving assets operated by a third-party.
The adoption of ASU 2016-02 resulted in the initial recognition of right of use assets and lease liabilities related to the Company's leasing arrangements totaling approximately $60 million on January 1, 2019. The adoption of ASU 2016-02 had no impact on opening retained earnings on January 1, 2019 and is not expected to materially impact consolidated net income or cash flows on an on-going basis.

In August 2017, the FASB issued ASU No. 2017-12 Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities (ASU 2017-12). ASU 2017-12 amends ASC 815, Derivatives and Hedging to improve the financial reporting of hedging relationships and to simplify the application of the hedge accounting guidance. The ASU makes various updates to the hedge accounting model, including changing the recognition and presentation of changes in the fair value of the hedging instrument and amending disclosure requirements, among other things. The Company adopted ASU 2017-12 on January 1, 2019. The adoption of ASU 2017-12 did not have a material impact on its financial statements.

9


Accounting Standards Not Yet Adopted
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 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.

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement (ASU 2018-13). ASU 2018-13 amends ASC 820 to eliminate, modify, and add certain disclosure requirements for fair value measurements. The guidance is effective for fiscal years beginning after December 15, 2019 and for interim periods within those fiscal years. Early adoption is permitted in any period, for either the whole standard or only the provisions that eliminate or modify requirements. The amendments are required to be applied retrospectively, with the exception of a few disclosure additions, which are to be applied on a prospective basis. The Company is currently evaluating the impact of adopting ASU 2018-13, but does not believe that it will have a significant impact on its disclosures.

In August 2018, the FASB issued ASU No. 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40) (ASU 2018-15). The new guidance requires a customer in a cloud computing arrangement that is a service contract to follow the existing internal-use software guidance to determine which implementation costs to capitalize as assets or expense as incurred. The guidance is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. The Company is currently evaluating the impact of adopting ASU 2018-15.


10


3. Revenue

The following table includes revenue disaggregated by major source (in thousands):
 
 
Three months ended
 
 
March 31,
2019
 
April 1,
2018
Motorcycles and Related Products:
 
 
 
 
Motorcycles
 
$
964,575

 
$
1,121,673

Parts & Accessories
 
159,703

 
169,075

General Merchandise
 
55,401

 
56,601

Licensing
 
8,577

 
8,358

Other
 
7,381

 
8,240

Revenue from Motorcycles and Related Products
 
1,195,637

 
1,363,947

Financial Services:
 
 
 
 
Interest income
 
159,804

 
154,041

Securitization and servicing fee income
 
189

 
352

Other income
 
28,750

 
23,781

Revenue from Financial Services
 
188,743

 
178,174

Total revenue
 
$
1,384,380

 
$
1,542,121

Deferred revenue relates to payments received at contract inception in advance of the Company’s performance under the contract and generally relates to the sale of Harley Ownership Group memberships and extended service plan contracts. Deferred revenue is recognized as revenue as the Company performs under the contract. Deferred revenue, included in Accrued liabilities and Other long-term liabilities on the consolidated balance sheet, was as follows (in thousands):
 
 
March 31,
2019
 
April 1,
2018
Balance, beginning of year
 
$
29,055

 
$
23,441

Balance, end of period
 
30,228

 
27,624

Previously deferred revenue recognized as revenue in the three months ended March 31, 2019 and April 1, 2018 was $6.1 million and $4.0 million, respectively. The Company expects to recognize approximately $16.2 million of the remaining unearned revenue over the next 12 months and $14.0 million thereafter.
4. Restructuring Expenses
In January 2018, the Company initiated a plan to further improve its manufacturing operations and cost structure by commencing a multi-year manufacturing optimization plan which includes the consolidation of its motorcycle assembly plant in Kansas City, Missouri, into its plant in York, Pennsylvania, and the closure of its wheel operations in Adelaide, Australia (Manufacturing Optimization Plan). As the U.S. operations are consolidated, the Company expects approximately 800 jobs will be eliminated with the closure of Kansas City operations and approximately 450 jobs will be added in York through 2019. Approximately 90 jobs will be eliminated in Adelaide.
The Company expects to incur restructuring and other consolidation costs of $152 million to $162 million in the Motorcycles segment related to the Manufacturing Optimization Plan through 2019, of which approximately 70% will be cash charges.
The current estimate includes $129 million to $134 million of restructuring expense and $23 million to $28 million of costs related to temporary inefficiencies. The Company expects restructuring expenses to include the cost of employee termination benefits, accelerated depreciation, and other project implementation costs of $40 million to $41 million, $51 million to $53 million, and $38 million to $40 million, respectively.
In November 2018, the Company implemented a reorganization of its workforce (Reorganization Plan). As a result, approximately 70 employees left the Company on an involuntary basis.

