UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C.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 March 31, 2019
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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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Wisconsin | | 39-1382325 |
(State of organization) | | (I.R.S. Employer Identification No.) |
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3700 West Juneau Avenue Milwaukee, Wisconsin
| Milwaukee | Wisconsin | 53208 |
(Address of principal executive offices) | | | (Zip code) |
RegistrantsRegistrant's telephone number:number, including area code: (414) 342-4680
None
(Former name, former address and former fiscal year, if changed since last report)
Securities Registered Pursuant to Section 12(b) of the Act: |
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Title of each class | Trading Symbol | Name of each exchange on which registered |
Common Stock Par Value $.01 PER SHARE | HOG | New York Stock Exchange |
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. Yesx☒No¨☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yesx☒ 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“emerging growth company"company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filerAccelerated Filer | ☒ | x | Accelerated filer | | ¨☐ |
Non-accelerated filer | ☐ | ¨ | Smaller reporting company | | ¨☐ |
| | Emerging growth company | | ¨ | | | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐No ☒
Yes ¨No x
Securities Registered Pursuant to Section 12(b)The registrant had outstanding 153,173,270 shares of the Act:common stock as of April 30, 2020.
HARLEY-DAVIDSON, INC.
Form 10-Q
For The Quarter Ended March 29, 2020
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Title of each classPart I | Trading Symbol | Name of each exchange on which registered |
COMMON STOCK PAR VALUE $.01 PER SHAREItem 1. | HOG | NEW YORK STOCK EXCHANGE |
Number of shares of the registrant’s common stock outstanding at May 3, 2019: 159,072,779 shares
Harley-Davidson, Inc.
Form 10-Q
For The Quarter Ended March 31, 2019
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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 | | | Three months ended | |
| March 31, 2019 | | April 1, 2018 | | | March 29, 2020 | | March 31, 2019 |
Revenue: | | | | Revenue: | | | | |
Motorcycles and Related Products | $ | 1,195,637 |
| | $ | 1,363,947 |
| Motorcycles and Related Products | | $ | 1,099,788 | | | $ | 1,195,637 | |
Financial Services | 188,743 |
| | 178,174 |
| Financial Services | | 198,456 | | | 188,743 | |
Total revenue | 1,384,380 |
| | 1,542,121 |
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| | | | 1,298,244 | | | 1,384,380 | |
Costs and expenses: | | | | Costs and expenses: | | |
Motorcycles and Related Products cost of goods sold | 848,198 |
| | 890,174 |
| Motorcycles and Related Products cost of goods sold | | 780,868 | | | 848,198 | |
Financial Services interest expense | 52,324 |
| | 48,450 |
| Financial Services interest expense | | 52,473 | | | 52,324 | |
Financial Services provision for credit losses | 34,491 |
| | 30,052 |
| Financial Services provision for credit losses | | 79,419 | | | 34,491 | |
Selling, administrative and engineering expense | 268,625 |
| | 290,186 |
| Selling, administrative and engineering expense | | 277,971 | | | 268,625 | |
Restructuring expense | 13,630 |
| | 46,842 |
| Restructuring expense | | — | | | 13,630 | |
Total costs and expenses | 1,217,268 |
| | 1,305,704 |
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| | | | 1,190,731 | | | 1,217,268 | |
Operating income | 167,112 |
| | 236,417 |
| Operating income | | 107,513 | | | 167,112 | |
Other income (expense), net | 4,660 |
| | 220 |
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Investment income | 6,358 |
| | 1,203 |
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Other income, net | | Other income, net | | 155 | | | 4,660 | |
Investment (loss) income | | Investment (loss) income | | (5,347) | | | 6,358 | |
Interest expense | 7,731 |
| | 7,690 |
| Interest expense | | 7,755 | | | 7,731 | |
Income before provision for income taxes | 170,399 |
| | 230,150 |
| Income before provision for income taxes | | 94,566 | | | 170,399 | |
Provision for income taxes | 42,454 |
| | 55,387 |
| Provision for income taxes | | 24,871 | | | 42,454 | |
Net income | $ | 127,945 |
| | $ | 174,763 |
| Net income | | $ | 69,695 | | | $ | 127,945 | |
Earnings per common share: | | | | |
Earnings per share: | | Earnings per share: | | | | |
Basic | $ | 0.80 |
| | $ | 1.04 |
| Basic | | $ | 0.46 | | | $ | 0.80 | |
Diluted | $ | 0.80 |
| | $ | 1.03 |
| Diluted | | $ | 0.45 | | | $ | 0.80 | |
Cash dividends per common share | $ | 0.375 |
| | $ | 0.370 |
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Cash dividends per share | | Cash dividends per share | | $ | 0.380 | | | $ | 0.375 | |
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 | | | Three months ended | |
| March 31, 2019 | | April 1, 2018 | | | March 29, 2020 | | March 31, 2019 |
Net income | $ | 127,945 |
| | $ | 174,763 |
| Net income | | $ | 69,695 | | | $ | 127,945 | |
Other comprehensive income, net of tax: | | | | |
Other comprehensive (loss) income, net of tax: | | Other comprehensive (loss) income, net of tax: | | |
Foreign currency translation adjustments | 331 |
| | 6,915 |
| Foreign currency translation adjustments | | (34,455) | | | 331 | |
Derivative financial instruments | (441 | ) | | 765 |
| Derivative financial instruments | | (19,845) | | | (441) | |
| Pension and postretirement benefit plans | 7,743 |
| | 85,765 |
| Pension and postretirement benefit plans | | 11,959 | | | 7,743 | |
Total other comprehensive income, net of tax | 7,633 |
| | 93,445 |
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| | | | (42,341) | | | 7,633 | |
Comprehensive income | $ | 135,578 |
| | $ | 268,208 |
| Comprehensive income | | $ | 27,354 | | | $ | 135,578 | |
The accompanying notes are an integral part of the consolidated financial statements.
HARLEY-DAVIDSON, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
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| (Unaudited) | | | | (Unaudited) |
| March 29, 2020 | | December 31, 2019 | | March 31, 2019 |
ASSETS | | | | | |
Current assets: | | | | | |
Cash and cash equivalents | $ | 1,465,061 | | | $ | 833,868 | | | $ | 749,600 | |
Marketable securities | — | | | — | | | 10,003 | |
Accounts receivable, net | 299,148 | | | 259,334 | | | 353,541 | |
Finance receivables, net of allowance of $63,881, $43,006, and $41,515 | 2,358,989 | | | 2,272,522 | | | 2,443,899 | |
Inventories, net | 610,924 | | | 603,571 | | | 595,806 | |
Restricted cash | 99,903 | | | 64,554 | | | 43,471 | |
Other current assets | 142,357 | | | 168,974 | | | 177,761 | |
| 4,976,382 | | | 4,202,823 | | | 4,374,081 | |
Finance receivables, net of allowance of $271,615, $155,575, and $149,357 | 4,933,418 | | | 5,101,844 | | | 4,994,693 | |
Property, plant and equipment, net | 826,845 | | | 847,382 | | | 876,003 | |
Prepaid pension costs | 64,802 | | | 56,014 | | | — | |
Goodwill | 64,063 | | | 64,160 | | | 64,131 | |
Deferred income taxes | 127,856 | | | 101,204 | | | 132,988 | |
Lease assets | 56,496 | | | 61,618 | | | 55,305 | |
Other long-term assets | 90,085 | | | 93,114 | | | 83,412 | |
| $ | 11,139,947 | | | $ | 10,528,159 | | | $ | 10,580,613 | |
LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | |
Current liabilities: | | | | | |
Accounts payable | $ | 333,411 | | | $ | 294,380 | | | $ | 380,918 | |
Accrued liabilities | 584,535 | | | 582,288 | | | 644,171 | |
Short-term debt | 1,335,664 | | | 571,995 | | | 1,192,925 | |
Current portion of long-term debt, net | 2,326,460 | | | 1,748,109 | | | 1,372,050 | |
| 4,580,070 | | | 3,196,772 | | | 3,590,064 | |
Long-term debt, net | 4,478,078 | | | 5,124,826 | | | 4,744,694 | |
Lease liabilities | 40,053 | | | 44,447 | | | 39,516 | |
Pension liabilities | 56,900 | | | 56,138 | | | 98,862 | |
Postretirement healthcare liabilities | 71,154 | | | 72,513 | | | 93,897 | |
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Other long-term liabilities | 221,709 | | | 229,464 | | | 215,969 | |
Commitments and contingencies (Note 17) | | | | | | | | |
Shareholders’ equity: | | | | | |
Preferred stock, NaN issued | — | | | — | | | — | |
Common stock | 1,834 | | | 1,828 | | | 1,826 | |
Additional paid-in-capital | 1,495,141 | | | 1,491,004 | | | 1,465,581 | |
Retained earnings | 2,126,646 | | | 2,193,997 | | | 2,074,669 | |
Accumulated other comprehensive loss | (579,290) | | | (536,949) | | | (622,051) | |
Treasury stock, at cost | (1,352,348) | | | (1,345,881) | | | (1,122,414) | |
| 1,691,983 | | | 1,803,999 | | | 1,797,611 | |
| $ | 11,139,947 | | | $ | 10,528,159 | | | $ | 10,580,613 | |
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| (Unaudited) | | | | (Unaudited) |
| March 31, 2019 | | December 31, 2018 | | April 1, 2018 |
ASSETS | | | | | |
Current assets: | | | | | |
Cash and cash equivalents | $ | 749,600 |
| | $ | 1,203,766 |
| | $ | 753,517 |
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Marketable securities | 10,003 |
| | 10,007 |
| | — |
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Accounts receivable, net | 353,541 |
| | 306,474 |
| | 355,107 |
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Finance receivables, net | 2,443,899 |
| | 2,214,424 |
| | 2,341,918 |
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Inventories | 595,806 |
| | 556,128 |
| | 564,571 |
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Restricted cash | 43,471 |
| | 49,275 |
| | 54,569 |
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Other current assets | 177,761 |
| | 144,368 |
| | 150,472 |
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Total current assets | 4,374,081 |
| | 4,484,442 |
| | 4,220,154 |
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Finance receivables, net | 4,994,693 |
| | 5,007,507 |
| | 4,784,524 |
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Property, plant and equipment, net | 876,003 |
| | 904,132 |
| | 934,645 |
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Prepaid pension costs | — |
| | — |
| | 122,230 |
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Goodwill | 64,131 |
| | 55,048 |
| | 56,524 |
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Deferred income taxes | 132,988 |
| | 141,464 |
| | 77,624 |
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Lease assets | 55,305 |
| | — |
| | — |
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Other long-term assets | 83,412 |
| | 73,071 |
| | 81,920 |
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| $ | 10,580,613 |
| | $ | 10,665,664 |
| | $ | 10,277,621 |
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LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | |
Current liabilities: | | | | | |
Accounts payable | $ | 380,918 |
| | $ | 284,861 |
| | $ | 319,040 |
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Accrued liabilities | 644,171 |
| | 601,130 |
| | 566,408 |
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Short-term debt | 1,192,925 |
| | 1,135,810 |
| | 1,036,976 |
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Current portion of long-term debt, net | 1,372,050 |
| | 1,575,799 |
| | 1,872,679 |
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Total current liabilities | 3,590,064 |
| | 3,597,600 |
| | 3,795,103 |
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Long-term debt, net | 4,744,694 |
| | 4,887,667 |
| | 4,108,511 |
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Lease liabilities | 39,516 |
| | — |
| | — |
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Pension liabilities | 98,862 |
| | 107,776 |
| | 54,921 |
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Postretirement healthcare liabilities | 93,897 |
| | 94,453 |
| | 113,031 |
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Other long-term liabilities | 215,969 |
| | 204,219 |
| | 210,106 |
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Commitments and contingencies (Note 17) |
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Shareholders’ equity: | | | | | |
Preferred stock, none issued | — |
| | — |
| | — |
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Common stock | 1,826 |
| | 1,819 |
| | 1,818 |
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Additional paid-in-capital | 1,465,581 |
| | 1,459,620 |
| | 1,432,692 |
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Retained earnings | 2,074,669 |
| | 2,007,583 |
| | 1,725,626 |
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Accumulated other comprehensive loss | (622,051 | ) | | (629,684 | ) | | (406,604 | ) |
Treasury stock, at cost | (1,122,414 | ) | | (1,065,389 | ) | | (757,583 | ) |
Total shareholders’ equity | 1,797,611 |
| | 1,773,949 |
| | 1,995,949 |
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| $ | 10,580,613 |
| | $ | 10,665,664 |
| | $ | 10,277,621 |
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HARLEY-DAVIDSON, INC.
