UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
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x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 25, 2017April 1, 2018
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¨ | 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)
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Wisconsin | | 39-1382325 |
(State of organization) | | (I.R.S. Employer Identification No.) |
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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.
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Large accelerated filer | | x | Accelerated filer | | ¨ |
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Non-accelerated filer | | ¨ | Smaller reporting company | | ¨ |
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| | | 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 July 28, 2017: 170,594,597May 4, 2018: 166,436,632 shares
Harley-Davidson, Inc.
Form 10-Q
For The Quarter Ended June 25, 2017April 1, 2018
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Part I | | |
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Item 1. | | |
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Item 2. | | |
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Item 3. | | |
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Item 4. | | |
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Part II | | |
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Item 1. | | |
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Item 2. | | |
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Item 6. | | |
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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 | | Six months ended | Three months ended |
| June 25, 2017 | | June 26, 2016 | | June 25, 2017 | | June 26, 2016 | April 1, 2018 | | March 26, 2017 |
Revenue: | | | | | | | | | | |
Motorcycles and Related Products | $ | 1,577,135 |
| | $ | 1,670,113 |
| | $ | 2,905,846 |
| | $ | 3,246,723 |
| $ | 1,363,947 |
| | $ | 1,328,711 |
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Financial Services | 188,034 |
| | 190,964 |
| | 361,255 |
| | 364,322 |
| 178,174 |
| | 173,221 |
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Total revenue | 1,765,169 |
| | 1,861,077 |
| | 3,267,101 |
| | 3,611,045 |
| 1,542,121 |
| | 1,501,932 |
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Costs and expenses: | | | | | | | | | | |
Motorcycles and Related Products cost of goods sold | 1,001,512 |
| | 1,062,555 |
| | 1,852,738 |
| | 2,048,885 |
| 890,174 |
| | 853,888 |
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Financial Services interest expense | 44,408 |
| | 42,895 |
| | 87,697 |
| | 88,814 |
| 48,450 |
| | 43,289 |
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Financial Services provision for credit losses | 26,217 |
| | 23,461 |
| | 69,806 |
| | 60,584 |
| 30,052 |
| | 43,589 |
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Selling, administrative and engineering expense | 291,450 |
| | 319,844 |
| | 563,800 |
| | 611,612 |
| 290,186 |
| | 271,984 |
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Restructuring expense | | 46,842 |
| | — |
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Total costs and expenses | 1,363,587 |
| | 1,448,755 |
| | 2,574,041 |
| | 2,809,895 |
| 1,305,704 |
| | 1,212,750 |
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Operating income | 401,582 |
| | 412,322 |
| | 693,060 |
| | 801,150 |
| 236,417 |
| | 289,182 |
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Other income (expense), net | | 220 |
| | 2,296 |
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Investment income | 577 |
| | 688 |
| | 1,456 |
| | 1,454 |
| 1,203 |
| | 879 |
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Interest expense | 7,726 |
| | 7,094 |
| | 15,399 |
| | 14,262 |
| 7,690 |
| | 7,673 |
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Income before provision for income taxes | 394,433 |
| | 405,916 |
| | 679,117 |
| | 788,342 |
| 230,150 |
| | 284,684 |
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Provision for income taxes | 135,566 |
| | 125,485 |
| | 233,881 |
| | 257,422 |
| 55,387 |
| | 98,315 |
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Net income | $ | 258,867 |
| | $ | 280,431 |
| | $ | 445,236 |
| | $ | 530,920 |
| $ | 174,763 |
| | $ | 186,369 |
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Earnings per common share: | | | | | | | | | | |
Basic | $ | 1.48 |
| | $ | 1.55 |
| | $ | 2.54 |
| | $ | 2.92 |
| $ | 1.04 |
| | $ | 1.06 |
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Diluted | $ | 1.48 |
| | $ | 1.55 |
| | $ | 2.53 |
| | $ | 2.91 |
| $ | 1.03 |
| | $ | 1.05 |
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Cash dividends per common share | $ | 0.365 |
| | $ | 0.350 |
| | $ | 0.730 |
| | $ | 0.700 |
| $ | 0.370 |
| | $ | 0.365 |
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The accompanying notes are an integral part of the consolidated financial statements.
HARLEY-DAVIDSON, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
| | | Three months ended | | Six months ended | Three months ended |
| June 25, 2017 | | June 26, 2016 | | June 25, 2017 | | June 26, 2016 | April 1, 2018 | | March 26, 2017 |
Net income | $ | 258,867 |
| | $ | 280,431 |
| | $ | 445,236 |
| | $ | 530,920 |
| $ | 174,763 |
| | $ | 186,369 |
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Other comprehensive income (loss), net of tax: | | | | | | | | | | |
Foreign currency translation adjustments | 9,637 |
| | 2,628 |
| | 25,194 |
| | 15,321 |
| 6,915 |
| | 15,557 |
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Derivative financial instruments | (10,412 | ) | | 3,009 |
| | (19,464 | ) | | (5,343 | ) | 765 |
| | (9,052 | ) |
Marketable securities | 1,204 |
| | (32 | ) | | 1,194 |
| | (77 | ) | — |
| | (10 | ) |
Pension and postretirement benefit plans | 7,256 |
| | 7,572 |
| | 14,512 |
| | 15,143 |
| 85,765 |
| | 7,256 |
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Total other comprehensive income, net of tax | 7,685 |
| | 13,177 |
| | 21,436 |
| | 25,044 |
| 93,445 |
| | 13,751 |
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Comprehensive income | $ | 266,552 |
| | $ | 293,608 |
| | $ | 466,672 |
| | $ | 555,964 |
| $ | 268,208 |
| | $ | 200,120 |
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The accompanying notes are an integral part of the consolidated financial statements.
HARLEY-DAVIDSON, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
| | | (Unaudited) | | | | (Unaudited) | (Unaudited) | | | | (Unaudited) |
| June 25, 2017 | | December 31, 2016 | | June 26, 2016 | April 1, 2018 | | December 31, 2017 | | March 26, 2017 |
ASSETS | | | | | | | | | | |
Current assets: | | | | | | | | | | |
Cash and cash equivalents | $ | 988,476 |
| | $ | 759,984 |
| | $ | 864,670 |
| $ | 753,517 |
| | $ | 687,521 |
| | $ | 839,700 |
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Marketable securities | — |
| | 5,519 |
| | 5,070 |
| — |
| | — |
| | 5,004 |
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Accounts receivable, net | 330,933 |
| | 285,106 |
| | 311,956 |
| 355,107 |
| | 329,986 |
| | 335,578 |
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Finance receivables, net | 2,338,533 |
| | 2,076,261 |
| | 2,457,974 |
| 2,341,918 |
| | 2,105,662 |
| | 2,354,095 |
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Inventories | 372,012 |
| | 499,917 |
| | 371,196 |
| 564,571 |
| | 538,202 |
| | 485,476 |
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Restricted cash | 63,225 |
| | 52,574 |
| | 78,078 |
| 54,569 |
| | 47,518 |
| | 75,705 |
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Deferred income taxes | — |
| | — |
| | 116,214 |
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Other current assets | 151,423 |
| | 174,491 |
| | 153,866 |
| 150,472 |
| | 175,853 |
| | 142,362 |
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Total current assets | 4,244,602 |
| | 3,853,852 |
| | 4,359,024 |
| 4,220,154 |
| | 3,884,742 |
| | 4,237,920 |
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Finance receivables, net | 4,994,002 |
| | 4,759,197 |
| | 4,824,071 |
| 4,784,524 |
| | 4,859,424 |
| | 4,792,027 |
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Property, plant and equipment, net | 946,326 |
| | 981,593 |
| | 951,309 |
| 934,645 |
| | 967,781 |
| | 953,044 |
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Prepaid pension costs | | 122,230 |
| | 19,816 |
| | — |
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Goodwill | 54,630 |
| | 53,391 |
| | 54,542 |
| 56,524 |
| | 55,947 |
| | 53,967 |
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Deferred income taxes | 170,358 |
| | 167,729 |
| | 83,047 |
| 77,624 |
| | 109,073 |
| | 165,196 |
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Other long-term assets | 77,853 |
| | 74,478 |
| | 76,447 |
| 81,920 |
| | 75,889 |
| | 79,701 |
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| $ | 10,487,771 |
| | $ | 9,890,240 |
| | $ | 10,348,440 |
| $ | 10,277,621 |
| | $ | 9,972,672 |
| | $ | 10,281,855 |
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LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | | | | | | |
Current liabilities: | | | | | | | | | | |
Accounts payable | $ | 327,346 |
| | $ | 235,318 |
| | $ | 273,696 |
| $ | 319,040 |
| | $ | 227,597 |
| | $ | 358,684 |
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Accrued liabilities | 533,412 |
| | 486,652 |
| | 485,811 |
| 566,408 |
| | 529,822 |
| | 547,637 |
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Short-term debt | 928,445 |
| | 1,055,708 |
| | 1,020,487 |
| 1,036,976 |
| | 1,273,482 |
| | 953,357 |
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Current portion of long-term debt, net | 1,565,558 |
| | 1,084,884 |
| | 732,773 |
| 1,872,679 |
| | 1,127,269 |
| | 697,061 |
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Total current liabilities | 3,354,761 |
| | 2,862,562 |
| | 2,512,767 |
| 3,795,103 |
| | 3,158,170 |
| | 2,556,739 |
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Long-term debt, net | 4,678,350 |
| | 4,666,975 |
| | 5,308,063 |
| 4,108,511 |
| | 4,587,258 |
| | 5,320,797 |
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Pension liability | 51,797 |
| | 84,442 |
| | 129,465 |
| 54,921 |
| | 54,606 |
| | 52,559 |
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Postretirement healthcare liability | 166,023 |
| | 173,267 |
| | 188,846 |
| 113,031 |
| | 118,753 |
| | 171,143 |
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Other long-term liabilities | 190,673 |
| | 182,836 |
| | 188,292 |
| 210,106 |
| | 209,608 |
| | 187,208 |
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Commitments and contingencies (Note 15) |
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Shareholders’ equity: | | | | | | | | | | |
Preferred stock, none issued | — |
| | — |
| | — |
| — |
| | — |
| | — |
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Common stock | 1,813 |
| | 1,806 |
| | 3,453 |
| 1,818 |
| | 1,813 |
| | 1,813 |
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Additional paid-in-capital | 1,404,428 |
| | 1,381,862 |
| | 1,349,755 |
| 1,432,692 |
| | 1,422,808 |
| | 1,397,172 |
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Retained earnings | 1,654,457 |
| | 1,337,673 |
| | 9,365,105 |
| 1,725,626 |
| | 1,607,570 |
| | 1,459,431 |
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Accumulated other comprehensive loss | (543,945 | ) | | (565,381 | ) | | (590,161 | ) | (406,604 | ) | | (500,049 | ) | | (551,630 | ) |
Treasury stock, at cost | (470,586 | ) | | (235,802 | ) | | (8,107,145 | ) | (757,583 | ) | | (687,865 | ) | | (313,377 | ) |
Total shareholders’ equity | 2,046,167 |
| | 1,920,158 |
| | 2,021,007 |
| 1,995,949 |
| | 1,844,277 |
| | 1,993,409 |
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| $ | 10,487,771 |
| | $ | 9,890,240 |
| | $ | 10,348,440 |
| $ | 10,277,621 |
| | $ | 9,972,672 |
| | $ | 10,281,855 |
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HARLEY-DAVIDSON, INC.
CONSOLIDATED BALANCE SHEETS (continued)
(In thousands)
| | | (Unaudited) | | | | (Unaudited) | (Unaudited) | | | | (Unaudited) |
| June 25, 2017 | | December 31, 2016 | | June 26, 2016 | April 1, 2018 | | December 31, 2017 | | March 26, 2017 |
Balances held by consolidated variable interest entities (Note 10) | | | | | | |
Balances held by consolidated variable interest entities (Note 11) | | | | | | |
Current finance receivables, net | $ | 217,348 |
| | $ | 225,289 |
| | $ | 258,870 |
| $ | 182,033 |
| | $ | 194,813 |
| | $ | 218,001 |
|
Other assets | $ | 2,170 |
| | $ | 2,781 |
| | $ | 3,047 |
| $ | 2,175 |
| | $ | 2,148 |
| | $ | 3,204 |
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Non-current finance receivables, net | $ | 653,683 |
| | $ | 643,047 |
| | $ | 884,226 |
| $ | 464,185 |
| | $ | 521,940 |
| | $ | 825,825 |
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Restricted cash - current and non-current | $ | 62,973 |
| | $ | 57,057 |
| | $ | 79,475 |
| $ | 55,140 |
| | $ | 48,706 |
| | $ | 79,254 |
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Current portion of long-term debt, net | $ | 241,754 |
| | $ | 241,396 |
| | $ | 288,786 |
| $ | 205,055 |
| | $ | 209,247 |
| | $ | 253,070 |
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Long-term debt, net | $ | 559,379 |
| | $ | 554,879 |
| | $ | 786,145 |
| $ | 361,049 |
| | $ | 422,834 |
| | $ | 718,509 |
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The accompanying notes are an integral part of the consolidated financial statements.
HARLEY-DAVIDSON, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
| | | Six months ended | Three months ended |
| June 25, 2017 | | June 26, 2016 | April 1, 2018 | | March 26, 2017 |
Net cash provided by operating activities (Note 3) | $ | 627,068 |
| | $ | 456,290 |
| |
Net cash provided by operating activities (Note 7) | | $ | 191,594 |
| | $ | 159,939 |
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Cash flows from investing activities: | | | | | | |
Capital expenditures | (69,816 | ) | | (107,531 | ) | (28,436 | ) | | (23,967 | ) |
Origination of finance receivables | (1,977,839 | ) | | (1,991,384 | ) | (798,067 | ) | | (844,692 | ) |
Collections on finance receivables | 1,647,799 |
| | 1,630,213 |
| 809,800 |
| | 781,154 |
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Proceeds from finance receivables sold | — |
| | 312,571 |
| |
Sales and redemptions of marketable securities | 6,916 |
| | 40,000 |
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Other | 115 |
| | 166 |
| (4,948 | ) | | 52 |
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Net cash used by investing activities | (392,825 | ) | | (115,965 | ) | (21,651 | ) | | (87,453 | ) |
Cash flows from financing activities: | | | | | | |
Proceeds from issuance of medium-term notes | 893,668 |
| | 1,193,396 |
| 347,553 |
| | 497,406 |
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Repayments of medium-term notes | (400,000 | ) | | (450,000 | ) | — |
| | (400,000 | ) |
Repayments of securitization debt | (275,659 | ) | | (385,837 | ) | (67,955 | ) | | (111,359 | ) |
Borrowings of asset-backed commercial paper | 341,625 |
| | 33,428 |
| 35,504 |
| | 305,209 |
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Repayments of asset-backed commercial paper | (77,732 | ) | | (34,989 | ) | (45,907 | ) | | (29,383 | ) |
Net decrease in credit facilities and unsecured commercial paper | (128,787 | ) | | (181,259 | ) | (234,145 | ) | | (101,702 | ) |
Net change in restricted cash | (7,248 | ) | | 17,992 |
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Dividends paid | (128,452 | ) | | (127,800 | ) | (62,731 | ) | | (64,611 | ) |
Purchase of common stock for treasury | (243,055 | ) | | (269,411 | ) | (72,968 | ) | | (79,753 | ) |
Excess tax benefits from share-based payments | — |
| | 331 |
| |
Issuance of common stock under employee stock option plans | 7,432 |
| | 2,367 |
| 1,719 |
| | 7,336 |
|
Net cash used by financing activities | (18,208 | ) | | (201,782 | ) | |
Effect of exchange rate changes on cash and cash equivalents | 12,457 |
| | 3,918 |
| |
Net increase in cash and cash equivalents | $ | 228,492 |
| | $ | 142,461 |
| |
Cash and cash equivalents: | | | | |
Cash and cash equivalents—beginning of period | $ | 759,984 |
| | $ | 722,209 |
| |
Net increase in cash and cash equivalents | 228,492 |
| | 142,461 |
| |
Cash and cash equivalents—end of period | $ | 988,476 |
| | $ | 864,670 |
| |
Net cash (used) provided by financing activities | | (98,930 | ) | | 23,143 |
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Effect of exchange rate changes on cash, cash equivalents and restricted cash | | 2,034 |
| | 7,219 |
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Net increase in cash, cash equivalents and restricted cash | | $ | 73,047 |
| | $ | 102,848 |
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Cash, cash equivalents and restricted cash: | | | | |
Cash, cash equivalents and restricted cash—beginning of period | | $ | 746,210 |
| | $ | 827,131 |
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Net increase in cash, cash equivalents and restricted cash | | 73,047 |
| | 102,848 |
|
Cash, cash equivalents and restricted cash—end of period | | $ | 819,257 |
| | $ | 929,979 |
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Reconciliation of cash, cash equivalents and restricted cash to the Consolidated Balance Sheet: | | Reconciliation of cash, cash equivalents and restricted cash to the Consolidated Balance Sheet: |
Cash and cash equivalents | | $ | 753,517 |
| | $ | 839,700 |
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Restricted cash | | 54,569 |
| | 75,705 |
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Restricted cash included in other long-term assets | | 11,171 |
| | 14,574 |
|
Total cash, cash equivalents and restricted cash shown in the Statement of Cash Flows | | $ | 819,257 |
| | $ | 929,979 |
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The accompanying notes are an integral part of the consolidated financial statements.
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 June 25, 2017April 1, 2018 and JuneMarch 26, 20162017, the consolidated statements of income for the three and six month periods then ended, the consolidated statements of comprehensive income for the three and six month periods then ended and the consolidated statements of cash flows for the sixthree 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, 20162017.
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,May 2014, the Financial Accounting Standards Board (FASB)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. The Company adopted ASU 2014-09 on January 1, 2018. The Company applied the standard to all contracts using the modified retrospective method. As such, the Company recognized the cumulative effect of the adoption as an adjustment to the opening balance of retained earnings. The comparative information has not been restated.
The majority of the Company’s Motorcycles and related products revenue will continue to be recognized when products are shipped to customers. For a limited number of vehicle sales where revenue was previously deferred due to a guaranteed resale value the Company will now recognize revenue when those vehicles are shipped in accordance with ASU 2014-09. The Company recorded a net increase to the opening balance of retained earnings of $6.0 million, net of income taxes, as of January 1, 2018 as a result of adopting ASU 2014-09. The Company also adjusted other assets and accrued liabilities associated with these vehicle sales in connection with its adoption of ASU 2014-09.
The majority of the Financial Services segment’s revenues relate to loan and servicing activities which are outside the scope of this guidance. Financial Services revenues that fall under the scope of ASU 2014-09 continue to be recognized at the point of sale, or over the estimated life of the contract, as appropriate.
The following tables illustrate the impact of adoption of ASU 2014-09 on the consolidated statement of income for the three months ended April 1, 2018 and the consolidated balance sheet as of April 1, 2018 (in thousands):
Consolidated Statement of Income |
| | | | | | | | | | | |
| As Reported | | Without Adoption of ASC 606 | | Effect of Change |
Revenue: | | | | | |
Motorcycles and Related Products | $ | 1,363,947 |
| | $ | 1,367,984 |
| | $ | (4,037 | ) |
Costs and expenses: | | | | | |
Motorcycles and Related Products cost of goods sold | $ | 890,174 |
| | $ | 890,238 |
| | $ | (64 | ) |
Operating income | $ | 236,417 |
| | $ | 240,390 |
| | $ | (3,973 | ) |
Income before provision for income taxes | $ | 230,150 |
| | $ | 234,123 |
| | $ | (3,973 | ) |
Provision for income taxes | $ | 55,387 |
| | $ | 56,350 |
| | $ | (963 | ) |
Net income | $ | 174,763 |
| | $ | 177,773 |
| | $ | (3,010 | ) |
Consolidated Balance Sheet
|
| | | | | | | | | | | |
| As Reported | | Without Adoption of ASC 606 | | Effect of Change |
ASSETS | | | | | |
Other current assets | $ | 150,472 |
| | $ | 166,864 |
| | $ | (16,392 | ) |
Deferred income taxes | $ | 77,624 |
| | $ | 79,472 |
| | $ | (1,848 | ) |
| | | | | |
LIABILITIES AND SHAREHOLDERS' EQUITY | | | | | |
Accrued liabilities | $ | 566,408 |
| | $ | 587,662 |
| | $ | (21,254 | ) |
Retained earnings | $ | 1,725,626 |
| | $ | 1,722,612 |
| | $ | 3,014 |
|
In August 2015,March 2017, the FASB issued ASU No. 2015-14 Revenue2017-07 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 Contracts with Customers: Deferral of Effective Date (ASU 2015-14) to deferservices rendered during the effective dateperiod. Other components of the new revenue recognition standard by one year to fiscal years beginning after December 15, 2017net periodic benefit cost will be presented separately from the line item that includes the service cost and interim periods therein.outside of any subtotal of operating income. The guidance may be adopted using either a full retrospective or modified retrospective approach.also limits the components that are eligible for capitalization in assets. The Company expectsadopted ASU 2017-07 retrospectively on January 1, 2018. As a result, the non-service cost components of net periodic benefit cost have been presented in Other income (expense), net and the prior period has been recast to adoptreflect the new revenue recognition guidance usingpresentation. The Company elected the modifiedpractical expedient allowing the use of previously disclosed benefit components as the basis for the retrospective method.application. Net periodic benefit cost (credit) previously recorded in Motorcycles and Related Products cost of goods sold and Selling, administrative and engineering expense of $2.7 million and $(0.4) million, respectively, for the three months ended March 26, 2017 has been reclassified to Other income (expense), net.
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 end-of-period total amounts shown on the statement of cash flows. The Company's efforts to evaluate the impact of the standard and to prepare for its adoptionCompany adopted ASU 2016-18 on January 1, 2018 are well underway. Based on a retrospective basis. As a result, the work completedchange in restricted cash has been excluded from financing activities and included in the change in cash, cash equivalents and restricted cash and the prior period has been recast to date (which includes the review of significant revenue sources), the Company expects the recognition of revenue for sales of motorcycles, parts and accessories and general
merchandise products underreflect the new revenue recognition guidance will occur at a point in time, which is consistent with current practice. 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.presentation.
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 ASU was subsequently amended by ASU No. 2018-03 and ASU No. 2018-04. The Company is required to adoptadopted ASU 2016-01 for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2017on January 1, 2018 on a prospective basis. The Company is currently evaluating the impact of adoption of ASU 2016-01.2016-01 did not have a material impact on its financial statements.
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 items 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 Company adopted ASU 2016-15 on January 1, 2018 on a retrospective basis. The adoption of ASU 2016-15 did not have a material impact on its financial statements.
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. The Company adopted ASU 2016-16 on January 1, 2018 using a modified retrospective approach. The adoption of ASU 2016-16 did not have a material impact on its financial statements.
Accounting Standards Not Yet 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 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 evaluatingin the process of gathering and analyzing information necessary to quantify the impact of adopting ASU 2016-02 and evaluating the transition practical expedients it will apply upon adoption. The Company anticipates the adoption of ASU 2016-02.2016-02 will result in an increase in assets and liabilities recognized in the balance sheet related to its lease arrangements.
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 end-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 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.
In MarchAugust 2017, the FASB issued ASU No. 2017-07 Compensation - Retirement Benefits2017-12 Derivatives and Hedging (Topic 715)815): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit CostTargeted Improvements to Accounting for Hedging Activities (ASU 2017-07)2017-12). ASU 2017-072017-12 amends ASC 715, Compensation - Retirement Benefits by requiring employers815, Derivatives and Hedging to presentimprove the service cost componentfinancial reporting of net periodic benefit costhedging 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 same income statement line item as other employee compensation costs arising from services rendered during the period. Other componentsfair value of the net periodic benefit cost will be presented separately from the line item that includes the service costhedging instrument and outside of any subtotal of operating income. The guidance also limits the components that are eligible for capitalization in assets.amending disclosure requirements, among other things. The Company is required to adopt ASU 2017-072017-12 for fiscal years beginning after December 15, 2018, and for interim periods within those fiscal years. Early adoption is permitted in any interim period after issuance of the ASU. For cash flow and net investment hedges existing at the date of adoption, the Company must apply a cumulative-effect adjustment as of the beginning of the fiscal year in which the standard is adopted. The amendments related to presentation and disclosure are required prospectively. The Company is currently evaluating the impact of adoption of ASU 2017-12.
In February 2018, the FASB issued ASU No. 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (ASU 2018-02). Under existing U.S. GAAP, the effects of changes in tax rates and laws on deferred tax balances are recorded as a component of income tax expense in the period in which the law was enacted. When deferred tax balances related to items originally recorded in accumulated other comprehensive income are adjusted, certain tax effects
become stranded in accumulated other comprehensive income. The amendments in ASU 2018-02 allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the 2017 Tax Cuts and Jobs Act. The amendments in this ASU also require certain disclosures about stranded tax effects. The guidance is effective for fiscal years beginning after December 15, 2017.2018, and interim periods within those fiscal years. Early adoption in any period is permitted aspermitted. The Company’s provisional adjustments recorded in 2017 to account for the impact of the beginning2017 Tax Cuts and Jobs Act resulted in stranded tax effects. The Company is currently evaluating the impact of adopting ASU 2018-02.
3. Revenue
The Company recognizes revenue when it satisfies a performance obligation by transferring control of a good or service to a customer. Revenue is measured based on the consideration that the Company expects to be entitled to in exchange for the goods or services transferred. Taxes that are collected from a customer concurrent with revenue-producing activities are excluded from revenue.
The following table disaggregates revenue by major source for the three months ended April 1, 2018 (in thousands):
|
| | | | |
Motorcycles and Related Products: | | |
Motorcycles | | $ | 1,121,673 |
|
Parts & Accessories | | 169,075 |
|
General Merchandise | | 56,601 |
|
Licensing | | 8,358 |
|
Other | | 8,240 |
|
Revenue from Motorcycles and Related Products | | 1,363,947 |
|
Financial Services: | | |
Interest income | | 154,041 |
|
Securitization and servicing fee income | | 352 |
|
Other income | | 23,781 |
|
Revenue from Financial Services | | 178,174 |
|
Total revenue | | $ | 1,542,121 |
|
The following is a description of principal activities from which the Company generates its revenue, by reportable segment.
Motorcycles and Related Products
Motorcycles, Parts and Accessories, and General Merchandise - Sales of motorcycles, parts and accessories, and general merchandise are recorded when control is transferred to wholesale customers (independent dealers). This generally takes place upon shipment of the products. The sale of products to independent dealers outside the U.S. and Canada is generally on open account with terms that generally approximate 30-120 days and the resulting receivables are included in accounts receivable in the consolidated balance sheets. The sale of products in the U.S. and Canada is financed by the purchasing dealers through HDFS and the related receivables are included in finance receivables in the consolidated balance sheets.
The Company may offer sales incentive programs to dealers and retail customers designed to promote the sale of motorcycles, parts and accessories, and general merchandise. The Company estimates its variable consideration related to motorcycles and related products sold under its sales incentive programs using the expected value method. Further, the Company accounts for consideration payable to a customer as part of its sales incentives as a reduction of revenue, which is accrued at the later of the date the related sale is recorded or the date the incentive program is both approved and communicated.
The Company may offer to its dealers the right to return eligible parts and accessories and general merchandise. When the Company offers a right to return, it estimates returns based on an annualanalysis of historical trends and records revenue on the initial sale only in the amount that it expects to be entitled. The remaining consideration is deferred in a refund liability account. The refund liability is remeasured for changes in the estimate at each reporting date with a corresponding adjustment to revenue.
Variable consideration related to sales incentives and rights to return is adjusted at the earliest of when the amount of consideration the Company expects to receive changes or the consideration becomes fixed. Adjustments for variable
consideration related to previously recognized sales decreased revenue by an immaterial amount during the three months ended April 1, 2018.
Shipping and handling costs associated with freight after control of a product has transferred to a customer are accounted for as fulfillment costs. The Company accrues for the shipping and handling in the same period that the related revenue is recognized.
The Company offers standard, limited warranties on its motorcycles and parts and accessories. These warranties provide assurance that the product will function as expected and are not separate performance obligations. The Company accounts for estimated warranty costs as a liability when control of the product transfers to the customer.
Licensing - The Company licenses the name “Harley-Davidson” and other trademarks owned by the Company and collects royalties from its customers (licensees). The trademark licenses are considered symbolic intellectual property, which interimgrant the customer a right to access the Company’s intellectual property. The Company satisfies its performance obligation over the license period, as the Company fulfills its promise to grant the customer rights to use and benefit from the intellectual property as well as maintain the intellectual property.
Payment is typically due within thirty days of the end of each quarter, for the royalties earned in that quarter. Revenue, in the form of sales-based royalties, is recognized when the customers’ subsequent sales occur. The Company applies the practical expedient in ASC 606-10-55-18 to recognize licensing revenues in the amount that the Company has the right to invoice because the royalties due each period correspond directly with the value of the Company’s performance to date. Revenue will be recognized over the remaining contract terms which range up to 6 years.
Other Revenue - Other Revenue consists primarily of revenue from Harley Ownership Group (H.O.G.) membership sales, motorcycle rental commissions, dealer software sales, museum admissions and events, and other miscellaneous products and services.
Financial Services
Interest income - Interest income on finance receivables is recorded as earned and is based on the average outstanding daily balance for wholesale and retail receivables. Accrued and uncollected interest is classified with finance receivables. Certain loan origination costs related to finance receivables, including payments made to dealers for certain retail loans, are deferred and recorded within finance receivables, and amortized over the estimated life of the contract.
Securitization and Servicing Income - Securitization and Servicing income consists of revenue from servicing and ancillary fees associated with HDFS' off-balance sheet asset-backed securitization transaction. Refer to Note 11 of the Notes to Consolidated Financial Statements for further discussion regarding asset-backed financing.
Other income - Other income consists primarily of insurance and licensing revenues. HDFS works with certain unaffiliated insurance companies to offer motorcycle insurance and protection products through most Harley-Davidson dealers in the U.S. and Canada. HDFS also works with third-party financial institutions that issue credit cards, or annualoffer other financial statements have not been issuedproducts bearing the Harley-Davidson brand in the U.S and internationally. For many of these contracts, the Company grants temporary rights to use the licensed trademarks owned by the Company and collects royalties from its customers in connection with sales of their products. The trademark licenses are considered symbolic intellectual property, which grant the customer a right to access the intellectual property. The Company satisfies its performance obligation over the license period, as it fulfills its promise to grant the customer rights to use and benefit from the intellectual property as well as maintain the intellectual property. Royalty and profit sharing amounts are received either quarterly or made availableper annum, based upon the contract. Revenue, in the form of sales-based royalties, is recognized when the customers’ subsequent sales occur. Revenue will be recognized over the remaining contract terms which range up to 6 years. The Company is the primary obligor for issuance.certain other insurance related contracts and as a result revenue is recognized over the life of the contract as the Company fulfills its performance obligation.
Contract Liabilities
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 H.O.G. memberships and extended service plan contracts. Deferred revenue is recognized as revenue as the Company performs under the contract. On January 1, 2018, $23.4 million of deferred revenue was included in Accrued liabilities and Other long-term liabilities in the consolidated balance sheet. $4.0 million of this was recognized as revenue in the three months ended April 1, 2018. At April 1, 2018, the unearned revenue balance was $27.6
million. The amendmentsCompany expects to recognize approximately $12.7 million of the remaining unearned revenue in 2018, $7.2 million in 2019 and $7.8 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. 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 by 2019. Approximately 90 jobs will be eliminated in Adelaide.
The Company expects to incur restructuring and other consolidation costs of $170 to $200 million in the Motorcycles segment related to this plan through 2019, of which approximately 70% will be cash charges. This includes $135 million to $155 million of restructuring expense and $35 million to $45 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 $50 million to $60 million, $45 million to $50 million and $40 million to $45 million, respectively. Restructuring expense is recorded as a separate line item in the consolidated statement of income and the accrued restructuring liability is recorded in accrued liabilities in the consolidated balance sheet. The Company expects the plan to be completed by mid-2019. Changes in the accrued restructuring liability (in thousands) were as follows:
|
| | | | | | | | | | | | | | | |
| Three months ended April 1, 2018 |
| Employee Termination Benefits | | Accelerated Depreciation | | Other | | Total |
Balance, beginning of period | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
Restructuring expense | (40,791 | ) | | (5,613 | ) | | (438 | ) | | (46,842 | ) |
Utilized - cash | 2,300 |
| | — |
| | 374 |
| | 2,674 |
|
Utilized - non cash | — |
| | 5,613 |
| | — |
| | 5,613 |
|
Foreign currency changes | 204 |
| | — |
| | 1 |
| | 205 |
|
Balance, end of period | $ | (38,287 | ) | | $ | — |
| | $ | (63 | ) | | $ | (38,350 | ) |
The Company incurred $0.7 million of incremental cost of goods sold during the three month period ended April 1, 2018 due to temporary inefficiencies resulting from implementing the manufacturing optimization plan.