11


Restructuring expense related to these plans is recorded as a separate line item in the consolidated statements of income and the accrued restructuring liability is recorded in Accrued liabilities on the consolidated balance sheet. The Company expects the plans to be completed by mid-2019. Changes in the accrued restructuring liability (in thousands) were as follows:
 
Three months ended March 31, 2019
 
Manufacturing Optimization Plan
 
Reorganization Plan
 
 
 
Employee Termination Benefits
 
Accelerated Depreciation
 
Other
 
Total
 
Employee Termination Benefits
 
Total
Balance, beginning of period
$
24,958

 
$

 
$
79

 
$
25,037

 
$
3,461

 
$
28,498

Restructuring expense (benefit)
9

 
8,379

 
5,636

 
14,024

 
(394
)
 
13,630

Utilized - cash
(2,600
)
 

 
(5,528
)
 
(8,128
)
 
(2,014
)
 
(10,142
)
Utilized - non cash

 
(8,379
)
 

 
(8,379
)
 

 
(8,379
)
Foreign currency changes
34

 

 

 
34

 
(2
)
 
32

Balance, end of period
$
22,401

 
$

 
$
187

 
$
22,588

 
$
1,051

 
$
23,639

 
Three months ended April 1, 2018
 
Manufacturing Optimization Plan
 
Reorganization Plan
 
 
 
Employee Termination Benefits
 
Accelerated Depreciation
 
Other
 
Total
 
Employee Termination Benefits
 
Total
Balance, beginning of period
$

 
$

 
$

 
$

 
$

 
$

Restructuring expense
40,791

 
5,613

 
438

 
46,842

 

 
46,842

Utilized - cash
(2,300
)
 

 
(374
)
 
(2,674
)
 

 
(2,674
)
Utilized - non cash

 
(5,613
)
 

 
(5,613
)
 

 
(5,613
)
Foreign currency changes
(204
)
 

 
(1
)
 
(205
)
 

 
(205
)
Balance, end of period
$
38,287

 
$

 
$
63

 
$
38,350

 
$

 
$
38,350

During the three months ended March 31, 2019, the restructuring liability was adjusted to reflect updated assumptions resulting in a reversal of approximately $0.4 million of previously recognized restructuring expense.
During the three months ended March 31, 2019 and April 1, 2018, the Company incurred $3.6 million and $0.7 million, respectively, of incremental cost of goods sold due to temporary inefficiencies resulting from implementing the Manufacturing Optimization Plan.
 
 
5. Income Taxes
The Company’s 2019 effective income tax rate for the three months ended March 31, 2019 was 24.9% compared to 24.1% for the three months ended April 1, 2018.

12


6. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share amounts):
 
Three months ended
 
March 31,
2019
 
April 1,
2018
Numerator:
 
 
 
Net income used in computing basic and diluted earnings per share
$
127,945

 
$
174,763

Denominator:
 
 
 
Denominator for basic earnings per share - weighted-average common shares
159,311

 
168,139

Effect of dilutive securities - employee stock compensation plan
715

 
1,035

Denominator for diluted earnings per share - adjusted weighted-average shares outstanding
160,026

 
169,174

Earnings per common share:
 
 
 
Basic
$
0.80

 
$
1.04

Diluted
$
0.80

 
$
1.03

Outstanding options to purchase 1.2 million and 1.0 million shares of common stock for the three months ended March 31, 2019 and April 1, 2018, respectively, were not included in the Company’s computation of dilutive securities because the exercise price was greater than the market price, and therefore, the effect would have been anti-dilutive.
The Company has a share-based compensation plan under which employees may be granted share-based awards including restricted stock units (RSUs). Non-forfeitable dividend equivalents are paid on unvested RSUs. As such, RSUs are considered participating securities under the two-class method of calculating earnings per share as described in ASC Topic 260, “Earnings per Share.” The two-class method of calculating earnings per share did not have a material impact on the Company’s earnings per share calculation for the three month periods ended March 31, 2019 and April 1, 2018.
7. Acquisition
On March 4, 2019, the Company purchased certain assets and liabilities of StaCyc, Inc. for total consideration of $14.9 million including cash paid at acquisition of $7.0 million. StaCyc produces electric-powered two-wheelers specifically designed for children and supports the Company’s plans to expand its portfolio of electric two-wheeled vehicles.
The Company has completed a provisional allocation of the purchase consideration which is subject to change upon the completion of the Company’s final valuation of acquired assets and liabilities. The primary assets acquired and included in the Motorcycles segment were goodwill of $9.5 million, which is expected to be tax deductible, and intangible assets of $5.3 million.
8. Additional Balance Sheet and Cash Flow Information
Investments in Marketable Securities
The Company’s marketable securities consisted of the following (in thousands):
 