CONSOLIDATED BALANCE SHEETS (continued)
(In thousands)
| | | | | | | | | | (Unaudited) | | (Unaudited) |
| (Unaudited) | | | | (Unaudited) | | March 29, 2020 | | December 31, 2019 | | March 31, 2019 |
| March 31, 2019 | | December 31, 2018 | | April 1, 2018 | |
Balances held by consolidated variable interest entities (Note 13) | | | | | | |
Current finance receivables, net | $ | 130,454 |
| | $ | 175,043 |
| | $ | 182,033 |
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Balances held by consolidated variable interest entities (Note 13): | | Balances held by consolidated variable interest entities (Note 13): | | | | | |
Finance receivables, net - current | | Finance receivables, net - current | $ | 381,904 | | | $ | 291,444 | | | $ | 130,454 | |
Other assets | $ | 1,416 |
| | $ | 1,563 |
| | $ | 2,175 |
| Other assets | $ | 2,262 | | | $ | 2,420 | | | $ | 1,416 | |
Non-current finance receivables, net | $ | 480,936 |
| | $ | 591,839 |
| | $ | 464,185 |
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Finance receivables, net - non-current | | Finance receivables, net - non-current | $ | 1,435,832 | | | $ | 1,027,179 | | | $ | 480,936 | |
Restricted cash - current and non-current | $ | 39,764 |
| | $ | 47,203 |
| | $ | 55,140 |
| Restricted cash - current and non-current | $ | 99,235 | | | $ | 63,812 | | | $ | 39,764 | |
Current portion of long-term debt, net | $ | 137,488 |
| | $ | 189,693 |
| | $ | 205,055 |
| Current portion of long-term debt, net | $ | 437,488 | | | $ | 317,607 | | | $ | 137,488 | |
Long-term debt, net | $ | 408,153 |
| | $ | 488,191 |
| | $ | 361,049 |
| Long-term debt, net | $ | 1,319,357 | | | $ | 937,212 | | | $ | 408,153 | |
The accompanying notes are an integral part of the consolidated financial statements.
HARLEY-DAVIDSON, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
| | | | | | | | Three months ended | |
| Three months ended | | March 29, 2020 | | March 31, 2019 |
| March 31, 2019 | | April 1, 2018 | |
Net cash provided by operating activities (Note 8) | $ | 32,671 |
| | $ | 191,594 |
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Net cash (used) provided by operating activities (Note 7) | | Net cash (used) provided by operating activities (Note 7) | $ | (8,582) | | | $ | 32,671 | |
Cash flows from investing activities: | | | | Cash flows from investing activities: | |
Capital expenditures | (35,255 | ) | | (28,436 | ) | Capital expenditures | (32,928) | | | (35,255) | |
Origination of finance receivables | (851,372 | ) | | (798,067 | ) | Origination of finance receivables | (780,061) | | | (851,372) | |
Collections on finance receivables | 815,824 |
| | 809,800 |
| Collections on finance receivables | 841,261 | | | 815,824 | |
| Acquisition of business | (7,000 | ) | | — |
| Acquisition of business | — | | | (7,000) | |
Other | 603 |
| | (4,948 | ) | |
Net cash used by investing activities | (77,200 | ) | | (21,651 | ) | |
Other investing activities | | Other investing activities | 16 | | | 603 | |
Net cash provided (used) by investing activities | | Net cash provided (used) by investing activities | 28,288 | | | (77,200) | |
Cash flows from financing activities: | | | | Cash flows from financing activities: | |
Proceeds from issuance of medium-term notes | 546,655 |
| | 347,553 |
| Proceeds from issuance of medium-term notes | — | | | 546,655 | |
Repayments of medium-term notes | (750,000 | ) | | — |
| Repayments of medium-term notes | (600,000) | | | (750,000) | |
| Proceeds from securitization debt | | Proceeds from securitization debt | 522,694 | | | — | |
Repayments of securitization debt | (76,505 | ) | | (67,955 | ) | Repayments of securitization debt | (130,918) | | | (76,505) | |
Borrowings of asset-backed commercial paper | — |
| | 35,504 |
| Borrowings of asset-backed commercial paper | 225,187 | | | — | |
Repayments of asset-backed commercial paper | (72,401 | ) | | (45,907 | ) | Repayments of asset-backed commercial paper | (67,809) | | | (72,401) | |
Net increase (decrease) in credit facilities and unsecured commercial paper | 58,527 |
| | (234,145 | ) | |
Net increase in unsecured commercial paper | | Net increase in unsecured commercial paper | 772,208 | | | 58,527 | |
Dividends paid | (60,859 | ) | | (62,731 | ) | Dividends paid | (58,817) | | | (60,859) | |
Purchase of common stock for treasury | (61,712 | ) | | (72,968 | ) | |
Issuance of common stock under employee stock option plans | 616 |
| | 1,719 |
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Net cash used by financing activities | (415,679 | ) | | (98,930 | ) | |
Repurchase of common stock | | Repurchase of common stock | (7,071) | | | (61,712) | |
| Issuance of common stock under share-based plans | | Issuance of common stock under share-based plans | 34 | | | 616 | |
Net cash provided (used) by financing activities | | Net cash provided (used) by financing activities | 655,508 | | | (415,679) | |
Effect of exchange rate changes on cash, cash equivalents and restricted cash | (409 | ) | | 2,034 |
| Effect of exchange rate changes on cash, cash equivalents and restricted cash | (5,732) | | | (409) | |
Net (decrease) increase in cash, cash equivalents and restricted cash | $ | (460,617 | ) | | $ | 73,047 |
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Net increase (decrease) in cash, cash equivalents and restricted cash | | Net increase (decrease) in cash, cash equivalents and restricted cash | $ | 669,482 | | | $ | (460,617) | |
| Cash, cash equivalents and restricted cash: | | | | Cash, cash equivalents and restricted cash: | |
Cash, cash equivalents and restricted cash—beginning of period | $ | 1,259,748 |
| | $ | 746,210 |
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Net (decrease) increase in cash, cash equivalents and restricted cash | (460,617 | ) | | 73,047 |
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Cash, cash equivalents and restricted cash—end of period | $ | 799,131 |
| | $ | 819,257 |
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Cash, cash equivalents and restricted cash, beginning of period | | Cash, cash equivalents and restricted cash, beginning of period | $ | 905,366 | | | $ | 1,259,748 | |
Net increase (decrease) in cash, cash equivalents and restricted cash | | Net increase (decrease) in cash, cash equivalents and restricted cash | 669,482 | | | (460,617) | |
Cash, cash equivalents and restricted cash, end of period | | Cash, cash equivalents and restricted cash, end of period | $ | 1,574,848 | | | $ | 799,131 | |
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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 on the Consolidated balance sheets to the Consolidated statements of cash flows: | | Reconciliation of cash, cash equivalents and restricted cash on the Consolidated balance sheets to the Consolidated statements of cash flows: | |
Cash and cash equivalents | $ | 749,600 |
| | $ | 753,517 |
| Cash and cash equivalents | $ | 1,465,061 | | | $ | 749,600 | |
Restricted cash | 43,471 |
| | 54,569 |
| Restricted cash | 99,903 | | | 43,471 | |
Restricted cash included in other long-term assets | 6,060 |
| | 11,171 |
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Total cash, cash equivalents and restricted cash shown in the Statement of Cash Flows | $ | 799,131 |
| | $ | 819,257 |
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Restricted cash included in Other long-term assets | | Restricted cash included in Other long-term assets | 9,884 | | | 6,060 | |
Cash, cash equivalents and restricted cash per the Consolidated statements of cash flows | | Cash, cash equivalents and restricted cash per the Consolidated statements of cash flows | $ | 1,574,848 | | | $ | 799,131 | |
The accompanying notes are an integral part of the consolidated financial statements.