5. Income Taxes
The Company’s 2018 effective income tax rate for the three months ended April 1, 2018 was 24.1% compared to 34.5% for the three months ended March 26, 2017. The Company's effective income tax rate was lower in 2018 due primarily to the impact of the 2017 Tax Cuts and Jobs Act (2017 Tax Act) that was enacted in December of 2017. The 2017 Tax Act included broad and complex changes to the U.S. tax code including a reduction of the corporate income tax rate from 35% to 21%, the move toward a territorial tax system and the elimination of the domestic manufacturing deduction. During the three months ended December 31, 2017, the Company recorded a $53.1 million tax expense to recognize the initial effects of the 2017 Tax Act relating primarily to the remeasurement of deferred tax assets. The Company has deemed its income tax estimates related to the presentation2017 Tax Act to be provisional under SEC Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the components of net periodic benefit cost should be applied retrospectively.Tax Cuts and Jobs Act (SAB 118). The amendments relatedCompany believes future guidance, interpretations and pronouncements will add clarity to the capitalizationnumerous aspects of certain componentsthe 2017 Tax Act that may impact the Company which may result in assets shouldrevisions to the Company’s provisional estimates. There were no material changes to these provisional estimates during the three month period ended April, 1 2018.
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 |
| April 1, 2018 | | March 26, 2017 |
Numerator: | | | |
Net income used in computing basic and diluted earnings per share | $ | 174,763 |
| | $ | 186,369 |
|
Denominator: | | | |
Denominator for basic earnings per share - weighted-average common shares | 168,139 |
| | 176,001 |
|
Effect of dilutive securities - employee stock compensation plan | 1,035 |
| | 1,069 |
|
Denominator for diluted earnings per share - adjusted weighted-average shares outstanding | 169,174 |
| | 177,070 |
|
Earnings per common share: | | | |
Basic | $ | 1.04 |
| | $ | 1.06 |
|
Diluted | $ | 1.03 |
| | $ | 1.05 |
|
Outstanding options to purchase 1.0 million and 0.8 million shares of common stock for the three months ended April 1, 2018 and March 26, 2017, 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 applied prospectively.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 Company's net periodic benefit cost components are disclosed in Note 13.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 April 1, 2018 and March 26, 2017.
3.7. Additional Balance Sheet and Cash Flow Information
Marketable Securities
The Company’s marketable securities consisted of the following (in thousands):
|
| | | | | | | | | | | |
| June 25, 2017 | | December 31, 2016 | | June 26, 2016 |
Available-for-sale securities: corporate bonds | $ | — |
| | $ | 5,519 |
| | $ | 5,070 |
|
Trading securities: mutual funds | 44,156 |
| | 38,119 |
| | 37,651 |
|
Total marketable securities | $ | 44,156 |
| | $ | 43,638 |
| | $ | 42,721 |
|
|
| | | | | | | | | | | |
| April 1, 2018 | | December 31, 2017 | | March 26, 2017 |
Available-for-sale corporate bonds | $ | — |
| | $ | — |
| | $ | 5,004 |
|
Mutual funds | 49,402 |
| | 48,006 |
| | 41,674 |
|
Total marketable securities | $ | 49,402 |
| | $ | 48,006 |
| | $ | 46,678 |
|
The Company’s available-for-sale corporate debt securities are carried at fair value with any unrealized gains or losses reported in other comprehensive income. During the first halfthree months of 2017, and 2016, unrealized losses were not material. There were no available-for-sale debt securities outstanding at June 25, 2017.
April 1, 2018. The Company's trading securities relate tomutual fund investments are held by the Company to fund certain deferred compensation obligations. The trading securitiesThese investments 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):
| | | June 25, 2017 | | December 31, 2016 | | June 26, 2016 | April 1, 2018 | | December 31, 2017 | | March 26, 2017 |
Components at the lower of FIFO cost or net realizable value | | | | | | |
Raw materials and work in process | $ | 117,199 |
| | $ | 140,639 |
| | $ | 134,702 |
| $ | 177,652 |
| | $ | 161,664 |
| | $ | 153,195 |
|
Motorcycle finished goods | 186,244 |
| | 285,281 |
| | 152,035 |
| 289,046 |
| | 289,530 |
| | 263,408 |
|
Parts and accessories and general merchandise | 116,836 |
| | 122,264 |
| | 133,727 |
| 150,228 |
| | 139,363 |
| | 117,140 |
|
Inventory at lower of FIFO cost or net realizable value | 420,279 |
| | 548,184 |
| | 420,464 |
| 616,926 |
| | 590,557 |
| | 533,743 |
|
Excess of FIFO over LIFO cost | (48,267 | ) | | (48,267 | ) | | (49,268 | ) | (52,355 | ) | | (52,355 | ) | | (48,267 | ) |
Total inventories, net | $ | 372,012 |
| | $ | 499,917 |
| | $ | 371,196 |
| $ | 564,571 |
| | $ | 538,202 |
| | $ | 485,476 |
|
Operating Cash Flow
The reconciliation of net income to net cash provided by operating activities is as follows (in thousands):
| | | Six months ended | Three months ended |
| June 25, 2017 | | June 26, 2016 | April 1, 2018 | | March 26, 2017 |
Cash flows from operating activities: | | | | | | |
Net income | $ | 445,236 |
| | $ | 530,920 |
| $ | 174,763 |
| | $ | 186,369 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | |
Depreciation and amortization of intangibles | 107,578 |
| | 100,956 |
| 62,473 |
| | 54,900 |
|
Amortization of deferred loan origination costs | 40,771 |
| | 43,555 |
| 20,116 |
| | 20,078 |
|
Amortization of financing origination fees | 4,079 |
| | 5,146 |
| 2,028 |
| | 2,076 |
|
Provision for long-term employee benefits | 14,950 |
| | 19,005 |
| 9,747 |
| | 7,475 |
|
Employee benefit plan contributions and payments | (37,307 | ) | | (35,189 | ) | (5,486 | ) | | (29,957 | ) |
Stock compensation expense | 17,497 |
| | 15,797 |
| 7,962 |
| | 6,992 |
|
Net change in wholesale finance receivables related to sales | (271,927 | ) | | (442,254 | ) | (239,902 | ) | | (317,087 | ) |
Provision for credit losses | 69,806 |
| | 60,584 |
| 30,052 |
| | 43,589 |
|
Gain on off-balance sheet asset-backed securitization | — |
| | (9,269 | ) | |
Deferred income taxes | 178 |
| | (3,548 | ) | 3,188 |
| | 3,989 |
|
Other, net | (4,163 | ) | | (20,508 | ) | (1,902 | ) | | (5,334 | ) |
Changes in current assets and liabilities: | | | | | | |
Accounts receivable, net | (28,239 | ) | | (55,109 | ) | (17,688 | ) | | (39,230 | ) |
Finance receivables - accrued interest and other | 2,067 |
| | (125 | ) | 4,758 |
| | 5,142 |
|
Inventories | 138,942 |
| | 225,586 |
| (21,542 | ) | | 23,476 |
|
Accounts payable and accrued liabilities | 133,120 |
| | 53,790 |
| 148,923 |
| | 182,928 |
|
Derivative instruments | 3,114 |
| | (1,474 | ) | 702 |
| | 3,120 |
|
Other | (8,634 | ) | | (31,573 | ) | 13,402 |
| | 11,413 |
|
Total adjustments | 181,832 |
| | (74,630 | ) | 16,831 |
| | (26,430 | ) |
Net cash provided by operating activities | $ | 627,068 |
| | $ | 456,290 |
| $ | 191,594 |
| | $ | 159,939 |
|
4.8. 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):
| | | June 25, 2017 | | December 31, 2016 | | June 26, 2016 | April 1, 2018 | | December 31, 2017 | | March 26, 2017 |
Retail | $ | 6,267,211 |
| | $ | 5,982,211 |
| | $ | 6,020,750 |
| $ | 6,064,192 |
| | $ | 6,140,600 |
| | $ | 6,002,550 |
|
Wholesale | 1,258,852 |
| | 1,026,590 |
| | 1,422,648 |
| 1,252,600 |
| | 1,016,957 |
| | 1,327,602 |
|
Total finance receivables | 7,526,063 |
| | 7,008,801 |
| | 7,443,398 |
| 7,316,792 |
| | 7,157,557 |
| | 7,330,152 |
|
Allowance for credit losses | (193,528 | ) | | (173,343 | ) | | (161,353 | ) | (190,350 | ) | | (192,471 | ) | | (184,030 | ) |
Finance receivables, net | $ | 7,332,535 |
| | $ | 6,835,458 |
| | $ | 7,282,045 |
| $ | 7,126,442 |
| | $ | 6,965,086 |
| | $ | 7,146,122 |
|
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 June 25, 2017 | Three months ended April 1, 2018 |
| Retail | | Wholesale | | Total | Retail | | Wholesale | | Total |
Balance, beginning of period | $ | 176,068 |
| | $ | 7,962 |
| | $ | 184,030 |
| $ | 186,254 |
| | $ | 6,217 |
| | $ | 192,471 |
|
Provision for credit losses | 26,550 |
| | (333 | ) | | 26,217 |
| 28,069 |
| | 1,983 |
| | 30,052 |
|
Charge-offs | (30,374 | ) | | — |
| | (30,374 | ) | (45,081 | ) | | — |
| | (45,081 | ) |
Recoveries | 13,655 |
| | — |
| | 13,655 |
| 12,908 |
| | — |
| | 12,908 |
|
Balance, end of period | $ | 185,899 |
| | $ | 7,629 |
| | $ | 193,528 |
| $ | 182,150 |
| | $ | 8,200 |
| | $ | 190,350 |
|
| | | | | | | | | | |
| Three months ended June 26, 2016 | Three months ended March 26, 2017 |
| Retail | | Wholesale | | Total | Retail | | Wholesale | | Total |
Balance, beginning of period | $ | 146,727 |
| | $ | 9,457 |
| | $ | 156,184 |
| $ | 166,810 |
| | $ | 6,533 |
| | $ | 173,343 |
|
Provision for credit losses | 24,563 |
| | (1,102 | ) | | 23,461 |
| 42,160 |
| | 1,429 |
| | 43,589 |
|
Charge-offs | (26,460 | ) | | — |
| | (26,460 | ) | (45,924 | ) | | — |
| | (45,924 | ) |
Recoveries | 11,459 |
| | — |
| | 11,459 |
| 13,022 |
| | — |
| | 13,022 |
|
Other (a) | (3,291 | ) | | — |
| | (3,291 | ) | |
Balance, end of period | $ | 152,998 |
| | $ | 8,355 |
| | $ | 161,353 |
| $ | 176,068 |
| | $ | 7,962 |
| | $ | 184,030 |
|
| | | | | | |
| Six months ended June 25, 2017 | |
| Retail | | Wholesale | | Total | |
Balance, beginning of period | $ | 166,810 |
| | $ | 6,533 |
| | $ | 173,343 |
| |
Provision for credit losses | 68,710 |
| | 1,096 |
| | 69,806 |
| |
Charge-offs | (76,298 | ) | | — |
| | (76,298 | ) | |
Recoveries | 26,677 |
| | — |
| | 26,677 |
| |
Balance, end of period | $ | 185,899 |
| | $ | 7,629 |
| | $ | 193,528 |
| |
| | | | | | |
| Six months ended June 26, 2016 | |
| Retail | | Wholesale | | Total | |
Balance, beginning of period | $ | 139,320 |
| | $ | 7,858 |
| | $ | 147,178 |
| |
Provision for credit losses | 60,087 |
| | 497 |
| | 60,584 |
| |
Charge-offs | (66,104 | ) | | — |
| | (66,104 | ) | |
Recoveries | 22,986 |
| | — |
| | 22,986 |
| |
Other (a) | (3,291 | ) | | — |
| | (3,291 | ) | |
Balance, end of period | $ | 152,998 |
| | $ | 8,355 |
| | $ | 161,353 |
| |
| |
(a) | Related to the sale of finance receivables with a principal balance of $301.8 million through an off-balance sheet asset-backed securitization transaction (see Note 10 for additional information). |
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.
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):
| | | June 25, 2017 | April 1, 2018 |
| Retail | | Wholesale | | Total | Retail | | Wholesale | | Total |
Allowance for credit losses, ending balance: | | | | | | | | | | |
Individually evaluated for impairment | $ | — |
| | $ | — |
| | $ | — |
| $ | — |
| | $ | 184 |
| | $ | 184 |
|
Collectively evaluated for impairment | 185,899 |
| | 7,629 |
| | 193,528 |
| 182,150 |
| | 8,016 |
| | 190,166 |
|
Total allowance for credit losses | $ | 185,899 |
| | $ | 7,629 |
| | $ | 193,528 |
| $ | 182,150 |
| | $ | 8,200 |
| | $ | 190,350 |
|
Finance receivables, ending balance: | | | | | | | | | | |
Individually evaluated for impairment | $ | — |
| | $ | — |
| | $ | — |
| $ | — |
| | $ | 220 |
| | $ | 220 |
|
Collectively evaluated for impairment | 6,267,211 |
| | 1,258,852 |
| | 7,526,063 |
| 6,064,192 |
| | 1,252,380 |
| | 7,316,572 |
|
Total finance receivables | $ | 6,267,211 |
| | $ | 1,258,852 |
| | $ | 7,526,063 |
| $ | 6,064,192 |
| | $ | 1,252,600 |
| | $ | 7,316,792 |
|
| | | | | | | | | | |
| December 31, 2016 | December 31, 2017 |
| Retail | | Wholesale | | Total | Retail | | Wholesale | | Total |
Allowance for credit losses, ending balance: | | | | | | | | | | |
Individually evaluated for impairment | $ | — |
| | $ | — |
| | $ | — |
| $ | — |
| | $ | — |
| | $ | — |
|
Collectively evaluated for impairment | 166,810 |
| | 6,533 |
| | 173,343 |
| 186,254 |
| | 6,217 |
| | 192,471 |
|
Total allowance for credit losses | $ | 166,810 |
| | $ | 6,533 |
| | $ | 173,343 |
| $ | 186,254 |
| | $ | 6,217 |
| | $ | 192,471 |
|
Finance receivables, ending balance: | | | | | | | | | | |
Individually evaluated for impairment | $ | — |
| | $ | — |
| | $ | — |
| $ | — |
| | $ | — |
| | $ | — |
|
Collectively evaluated for impairment | 5,982,211 |
| | 1,026,590 |
| | 7,008,801 |
| 6,140,600 |
| | 1,016,957 |
| | 7,157,557 |
|
Total finance receivables | $ | 5,982,211 |
| | $ | 1,026,590 |
| | $ | 7,008,801 |
| $ | 6,140,600 |
| | $ | 1,016,957 |
| | $ | 7,157,557 |
|
| | | | | | | | | | |
| June 26, 2016 | March 26, 2017 |
| Retail | | Wholesale | | Total | Retail | | Wholesale | | Total |
Allowance for credit losses, ending balance: | | | | | | | | | | |
Individually evaluated for impairment | $ | — |
| | $ | — |
| | $ | — |
| $ | — |
| | $ | — |
| | $ | — |
|
Collectively evaluated for impairment | 152,998 |
| | 8,355 |
| | 161,353 |
| 176,068 |
| | 7,962 |
| | 184,030 |
|
Total allowance for credit losses | $ | 152,998 |
| | $ | 8,355 |
| | $ | 161,353 |
| $ | 176,068 |
| | $ | 7,962 |
| | $ | 184,030 |
|
Finance receivables, ending balance: | | | | | | | | | | |
Individually evaluated for impairment | $ | — |
| | $ | — |
| | $ | — |
| $ | — |
| | $ | — |
| | $ | — |
|
Collectively evaluated for impairment | 6,020,750 |
| | 1,422,648 |
| | 7,443,398 |
| 6,002,550 |
| | 1,327,602 |
| | 7,330,152 |
|
Total finance receivables | $ | 6,020,750 |
| | $ | 1,422,648 |
| | $ | 7,443,398 |
| $ | 6,002,550 |
| | $ | 1,327,602 |
| | $ | 7,330,152 |
|
There were noAdditional information related to the wholesale finance receivables at June 25, 2017, December 31, 2016, or June 26, 2016that wereare individually deemed to be impaired under ASC Topic 310, “Receivables.“Receivables,” 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 June 25, 2017April 1, 2018, December 31, 20162017 and JuneMarch 26, 20162017, all retail finance receivables were accounted for as interest-earning receivables, of which $25.127.9 million, $40.440.0 million and $21.928.5 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. The recorded investment of non-accrual status wholesale finance receivables at April 1, 2018 was $0.2 million. There were no wholesale receivables on non-accrual status at June 25,December 31, 2017 or March 26, 2017. At April 1, 2018, December 31, 20162017 orand JuneMarch 26, 2016. At June 25, 2017, December 31, 2016 and June 26, 2016, $1.10.2 million, $0.30.1 million, and $0.20.6 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):
| | | June 25, 2017 | 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 | Current | | 31-60 Days Past Due | | 61-90 Days Past Due | | Greater than 90 Days Past Due | | Total Past Due | | Total Finance Receivables |
Retail | $ | 6,086,592 |
| | $ | 118,616 |
| | $ | 36,914 |
| | $ | 25,089 |
| | $ | 180,619 |
| | $ | 6,267,211 |
| $ | 5,897,632 |
| | $ | 105,366 |
| | $ | 33,275 |
| | $ | 27,919 |
| | $ | 166,560 |
| | $ | 6,064,192 |
|
Wholesale | 1,257,301 |
| | 281 |
| | 142 |
| | 1,128 |
| | 1,551 |
| | 1,258,852 |
| 1,247,175 |
| | 549 |
| | 4,705 |
| | 171 |
| | 5,425 |
| | 1,252,600 |
|
Total | $ | 7,343,893 |
| | $ | 118,897 |
| | $ | 37,056 |
| | $ | 26,217 |
| | $ | 182,170 |
| | $ | 7,526,063 |
| $ | 7,144,807 |
| | $ | 105,915 |
| | $ | 37,980 |
| | $ | 28,090 |
| | $ | 171,985 |
| | $ | 7,316,792 |
|
| | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2016 | December 31, 2017 |
| Current | | 31-60 Days Past Due | | 61-90 Days Past Due | | Greater than 90 Days Past Due | | Total Past Due | | Total Finance Receivables | 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 |
| $ | 5,913,473 |
| | $ | 139,629 |
| | $ | 47,539 |
| | $ | 39,959 |
| | $ | 227,127 |
| | $ | 6,140,600 |
|
Wholesale | 1,024,995 |
| | 1,000 |
| | 319 |
| | 276 |
| | 1,595 |
| | 1,026,590 |
| 1,016,000 |
| | 595 |
| | 245 |
| | 117 |
| | 957 |
| | 1,016,957 |
|
Total | $ | 6,785,813 |
| | $ | 132,302 |
| | $ | 49,961 |
| | $ | 40,725 |
| | $ | 222,988 |
| | $ | 7,008,801 |
| $ | 6,929,473 |
| | $ | 140,224 |
| | $ | 47,784 |
| | $ | 40,076 |
| | $ | 228,084 |
| | $ | 7,157,557 |
|
| | | | | | | | | | | | | | | | | | | | | | |
| June 26, 2016 | 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 | Current | | 31-60 Days Past Due | | 61-90 Days Past Due | | Greater than 90 Days Past Due | | Total Past Due | | Total Finance Receivables |
Retail | $ | 5,852,659 |
| | $ | 108,192 |
| | $ | 37,961 |
| | $ | 21,938 |
| | $ | 168,091 |
| | $ | 6,020,750 |
| $ | 5,840,164 |
| | $ | 100,471 |
| | $ | 33,403 |
| | $ | 28,512 |
| | $ | 162,386 |
| | $ | 6,002,550 |
|
Wholesale | 1,421,846 |
| | 457 |
| | 153 |
| | 192 |
| | 802 |
| | 1,422,648 |
| 1,325,575 |
| | 1,129 |
| | 273 |
| | 625 |
| | 2,027 |
| | 1,327,602 |
|
Total | $ | 7,274,505 |
| | $ | 108,649 |
| | $ | 38,114 |
| | $ | 22,130 |
| | $ | 168,893 |
| | $ | 7,443,398 |
| $ | 7,165,739 |
| | $ | 101,600 |
| | $ | 33,676 |
| | $ | 29,137 |
| | $ | 164,413 |
| | $ | 7,330,152 |
|
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):
| | | June 25, 2017 | | December 31, 2016 | | June 26, 2016 | April 1, 2018 | | December 31, 2017 | | March 26, 2017 |
Prime | $ | 5,034,187 |
| | $ | 4,768,420 |
| | $ | 4,756,479 |
| $ | 4,923,237 |
| | $ | 4,966,193 |
| | $ | 4,806,730 |
|
Sub-prime | 1,233,024 |
| | 1,213,791 |
| | 1,264,271 |
| 1,140,955 |
| | 1,174,407 |
| | 1,195,820 |
|
Total | $ | 6,267,211 |
| | $ | 5,982,211 |
| | $ | 6,020,750 |
| $ | 6,064,192 |
| | $ | 6,140,600 |
| | $ | 6,002,550 |
|
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):
| | | June 25, 2017 | | December 31, 2016 | | June 26, 2016 | April 1, 2018 | | December 31, 2017 | | March 26, 2017 |
Doubtful | $ | 5,203 |
| | $ | 1,333 |
| | $ | — |
| $ | 1,582 |
| | $ | 688 |
| | $ | 1,133 |
|
Substandard | 10,458 |
| | 1,773 |
| | 19,637 |
| 3,368 |
| | 3,837 |
| | 9,213 |
|
Special Mention | 4,953 |
| | 30,152 |
| | 4,334 |
| 33,085 |
| | 26,866 |
| | 19,898 |
|
Medium Risk | 8,115 |
| | 14,620 |
| | 6,350 |
| 10,512 |
| | 9,917 |
| | 14,648 |
|
Low Risk | 1,230,123 |
| | 978,712 |
| | 1,392,327 |
| 1,204,053 |
| | 975,649 |
| | 1,282,710 |
|
Total | $ | 1,258,852 |
| | $ | 1,026,590 |
| | $ | 1,422,648 |
| $ | 1,252,600 |
| | $ | 1,016,957 |
| | $ | 1,327,602 |
|
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.
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):
|
| | | | | | | | | | | | | | | |
| June 25, 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 | $ | 625,485 |
| | $ | 375,550 |
| | $ | 249,935 |
| | $ | — |
|
Marketable securities | 44,156 |
| | 44,156 |
| | — |
| | — |
|
Derivatives | 458 |
| | — |
| | 458 |
| | — |
|
Total | $ | 670,099 |
| | $ | 419,706 |
| | $ | 250,393 |
| | $ | — |
|
Liabilities: | | | | | | | |
Derivatives | $ | 4,865 |
| | $ | — |
| | $ | 4,865 |
| | $ | — |
|
| | | | | | | |
| 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 |
| | $ | — |
|
| | | | | | | |
| June 26, 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 | $ | 549,426 |
| | $ | 392,800 |
| | $ | 156,626 |
| | $ | — |
|
Marketable securities | 42,721 |
| | 37,651 |
| | 5,070 |
| | — |
|
Derivatives | 9,528 |
| | — |
| | 9,528 |
| | — |
|
Total | $ | 601,675 |
| | $ | 430,451 |
| | $ | 171,224 |
| | $ | — |
|
Liabilities: | | | | | | | |
Derivatives | $ | 1,605 |
| | $ | — |
| | $ | 1,605 |
| | $ | — |
|
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 $17.9 million, $19.3 million and $15.3 million at June 25, 2017, December 31, 2016 and June 26, 2016, respectively, for which the fair value adjustment was $2.7 million, $9.3 million and $3.6 million, respectively. Fair value is estimated using Level 2 inputs based on the recent market values of repossessed inventory.
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):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| June 25, 2017 | | December 31, 2016 | | June 26, 2016 |
| Fair Value | | Carrying Value | | Fair Value | | Carrying Value | | Fair Value | | Carrying Value |
Assets: | | | | | | | | | | | |
Cash and cash equivalents | $ | 988,476 |
| | $ | 988,476 |
| | $ | 759,984 |
| | $ | 759,984 |
| | $ | 864,670 |
| | $ | 864,670 |
|
Marketable securities | $ | 44,156 |
| | $ | 44,156 |
| | $ | 43,638 |
| | $ | 43,638 |
| | $ | 42,721 |
| | $ | 42,721 |
|
Derivatives | $ | 458 |
| | $ | 458 |
| | $ | 29,034 |
| | $ | 29,034 |
| | $ | 9,528 |
| | $ | 9,528 |
|
Finance receivables, net | $ | 7,401,974 |
| | $ | 7,332,535 |
| | $ | 6,921,037 |
| | $ | 6,835,458 |
| | $ | 7,369,410 |
| | $ | 7,282,045 |
|
Restricted cash | $ | 74,395 |
| | $ | 74,395 |
| | $ | 67,147 |
| | $ | 67,147 |
| | $ | 92,650 |
| | $ | 92,650 |
|
Liabilities: | | | | | | | | | | | |
Derivatives | $ | 4,865 |
| | $ | 4,865 |
| | $ | 142 |
| | $ | 142 |
| | $ | 1,605 |
| | $ | 1,605 |
|
Unsecured commercial paper | $ | 928,445 |
| | $ | 928,445 |
| | $ | 1,055,708 |
| | $ | 1,055,708 |
| | $ | 1,020,487 |
| | $ | 1,020,487 |
|
Asset-backed U.S. commercial paper conduit facilities | $ | 279,833 |
| | $ | 279,833 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
Asset-backed Canadian commercial paper conduit facility | $ | 138,739 |
| | $ | 138,739 |
| | $ | 149,338 |
| | $ | 149,338 |
| | $ | 161,626 |
| | $ | 161,626 |
|
Medium-term notes | $ | 4,623,146 |
| | $ | 4,562,403 |
| | $ | 4,139,462 |
| | $ | 4,064,940 |
| | $ | 4,239,390 |
| | $ | 4,063,297 |
|
Senior unsecured notes | $ | 773,084 |
| | $ | 741,633 |
| | $ | 744,552 |
| | $ | 741,306 |
| | $ | 808,227 |
| | $ | 740,982 |
|
Asset-backed securitization debt | $ | 521,956 |
| | $ | 521,300 |
| | $ | 797,688 |
| | $ | 796,275 |
| | $ | 1,080,416 |
| | $ | 1,074,931 |
|
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.
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.
7.9. 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).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 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 2017, theThe Company entered into ahas periodically utilized treasury rate lock contracts to fix the interest rate on a portion of the principal related to its anticipatedthe issuance of medium-term notes during the second quarter of 2017. Thelong-term debt. All such treasury rate lock contract wascontracts have since settled in June 2017. Theand the loss at settlement was recorded in accumulated other comprehensive loss and will be reclassified into earnings over the life of the debt.
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 bewhich is being reclassified into earnings over the life of the debt.
The following tables summarize the fair value of the Company’s derivative financial instruments (in thousands):
| | | | June 25, 2017 | | December 31, 2016 | | June 26, 2016 | | April 1, 2018 | | December 31, 2017 | | March 26, 2017 |
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) | | 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) | | $ | 544,601 |
| | $ | 409 |
| | $ | 4,622 |
| | $ | 554,551 |
| | $ | 28,528 |
| | $ | 142 |
| | $ | 542,788 |
| | $ | 9,423 |
| | $ | 1,358 |
| | $ | 720,869 |
| | $ | 3,442 |
| | $ | 22,807 |
| | $ | 675,724 |
| | $ | 1,388 |
| | $ | 21,239 |
| | $ | 534,652 |
| | $ | 12,195 |
| | $ | 1,015 |
|
Commodity contracts(c) | | 1,102 |
| | — |
| | 75 |
| | 992 |
| | 177 |
| | — |
| | 861 |
| | 88 |
| | — |
| | 728 |
| | — |
| | 11 |
| | 915 |
| | — |
| | 69 |
| | 1,027 |
| | 23 |
| | — |
|
Total | | $ | 545,703 |
| | $ | 409 |
| | $ | 4,697 |
|
| $ | 555,543 |
| | $ | 28,705 |
| | $ | 142 |
|
| $ | 543,649 |
| | $ | 9,511 |
| | $ | 1,358 |
| | $ | 721,597 |
| | $ | 3,442 |
| | $ | 22,818 |
|
| $ | 676,639 |
| | $ | 1,388 |
| | $ | 21,308 |
|
| $ | 535,679 |
| | $ | 12,218 |
| | $ | 1,015 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | June 25, 2017 | | December 31, 2016 | | June 26, 2016 | | April 1, 2018 | | December 31, 2017 | | March 26, 2017 |
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) | | 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 | | $ | 4,336 |
| | $ | 49 |
| | $ | 168 |
| | $ | 5,025 |
| | $ | 329 |
| | $ | — |
| | $ | 4,298 |
| | $ | 17 |
| | $ | 247 |
| | $ | 4,577 |
| | $ | 171 |
| | $ | 32 |
| | $ | 4,532 |
| | $ | 381 |
| | $ | — |
| | $ | 5,046 |
| | $ | 228 |
| | $ | 37 |
|
Total | | $ | 4,336 |
|
| $ | 49 |
| | $ | 168 |
| | $ | 5,025 |
| | $ | 329 |
| | $ | — |
| | $ | 4,298 |
| | $ | 17 |
| | $ | 247 |
| | $ | 4,577 |
|
| $ | 171 |
| | $ | 32 |
| | $ | 4,532 |
| | $ | 381 |
| | $ | — |
| | $ | 5,046 |
| | $ | 228 |
| | $ | 37 |
|
| |
(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 | | Amount of Gain/(Loss) Recognized in OCI, before tax |
| | Three months ended | | Six months ended | | Three months ended |
Cash Flow Hedges | | June 25, 2017 | | June 26, 2016 | | June 25, 2017 | | June 26, 2016 | | April 1, 2018 | | March 26, 2017 |
Foreign currency contracts | | $ | (11,851 | ) | | $ | 8,017 |
| | $ | (23,648 | ) | | $ | (4,507 | ) | | $ | (5,890 | ) | | $ | (11,797 | ) |
Commodity contracts | | (80 | ) | | 119 |
| | (186 | ) | | (73 | ) | | (16 | ) | | (106 | ) |
Treasury rate locks | | (719 | ) | | — |
| | (719 | ) | | — |
| |
Total | | $ | (12,650 | ) | | $ | 8,136 |
| | $ | (24,553 | ) | | $ | (4,580 | ) | | $ | (5,906 | ) | | $ | (11,903 | ) |
| | | | Amount of Gain/(Loss) Reclassified from AOCL into Income | | | | Amount of Gain/(Loss) Reclassified from AOCL into Income | | |
| | Three months ended | | Six months ended | | Expected to be Reclassified | | Three months ended | | Expected to be Reclassified |
Cash Flow Hedges | | June 25, 2017 | | June 26, 2016 | | June 25, 2017 | | June 26, 2016 | | Over the Next Twelve Months | | April 1, 2018 | | March 26, 2017 | | Over the Next Twelve Months |
Foreign currency contracts(a) | | $ | 3,957 |
| | $ | 3,551 |
| | $ | 6,473 |
| | $ | 4,407 |
| | $ | (3,538 | ) | | $ | (6,709 | ) | | $ | 2,516 |
| | $ | (15,783 | ) |
Commodity contracts(a) | | 17 |
| | (104 | ) | | 65 |
| | (319 | ) | | (75 | ) | | (73 | ) | | 48 |
| | 1 |
|
Treasury rate locks(b) | | (99 | ) | | (90 | ) | | (189 | ) | | (181 | ) | | (506 | ) | | (126 | ) | | (90 | ) | | (506 | ) |
Total | | $ | 3,875 |
| | $ | 3,357 |
| | $ | 6,349 |
| | $ | 3,907 |
| | $ | (4,119 | ) | | $ | (6,908 | ) | | $ | 2,474 |
| | $ | (16,288 | ) |
| |
(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 and six months ended June 25,April 1, 2018 and March 26, 2017, and June 26, 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.