March 31,
2019
 
December 31,
2018
 
April 1,
2018
Debt securities
$
10,003

 
$
10,007

 
$

Mutual funds
49,896

 
44,243

 
49,402

Total marketable securities
$
59,899

 
$
54,250

 
$
49,402

The debt securities, which are included in Marketable securities on the consolidated balance sheets, are carried at fair value with unrealized gains or losses reported in other comprehensive income. The mutual fund investments are held to fund certain deferred compensation obligations. These investments, which are included in Other long-term assets on the consolidated balance sheets, are carried at fair value with gains and losses recorded in net income.

13


Inventories
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):
 
March 31,
2019
 
December 31,
2018
 
April 1,
2018
Raw materials and work in process
$
204,759

 
$
177,110

 
$
177,652

Motorcycle finished goods
304,386

 
301,630

 
289,046

Parts & accessories and general merchandise
145,300

 
136,027

 
150,228

Inventory at lower of FIFO cost or net realizable value
654,445

 
614,767

 
616,926

Excess of FIFO over LIFO cost
(58,639
)
 
(58,639
)
 
(52,355
)
Total inventories, net
$
595,806

 
$
556,128

 
$
564,571

Operating Cash Flow
The reconciliation of net income to net cash provided by operating activities is as follows (in thousands):
 
Three months ended
 
March 31,
2019
 
April 1,
2018
Cash flows from operating activities:
 
 
 
Net income
$
127,945

 
$
174,763

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization of intangibles
64,372

 
62,473

Amortization of deferred loan origination costs
18,968

 
20,116

Amortization of financing origination fees
2,194

 
2,028

Provision for long-term employee benefits
3,156

 
9,747

Employee benefit plan contributions and payments
(2,507
)
 
(5,486
)
Stock compensation expense
6,537

 
7,962

Net change in wholesale finance receivables related to sales
(237,569
)
 
(239,902
)
Provision for credit losses
34,491

 
30,052

Deferred income taxes
5,981

 
3,188

Other, net
2,731

 
(1,902
)
Changes in current assets and liabilities:
 
 
 
Accounts receivable, net
(49,746
)
 
(17,688
)
Finance receivables - accrued interest and other
92

 
4,758

Inventories
(40,600
)
 
(21,542
)
Accounts payable and accrued liabilities
123,975

 
148,923

Derivative instruments
867

 
702

Other
(28,216
)
 
13,402

Total adjustments
(95,274
)
 
16,831

Net cash provided by operating activities
$
32,671

 
$
191,594

9. 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 and are primarily related to sales of motorcycles to the dealers' customers. The Company holds either titles or liens on titles to vehicles financed by promissory notes and installment sales contracts.

14


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. Wholesale finance receivables are related primarily to sales of motorcycles and related parts and accessories to dealers.
Finance receivables, net, consisted of the following (in thousands):
 
March 31,
2019
 
December 31,
2018
 
April 1,
2018
Retail
$
6,290,036

 
$
6,328,201

 
$
6,064,192

Wholesale
1,339,428

 
1,083,615

 
1,252,600

Total finance receivables
7,629,464

 
7,411,816

 
7,316,792

Allowance for credit losses
(190,872
)
 
(189,885
)
 
(190,350
)
Finance receivables, net
$
7,438,592

 
$
7,221,931

 
$
7,126,442

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 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 31, 2019
 
Retail
 
Wholesale
 
Total
Balance, beginning of period
$
182,098

 
$
7,787

 
$
189,885

Provision for credit losses
32,832

 
1,659

 
34,491

Charge-offs
(44,721
)
 

 
(44,721
)
Recoveries
11,217

 

 
11,217

Balance, end of period
$
181,426

 
$
9,446

 
$
190,872

 
 