HARLEY-DAVIDSON, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands, except share amounts)
(Unaudited)
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| Common Stock | | | | Additional Paid-in Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Treasury Stock | | Total |
| Issued Shares | | Balance | | | | | | | | | | |
Balance, December 31, 2019 | 182,816,536 | | | $ | 1,828 | | | $ | 1,491,004 | | | $ | 2,193,997 | | | $ | (536,949) | | | $ | (1,345,881) | | | $ | 1,803,999 | |
Net income | — | | | — | | | — | | | 69,695 | | | — | | | — | | | 69,695 | |
Other comprehensive loss, net of tax (Note 18) | — | | | — | | | — | | | — | | | (42,341) | | | — | | | (42,341) | |
Dividends ($0.380 per share) | — | | | — | | | — | | | (58,817) | | | — | | | — | | | (58,817) | |
Repurchase of common stock | — | | | — | | | — | | | — | | | — | | | (7,071) | | | (7,071) | |
Share-based compensation | 585,053 | | | 6 | | | 4,137 | | | — | | | — | | | 604 | | | 4,747 | |
Cumulative effect of change in accounting (Note 2) | — | | | — | | | — | | | (78,229) | | | — | | | — | | | (78,229) | |
Balance, March 29, 2020 | 183,401,589 | | | $ | 1,834 | | | $ | 1,495,141 | | | $ | 2,126,646 | | | $ | (579,290) | | | $ | (1,352,348) | | | $ | 1,691,983 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Common Stock | | | | Additional Paid-in Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Treasury Stock | | Total |
| Issued Shares | | Balance | | | | | | | | | | |
Balance, December 31, 2018 | 181,931,225 | | | $ | 1,819 | | | $ | 1,459,620 | | | $ | 2,007,583 | | | $ | (629,684) | | | $ | (1,065,389) | | | $ | 1,773,949 | |
Net income | — | | | — | | | — | | | 127,945 | | | — | | | — | | | 127,945 | |
Other comprehensive income, net of tax (Note 18) | — | | | — | | | — | | | — | | | 7,633 | | | — | | | 7,633 | |
Dividends ($0.375 per share) | — | | | — | | | — | | | (60,859) | | | — | | | — | | | (60,859) | |
Repurchase of common stock | — | | | — | | | — | | | — | | | — | | | (61,712) | | | (61,712) | |
Share-based compensation | 702,687 | | | 7 | | | 5,961 | | | — | | | — | | | 4,687 | | | 10,655 | |
| | | | | | | | | | | | | |
Balance, March 31, 2019 | 182,633,912 | | | $ | 1,826 | | | $ | 1,465,581 | | | $ | 2,074,669 | | | $ | (622,051) | | | $ | (1,122,414) | | | $ | 1,797,611 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
The accompanying notes are an integral part of the consolidated financial statements.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | Additional Paid-in Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Treasury Balance | | Total |
| | Issued Shares | | Balance | |
Balance December 31, 2018 | | 181,931,225 |
| | $ | 1,819 |
| | $ | 1,459,620 |
| | $ | 2,007,583 |
| | $ | (629,684 | ) | | $ | (1,065,389 | ) | | $ | 1,773,949 |
|
Net income | | — |
| | — |
| | — |
| | 127,945 |
| | — |
| | — |
| | 127,945 |
|
Total other comprehensive income, net of tax (Note 18) | | — |
| | — |
| | — |
| | — |
| | 7,633 |
| | — |
| | 7,633 |
|
Dividends | | — |
| | — |
| | — |
| | (60,859 | ) | | — |
| | — |
| | (60,859 | ) |
Repurchase of common stock | | — |
| | — |
| | — |
| | — |
| | — |
| | (61,712 | ) | | (61,712 | ) |
Share-based compensation | | 702,687 |
| | 7 |
| | 5,961 |
| | — |
| | — |
| | 4,687 |
| | 10,655 |
|
Balance March 31, 2019 | | 182,633,912 |
| | $ | 1,826 |
| | $ | 1,465,581 |
| | $ | 2,074,669 |
| | $ | (622,051 | ) | | $ | (1,122,414 | ) | | $ | 1,797,611 |
|
| | | | | | | | | | | | | | |
| | Common Stock | | Additional Paid-in Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Treasury Balance | | Total |
| | Issued Shares | | Balance | |
Balance December 31, 2017 | | 181,286,547 |
| | $ | 1,813 |
| | $ | 1,422,808 |
| | $ | 1,607,570 |
| | $ | (500,049 | ) | | $ | (687,865 | ) | | $ | 1,844,277 |
|
Net income | | — |
| | — |
| | — |
| | 174,763 |
| | — |
| | — |
| | 174,763 |
|
Total other comprehensive income, net of tax (Note 18) | | — |
| | — |
| | — |
| | — |
| | 93,445 |
| | — |
| | 93,445 |
|
Dividends | | — |
| | — |
| | — |
| | (62,731 | ) | | — |
| | — |
| | (62,731 | ) |
Repurchase of common stock | | — |
| | — |
| | — |
| | — |
| | — |
| | (72,968 | ) | | (72,968 | ) |
Share-based compensation | | 489,896 |
| | 5 |
| | 9,884 |
| | — |
| | — |
| | 3,250 |
| | 13,139 |
|
Cumulative effect of change in accounting | | — |
| | — |
| | — |
| | 6,024 |
| | — |
| | — |
| | 6,024 |
|
Balance April 1, 2018 | | 181,776,443 |
| | $ | 1,818 |
| | $ | 1,432,692 |
| | $ | 1,725,626 |
| | $ | (406,604 | ) | | $ | (757,583 | ) | | $ | 1,995,949 |
|
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 subsidiaries, all of which are 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 arehave been eliminated.
The Company operates in 2 reportable segments: Motorcycles and Related Products (Motorcycles) and Financial Services.
In the opinion of the Company's management, the accompanying unaudited consolidated financial statements contain all adjustments, (consistingconsisting only of normal recurring adjustments)adjustments, necessary to present fairly the consolidatedConsolidated balance sheets as of March 29, 2020 and March 31, 2019, and April 1, 2018, the consolidated Consolidated statements of income for the three month periods then ended, the consolidatedConsolidated statements of comprehensive income for the three month periods then ended, the consolidatedConsolidated statements of cash flows for the three month periods then ended, and the consolidatedConsolidated statements of shareholders' equity for the three month periods then ended.
Certain information and footnote disclosures normally included in complete financial statements have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) and U.S. generally accepted accounting principles (U.S. GAAP) for interim financial reporting. TheseThe consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.
The Company operates in two reportable segments: Motorcycles and Related Products (Motorcycles) and Financial Services.2019.
The preparation of consolidated financial statements in conformity with U.S. GAAP requires the Company's management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and the accompanying notes. Actual results could differ from those estimates.
During the first quarter of 2020, the outbreak of a novel strain of coronavirus (COVID-19) spread throughout the world, and it was recognized as a pandemic in March 2020. This outbreak has severely restricted the level of economic activity around the world, including in the U.S. Globally, the continued spread of COVID-19 has led to supply chain destabilization, facility closures, workforce disruption, and volatility in the economy, and its full impact is not yet known. These impacts expanded significantly during March 2020 and may continue to expand in scope, type and severity. The Company’s operations and demand for its products have already been adversely impacted as a result of the COVID-19 pandemic. The Company acted quickly and in alignment with government efforts to protect the safety and health of its employees and the Harley-Davidson community. The Company implemented travel restrictions, enhanced sanitation practices, cancelled events and closed facilities including temporarily suspending its global manufacturing starting in March 2020. While the impact on demand, facility closures and other restrictions are expected to be temporary, the duration and financial impact to the Company are unknown at this time. This uncertainty could have an impact in future periods on certain estimates used in the preparation of financial results for the period ending March 29, 2020, including, but not limited to, allowance for credit losses, goodwill, long-lived assets, fair value measurements, provision for income tax and hedge accounting with respect to forecasted future transactions.
2. New Accounting Standards
Accounting Standards Recently Adopted
In February 2016, the FASB issued ASU No. 2016-02 Leases (Topic 842) (ASU 2016-02). ASU 2016-02 amends the existing lease accounting model by requiring a lessee to recognize the rights and obligations resulting from certain leases as assets and liabilities on the balance sheet. ASU 2016-02 also requires a company to disclose key information about their leasing arrangements. The Company adopted ASU 2016-02 on January 1, 2019 using a modified retrospective approach. Pursuant to ASU 2018-11, Leases (Topic 842): Targeted Improvements, the Company applied the new leases standard at the adoption date and recognized a cumulative effect adjustment to the opening balance sheet on January 1, 2019.
The Company elected the package of practical expedients upon transition that allows entities not to reassess lease identification, classification and initial direct costs for leases that existed prior to adoption. The Company also elected the short-term lease practical expedient that allows entities to recognize lease payments on a straight-line basis over the lease term for leases with a term of 12 months or less. The Company has elected the practical expedient allowing entities to not separate non-lease components from lease components, but instead account for such components as a single lease component for all leases except leases involving assets operated by a third-party.
The adoption of ASU 2016-02 resulted in the initial recognition of right of use assets and lease liabilities related to the Company's leasing arrangements totaling approximately $60 million on January 1, 2019. The adoption of ASU 2016-02 had no impact on opening retained earnings on January 1, 2019 and is not expected to materially impact consolidated net income or cash flows on an on-going basis.
In August 2017, the FASB issued ASU No. 2017-12 Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities (ASU 2017-12). ASU 2017-12 amends ASC 815, Derivatives and Hedging to improve the financial reporting of hedging relationships and to simplify the application of the hedge accounting guidance. The ASU makes various updates to the hedge accounting model, including changing the recognition and presentation of changes in the fair value of the hedging instrument and amending disclosure requirements, among other things. The Company adopted ASU 2017-12 on January 1, 2019. The adoption of ASU 2017-12 did not have a material impact on its financial statements.
Accounting Standards Not Yet Adopted
In July 2016, the FASBFinancial Accounting Standards Board (FASB) issued ASUAccounting Standards Update (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 recognizea company recognizes expected credit losses on financial assets. The standard requires a more timelyinstruments by requiring 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 credit losses upon initial recognition of the financial instrument. ASU 2016-13 replaced the incurred loss methodology. The Company is required to adoptadopted ASU 2016-13 for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2019 on January 1, 2020 using a modified retrospective basis. Early adoption is permittedapproach for fiscal years beginning after December 15, 2018. An entity should applyfinancial instruments measured at amortized cost.