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 | | Amount of Gain/(Loss) Recognized in Income on Derivative |
| | Three months ended | | Six months ended | | Three months ended |
Derivatives Not Designated As Hedges | | June 25, 2017 | | June 26, 2016 | | June 25, 2017 | | June 26, 2016 | | April 1, 2018 | | March 26, 2017 |
Commodity contracts(a) | | $ | (193 | ) | | $ | 67 |
| | $ | (173 | ) | | $ | (224 | ) | | $ | 6 |
| | $ | 20 |
|
Total | | $ | (193 | ) | | $ | 67 |
| | $ | (173 | ) | | $ | (224 | ) | | $ | 6 |
| | $ | 20 |
|
| |
(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 June 25, 2017 |
| | Foreign currency translation adjustments | | Marketable securities | | Derivative financial instruments | | Pension and postretirement benefit plans | | Total |
Balance, beginning of period | | $ | (52,575 | ) | | $ | (1,204 | ) | | $ | 3,472 |
| | $ | (501,323 | ) | | $ | (551,630 | ) |
Other comprehensive income (loss) before reclassifications | | 9,447 |
| | 1,912 |
| | (12,650 | ) | | — |
| | (1,291 | ) |
Income tax expense (benefit) | | 190 |
| | (708 | ) | | 4,678 |
| | — |
| | 4,160 |
|
Net other comprehensive income (loss) before reclassifications | | 9,637 |
| | 1,204 |
| | (7,972 | ) | | — |
| | 2,869 |
|
Reclassifications: | | | | | | | | | | |
Realized (gains) losses - foreign currency contracts(a) | | — |
| | — |
| | (3,957 | ) | | — |
| | (3,957 | ) |
Realized (gains) losses - commodities contracts(a) | | — |
| | — |
| | (17 | ) | | — |
| | (17 | ) |
Realized (gains) losses - treasury rate lock(b) | | — |
| | — |
| | 99 |
| | — |
| | 99 |
|
Prior service credits(c) | | — |
| | — |
| | — |
| | (289 | ) | | (289 | ) |
Actuarial losses(c) | | — |
| | — |
| | — |
| | 11,813 |
| | 11,813 |
|
Total reclassifications before tax | | — |
| | — |
| | (3,875 | ) | | 11,524 |
| | 7,649 |
|
Income tax expense (benefit) | | — |
| | — |
| | 1,435 |
| | (4,268 | ) | | (2,833 | ) |
Net reclassifications | | — |
| | — |
| | (2,440 | ) | | 7,256 |
| | 4,816 |
|
Other comprehensive income (loss) | | 9,637 |
| | 1,204 |
| | (10,412 | ) | | 7,256 |
| | 7,685 |
|
Balance, end of period | | $ | (42,938 | ) | | $ | — |
| | $ | (6,940 | ) | | $ | (494,067 | ) | | $ | (543,945 | ) |
| | | | | | | | | | |
| | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | |
| | Three months ended June 26, 2016 |
| | Foreign currency translation adjustments | | Marketable securities | | Derivative financial instruments | | Pension and postretirement benefit plans | | Total |
Balance, beginning of period | | $ | (46,151 | ) | | $ | (1,139 | ) | | $ | (2,466 | ) | | $ | (553,582 | ) | | $ | (603,338 | ) |
Other comprehensive income (loss) before reclassifications | | 2,516 |
| | (51 | ) | | 8,136 |
| | — |
| | 10,601 |
|
Income tax expense (benefit) | | 112 |
| | 19 |
| | (3,014 | ) | | — |
| | (2,883 | ) |
Net other comprehensive income (loss) before reclassifications | | 2,628 |
| | (32 | ) | | 5,122 |
| | — |
| | 7,718 |
|
Reclassifications: | | | | | | | | | | |
Realized (gains) losses - foreign currency contracts(a) | | — |
| | — |
| | (3,551 | ) | | — |
| | (3,551 | ) |
Realized (gains) losses - commodities contracts(a) | | — |
| | — |
| | 104 |
| | — |
| | 104 |
|
Realized (gains) losses - treasury rate lock(b) | | — |
| | — |
| | 90 |
| | — |
| | 90 |
|
Prior service credits(c) | | — |
| | — |
| | — |
| | (446 | ) | | (446 | ) |
Actuarial losses(c) | | — |
| | — |
| | — |
| | 12,472 |
| | 12,472 |
|
Total reclassifications before tax | | — |
| | — |
| | (3,357 | ) | | 12,026 |
| | 8,669 |
|
Income tax expense (benefit) | | — |
| | — |
| | 1,244 |
| | (4,454 | ) | | (3,210 | ) |
Net reclassifications | | — |
| | — |
| | (2,113 | ) | | 7,572 |
| | 5,459 |
|
Other comprehensive income (loss) | | 2,628 |
| | (32 | ) | | 3,009 |
| | 7,572 |
| | 13,177 |
|
Balance, end of period | | $ | (43,523 | ) | | $ | (1,171 | ) | | $ | 543 |
| | $ | (546,010 | ) | | $ | (590,161 | ) |
|
| | | | | | | | | | | | | | | | | | | | |
| | Six months ended June 25, 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 | | 25,080 |
| | 1,896 |
| | (24,553 | ) | | — |
| | 2,423 |
|
Income tax expense (benefit) | | 114 |
| | (702 | ) | | 9,087 |
| | — |
| | 8,499 |
|
Net other comprehensive income (loss) before reclassifications | | 25,194 |
| | 1,194 |
| | (15,466 | ) | | — |
| | 10,922 |
|
Reclassifications: | | | | | | | | | | |
Realized (gains) losses - foreign currency contracts(a) | | — |
| | — |
| | (6,473 | ) | | — |
| | (6,473 | ) |
Realized (gains) losses - commodities contracts(a) | | — |
| | — |
| | (65 | ) | | — |
| | (65 | ) |
Realized (gains) losses - treasury rate lock(b) | | — |
| | — |
| | 189 |
| | — |
| | 189 |
|
Prior service credits(c) | | — |
| | — |
| | — |
| | (578 | ) | | (578 | ) |
Actuarial losses(c) | | — |
| | — |
| | — |
| | 23,626 |
| | 23,626 |
|
Total reclassifications before tax | | — |
| | — |
| | (6,349 | ) | | 23,048 |
| | 16,699 |
|
Income tax expense (benefit) | | — |
| | — |
| | 2,351 |
| | (8,536 | ) | | (6,185 | ) |
Net reclassifications | | — |
| | — |
| | (3,998 | ) | | 14,512 |
| | 10,514 |
|
Other comprehensive income (loss) | | 25,194 |
| | 1,194 |
| | (19,464 | ) | | 14,512 |
| | 21,436 |
|
Balance, end of period | | $ | (42,938 | ) | | $ | — |
| | $ | (6,940 | ) | | $ | (494,067 | ) | | $ | (543,945 | ) |
| | | | | | | | | | |
| | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | |
| | Six months ended June 26, 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 | | 17,087 |
| | (122 | ) | | (4,580 | ) | | — |
| | 12,385 |
|
Income tax (benefit) expense | | (1,766 | ) | | 45 |
| | 1,696 |
| | — |
| | (25 | ) |
Net other comprehensive income (loss) before reclassifications | | 15,321 |
| | (77 | ) | | (2,884 | ) | | — |
| | 12,360 |
|
Reclassifications: | | | | | | | | | | |
Realized (gains) losses - foreign currency contracts(a) | | — |
| | — |
| | (4,407 | ) | | — |
| | (4,407 | ) |
Realized (gains) losses - commodities contracts(a) | | — |
| | — |
| | 319 |
| | — |
| | 319 |
|
Realized (gains) losses - treasury rate lock(b) | | — |
| | — |
| | 181 |
| | — |
| | 181 |
|
Prior service credits(c) | | — |
| | — |
| | — |
| | (892 | ) | | (892 | ) |
Actuarial losses(c) | | — |
| | — |
| | — |
| | 24,944 |
| | 24,944 |
|
Total reclassifications before tax | | — |
| | — |
| | (3,907 | ) | | 24,052 |
| | 20,145 |
|
Income tax expense (benefit) | | — |
| | — |
| | 1,448 |
| | (8,909 | ) | | (7,461 | ) |
Net reclassifications | | — |
| | — |
| | (2,459 | ) | | 15,143 |
| | 12,684 |
|
Other comprehensive income (loss) | | 15,321 |
| | (77 | ) | | (5,343 | ) | | 15,143 |
| | 25,044 |
|
Balance, end of period | | $ | (43,523 | ) | | $ | (1,171 | ) | | $ | 543 |
| | $ | (546,010 | ) | | $ | (590,161 | ) |
| |
(a) | Amounts reclassified to net income are included in Motorcycles and Related Products cost of goods sold. |
| |
(b) | Amounts reclassified to net income are included in interest expense. |
| |
(c) | Amounts reclassified are included in the computation of net periodic benefit cost. See Note 13 for information related to pension and postretirement benefit plans. |
9.10. 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):
| | | | June 25, 2017 | | December 31, 2016 | | June 26, 2016 | | April 1, 2018 | | December 31, 2017 | | March 26, 2017 |
Unsecured commercial paper | | $ | 928,445 |
| | $ | 1,055,708 |
| | $ | 1,020,487 |
| | $ | 1,036,976 |
| | $ | 1,273,482 |
| | $ | 953,357 |
|
Total short-term debt | | $ | 928,445 |
| | $ | 1,055,708 |
| | $ | 1,020,487 |
| | $ | 1,036,976 |
| | $ | 1,273,482 |
| | $ | 953,357 |
|
Debt with a contractual term greater than one year is generally classified as long-term debt and consisted of the following (in thousands):
|
| | | | | | | | | | | | |
| | June 25, 2017 | | December 31, 2016 | | June 26, 2016 |
Secured debt (Note 10) | | | | | | |
Asset-backed Canadian commercial paper conduit facility | | $ | 138,739 |
| | $ | 149,338 |
| | $ | 161,626 |
|
Asset-backed U.S. commercial paper conduit facilities | | 279,833 |
| | — |
| | — |
|
Asset-backed securitization debt | | 522,095 |
| | 797,755 |
| | 1,077,317 |
|
Less: unamortized discount and debt issuance costs | | (795 | ) | | (1,480 | ) | | (2,386 | ) |
Total secured debt | | 939,872 |
| | 945,613 |
| | 1,236,557 |
|
| | | | | | |
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 |
|
2.55% Medium-term notes due in 2022 par value, issued June 2017 | | 400,000 |
| | — |
| | — |
|
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 | | (23,452 | ) | | (21,242 | ) | | (24,429 | ) |
Gross long-term debt | | 6,243,908 |
| | 5,751,859 |
| | 6,040,836 |
|
Less: current portion of long-term debt, net of unamortized discount and debt issuance costs | | (1,565,558 | ) | | (1,084,884 | ) | | (732,773 | ) |
Total long-term debt | | $ | 4,678,350 |
| | $ | 4,666,975 |
| | $ | 5,308,063 |
|
|
| | | | | | | | | | | | |
| | April 1, 2018 | | December 31, 2017 | | March 26, 2017 |
Secured debt (Note 11) | | | | | | |
Asset-backed Canadian commercial paper conduit facility | | $ | 158,162 |
| | $ | 174,779 |
| | $ | 141,013 |
|
Asset-backed U.S. commercial paper conduit facilities | | 281,311 |
| | 279,457 |
| | 286,205 |
|
Asset-backed securitization debt | | 285,130 |
| | 353,085 |
| | 686,396 |
|
Less: unamortized discount and debt issuance costs | | (337 | ) | | (461 | ) | | (1,022 | ) |
Total secured debt | | 724,266 |
| | 806,860 |
| | 1,112,592 |
|
| | | | | | |
Unsecured notes (at par value) | | | | | | |
1.55% Medium-term notes due in 2017, issued November 2014 | | — |
| | — |
| | 400,000 |
|
6.80% Medium-term notes due in 2018, issued May 2008 | | 877,488 |
| | 877,488 |
| | 877,488 |
|
2.25% Medium-term notes due in 2019, issued January 2016 | | 600,000 |
| | 600,000 |
| | 600,000 |
|
Floating-rate Medium-term notes due in 2019, issued March 2017(a) | | 150,000 |
| | 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 |
|
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 |
|
2.55% Medium-term notes due in 2022, issued June 2017 | | 400,000 |
| | 400,000 |
| | — |
|
3.35% Medium-term notes due in 2023, issued February 2018 | | 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 | | (20,564 | ) | | (19,821 | ) | | (22,222 | ) |
Gross long-term debt | | 5,981,190 |
| | 5,714,527 |
| | 6,017,858 |
|
Less: current portion of long-term debt, net of unamortized discount and debt issuance costs | | (1,872,679 | ) | | (1,127,269 | ) | | (697,061 | ) |
Total long-term debt | | $ | 4,108,511 |
| | $ | 4,587,258 |
| | $ | 5,320,797 |
|
(a) Floating interest rate based on LIBOR plus 35 bps.
10.11. 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-backedasset-
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 Statement 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):
| | | June 25, 2017 | April 1, 2018 |
| Finance receivables | | Allowance for credit losses | | Restricted cash | | Other assets | | Total assets | | Asset-backed debt | 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 | $ | 599,754 |
| | $ | (18,291 | ) | | $ | 47,980 |
| | $ | 1,360 |
| | $ | 630,803 |
| | $ | 521,300 |
| $ | 367,584 |
| | $ | (11,387 | ) | | $ | 38,207 |
| | $ | 1,207 |
| | $ | 395,611 |
| | $ | 284,793 |
|
Asset-backed U.S. commercial paper conduit facilities | 298,700 |
| | (9,132 | ) | | 14,993 |
| | 810 |
| | 305,371 |
| | 279,833 |
| 299,318 |
| | (9,297 | ) | | 16,933 |
| | 968 |
| | 307,922 |
| | 281,311 |
|
Unconsolidated VIEs | | | | | | | | | | | | | | | | | | | | | | |
Asset-backed Canadian commercial paper conduit facility | 152,248 |
| | (2,911 | ) | | 11,422 |
| | 203 |
| | 160,962 |
| | 138,739 |
| 183,073 |
| | (3,085 | ) | | 10,600 |
| | 320 |
| | 190,908 |
| | 158,162 |
|
Total on-balance sheet assets and liabilities | $ | 1,050,702 |
| | $ | (30,334 | ) | | $ | 74,395 |
| | $ | 2,373 |
| | $ | 1,097,136 |
| | $ | 939,872 |
| $ | 849,975 |
| | $ | (23,769 | ) | | $ | 65,740 |
| | $ | 2,495 |
| | $ | 894,441 |
| | $ | 724,266 |
|
| | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2016 | December 31, 2017 |
| Finance receivables | | Allowance for credit losses | | Restricted cash | | Other assets | | Total assets | | Asset-backed debt | 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 | $ | 893,804 |
| | $ | (25,468 | ) | | $ | 57,057 |
| | $ | 2,452 |
| | $ | 927,845 |
| | $ | 796,275 |
| $ | 439,301 |
| | $ | (13,686 | ) | | $ | 34,919 |
| | $ | 1,260 |
| | $ | 461,794 |
| | $ | 352,624 |
|
Asset-backed U.S. commercial paper conduit facilities | — |
| | — |
| | — |
| | 329 |
| | 329 |
| | — |
| 300,530 |
| | (9,392 | ) | | 13,787 |
| | 888 |
| | 305,813 |
| | 279,457 |
|
Unconsolidated VIEs | | | | | | | | | | | | | | | | | | | | | | |
Asset-backed Canadian commercial paper conduit facility | 165,719 |
| | (3,573 | ) | | 10,090 |
| | 426 |
| | 172,662 |
| | 149,338 |
| 203,691 |
| | (3,746 | ) | | 9,983 |
| | 470 |
| | 210,398 |
| | 174,779 |
|
Total on-balance sheet assets and liabilities | $ | 1,059,523 |
| | $ | (29,041 | ) | | $ | 67,147 |
| | $ | 3,207 |
| | $ | 1,100,836 |
| | $ | 945,613 |
| $ | 943,522 |
| | $ | (26,824 | ) | | $ | 58,689 |
| | $ | 2,618 |
| | $ | 978,005 |
| | $ | 806,860 |
|
| | | | | | | | | | | | | | | | | | | | | | |
| June 26, 2016 | March 26, 2017 |
| Finance receivables | | Allowance for credit losses | | Restricted cash | | Other assets | | Total assets | | Asset-backed debt | 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 | $ | 1,173,527 |
| | $ | (30,431 | ) | | $ | 79,475 |
| | $ | 2,825 |
| | $ | 1,225,396 |
| | $ | 1,074,931 |
| $ | 772,152 |
| | $ | (23,239 | ) | | $ | 63,473 |
| | $ | 2,532 |
| | $ | 814,918 |
| | $ | 685,374 |
|
Asset-backed U.S. commercial paper conduit facilities | — |
| | — |
| | — |
| | 222 |
| | 222 |
| | — |
| 304,091 |
| | (9,178 | ) | | 15,781 |
| | 672 |
| | 311,366 |
| | 286,205 |
|
Unconsolidated VIEs | | | | | | | | | | | | | | | | | | | | | | |
Asset-backed Canadian commercial paper conduit facility | 177,360 |
| | (3,620 | ) | | 13,175 |
| | 332 |
| | 187,247 |
| | 161,626 |
| 155,240 |
| | (3,048 | ) | | 11,025 |
| | 382 |
| | 163,599 |
| | 141,013 |
|
Total on-balance sheet assets and liabilities | $ | 1,350,887 |
| | $ | (34,051 | ) | | $ | 92,650 |
| | $ | 3,379 |
| | $ | 1,412,865 |
| | $ | 1,236,557 |
| $ | 1,231,483 |
| | $ | (35,465 | ) | | $ | 90,279 |
| | $ | 3,586 |
| | $ | 1,289,883 |
| | $ | 1,112,592 |
|
On-Balance Sheet Asset-Backed Securitization VIEs
The Company transfers U.S. retail motorcycle finance receivables to SPEs which in turn issue secured notes to investors, with various maturities and interest rates, secured by future collections of the purchased U.S. retail motorcycle finance receivables. Each on-balance sheet asset-backed securitization SPE is a separate legal entity, and the U.S. retail motorcycle finance receivables included in the asset-backed securitizations are only available for payment of the secured debt and other obligations arising from the asset-backed securitization transaction and are not available to pay other obligations or claims of
the Company’s creditors until the associated secured debt and other obligations are satisfied. Restricted cash balances held by the SPEs are used only to support the securitizations. There are no amortization schedules for the secured notes; however, the debt is reduced monthly as available collections on the related U.S. retail motorcycle finance receivables are applied to outstanding principal. The secured notes’ contractual lives have various maturities ranging from 20192020 to 2022.
The Company is the primary beneficiary of its on-balance sheet asset-backed securitization VIEs because it retains servicing rights and a residual interest in the VIEs in the form of a debt security. As the servicer, the Company is the variable
interest holder with the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance. As a residual interest holder, the Company has the obligation to absorb losses and the right to receive benefits which could potentially be significant to the VIE.
There were no on-balance sheet asset-backed securitization transactions during the first halfquarter of 20172018 or 2016.2017.
On-Balance Sheet Asset-Backed U.S. Commercial Paper Conduit Facilities VIE
OnIn December 14, 2016, the Company entered into a new revolving facility agreement with a third party bank-sponsored asset-backed U.S. commercial paper conduit, which provides for a total commitment of up to $300.0 million. Also on that date,2017, the Company renewed its existing $300.0 million and $600.0 million revolving facility agreement, which had expired on December 14, 2016,agreements with the same third partya third-party bank-sponsored asset-backed U.S. commercial paper conduit. Availability under the revolving facilities (together, the U.S. Conduit Facilities) is based on, among other things, the amount of eligible U.S. retail motorcycle finance receivables held by the relevant SPE as collateral.
Under the U.S. Conduit Facilities, the Company may transfer U.S. retail motorcycle finance receivables to an SPE, which in turn may issue debt to the third party bank-sponsored asset-backed commercial paper conduit. The assets of the SPE are restricted as collateral for the payment of the debt or other obligations arising in the transaction and are not available to pay other obligations or claims of the Company’s creditors. The terms for this debt provide for interest on the outstanding principal based on prevailing commercial paper rates or LIBOR to the extent the advance is not funded by a conduit lender through the issuance of commercial paper plus, in each case, a program fee based on outstanding principal. The U.S. Conduit Facilities also provide for an unused commitment fee based on the unused portion of the total aggregate commitment of $900.0 million. There is no amortization schedule; however, the debt will be reduced monthly as available collections on the related finance receivables are applied to outstanding principal. Upon expiration of the U.S. Conduit Facilities, any outstanding principal will continue to be reduced monthly through available collections. The contractual maturity of the debt is approximately 5 years. Unless earlier terminated or extended by mutual agreement of the Company and the lenders, as of June 25, 2017,April 1, 2018, the U.S. Conduit Facilities have an expiration date of December 13, 2017.12, 2018.
The Company is the primary beneficiary of its U.S. Conduit Facilities VIE because it retains servicing rights and a residual interest in the VIE in the form of a debt security. As the servicer, the Company is the variable interest holder with the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance. As a residual interest holder, the Company has the obligation to absorb losses and the right to receive benefits which could potentially be significant to the VIE.
In January 2017 and April 2017, the Company transferred $333.4 million and $28.2 million, respectively,The following table includes quarterly transfers of U.S. retail motorcycle finance receivables to an SPE which, in turn, issued $300.0 million and $24.0 million, respectively, of debt under the U.S. Conduit Facilities. The contractual maturity ofand the debt is approximately 5 years. The VIE had no borrowings outstanding under the U.S. Conduit Facilities at December 31, 2016 or June 26, 2016.respective proceeds (in thousands):
|
| | | | | | | | | | | | | | | |
| 2018 | | 2017 |
| Transfers | | Proceeds | | Transfers | | Proceeds |
First quarter | $ | 32,900 |
| | $ | 29,300 |
| | $ | 333,400 |
| | $ | 300,000 |
|
On-Balance Sheet Asset-Backed Canadian Commercial Paper Conduit Facility
In June 2016,2017, the Company amended its facility agreement (Canadian Conduit) with a Canadian bank-sponsored asset-backed commercial paper conduit. Under the agreement, the Canadian Conduit is contractually committed, at the Company's option, to purchase eligible Canadian retail motorcycle finance receivables for proceeds up to C$240.0220.0 million. The transferred assets are restricted as collateral for the payment of the debt. The terms for this debt provide for interest on the outstanding principal based on prevailing market interest rates plus a specified margin. The Canadian Conduit also provides for a program fee and an unused commitment fee based on the unused portion of the total aggregate commitment of C$240.0220.0 million. There is no amortization schedule; however, the debt is reduced monthly as available collections on the related finance receivables are applied to outstanding principal. Upon expiration of the Canadian Conduit, any outstanding principal will continue to be reduced monthly through available collections. The contractual maturity of the debt is approximately 5 years. Unless earlier terminated or extended by mutual agreement ofbetween the Company and the lenders, as of June 25, 2017,April 1, 2018, the Canadian Conduit hadhas an expiration date of June 30, 2017. The Canadian Conduit was renewed on June 30, 2017 with similar terms and a borrowing amount of up to C$220.0 million with an expiration date of June 30, 2018.
The Company is not the primary beneficiary of the Canadian bank-sponsored, multi-seller conduit VIE; therefore, the Company doesn’tdoes not consolidate the VIE. However, the Company treats the conduit facility as a secured borrowing as it maintains effective control over the assets transferred to the VIE and, therefore, doesn’tdoes not meet the requirements for sale accounting.
As the Company participates in and does not consolidate the Canadian bank-sponsored, multi-seller conduit VIE, the maximum exposure to loss associated with this VIE, which would only be incurred in the unlikely event that all the finance receivables and underlying collateral have no residual value, was $22.2$32.7 million at June 25, 2017.April 1, 2018. The maximum exposure is not an indication of the Company's expected loss exposure.
The following table includes quarterly transfers of Canadian retail motorcycle finance receivables to the Canadian Conduit and the respective proceeds (in thousands):
|
| | | | | | | | | | | | | | | |
| 2017 | | 2016 |
| Transfers | | Proceeds | | Transfers | | Proceeds |
First quarter | $ | 6,300 |
| | $ | 5,500 |
| | $ | 6,600 |
| | $ | 5,800 |
|
Second quarter | 14,200 |
| | 12,400 |
| | 31,400 |
| | 27,500 |
|
| $ | 20,500 |
| | $ | 17,900 |
| | $ | 38,000 |
| | $ | 33,300 |
|
|
| | | | | | | | | | | | | | | |
| 2018 | | 2017 |
| Transfers | | Proceeds | | Transfers | | Proceeds |
First quarter | $ | 7,600 |
| | $ | 6,200 |
| | $ | 6,300 |
| | $ | 5,500 |
|
Off-Balance Sheet Asset-Backed Securitization VIE
There were no off-balance sheet asset-backed securitization transactions during the first halfquarter of 2018 or 2017. During the second quarter of 2016, the Company sold retail motorcycle finance receivables with a principal balance of $301.8 million into a securitization VIE that was not consolidated, recognized a gain of $9.3 million and received cash proceeds of $312.6 million. Similar to an on-balance sheet asset-backed securitization, the Company transferred U.S. retail motorcycle finance receivables to an SPE which in turn issued secured notes to investors, with various maturities and interest rates, secured by future collections of the purchased U.S. retail motorcycle finance receivables. The off-balance sheet asset-backed securitization SPE is a separate legal entity, and the U.S. retail motorcycle finance receivables included in the asset-backed securitization are only available for payment of the secured debt and other obligations arising from the asset-backed securitization transaction and are not available to pay other obligations or claims of the Company’s creditors. In an on-balance sheet asset-backed securitization, the Company retains a financial interest in the VIE in the form of a debt security. As part of this off-balance sheet securitization, the Company did not retain any financial interest in the VIE beyond servicing rights and ordinary representations and warranties and related covenants.
The Company is not the primary beneficiary of the off-balance sheet asset-backed securitization VIE because it only retained servicing rights and does not have the obligation to absorb losses or the right to receive benefits from the VIE which could potentially be significant to the VIE. Accordingly, this transaction met the accounting sale requirements under ASC Topic 860 and was recorded as a sale for accounting purposes. Upon the sale, the retail motorcycle finance receivables were removed from the Company’s balance sheet and a gain was recognized for the difference between the cash proceeds received, the assets derecognized and the liabilities recognized as part of the transaction. The gain on sale was included in Financial Services revenue in the Consolidated Statement of Income.
At June 25, 2017,April 1, 2018, the assets of this off-balance sheet asset-backed securitization VIE were $187.8$127.6 million and represented the current unpaid principal balance of the retail motorcycle finance receivables, which was the Company’s maximum exposure to loss in the off-balance sheet VIE at June 25, 2017.April 1, 2018. This is based on the unlikely event that all the receivables have underwriting defects or other defects that trigger a violation of certain covenants and that the underlying collateral has no residual value. This maximum exposure is not an indication of expected losses.
Servicing Activities
The Company services all retail motorcycle finance receivables that it originates. When the Company transfers retail motorcycle finance receivables to SPEs through asset-backed financings, the Company retains the right to service the finance receivables and receives servicing fees based on the securitized finance receivables balance and certain ancillary fees. In on-balance sheet asset-backed financing,financings, servicing fees are eliminated in consolidation and therefore are not recorded on a consolidated basis. In off-balance sheet asset-backed financings, servicing fees and ancillary fees are recorded in Financial Services revenue in the Consolidated Statement of Income. The fees the Company is paid for servicing represent adequate compensation, and consequently, the Company does not recognize a servicing asset or liability. The Company recognized servicing fee income of $1.1$0.4 million and $0.3$0.6 million during the six months ended June 25,first quarter of 2018 and 2017, and June 26, 2016, respectively.
The unpaid principal balance of retail motorcycle finance receivables serviced by the Company was as follows (in thousands):
| | | June 25, 2017 | | December 31, 2016 | | June 26, 2016 | April 1, 2018 | | December 31, 2017 | | March 26, 2017 |
On-balance sheet retail motorcycle finance receivables | $ | 6,121,372 |
| | $ | 5,839,467 |
| | $ | 5,872,668 |
| $ | 5,923,564 |
| | $ | 5,993,185 |
| | $ | 5,867,143 |
|
Off-balance sheet retail motorcycle finance receivables | 187,769 |
| | 236,706 |
| | 292,176 |
| 127,643 |
| | 146,425 |
| | 212,764 |
|
Total serviced retail motorcycle finance receivables | $ | 6,309,141 |
| | $ | 6,076,173 |
| | $ | 6,164,844 |
| $ | 6,051,207 |
| | $ | 6,139,610 |
| | $ | 6,079,907 |
|
The unpaid principal balance of retail motorcycle finance receivables serviced by the Company 30 days or more delinquent was as follows (in thousands):
| | | Amount 30 days or more past due: | Amount 30 days or more past due: |
| June 25, 2017 | | December 31, 2016 | | June 26, 2016 | April 1, 2018 | | December 31, 2017 | | March 26, 2017 |
On-balance sheet retail motorcycle finance receivables | $ | 180,619 |
| | $ | 221,393 |
| | $ | 168,091 |
| $ | 166,560 |
| | $ | 227,127 |
| | $ | 162,386 |
|
Off-balance sheet retail motorcycle finance receivables | 1,659 |
| | 1,858 |
| | 460 |
| 1,652 |
| | 2,106 |
| | 1,476 |
|
Total serviced retail motorcycle finance receivables | $ | 182,278 |
| | $ | 223,251 |
| | $ | 168,551 |
| $ | 168,212 |
| | $ | 229,233 |
| | $ | 163,862 |
|
Credit losses, net of recoveries for the retail motorcycle finance receivables serviced by the Company were as follows (in thousands):
| | | Three months ended | | Six months ended | Three months ended |
| June 25, 2017 | | June 26, 2016 | | June 25, 2017 | | June 26, 2016 | April 1, 2018 | | March 26, 2017 |
On-balance sheet retail motorcycle finance receivables | $ | 16,719 |
| | $ | 15,001 |
| | $ | 49,621 |
| | $ | 43,118 |
| $ | 32,173 |
| | $ | 32,902 |
|
Off-balance sheet retail motorcycle finance receivables | 152 |
| | 15 |
| | 566 |
| | 15 |
| 361 |
| | 414 |
|
Total serviced retail motorcycle finance receivables | $ | 16,871 |
| | $ | 15,016 |
| | $ | 50,187 |
| | $ | 43,133 |
| $ | 32,534 |
| | $ | 33,316 |
|
11.12. Fair Value
The Company assesses the inputs used to measure fair value using a three-tier hierarchy.
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.
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):
|
| | | | | | | | | | | | | | | |
| April 1, 2018 |
| 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 | $ | 653,124 |
| | $ | 326,324 |
| | $ | 326,800 |
| | $ | — |
|
Marketable securities | 49,402 |
| | 49,402 |
| | — |
| | — |
|
Derivatives | 3,613 |
| | — |
| | 3,613 |
| | — |
|
Total | $ | 706,139 |
| | $ | 375,726 |
| | $ | 330,413 |
| | $ | — |
|
Liabilities: | | | | | | | |
Derivatives | $ | 22,850 |
| | $ | — |
| | $ | 22,850 |
| | $ | — |
|
| | | | | | | |
| December 31, 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 | $ | 488,432 |
| | $ | 358,500 |
| | $ | 129,932 |
| | $ | — |
|
Marketable securities | 48,006 |
| | 48,006 |
| | — |
| | — |
|
Derivatives | 1,769 |
| | — |
| | 1,769 |
| | — |
|
Total | $ | 538,207 |
| | $ | 406,506 |
| | $ | 131,701 |
| | $ | — |
|
Liabilities: | | | | | | | |
Derivatives | $ | 21,308 |
| | $ | — |
| | $ | 21,308 |
| | $ | — |
|
| | | | | | | |
| 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 |
| | $ | — |
|
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 $23.8 million, $19.6 million and $20.1 million at April 1, 2018, December 31, 2017 and March 26, 2017, respectively, for which the fair value adjustment was $8.3 million, $9.0 million and $6.3 million, respectively. Fair value is estimated using Level 2 inputs based on the recent market values of repossessed inventory.
Fair Value of Financial Instruments Measured at Cost
The carrying value of the Company's cash and cash equivalents and restricted cash approximates their fair values.
The following table summarizes the fair value and carrying value of the Company’s remaining financial instruments that are measured at cost or amortized cost (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| April 1, 2018 | | December 31, 2017 | | March 26, 2017 |
| Fair Value | | Carrying Value | | Fair Value | | Carrying Value | | Fair Value | | Carrying Value |
Assets: | | | | | | | | | | | |
Finance receivables, net | $ | 7,195,908 |
| | $ | 7,126,442 |
| | $ | 7,021,549 |
| | $ | 6,965,086 |
| | $ | 7,225,210 |
| | $ | 7,146,122 |
|
Liabilities: | | | | | | | | | | | |
Unsecured commercial paper | $ | 1,036,976 |
| | $ | 1,036,976 |
| | $ | 1,273,482 |
| | $ | 1,273,482 |
| | $ | 953,357 |
| | $ | 953,357 |
|
Asset-backed U.S. commercial paper conduit facilities | $ | 281,311 |
| | $ | 281,311 |
| | $ | 279,457 |
| | $ | 279,457 |
| | $ | 286,205 |
| | $ | 286,205 |
|
Asset-backed Canadian commercial paper conduit facility | $ | 158,162 |
| | $ | 158,162 |
| | $ | 174,779 |
| | $ | 174,779 |
| | $ | 141,013 |
| | $ | 141,013 |
|
Medium-term notes | $ | 4,486,399 |
| | $ | 4,514,798 |
| | $ | 4,189,092 |
| | $ | 4,165,706 |
| | $ | 4,234,664 |
| | $ | 4,163,797 |
|
Senior unsecured notes | $ | 750,440 |
| | $ | 742,126 |
| | $ | 784,433 |
| | $ | 741,961 |
| | $ | 755,646 |
| | $ | 741,469 |
|
Asset-backed securitization debt | $ | 283,591 |
| | $ | 284,793 |
| | $ | 351,767 |
| | $ | 352,624 |
| | $ | 685,953 |
| | $ | 685,374 |
|
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.