 
 
 
 
 
Three months ended April 1, 2018
 
Retail
 
Wholesale
 
Total
Balance, beginning of period
$
186,254

 
$
6,217

 
$
192,471

Provision for credit losses
28,069

 
1,983

 
30,052

Charge-offs
(45,081
)
 

 
(45,081
)
Recoveries
12,908

 

 
12,908

Balance, end of period
$
182,150

 
$
8,200

 
$
190,350

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

15


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.
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 31, 2019
 
Retail
 
Wholesale
 
Total
Allowance for credit losses, ending balance:
 
 
 
 
 
Individually evaluated for impairment
$

 
$

 
$

Collectively evaluated for impairment
181,426

 
9,446

 
190,872

Total allowance for credit losses
$
181,426

 
$
9,446

 
$
190,872

Finance receivables, ending balance:
 
 
 
 
 
Individually evaluated for impairment
$

 
$

 
$

Collectively evaluated for impairment
6,290,036

 
1,339,428

 
7,629,464

Total finance receivables
$
6,290,036

 
$
1,339,428

 
$
7,629,464

 
 
 
 
 
 
 
December 31, 2018
 
Retail
 
Wholesale
 
Total
Allowance for credit losses, ending balance:
 
 
 
 
 
Individually evaluated for impairment
$

 
$

 
$

Collectively evaluated for impairment
182,098

 
7,787

 
189,885

Total allowance for credit losses
$
182,098

 
$
7,787

 
$
189,885

Finance receivables, ending balance:
 
 
 
 
 
Individually evaluated for impairment
$

 
$

 
$

Collectively evaluated for impairment
6,328,201

 
1,083,615

 
7,411,816

Total finance receivables
$
6,328,201

 
$
1,083,615

 
$
7,411,816

 
 
 
 
 
 
 
April 1, 2018
 
Retail
 
Wholesale
 
Total
Allowance for credit losses, ending balance:
 
 
 
 
 
Individually evaluated for impairment
$

 
$
184

 
$
184

Collectively evaluated for impairment
182,150

 
8,016

 
190,166

Total allowance for credit losses
$
182,150

 
$
8,200

 
$
190,350

Finance receivables, ending balance:
 
 
 
 
 
Individually evaluated for impairment
$

 
$
220

 
$
220

Collectively evaluated for impairment
6,064,192

 
1,252,380

 
7,316,572

Total finance receivables
$
6,064,192

 
$
1,252,600

 
$
7,316,792


16


There are no wholesale finance receivables at March 31, 2019 or December 31, 2018 that are individually deemed to be impaired under ASC Topic 310, "Receivables". Additional information related to the wholesale finance receivables that are individually deemed to be impaired at April 1, 2018 includes (in thousands):
 
Recorded
Investment
 
Unpaid
Principal
Balance
 
Related
Allowance
 
Average
Recorded
Investment
 
Interest
Income
Recognized
Wholesale:
 
 
 
 
 
 
 
 
 
No related allowance recorded
$

 
$

 
$

 
$

 
$

Related allowance recorded
251

 
220

 
184

 
251

 

Total impaired wholesale finance receivables
$
251

 
$
220

 
$
184

 
$
251

 
$

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 31, 2019December 31, 2018 and April 1, 2018, all retail finance receivables were accounted for as interest-earning receivables, of which $39.0 million, $41.2 million and $27.9 million, respectively, were 90 days or more past due.
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 31, 2019 or December 31, 2018. The recorded investment in non-accrual status wholesale finance receivables at April 1, 2018 was $0.2 million. At March 31, 2019December 31, 2018 and April 1, 2018, $0.8 million, $1.1 million, and $0.2 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 31, 2019
 
Current
 
31-60 Days
Past Due
 
61-90 Days
Past Due
 
Greater than
90 Days
Past Due
 
Total
Past Due
 
Total
Finance
Receivables
Retail
$
6,088,894

 
$
119,150

 
$
43,028

 
$
38,964

 
$
201,142

 
$
6,290,036

Wholesale
1,337,429

 
862

 
355

 
782

 
1,999

 
1,339,428

Total
$
7,426,323

 
$
120,012

 
$
43,383

 
$
39,746

 
$
203,141

 
$
7,629,464

 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2018
 
Current
 
31-60 Days
Past Due
 
61-90 Days
Past Due
 
Greater than
90 Days
Past Due
 
Total
Past Due
 
Total
Finance
Receivables
Retail
$
6,100,186

 
$
136,945

 
$
49,825

 
$
41,245

 
$
228,015

 
$
6,328,201

Wholesale
1,081,729

 
522

 
273

 
1,091

 
1,886

 
1,083,615

Total
$
7,181,915

 
$
137,467

 
$
50,098

 
$
42,336

 
$
229,901

 
$
7,411,816

 
 