On January 1, 2020, the standard by recordingCompany remeasured the allowance for credit losses on financial instruments under the new accounting standard. The difference was recorded as a cumulative effect adjustment to retainedRetained earnings upon adoption. Adoption, net of this standard will impact how the Company recognizes credit losses on its financial instruments.income taxes. The Company is currently evaluating the impact ofinitial adoption of ASU 2016-13 but anticipatesdid not impact the adoptionCompany’s Consolidated statements of income. The effect of adopting ASU 2016-13 will result in an increaseon the Company’s Consolidated balance sheets was as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| December 31, 2019 | | Effect of Adoption | | January 1, 2020 |
ASSETS | | | | | |
Finance receivables(a) | $ | 7,572,947 | | | | $ | — | | | | $ | 7,572,947 | |
Allowance for credit losses on finance receivables(a) | $ | (198,581) | | | | $ | (100,604) | | | | $ | (299,185) | |
Deferred income taxes | $ | 101,204 | | | | $ | 22,484 | | | | $ | 123,688 | |
| | | | | | | | | | |
LIABILITIES AND SHAREHOLDERS' EQUITY | | | | | | | | | | |
Accrued liabilities | $ | 582,288 | | | | $ | 109 | | | | $ | 582,397 | |
Retained earnings | $ | 2,193,997 | | | | $ | (78,229) | | | | $ | 2,115,768 | |
(a)Reported as Finance receivables, net on the Consolidated balance sheets, allocated between current and non-current
Financial Statement Comparability to Prior Periods – During the three months ended March 29, 2020, under ASU 2016-13, the Company recognized full lifetime expected credit losses upon initial recognition of the associated financial instrument. Under ASU 2016-13, changes in the annual provisionallowance for credit losses and the related allowanceimpact on the provision for credit losses.
losses will be affected by the size and composition of the Company's finance receivables portfolios, economic conditions, reasonable and supportable forecasts, and other appropriate factors at each reporting period. Prior periods have not been restated and will continue to be reported in accordance with the previously applicable U.S. GAAP, which generally required that a credit loss be incurred before it was recognized.As such, prior periods will not be comparable to the current period. Additional information on the Company’s finance receivables is discussed further in Note 8.
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 simplifiessimplified 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 adoptadopted ASU 2017-04 for its annual and any interim goodwill impairment tests in fiscal years beginning after December 15, 2019on January 1, 2020 on a prospective basis. EarlyThe adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017.
of ASU 2017-04 did not have a material impact to the Company's consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement (ASU 2018-13). ASU 2018-13 amendsamended ASC 820 to eliminate, modify, and add certain disclosure requirements for fair value measurements. The guidance is effective for fiscal years beginning after December 15, 2019 and for interim periods within those fiscal years. Early adoption is permitted in any period, for either the whole standard or only the provisions that eliminate or modify requirements. The amendments arewere required to be applied retrospectively, with the exception of a few disclosure additions, which arewere to be applied on a prospective basis. The Company is currently evaluating the impactadopted ASC 2018-13 on January 1, 2020. The adoption of adopting ASU 2018-13 but doesdid not believe that it will have a significantmaterial impact on itsthe Company's disclosures.
In August 2018, the FASB issued ASU No. 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40) (ASU 2018-15). The new guidance requires a customer in a cloud computing arrangement that is a service contract to follow the existing internal-use software guidance to determine which implementation costs to capitalize as assets or expense as incurred. The Company adopted ASU 2018-15 on January 1, 2020 on a prospective basis. The adoption of ASU 2018-15 did not have a material impact on the Company's consolidated financial statements.
Accounting Standards Not Yet Adopted
In December 2019, the FASB issued ASU No. 2019-12, Simplifying the Accounting for Income Taxes (ASU No. 2019-12). The new guidance eliminates certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The new guidance also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. The guidance is effective for fiscal years beginning after December 15, 2019,2020 and for interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the impact of adopting ASU 2018-15.2019-12.
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 includesDisaggregated revenue disaggregated by major source was as follows (in thousands):
| | | | | | | | | | | | | | | |
| | | | | Three months ended | | |
| | | | | March 29, 2020 | | March 31, 2019 |
Motorcycles and Related Products Revenue: | | | | | | | |
Motorcycles | | | | | $ | 899,365 | | | $ | 964,575 | |
Parts & accessories | | | | | 134,685 | | | 159,703 | |
General merchandise | | | | | 49,160 | | | 55,401 | |
Licensing | | | | | 8,029 | | | 8,577 | |
Other | | | | | 8,549 | | | 7,381 | |
| | | | | 1,099,788 | | | 1,195,637 | |
Financial Services Revenue: | | | | | | | |
Interest income | | | | | 170,001 | | | 159,804 | |
Other | | | | | 28,455 | | | 28,939 | |
| | | | | 198,456 | | | 188,743 | |
| | | | | $ | 1,298,244 | | | $ | 1,384,380 | |
|
| | | | | | | | |
| | Three months ended |
| | March 31, 2019 | | April 1, 2018 |
Motorcycles and Related Products: | | | | |
Motorcycles | | $ | 964,575 |
| | $ | 1,121,673 |
|
Parts & Accessories | | 159,703 |
| | 169,075 |
|
General Merchandise | | 55,401 |
| | 56,601 |
|
Licensing | | 8,577 |
| | 8,358 |
|
Other | | 7,381 |
| | 8,240 |
|
Revenue from Motorcycles and Related Products | | 1,195,637 |
| | 1,363,947 |
|
Financial Services: | | | | |
Interest income | | 159,804 |
| | 154,041 |
|
Securitization and servicing fee income | | 189 |
| | 352 |
|
Other income | | 28,750 |
| | 23,781 |
|
Revenue from Financial Services | | 188,743 |
| | 178,174 |
|
Total revenue | | $ | 1,384,380 |
| | $ | 1,542,121 |
|
DeferredThe Company maintains certain deferred revenue relatesbalances related to payments received at contract inception in advance of the Company’s performance under the contract and generally relates to the sale of Harley Ownership GroupOwners Group® memberships and extended service plan contracts. Deferred revenue is recognized as revenue as the Company performs under the contract. Deferred revenue, included in Accrued liabilitiesand Other long-term liabilities on the consolidatedConsolidated balance sheet,sheets, was as follows (in thousands):
| | | | | | | | March 29, 2020 | | | March 31, 2019 |
| | March 31, 2019 | | April 1, 2018 | |
Balance, beginning of year | | $ | 29,055 |
| | $ | 23,441 |
| |
Balance, beginning of period | | Balance, beginning of period | $ | 29,745 | | | | $ | 29,055 | |
Balance, end of period | | 30,228 |
| | 27,624 |
| Balance, end of period | 29,434 | | | | 30,228 | |
Previously deferred revenue recognized as revenue in the three months ended March 29, 2020 and March 31, 2019 and April 1, 2018 was $6.1$6.9 million and $4.0$6.1 million, respectively. The Company expects to recognize approximately $16.2$15.4 million of the remaining unearned revenue over the next 12 months and $14.0 million thereafter.
4. Restructuring Expenses
In January 2018, the Company initiated a plan to further improve its manufacturing operations and cost structure by commencing a multi-year manufacturing optimization plan which includesincluded the consolidation of its motorcycle assembly plant in Kansas City, Missouri, into its plant in York, Pennsylvania, and the closure of its wheel operations in Adelaide, Australia (Manufacturing Optimization Plan). AsThe consolidation of operations included the U.S. operations are consolidated, the Company expectselimination of approximately 800 jobs will be eliminated withat the closure of Kansas City operationsfacility and the addition of approximately 450 jobs will be added inat the York facility through 2019. ApproximatelyThe Adelaide facility closure included the elimination of approximately 90 jobs will be eliminated in Adelaide.
The Company expects to incur restructuring and other consolidation costs of $152 million to $162 million injobs. Through December 31, 2019, the Motorcycles segment incurred cumulative restructuring expenses of $122.2 million and other costs related to temporary inefficiencies of $23.2 million under the Manufacturing Optimization Plan. The plant consolidation and closures were completed in 2019. NaN expenses were recorded under the Manufacturing Optimization Plan through 2019, of which approximately 70% will be cash charges.
The current estimate includes $129 million to $134 million of restructuring expensein the three months ended March 29, 2020, and $23 million to $28 million of costs related to temporary inefficiencies. The Company expects restructuringno additional expenses to includeare expected under the cost of employee termination benefits, accelerated depreciation, and other project implementation costs of $40 million to $41 million, $51 million to $53 million, and $38 million to $40 million, respectively.plan.
In November 2018, the Company implementedinitiated a reorganization of its workforce (Reorganization Plan)., which was completed in 2019. As a result, approximately 70 employees left the Company on an involuntary basis.
Restructuring expense related to thesethe restructuring plans is recordedpresented as a separate line item in the consolidatedConsolidated statements of income and the accrued restructuring liability is recorded in Accrued liabilities on the consolidatedConsolidated balance sheet. The Company expects the plans to be completed by mid-2019.sheets. Changes in the accrued restructuring liability (in thousands) were as follows:follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended March 29, 2020 | | | | | | | | | | |
| Manufacturing Optimization Plan | | | | | | | | Reorganization Plan | | |
| Employee Termination Benefits | | Accelerated Depreciation | | Other | | Total | | Employee Termination Benefits | | Total |
Balance, beginning of period | $ | 865 | | | $ | — | | | $ | 2 | | | $ | 867 | | | $ | — | | | $ | 867 | |
| | | | | | | | | | | |
Utilized – cash | (445) | | | — | | | (2) | | | (447) | | | — | | | (447) | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Balance, end of period | $ | 420 | | | $ | — | | | $ | — | | | $ | 420 | | | $ | — | | | $ | 420 | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended March 31, 2019 |
| Manufacturing Optimization Plan | | Reorganization Plan | | |
| Employee Termination Benefits | | Accelerated Depreciation | | Other | | Total | | Employee Termination Benefits | | Total |
Balance, beginning of period | $ | 24,958 |
| | $ | — |
| | $ | 79 |
| | $ | 25,037 |
| | $ | 3,461 |
| | $ | 28,498 |
|
Restructuring expense (benefit) | 9 |
| | 8,379 |
| | 5,636 |
| | 14,024 |
| | (394 | ) | | 13,630 |
|
Utilized - cash | (2,600 | ) | | — |
| | (5,528 | ) | | (8,128 | ) | | (2,014 | ) | | (10,142 | ) |
Utilized - non cash | — |
| | (8,379 | ) | | — |
| | (8,379 | ) | | — |
| | (8,379 | ) |
Foreign currency changes | 34 |
| | — |
| | — |
| | 34 |
| | (2 | ) | | 32 |
|
Balance, end of period | $ | 22,401 |
| | $ | — |
| | $ | 187 |
| | $ | 22,588 |
| | $ | 1,051 |
| | $ | 23,639 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended March 31, 2019 | | | | | | | | | | |
| Manufacturing Optimization Plan | | | | | | | | Reorganization Plan | | |
| Employee Termination Benefits | | Accelerated Depreciation | | Other | | Total | | Employee Termination Benefits | | Total |
Balance, beginning of period | $ | 24,958 | | | $ | — | | | $ | 79 | | | $ | 25,037 | | | $ | 3,461 | | | $ | 28,498 | |
Restructuring expense (benefit) | 9 | | | 8,379 | | | 5,636 | | | 14,024 | | | (394) | | | 13,630 | |
Utilized – cash | (2,600) | | | — | | | (5,528) | | | (8,128) | | | (2,014) | | | (10,142) | |
Utilized – non cash | — | | | (8,379) | | | — | | | (8,379) | | | — | | | (8,379) | |
Foreign currency changes | 34 | | | — | | | — | | | 34 | | | (2) | | | 32 | |
Balance, end of period | $ | 22,401 | | | $ | — | | | $ | 187 | | | $ | 22,588 | | | $ | 1,051 | | | $ | 23,639 | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended April 1, 2018 |
| Manufacturing Optimization Plan | | Reorganization Plan | | |
| Employee Termination Benefits | | Accelerated Depreciation | | Other | | Total | | Employee Termination Benefits | | Total |
Balance, beginning of period | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
Restructuring expense | 40,791 |
| | 5,613 |
| | 438 |
| | 46,842 |
| | — |
| | 46,842 |
|
Utilized - cash | (2,300 | ) | | — |
| | (374 | ) | | (2,674 | ) | | — |
| | (2,674 | ) |
Utilized - non cash | — |
| | (5,613 | ) | | — |
| | (5,613 | ) | | — |
| | (5,613 | ) |
Foreign currency changes | (204 | ) | | — |
| | (1 | ) | | (205 | ) | | — |
| | (205 | ) |
Balance, end of period | $ | 38,287 |
| | $ | — |
| | $ | 63 |
| | $ | 38,350 |
| | $ | — |
| | $ | 38,350 |
|
During the three months ended March 31, 2019, the restructuring liability was adjusted to reflect updated assumptions resulting in a reversal of approximately $0.4 million of previously recognized restructuring expense.