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 calculated using Level 2 inputs approximates fair value due to its short maturity. The carrying value of debt provided under the U.S. conduit facilities and Canadian conduit facility calculated using Level 2 inputs approximates fair value since the interest rates charged under the facility are tied directly to market rates and fluctuate as market rates change. The fair values of the medium-term notes and senior unsecured notes are estimated based upon rates currently available for debt with similar terms and remaining maturities (Level 2 inputs). The fair value of the debt related to on-balance sheet asset-backed securitization transactions is estimated based on pricing currently available for transactions with similar terms and maturities (Level 2 inputs).
13. Product Warranty and Recall Campaigns
The Company currently provides a standard two-year limited warranty on all new motorcycles sold worldwide, except for Japan, where the Company currently provides a standard three-year limited warranty on all new motorcycles sold. In addition, the Company provides a one-year warranty for Parts & Accessories (P&A). The warranty coverage for the retail customer generally begins when the product is sold to a retail customer. The Company maintains reservesaccrues for future warranty claims using an estimated cost which is based primarily on historical Company claim information maintained by the Company.information. Additionally, the Company has from time to time initiated certain voluntary recall campaigns. The Company reservesaccrues for allthe estimated costscost associated with voluntary recalls in the period that management approves and commits to the recall.
Changes in the Company’s warranty and recall liability were as follows (in thousands):
| | | Three months ended | | Six months ended | Three months ended |
| June 25, 2017 | | June 26, 2016 | | June 25, 2017 | | June 26, 2016 | April 1, 2018 | | March 26, 2017 |
Balance, beginning of period | $ | 78,211 |
| | $ | 74,836 |
| | $ | 79,482 |
| | $ | 74,217 |
| $ | 94,202 |
| | $ | 79,482 |
|
Warranties issued during the period | 18,084 |
| | 20,202 |
| | 34,836 |
| | 38,214 |
| 14,606 |
| | 16,752 |
|
Settlements made during the period | (21,200 | ) | | (22,679 | ) | | (40,533 | ) | | (40,842 | ) | (16,638 | ) | | (19,333 | ) |
Recalls and changes to pre-existing warranty liabilities | 5,586 |
| | 10,121 |
| | 6,896 |
| | 10,891 |
| 2,905 |
| | 1,310 |
|
Balance, end of period | $ | 80,681 |
| | $ | 82,480 |
| | $ | 80,681 |
| | $ | 82,480 |
| $ | 95,075 |
| | $ | 78,211 |
|
The liability for recall campaigns was $7.932.3 million, $13.635.3 million and $14.310.3 million as of June 25, 2017April 1, 2018, December 31, 20162017 and JuneMarch 26, 20162017, respectively.
12. 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 | | Six months ended |
| June 25, 2017 | | June 26, 2016 | | June 25, 2017 | | June 26, 2016 |
Numerator: | | | | | | | |
Net income used in computing basic and diluted earnings per share | $ | 258,867 |
| | $ | 280,431 |
| | $ | 445,236 |
| | $ | 530,920 |
|
Denominator: | | | | | | | |
Denominator for basic earnings per share - weighted-average common shares | 174,409 |
| | 180,587 |
| | 175,178 |
| | 181,976 |
|
Effect of dilutive securities - employee stock compensation plan | 915 |
| | 752 |
| | 992 |
| | 764 |
|
Denominator for diluted earnings per share - adjusted weighted-average shares outstanding | 175,324 |
| | 181,339 |
| | 176,170 |
| | 182,740 |
|
Earnings per common share: | | | | | | | |
Basic | $ | 1.48 |
| | $ | 1.55 |
| | $ | 2.54 |
| | $ | 2.92 |
|
Diluted | $ | 1.48 |
| | $ | 1.55 |
| | $ | 2.53 |
| | $ | 2.91 |
|
Outstanding options to purchase 0.6 million and 1.5 million shares of common stock for the three months ended June 25, 2017 and June 26, 2016, respectively, and 0.7 million and 1.7 million shares of common stock for the six months ended June 25, 2017 and June 26, 2016, 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 and six month periods ended June 25, 2017 and June 26, 2016.
13.14. Employee Benefit Plans
The Company has a defined benefit qualified pension plan and postretirement healthcare benefit plans that cover certain employees of the Motorcycles segment. The Company also has unfunded supplemental employee retirement plan agreements (SERPA) with certain employees which were instituted to replace benefits lost under the Tax Revenue Reconciliation Act of 1993. Net periodic benefit costs areService cost is allocated among selling, administrative and engineering expense, cost of goods sold and inventory. Amounts capitalized in inventory are not significant. Non-service cost components of net periodic benefit cost are presented in other income (expense), net. Refer to Note 2 regarding the adoption of ASU 2017-07 for further discussion of the impact on net periodic benefit costs. Components of net periodic benefit costs were as follows (in thousands):
| | | Three months ended | | Six months ended | Three months ended |
| June 25, 2017 | | June 26, 2016 | | June 25, 2017 | | June 26, 2016 | April 1, 2018 | | March 26, 2017 |
Pension and SERPA Benefits | | | | | | | | | | |
Service cost | $ | 7,896 |
| | $ | 8,359 |
| | $ | 15,792 |
| | $ | 16,718 |
| $ | 8,155 |
| | $ | 7,896 |
|
Interest cost | 21,269 |
| | 22,707 |
| | 42,538 |
| | 45,414 |
| 20,590 |
| | 21,269 |
|
Expected return on plan assets | (35,345 | ) | | (36,445 | ) | | (70,690 | ) | | (72,890 | ) | (36,891 | ) | | (35,345 | ) |
Amortization of unrecognized: | | | | | | | | | | |
Prior service cost | 254 |
| | 255 |
| | 508 |
| | 510 |
| |
Prior service (credit) cost | | (106 | ) | | 254 |
|
Net loss | 10,998 |
| | 11,588 |
| | 21,996 |
| | 23,176 |
| 15,819 |
| | 10,998 |
|
Settlement loss | — |
| | 300 |
| | — |
| | 600 |
| |
Curtailment loss | | 1,018 |
| | — |
|
Net periodic benefit cost | $ | 5,072 |
| | $ | 6,764 |
| | $ | 10,144 |
| | $ | 13,528 |
| $ | 8,585 |
| | $ | 5,072 |
|
Postretirement Healthcare Benefits | | | | | | | | | | |
Service cost | $ | 1,875 |
| | $ | 1,870 |
| | $ | 3,750 |
| | $ | 3,740 |
| $ | 1,812 |
| | $ | 1,875 |
|
Interest cost | 3,412 |
| | 3,704 |
| | 6,824 |
| | 7,408 |
| 2,897 |
| | 3,412 |
|
Expected return on plan assets | (3,156 | ) | | (3,017 | ) | | (6,312 | ) | | (6,034 | ) | (3,541 | ) | | (3,156 | ) |
Amortization of unrecognized: | | | | | | | | | | |
Prior service credit | (543 | ) | | (701 | ) | | (1,086 | ) | | (1,402 | ) | (460 | ) | | (543 | ) |
Net loss | 815 |
| | 884 |
| | 1,630 |
| | 1,768 |
| 454 |
| | 815 |
|
Net periodic benefit cost | $ | 2,403 |
| | $ | 2,740 |
| | $ | 4,806 |
| | $ | 5,480 |
| $ | 1,162 |
| | $ | 2,403 |
|
During the first halfthree months ended April 1, 2018, the qualified pension plan and certain postretirement healthcare plan assets and obligations were remeasured as a result of 2017,a curtailment of benefits related to the planned closure of the Company's motorcycle assembly plant in Kansas City, Missouri, discussed further in Note 4. As a result of the remeasurement, the Company voluntarily contributed $25.0recorded a benefit of $96.4 million before income taxes in cash to further fund its qualified pension plan. other comprehensive income during the three months ended April 1, 2018.
There are no required or planned contributions to the qualified pension plan contributions for the remainder of 20172018. The Company expects it will continue to make ongoing benefit payments under the SERPA and postretirement healthcare plans.
14. Business Segments
Harley-Davidson, Inc. is the parent company for the groups of companies doing business as Harley-Davidson Motor Company (HDMC) and Harley-Davidson Financial Services (HDFS). The Company operates in two segments: the Motorcycles & Related Products (Motorcycles) segment and the Financial Services segment. The Company’s reportable segments are strategic business units that offer different products and services and are managed separately based on the fundamental differences in their operations. Selected segment information is set forth below (in thousands):
|
| | | | | | | | | | | | | | | |
| Three months ended | | Six months ended |
| June 25, 2017 | | June 26, 2016 | | June 25, 2017 | | June 26, 2016 |
Motorcycles net revenue | $ | 1,577,135 |
| | $ | 1,670,113 |
| | $ | 2,905,846 |
| | $ | 3,246,723 |
|
Gross profit | 575,623 |
| | 607,558 |
| | 1,053,108 |
| | 1,197,838 |
|
Selling, administrative and engineering expense | 255,976 |
| | 284,809 |
| | 494,619 |
| | 542,632 |
|
Operating income from Motorcycles | 319,647 |
| | 322,749 |
| | 558,489 |
| | 655,206 |
|
Financial Services revenue | 188,034 |
| | 190,964 |
| | 361,255 |
| | 364,322 |
|
Financial Services expense | 106,099 |
| | 101,391 |
| | 226,684 |
| | 218,378 |
|
Operating income from Financial Services | 81,935 |
| | 89,573 |
| | 134,571 |
| | 145,944 |
|
Operating income | $ | 401,582 |
| | $ | 412,322 |
| | $ | 693,060 |
| | $ | 801,150 |
|
15. Commitments and Contingencies
The Company is subject to lawsuits and other claims related to environmental, product and other matters. In determining required reservescosts to accrue related to these items, the Company carefully analyzes cases and considers the likelihood of adverse judgments
or outcomes, as well as the potential range of possible loss. The required reservesAny amounts accrued for these matters are monitored on an ongoing basis and are updated based on new developments or new information inas it becomes available for each matter.
Environmental Protection Agency Notice:
In December 2009, the Company received formal, written requests for information from the United States Environmental Protection Agency (EPA) regarding: (i) certificates of conformity for motorcycle emissions and related designations and labels, (ii) aftermarket parts, and (iii) warranty claims on emissions related components. The Company promptly submitted written responses to the EPA’s inquiry and has engaged in information exchanges and discussions with the EPA. In August 2016, the Company entered into a consent decree with the EPA regarding these issues, and the consent decree was subsequently revised in July 2017 (the Settlement). In the Settlement, the Company agreed to, among other things, pay a fine, and not sell tuning products unless they are approved by the EPA or California Air Resources Board. FollowingIn December 2017, the required public comment period,EPA filed the Settlement with the U.S. District Court for the District of Columbia for the purpose of obtaining court approval of the Settlement. Three amicus briefs opposing portions of the Settlement were filed with the court by the deadline of January 31, 2018. On March 1, 2018, the Company and the EPA each filed separate response briefs. The Company anticipates the EPAcourt will move the courtmake a decision whether or not to finalize the Settlement in the comingfollowing months. The Company has a reservean accrual associated with this matter which is included in accrued liabilities in the Consolidated Balance Sheet,Sheets, and as a result, if it is finalized, the Settlement would not have a material adverse effect on the Company's financial condition or results of operations. The Settlement is not final until it is approved by the court, and if it is not approved by the court, the Company cannot reasonably estimate the impact of any remedies the EPA might seek beyond the Company's current reserve for this matter.
York Environmental Matters:
The Company is involved with government agencies and groups of potentially responsible parties related to a matter involving the cleanup of soil and groundwater contamination at its York, Pennsylvania facility. The York facility was formerly used by the U.S. Navy and AMF prior to the purchase of the York facility by the Company from AMF in 1981. Although the Company is not certain as to the full extent of the environmental contamination at the York facility, it has been working with the Pennsylvania Department of Environmental Protection (PADEP) since 1986 in undertaking environmental investigation and remediation activities, including a site-wide remedial investigation/feasibility study (RI/FS).
In January 1995, the Company entered into a settlement agreement (the Agreement) with the Navy, and the parties amended the Agreement in 2013 to address ordnance and explosive waste. The Agreement calls for the Navy and the Company to contribute amounts into a trust equal to 53% and 47%, respectively, of costs associated with environmental investigation and remediation activities at the York facility (Response Costs). The trust administers the payment of the Response Costs incurred at the York facility as covered by the Agreement.
The Company has a reservean accrual for its estimate of its share of the future Response Costs at the York facility which is included in accruedother long-term liabilities in the Consolidated Balance Sheets. While much of the work on the RI/FS is complete, it is still under agency review and given the uncertainty that exists concerning the nature and scope of additional environmental investigation and remediation that may ultimately be required under the RI/FS that is finally approved or otherwise at the York facility, the Company is unable to make a reasonable estimate of those additional costs, if any, that may result.
The estimate of the Company's future Response Costs that will be incurred at the York facility is based on reports of independent environmental consultants retained by the Company, the actual costs incurred to date and the estimated costs to complete the necessary investigation and remediation activities.
Product Liability Matters:
The Company is involved in product liability suits related to the operation of its business. The Company accrues for claim exposures that are probable of occurrence and can be reasonably estimated. The Company also maintains insurance coverage for product liability exposures. The Company believes that its accruals and insurance coverage are adequate and that product liability suits will not have a material adverse effect on the Company’s consolidated financial statements.
National Highway Traffic Safety Administration Matters:
In July 2016, the National Highway Traffic Safety Administration (NHTSA) began an investigation into certain of the Company's motorcycles equipped with anti-lock braking systems (ABS). NHTSA’s investigation is in response to rider complaints related to brake failures and applies to model yearmodel-year 2008-2013 Touring and model yearmodel-year 2008-2017 V-ROD®motorcycles. NHTSA noted that Harley-Davidson has a two-year brake fluid replacement interval that owners either are unaware of or ignore. The Company does not believe that a loss related to this matter is probable and no reserve has been established. However, it is possible that the outcome of NHTSA’s investigation could result in future costs to the Company. Given the uncertainty that still exists concerning the resolution of this matter,During 2017, the Company cannot reasonably estimate these possible future costs, if any.estimated and recorded a $29.4 million accrual associated with the NHTSA matter. On January 30, 2018, the Company announced a voluntary recall which offers a free brake fluid flush for model-year
2008-2011 Touring and V-ROD® motorcycles. In late April 2018, the Company received the closing resume from NHTSA which officially closes the investigation. The Company believes the accrued liability it has recorded will adequately cover the cost of the recall.
16. Accumulated Other Comprehensive Loss
The following tables set forth the changes in accumulated other comprehensive loss (AOCL) (in thousands): |
| | | | | | | | | | | | | | | | | | | | |
| | Three months ended April 1, 2018 |
| | Foreign currency translation adjustments | | Marketable securities | | Derivative financial instruments | | Pension and postretirement benefit plans | | Total |
Balance, beginning of period | | $ | (21,852 | ) | | $ | — |
| | $ | (17,254 | ) | | $ | (460,943 | ) | | $ | (500,049 | ) |
Other comprehensive income (loss) before reclassifications | | 6,915 |
| | — |
| | (5,906 | ) | | 96,374 |
| | 97,383 |
|
Income tax benefit (expense) | | — |
| | — |
| | 1,387 |
| | (22,629 | ) | | (21,242 | ) |
Net other comprehensive income (loss) before reclassifications | | 6,915 |
| | — |
| | (4,519 | ) | | 73,745 |
| | 76,141 |
|
Reclassifications: | | | | | | | | | | |
Realized (gains) losses - foreign currency contracts(a) | | — |
| | — |
| | 6,709 |
| | — |
| | 6,709 |
|
Realized (gains) losses - commodity contracts(a) | | — |
| | — |
| | 73 |
| | — |
| | 73 |
|
Realized (gains) losses - treasury rate locks(b) | | — |
| | — |
| | 126 |
| | — |
| | 126 |
|
Prior service credits(c) | | — |
| | — |
| | — |
| | (566 | ) | | (566 | ) |
Actuarial losses(c) | | — |
| | — |
| | — |
| | 16,273 |
| | 16,273 |
|
Total reclassifications before tax | | — |
| | — |
| | 6,908 |
| | 15,707 |
| | 22,615 |
|
Income tax expense | | — |
| | — |
| | (1,624 | ) | | (3,687 | ) | | (5,311 | ) |
Net reclassifications | | — |
| | — |
| | 5,284 |
| | 12,020 |
| | 17,304 |
|
Other comprehensive income | | 6,915 |
| | — |
| | 765 |
| | 85,765 |
| | 93,445 |
|
Balance, end of period | | $ | (14,937 | ) | | $ | — |
| | $ | (16,489 | ) | | $ | (375,178 | ) | | $ | (406,604 | ) |
| | | | | | | | | | |
| | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | |
| | 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 (expense) benefit | | (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 locks(b) | | — |
| | — |
| | 90 |
| | — |
| | 90 |
|
Prior service credits(c) | | — |
| | — |
| | — |
| | (289 | ) | | (289 | ) |
Actuarial losses(c) | | — |
| | — |
| | — |
| | 11,813 |
| | 11,813 |
|
Total reclassifications before tax | | — |
| | — |
| | (2,474 | ) | | 11,524 |
| | 9,050 |
|
Income tax benefit (expense) | | — |
| | — |
| | 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 | ) |
| |
(a) | Amounts reclassified to net income are included in Motorcycles and Related Products cost of goods sold. |
| |
(b) | Amounts reclassified to net income are included in interest expense. |
| |
(c) | Amounts reclassified are included in the computation of net periodic benefit cost. See Note 14 for information related to pension and postretirement benefit plans. |
17. Business Segments
Harley-Davidson, Inc. is the parent company for the groups of companies doing business as Harley-Davidson Motor Company (HDMC) and Harley-Davidson Financial Services (HDFS). The Company operates in two segments: the Motorcycles & Related Products (Motorcycles) segment and the Financial Services segment. The Company’s reportable segments are strategic business units that offer different products and services and are managed separately based on the fundamental differences in their operations. Selected segment information is set forth below (in thousands):
|
| | | | | | | |
| Three months ended |
| April 1, 2018 | | March 26, 2017 |
Motorcycles net revenue | $ | 1,363,947 |
| | $ | 1,328,711 |
|
Gross profit | 473,773 |
| | 474,823 |
|
Selling, administrative and engineering expense | 254,093 |
| | 238,277 |
|
Restructuring expense | 46,842 |
| | — |
|
Operating income from Motorcycles | 172,838 |
| | 236,546 |
|
Financial Services revenue | 178,174 |
| | 173,221 |
|
Financial Services expense | 114,595 |
| | 120,585 |
|
Operating income from Financial Services | 63,579 |
| | 52,636 |
|
Operating income | $ | 236,417 |
| | $ | 289,182 |
|
As discussed in Note 2, the Company adopted ASU 2017-07 on January 1, 2018 which required the Company to record the non-service cost components of net periodic benefit plan costs in non-operating income on a prospective and retrospective basis. As a result, operating income from Motorcycles excludes these costs for all periods presented.
18. Supplemental Consolidating Data
The supplemental consolidating data for the periods noted is presented for informational purposes. The supplemental consolidating data may be different than segment information presented elsewhere due to the allocation of intercompany eliminations to reportingthe reportable segments. All supplemental data is presented in thousands.
|
| | | | | | | | | | | | | | | |
| Three months ended April 1, 2018 |
| HDMC Entities | | HDFS Entities | | Eliminations | | Consolidated |
Revenue: | | | | | | | |
Motorcycles and Related Products | $ | 1,366,246 |
| | $ | — |
| | $ | (2,299 | ) | | $ | 1,363,947 |
|
Financial Services | — |
| | 178,460 |
| | (286 | ) | | 178,174 |
|
Total revenue | 1,366,246 |
| | 178,460 |
| | (2,585 | ) | | 1,542,121 |
|
Costs and expenses: | | | | | | | |
Motorcycles and Related Products cost of goods sold | 890,174 |
| | — |
| | — |
| | 890,174 |
|
Financial Services interest expense | — |
| | 48,450 |
| | — |
| | 48,450 |
|
Financial Services provision for credit losses | — |
| | 30,052 |
| | — |
| | 30,052 |
|
Selling, administrative and engineering expense | 254,401 |
| | 38,391 |
| | (2,606 | ) | | 290,186 |
|
Restructuring expense | 46,842 |
| | — |
| | — |
| | 46,842 |
|
Total costs and expenses | 1,191,417 |
| | 116,893 |
| | (2,606 | ) | | 1,305,704 |
|
Operating income | 174,829 |
| | 61,567 |
| | 21 |
| | 236,417 |
|
Other income (expense), net | 220 |
| | — |
| | — |
| | 220 |
|
Investment income | 111,203 |
| | — |
| | (110,000 | ) | | 1,203 |
|
Interest expense | 7,690 |
| | — |
| | — |
| | 7,690 |
|
Income before provision for income taxes | 278,562 |
| | 61,567 |
| | (109,979 | ) | | 230,150 |
|
Provision for income taxes | 40,233 |
| | 15,154 |
| | — |
| | 55,387 |
|
Net income | $ | 238,329 |
| | $ | 46,413 |
| | $ | (109,979 | ) | | $ | 174,763 |
|
| | | Three months ended June 25, 2017 | Three months ended March 26, 2017 |
| HDMC Entities | | HDFS Entities | | Eliminations | | Consolidated | HDMC Entities | | HDFS Entities | | Eliminations | | Consolidated |
Revenue: | | | | | | | | | | | | | | |
Motorcycles and Related Products | $ | 1,580,109 |
| | $ | — |
| | $ | (2,974 | ) | | $ | 1,577,135 |
| $ | 1,330,618 |
| | $ | — |
| | $ | (1,907 | ) | | $ | 1,328,711 |
|
Financial Services | — |
| | 188,712 |
| | (678 | ) | | 188,034 |
| — |
| | 173,557 |
| | (336 | ) | | 173,221 |
|
Total revenue | 1,580,109 |
| | 188,712 |
| | (3,652 | ) | | 1,765,169 |
| 1,330,618 |
| | 173,557 |
| | (2,243 | ) | | 1,501,932 |
|
Costs and expenses: | | | | | | | | | | | | | | |
Motorcycles and Related Products cost of goods sold | 1,001,512 |
| | — |
| | — |
| | 1,001,512 |
| 853,888 |
| | — |
| | — |
| | 853,888 |
|
Financial Services interest expense | — |
| | 44,408 |
| | — |
| | 44,408 |
| — |
| | 43,289 |
| | — |
| | 43,289 |
|
Financial Services provision for credit losses | — |
| | 26,217 |
| | — |
| | 26,217 |
| — |
| | 43,589 |
| | — |
| | 43,589 |
|
Selling, administrative and engineering expense | 256,513 |
| | 38,448 |
| | (3,511 | ) | | 291,450 |
| 238,630 |
| | 35,614 |
| | (2,260 | ) | | 271,984 |
|
Total costs and expenses | 1,258,025 |
| | 109,073 |
| | (3,511 | ) | | 1,363,587 |
| 1,092,518 |
| | 122,492 |
| | (2,260 | ) | | 1,212,750 |
|
Operating income | 322,084 |
| | 79,639 |
| | (141 | ) | | 401,582 |
| 238,100 |
| | 51,065 |
| | 17 |
| | 289,182 |
|
Other income (expense), net | | 2,296 |
| | — |
| | — |
| | 2,296 |
|
Investment income | 577 |
| | — |
| | — |
| | 577 |
| 106,879 |
| | — |
| | (106,000 | ) | | 879 |
|
Interest expense | 7,726 |
| | — |
| | — |
| | 7,726 |
| 7,673 |
| | — |
| | — |
| | 7,673 |
|
Income before provision for income taxes | 314,935 |
| | 79,639 |
| | (141 | ) | | 394,433 |
| 339,602 |
| | 51,065 |
| | (105,983 | ) | | 284,684 |
|
Provision for income taxes | 106,035 |
| | 29,531 |
| | — |
| | 135,566 |
| 79,157 |
| | 19,158 |
| | — |
| | 98,315 |
|
Net income | $ | 208,900 |
| | $ | 50,108 |
| | $ | (141 | ) | | $ | 258,867 |
| $ | 260,445 |
| | $ | 31,907 |
| | $ | (105,983 | ) | | $ | 186,369 |
|
| | | | | | | | |
| Six months ended June 25, 2017 | |
| HDMC Entities | | HDFS Entities | | Eliminations | | Consolidated | |
Revenue: | | | | | | | | |
Motorcycles and Related Products | $ | 2,910,727 |
| | $ | — |
| | $ | (4,881 | ) | | $ | 2,905,846 |
| |
Financial Services | — |
| | 362,269 |
| | (1,014 | ) | | 361,255 |
| |
Total revenue | 2,910,727 |
| | 362,269 |
| | (5,895 | ) | | 3,267,101 |
| |
Costs and expenses: | | | | | | | | |
Motorcycles and Related Products cost of goods sold | 1,852,738 |
| | — |
| | — |
| | 1,852,738 |
| |
Financial Services interest expense | — |
| | 87,697 |
| | — |
| | 87,697 |
| |
Financial Services provision for credit losses | — |
| | 69,806 |
| | — |
| | 69,806 |
| |
Selling, administrative and engineering expense | 495,509 |
| | 74,062 |
| | (5,771 | ) | | 563,800 |
| |
Total costs and expenses | 2,348,247 |
| | 231,565 |
| | (5,771 | ) | | 2,574,041 |
| |
Operating income | 562,480 |
| | 130,704 |
| | (124 | ) | | 693,060 |
| |
Investment income | 107,456 |
| | — |
| | (106,000 | ) | | 1,456 |
| |
Interest expense | 15,399 |
| | — |
| | — |
| | 15,399 |
| |
Income before provision for income taxes | 654,537 |
| | 130,704 |
| | (106,124 | ) | | 679,117 |
| |
Provision for income taxes | 185,192 |
| | 48,689 |
| | — |
| | 233,881 |
| |
Net income | $ | 469,345 |
| | $ | 82,015 |
| | $ | (106,124 | ) | | $ | 445,236 |
| |
|
| | | | | | | | | | | | | | | |
| Three months ended June 26, 2016 |
| HDMC Entities | | HDFS Entities | | Eliminations | | Consolidated |
Revenue: | | | | | | | |
Motorcycles and Related Products | $ | 1,673,379 |
| | $ | — |
| | $ | (3,266 | ) | | $ | 1,670,113 |
|
Financial Services | — |
| | 191,935 |
| | (971 | ) | | 190,964 |
|
Total revenue | 1,673,379 |
| | 191,935 |
| | (4,237 | ) | | 1,861,077 |
|
Costs and expenses: | | | | | | | |
Motorcycles and Related Products cost of goods sold | 1,062,555 |
| | — |
| | — |
| | 1,062,555 |
|
Financial Services interest expense | — |
| | 42,895 |
| | — |
| | 42,895 |
|
Financial Services provision for credit losses | — |
| | 23,461 |
| | — |
| | 23,461 |
|
Selling, administrative and engineering expense | 285,367 |
| | 38,301 |
| | (3,824 | ) | | 319,844 |
|
Total costs and expenses | 1,347,922 |
| | 104,657 |
| | (3,824 | ) | | 1,448,755 |
|
Operating income | 325,457 |
| | 87,278 |
| | (413 | ) | | 412,322 |
|
Investment income | 43,688 |
| | — |
| | (43,000 | ) | | 688 |
|
Interest expense | 7,094 |
| | — |
| | — |
| | 7,094 |
|
Income before provision for income taxes | 362,051 |
| | 87,278 |
| | (43,413 | ) | | 405,916 |
|
Provision for income taxes | 93,788 |
| | 31,697 |
| | — |
| | 125,485 |
|
Net income | $ | 268,263 |
| | $ | 55,581 |
| | $ | (43,413 | ) | | $ | 280,431 |
|
| | | | | | | |
| Six months ended June 26, 2016 |
| HDMC Entities | | HDFS Entities | | Eliminations | | Consolidated |
Revenue: | | | | | | | |
Motorcycles and Related Products | $ | 3,252,018 |
| | $ | — |
| | $ | (5,295 | ) | | $ | 3,246,723 |
|
Financial Services | — |
| | 365,456 |
| | (1,134 | ) | | 364,322 |
|
Total revenue | 3,252,018 |
| | 365,456 |
| | (6,429 | ) | | 3,611,045 |
|
Costs and expenses: | | | | | | | |
Motorcycles and Related Products cost of goods sold | 2,048,885 |
| | — |
| | — |
| | 2,048,885 |
|
Financial Services interest expense | — |
| | 88,814 |
| | — |
| | 88,814 |
|
Financial Services provision for credit losses | — |
| | 60,584 |
| | — |
| | 60,584 |
|
Selling, administrative and engineering expense | 543,598 |
| | 74,275 |
| | (6,261 | ) | | 611,612 |
|
Total costs and expenses | 2,592,483 |
| | 223,673 |
| | (6,261 | ) | | 2,809,895 |
|
Operating income | 659,535 |
| | 141,783 |
| | (168 | ) | | 801,150 |
|
Investment income | 184,454 |
| | — |
| | (183,000 | ) | | 1,454 |
|
Interest expense | 14,262 |
| | — |
| | — |
| | 14,262 |
|
Income before provision for income taxes | 829,727 |
| | 141,783 |
| | (183,168 | ) | | 788,342 |
|
Provision for income taxes | 204,361 |
| | 53,061 |
| | — |
| | 257,422 |
|
Net income | $ | 625,366 |
| | $ | 88,722 |
| | $ | (183,168 | ) | | $ | 530,920 |
|
|
| | | | | | | | | | | | | | | |
| April 1, 2018 |
| HDMC Entities | | HDFS Entities | | Eliminations | | Consolidated |
ASSETS | | | | | | | |