 
 
 
 
 
 
 
 
 
 
 
April 1, 2018
 
Current
 
31-60 Days
Past Due
 
61-90 Days
Past Due
 
Greater than
90 Days
Past Due
 
Total
Past Due
 
Total
Finance
Receivables
Retail
$
5,897,632

 
$
105,366

 
$
33,275

 
$
27,919

 
$
166,560

 
$
6,064,192

Wholesale
1,247,175

 
549

 
4,705

 
171

 
5,425

 
1,252,600

Total
$
7,144,807

 
$
105,915

 
$
37,980

 
$
28,090

 
$
171,985

 
$
7,316,792

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.

17


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 31,
2019
 
December 31,
2018
 
April 1,
2018
Prime
$
5,160,942

 
$
5,183,754

 
$
4,923,237

Sub-prime
1,129,094

 
1,144,447

 
1,140,955

Total
$
6,290,036

 
$
6,328,201

 
$
6,064,192

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 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 31,
2019
 
December 31,
2018
 
April 1,
2018
Doubtful
$
8,679

 
$
2,210

 
$
1,582

Substandard
7,866

 
9,660

 
3,368

Special Mention
11,484

 
10,299

 
33,085

Medium Risk
917

 
25,802

 
10,512

Low Risk
1,310,482

 
1,035,644

 
1,204,053

Total
$
1,339,428

 
$
1,083,615

 
$
1,252,600

10. 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.
The Company sells products in foreign currencies and utilizes foreign currency exchange contracts to mitigate the effects of foreign currency exchange rate fluctuations related to the Euro, the Australian dollar, the Japanese yen, the Brazilian real, the Canadian dollar and the Mexican peso. The foreign currency exchange contracts generally have maturities of less than one year.
The Company utilizes commodity contracts to mitigate the effects of commodity price fluctuations related to metals and fuel consumed in the Company’s motorcycle production and distribution processes. The commodity contracts generally have maturities of less than one year.
The Company periodically utilizes treasury rate lock contracts to fix the interest rate on a portion of the principal related to the anticipated issuance of long-term debt as well as interest rate swaps to reduce the impact of fluctuations in interest rates on long-term debt.

18


All derivative instruments are recognized on the balance sheet at fair value. 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 cash flow hedges are 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 cash flow hedging transactions are highly effective in offsetting changes in cash flows of the hedged items. No component of a hedging derivative instrument’s gain or loss is excluded from the assessment of hedge effectiveness. Derivatives not designated as hedges are not speculative and are used to manage the Company’s exposure to foreign currency and commodity risks. Changes in the fair value of derivatives not designated in hedging relationships are recorded directly in earnings.
The following tables summarize the notional and recorded fair values of the Company’s derivative financial instruments (in thousands):
 
 
Derivatives Designated as Cash Flow Hedging
Instruments Under ASC Topic 815
 
 
March 31, 2019
 
December 31, 2018
 
April 1, 2018
Derivative
 
Notional
Value
 
Other Current Assets
 
Accrued Liabil-ities
 
Notional
Value
 
Other Current Assets
 
Accrued Liabil-ities
 
Notional
Value
 
Other Current Assets
 
Accrued Liabil-ities
Foreign currency contracts
 
$
480,937

 
$
15,576

 
$
646

 
$
442,976

 
$
15,071

 
$
313

 
$
720,869

 
$
3,442

 
$
22,807

Commodity contracts
 
589

 

 
6

 
827

 

 
46

 
728

 

 
11

Interest rate swaps
 
900,000

 

 
6,893

 
900,000

 

 
4,494

 

 

 

Total
 
$
1,381,526

 
$
15,576

 
$
7,545


$
1,343,803

 
$
15,071

 
$
4,853


$
721,597

 
$
3,442

 
$
22,818

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivatives Not Designated as Hedging
Instruments Under ASC Topic 815
 