During the three months ended March 31, 2019 and April 1, 2018, theThe Company incurred $3.6 millionincremental Motorcycles and $0.7 million, respectively, of incrementalRelated Products cost of goods sold due to temporary inefficiencies resulting from implementing the Manufacturing Optimization Plan.Plan during the three months ended March 31, 2019 of $3.6 million.
5. Income Taxes
The Company’s 2019 effective income tax rate for the three months ended March 31, 201929, 2020 was 24.9%26.3% compared to 24.1%24.9% for the three months ended April 1, 2018.March 31, 2019. The increase in the first quarter 2020 effective income tax rate over 2019 was due to discrete income tax expenses recorded during the three months ended March 29, 2020 which included adjustments related to the reassessment of the realizability of certain deferred tax assets. The first quarter 2020 effective income tax rate was determined based on the Company's current projection for full-year 2020 financial results. Given uncertainty surrounding the impact of the COVID-19 pandemic, the Company's projection for full-year 2020 financial results, in total and across its numerous tax jurisdictions, is likely to evolve and ultimately impact the Company's 2020 full-year effective income tax rate.
6. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per share was as follows (in thousands, except per share amounts):
| | | | | | | | | | | | | | | |
| | | | | Three months ended | | |
| | | | | March 29, 2020 | | March 31, 2019 |
Net income | | | | | $ | 69,695 | | | $ | 127,945 | |
| | | | | | | |
Basic weighted-average shares outstanding | | | | | 153,004 | | | 159,311 | |
Effect of dilutive securities – employee stock compensation plan | | | | | 740 | | | 715 | |
Diluted weighted-average shares outstanding | | | | | 153,744 | | | 160,026 | |
Earnings per share: | | | | | | | |
Basic | | | | | $ | 0.46 | | | $ | 0.80 | |
Diluted | | | | | $ | 0.45 | | | $ | 0.80 | |
|
| | | | | | | |
| Three months ended |
| March 31, 2019 | | April 1, 2018 |
Numerator: | | | |
Net income used in computing basic and diluted earnings per share | $ | 127,945 |
| | $ | 174,763 |
|
Denominator: | | | |
Denominator for basic earnings per share - weighted-average common shares | 159,311 |
| | 168,139 |
|
Effect of dilutive securities - employee stock compensation plan | 715 |
| | 1,035 |
|
Denominator for diluted earnings per share - adjusted weighted-average shares outstanding | 160,026 |
| | 169,174 |
|
Earnings per common share: | | | |
Basic | $ | 0.80 |
| | $ | 1.04 |
|
Diluted | $ | 0.80 |
| | $ | 1.03 |
|
Outstanding options to purchase 1.21.7 million and 1.01.2 million shares of common stock for the three months ended March 29, 2020 and March 31, 2019, and April 1, 2018, respectively, were not included in the Company’s computationeffect 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.”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 calculationcalculations for the three month periodsmonths ended March 29, 2020 and March 31, 2019 and April 1, 2018.2019.
7. Acquisition
On March 4, 2019, the Company purchased certain assets and liabilities of StaCyc, Inc. for total consideration of $14.9 million including cash paid at acquisition of $7.0 million. StaCyc produces electric-powered two-wheelers specifically designed for children and supports the Company’s plans to expand its portfolio of electric two-wheeled vehicles.
The Company has completed a provisional allocation of the purchase consideration which is subject to change upon the completion of the Company’s final valuation of acquired assets and liabilities. The primary assets acquired and included in the Motorcycles segment were goodwill of $9.5 million, which is expected to be tax deductible, and intangible assets of $5.3 million.
8. Additional Balance Sheet and Cash Flow Information
Investments in Marketable Securities
– The Company’s investments in marketable securities consisted of the following (in thousands):
| | | | | | | | | | | | | | | | | |
| March 29, 2020 | | December 31, 2019 | | March 31, 2019 |
Debt securities | $ | — | | | $ | — | | | $ | 10,003 | |
Mutual funds | 44,144 | | | 52,575 | | | 49,896 | |
| $ | 44,144 | | | $ | 52,575 | | | $ | 59,899 | |
|
| | | | | | | | | | | |
| March 31, 2019 | | December 31, 2018 | | April 1, 2018 |
Debt securities | $ | 10,003 |
| | $ | 10,007 |
| | $ | — |
|
Mutual funds | 49,896 |
| | 44,243 |
| | 49,402 |
|
Total marketable securities | $ | 59,899 |
| | $ | 54,250 |
| | $ | 49,402 |
|
The debtDebt securities, which are included in Marketable securities on the consolidatedConsolidated balance sheets, are carried at fair value with unrealized gains or losses reported in other comprehensive income. The mutual fund investments are held to fund certain deferred compensation obligations. These investments, which areMutual funds, included in Other long-term assets on the consolidatedConsolidated balance sheets, are carried at fair value with gains and losses recorded in net income. Mutual funds are held to support certain deferred compensation obligations.
Inventories,
net – Substantially all inventories located in the United StatesU.S. 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, net consisted of the following (in thousands):
| | | | | | | | | | | | | | | | | |
| March 29, 2020 | | December 31, 2019 | | March 31, 2019 |
Raw materials and work in process | $ | 245,384 | | | $ | 235,433 | | | $ | 204,759 | |
Motorcycle finished goods | 272,648 | | | 280,306 | | | 304,386 | |
Parts & accessories and general merchandise | 149,318 | | | 144,258 | | | 145,300 | |
Inventory at lower of FIFO cost or net realizable value | 667,350 | | | 659,997 | | | 654,445 | |
Excess of FIFO over LIFO cost | (56,426) | | | (56,426) | | | (58,639) | |
| $ | 610,924 | | | $ | 603,571 | | | $ | 595,806 | |
|
| | | | | | | | | | | |
| March 31, 2019 | | December 31, 2018 | | April 1, 2018 |
Raw materials and work in process | $ | 204,759 |
| | $ | 177,110 |
| | $ | 177,652 |
|
Motorcycle finished goods | 304,386 |
| | 301,630 |
| | 289,046 |
|
Parts & accessories and general merchandise | 145,300 |
| | 136,027 |
| | 150,228 |
|
Inventory at lower of FIFO cost or net realizable value | 654,445 |
| | 614,767 |
| | 616,926 |
|
Excess of FIFO over LIFO cost | (58,639 | ) | | (58,639 | ) | | (52,355 | ) |
Total inventories, net | $ | 595,806 |
| | $ | 556,128 |
| | $ | 564,571 |
|
Operating Cash Flow
– The reconciliation of netNet income to netNet cash (used) provided by operating activities is was as follows (in thousands):
| | | | | | | | | | | |
| Three months ended | | |
| March 29, 2020 | | March 31, 2019 |
Cash flows from operating activities: | | | |
Net income | $ | 69,695 | | | $ | 127,945 | |
Adjustments to reconcile Net income to Net cash provided by operating activities: | | | |
Depreciation and amortization | 47,427 | | | 64,372 | |
Amortization of deferred loan origination costs | 16,739 | | | 18,968 | |
Amortization of financing origination fees | 2,999 | | | 2,194 | |
Provision for long-term employee benefits | 7,852 | | | 3,156 | |
Employee benefit plan contributions and payments | (1,608) | | | (2,507) | |
Stock compensation expense | 3,896 | | | 6,537 | |
Net change in wholesale finance receivables related to sales | (208,183) | | | (237,569) | |
Provision for credit losses | 79,419 | | | 34,491 | |
| | | |
| | | |
| | | |
Deferred income taxes | (3,803) | | | 5,981 | |
| | | |
Other, net | 3,579 | | | 2,731 | |
Changes in current assets and liabilities: | | | |
Accounts receivable, net | (47,272) | | | (49,746) | |
Finance receivables – accrued interest and other | 4,007 | | | 92 | |
Inventories, net | (23,943) | | | (40,600) | |
Accounts payable and accrued liabilities | 10,562 | | | 123,975 | |
Derivative financial instruments | 2,812 | | | 867 | |
Other | 27,240 | | | (28,216) | |
| (78,277) | | | (95,274) | |
Net cash (used) provided by operating activities | $ | (8,582) | | | $ | 32,671 | |
|
| | | | | | | |
| Three months ended |
| March 31, 2019 | | April 1, 2018 |
Cash flows from operating activities: | | | |
Net income | $ | 127,945 |
| | $ | 174,763 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | | | |
Depreciation and amortization of intangibles | 64,372 |
| | 62,473 |
|
Amortization of deferred loan origination costs | 18,968 |
| | 20,116 |
|
Amortization of financing origination fees | 2,194 |
| | 2,028 |
|
Provision for long-term employee benefits | 3,156 |
| | 9,747 |
|
Employee benefit plan contributions and payments | (2,507 | ) | | (5,486 | ) |
Stock compensation expense | 6,537 |
| | 7,962 |
|
Net change in wholesale finance receivables related to sales | (237,569 | ) | | (239,902 | ) |
Provision for credit losses | 34,491 |
| | 30,052 |
|
Deferred income taxes | 5,981 |
| | 3,188 |
|
Other, net | 2,731 |
| | (1,902 | ) |
Changes in current assets and liabilities: | | | |
Accounts receivable, net | (49,746 | ) | | (17,688 | ) |
Finance receivables - accrued interest and other | 92 |
| | 4,758 |
|
Inventories | (40,600 | ) | | (21,542 | ) |
Accounts payable and accrued liabilities | 123,975 |
| | 148,923 |
|
Derivative instruments | 867 |
| | 702 |
|
Other | (28,216 | ) | | 13,402 |
|
Total adjustments | (95,274 | ) | | 16,831 |
|
Net cash provided by operating activities | $ | 32,671 |
| | $ | 191,594 |
|
9.8. Finance Receivables
The Company provides retail financial services to customers of the Company’sits independent dealers in the United StatesU.S. and Canada. The origination of retail loans is a separate and distinct transaction between the Company and the retail customer, unrelated to the Company’s sale of product to its dealers. Retail finance receivables consist of secured promissory notes and secured installment sales contracts and are primarily related to independent dealer sales of motorcycles to the dealers'retail customers. 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 its independent dealers in the Company’s independentU.S. and Canada. Wholesale finance receivables are related primarily to the Company's sale of motorcycles and related parts and accessories to dealers. Wholesale loans to dealers are generally secured by financed inventory or property and are originated in the U.S. and Canada. Wholesale finance receivables are related primarily to sales of motorcycles and related parts and accessories to dealers.property.