Current assets: | | | | | | | |
Cash and cash equivalents | $ | 403,009 |
| | $ | 350,508 |
| | $ | — |
| | $ | 753,517 |
|
Accounts receivable, net | 686,265 |
| | — |
| | (331,158 | ) | | 355,107 |
|
Finance receivables, net | — |
| | 2,341,918 |
| | — |
| | 2,341,918 |
|
Inventories | 564,571 |
| | — |
| | — |
| | 564,571 |
|
Restricted cash | — |
| | 54,569 |
| | — |
| | 54,569 |
|
Other current assets | 108,613 |
| | 44,724 |
| | (2,865 | ) | | 150,472 |
|
Total current assets | 1,762,458 |
| | 2,791,719 |
| | (334,023 | ) | | 4,220,154 |
|
Finance receivables, net | — |
| | 4,784,524 |
| | — |
| | 4,784,524 |
|
Property, plant and equipment, net | 887,522 |
| | 47,123 |
| | — |
| | 934,645 |
|
Prepaid pension costs | 122,230 |
| | — |
| | — |
| | 122,230 |
|
Goodwill | 56,524 |
| | — |
| | — |
| | 56,524 |
|
Deferred income taxes | 36,140 |
| | 42,543 |
| | (1,059 | ) | | 77,624 |
|
Other long-term assets | 145,344 |
| | 23,514 |
| | (86,938 | ) | | 81,920 |
|
| $ | 3,010,218 |
| | $ | 7,689,423 |
| | $ | (422,020 | ) | | $ | 10,277,621 |
|
LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | | | |
Current liabilities: | | | | | | | |
Accounts payable | $ | 297,162 |
| | $ | 353,036 |
| | $ | (331,158 | ) | | $ | 319,040 |
|
Accrued liabilities | 462,279 |
| | 106,149 |
| | (2,020 | ) | | 566,408 |
|
Short-term debt | — |
| | 1,036,976 |
| | — |
| | 1,036,976 |
|
Current portion of long-term debt, net | — |
| | 1,872,679 |
| | — |
| | 1,872,679 |
|
Total current liabilities | 759,441 |
| | 3,368,840 |
| | (333,178 | ) | | 3,795,103 |
|
Long-term debt, net | 742,126 |
| | 3,366,385 |
| | — |
| | 4,108,511 |
|
Pension liability | 54,921 |
| | — |
| | — |
| | 54,921 |
|
Postretirement healthcare liability | 113,031 |
| | — |
| | — |
| | 113,031 |
|
Other long-term liabilities | 171,389 |
| | 35,899 |
| | 2,818 |
| | 210,106 |
|
Commitments and contingencies (Note 15) | | | | | | | |
Shareholders’ equity | 1,169,310 |
| | 918,299 |
| | (91,660 | ) | | 1,995,949 |
|
| $ | 3,010,218 |
| | $ | 7,689,423 |
| | $ | (422,020 | ) | | $ | 10,277,621 |
|
| | | June 25, 2017 | December 31, 2017 |
| HDMC Entities | | HDFS Entities | | Eliminations | | Consolidated | HDMC Entities | | HDFS Entities | | Eliminations | | Consolidated |
ASSETS | | | | | | | | | | | | | | |
Current assets: | | | | | | | | | | | | | | |
Cash and cash equivalents | $ | 586,892 |
| | $ | 401,584 |
| | $ | — |
| | $ | 988,476 |
| $ | 338,186 |
| | $ | 349,335 |
| | $ | — |
| | $ | 687,521 |
|
Accounts receivable, net | 709,343 |
| | — |
| | (378,410 | ) | | 330,933 |
| 483,709 |
| | — |
| | (153,723 | ) | | 329,986 |
|
Finance receivables, net | — |
| | 2,338,533 |
| | — |
| | 2,338,533 |
| — |
| | 2,105,662 |
| | — |
| | 2,105,662 |
|
Inventories | 372,012 |
| | — |
| | — |
| | 372,012 |
| 538,202 |
| | — |
| | — |
| | 538,202 |
|
Restricted cash | — |
| | 63,225 |
| | — |
| | 63,225 |
| — |
| | 47,518 |
| | — |
| | 47,518 |
|
Other current assets | 108,162 |
| | 43,261 |
| | — |
| | 151,423 |
| 132,999 |
| | 48,521 |
| | (5,667 | ) | | 175,853 |
|
Total current assets | 1,776,409 |
| | 2,846,603 |
| | (378,410 | ) | | 4,244,602 |
| 1,493,096 |
| | 2,551,036 |
| | (159,390 | ) | | 3,884,742 |
|
Finance receivables, net | — |
| | 4,994,002 |
| | — |
| | 4,994,002 |
| — |
| | 4,859,424 |
| | — |
| | 4,859,424 |
|
Property, plant and equipment, net | 905,244 |
| | 41,082 |
| | — |
| | 946,326 |
| 922,280 |
| | 45,501 |
| | — |
| | 967,781 |
|
Prepaid pension costs | | 19,816 |
| | — |
| | — |
| | 19,816 |
|
Goodwill | 54,630 |
| | — |
| | — |
| | 54,630 |
| 55,947 |
| | — |
| | — |
| | 55,947 |
|
Deferred income taxes | 100,949 |
| | 71,108 |
| | (1,699 | ) | | 170,358 |
| 66,877 |
| | 43,515 |
| | (1,319 | ) | | 109,073 |
|
Other long-term assets | 139,742 |
| | 22,740 |
| | (84,629 | ) | | 77,853 |
| 138,344 |
| | 23,593 |
| | (86,048 | ) | | 75,889 |
|
| $ | 2,976,974 |
| | $ | 7,975,535 |
| | $ | (464,738 | ) | | $ | 10,487,771 |
| $ | 2,696,360 |
| | $ | 7,523,069 |
| | $ | (246,757 | ) | | $ | 9,972,672 |
|
LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | | | | | | | | | | |
Current liabilities: | | | | | | | | | | | | | | |
Accounts payable | $ | 298,372 |
| | $ | 407,384 |
| | $ | (378,410 | ) | | $ | 327,346 |
| $ | 214,263 |
| | $ | 167,057 |
| | $ | (153,723 | ) | | $ | 227,597 |
|
Accrued liabilities | 441,102 |
| | 92,217 |
| | 93 |
| | 533,412 |
| 444,028 |
| | 90,942 |
| | (5,148 | ) | | 529,822 |
|
Short-term debt | — |
| | 928,445 |
| | — |
| | 928,445 |
| — |
| | 1,273,482 |
| | — |
| | 1,273,482 |
|
Current portion of long-term debt, net | — |
| | 1,565,558 |
| | — |
| | 1,565,558 |
| — |
| | 1,127,269 |
| | — |
| | 1,127,269 |
|
Total current liabilities | 739,474 |
| | 2,993,604 |
| | (378,317 | ) | | 3,354,761 |
| 658,291 |
| | 2,658,750 |
| | (158,871 | ) | | 3,158,170 |
|
Long-term debt, net | 741,633 |
| | 3,936,717 |
| | — |
| | 4,678,350 |
| 741,961 |
| | 3,845,297 |
| | — |
| | 4,587,258 |
|
Pension liability | 51,797 |
| | — |
| | — |
| | 51,797 |
| 54,606 |
| | — |
| | — |
| | 54,606 |
|
Postretirement healthcare liability | 166,023 |
| | — |
| | — |
| | 166,023 |
| 118,753 |
| | — |
| | — |
| | 118,753 |
|
Other long-term liabilities | 155,086 |
| | 32,714 |
| | 2,873 |
| | 190,673 |
| 171,200 |
| | 35,503 |
| | 2,905 |
| | 209,608 |
|
Commitments and contingencies (Note 15) | | | | | | | | | | | | | | |
Shareholders’ equity | 1,122,961 |
| | 1,012,500 |
| | (89,294 | ) | | 2,046,167 |
| 951,549 |
| | 983,519 |
| | (90,791 | ) | | 1,844,277 |
|
| $ | 2,976,974 |
| | $ | 7,975,535 |
| | $ | (464,738 | ) | | $ | 10,487,771 |
| $ | 2,696,360 |
| | $ | 7,523,069 |
| | $ | (246,757 | ) | | $ | 9,972,672 |
|
| | | December 31, 2016 | March 26, 2017 |
| HDMC Entities | | HDFS Entities | | Eliminations | | Consolidated | HDMC Entities | | HDFS Entities | | Eliminations | | Consolidated |
ASSETS | | | | | | | | | | | | | | |
Current assets: | | | | | | | | | | | | | | |
Cash and cash equivalents | $ | 425,540 |
| | $ | 334,444 |
| | $ | — |
| | $ | 759,984 |
| $ | 479,439 |
| | $ | 360,261 |
| | $ | — |
| | $ | 839,700 |
|
Marketable securities | 5,019 |
| | 500 |
| | — |
| | 5,519 |
| 5,004 |
| | — |
| | — |
| | 5,004 |
|
Accounts receivable, net | 450,186 |
| | — |
| | (165,080 | ) | | 285,106 |
| 740,231 |
| | — |
| | (404,653 | ) | | 335,578 |
|
Finance receivables, net | — |
| | 2,076,261 |
| | — |
| | 2,076,261 |
| — |
| | 2,354,095 |
| | — |
| | 2,354,095 |
|
Inventories | 499,917 |
| | — |
| | — |
| | 499,917 |
| 485,476 |
| | — |
| | — |
| | 485,476 |
|
Restricted cash | — |
| | 52,574 |
| | — |
| | 52,574 |
| — |
| | 75,705 |
| | — |
| | 75,705 |
|
Other current assets | 127,606 |
| | 46,934 |
| | (49 | ) | | 174,491 |
| 102,298 |
| | 40,064 |
| | — |
| | 142,362 |
|
Total current assets | 1,508,268 |
| | 2,510,713 |
| | (165,129 | ) | | 3,853,852 |
| 1,812,448 |
| | 2,830,125 |
| | (404,653 | ) | | 4,237,920 |
|
Finance receivables, net | — |
| | 4,759,197 |
| | — |
| | 4,759,197 |
| — |
| | 4,792,027 |
| | — |
| | 4,792,027 |
|
Property, plant and equipment, net | 942,634 |
| | 38,959 |
| | — |
| | 981,593 |
| 913,462 |
| | 39,582 |
| | — |
| | 953,044 |
|
Goodwill | 53,391 |
| | — |
| | — |
| | 53,391 |
| 53,967 |
| | — |
| | — |
| | 53,967 |
|
Deferred income taxes | 103,487 |
| | 66,152 |
| | (1,910 | ) | | 167,729 |
| 98,291 |
| | 68,306 |
| | (1,401 | ) | | 165,196 |
|
Other long-term assets | 132,835 |
| | 24,769 |
| | (83,126 | ) | | 74,478 |
| 137,712 |
| | 25,790 |
| | (83,801 | ) | | 79,701 |
|
| $ | 2,740,615 |
| | $ | 7,399,790 |
| | $ | (250,165 | ) | | $ | 9,890,240 |
| $ | 3,015,880 |
| | $ | 7,755,830 |
| | $ | (489,855 | ) | | $ | 10,281,855 |
|
LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | | | | | | | | | | |
Current liabilities: | | | | | | | | | | | | | | |
Accounts payable | $ | 219,353 |
| | $ | 181,045 |
| | $ | (165,080 | ) | | $ | 235,318 |
| $ | 333,227 |
| | $ | 430,110 |
| | $ | (404,653 | ) | | $ | 358,684 |
|
Accrued liabilities | 395,907 |
| | 90,910 |
| | (165 | ) | | 486,652 |
| 442,181 |
| | 105,060 |
| | 396 |
| | 547,637 |
|
Short-term debt | — |
| | 1,055,708 |
| | — |
| | 1,055,708 |
| — |
| | 953,357 |
| | — |
| | 953,357 |
|
Current portion of long-term debt, net | — |
| | 1,084,884 |
| | — |
| | 1,084,884 |
| — |
| | 697,061 |
| | — |
| | 697,061 |
|
Total current liabilities | 615,260 |
| | 2,412,547 |
| | (165,245 | ) | | 2,862,562 |
| 775,408 |
| | 2,185,588 |
| | (404,257 | ) | | 2,556,739 |
|
Long-term debt, net | 741,306 |
| | 3,925,669 |
| | — |
| | 4,666,975 |
| 741,469 |
| | 4,579,328 |
| | — |
| | 5,320,797 |
|
Pension liability | 84,442 |
| | — |
| | — |
| | 84,442 |
| 52,559 |
| | — |
| | — |
| | 52,559 |
|
Postretirement healthcare liability | 173,267 |
| | — |
| | — |
| | 173,267 |
| 171,143 |
| | — |
| | — |
| | 171,143 |
|
Other long-term liabilities | 150,391 |
| | 29,697 |
| | 2,748 |
| | 182,836 |
| 152,974 |
| | 31,506 |
| | 2,728 |
| | 187,208 |
|
Commitments and contingencies (Note 15) | | | | | | | | | | | | | | |
Shareholders’ equity | 975,949 |
| | 1,031,877 |
| | (87,668 | ) | | 1,920,158 |
| 1,122,327 |
| | 959,408 |
| | (88,326 | ) | | 1,993,409 |
|
| $ | 2,740,615 |
| | $ | 7,399,790 |
| | $ | (250,165 | ) | | $ | 9,890,240 |
| $ | 3,015,880 |
| | $ | 7,755,830 |
| | $ | (489,855 | ) | | $ | 10,281,855 |
|
|
| | | | | | | | | | | | | | | |
| June 26, 2016 |
| HDMC Entities | | HDFS Entities | | Eliminations | | Consolidated |
ASSETS | | | | | | | |
Current assets: | | | | | | | |
Cash and cash equivalents | $ | 445,662 |
| | $ | 419,008 |
| | $ | — |
| | $ | 864,670 |
|
Marketable securities | 5,070 |
| | — |
| | — |
| | 5,070 |
|
Accounts receivable, net | 816,439 |
| | — |
| | (504,483 | ) | | 311,956 |
|
Finance receivables, net | — |
| | 2,457,974 |
| | — |
| | 2,457,974 |
|
Inventories | 371,196 |
| | — |
| | — |
| | 371,196 |
|
Restricted cash | — |
| | 78,078 |
| | — |
| | 78,078 |
|
Deferred income taxes | 60,497 |
| | 55,717 |
| | — |
| | 116,214 |
|
Other current assets | 124,923 |
| | 38,203 |
| | (9,260 | ) | | 153,866 |
|
Total current assets | 1,823,787 |
| | 3,048,980 |
| | (513,743 | ) | | 4,359,024 |
|
Finance receivables, net | — |
| | 4,824,071 |
| | — |
| | 4,824,071 |
|
Property, plant and equipment, net | 916,388 |
| | 34,921 |
| | — |
| | 951,309 |
|
Goodwill | 54,542 |
| | — |
| | — |
| | 54,542 |
|
Deferred income taxes | 76,194 |
| | 8,555 |
| | (1,702 | ) | | 83,047 |
|
Other long-term assets | 133,540 |
| | 24,744 |
| | (81,837 | ) | | 76,447 |
|
| $ | 3,004,451 |
| | $ | 7,941,271 |
| | $ | (597,282 | ) | | $ | 10,348,440 |
|
LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | | | |
Current liabilities: | | | | | | | |
Accounts payable | $ | 239,380 |
| | $ | 538,799 |
| | $ | (504,483 | ) | | $ | 273,696 |
|
Accrued liabilities | 397,645 |
| | 97,150 |
| | (8,984 | ) | | 485,811 |
|
Short-term debt | — |
| | 1,020,487 |
| | — |
| | 1,020,487 |
|
Current portion of long-term debt, net | — |
| | 732,773 |
| | — |
| | 732,773 |
|
Total current liabilities | 637,025 |
| | 2,389,209 |
| | (513,467 | ) | | 2,512,767 |
|
Long-term debt, net | 740,982 |
| | 4,567,081 |
| | — |
| | 5,308,063 |
|
Pension liability | 129,465 |
| | — |
| | — |
| | 129,465 |
|
Postretirement healthcare liability | 188,846 |
| | — |
| | — |
| | 188,846 |
|
Other long-term liabilities | 157,835 |
| | 27,621 |
| | 2,836 |
| | 188,292 |
|
Commitments and contingencies (Note 15) | | | | | | | |
Shareholders’ equity | 1,150,298 |
| | 957,360 |
| | (86,651 | ) | | 2,021,007 |
|
| $ | 3,004,451 |
| | $ | 7,941,271 |
| | $ | (597,282 | ) | | $ | 10,348,440 |
|
|
| | | | | | | | | | | | | | | |
| Three months ended April 1, 2018 |
| HDMC Entities | | HDFS Entities | | Eliminations | | Consolidated |
Cash flows from operating activities: | | | | | | | |
Net income | $ | 238,329 |
| | $ | 46,413 |
| | $ | (109,979 | ) | | $ | 174,763 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | |
Depreciation and amortization of intangibles | 61,405 |
| | 1,068 |
| | — |
| | 62,473 |
|
Amortization of deferred loan origination costs | — |
| | 20,116 |
| | — |
| | 20,116 |
|
Amortization of financing origination fees | 165 |
| | 1,863 |
| | — |
| | 2,028 |
|
Provision for long-term employee benefits | 9,747 |
| | — |
| | — |
| | 9,747 |
|
Employee benefit plan contributions and payments | (5,486 | ) | | — |
| | — |
| | (5,486 | ) |
Stock compensation expense | 7,072 |
| | 890 |
| | — |
| | 7,962 |
|
Net change in wholesale finance receivables related to sales | — |
| | — |
| | (239,902 | ) | | (239,902 | ) |
Provision for credit losses | — |
| | 30,052 |
| | — |
| | 30,052 |
|
Deferred income taxes | 2,469 |
| | 979 |
| | (260 | ) | | 3,188 |
|
Other, net | (2,081 | ) | | 200 |
| | (21 | ) | | (1,902 | ) |
Changes in current assets and liabilities: | | | | | | | |
Accounts receivable, net | (195,123 | ) | | — |
| | 177,435 |
| | (17,688 | ) |
Finance receivables - accrued interest and other | — |
| | 4,758 |
| | — |
| | 4,758 |
|
Inventories | (21,542 | ) | | — |
| | — |
| | (21,542 | ) |
Accounts payable and accrued liabilities | 121,833 |
| | 201,056 |
| | (173,966 | ) | | 148,923 |
|
Derivative instruments | 666 |
| | 36 |
| | — |
| | 702 |
|
Other | 9,935 |
| | 6,269 |
| | (2,802 | ) | | 13,402 |
|
Total adjustments | (10,940 | ) | | 267,287 |
| | (239,516 | ) | | 16,831 |
|
Net cash provided by operating activities | 227,389 |
| | 313,700 |
| | (349,495 | ) | | 191,594 |
|
| | | | | | | |
|
| | | | | | | | | | | | | | | |
| Six months ended June 25, 2017 |
| HDMC Entities | | HDFS Entities | | Eliminations | | Consolidated |
Cash flows from operating activities: | | | | | | | |
Net income | $ | 469,345 |
| | $ | 82,015 |
| | $ | (106,124 | ) | | $ | 445,236 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | |
Depreciation and amortization of intangibles | 104,157 |
| | 3,421 |
| | — |
| | 107,578 |
|
Amortization of deferred loan origination costs | — |
| | 40,771 |
| | — |
| | 40,771 |
|
Amortization of financing origination fees | 327 |
| | 3,752 |
| | — |
| | 4,079 |
|
Provision for long-term employee benefits | 14,950 |
| | — |
| | — |
| | 14,950 |
|
Employee benefit plan contributions and payments | (37,307 | ) | | — |
| | — |
| | (37,307 | ) |
Stock compensation expense | 15,995 |
| | 1,502 |
| | — |
| | 17,497 |
|
Net change in wholesale finance receivables related to sales | — |
| | — |
| | (271,927 | ) | | (271,927 | ) |
Provision for credit losses | — |
| | 69,806 |
| | — |
| | 69,806 |
|
Deferred income taxes | 4,975 |
| | (4,586 | ) | | (211 | ) | | 178 |
|
Other, net | (6,422 | ) | | 2,134 |
| | 125 |
| | (4,163 | ) |
Changes in current assets and liabilities: | | | | | | | |
Accounts receivable, net | (241,569 | ) | | — |
| | 213,330 |
| | (28,239 | ) |
Finance receivables - accrued interest and other | — |
| | 2,067 |
| | — |
| | 2,067 |
|
Inventories | 138,942 |
| | — |
| | — |
| | 138,942 |
|
Accounts payable and accrued liabilities | 112,916 |
| | 228,247 |
| | (208,043 | ) | | 133,120 |
|
Derivative instruments | 3,106 |
| | 8 |
| | — |
| | 3,114 |
|
Other | (8,683 | ) | | 98 |
| | (49 | ) | | (8,634 | ) |
Total adjustments | 101,387 |
| | 347,220 |
| | (266,775 | ) | | 181,832 |
|
Net cash provided by operating activities | 570,732 |
| | 429,235 |
| | (372,899 | ) | | 627,068 |
|
| | | | | | | |
|
| | | | | | | | | | | | | | | |
| Three months ended April 1, 2018 |
| HDMC Entities | | HDFS Entities | | Eliminations | | Consolidated |
Cash flows from investing activities: | | | | | | | |
Capital expenditures | (25,746 | ) | | (2,690 | ) | | — |
| | (28,436 | ) |
Origination of finance receivables | — |
| | (1,786,309 | ) | | 988,242 |
| | (798,067 | ) |
Collections on finance receivables | — |
| | 1,558,547 |
| | (748,747 | ) | | 809,800 |
|
Other | (4,948 | ) | | — |
| | — |
| | (4,948 | ) |
Net cash used by investing activities | (30,694 | ) | | (230,452 | ) | | 239,495 |
| | (21,651 | ) |
Cash flows from financing activities: | | | | | | | |
Proceeds from issuance of medium-term notes | — |
| | 347,553 |
| | — |
| | 347,553 |
|
Repayments of securitization debt | — |
| | (67,955 | ) | | — |
| | (67,955 | ) |
Borrowings of asset-backed commercial paper | — |
| | 35,504 |
| | — |
| | 35,504 |
|
Repayments of asset-backed commercial paper | — |
| | (45,907 | ) | | — |
| | (45,907 | ) |
Net decrease in credit facilities and unsecured commercial paper | — |
| | (234,145 | ) | | — |
| | (234,145 | ) |
Dividends paid | (62,731 | ) | | (110,000 | ) | | 110,000 |
| | (62,731 | ) |
Purchase of common stock for treasury | (72,968 | ) | | — |
| | — |
| | (72,968 | ) |
Issuance of common stock under employee stock option plans | 1,719 |
| | — |
| | — |
| | 1,719 |
|
Net cash used by financing activities | (133,980 | ) | | (74,950 | ) | | 110,000 |
| | (98,930 | ) |
Effect of exchange rate changes on cash, cash equivalents and restricted cash | 2,108 |
| | (74 | ) | | — |
| | 2,034 |
|
Net increase in cash, cash equivalents and restricted cash | $ | 64,823 |
| | $ | 8,224 |
| | $ | — |
| | $ | 73,047 |
|
Cash, cash equivalents and restricted cash: | | | | | | | |
Cash, cash equivalents and restricted cash—beginning of period | $ | 338,186 |
| | $ | 408,024 |
| | $ | — |
| | $ | 746,210 |
|
Net increase in cash, cash equivalents and restricted cash | 64,823 |
| | 8,224 |
| | — |
| | 73,047 |
|
Cash, cash equivalents and restricted cash—end of period | $ | 403,009 |
| | $ | 416,248 |
| | $ | — |
| | $ | 819,257 |
|
| | | Six months ended June 25, 2017 | Three months ended March 26, 2017 |
| HDMC Entities | | HDFS Entities | | Eliminations | | Consolidated | HDMC Entities | | HDFS Entities | | Eliminations | | Consolidated |
Cash flows from operating activities: | | | | | | | | |
Net income | | $ | 260,445 |
| | $ | 31,907 |
| | $ | (105,983 | ) | | $ | 186,369 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | |
Depreciation and amortization of intangibles | | 53,241 |
| | 1,659 |
| | — |
| | 54,900 |
|
Amortization of deferred loan origination costs | | — |
| | 20,078 |
| | — |
| | 20,078 |
|
Amortization of financing origination fees | | 163 |
| | 1,913 |
| | — |
| | 2,076 |
|
Provision for long-term employee benefits | | 7,475 |
| | — |
| | — |
| | 7,475 |
|
Employee benefit plan contributions and payments | | (29,957 | ) | | — |
| | — |
| | (29,957 | ) |
Stock compensation expense | | 6,317 |
| | 675 |
| | — |
| | 6,992 |
|
Net change in wholesale finance receivables related to sales | | — |
| | — |
| | (317,087 | ) | | (317,087 | ) |
Provision for credit losses | | — |
| | 43,589 |
| | — |
| | 43,589 |
|
Deferred income taxes | | 6,728 |
| | (2,230 | ) | | (509 | ) | | 3,989 |
|
Other, net | | (6,728 | ) | | 1,411 |
| | (17 | ) | | (5,334 | ) |
Changes in current assets and liabilities: | | | | | | | | |
Accounts receivable, net | | (278,803 | ) | | — |
| | 239,573 |
| | (39,230 | ) |
Finance receivables - accrued interest and other | | — |
| | 5,142 |
| | — |
| | 5,142 |
|
Inventories | | 23,476 |
| | — |
| | — |
| | 23,476 |
|
Accounts payable and accrued liabilities | | 154,372 |
| | 263,011 |
| | (234,455 | ) | | 182,928 |
|
Derivative instruments | | 3,120 |
| | — |
| | — |
| | 3,120 |
|
Other | | 5,537 |
| | 5,925 |
| | (49 | ) | | 11,413 |
|
Total adjustments | | (55,059 | ) | | 341,173 |
| | (312,544 | ) | | (26,430 | ) |
Net cash provided by operating activities | | 205,386 |
| | 373,080 |
| | (418,527 | ) | | 159,939 |
|
Cash flows from investing activities: | | | | | | | | | | | | | | |
Capital expenditures | (64,273 | ) | | (5,543 | ) | | — |
| | (69,816 | ) | (21,686 | ) | | (2,281 | ) | | — |
| | (23,967 | ) |
Origination of finance receivables | — |
| | (4,205,868 | ) | | 2,228,029 |
| | (1,977,839 | ) | — |
| | (1,932,599 | ) | | 1,087,907 |
| | (844,692 | ) |
Collections on finance receivables | — |
| | 3,608,929 |
| | (1,961,130 | ) | | 1,647,799 |
| — |
| | 1,556,534 |
| | (775,380 | ) | | 781,154 |
|
Sales and redemptions of marketable securities | 6,916 |
| | — |
| | — |
| | 6,916 |
| |
Other | 115 |
| | — |
| | — |
| | 115 |
| 52 |
| | — |
| | — |
| | 52 |
|
Net cash used by investing activities | (57,242 | ) | | (602,482 | ) | | 266,899 |
| | (392,825 | ) | (21,634 | ) | | (378,346 | ) | | 312,527 |
| | (87,453 | ) |
Cash flows from financing activities: | | | | | | | | | | | | | | |
Proceeds from issuance of medium-term notes | — |
| | 893,668 |
| | — |
| | 893,668 |
| — |
| | 497,406 |
| | — |
| | 497,406 |
|
Repayments of medium-term notes | — |
| | (400,000 | ) | | — |
| | (400,000 | ) | — |
| | (400,000 | ) | | — |
| | (400,000 | ) |
Repayments of securitization debt | — |
| | (275,659 | ) | | — |
| | (275,659 | ) | — |
| | (111,359 | ) | | — |
| | (111,359 | ) |
Borrowings of asset-backed commercial paper | — |
| | 341,625 |
| | — |
| | 341,625 |
| — |
| | 305,209 |
| | — |
| | 305,209 |
|
Repayments of asset-backed commercial paper | — |
| | (77,732 | ) | | — |
| | (77,732 | ) | — |
| | (29,383 | ) | | — |
| | (29,383 | ) |
Net decrease in credit facilities and unsecured commercial paper | — |
| | (128,787 | ) | | — |
| | (128,787 | ) | — |
| | (101,702 | ) | | — |
| | (101,702 | ) |
Net change in restricted cash | — |
| | (7,248 | ) | | — |
| | (7,248 | ) | |
Dividends paid | (128,452 | ) | | (106,000 | ) | | 106,000 |
| | (128,452 | ) | (64,611 | ) | | (106,000 | ) | | 106,000 |
| | (64,611 | ) |
Purchase of common stock for treasury | (243,055 | ) | | — |
| | — |
| | (243,055 | ) | (79,753 | ) | | — |
| | — |
| | (79,753 | ) |
Issuance of common stock under employee stock option plans | 7,432 |
| | — |
| | — |
| | 7,432 |
| 7,336 |
| | — |
| | — |
| | 7,336 |
|
Net cash (used by) provided by financing activities | (364,075 | ) | | 239,867 |
| | 106,000 |
| | (18,208 | ) | |
Effect of exchange rate changes on cash and cash equivalents | 11,937 |
| | 520 |
| | — |
| | 12,457 |
| |
Net increase in cash and cash equivalents | $ | 161,352 |
| | $ | 67,140 |
| | $ | — |
| | $ | 228,492 |
| |
Cash and cash equivalents: | | | | | | | | |
Cash and cash equivalents—beginning of period | $ | 425,540 |
| | $ | 334,444 |
| | $ | — |
| | $ | 759,984 |
| |
Net increase in cash and cash equivalents | 161,352 |
| | 67,140 |
| | — |
| | 228,492 |
| |
Cash and cash equivalents—end of period | $ | 586,892 |
| | $ | 401,584 |
| | $ | — |
| | $ | 988,476 |
| |
Net cash (used) provided by financing activities | | (137,028 | ) | | 54,171 |
| | 106,000 |
| | 23,143 |
|
Effect of exchange rate changes on cash, cash equivalents and restricted cash | | 7,175 |
| | 44 |
| | — |
| | 7,219 |
|
Net increase in cash, cash equivalents and restricted cash | | $ | 53,899 |
| | $ | 48,949 |
| | $ | — |
| | $ | 102,848 |
|
Cash, cash equivalents and restricted cash: | | | | | | | | |
Cash, cash equivalents and restricted cash—beginning of period | | $ | 425,540 |
| | $ | 401,591 |
| | $ | — |
| | $ | 827,131 |
|
Net increase in cash, cash equivalents and restricted cash | | 53,899 |
| | 48,949 |
| | — |
| | 102,848 |
|
Cash, cash equivalents and restricted cash—end of period | | $ | 479,439 |
| | $ | 450,540 |
| | $ | — |
| | $ | 929,979 |
|
|
| | | | | | | | | | | | | | | |
| Six months ended June 26, 2016 |
| HDMC Entities | | HDFS Entities | | Eliminations | | Consolidated |
Cash flows from operating activities: | | | | | | | |
Net income | $ | 625,366 |
| | $ | 88,722 |
| | $ | (183,168 | ) | | $ | 530,920 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | |
Depreciation and amortization of intangibles | 97,025 |
| | 3,931 |
| | — |
| | 100,956 |
|
Amortization of deferred loan origination costs | — |
| | 43,555 |
| | — |
| | 43,555 |
|
Amortization of financing origination fees | 330 |
| | 4,816 |
| | — |
| | 5,146 |
|
Provision for long-term employee benefits | 19,005 |
| | — |
| | — |
| | 19,005 |
|
Employee benefit plan contributions and payments | (35,189 | ) | | — |
| | — |
| | (35,189 | ) |
Stock compensation expense | 14,562 |
| | 1,235 |
| | — |
| | 15,797 |
|
Net change in wholesale finance receivables related to sales | — |
| | — |
| | (442,254 | ) | | (442,254 | ) |
Provision for credit losses | — |
| | 60,584 |
| | — |
| | 60,584 |
|
Gain on off-balance sheet asset-backed securitization | — |
| | (9,269 | ) | | — |
| | (9,269 | ) |
Deferred income taxes | 798 |
| | (3,906 | ) | | (440 | ) | | (3,548 | ) |
Other, net | (20,505 | ) | | (171 | ) | | 168 |
| | (20,508 | ) |
Changes in current assets and liabilities: | | | | | | | |
Accounts receivable, net | (416,198 | ) | | — |
| | 361,089 |
| | (55,109 | ) |
Finance receivables - accrued interest and other | — |
| | (125 | ) | | — |
| | (125 | ) |
Inventories | 225,586 |
| | — |
| | — |
| | 225,586 |
|
Accounts payable and accrued liabilities | 23,420 |
| | 385,992 |
| | (355,622 | ) | | 53,790 |
|
Derivative instruments | (1,474 | ) | | — |
| | — |
| | (1,474 | ) |
Other | (33,237 | ) | | 1,664 |
| | — |
| | (31,573 | ) |
Total adjustments | (125,877 | ) | | 488,306 |
| | (437,059 | ) | | (74,630 | ) |
Net cash provided by operating activities | 499,489 |
| | 577,028 |
| | (620,227 | ) | | 456,290 |
|
|
| | | | | | | | | | | | | | | |
| Six months ended June 26, 2016 |
| HDMC Entities | | HDFS Entities | | Eliminations | | Consolidated |
Cash flows from investing activities: | | | | | | | |
Capital expenditures | (104,125 | ) | | (3,406 | ) | | — |
| | (107,531 | ) |
Origination of finance receivables | — |
| | (4,507,717 | ) | | 2,516,333 |
| | (1,991,384 | ) |
Collections on finance receivables | — |
| | 3,709,319 |
| | (2,079,106 | ) | | 1,630,213 |
|
Proceeds from finance receivables sold | — |
| | 312,571 |
| | — |
| | 312,571 |
|
Sales and redemptions of marketable securities | 40,000 |
| | — |
| | — |
| | 40,000 |
|
Other | 166 |
| | — |
| | — |
| | 166 |
|
Net cash used by investing activities | (63,959 | ) | | (489,233 | ) | | 437,227 |
| | (115,965 | ) |
Cash flows from financing activities: | | | | | | | |
Proceeds from issuance of medium-term notes | — |
| | 1,193,396 |
| | — |
| | 1,193,396 |
|
Repayments of medium-term notes | — |
| | (450,000 | ) | | — |
| | (450,000 | ) |
Repayments of securitization debt | — |
| | (385,837 | ) | | — |
| | (385,837 | ) |
Borrowings of asset-backed commercial paper | — |
| | 33,428 |
| | — |
| | 33,428 |
|
Repayments of asset-backed commercial paper | — |
| | (34,989 | ) | | — |
| | (34,989 | ) |
Net decrease in credit facilities and unsecured commercial paper | — |
| | (181,259 | ) | | — |
| | (181,259 | ) |
Net change in restricted cash | — |
| | 17,992 |
| | — |
| | 17,992 |
|
Dividends paid | (127,800 | ) | | (183,000 | ) | | 183,000 |
| | (127,800 | ) |
Purchase of common stock for treasury | (269,411 | ) | | — |
| | — |
| | (269,411 | ) |
Excess tax benefits from share-based payments | 331 |
| | — |
| | — |
| | 331 |
|
Issuance of common stock under employee stock option plans | 2,367 |
| | — |
| | — |
| | 2,367 |
|
Net cash (used by) provided by financing activities | (394,513 | ) | | 9,731 |
| | 183,000 |
| | (201,782 | ) |
Effect of exchange rate changes on cash and cash equivalents | 4,202 |
| | (284 | ) | | — |
| | 3,918 |
|
Net increase in cash and cash equivalents | $ | 45,219 |
| | $ | 97,242 |
| | $ | — |
| | $ | 142,461 |
|
Cash and cash equivalents: | | | | | | | |
Cash and cash equivalents—beginning of period | $ | 400,443 |
| | $ | 321,766 |
| | $ | — |
| | $ | 722,209 |
|
Net increase in cash and cash equivalents | 45,219 |
| | 97,242 |
| | — |
| | 142,461 |
|
Cash and cash equivalents—end of period | $ | 445,662 |
| | $ | 419,008 |
| | $ | — |
| | $ | 864,670 |
|
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Harley-Davidson, Inc. is the parent company of the groups of companies doing business as Harley-Davidson Motor Company (HDMC) and Harley-Davidson Financial Services (HDFS). Unless the context otherwise requires, all references to the "Company" include Harley-Davidson, Inc. and all its subsidiaries. The Company operates in two segments: Motorcycles & Related Products (Motorcycles) and Financial Services. The Company’s reportable segments are strategic business units that offer different products and services and are managed separately based on the fundamental differences in their operations.