 
March 31, 2019
 
December 31, 2018
 
April 1, 2018
Derivative
 
Notional
Value
 
Other Current Assets
 
Accrued Liabil-ities
 
Notional
Value
 
Other Current Assets
 
Accrued Liabil-ities
 
Notional
Value
 
Other Current Assets
 
Accrued Liabil-ities
Foreign currency contracts
 
$
157,678

 
$
413

 
$
69

 
$

 
$

 
$

 
$

 
$

 
$

Commodity contracts
 
7,225

 
94

 
119

 
5,239

 

 
463

 
4,577

 
171

 
32

Total
 
$
164,903


$
507

 
$
188

 
$
5,239

 
$

 
$
463

 
$
4,577

 
$
171

 
$
32

 

19


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
 
Amount of Gain/(Loss) Reclassified from AOCL into Income
 
Location of Gain/(Loss) Reclassified from AOCL into Income
 
Total Statement of Income Amount for Line Items in which the Effects of Cash Flow Hedges are Recorded
 
 
Three months ended
 
Three months ended
 
 
 
Three months ended
Cash Flow Hedges
 
March 31,
2019
 
April 1,
2018
 
March 31,
2019
 
April 1,
2018
 
Income statement
line item
 
March 31,
2019
 
April 1,
2018
Foreign currency contracts
 
$
4,152

 
$
(5,890
)
 
$
2,453

 
$
(6,709
)
 
Motorcycles cost of goods sold
 
$
848,198

 
$
890,174

Commodity contracts
 
30

 
(16
)
 
(10
)
 
(73
)
 
Motorcycles cost of goods sold
 
$
848,198

 
$
890,174

Treasury rate locks
 

 

 
(90
)
 
(90
)
 
Interest expense
 
$
7,731

 
$
7,690

Treasury rate locks
 

 

 
(32
)
 
(36
)
 
Financial Services interest expense
 
$
52,324

 
$
48,450

Interest rate swaps
 
(3,005
)
 

 
(606
)
 

 
Financial Services interest expense
 
$
52,324

 
$
48,450

Total
 
$
1,177

 
$
(5,906
)
 
$
1,715

 
$
(6,908
)
 
 
 
 
 
 
 
The amount of net gain included in accumulated other comprehensive loss at March 31, 2019, estimated to be reclassified into income over the next twelve months was $11.6 million.
The following table summarizes the amount of gains and losses recognized in income related to derivative financial instruments not designated as hedging instruments. The following amounts were recorded in Motorcycles cost of goods sold (in thousands):
 
 
Amount of Gain Recognized in Income on Derivative
 
 
Three months ended
Derivatives Not Designated as Hedges
 
March 31,
2019
 
April 1,
2018
Foreign currency contracts
 
$
887

 
$

Commodity contracts
 
317

 
6

Total
 
$
1,204

 
$
6

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.
11. Leases
The Company determines if an arrangement is or contains a lease at contract inception. Right-of-use (ROU) assets related to leases are recorded in Lease assets and lease liabilities are recorded in Accrued liabilities and Lease liabilities on the consolidated balance sheet. 
ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized at lease commencement date based on the present value of future lease payments over the lease term. The ROU asset also includes prepaid lease payments and initial direct costs and is reduced for lease incentives paid by the lessor. The discount rate used to determine the present value is generally the Company's incremental borrowing rate because the implicit rate in the lease is not readily determinable. The lease term used to calculate the ROU asset and lease liability includes periods covered by options to extend or terminate when the Company is reasonably certain the lease term will include these optional periods.

20


The Company has lease arrangements for sales and administrative offices, manufacturing and distribution facilities, product testing facilities, equipment and vehicles. All of the Company’s lease arrangements are accounted for as operating leases. The Company’s leases have remaining lease terms ranging from 1 to 13 years, some of which include options to extend the leases for periods generally not greater than 5 years and some of which include options to terminate the leases within 1 year. Certain leases also include options to purchase the leased asset. Leases do not contain any material residual value guarantees or material restrictive covenants.
Operating lease expense for the three months ended March 31, 2019 was $6.3 million. This includes variable lease costs related to leases involving assets operated by a third-party of approximately $1.1 million. Other variable and short-term lease costs were not material.
Balance sheet information related to leases was as follows (in thousands):
 
March 31,
2019
Lease assets
$
55,305

 
 
Accrued liabilities
$
17,391

Lease liabilities
39,516

 
$
56,907

Future maturities of lease liabilities were as follows as of March 31, 2019 (in thousands):
 