Finance receivables, net, consisted of the following (in thousands):
| | | | | | | | | | | | | | | | | |
| March 29, 2020 | | December 31, 2019 | | March 31, 2019 |
Retail finance receivables | $ | 6,269,247 | | | $ | 6,416,428 | | | $ | 6,290,036 | |
Wholesale finance receivables | 1,358,656 | | | 1,156,519 | | | 1,339,428 | |
| 7,627,903 | | | 7,572,947 | | | 7,629,464 | |
Allowance for credit losses | (335,496) | | | (198,581) | | | (190,872) | |
| $ | 7,292,407 | | | $ | 7,374,366 | | | $ | 7,438,592 | |
|
| | | | | | | | | | | |
| March 31, 2019 | | December 31, 2018 | | April 1, 2018 |
Retail | $ | 6,290,036 |
| | $ | 6,328,201 |
| | $ | 6,064,192 |
|
Wholesale | 1,339,428 |
| | 1,083,615 |
| | 1,252,600 |
|
Total finance receivables | 7,629,464 |
| | 7,411,816 |
| | 7,316,792 |
|
Allowance for credit losses | (190,872 | ) | | (189,885 | ) | | (190,350 | ) |
Finance receivables, net | $ | 7,438,592 |
| | $ | 7,221,931 |
| | $ | 7,126,442 |
|
A provision for creditOn January 1, 2020, the Company adopted ASU 2016-13, which requires an entity to recognize expected lifetime losses on finance receivables is charged or credited to earnings in amounts that the Company believes are sufficient to maintain the allowance for credit losses at a level that is adequate to cover losses inherent in the existing portfolio.upon origination. The allowance for credit losses as of March 29, 2020 represents management’sthe Company’s estimate of lifetime losses for its finance receivables. Prior to the adoption of ASU 2016-13, the Company maintained an allowance for credit losses based on the Company’s estimate of probable losses inherent in the finance receivable portfolio as of the balance sheet date. However, due to
Under ASU 2016-13, 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 onCompany’s finance receivables by portfolio were as follows (in thousands):
|
| | | | | | | | | | | |
| Three months ended March 31, 2019 |
| Retail | | Wholesale | | Total |
Balance, beginning of period | $ | 182,098 |
| | $ | 7,787 |
| | $ | 189,885 |
|
Provision for credit losses | 32,832 |
| | 1,659 |
| | 34,491 |
|
Charge-offs | (44,721 | ) | | — |
| | (44,721 | ) |
Recoveries | 11,217 |
| | — |
| | 11,217 |
|
Balance, end of period | $ | 181,426 |
| | $ | 9,446 |
| | $ | 190,872 |
|
| | | | | |
| Three months ended April 1, 2018 |
| Retail | | Wholesale | | Total |
Balance, beginning of period | $ | 186,254 |
| | $ | 6,217 |
| | $ | 192,471 |
|
Provision for credit losses | 28,069 |
| | 1,983 |
| | 30,052 |
|
Charge-offs | (45,081 | ) | | — |
| | (45,081 | ) |
Recoveries | 12,908 |
| | — |
| | 12,908 |
|
Balance, end of period | $ | 182,150 |
| | $ | 8,200 |
| | $ | 190,350 |
|
Finance receivables are considered impaired when management determines it is probable that the Company will be unable to collect all amounts due according to the terms of the loan agreement. Portionsreported at amortized cost, net of the allowance for credit losses are established to cover estimated losseslosses. Amortized cost includes the principal outstanding, accrued interest, and deferred loan fees and costs. Based on differences in the nature of the finance receivables specifically identifiedand the underlying methodology for impairment. The unspecified portion ofcalculating the allowance for creditloan losses, covers estimated losses onthe Company segments its finance receivables which are collectively reviewedinto the retail and wholesale portfolios. The Company further disaggregates each portfolio by credit quality indicators. As the credit risk varies between the retail and wholesale portfolios, the Company utilizes different credit quality indicators for impairment.each portfolio. Prior to the adoption of ASU 2016-13, the Company’s investment in finance receivables included the same components as the amortized cost under the new accounting guidance.
The retail portfolio primarily consists of a large number of small balance, homogeneous finance receivables. The Company performs a collective evaluation of the adequacy of the retail allowance for credit losses. For periods after January 1, 2020, the Company utilizes a vintage-based loss forecast methodology that includes decompositions for probability of default, exposure at default, attrition rate, and recovery balance rate. Reasonable and supportable economic forecasts for a two-year period are incorporated into the methodology to reflect the estimated impact of changes in future economic conditions, such as unemployment rates, household obligations or other relevant factors, over the expected life of the retail portfolio. For periods beyond the Company’s reasonable and supportable forecasts, the Company reverts to its average historical loss experience for a three-year period using a mean-reversion process. Adjustments to historical loss information are made for differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, or term as well as other relevant factors. For periods prior to January 1, 2020, the Company performed a periodic and systematic collective evaluation of the adequacy of the retail allowance for credit losses. The Company utilizesutilized loss forecast models which considerconsidered 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.conditions.
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.review to determine whether the loans share similar risk characteristics. The Company classifies loans that do not share risk characteristics as Non-Performing and evaluates these loans individually. A specific allowance for credit losses is established for wholesalethese 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.foreclosure is probable. The impairmentspecific allowance is determined based on amortized cost of the related finance receivable and the estimated fair value of the collateral, less selling costs and 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.receive. Finance receivables in the wholesale portfolio thatnot individually assessed are not considered impaired on an individual basis are segregated,aggregated, based on similar risk characteristics, according
to the Company’s internal risk rating system and collectively evaluated for impairment. Themeasured collectively. For periods after January 1, 2020, 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, reasonable and supportable economic forecasts, and the value of the underlying collateral and expected recoveries. For periods prior to January 1, 2020, the related allowance for credit losses was 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 isChanges in the Company’s policy not to changeeconomic outlook impacted the termsretail and conditionswholesale estimates for expected credit losses at March 29, 2020. As part of finance receivables. However, to minimize the economic loss,January 1, 2020 ASU 2016-13 adoption, the Company may modify certain finance receivablesexpected to be operating in troubled debt restructurings. Total restructured finance receivables area negative economic environment during the year, and the Company had also incorporated the potential for a recession in 2020 into its economic forecast. However, at the end of the first quarter of 2020, the Company's economic forecast significantly deteriorated and included current recessionary conditions extending into 2021, with a considerable drop in U.S. Gross Domestic Product (GDP) and a substantial increase in unemployment in the second quarter of 2020.
The historical experience incorporated into the portfolio-specific models does not significant.fully reflect the Company's comprehensive expectations regarding the future. As such, the Company incorporated qualitative factors to produce reasonable and supportable allowance balances. These factors include motorcycle recovery value considerations, seasonality adjustments and specific problem loan trends.
TheDue to the use of projections and assumptions in estimating the losses, the amount of losses actually incurred by the Company in either portfolio could differ from the amounts estimated. Further, the Company’s allowance for credit losses incorporates management’s expectations surrounding the economic forecasts and known conditions, including the
anticipated impact of COVID-19, at the balance sheet date. The Company’s expectations surrounding its economic forecasts may change in future periods as additional information becomes available.