The Motorcycles segment consists of HDMC which designs, manufactures and sells at wholesale on-road Harley-Davidson motorcycles as well as a line of motorcycle parts, accessories, general merchandise and related services. The Company's products are sold to retail customers through a network of independent dealers. The Company conducts business on a global basis, with sales in the United States, Canada, Latin America, Europe/Middle East/Africa (EMEA) and the Asia Pacific region.
The Financial Services segment consists of HDFS which primarily providesis engaged in the business of financing and servicing wholesale inventory receivables and retail financingconsumer loans, primarily for the purchase of Harley-Davidson motorcycles. HDFS also works with certain unaffiliated insurance companies to provide motorcycle insurance and insurance-related programsprotection products to Harley-Davidson dealers and their retail customers.motorcycle owners. HDFS conducts business principally in the United States and Canada.
The “% Change” figures included in the “Results of Operations” section were calculated using unrounded dollar amounts and may differ from calculations using the rounded dollar amounts presented.
(1) Note Regarding Forward-Looking Statements
The Company intends that certain matters discussed in this report are “forward-looking statements” intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. These forward-looking statements can generally be identified as such by reference to this footnote or because the context of the statement will include words such as the Company “believes,” “anticipates,” “expects,” “plans,” or “estimates” or words of similar meaning. Similarly, statements that describe future plans, objectives, outlooks, targets, guidance or goals are also forward-looking statements. Such forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those anticipated as of the date of this report. Certain of such risks and uncertainties are described in close proximity to such statements or elsewhere in this report, including under the caption “Cautionary Statements” and in Item 1A “Risk Factors” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.2017. Shareholders, potential investors, and other readers are urged to consider these factors in evaluating the forward-looking statements and are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements included in the Overview and Outlook section are only made as of July 18, 2017 andApril 24, 2018, the remaining forward-looking statements in this report are only made as of the date of the filing of this report (August 3, 2017)(May 10, 2018) and the Company disclaims any obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances.
Overview(1)
The Company’s net income was $258.9$174.8 million, or $1.48$1.03 per diluted share, for the secondfirst quarter of 20172018 compared to $280.4$186.4 million, or $1.55$1.05 per diluted share, in the secondfirst quarter of 2016.2017. Operating income from the Motorcycles segment decreased $3.1$63.7 million or 1.0%26.9% compared to last year’s secondfirst quarter primarily due primarily to restructuring expenses of $46.8 million and higher selling, administrative and engineering expenses. Motorcycle segment revenue in the first quarter of 2018 was up over the prior year, despite lower motorcycle shipments.shipments, due to favorable product mix, favorable foreign currency exchange rates and model-year price increases. Operating income from the Financial Services segment in the secondfirst quarter of 20172018 was $81.9$63.6 million, down 8.5%up 20.8% compared to the year-ago quarter due primarily to a $9.3 million gain on the sale of retail finance receivables recognized as part of the second quarter 2016 off-balance sheet securitization that did not recur in the second quarter of 2017.lower provision for credit losses.
Worldwide retail sales of new Harley-Davidson motorcycles in the first quarter of 2018 were down 6.7%7.2% compared to the secondfirst quarter of 2016.2017. In the U.S., retail sales were down 9.3%12.0%, while retail sales in international markets declined 2.3%were up 0.2%, compared to the prior year secondfirst quarter. The declineIn the first quarter of 2018, U.S. retail sales continued to be adversely impacted by very weak U.S. industry sales. In international markets, retail sales grew behind strong performance in Europe and Latin America.
During the U.S. was significant and larger thanfirst quarter of 2018, the Company's expectations, while international performance was generally in line with the Company's expectations. As a resultCompany continued to focus on its 2027 objectives of the very tough market conditionsbuilding two million new riders in the U.S., growing its international business to 50 percent of annual volume, launching 100 new high impact motorcycles and doing so profitably and sustainably. In addition, considering the prolonged softness in the U.S. industry and given what the Company believes is untapped potential in international markets and in certain high-growth spaces globally, the Company is taking action to:crafting strategy accelerants to deliver value through 2022 and beyond. The Company plans to leverage its core business more fully and expand in new directions to accelerate value creation as it pursues its long-term objectives. The
Address market issues
Company is currently refining its plans and, in the U.S. through disciplined and aggressive supply management
Manage cost aggressively in the near-term while continuingsummer of 2018, intends to invest in the future
Focus relentlessly on its long-term strategies of growing ridership in the U.S. and growing its reach and impact internationally, while growing market share and profitability globally
Overview (continued)(1)
For the remainder of 2017, the Company believes the retail environment will continue to be challenging; however, it expects year-over-year retail sales ratesreveal significant additional steps to improve from those experienced during the first half of 2017, supported by:
Increased marketing investment focused on growing ridership in the U.S.
| |
• | Increased availability of Street RodTM internationally
|
International dealer network expansion
Easier second half retail sales comparisons
High-impact model-year 2018 Harley-Davidson motorcycles performance and value creation through 2022 and beyond.
Outlook(1)
On July 18, 2017,April 24, 2018, the Company provided the following information concerning its expectations for the Company for the remainder of 2017:
Given the weak U.S. industry results during the second quarter, the Company reduced its full-year 2017 shipment guidance and now expects to ship 241,000 to 246,000 motorcycles to dealers worldwide in 2017, which is down approximately 6% to 8% from 2016 and takes into account the Company's expectation of significantly lower U.S. year-end retail inventory as compared to 2016. The Company's previous full-year shipment guidance was flat to down modestly as compared to 2016. The Company expects shipments in the third quarter of 39,000 to 44,000 motorcycles compared to 48,611 motorcyclesshipped in the year-ago period.
The Company also adjusted its 2017 margin outlook for the Motorcycles segment and now expects gross margin as a percent of revenue to be down modestly. Full-year operating expenses for the Motorcycles segment, including selling, administrative and engineering expenses, are now expected to be down compared to 2016, but slightly higher as a percent of revenue. Consequently, operating margin as a percent of revenue is now expected to be down approximately 1 percentage point, compared to 2016. The Company had previously expected gross margin percent, operating expenses as a percent of revenue and in absolute dollars and operating margin percent to be approximately in line with 2016.
In the third quarter of 2017, the Company expects gross margin as a percent of revenue to be down approximately 2.5 percentage points versus the third quarter of 2016. The Company expects the decrease in gross margin to be primarily driven by lower fixed cost absorption as the Company reduces production. It expects the lower gross margin percent in the third quarter to be largely recovered in the fourth quarter. It also expects third quarter selling, administrative and engineering expenses to be higher than prior year driven by increased marketing expense related to the launch of model-year 2018 motorcycles and spending focused on increasing ridership in the U.S.2018:
The Company continues to expect to ship 231,000 to 236,000 motorcycles to dealers worldwide in 2018, which is down approximately 2% to 4% from 2017. The Company's shipment expectation assumes that U.S. dealer retail sales will be down partially offset by growth in international retail sales as compared to the prior year. The Company expects 2018 year-end U.S. retail inventory to be flat to 2017 and flat to up in international markets as it continues to add new dealers.
Operating income as a percent of revenue for the Motorcycles segment is expected to be approximately 9.5% to 10.5% for the full year 2018. This reduction of approximately 2 to 3 percentage points compared to 2017, is primarily due to expected manufacturing optimization plan costs of $120 to $140 million. Refer to "Manufacturing Optimization Costs and Savings" below for further information.
Gross margin as a percent of revenue in 2018 is expected to benefit from pricing on model-year 2018 and 2019 motorcycles, a more favorable foreign currency exchange environment throughout the year and positive mix. However, the Company expects these positive impacts to be more than offset by rising steel and aluminum costs and increased manufacturing expense. Recently announced U.S. tariffs may also put additional pressure on the Company's steel and aluminum costs for the remainder of 2018; however, based on its current estimates of these incremental costs, the Company expects it will be able to mitigate these costs. Manufacturing expense is expected to be higher than in 2017, due to $20 to $25 million of temporary inefficiencies related to the manufacturing optimization plan and higher depreciation.
The Company continues to expect selling, administrative and engineering expense to be higher in 2018 compared to 2017, but largely flat to 2017 when expressed as a percent of revenue. The Company expects selling, administrative and engineering expense to be up behind increased investments in marketing and product development as the Company works to grow ridership globally.
Given strong first quarter 2018 results, the Company now expects operating income for the Financial Services segment to be flat to down modestly in 20172018 as compared to 2016 largely2017. The Company continues to expect 2018 results to be impacted by lower net interest income offset by a lower provision for credit losses.
As described in Note 2 of the Notes to the Financial Statements, the Company adopted ASU 2017-07 in 2018 which requires the Company to record the non-service cost components of net periodic retirement plan costs in non-operating income and to recast prior periods to reflect the new classification. The Company expects 2018 full year non-operating income related to net periodic retirement plan costs of approximately $2 million in 2018 compared to $9.2 million in 2017. The reduction is due to an increase in the amortization of actuarial losses following the 2018 first-quarter remeasurement of the Company's qualified pension plan. The remeasurement was required as a result of the 2016 off-balance sheet asset-backed securitization gain on salecurtailment of $9.3 millionqualified pension plan benefits associated with the manufacturing optimization plan.
The Company continues to expect its full year effective tax rate will be approximately 23.5% to 25.0%, down approximately 10 percentage points from the rate that it does not expectwould have been expected excluding the impact of the 2017 Tax Cuts and Jobs Act (2017 Tax Act). This guidance excludes the effect of potential future adjustments associated with revisions to recurthe tax expense recorded in 2017.the fourth quarter of 2017 related to the enactment of the 2017 Tax Act, other new tax legislation or audit settlements. The Company continues to regard its income tax estimates related to the 2017 Tax Act as provisional under SAB 118. The Company believes future guidance, interpretations and pronouncements will add clarity to the numerous aspects of the 2017 Tax Act that may impact the Company which may result in revisions to the Company’s provisional estimates.
The Company continues to estimate capital expenditures for 20172018 to be between $200$250 million and $220 million.$270 million, which includes approximately $50 million to support the manufacturing optimization plan. The Company anticipates it will have the ability to fund all capital expenditures in 20172018 with cash flows generated by operations.
In the second quarter of 2018, the Company expects to ship approximately 67,500 to 72,500 motorcycles, which is down 11% to 18% compared to 2017. Given actual 2018 first-quarter shipments and the Company's expectations for shipments in the second quarter, first-half shipments in 2018 are expected to be down 11% to 14% compared to 2017. Consequently, to achieve the 2018 full-year shipment guidance, the Company expects shipments in the second half of 2018 to be up approximately 12% over 2017. The Company continuesbelieves this shipment cadence will result in tight U.S retail inventories through the 2018 selling
season and an improved level of model year 2018 carry-over inventory. The timing of 2018 shipments is also expected to expect its full-year 2017 effective income tax rateresult in flat year-end retail inventory in the U.S. in support of the Company's disciplined supply strategy which it believes is delivering the intended results. Finally, the Company expects this shipment cadence will also impact the timing of operating margin in each of the remaining quarters of 2018.
In the second quarter of 2018, the Company expects operating margin for the Motorcycles segment to be down approximately 34.5%. This guidance excludes5 percentage points versus 2017 and to be impacted by an unfavorable shipment mix, approximately $20 million of manufacturing optimization plan costs, higher fixed costs per unit on lower production and shipments (which the effect of any potential future adjustments such as new tax legislation or audit settlements which are recorded as discrete tax itemsCompany expects to recover in the period in which they are settled.third quarter of 2018) and higher marketing and product development expense as compared to 2017.
Manufacturing Optimization Plan Costs and Savings(1)
In 2018, the Company commenced a significant, multi-year manufacturing optimization plan anchored by the consolidation of its final assembly plant in Kansas City, Missouri into its plant in York, Pennsylvania. As the 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 by 2019. As part of this manufacturing optimization plan, the Company will also close its wheel operations in Adelaide, Australia resulting in the elimination of approximately 90 jobs. The following table summarizes the expected costs and savings associated with the manufacturing optimization plan. |
| | | | | | | |
(in millions) | 2018 | | 2019 | | 2020 | | Total |
| | | | | | | |
Cost related to temporary inefficiencies | $ 20 - $ 25 | | $15 - $20 | | n/a | | $ 35 - $ 45 |
Restructuring expenses | $100 - $115 | | $35 - $40 | | n/a | | $135 - $155 |
| $120 - $140 | | $50 - $60 | | | | $170 - $200 |
% cash | 70% | | 75% | | | | 70% |
| 2018 | | 2019 | | 2020 | | Annual Ongoing |
Annual cash savings | - | | $25 - $30 | | $45 - $50 | | $65 - $75 |
The Company expects restructuring expenses to include the cost of employee termination benefits, accelerated depreciation and other project implementation costs of $50 to $60 million, $45 to $50 million and $40 to $45 million, respectively. The timing of cash payments for restructuring may not occur in the same fiscal period as the expense.
During the first quarter of 2018, the Company recorded restructuring expenses totaling $46.8 million and costs related to temporary inefficiencies of $0.7 million. Refer to Note 4 of the Notes to the Consolidated Financial Statements for additional information concerning restructuring expenses. The Company expects total capital expenditures of $75 million associated with the manufacturing optimization plan through 2019, including $50 million in 2018.
Results of Operations for the Three Months EndedJune 25, 2017April 1, 2018
Compared to the Three Months EndedJuneMarch 26, 20162017
Consolidated Results
| | | Three months ended | | | | | Three months ended | | | | |
(in thousands, except earnings per share) | June 25, 2017 | | June 26, 2016 | | (Decrease) Increase | | % Change | April 1, 2018 | | March 26, 2017 | | (Decrease) Increase | | % Change |
Operating income from Motorcycles & Related Products | $ | 319,647 |
| | $ | 322,749 |
| | $ | (3,102 | ) | | (1.0 | )% | |
Operating income from Motorcycles | | $ | 172,838 |
| | $ | 236,546 |
| | $ | (63,708 | ) | | (26.9 | )% |
Operating income from Financial Services | 81,935 |
| | 89,573 |
| | (7,638 | ) | | (8.5 | ) | 63,579 |
| | 52,636 |
| | 10,943 |
| | 20.8 |
|
Operating income | 401,582 |
| | 412,322 |
| | (10,740 | ) | | (2.6 | ) | 236,417 |
| | 289,182 |
| | (52,765 | ) | | (18.2 | ) |
Other income (expense), net | | 220 |
| | 2,296 |
| | (2,076 | ) | | (90.4 | ) |
Investment income | 577 |
| | 688 |
| | (111 | ) | | (16.1 | ) | 1,203 |
| | 879 |
| | 324 |
| | 36.9 |
|
Interest expense | 7,726 |
| | 7,094 |
| | 632 |
| | 8.9 |
| 7,690 |
| | 7,673 |
| | 17 |
| | 0.2 |
|
Income before income taxes | 394,433 |
| | 405,916 |
| | (11,483 | ) | | (2.8 | ) | 230,150 |
| | 284,684 |
| | (54,534 | ) | | (19.2 | ) |
Provision for income taxes | 135,566 |
| | 125,485 |
| | 10,081 |
| | 8.0 |
| 55,387 |
| | 98,315 |
| | (42,928 | ) | | (43.7 | ) |
Net income | $ | 258,867 |
| | $ | 280,431 |
| | $ | (21,564 | ) | | (7.7 | )% | $ | 174,763 |
| | $ | 186,369 |
| | $ | (11,606 | ) | | (6.2 | )% |
Diluted earnings per share | $ | 1.48 |
| | $ | 1.55 |
| | $ | (0.07 | ) | | (4.5 | )% | $ | 1.03 |
| | $ | 1.05 |
| | $ | (0.02 | ) | | (1.9 | )% |
Consolidated operating income was down $10.718.2% in the first quarter of 2018 due to a decrease in operating income from the Motorcycles segment of $63.7 million, or 26.9%, compared to the first quarter of 2017. Operating income from the Financial Services segment improved by $10.9 million in the secondfirst quarter of 20172018, or 2.6%, compared to the same period last year. Operating income from the Motorcycles segment declined$3.1 million, or 1.0%, compared to the second quarter of 2016, and operating income from the Financial Services segment decreased $7.6 million, or 8.5%, compared to the second quarter of 2016. Please refer to the “Motorcycles & Related Products Segment” and “Financial Services Segment” discussions following for a more detailed discussion of the factors affecting operating income.
Other income in the first quarter was adversely impacted by higher amortization of actuarial losses and pension curtailment expense following a 2018 first-quarter remeasurement of the qualified pension plan.
The effective income tax rate for the secondfirst quarter of 20172018 was 34.4%24.1% compared to 30.9%34.5% for the second quarter of 2016.same period in 2017. The second quarter 2016lower effective income tax rate was lowerprimarily due to discretethe impact of the 2017 Tax Act enacted in December 2017. The 2017 Tax Act reduced the federal corporate income tax benefits that were recognized following the closure of various tax audits during the quarter.rate beginning in 2018 from 35% to 21%.
Diluted earnings per share were $1.481.03 in the secondfirst quarter of 20172018, down 4.5%1.9% from the same period in the prior year. Diluted earnings per share were adversely impactedyear on lower net income partially offset by the 7.7% decrease in net income, but benefited frompositive impact of lower diluted weighted average shares outstanding. Diluted weighted average shares outstanding decreased from 181.3177.1 million in the secondfirst quarter of 20162017 to 175.3169.2 million in the secondfirst quarter of 2017,2018, driven by the Company's repurchases of common stock. Please refer to "Liquidity and Capital Resources" for additional information concerning the Company's share repurchase activity.
Motorcycles Retail Sales and Registration Data
Harley-Davidson Motorcycle Retail Sales(a)
The following table includes retail unit sales of Harley-Davidson motorcycles:
|
| | | | | | | | | | | |
| Three months ended | | | | |
| March 31, 2018 | | March 31, 2017 | | (Decrease) Increase | | % Change |
United States | 29,309 |
| | 33,316 |
| | (4,007 | ) | | (12.0 | )% |
| | | | | | | |
Europe(b) | 9,716 |
| | 8,984 |
| | 732 |
| | 8.1 |
|
EMEA - Other | 1,146 |
| | 1,183 |
| | (37 | ) | | (3.1 | ) |
Total EMEA | 10,862 |
| | 10,167 |
| | 695 |
| | 6.8 |
|
| | | | | | | |
Asia Pacific(c) | 4,452 |
| | 4,897 |
| | (445 | ) | | (9.1 | ) |
Asia Pacific - Other | 1,877 |
| | 1,966 |
| | (89 | ) | | (4.5 | ) |
Total Asia Pacific | 6,329 |
| | 6,863 |
| | (534 | ) | | (7.8 | ) |
| | | | | | | |
Latin America | 2,506 |
| | 2,342 |
| | 164 |
| | 7.0 |
|
Canada | 2,080 |
| | 2,361 |
| | (281 | ) | | (11.9 | ) |
Total International Retail Sales | 21,777 |
| | 21,733 |
| | 44 |
| | 0.2 |
|
Total Worldwide Retail Sales | 51,086 |
| | 55,049 |
| | (3,963 | ) | | (7.2 | )% |
|
| | | | | | | | | | | |
| Three months ended | | | | |
| June 30, 2017 | | June 30, 2016 | | (Decrease) Increase | | % Change |
United States | 49,668 |
| | 54,786 |
| | (5,118 | ) | | (9.3 | )% |
| | | | | | | |
Europe(b) | 15,357 |
| | 15,188 |
| | 169 |
| | 1.1 |
|
EMEA - Other | 1,873 |
| | 2,325 |
| | (452 | ) | | (19.4 | ) |
Total EMEA | 17,230 |
| | 17,513 |
| | (283 | ) | | (1.6 | ) |
| | | | | | |
|
|
Japan | 2,677 |
| | 2,763 |
| | (86 | ) | | (3.1 | ) |
Asia Pacific - Other | 5,631 |
| | 5,818 |
| | (187 | ) | | (3.2 | ) |
Total Asia Pacific | 8,308 |
| | 8,581 |
| | (273 | ) | | (3.2 | ) |
| | | | | | |
|
|
Latin America | 2,355 |
| | 2,573 |
| | (218 | ) | | (8.5 | ) |
Canada | 3,827 |
| | 3,813 |
| | 14 |
| | 0.4 |
|
Total International Retail Sales | 31,720 |
| | 32,480 |
| | (760 | ) | | (2.3 | ) |
Total Worldwide Retail Sales | 81,388 |
| | 87,266 |
| | (5,878 | ) | | (6.7 | )% |
| |
(a) | Data source for retail sales figures shown above is new sales warranty and registration information provided by Harley-Davidson dealers and compiled by the Company. The Company must rely on information that its dealers supply concerning new retail sales, and the Company does not regularly verify the information that its dealers supply. This information is subject to revision. |
| |
(b) | Includes Austria, Belgium, Denmark, Finland, France, Germany, Greece, Italy, Luxembourg, Netherlands, Norway, Portugal, Spain, Sweden, Switzerland and the United Kingdom. |
| |
(c) | Includes Japan, Australia, New Zealand and Korea. Prior period Asia Pacific retail sales have been reclassified to conform to the current year presentation. |
InRetail sales of new Harley-Davidson motorcycles in the U.S., were down 12.0% in the first quarter of 2018, which was within the Company's range of expectations, but at the less favorable end of the range. The Company's retail sales were adversely impacted by a continued weak U.S. industry which was down 11.1% in the secondfirst quarter, as compared to the first quarter of 2017 were significantly below the Company's expectations driven by very weak industry conditions.2017. The Company believes that industry sales of new motorcycles continued to be adversely impacted by soft used motorcycle pricing adversely impacted new motorcycle sales in the industry during the second quarter. Despite the disappointing industry trends that persisted into the second quarter, the Company was encouraged by two market indicators related to used Harley-Davidson motorcycles.
First,prices. Retail sales of used Harley-Davidson motorcycles in the U.S. have performed well. Throughthrough February 2018 were down compared
to prior year, but continued to outperform sales of new motorcycles despite increased used motorcycle prices for the May 2017 year-to-date period, growth ratesthird straight quarter in dealerships and the broader market. The Company believes used sales are an important indicator of overall demand for salesthe Company's motorcycles.
In addition, wholesale prices of used Harley-Davidson motorcycles were up year over year. In addition, combined retail sales of new and used Harley-Davidson motorcycles in the U.S. were also up on a year-to-date basis through May, as compared to the same period in 2016. (Source: Based on IHS Markit New and Used Motorcycle Registration data for calendar years to date (January through May) 2016 and 2017)
Second, wholesale prices for used Harley-Davidson motorcycles sold at auction in the U.S. showed what we believe to be a favorable trend that began induring the first quarter of 20172018 increased above year-ago levels, and third-party pricing services continued into the second quarter. (Source: Company data)
The Company's U.S. market share of 601+cc new motorcyclesto publish higher retail values year-over-year for the second quarter of 2017 was 48.5%, down 1.0 percentage points compared to the same period last year, when market share grew 2.0 percentage points over the second quarter of 2015 (Source: Motorcycle Industry Council). The Company believes that market share in the second quarter of 2017 was adversely impacted by the fact that it offered low-rate financing in 2016 and by lower subprime financing of new motorcycles in 2017.
International retail sales performance was also down in the second quarter of 2017, but generally in line with Company expectations. The Company believes growth prospects internationally are significant long-term. The Company expects growth in international retail sales in the second half of 2017 behind expanded distribution, broader availability of Street RodTM motorcycles, the launch of model-year 2018 motorcycles and significantly easier year-over-year comparisons.(1)
In EMEA, retail sales were down modestly versus the second quarter of 2016 which grew 8.2% over the same period in 2015. The Company believes underlying demand remains strong in EMEA, especially for the new Milwaukee-EightTM -powered motorcycles and Street RodTM motorcycles.
In the Asia Pacific region, retail sales were lower in Australia and Japan while emerging markets grew during the quarter, with the exception of India where that market’s retail sales reflected the continued impact of the country's currency demonetization and a newly implemented national sales tax.
Retail sales in Latin America were down driven by declines in Mexico, partially offset by gains in Brazil.
Finally, retail sales in Canada were up slightly in a highly competitive environment.
Motorcycles & Related Products Segment
Motorcycle Unit Shipments
The following table includes wholesale motorcycle unit shipments for the Motorcycles segment:
|
| | | | | | | | | | | | | | | | | |
| Three months ended | | | | |
| June 25, 2017 | | June 26, 2016 | | Unit | | Unit |
| Units | | Mix % | | Units | | Mix % | | (Decrease) Increase | | % Change |
United States | 52,966 |
| | 64.7 | % | | 57,804 |
| | 65.6 | % | | (4,838 | ) | | (8.4 | )% |
International | 28,841 |
| | 35.3 | % | | 30,356 |
| | 34.4 | % | | (1,515 | ) | | (5.0 | ) |
Harley-Davidson motorcycle units | 81,807 |
| | 100.0 | % | | 88,160 |
| | 100.0 | % | | (6,353 | ) | | (7.2 | )% |
Touring motorcycle units | 36,650 |
| | 44.8 | % | | 27,675 |
| | 31.4 | % | | 8,975 |
| | 32.4 | % |
Cruiser motorcycle units | 25,247 |
| | 30.9 | % | | 37,655 |
| | 42.7 | % | | (12,408 | ) | | (33.0 | ) |
Sportster® / Street motorcycle units | 19,910 |
| | 24.3 | % | | 22,830 |
| | 25.9 | % | | (2,920 | ) | | (12.8 | ) |
Harley-Davidson motorcycle units | 81,807 |
| | 100.0 | % | | 88,160 |
| | 100.0 | % | | (6,353 | ) | | (7.2 | )% |
The Company shipped 81,807used Harley-Davidson motorcycles worldwide during the second quarter of 2017, which was 7.2% lower than the second quarter of 2016 and in line withmotorcycles. Stronger used bike prices reinforce the Company's expectations.disciplined focus on driving premium value for its riders, dealers and the brand.
Shipments of Touring motorcycles as a percentage of total shipments increased in the second quarter of 2017 compared to the prior year while shipments of Cruiser and Sportster®/Street motorcycles as a percentage of total shipments decreased. The higher shipment mix of Touring motorcycles reflected demand for the new 2017 Touring motorcycles featuring the Milwaukee-Eight™ engine.
U.S dealer inventory of Harley-Davidson motorcycles was down approximately 7,200 motorcycles at the end of the second quarter compared to the end of the same quarter in 2016. While this was a significant reduction, it was less than the Company had planned due to retail sales slowing late in the second quarter as the Company produced its final model-year 2017 motorcycles. The Company plans to work closely with dealers to help facilitate the sell-through of remaining model-year 2017 motorcycle inventory in anticipation of model-year 2018 motorcycles. The Company now expects that 2017 year-end U.S. dealer inventory will be down significantly from prior year-end levels.(1)
Segment Results
The following table includes the condensed statements of operations for the Motorcycles segment (in thousands):
|
| | | | | | | | | | | | | | |
| Three months ended | | | | |
| June 25, 2017 | | June 26, 2016 | | (Decrease) Increase | | % Change |
Revenue: | | | | | | | |
Motorcycles | $ | 1,270,433 |
| | $ | 1,330,632 |
| | $ | (60,199 | ) | | (4.5 | )% |
Parts & Accessories | 237,498 |
| | 258,208 |
| | (20,710 | ) | | (8.0 | ) |
General Merchandise | 63,017 |
| | 75,757 |
| | (12,740 | ) | | (16.8 | ) |
Other | 6,187 |
| | 5,516 |
| | 671 |
| | 12.2 |
|
Total revenue | 1,577,135 |
| | 1,670,113 |
| | (92,978 | ) | | (5.6 | ) |
Cost of goods sold | 1,001,512 |
| | 1,062,555 |
| | (61,043 | ) | | (5.7 | ) |
Gross profit | 575,623 |
| | 607,558 |
| | (31,935 | ) | | (5.3 | ) |
Selling & administrative expense | 210,702 |
| | 236,428 |
| | (25,726 | ) | | (10.9 | ) |
Engineering expense | 45,274 |
| | 48,381 |
| | (3,107 | ) | | (6.4 | ) |
Operating expense | 255,976 |
| | 284,809 |
| | (28,833 | ) | | (10.1 | ) |
Operating income from Motorcycles | $ | 319,647 |
| | $ | 322,749 |
| | $ | (3,102 | ) | | (1.0 | )% |
The following table includes the estimated impact of significant factors affecting the comparability of net revenue, cost of goods sold and gross profit from the second quarter of 2016 to the second quarter of 2017 (in millions):
|
| | | | | | | | | | | |
| Net Revenue | | Cost of Goods Sold | | Gross Profit |
Three months ended June 26, 2016 | $ | 1,670.1 |
| | $ | 1,062.5 |
| | $ | 607.6 |
|
Volume | (147.7 | ) | | (88.8 | ) | | (58.9 | ) |
Price, net of related cost | 29.5 |
| | 9.7 |
| | 19.8 |
|
Foreign currency exchange rates and hedging | (10.9 | ) | | (2.3 | ) | | (8.6 | ) |
Shipment mix | 36.1 |
| | 8.9 |
| | 27.2 |
|
Raw material prices | — |
| | 7.5 |
| | (7.5 | ) |
Manufacturing and other costs | — |
| | 4.0 |
| | (4.0 | ) |
Total | (93.0 | ) | | (61.0 | ) | | (32.0 | ) |
Three months ended June 25, 2017 | $ | 1,577.1 |
| | $ | 1,001.5 |
| | $ | 575.6 |
|
The following factors affected the comparability of net revenue, cost of goods sold and gross profit from the second quarter of 2016 to the second quarter of 2017:
| |
• | The decrease in volume was due to lower wholesale motorcycle shipments, as well as lower parts & accessories (P&A) and general merchandise sales. P&A and general merchandise sales were down due in large part to lower motorcycle shipments and lower retail motorcycle sales. In addition, shipments of general merchandise were reduced in advance of new merchandise which will be introduced to dealers in August 2017, including the 115th anniversary collection.
|
On average, wholesale prices for the Company’s model-year 2017 motorcycles were higher than the prior model-year resulting in a favorable impact on revenue which was partially offset by increased cost related to the additional content added to the model-year 2017 motorcycles.
Revenue and gross profit were negatively impacted by weaker foreign currency rates, relative to the U.S. dollar, as compared to the same quarter last year.
Shipment mix changes had a positive impact on revenue and gross profit primarily driven by an increased mix of Touring motorcycles.
Raw material prices were higher due primarily to increased steel and aluminum costs.
Manufacturing costs were negatively impacted by lower fixed cost absorption and higher depreciation.
The decrease in operating expense during the second quarter of 2017 was primarily due to the timing of year-over-year marketing expenditures, lower recall costs and lower employee costs compared to the same quarter last year.
Financial Services Segment
Segment Results
The following table includes the condensed statements of operations for the Financial Services segment (in thousands):
|
| | | | | | | | | | | | | | |
| Three months ended | | | | |
| June 25, 2017 | | June 26, 2016 | | Increase (Decrease) | | % Change |
Interest income | $ | 157,429 |
| | $ | 157,009 |
| | $ | 420 |
| | 0.3 | % |
Other income | 30,094 |
| | 24,434 |
| | 5,660 |
| | 23.2 |
|
Securitization and servicing income | 511 |
| | 9,521 |
| | (9,010 | ) | | (94.6 | ) |
Financial Services revenue | 188,034 |
| | 190,964 |
| | (2,930 | ) | | (1.5 | ) |
Interest expense | 44,408 |
| | 42,895 |
| | 1,513 |
| | 3.5 |
|
Provision for credit losses | 26,217 |
| | 23,461 |
| | 2,756 |
| | 11.7 |
|
Operating expenses | 35,474 |
| | 35,035 |
| | 439 |
| | 1.3 |
|
Financial Services expense | 106,099 |
| | 101,391 |
| | 4,708 |
| | 4.6 |
|
Operating income from Financial Services | $ | 81,935 |
| | $ | 89,573 |
| | $ | (7,638 | ) | | (8.5 | )% |
Interest income for the second quarter of 2017 increased slightly primarily due to higher average retail receivables, partially offset by lower average wholesale receivables and a lower yield in the wholesale portfolio. Other income was favorable due to increased licensing revenue and insurance commission revenue. Securitization and servicing income was lower due to the $9.3 million gain on the sale of finance receivables recognized as part of the second quarter 2016 off-balance sheet asset-backed securitization. There was no comparable transaction in the current quarter.