Operating Leases
2019
$
14,743

2020
15,023

2021
12,467

2022
8,837

2023
3,511

Thereafter
6,291

Total present value of lease payments
60,872

Less present value discount
3,965

Total lease liability
$
56,907

Other lease information is as follows:
 
Three months ended
 
March 31,
2019
Cash paid for amounts included in the measurement of lease liabilities (in millions):
 
Operating cash flows
$
5,361

Right-of-use assets obtained in exchange for lease obligations (in millions)
298

 
March 31,
2019
Weighted average remaining lease term (in years)
4.61

Weighted average discount rate
3.3
%

21


12. Debt
Debt with a contractual term of one year or less is generally classified as short-term debt and consisted of the following (in thousands):
 
 
March 31,
2019
 
December 31,
2018
 
April 1,
2018
Unsecured commercial paper
 
$
1,192,925

 
$
1,135,810

 
$
1,036,976

Total short-term debt
 
$
1,192,925

 
$
1,135,810

 
$
1,036,976

Debt with a contractual term greater than one year is generally classified as long-term debt and consisted of the following (in thousands): 
 
 
March 31,
2019
 
December 31,
2018
 
April 1,
2018
Secured debt (Note 13)
 
 
 
 
 
 
Asset-backed Canadian commercial paper conduit facility
 
$
142,676

 
$
155,951

 
$
158,162

Asset-backed U.S. commercial paper conduit facilities
 
526,947

 
582,717

 
281,311

Asset-backed securitization debt
 
18,712

 
95,216

 
285,130

Less: unamortized discount and debt issuance costs
 
(18
)
 
(49
)
 
(337
)
Total secured debt
 
688,317

 
833,835

 
724,266

 
 
 
 
 
 
 
Unsecured notes (at par value)
 
 
 
 
 
 
6.80% Medium-term notes due in 2018, issued May 2008
 

 

 
877,488

2.25% Medium-term notes due in 2019, issued January 2016
 

 
600,000

 
600,000

Floating-rate Medium-term notes due in 2019, issued March 2017(a)
 

 
150,000

 
150,000

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

 
600,000

 
600,000

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

 
600,000

 
600,000

Floating-rate Medium-term notes due in 2020, issued May 2018(b)
 
450,000

 
450,000

 

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

 
350,000

 
350,000

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

 
600,000

 
600,000

Floating-rate Medium-term notes due in 2021, issued November 2018(c)
 
450,000

 
450,000

 

3.55% Medium-term notes due in 2021, issued May 2018
 
350,000

 
350,000

 

4.05% Medium-term notes due in 2022, issued February 2019
 
550,000

 

 

2.55% Medium-term notes due in 2022, issued June 2017
 
400,000

 
400,000

 
400,000

3.35% Medium-term notes due in 2023, issued February 2018
 
350,000

 
350,000

 
350,000

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

 
450,000

 
450,000

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

 
300,000

 
300,000

Less: unamortized discount and debt issuance costs
 
(21,573
)
 
(20,369
)
 
(20,564
)
Gross long-term debt
 
6,116,744

 
6,463,466

 
5,981,190

Less: current portion of long-term debt, net of unamortized discount and
debt issuance costs
 
(1,372,050
)
 
(1,575,799
)
 
(1,872,679
)
Total long-term debt
 
$
4,744,694

 
$
4,887,667

 
$
4,108,511

(a)
Floating interest rate based on LIBOR plus 35 bps.
(b)
Floating interest rate based on LIBOR plus 50 bps. The Company utilized an interest rate swap designated as a cash flow hedge to convert this from a floating rate basis to a fixed rate basis. Refer to Note 10 of the Notes to the Consolidated Financial Statements for further details.
(c)
Floating interest rate based on LIBOR plus 94 bps. The Company utilized an interest rate swap designated as a cash flow hedge to convert this from a floating rate basis to a fixed rate basis. Refer to Note 10 of the Notes to the Consolidated Financial Statements for further details.

22


13. 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 (SPEs), 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 of 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 statements of income.
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 31, 2019
 
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
$
62,771

 
$
(1,855
)
 
$
8,199

 
$
134

 
$
69,249

 
$
18,694

Asset-backed U.S. commercial paper conduit facilities
567,295

 
(16,821
)
 
31,565

 
1,282

 
583,321

 
526,947

Unconsolidated VIEs
 
 
 
 
 
 
 
 
 
 
 
Asset-backed Canadian commercial paper conduit facility
164,779

 
(3,003
)
 
9,767