Changes in the allowance for credit losses on finance receivables by portfolio segregated by those amounts that are individually evaluated for impairment and those that are collectively evaluated for impairment, waswere as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| Three months ended March 29, 2020 | | | | |
| Retail | | Wholesale | | Total |
Balance, beginning of period | $ | 188,501 | | | $ | 10,080 | | | $ | 198,581 | |
Cumulative effect of change in accounting(a) | 95,558 | | | 5,046 | | | 100,604 | |
Provision for credit losses | 70,417 | | | 9,002 | | | 79,419 | |
Charge-offs | (55,215) | | | — | | | (55,215) | |
Recoveries | 12,107 | | | — | | | 12,107 | |
Balance, end of period | $ | 311,368 | | | $ | 24,128 | | | $ | 335,496 | |
| Three months ended March 31, 2019 | | | | |
| Retail | | Wholesale | | Total |
Balance, beginning of period | $ | 182,098 | | | $ | 7,787 | | | $ | 189,885 | |
Provision for credit losses | 32,832 | | | 1,659 | | | 34,491 | |
Charge-offs | (44,721) | | | — | | | (44,721) | |
Recoveries | 11,217 | | | — | | | 11,217 | |
Balance, end of period | $ | 181,426 | | | $ | 9,446 | | | $ | 190,872 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
|
| | | | | | | | | | | |
| March 31, 2019 |
| Retail | | Wholesale | | Total |
Allowance for credit losses, ending balance: | | | | | |
Individually evaluated for impairment | $ | — |
| | $ | — |
| | $ | — |
|
Collectively evaluated for impairment | 181,426 |
| | 9,446 |
| | 190,872 |
|
Total allowance for credit losses | $ | 181,426 |
| | $ | 9,446 |
| | $ | 190,872 |
|
Finance receivables, ending balance: | | | | | |
Individually evaluated for impairment | $ | — |
| | $ | — |
| | $ | — |
|
Collectively evaluated for impairment | 6,290,036 |
| | 1,339,428 |
| | 7,629,464 |
|
Total finance receivables | $ | 6,290,036 |
| | $ | 1,339,428 |
| | $ | 7,629,464 |
|
| | | | | |
| December 31, 2018 |
| Retail | | Wholesale | | Total |
Allowance for credit losses, ending balance: | | | | | |
Individually evaluated for impairment | $ | — |
| | $ | — |
| | $ | — |
|
Collectively evaluated for impairment | 182,098 |
| | 7,787 |
| | 189,885 |
|
Total allowance for credit losses | $ | 182,098 |
| | $ | 7,787 |
| | $ | 189,885 |
|
Finance receivables, ending balance: | | | | | |
Individually evaluated for impairment | $ | — |
| | $ | — |
| | $ | — |
|
Collectively evaluated for impairment | 6,328,201 |
| | 1,083,615 |
| | 7,411,816 |
|
Total finance receivables | $ | 6,328,201 |
| | $ | 1,083,615 |
| | $ | 7,411,816 |
|
| | | | | |
| April 1, 2018 |
| Retail | | Wholesale | | Total |
Allowance for credit losses, ending balance: | | | | | |
Individually evaluated for impairment | $ | — |
| | $ | 184 |
| | $ | 184 |
|
Collectively evaluated for impairment | 182,150 |
| | 8,016 |
| | 190,166 |
|
Total allowance for credit losses | $ | 182,150 |
| | $ | 8,200 |
| | $ | 190,350 |
|
Finance receivables, ending balance: | | | | | |
Individually evaluated for impairment | $ | — |
| | $ | 220 |
| | $ | 220 |
|
Collectively evaluated for impairment | 6,064,192 |
| | 1,252,380 |
| | 7,316,572 |
|
Total finance receivables | $ | 6,064,192 |
| | $ | 1,252,600 |
| | $ | 7,316,792 |
|
There are no wholesale finance receivables at March 31, 2019 or December 31, 2018(a)On January 1, 2020, the Company adopted ASU 2016-13 and increased the allowance for loan loss through Retained earnings, net of income taxes, to establish an allowance that are individually deemed to be impaired under ASC Topic 310, "Receivables". Additional information related to the wholesale finance receivables that are individually deemed to be impaired at April 1, 2018 includes (in thousands):
|
| | | | | | | | | | | | | | | | | | | |
| Recorded Investment | | Unpaid Principal Balance | | Related Allowance | | Average Recorded Investment | | Interest Income Recognized |
Wholesale: | | | | | | | | | |
No related allowance recorded | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
Related allowance recorded | 251 |
| | 220 |
| | 184 |
| | 251 |
| | — |
|
Total impaired wholesale finance receivables | $ | 251 |
| | $ | 220 |
| | $ | 184 |
| | $ | 251 |
| | $ | — |
|
Retail finance receivables are contractually delinquent if the minimum payment is not received by the specified due date. Retail finance receivables are generally charged-off when the receivable is 120 days or more delinquent, the related asset is repossessed, or the receivable is otherwise deemed uncollectible. All retail finance receivables accrue interest until either collected or charged-off. Accordingly, as of March 31, 2019, December 31, 2018 and April 1, 2018, all retail finance receivables were accounted for as interest-earning receivables, of which $39.0 million, $41.2 million and $27.9 million, respectively, were 90 days or more past due.
Wholesale finance receivables are delinquent if the minimum payment is not received by the contractual due date. Wholesale finance receivables are written down once management determines that the specific borrower does not have the ability to repay the loan in full. Interest continues to accruerepresents expected lifetime credit losses 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 termsportfolios at date of the loans and future payments are reasonably assured. While on non-accrual status, all cash received is applied to principal or interest as appropriate. There were no wholesale receivables on non-accrual status at March 31, 2019 or December 31, 2018. The recorded investment in non-accrual status wholesale finance receivables at April 1, 2018 was $0.2 million. At March 31, 2019, December 31, 2018 and April 1, 2018, $0.8 million, $1.1 million, and $0.2 million of wholesale finance receivables were 90 days or more past due and accruing interest, respectively.adoption.
An analysis of the aging of past due finance receivables was as follows (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2019 |
| Current | | 31-60 Days Past Due | | 61-90 Days Past Due | | Greater than 90 Days Past Due | | Total Past Due | | Total Finance Receivables |
Retail | $ | 6,088,894 |
| | $ | 119,150 |
| | $ | 43,028 |
| | $ | 38,964 |
| | $ | 201,142 |
| | $ | 6,290,036 |
|
Wholesale | 1,337,429 |
| | 862 |
| | 355 |
| | 782 |
| | 1,999 |
| | 1,339,428 |
|
Total | $ | 7,426,323 |
| | $ | 120,012 |
| | $ | 43,383 |
| | $ | 39,746 |
| | $ | 203,141 |
| | $ | 7,629,464 |
|
| | | | | | | | | | | |
| December 31, 2018 |
| Current | | 31-60 Days Past Due | | 61-90 Days Past Due | | Greater than 90 Days Past Due | | Total Past Due | | Total Finance Receivables |
Retail | $ | 6,100,186 |
| | $ | 136,945 |
| | $ | 49,825 |
| | $ | 41,245 |
| | $ | 228,015 |
| | $ | 6,328,201 |
|
Wholesale | 1,081,729 |
| | 522 |
| | 273 |
| | 1,091 |
| | 1,886 |
| | 1,083,615 |
|
Total | $ | 7,181,915 |
| | $ | 137,467 |
| | $ | 50,098 |
| | $ | 42,336 |
| | $ | 229,901 |
| | $ | 7,411,816 |
|
| | | | | | | | | | | |
| April 1, 2018 |
| Current | | 31-60 Days Past Due | | 61-90 Days Past Due | | Greater than 90 Days Past Due | | Total Past Due | | Total Finance Receivables |
Retail | $ | 5,897,632 |
| | $ | 105,366 |
| | $ | 33,275 |
| | $ | 27,919 |
| | $ | 166,560 |
| | $ | 6,064,192 |
|
Wholesale | 1,247,175 |
| | 549 |
| | 4,705 |
| | 171 |
| | 5,425 |
| | 1,252,600 |
|
Total | $ | 7,144,807 |
| | $ | 105,915 |
| | $ | 37,980 |
| | $ | 28,090 |
| | $ | 171,985 |
| | $ | 7,316,792 |
|
A significant part of managing the Company's finance receivable portfolios includes the assessment of credit risk associated with each borrower. As the credit risk varies between the retail and wholesale portfolios, the Company utilizes different credit risk indicators for each portfolio.
The Company manages retail credit risk through its credit approval policyprocess 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. RetailFor the Company’s U.S. and Canadian retail finance receivable portfolios, the Company determines the credit quality indicator for each loan at origination and does not update the credit quality indicator subsequent to the loan origination date.
As loan performance by credit quality indicator differs between the U.S. and Canadian retail loans, the Company’s credit quality indicators vary for the two portfolios. For the U.S. retail receivable portfolio, loans with a FICO score of 640740 or above at origination are generally considered super prime, loans with a FICO score between 640 and 740 are generally categorized as prime, and those loans with FICO score below 640 are generally considered sub-prime. For the Canadian retail finance receivable portfolio, loans with a FICO score of 700 or above at origination are generally considered super prime, loans with a FICO score between 620 and 700 are generally categorized as prime, and those loans with FICO score below 620 are generally considered sub-prime.
The amortized cost of the Company's U.S. and Canada retail finance receivable portfolios by credit quality indicator and vintage, as of March 29, 2020, was as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2020 | | 2019 | | 2018 | | 2017 | | 2016 | | 2015 & Prior | | Total |
U.S. Retail: | | | | | | | | | | | | | |
Super prime | $ | 204,937 | | | | $ | 825,176 | | | | $ | 539,296 | | | | $ | 275,621 | | | | $ | 140,284 | | | | $ | 62,924 | | | | $ | 2,048,238 | |
Prime | 265,365 | | | | 1,065,132 | | | | 717,234 | | | | 441,284 | | | | 262,421 | | | | 155,338 | | | | 2,906,774 | |
Sub-prime | 108,068 | | | | 394,291 | | | | 239,571 | | | | 155,391 | | | | 108,531 | | | | 98,124 | | | | 1,103,976 | |
| 578,370 | | | | 2,284,599 | | | | 1,496,101 | | | | 872,296 | | | | 511,236 | | | | 316,386 | | | | $ | 6,058,988 | |
Canadian Retail: | | | | | | | | | | | | | |
Super prime | $ | 12,819 | | | | $ | 61,889 | | | | $ | 39,516 | | | | $ | 22,186 | | | | $ | 10,565 | | | | $ | 4,989 | | | | $ | 151,964 | |
Prime | 3,968 | | | | 16,479 | | | | 12,389 | | | | 8,441 | | | | 4,549 | | | | 3,929 | | | | 49,755 | |
Sub-prime | 768 | | | | 2,827 | | | | 1,919 | | | | 1,348 | | | | 921 | | | | 757 | | | | 8,540 | |
| 17,555 | | | | 81,195 | | | | 53,824 | | | | 31,975 | | | | 16,035 | | | | 9,675 | | | | 210,259 | |
| $ | 595,925 | | | $ | 2,365,794 | | | $ | 1,549,925 | | | $ | 904,271 | | | $ | 527,271 | | | $ | 326,061 | | | $ | 6,269,247 | |
Prior to the adoption of ASU 2016-13, retail loans with a FICO score of 640 or above at origination were generally considered prime, and loans with a FICO score below 640 are were generally considered sub-prime. These credit quality indicators arewere determined at the time of loan origination and arewere not updated subsequent to the loan origination date.