Interest expense increased due to higher cost of funds, partially offset by lower average outstanding debt.
The provision for credit losses increased $2.8 million in the second quarter of 2017 as compared to the second quarter of 2016. The retail motorcycle provision increased $1.4 million as a result of higher credit losses and an increase in receivables partially offset by a smaller increase in the retail reserve rate. Credit losses were higher as a result of unfavorable performance across the retail motorcycle portfolio. The wholesale provision was unfavorable by $0.8 million.
Changes in the allowance for credit losses on finance receivables were as follows (in thousands):
|
| | | | | | | |
| Three months ended |
| June 25, 2017 | | June 26, 2016 |
Balance, beginning of period | $ | 184,030 |
| | $ | 156,184 |
|
Provision for credit losses | 26,217 |
| | 23,461 |
|
Charge-offs, net of recoveries | (16,719 | ) | | (15,001 | ) |
Other (a) | — |
| | (3,291 | ) |
Balance, end of period | $ | 193,528 |
| | $ | 161,353 |
|
| |
(a) | Related to the sale of finance receivables during the second quarter of 2016 through the off-balance sheet asset-backed securitization transaction. |
Results of Operations for the Six Months EndedJune 25, 2017
Compared to the Six Months EndedJune 26, 2016
Consolidated Results
|
| | | | | | | | | | | | | | |
| Six months ended | | | | |
(in thousands, except earnings per share) | June 25, 2017 | | June 26, 2016 | | (Decrease) Increase | | % Change |
Operating income from Motorcycles & Related Products | $ | 558,489 |
| | $ | 655,206 |
| | $ | (96,717 | ) | | (14.8 | )% |
Operating income from Financial Services | 134,571 |
| | 145,944 |
| | (11,373 | ) | | (7.8 | ) |
Operating income | 693,060 |
| | 801,150 |
| | (108,090 | ) | | (13.5 | ) |
Investment income | 1,456 |
| | 1,454 |
| | 2 |
| | 0.1 |
|
Interest expense | 15,399 |
| | 14,262 |
| | 1,137 |
| | 8.0 |
|
Income before income taxes | 679,117 |
| | 788,342 |
| | (109,225 | ) | | (13.9 | ) |
Provision for income taxes | 233,881 |
| | 257,422 |
| | (23,541 | ) | | (9.1 | ) |
Net income | $ | 445,236 |
| | $ | 530,920 |
| | $ | (85,684 | ) | | (16.1 | )% |
Diluted earnings per share | $ | 2.53 |
| | $ | 2.91 |
| | $ | (0.38 | ) | | (13.1 | )% |
Consolidated operating income was down 13.5% in the first half of 2017 primarily due to a decrease in operating income from the Motorcycles segment of $96.7 million, or 14.8%, compared to the first half of 2016. Operating income from the Financial Services segment declined by $11.4 million in the first half of 2017 compared to the same period last year. Please refer to the “Motorcycles & Related Products Segment” and “Financial Services Segment” discussions following for a more detailed discussion of the factors affecting operating income.
The effective income tax rate for the first half of 2017 was 34.4% compared to 32.7% for the first half of 2016. The income tax rate in the first half of 2016 was lower due to discrete tax benefits that were recognized following the closure of various tax audits during the second quarter of 2016.
Diluted earnings per share were $2.53 in the first half of 2017, down 13.1% from the same period in the prior year on lower net income partially offset by the positive impact of lower diluted weighted average shares outstanding. Diluted weighted average shares outstanding decreased from 182.7 million in the first half of 2016 to 176.2 million in the first half of 2017, driven by the Company's repurchases of common stock. Please refer to "Liquidity and Capital Resources" for additional information concerning the Company's share repurchase activity.
Motorcycles Retail Sales and Registration Data
Harley-Davidson Motorcycle Retail Sales(a)
The following table includes retail unit sales of Harley-Davidson motorcycles:
|
| | | | | | | | | | | |
| Six months ended | | | | |
| June 30, 2017 | | June 30, 2016 | | (Decrease) Increase | | % Change |
United States | 82,984 |
| | 90,112 |
| | (7,128 | ) | | (7.9 | )% |
| | | | | | | |
Europe(b) | 24,341 |
| | 24,034 |
| | 307 |
| | 1.3 |
|
EMEA - Other | 3,056 |
| | 3,689 |
| | (633 | ) | | (17.2 | ) |
Total EMEA | 27,397 |
| | 27,723 |
| | (326 | ) | | (1.2 | ) |
| | | | | | | |
Japan | 4,663 |
| | 4,869 |
| | (206 | ) | | (4.2 | ) |
Asia Pacific - Other | 10,508 |
| | 11,278 |
| | (770 | ) | | (6.8 | ) |
Total Asia Pacific | 15,171 |
| | 16,147 |
| | (976 | ) | | (6.0 | ) |
| | | | | | | |
Latin America | 4,697 |
| | 4,459 |
| | 238 |
| | 5.3 |
|
Canada | 6,188 |
| | 6,283 |
| | (95 | ) | | (1.5 | ) |
Total International Retail Sales | 53,453 |
| | 54,612 |
| | (1,159 | ) | | (2.1 | ) |
Total Worldwide Retail Sales | 136,437 |
| | 144,724 |
| | (8,287 | ) | | (5.7 | )% |
| |
(a) | Data source for retail sales figures shown above is new sales warranty and registration information provided by Harley-Davidson dealers and compiled by the Company. The Company must rely on information that its dealers supply concerning new retail sales, and the Company does not regularly verify the information that its dealers supply. This information is subject to revision. |
| |
(b) | Includes Austria, Belgium, Denmark, Finland, France, Germany, Greece, Italy, Luxembourg, Netherlands, Norway, Portugal, Spain, Sweden, Switzerland and the United Kingdom. The EMEA Europe total for June 30, 2016 includes 251 units originally reported in the EMEA-Other total. |
The Company believes 2017 retail sales of its motorcycles were negatively impacted by weak industry conditions in the U.S. The Company believes soft used motorcycle pricing adversely impacted new motorcycle sales in the industry during the first half of 2017. The Company's U.S. market share of new 601+cc motorcycles for the first halfquarter of 20172018 was 49.6%50.4%, down 0.40.9 percentage points compared to the same period last year (Source: Motorcycle Industry Council).
on limited availability of new motorcycles and a highly competitive marketplace. While market share remains a key focus, the slight contraction during the first quarter of 2018 came with a more profitable mix of motorcycles and less promotional support than in the prior year quarter.
In EMEA, retail sales were down modestly versusduring the first halfquarter of 2016 which2018 grew 8.4% over the same periodacross most western European markets, partially offset by slightly lower retail sales in 2015.emerging markets as compared to last year. The Company's market share of new 601+cc motorcycles in Europe was 10.4% through June 2017 was 9.5%, down 1.0March, up 1.3 percentage points fromcompared to the prior year quarter (Source: Association des Constructeurs Europeens de Motocycles). Harley-Davidson retail sales and market share gains in Europe were driven by strong retail sales growth of the Company's new Softail motorcycles.
InRetail sales in the Asia Pacific region continued to be soft in the first quarter of 2018; however, the year over year rate of decline decreased compared to the fourth quarter of 2017. During the first quarter of 2018, Asia Pacific retail sales were adversely impacted by lower sales in Australia and Japan.
During the first quarter of 2018, retail sales in Latin America were up over prior year driven by higher sales in Brazil. In Canada, retail sales during the first halfquarter of 2017 were lower compared to 2016 in Australia and Japan, as well as India where that market’s retail sales reflected the continued impact of the country's currency demonetization and a newly implemented national sales tax.
Latin America retail sales in the first six months of 2017 were up2018 declined 11.9% compared to the first six months of 2016 driven by strength in Brazil offset by lower retail sales in Mexico.
Retail sales in Canada were down in the first half of 2017 compared to 2016 when retail sales grew 7.2% over the same period in 2015.
prior year quarter.
Motorcycle Registration Data(a)
The following table includes industry retail motorcycle registration data:
| | | Six months ended | | | | | Three months ended | | | | |
| June 30, 2017 | | June 30, 2016 | | (Decrease) Increase | | % Change | March 31, 2018 | | March 31, 2017 | | Decrease | | % Change |
United States(b) | 165,589 |
| | 177,447 |
| | (11,858 | ) | | (6.7 | )% | 57,100 |
| | 64,220 |
| | (7,120 | ) | | (11.1 | )% |
Europe(c) | 254,721 |
| | 248,519 |
| | 6,202 |
| | 2.5 | % | 93,217 |
| | 100,533 |
| | (7,316 | ) | | (7.3 | )% |
| |
(a) | Data includes on-road 601+cc models. On-road 601+cc models include dual purpose models, three-wheeled motorcycles and autocycles. Registration data for Harley-Davidson Street® 500 motorcycles is not included in this table. |
| |
(b) | United States industry data is derived from information provided by Motorcycle Industry Council (MIC). This third-party data is subject to revision and update. |
| |
(c) | Europe data includes Austria, Belgium, Denmark, Finland, France, Germany, Greece, Italy, Luxembourg, Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, and the United Kingdom. Industry retail motorcycle registration data includes 601+cc models derived from information provided by Association des Constructeurs Europeens de Motocycles (ACEM), an independent agency. This third-party data is subject to revision and update. |
Motorcycles & Related Products Segment
Motorcycle Unit Shipments
The following table includes wholesale motorcycle unit shipments for the Motorcycles segment:
| | | Six months ended | | | | | Three months ended | | | | |
| June 25, 2017 | | June 26, 2016 | | | | Unit | April 1, 2018 | | March 26, 2017 | | | | |
| Units | | Mix % | | Units | | Mix % | | Unit Decrease | | % Change | Units | | Mix % | | Units | | Mix % | | Unit (Decrease) Increase | | Unit % Change |
United States | 98,750 |
| | 64.7 | % | | 115,439 |
| | 67.4 | % | | (16,689 | ) | | (14.5 | )% | 38,797 |
| | 60.7 | % | | 45,784 |
| | 64.6 | % | | (6,987 | ) | | (15.3 | )% |
International | 53,888 |
| | 35.3 | % | | 55,757 |
| | 32.6 | % | | (1,869 | ) | | (3.4 | ) | 25,147 |
| | 39.3 | % | | 25,047 |
| | 35.4 | % | | 100 |
| | 0.4 |
|
Harley-Davidson motorcycle units | 152,638 |
| | 100.0 | % | | 171,196 |
| | 100.0 | % | | (18,558 | ) | | (10.8 | )% | 63,944 |
| | 100.0 | % | | 70,831 |
| | 100.0 | % | | (6,887 | ) | | (9.7 | )% |
Touring motorcycle units | 65,718 |
| | 43.1 | % | | 66,172 |
| | 38.7 | % | | (454 | ) | | (0.7 | )% | 30,857 |
| | 48.3 | % | | 29,068 |
| | 41.0 | % | | 1,789 |
| | 6.2 | % |
Cruiser motorcycle units | 50,401 |
| | 33.0 | % | | 64,584 |
| | 37.7 | % | | (14,183 | ) | | (22.0 | ) | 21,554 |
| | 33.7 | % | | 25,154 |
| | 35.5 | % | | (3,600 | ) | | (14.3 | ) |
Sportster® / Street motorcycle units | 36,519 |
| | 23.9 | % | | 40,440 |
| | 23.6 | % | | (3,921 | ) | | (9.7 | ) | 11,533 |
| | 18.0 | % | | 16,609 |
| | 23.5 | % | | (5,076 | ) | | (30.6 | ) |
Harley-Davidson motorcycle units | 152,638 |
| | 100.0 | % | | 171,196 |
| | 100.0 | % | | (18,558 | ) | | (10.8 | )% | 63,944 |
| | 100.0 | % | | 70,831 |
| | 100.0 | % | | (6,887 | ) | | (9.7 | )% |
The Company shipped 152,63863,944 Harley-Davidson motorcycles worldwide during the first halfquarter of 2017,2018, which was 10.8%9.7% lower than the first half of 2016.same period in 2017. Shipments of Touring motorcycles as a percentagepercent of total shipments increased inwere significantly higher compared to last year’s first quarter when the Company limited Touring shipments to allow dealers to focus on selling through the model year 2016 Touring motorcycles ahead of the 2017 models which featured the new Milwaukee-Eight engine. In the second quarter of 2018, the Company expects Touring as a percent of total shipments to be down compared to prior year as the overall product mix returns to a more normal allocation.(1)
At the end of the first halfquarter of 20172018, U.S. dealer retail inventory of new motorcycles was down approximately 9,100 motorcycles compared to the prior year while shipments of Cruiser motorcycles decreasedquarter. The Company believes its discipline to reduce supply and improve model-year mix in the U.S. retail channel has delivered the intended results and retail inventory is well-positioned as a percentage of total shipments. The higher shipment mix of Touring motorcycles reflects demand fordealers move into the new 2017 Touring motorcycles featuring the Milwaukee-Eight™ engine.
selling season.
Segment Results
The following table includes the condensed statements of operations for the Motorcycles segment (in thousands): | | | Six months ended | | | | | Three months ended | | | | |
| June 25, 2017 | | June 26, 2016 | | (Decrease) Increase | | % Change | April 1, 2018 | | March 26, 2017 | | Increase (Decrease)
| | % Change |
Revenue: | | | | | | | | |
Revenue(a): | | | | | | | | |
Motorcycles | $ | 2,370,135 |
| | $ | 2,648,210 |
| | $ | (278,075 | ) | | (10.5 | )% | $ | 1,121,673 |
| | $ | 1,083,639 |
| | $ | 38,034 |
| | 3.5 | % |
Parts & Accessories | 406,523 |
| | 441,913 |
| | (35,390 | ) | | (8.0 | ) | 169,075 |
| | 168,023 |
| | 1,052 |
| | 0.6 |
|
General Merchandise | 118,853 |
| | 146,375 |
| | (27,522 | ) | | (18.8 | ) | 56,601 |
| | 55,836 |
| | 765 |
| | 1.4 |
|
Licensing | | 8,358 |
| | 9,275 |
| | (917 | ) | | (9.9 | ) |
Other | 10,335 |
| | 10,225 |
| | 110 |
| | 1.1 |
| 8,240 |
| | 11,938 |
| | (3,698 | ) | | (31.0 | ) |
Total revenue | 2,905,846 |
| | 3,246,723 |
| | (340,877 | ) | | (10.5 | ) | 1,363,947 |
| | 1,328,711 |
| | 35,236 |
| | 2.7 |
|
Cost of goods sold | 1,852,738 |
| | 2,048,885 |
| | (196,147 | ) | | (9.6 | ) | 890,174 |
| | 853,888 |
| | 36,286 |
| | 4.2 |
|
Gross profit | 1,053,108 |
| | 1,197,838 |
| | (144,730 | ) | | (12.1 | ) | 473,773 |
| | 474,823 |
| | (1,050 | ) | | (0.2 | ) |
Operating expenses: | | | | | | | | |
Selling & administrative expense | 411,084 |
| | 452,140 |
| | (41,056 | ) | | (9.1 | ) | 207,544 |
| | 200,016 |
| | 7,528 |
| | 3.8 |
|
Engineering expense | 83,535 |
| | 90,492 |
| | (6,957 | ) | | (7.7 | ) | 46,549 |
| | 38,261 |
| | 8,288 |
| | 21.7 |
|
Restructuring expense | | 46,842 |
| | — |
| | 46,842 |
| | — |
|
Operating expense | 494,619 |
| | 542,632 |
| | (48,013 | ) | | (8.8 | ) | 300,935 |
| | 238,277 |
| | 62,658 |
| | 26.3 |
|
Operating income from Motorcycles | $ | 558,489 |
| | $ | 655,206 |
| | $ | (96,717 | ) | | (14.8 | )% | $ | 172,838 |
| | $ | 236,546 |
| | $ | (63,708 | ) | | (26.9 | )% |
| |
(a) | In connection with the adoption of ASU 2014-09, the Company has changed its presentation of disaggregated Motorcycles segment revenue and the prior period has been reclassified to reflect the new presentation. |
The following table includes the estimated impact of significant factors affecting the comparability of net revenue, cost of goods sold and gross profit from the first halfquarter of 20162017 to the first halfquarter of 20172018 (in millions):
| | | Net Revenue | | Cost of Goods Sold | | Gross Profit | Net Revenue | | Cost of Goods Sold | | Gross Profit |
Six months ended June 26, 2016 | $ | 3,246.7 |
| | $ | 2,048.9 |
| | $ | 1,197.8 |
| |
Three months ended March 26, 2017 | | $ | 1,328.7 |
| | $ | 853.9 |
| | $ | 474.8 |
|
Volume | (380.8 | ) | | (229.0 | ) | | (151.8 | ) | (119.2 | ) | | (75.7 | ) | | (43.5 | ) |
Price, net of related costs | 56.4 |
| | 24.0 |
| | 32.4 |
| 29.0 |
| | 20.2 |
| | 8.8 |
|
Foreign currency exchange rates and hedging | (12.1 | ) | | (10.1 | ) | | (2.0 | ) | 39.6 |
| | 24.1 |
| | 15.5 |
|
Shipment mix | (4.4 | ) | | (5.2 | ) | | 0.8 |
| 85.8 |
| | 49.4 |
| | 36.4 |
|
Raw material prices | — |
| | 9.8 |
| | (9.8 | ) | — |
| | 4.2 |
| | (4.2 | ) |
Manufacturing and other costs | — |
| | 14.3 |
| | (14.3 | ) | — |
| | 14.0 |
| | (14.0 | ) |
Total | (340.9 | ) | | (196.2 | ) | | (144.7 | ) | 35.2 |
| | 36.2 |
| | (1.0 | ) |
Six months ended June 25, 2017 | $ | 2,905.8 |
| | $ | 1,852.7 |
| | $ | 1,053.1 |
| |
Three months ended April 1, 2018 | | $ | 1,363.9 |
| | $ | 890.1 |
| | $ | 473.8 |
|
The following factors affected the comparability of net revenue, cost of goods sold and gross profit from the first halfquarter of 20162017 to the first halfquarter of 2017:2018:
| |
• | The decrease in volume was due to lower wholesale motorcycle shipments, as well as lower P&A and general merchandise sales. P&A and general merchandise sales were down due in large part to lower motorcycle shipments and lower retail motorcycle sales. In addition, shipments of general merchandise were reduced in advance of new merchandise which will be introduced to dealers in August 2017, including the 115th anniversary collection.The decrease in volume was due to lower wholesale motorcycle shipments. |
On average, wholesale prices for motorcycles shipped in the current period were higher than in the same period last year resulting in a favorable impact on revenue. The positive impact on revenue was partially offset by increased costs related to the additional content added to motorcycles shipped in the current period as compared to the same period last year.
Revenue was negativelypositively impacted by weakerstronger weighted-average foreign currency exchange rates, relative to the U.S. dollar, as compared to the same period last year. However, the unfavorableThe favorable revenue impact was mostlypartially offset by higher costs associated with unfavorable losses on currency hedging and the favorable impact on cost that resulted from remeasuringremeasurement of foreign-denominated balance sheet accounts, and hedging activities, as compared to the same period last year.prior year quarter.
Shipment mix changes droveresulted in a slight positive impact on gross profit as the mix of Touring motorcycles increased. However, the positive impact resulting from an increase in the mix of Touring motorcycles was offset by the unfavorable impact offavorable changes in the mix of models within motorcycle families, as well as, changes in P&A and general merchandise product mix.families.
Raw material prices were higher primarily due primarily to increased steel and aluminum costs.
Manufacturing costs were negatively impacted by lower fixed cost absorption due to lower production, higher depreciation and higher depreciation.temporary inefficiencies associated with the manufacturing optimization plan.
The decreaseincrease in operating expenseexpenses during the first halfquarter of 20172018 was primarily due to the timing of year-over-yearhigher selling, administrative and engineering expenses on increased investments in marketing expenditures, lower recall costs and reduced employee costs comparedproduct development and a $46.8 million restructuring expense related to the same period last year.Company's manufacturing optimization plan.
Financial Services Segment
Segment Results
The following table includes the condensed statements of operations for the Financial Services segment (in thousands):
| | | Six months ended | | | | | Three months ended | | | | |
| June 25, 2017 | | June 26, 2016 | | (Decrease) Increase | | % Change | April 1, 2018 | | March 26, 2017 | | Increase (Decrease) | | % Change |
Interest income | $ | 308,157 |
| | $ | 309,535 |
| | $ | (1,378 | ) | | (0.4 | )% | $ | 154,041 |
| | $ | 150,728 |
| | $ | 3,313 |
| | 2.2 | % |
Securitization and servicing income | | 352 |
| | 574 |
| | (222 | ) | | (38.7 | ) |
Other income | 52,013 |
| | 45,266 |
| | 6,747 |
| | 14.9 |
| 23,781 |
| | 21,919 |
| | 1,862 |
| | 8.5 |
|
Securitization and servicing income | 1,085 |
| | 9,521 |
| | (8,436 | ) | | (88.6 | ) | |
Financial Services revenue | 361,255 |
| | 364,322 |
| | (3,067 | ) | | (0.8 | ) | 178,174 |
| | 173,221 |
| | 4,953 |
| | 2.9 |
|
Interest expense | 87,697 |
| | 88,814 |
| | (1,117 | ) | | (1.3 | ) | 48,450 |
| | 43,289 |
| | 5,161 |
| | 11.9 |
|
Provision for credit losses | 69,806 |
| | 60,584 |
| | 9,222 |
| | 15.2 |
| 30,052 |
| | 43,589 |
| | (13,537 | ) | | (31.1 | ) |
Operating expenses | 69,181 |
| | 68,980 |
| | 201 |
| | 0.3 |
| 36,093 |
| | 33,707 |
| | 2,386 |
| | 7.1 |
|
Financial Services expense | 226,684 |
| | 218,378 |
| | 8,306 |
| | 3.8 |
| 114,595 |
| | 120,585 |
| | (5,990 | ) | | (5.0 | ) |
Operating income from Financial Services | $ | 134,571 |
| | $ | 145,944 |
| | $ | (11,373 | ) | | (7.8 | )% | $ | 63,579 |
| | $ | 52,636 |
| | $ | 10,943 |
| | 20.8 | % |
Interest income was lower forfavorable in the first six monthsquarter of 2017 primarily2018 due to lower average wholesale receivables and a lower yield in the wholesale portfolio partially offset by higher average retail receivables outstanding.at a higher average yield. Other income was favorable due to increased licensing revenue and insurance commission revenue. Securitization and servicing income was lowerinvestment income.
Interest expense increased due to a $9.3 million gain on the salehigher cost of finance receivables recognized as part of the second quarter 2016 off-balance sheet asset-backed securitization. There was no comparable transaction in the current year.
Interest expense decreased due to lowerfunds and higher average outstanding debt partially offset by unfavorable cost of funds.debt.
The provision for credit losses increased $9.2decreased $13.5 million incompared to the first six monthsquarter of 2017. The retail motorcycle provision increased $8.0decreased $14.2 million driven primarily by higherlower credit losses. Credit losses were higher asand a result of unfavorable performance acrossdecrease in the retail motorcycle portfolio.reserve rate as compared to an increase in the reserve rate during the first quarter of 2017. The wholesale provision increased $0.6 million.million due to a slight increase in the reserve rate compared to the first quarter of 2017.
Annualized credit losses for the Company's retail motorcycle loans were 1.71%2.15% through June 25, 2017April 1, 2018 compared to 1.50%2.31% through JuneMarch 26, 2016.2017. The 30-day delinquency rate for on-balance sheet retail motorcycle loans at June 25, 2017April 1, 2018 was 3.25%3.31% compared to 3.16%3.17% at JuneMarch 26, 20162017.
Changes in the allowance for credit losses on finance receivables were as follows (in thousands): | | | Six months ended | Three months ended |
| June 25, 2017 | | June 26, 2016 | April 1, 2018 | | March 26, 2017 |
Balance, beginning of period | $ | 173,343 |
| | $ | 147,178 |
| $ | 192,471 |
| | $ | 173,343 |
|
Provision for credit losses | 69,806 |
| | 60,584 |
| 30,052 |
| | 43,589 |
|
Charge-offs, net of recoveries | (49,621 | ) | | (43,118 | ) | (32,173 | ) | | (32,902 | ) |
Other (a) | — |
| | (3,291 | ) | |
Balance, end of period | $ | 193,528 |
| | $ | 161,353 |
| $ | 190,350 |
| | $ | 184,030 |
|
| |
(a) | Related to the sale of finance receivables during the second quarter of 2016 through the off-balance sheet asset-backed securitization transaction. |
Other Matters
Contractual Obligations
The Company has updated the contractual obligations table under the caption “Contractual Obligations” in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations of the Company’s Annual Report on Form 10-K for the year ended December 31, 20162017 as of June 25, 2017April 1, 2018 to reflect the new projected principal and interest payments for the remainder of 20172018 and beyond as follows (in thousands): | | | 2017 | | 2018-2019 | | 2020-2021 | | Thereafter | | Total | 2018 | | 2019-2020 | | 2021-2022 | | Thereafter | | Total |
Principal payments on debt | $ | 1,462,076 |
| | $ | 2,818,108 |
| | $ | 1,736,834 |
| | $ | 1,179,582 |
| | $ | 7,196,600 |
| $ | 2,088,427 |
| | $ | 2,682,631 |
| | $ | 1,168,009 |
| | $ | 1,100,000 |
| | $ | 7,039,067 |
|
Interest payments on debt | 98,338 |
| | 259,471 |
| | 118,756 |
| | 400,628 |
| | 877,193 |
| 148,330 |
| | 205,800 |
| | 102,764 |
| | 367,841 |
| | 824,735 |
|
| $ | 1,560,414 |
| | $ | 3,077,579 |
| | $ | 1,855,590 |
| | $ | 1,580,210 |
| | $ | 8,073,793 |
| $ | 2,236,757 |
| | $ | 2,888,431 |
| | $ | 1,270,773 |
| | $ | 1,467,841 |
| | $ | 7,863,802 |
|
Interest obligations for floating rate instruments, as calculated above, assume rates in effect at June 25, 2017April 1, 2018 remain constant. For purposes of the above, the principal payment balances for medium-term notes, on-balance sheet asset-backed securitizations and senior unsecured notes are shown gross ofwithout reduction for debt issuance costs. Refer to Note 910 for a breakout of the finance costs consistent with ASU No. 2015-03.
As of June 25, 2017,April 1, 2018, there have been no other material changes to the Company’s summary of expected payments for significant contractual obligations in the contractual obligations table in the Company's Annual Report on Form 10-K for the year ended December 31, 2016.2017.
Commitments and Contingencies
The Company is subject to lawsuits and other claims related to environmental, product and other matters. In determining required reserves related to these items, the Company carefully analyzes cases and considers the likelihood of adverse judgments or outcomes, as well as the potential range of possible loss. The required reserves are monitored on an ongoing basis and are updated based on new developments or new information in each matter.
Environmental Protection Agency Notice:
In December 2009, the Company received formal, written requests for information from the United States Environmental Protection Agency (EPA) regarding: (i) certificates of conformity for motorcycle emissions and related designations and labels, (ii) aftermarket parts, and (iii) warranty claims on emissions related components. The Company promptly submitted written responses to the EPA’s inquiry and has engaged in information exchanges and discussions with the EPA. In August 2016, the Company entered into a consent decree with the EPA regarding these issues, and the consent decree was subsequently revised in July 2017 (the Settlement). In the Settlement, the Company agreed to, among other things, pay a fine, and not sell tuning products unless they are approved by the EPA or California Air Resources Board. FollowingIn December 2017, the required public comment period,EPA filed the Settlement with the U.S. District Court for the District of Columbia for the purpose of obtaining court approval of the Settlement. Three amicus briefs opposing portions of the Settlement were filed with the court by the deadline of January 31, 2018. On March 1, 2018, the Company and the EPA each filed separate response briefs. The Company anticipates the EPAcourt will move the courtmake a decision whether or not to finalize the Settlement in the comingfollowing months. The Company has a reservean accrual associated with this matter which is included in accrued liabilities in the Consolidated Balance Sheet,Sheets, and as a result, if it is finalized, the Settlement would not have a material adverse effect on the Company's financial condition or results of operations. The Settlement is not final until it is approved by the court, and if it is not approved by the court, the Company cannot reasonably estimate the impact of any remedies the EPA might seek beyond the Company's current reserve for this matter.
York Environmental Matters:
The Company is involved with government agencies and groups of potentially responsible parties related to a matter involving the cleanup of soil and groundwater contamination at its York, Pennsylvania facility. The York facility was formerly used by the U.S. Navy and AMF prior to the purchase of the York facility by the Company from AMF in 1981. Although the Company is not certain as to the full extent of the environmental contamination at the York facility, it has been working with the Pennsylvania Department of Environmental Protection (PADEP) since 1986 in undertaking environmental investigation and remediation activities, including a site-wide remedial investigation/feasibility study (RI/FS).
In January 1995, the Company entered into a settlement agreement (the Agreement) with the Navy, and the parties amended the Agreement in 2013 to address ordnance and explosive waste. The Agreement calls for the Navy and the Company to contribute amounts into a trust equal to 53% and 47%, respectively, of costs associated with environmental investigation and remediation activities at the York facility (Response Costs). The trust administers the payment of the Response Costs incurred at the York facility as covered by the Agreement.
The Company has a reservean accrual for its estimate of its share of the future Response Costs at the York facility which is included in accruedother long-term liabilities in the Consolidated Balance Sheets. While much of the work on the RI/FS is complete, it is still under agency review and given the uncertainty that exists concerning the nature and scope of additional environmental
investigation and remediation that may ultimately be required under the RI/FS that is finally approved or otherwise at the York facility, the Company is unable to make a reasonable estimate of those additional costs, if any, that may result.
The estimate of the Company's future Response Costs that will be incurred at the York facility is based on reports of independent environmental consultants retained by the Company, the actual costs incurred to date and the estimated costs to complete the necessary investigation and remediation activities.
Product Liability Matters:
The Company is involved in product liability suits related to the operation of its business. The Company accrues for claim exposures that are probable of occurrence and can be reasonably estimated. The Company also maintains insurance coverage for product liability exposures. The Company believes that its accruals and insurance coverage are adequate and that product liability suits will not have a material adverse effect on the Company’s consolidated financial statements.(1)
National Highway Traffic Safety Administration Matters:
In July 2016, the National Highway Traffic Safety Administration (NHTSA) began an investigation into certain of the Company's motorcycles equipped with anti-lock braking systems (ABS). NHTSA’s investigation is in response to rider complaints related to brake failures and applies to model yearmodel-year 2008-2013 Touring and model yearmodel-year 2008-2017 V-ROD®motorcycles. NHTSA noted that Harley-Davidson has a two-year brake fluid replacement interval that owners either are unaware of or ignore. During 2017, the Company estimated and recorded a $29.4 million accrual associated with the NHTSA matter. On January 30, 2018, the Company announced a voluntary recall which offers a free brake fluid flush for model-year 2008-2011 Touring and V-ROD® motorcycles. In late April 2018, the Company received the closing resume from NHTSA which officially closes the investigation. The Company does not believe that a loss related to this matter is probable and no reservebelieves the accrued liability it has been established. However, it is possible thatrecorded will adequately cover the outcomecost of NHTSA’s investigation could result in future costs to the Company. Given the uncertainty that still exists concerning the resolution of this matter, the Company cannot reasonably estimate these possible future costs, if any.recall.
Off-Balance Sheet Arrangements
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 SPEs,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 SPEs are separate legal entities that assume the risks and rewards of ownership of the retail motorcycle finance receivables they hold. The assets of the VIEs are not available to pay other obligations or claims of the Company’s creditors. The Company’s economic exposure related to the VIEs is generally limited to restricted cash reserve accounts, retained interests and ordinary representations and warranties and related covenants. The VIEs have a limited life and generally terminate upon final distribution of amounts owed to investors.
The accounting treatment for asset-backed financings depends on the terms of the related transaction and the Company’s continuing involvement with the VIE. Most of the Company’s asset-backed financings do not meet the criteria to be treated as a sale for accounting purposes because, in addition to retaining servicing rights, the Company retains a financial interest in the VIE in the form of a debt security. These transactions are treated as secured borrowings. As secured borrowings, the retail motorcycle finance receivables remain on the balance sheet with a corresponding obligation reflected as debt.
During the second quarter of 2016, the Company sold finance receivables with a principal balance of $301.8 million into a securitization VIE. The transaction met the criteria to be treated as a sale for accounting purposes and resulted in an off-balance sheet arrangement because the Company did not retain any financial interest in the VIE beyond servicing rights and ordinary representations and warranties and related covenants. Upon sale, the retail motorcycle finance receivables were removed from the Company’s balance sheet, and a gain of $9.3 million was recognized in Financial Services revenue. For more information, see Note 10.11.
Liquidity and Capital Resources as of June 25, 2017April 1, 2018(1)
Over the long-term, the Company expects that its business model will continue to generate cash that will allow it to invest in the business, fund future growth opportunities and return value to shareholders.(1) The Company will evaluate opportunities to enhance value forreturn cash to its shareholders through increasing dividends and repurchasing shares. The Company believes the Motorcycles operations will continue to be primarily funded through cash flows generated by operations.(1) The Financial Services operations have been funded with unsecured debt, unsecured commercial paper, asset-backed commercial paper conduit facilities, committed unsecured bank facilities and asset-backed securitizations.
The Company’s strategy is to maintain a minimum of twelve months of its projected liquidity needs through a combination of cash and marketable securitiescash equivalents and availability under credit facilities. The following table summarizes the Company’s cash and availability under credit and conduit facilities (in thousands): | | | June 25, 2017 | April 1, 2018 |
Cash and cash equivalents | $ | 988,476 |
| $ | 753,517 |
|
| | |
Credit facilities | 636,555 |
| 528,024 |
|
Asset-backed U.S. commercial paper conduit facilities(a) | 620,167 |
| 618,689 |
|
Asset-backed Canadian commercial paper conduit facility(b)(a) | 30,179 |
| 12,534 |
|
Total availability under credit and conduit facilities | 1,286,901 |
| 1,159,247 |
|
Total | $ | 2,275,377 |
| $ | 1,912,764 |
|
| |
(a) | The U.S. commercial paper conduitIncludes facilities expire on December 13, 2017. Theexpiring in the next twelve months which the Company anticipates that it willexpects to renew these facilities prior to expiration. |
| |
(b) | The Canadian commercial paper conduit facility was due to expire on June 30, 2017 and is limited to Canadian denominated borrowings. The Company renewed this facility and the new facility expires on June 30, 2018.(1) |
The Company recognizes that it must continue to monitor and adjust its business to changes in the lending environment. The Company intends to continue with a diversified funding profile through a combination of short-term and long-term funding vehicles and to pursue a variety of sources to obtain cost-effective funding. The Financial Services operations could be negatively affected by higher costs of funding and increased difficulty of raising, or potential unsuccessful efforts to raise, funding in the short-term and long-term capital markets.(1) These negative consequences could in turn adversely affect the Company’s business and results of operations in various ways, including through higher costs of capital, reduced funds available through its Financial Services operations to provide loans to independent dealers and their retail customers, and dilution to existing shareholders through the use of alternative sources of capital.
Cash Flow Activity
The following table summarizes the cash flow activity for the periods indicated (in thousands):
|
| | | | | | | |
| Six months ended |
| June 25, 2017 | | June 26, 2016 |
Net cash provided by operating activities | $ | 627,068 |
| | $ | 456,290 |
|
Net cash used by investing activities | (392,825 | ) | | (115,965 | ) |
Net cash used by financing activities | (18,208 | ) | | (201,782 | ) |
Effect of exchange rate changes on cash and cash equivalents | 12,457 |
| | 3,918 |
|
Net increase in cash and cash equivalents | $ | 228,492 |
| | $ | 142,461 |
|
|
| | | | | | | |
| Three months ended |
| April 1, 2018 | | March 26, 2017 |
Net cash provided by operating activities | $ | 191,594 |
| | $ | 159,939 |
|
Net cash used by investing activities | (21,651 | ) | | (87,453 | ) |
Net cash (used) provided by financing activities | (98,930 | ) | | 23,143 |
|
Effect of exchange rate changes on cash, cash equivalents and restricted cash | 2,034 |
| | 7,219 |
|
Net increase in cash, cash equivalents and restricted cash | $ | 73,047 |
| | $ | 102,848 |
|
Operating Activities
The increase in cash provided by operating activities for the first halfquarter of 20172018 compared to the first half of 2016same period in 2017 was primarily due to a decrease in cash outflows related to wholesale financing and a favorable impact from working capital, partiallylower cash outflows for retirement plans offset by lower net income.less favorable changes in working capital. During each of the first quartersquarter of 2017, and 2016, the Company made a $25.0 million voluntary contribution to its qualified pension plan. No further qualified pension plan contributionsThere was no comparable voluntary contribution in the first quarter of 2018 and there are expected innone are planned for the remainder of 2017; however, the Company expects it will continue to make benefit payments under the SERPA and postretirement healthcare plans.2018.(1)
Investing Activities
The Company’s investing activities consist primarily of capital expenditures and net changes in finance receivables. Capital expenditures were $69.8$28.4 million in the first halfquarter of 20172018 compared to $107.5$24.0 million in the same period last year. Net cash outflowsflows for finance receivables for the first halfquarter of 20172018 were $31.1$75.3 million lower than infavorable compared to the same period last year due primarily to a decrease in retail lending activity. In the second quarter of 2016, the Company completed a sale of finance receivables through an off-balance sheet asset-backed securitization transaction resulting in proceeds of $312.6 million. There was no comparable transaction in 2017.
Financing Activities
The Company’s financing activities consist primarily of share repurchases, dividend payments and debt activity. Cash outflows for share repurchases were $243.1$73.0 million in the first halfquarter of 20172018 compared to $269.4$79.8 million in the same period last year. Share repurchases during the first sixthree months of 20172018 totaled 4.41.4 million shares of common stock related to discretionary share repurchases and 0.2 million shares of common stock that employees surrendered to satisfy withholding taxes in connection with the vesting of restricted stock units. As of June 25, 2017,April 1, 2018, there were 15.024.2 million shares remaining on the board-approved share repurchase authorization.
authorizations. The Company paid dividends of $0.73$0.370 and $0.70$0.365 per share totaling $128.5$62.7 million and $127.8$64.6 million during the first six monthsquarters of 20172018 and 2016,2017, respectively.
Financing cash flows related to debt activity resulted in net cash inflows of $353.1$35.1 million in the first sixthree months of 20172018 compared to net cash inflows of $174.7$160.2 million in the first sixthree months of 2016.2017. The Company’s total outstanding debt consisted of the following (in thousands): | | | June 25, 2017 | | June 26, 2016 | April 1, 2018 | | March 26, 2017 |
Unsecured commercial paper | $ | 928,445 |
| | $ | 1,020,487 |
| $ | 1,036,976 |
| | $ | 953,357 |
|
Asset-backed Canadian commercial paper conduit facility | 138,739 |
| | 161,626 |
| 158,162 |
| | 141,013 |
|
Asset-backed U.S. commercial paper conduit facilities | 279,833 |
| | — |
| 281,311 |
| | 286,205 |
|
Medium-term notes, net | 4,562,403 |
| | 4,063,297 |
| 4,514,798 |
| | 4,163,797 |
|
Senior unsecured notes, net | 741,633 |
| | 740,982 |
| 742,126 |
| | 741,469 |
|
Asset-backed securitization debt, net | 521,300 |
| | 1,074,931 |
| 284,793 |
| | 685,374 |
|
Total debt | $ | 7,172,353 |
| | $ | 7,061,323 |
| $ | 7,018,166 |
| | $ | 6,971,215 |
|
To access the debt capital markets, the Company relies on credit rating agencies to assign short-term and long-term credit ratings. Generally, lower credit ratings result in higher borrowing costs and reduced access to debt capital markets. A credit rating agency may change or withdraw the Company’s ratings based on its assessment of the Company’s current and future ability to meet interest and principal repayment obligations. The Company’s short-term debt ratings affect its ability to issue unsecured commercial paper. The Company’s short- and long-term debt ratings as of June 25, 2017April 1, 2018 were as follows:
|
| | | | | |
| Short-Term | | Long-Term | | Outlook |
Moody’s | P2 | | A3 | | Stable |
Standard & Poor’s | A2 | | A- | | StableNegative |
Fitch | F1 | | A | | Stable |
Credit Facilities – On May 1, 2017,April 6, 2018, the Company entered into a $780.0 million five-year credit facility to replace the $675.0 million five-year credit facility that was due to mature in April 2019 and also terminated the $100.0 million 364-day credit facility whichthat would have matured at the end of April 2018. The new five-year credit facility matures onin April 30, 2018.2023. The Company also has a $675.0 million five-year credit facility which matures in April 2019 and a $765.0 million five-year credit facility which matures in April 2021. The new 364-day credit facility and thetwo five-year credit facilities (together, the Global Credit Facilities) bear interest at variable interest rates, which may be adjusted upward or downward depending on certain criteria, such as credit ratings. The Global Credit Facilities also require the Company to pay a fee based on the average daily unused portion of the aggregate commitments under the Global Credit Facilities. The Global Credit Facilities are committed facilities and primarily used to support the Company's unsecured commercial paper program. During the second quarter of 2017, the Company renewed its $25.0 million credit facility which had expired onin May 24, 2017. The $25.0 million credit facility bears interest at variable interest rates, and the Company must paypays a fee based on the unused portion of the $25.0 million commitment. TheThis credit facility expires onin May 23, 2018.
Unsecured Commercial Paper – Subject to limitations, the Company could issue unsecured commercial paper of up to $1.54 billion as of June 25, 2017April 1, 2018 supported by the Global Credit Facilities, as discussed above. Outstanding unsecured
commercial paper may not exceed the unused portion of the Global Credit Facilities. Maturities may range up to 365 days from the issuance date. The Company intends to repay unsecured commercial paper as it matures with additional unsecured commercial paper or through other means, such as borrowing under the Global Credit Facilities, borrowing under its asset-backed U.S. commercial paper conduit facility or through the use of operating cash flow and cash on hand.(1)
Medium-Term Notes – The Company had the following medium-term notes (collectively, the Notes) issued and outstanding at June 25, 2017April 1, 2018 (in thousands):
| | Principal Amount | | Rate | | Issue Date | | Maturity Date | | Rate | | Issue Date | | Maturity Date |
$400,000 | | 1.55% | | November 2014 | | November 2017 | |
$877,488 | | 6.80% | | May 2008 | | June 2018 | | 6.80% | | May 2008 | | June 2018 |
$600,000 | | 2.25% | | January 2016 | | January 2019 | | 2.25% | | January 2016 | | January 2019 |
$150,000 | | Floating-rate(a) | | March 2017 | | March 2019 | | Floating-rate(a) | | March 2017 | | March 2019 |
$600,000 | | 2.40% | | September 2014 | | September 2019 | | 2.40% | | September 2014 | | September 2019 |
$600,000 | | 2.15% | | February 2015 | | February 2020 | | 2.15% | | February 2015 | | February 2020 |
$350,000 | | 2.40% | | March 2017 | | June 2020 | | 2.40% | | March 2017 | | June 2020 |
$600,000 | | 2.85% | | January 2016 | | January 2021 | | 2.85% | | January 2016 | | January 2021 |
$400,000 | | 2.55% | | June 2017 | | June 2022 | | 2.55% | | June 2017 | | June 2022 |
$350,000 | | | 3.35% | | February 2018 | | February 2023 |
| |
(a) | Floating interest rate based on LIBOR plus 35 bps. |
The fixed rate Notes provide for semi-annual interest payments and principalthe floating rate Note provides for quarterly interest payments. Principal on the Notes is due at maturity. Unamortized discount and debt issuance costs on the Notes reduced the outstanding balance by $15.1$12.7 million and $15.4$13.7 million at June 25,April 1, 2018 and March 26, 2017, and June 26, 2016, respectively. There were no medium-term notes repurchasednote maturities during the secondfirst quarter of 2017 and 2016.2018. During the first quarter of 2017, and 2016, $400.0 million of 2.70% and $450.0 million of 3.88% medium-term notes matured, respectively, and the principal and accrued interest were paid in full.
Senior Unsecured Notes – In July 2015, the Company issued $750.0 million of senior unsecured notes.notes in an underwritten offering. The senior unsecured notes provide for semi-annual interest payments and principal due at maturity. $450.0 million ($444.4 million net of discount and issuance costs) of the senior unsecured notes mature in July 2025 and have an interest rate of 3.50%, and $300.0 million ($296.0 million net of discount and issuance costs) of the senior unsecured notes mature in July 2045 and have an interest rate of 4.625%. The Company used the proceeds from the debt to repurchase shares of its common stock in 2015.
On-Balance Sheet Asset-Backed Canadian Commercial Paper Conduit Facility – The Company has a revolving facility agreement (Canadian Conduit) with a Canadian bank-sponsored asset-backed commercial paper conduit. Under the agreement, the Canadian Conduit is contractually committed, at the Company's option, to purchase from the Company eligible Canadian retail motorcycle finance receivables for proceeds up to C$240.0220.0 million. The transferred assets are restricted as collateral for the payment of the debt. The terms for this facility provide for interest on the outstanding principal based on prevailing market interest rates plus a specified margin. The Canadian Conduit also provides for a program fee and an unused commitment fee based on the unused portion of the total aggregate commitment of C$240.0220.0 million. There is no amortization schedule; however, the debt is reduced monthly as available collections on the related finance receivables are applied to outstanding principal. Upon expiration of the Canadian Conduit, any outstanding principal will continue to be reduced monthly through available collections. Unless earlier terminated or extended by mutual agreement ofbetween the Company and the lenders, as of June 25, 2017,April 1, 2018, the Canadian Conduit had an expiration date of June 30, 2017. The Canadian Conduit was renewed on June 30, 2017 with similar terms and a borrowing amount of up to C$220.0 million withhas an expiration date of June 30, 2018.
The following table includes quarterly transfers of Canadian retail motorcycle finance receivables to the Canadian Conduit and the respective proceeds (in thousands):
|
| | | | | | | | | | | | | | | |
| 2017 | | 2016 |
| Transfers | | Proceeds | | Transfers | | Proceeds |
First quarter | $ | 6,300 |
| | $ | 5,500 |
| | $ | 6,600 |
| | $ | 5,800 |
|
Second quarter | 14,200 |
| | 12,400 |
| | 31,400 |
| | 27,500 |
|
| $ | 20,500 |
| | $ | 17,900 |
| | $ | 38,000 |
| | $ | 33,300 |
|
|
| | | | | | | | | | | | | | | |
| 2018 | | 2017 |
| Transfers | | Proceeds | | Transfers | | Proceeds |
First quarter | $ | 7,600 |
| | $ | 6,200 |
| | $ | 6,300 |
| | $ | 5,500 |
|
On-Balance Sheet Asset-Backed U.S. Commercial Paper Conduit Facilities VIE – OnIn December 14, 2016, the Company entered into a new revolving facility agreement with a third party bank-sponsored asset-backed U.S. commercial paper conduit, which provides for a total commitment of up to $300.0 million. Also on that date,2017, the Company renewed its existing $300.0 million and $600.0
million revolving facility agreement, which had expired on December 14, 2016agreements with the same third partya third-party bank-sponsored asset-backed U.S. commercial paper conduit. In January 2017 and April 2017,Availability under the Company transferred $333.4 million and $28.2 million, respectively,revolving facilities (together, the U.S. Conduit Facilities) is based on, among other things, the amount of eligible U.S. retail motorcycle receivables held by the relevant SPE as collateral.
The following table includes quarterly transfers of U.S. retail motorcycle finance receivables to an SPE which, in turn, issued $300.0 million and $24.0 million, respectively, of debt under the U.S. Conduit Facilities. The contractual maturity ofand the debt is approximately 5 years. The VIE had no borrowings outstanding under the U.S. Conduit Facilities at December 31, 2016 or June 26, 2016.respective proceeds (in thousands):
|
| | | | | | | | | | | | | | | |
| 2018 | | 2017 |
| Transfers | | Proceeds | | Transfers | | Proceeds |
First quarter | $ | 32,900 |
| | $ | 29,300 |
| | $ | 333,400 |
| | $ | 300,000 |
|
The terms for this debt provide for interest on the outstanding principal based on prevailing commercial paper rates or LIBOR to the extent the advance is not funded by a conduit lender through the issuance of commercial paper plus, in each case, a program fee based on outstanding principal. The U.S. Conduit Facilities also provide for an unused commitment fee based on the unused portion of the total aggregate commitment of $900.0 million. There is no amortization schedule; however, the debt will be reduced monthly as available collections on the related finance receivables are applied to outstanding principal. Upon expiration of the U.S. Conduit Facilities, any outstanding principal will continue to be reduced monthly through available collections. Unless earlier terminated or extended by mutual agreement of the Company and the lenders, as of June 25, 2017,April 1, 2018, the U.S. Conduit Facilities have an expiration date of December 13, 2017.12, 2018.
Asset-Backed Securitization VIEs – For all of its asset-backed securitization transactions, the Company transfers U.S. retail motorcycle finance receivables to separate VIEs, which in turn issue secured notes with various maturities and interest rates to investors. All of the notes held by the VIEs are secured by future collections of the purchased U.S. retail motorcycle finance receivables. The U.S. retail motorcycle finance receivables included in the asset-backed securitization transactions are not available to pay other obligations or claims of the Company's creditors until the associated debt and other obligations are satisfied. Restricted cash balances held by the VIEs are used only to support the securitizations.
The accounting treatment for asset-backed securitizations depends on the terms of the related transaction and the Company’s continuing involvement with the VIE. Most of the Company’s asset-backed securitizations do not meet the criteria to be accounted for as a sale because, in addition to retaining servicing rights, the Company retains a financial interest in the VIE in the form of a debt security. These transactions are treated as secured borrowings. As secured borrowings, the retail motorcycle finance receivables remain on the balance sheet with a corresponding obligation reflected as debt. There is no amortization schedule for the secured notes; however, the debt is reduced monthly as available collections on the related retail motorcycle finance receivables are applied to outstanding principal. The secured notes’ contractual lives have various maturities ranging from 20192020 to 2022.
There were no on or off-balance sheet asset-backed securitization transactions during the first half of 2017. During the second quarter of 2016, the Company sold U.S. retail motorcycle finance receivables with a principal balance of $301.8 million into an asset-backed securitization VIE, and the transaction met the criteria to be accounted for as a sale because the Company did not retain any financial interest in the VIE beyond servicing rights and ordinary representations and warranties and related covenants. Upon the sale, the retail motorcycle finance receivables were removed from the Company’s balance sheet and a gain of $9.3 million was recognized in Financial Services revenue. There were no on-balance sheet asset-backed securitization transactions during the first half of 2016.2018 or 2017.
Support Agreement - The Company has a support agreement with HDFS whereby, if required, the Company agrees to provide HDFS with financial support to maintain HDFS’ fixed-charge coverage at 1.25 and minimum net worth of $40.0 million. Support may be provided at the Company’s option as capital contributions or loans. Accordingly, certain debt covenants may restrict the Company’s ability to withdraw funds from HDFS outside the normal course of business. No amount has ever been provided to HDFS under the support agreement.
Operating and Financial Covenants – HDFS and the Company are subject to various operating and financial covenants related to the credit facilities and various operating covenants under the Notes and the U.S. and Canadian asset-backed commercial paper conduit facilities. The more significant covenants are described below.
The operating covenants limit the Company’s and HDFS’ ability to:
Assume or incur certain liens;
Participate in certain mergers or consolidations; and
Purchase or hold margin stock.
Under the current financial covenants of the Global Credit Facilities, the ratio of HDFS’s consolidated debt, excluding secured debt, to HDFS’s consolidated shareholder's equity, ratio of HDFSexcluding accumulated other comprehensive income (or loss), cannot exceed 10.0010.0 to 1.001.0 as of the end of any fiscal quarter. In addition, the ratio of the Company's consolidated debt to the Company's consolidated debt and consolidated shareholders’ equity (where the Company's consolidated debt in each case excluding the debtexcludes that of HDFS and its subsidiaries, and the Company's consolidated shareholders’ equity excludes accumulated other comprehensive income (or loss)), cannot exceed 0.70 to 1.00 as of the end of any fiscal quarter. No financial covenants are required under the Notes or the U.S. or Canadian asset-backed commercial paper conduit facilities.
At June 25, 2017April 1, 2018, HDFS and the Company remained in compliance with all of the then existing covenants.
Cautionary Statements
The Company’sCompany's ability to meet the targets and expectations noted depends upon, among other factors, the Company’sCompany's ability to:
to (i) develop and execute its business strategy,
(ii) drive demand by executingexecute its marketing strategy of appealing togrowing ridership, globally, (iii) effectively execute its manufacturing optimization initiative within expected costs and growing sales to multi-generational and multi-cultural customers worldwide in an increasingly competitive marketplace,
(iii)timing, (iv) develop and introduce products, services and experiences that are successful in the marketplace,
(iv) (v) manage the impact that new or adjusted tariffs may have on the cost of raw materials and components and our ability to sell product internationally, (vi) manage the impact that prices for and supply of used motorcycles may have on its business, including on retail sales of new motorcycles,
(v) (vii) balance production volumes for its new motorcycles with consumer demand, including in circumstances where competitors may be supplying new
motorcycles to the market in excess of demand at reduced prices,
(vi) (viii) manage through changes in general economic and business conditions, including changing capital, credit and retail markets, and the changing political environment,
(vii) (ix) manage risks that arise through expanding international manufacturing, operations and sales,
(viii) accurately estimate and adjust to fluctuations in foreign currency exchange rates, interest rates and commodity prices,
(ix) manage (x) successfully execute the credit quality, the loan servicing and collection activities, and the recovery rates of HDFS' loan portfolio,
(x)Company’s manufacturing strategy, including its flexible production strategy, (xi) prevent and detect any issues with its motorcycles or any associated manufacturing processes to avoid delays in new model launches, recall campaigns, regulatory agency investigations, increased warranty costs or litigation and adverse effects on its reputation and brand strength,
(xi) and carry out any product programs or recalls within expected costs and timing, (xii) continue to manage the relationships and agreements that the Company has with its labor unions to help drive long-term competitiveness, (xiii) accurately estimate and adjust to fluctuations in foreign currency exchange rates, interest rates and commodity prices, (xiv) manage the credit quality, the loan servicing and collection activities, and the recovery rates of HDFS' loan portfolio, (xv) retain and attract talented employees,
(xii) (xvi) prevent a cybersecurity breach involving consumer, employee, dealer, supplier, or companyCompany data and respond to evolving regulatory requirements regarding data security,
(xiii) (xvii) continue to develop the capabilities of its distributors and dealers and manage the risks that its independent dealers may have difficulty obtaining capital and managing through changing economic conditions and consumer demand,
(xiv) (xviii) adjust to tax reform, healthcare inflation and reform and pension reform,
(xv) and successfully estimate the impact of any such reform on the Company’s business, (xix) manage through the effects inconsistent and unpredictable weather patterns may have on retail sales of motorcycles,
(xvi) (xx) manage supply chain issues, including quality issues and any unexpected interruptions or price increases caused by raw material shortages or natural disasters,
(xvii) (xxi) implement and manage enterprise-wide information technology systems, including systems at its manufacturing facilities,
(xviii) (xxii) manage changes and prepare for requirements in legislative and regulatory environments for its products, services and operations,
(xix) (xxiii) manage its exposure to product liability claims and commercial or contractual disputes,
(xx) execute its flexible production strategy,
(xxi) and (xxiv) successfully access the capital and/or credit markets on terms (including interest rates) that are acceptable to the Company and within its expectations, and
(xxii) continue to manage the relationships and agreements that the Company has with its labor unions to help drive long-term competitiveness.expectations.
In addition, the Company could experience delays or disruptions in its operations as a result of work stoppages, strikes, natural causes, terrorism or other factors. Further, actual foreign currency exchange rates may vary from underlying assumptions. Other factors are described in risk factors that the Company has disclosed in documents previously filed with the Securities and Exchange Commission.
Many of these risk factors are impacted by the current changing capital, credit and retail markets and the Company's ability to manage through inconsistent economic conditions.
The Company’s ability to sell its motorcycles and related products and services and to meet its financial expectations also depends on the ability of the Company’s independent dealers to sell its motorcycles and related products and services to retail customers. The Company depends on the capability and financial capacity of its independent dealers to develop and implement effective retail sales plans to create demand for the motorcycles and related products and services they purchase from the Company.
In addition, the Company’s independent dealers and distributors may experience difficulties in operating their businesses and selling Harley-Davidson motorcycles and related products and services as a result of weather, economic conditions or other factors.
In recent years, HDFS has experienced historically low levels of retail credit losses, but there is no assurance that this will continue. The Company believes that HDFS' retail credit losses may increase over time due to changing consumer credit behavior and HDFS' efforts to increase prudently structured loan approvals to sub-prime borrowers, as well as actions that the Company has taken and could take that impact motorcycle values.
Refer to “Risk Factors” under Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 20162017 for a discussion of additional risk factors and a more complete discussion of some of the cautionary statements noted above.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company’s earnings related to its operations outside the U.S. are impacted by changes in foreign currency exchange rates. The majority of the Company’s exposure relates to the Euro, the Australian dollar, the Japanese yen, Canadian dollar, Mexican peso and the Brazilian real. A weakening in foreign currencies relative to the U.S. dollar will generally have an adverse effect on revenue related to sales made in those foreign currencies offset by a corresponding positive impact from natural hedges created by the operating costs incurred in those same foreign currencies. As the majority of the Company’s manufacturing occurs in the U.S., the Company’s operating expenses paid in foreign currencies generally include limited manufacturing costs and the selling and administrative costs incurred at the Company’s international locations. In addition, to the extent the Company carries foreign-denominated cash, receivables or accounts payable, those amounts are also exposed to foreign currency remeasurements that can impact the Company’s earnings.
The Company also uses derivative financial instruments to hedge a portion of the forecasted cash flows in its key foreign currencies. These instruments generally have terms of up to 12 months and are purchased over time so that at any point in time
some portion of the next 12 months of expected foreign currency exposure is hedged. The hedging instruments allow the Company to lock in the exchange rate on future foreign currency cash flows based on the forward rates available at the time of purchase. The level of gain or loss on these instruments will depend on the spread between the forward rate and the corresponding spot rate at the date the instruments are settled.
HDFS’ earnings are affected by changes in interest rates. HDFS’ interest-rate sensitive financial instruments include finance receivables and debt. With the exception of short-term commercial paper and debt issued through the commercial paper
conduit facilities, the majority of HDFS' debt instruments have fixed interest rates.
Refer to the Company's Annual Report on Form 10-K for the year ended December 31, 20162017 for further information concerning the Company's market risk. There have been no material changes to the market risk information included in the Company's Annual Report on Form 10-K for the year ended December 31, 2016.2017.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
In accordance with Rule 13a-15(b) of the Securities Exchange Act of 1934 (the Exchange Act), as of the end of the period covered by this Quarterly Report on Form 10-Q, the Company’s management evaluated, with the participation of the Company’s President and Chief Executive Officer and the Senior Vice President and Chief Financial Officer, the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act). Based upon their evaluation of these disclosure controls and procedures, the President and Chief Executive Officer and the Senior Vice President and Chief Financial Officer have concluded that the disclosure controls and procedures were effective as of the end of the period covered by this Quarterly Report on Form 10-Q to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time period specified in the Securities and Exchange Commission rules and forms, and to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its President and Chief Executive Officer and Senior Vice President and Chief Financial Officer, as appropriate, to allow timely decisions regarding disclosure.
Changes in Internal Controls
There were no changes in the Company's internal control over financial reporting during the quarter ended June 25, 2017April 1, 2018 that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II – OTHER INFORMATION
Item 1 – Legal Proceedings
The information required under this Item 1 of Part II is contained in Item 1 of Part I of this Quarterly Report on Form 10-Q in Note 15 of the Notes to Consolidated Financial Statements, and such information is incorporated herein by reference in this Item 1 of Part II.
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds
The following table contains detail related to the Company's repurchase of its common stock based on the date of trade during the quarter ended June 25, 2017:April 1, 2018:
|
| | | | | | | | | | | | |
2017 Fiscal Month | Total Number of Shares Purchased (a) | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs |
March 27 to April 30 | 450,548 |
| | $ | 56 |
| | 450,548 |
| | 17,584,514 |
|
May 1 to May 28 | 1,066,270 |
| | $ | 56 |
| | 1,066,270 |
| | 16,519,429 |
|
May 29 to June 25 | 1,472,823 |
| | $ | 53 |
| | 1,472,823 |
| | 15,046,920 |
|
Total | 2,989,641 |
| | $ | 55 |
| | 2,989,641 |
| | |
|
| | | | | | | | | | | | |
2018 Fiscal Month | Total Number of Shares Purchased (a) | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs |
January 1 to February 4 | 1,141 |
| | $ | 51 |
| | 1,141 |
| | 10,594,144 |
|
February 5 to March 4 | 767,624 |
| | $ | 47 |
| | 767,624 |
| | 24,988,413 |
|
March 5 to April 1 | 834,536 |
| | $ | 44 |
| | 834,536 |
| | 24,155,467 |
|
Total | 1,603,301 |
| | $ | 46 |
| | 1,603,301 |
| | |
| |
(a) | Includes discretionary share repurchases and shares of common stock that employees surrendered to satisfy withholding taxes in connection with the vesting of restricted stock units |
In February 2016, the Company's Board of Directors authorized the Company to repurchase up to 20.0 million shares of its common stock with no dollar limit or expiration date which superseded the share repurchase authority granted by the Board of Directors in December 1997. The Company repurchased 3.01.4 million shares on a discretionary basis during the quarter ended June 25, 2017April 1, 2018 under this authorization. In February 2018, the Company's Board of Directors authorized the Company to repurchase up to 15.0 million additional shares of its common stock with no dollar limit or expiration date. As of June 25, 2017, 15.0April 1, 2018, 24.2 million shares remained under this authorization.these authorizations.
Under the share repurchase authorizations, the Company’s common stock may be purchased through any one or more of a Rule 10b5-1 trading plan and discretionary purchases on the open market, block trades, accelerated share repurchases or privately negotiated transactions. The number of shares repurchased, if any, and the timing of repurchases will depend on a number of factors, including share price, trading volume and general market conditions, as well as on working capital requirements, general business conditions and other factors. The repurchase authority has no expiration date but may be suspended, modified or discontinued at any time.
The Harley-Davidson, Inc. 2014 Incentive Stock Plan and predecessor stock plans permit participants to satisfy all or a portion of the statutory federal, state and local withholding tax obligations arising in connection with plan awards by electing to (a) have the Company withhold shares otherwise issuable under the award, (b) tender back shares received in connection with such award or (c) deliver other previously owned shares, in each case having a value equal to the amount to be withheld. During the secondfirst quarter of 20172018, the Company acquired 2,045164,624 shares of common stock that employees presented to the Company to satisfy withholding taxes in connection with the vesting of restricted stock units.
Item 6 – Exhibits
Refer to the Exhibit Index on page 65 ofimmediately following this report.page.
Harley-Davidson, Inc.
Exhibit Index to Form 10-Q
|
| | |
Exhibit No. | | Description |
| | Officers' Certificate, dated February 9, 2018, pursuant to Sections 102 and 301 of the Indenture, dated March 4, 2011, with the form of 3.350% Medium-Term Notes due 2023 |
| | Form of Transition Agreement between the Registrant and Ms. Kumbier dated February 1, 2018 |
| | Chief Executive Officer Certification pursuant to Rule 13a-14(a) |
| | Chief Financial Officer Certification pursuant to Rule 13a-14(a) |
| | Written Statement of the Chief Executive Officer and the Chief Financial Officer pursuant to 18 U.S.C. §1350 |
101.INS | | XBRL Instance Document |
101.SCH | | XBRL Taxonomy Extension Schema Document |
101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document |
101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document |
101.LAB | | XBRL Taxonomy Extension Label Linkbase Document |
101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document |
| |
* | Represents a management contract or compensatory plan, contract or arrangement in which a director or named executive officer of the Company participated. |
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
| |
| HARLEY-DAVIDSON, INC. |
| |
Date: August 3, 2017May 10, 2018 | /s/ John A. Olin |
| John A. Olin |
| Senior Vice President and |
| Chief Financial Officer |
| (Principal financial officer) |
|
| |
Date: August 3, 2017May 10, 2018 | /s/ Mark R. Kornetzke |
| Mark R. Kornetzke |
| Chief Accounting Officer |
| (Principal accounting officer) |
Harley-Davidson, Inc.
Exhibit Index to Form 10-Q
|
| | |
Exhibit No. | | Description |
31.1 | | Chief Executive Officer Certification pursuant to Rule 13a-14(a) |
31.2 | | Chief Financial Officer Certification pursuant to Rule 13a-14(a) |
32.1 | | Written Statement of the Chief Executive Officer and the Chief Financial Officer pursuant to 18 U.S.C. §1350 |
101 | | Financial statements from the quarterly report on Form 10-Q of Harley-Davidson, Inc. for the quarter ended June 25, 2017, filed on August 3, 2017, formatted in XBRL: (i) the Consolidated Statements of Income; (ii) the Consolidated Statements of Comprehensive Income; (iii) the Consolidated Balance Sheets; (iv) the Consolidated Statements of Cash Flows; and (v) the Notes to Consolidated Financial Statements. |