The recorded investment in retail finance receivables, by credit quality indicator, was as follows (in thousands):
| | | March 31, 2019 | | December 31, 2018 | | April 1, 2018 | | December 31, 2019 | | March 31, 2019 |
Prime | $ | 5,160,942 |
| | $ | 5,183,754 |
| | $ | 4,923,237 |
| Prime | | $ | 5,278,093 | | | $ | 5,160,942 | |
Sub-prime | 1,129,094 |
| | 1,144,447 |
| | 1,140,955 |
| Sub-prime | | 1,138,335 | | | 1,129,094 | |
Total | $ | 6,290,036 |
| | $ | 6,328,201 |
| | $ | 6,064,192 |
| |
| | | | $ | 6,416,428 | | | $ | 6,290,036 | |
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’sthe Company’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 Company classifies dealers identified as those in which foreclosure is probable as Non-Performing. 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 amortized cost of wholesale financial receivables, by credit quality indicator and vintage, was as follows as of March 29, 2020 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2020 | | 2019 | | 2018 | | 2017 | | 2016 | | 2015 & Prior | | Total |
Non-Performing | $ | — | | | | $ | 2,376 | | | | $ | 1,774 | | | | $ | 107 | | | | $ | 25 | | | | $ | 43 | | | | $ | 4,325 | |
Doubtful | 478 | | | | 4,169 | | | | 529 | | | | 51 | | | | — | | | | 726 | | | | 5,953 | |
Substandard | 5,375 | | | | 6,374 | | | | 391 | | | | 131 | | | | — | | | | — | | | | 12,271 | |
Special Mention | 5,239 | | | | 8,001 | | | | 977 | | | | 6 | | | | — | | | | 1,268 | | | | 15,491 | |
Medium Risk | 8,307 | | | | 10,996 | | | | 1,091 | | | | 23 | | | | — | | | | 826 | | | | 21,243 | |
Low Risk | 658,137 | | | | 574,401 | | | | 47,101 | | | | 10,997 | | | | 6,323 | | | | 2,414 | | | | 1,299,373 | |
| $ | 677,536 | | | | $ | 606,317 | | | | $ | 51,863 | | | | $ | 11,315 | | | | $ | 6,348 | | | | $ | 5,277 | | | | $ | 1,358,656 | |
Dealer risk rating categories prior to the adoption of ASU 2016-13 were consistent with the current risk rating categories with the exception of the Non-Performing category for dealers identified as those in which foreclosure is probable, which was established in connection with the January 1, 2020 adoption of the new accounting guidance. The recorded investment in wholesale finance receivables, by internal credit quality indicator, was as follows (in thousands):
| | | | | | | | | | | | | | |
| | December 31, 2019 | | March 31, 2019 |
| | | | |
Doubtful | | $ | 11,664 | | | $ | 8,679 | |
Substandard | | 6,122 | | | 7,866 | |
Special Mention | | 16,125 | | | 11,484 | |
Medium Risk | | 16,800 | | | 917 | |
Low Risk | | 1,105,808 | | | 1,310,482 | |
| | $ | 1,156,519 | | | $ | 1,339,428 | |
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. The Company reverses accrued interest related to charged-off accounts against interest income when the account is charged-off. The Company reversed $6.4 million of accrued interest against interest income during the three months ended March 29, 2020. All retail finance receivables accrue interest until either collected or charged-off. Due to the timely write-off of accrued interest, the Company made the election provided under ASU 2016-13 to exclude accrued interest from its allowance for credit losses. Accordingly, as of March 29, 2020,
|
| | | | | | | | | | | |
| March 31, 2019 | | December 31, 2018 | | April 1, 2018 |
Doubtful | $ | 8,679 |
| | $ | 2,210 |
| | $ | 1,582 |
|
Substandard | 7,866 |
| | 9,660 |
| | 3,368 |
|
Special Mention | 11,484 |
| | 10,299 |
| | 33,085 |
|
Medium Risk | 917 |
| | 25,802 |
| | 10,512 |
|
Low Risk | 1,310,482 |
| | 1,035,644 |
| | 1,204,053 |
|
Total | $ | 1,339,428 |
| | $ | 1,083,615 |
| | $ | 1,252,600 |
|
December 31, 2019 and March 31, 2019, all retail finance receivables were accounted for as interest-earning receivables, of which $38.7 million, $48.0 million and $39.0 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 the Company 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 Company determines that foreclosure is probable, 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. Once an account is charged-off, the Company will reverse the associated accrued interest against interest income. As the Company follows a non-accrual policy for interest, the allowance for credit losses excludes accrued interest for the wholesale portfolio. There were no charged-off accounts during the three months ended March 29, 2020. As such, the Company did not reverse any accrued interest in that period. At March 29, 2020, December 31, 2019 and March 31, 2019, $3.1 million, $2.6 million, and $0.8 million, respectively of wholesale finance receivables were 90 days or more past due and accruing interest.
Additional information related to the wholesale finance receivables on non-accrual status at March 29, 2020 includes (in thousands):
| | | | | | | | | | | | | | | | | |
| Amortized Cost, Beginning of Period | | Amortized Cost, End of Period | | Interest Income Recognized |
Wholesale: | | | | | |
No related allowance recorded | $ | — | | | $ | — | | | $ | — | |
Related allowance recorded | 4,994 | | | 4,325 | | | — | |
| $ | 4,994 | | | $ | 4,325 | | | $ | — | |
The aging analysis of finance receivables was as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 29, 2020 | | | | | | | | | | |
| Current | | 31-60 Days Past Due | | 61-90 Days Past Due | | Greater than 90 Days Past Due | | Total Past Due | | Total Finance Receivables |
Retail finance receivables | $ | 6,091,319 | | | $ | 101,412 | | | $ | 37,816 | | | $ | 38,700 | | | $ | 177,928 | | | $ | 6,269,247 | |
Wholesale finance receivables | 1,352,084 | | | 2,051 | | | 1,437 | | | 3,084 | | | 6,572 | | | 1,358,656 | |
| $ | 7,443,403 | | | $ | 103,463 | | | $ | 39,253 | | | $ | 41,784 | | | $ | 184,500 | | | $ | 7,627,903 | |
| | | | | | | | | | | |
| December 31, 2019 | | | | | | | | | | |
| Current | | 31-60 Days Past Due | | 61-90 Days Past Due | | Greater than 90 Days Past Due | | Total Past Due | | Total Finance Receivables |
Retail finance receivables | $ | 6,171,930 | | | $ | 142,479 | | | $ | 53,995 | | | $ | 48,024 | | | $ | 244,498 | | | $ | 6,416,428 | |
Wholesale finance receivables | 1,152,416 | | | 1,145 | | | 384 | | | 2,574 | | | 4,103 | | | 1,156,519 | |
| $ | 7,324,346 | | | $ | 143,624 | | | $ | 54,379 | | | $ | 50,598 | | | $ | 248,601 | | | $ | 7,572,947 | |
| | | | | | | | | | | |
| March 31, 2019 | | | | | | | | | | |
| Current | | 31-60 Days Past Due | | 61-90 Days Past Due | | Greater than 90 Days Past Due | | Total Past Due | | Total Finance Receivables |
Retail finance receivables | $ | 6,088,894 | | | $ | 119,150 | | | $ | 43,028 | | | $ | 38,964 | | | $ | 201,142 | | | $ | 6,290,036 | |
Wholesale finance receivables | 1,337,429 | | | 862 | | | 355 | | | 782 | | | 1,999 | | | 1,339,428 | |
| $ | 7,426,323 | | | $ | 120,012 | | | $ | 43,383 | | | $ | 39,746 | | | $ | 203,141 | | | $ | 7,629,464 | |
Prior to the Company's January 1, 2020 adoption of ASU 2016-13, finance receivables were considered impaired when management determined it was probable that the Company would not be able to collect all amounts due according to the terms of the loan agreement. Portions of the allowance for credit losses were established to cover estimated losses on finance receivables specifically identified for impairment. The unspecified portion of the allowance for credit losses covered estimated losses on finance receivables which were collectively reviewed for impairment.
The allowance for credit losses and finance receivables by portfolio, segregated by those amounts that were individually evaluated for impairment and those that were collectively evaluated for impairment, were as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| December 31, 2019 | | | | |
| Retail | | Wholesale | | Total |
Allowance for credit losses, ending balance: | | | | | |
Individually evaluated for impairment | $ | — | | | $ | 2,100 | | | $ | 2,100 | |
Collectively evaluated for impairment | 188,501 | | | 7,980 | | | 196,481 | |
| $ | 188,501 | | | $ | 10,080 | | | $ | 198,581 | |
Finance receivables, ending balance: | | | | | |
Individually evaluated for impairment | $ | — | | | $ | 4,601 | | | $ | 4,601 | |
Collectively evaluated for impairment | 6,416,428 | | | 1,151,918 | | | 7,568,346 | |
| $ | 6,416,428 | | | $ | 1,156,519 | | | $ | 7,572,947 | |
| | | | | |
| March 31, 2019 | | | | |
| Retail | | Wholesale | | Total |
Allowance for credit losses, ending balance: | | | | | |
Individually evaluated for impairment | $ | — | | | $ | — | | | $ | — | |
Collectively evaluated for impairment | 181,426 | | | 9,446 | | | 190,872 | |
| $ | 181,426 | | | $ | 9,446 | | | $ | 190,872 | |
Finance receivables, ending balance: | | | | | |
Individually evaluated for impairment | $ | — | | | $ | — | | | $ | — | |
Collectively evaluated for impairment | 6,290,036 | | | 1,339,428 | | | 7,629,464 | |
| $ | 6,290,036 | | | $ | 1,339,428 | | | $ | 7,629,464 | |
Additional information related to the wholesale finance receivables that were individually deemed to be impaired under ASC Topic 310, Receivables at December 31, 2019 included the following (in thousands). There were no wholesale receivables individually deemed to be impaired at March 31, 2019.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Recorded Investment | | Unpaid Principal Balance | | Related Allowance | | Average Recorded Investment | | Interest Income Recognized |
Wholesale: | | | | | | | | | |
No related allowance recorded | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
Related allowance recorded | 4,994 | | | 4,601 | | | 2,100 | | | 4,976 | | | — | |
| $ | 4,994 | | | $ | 4,601 | | | $ | 2,100 | | | $ | 4,976 | | | $ | — | |
Retail finance receivables were not evaluated individually for impairment prior to charge-off at December 31, 2019 or March 31, 2019.
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 as of March 29, 2020, December 31, 2019 and March 31, 2019. Additionally, in certain situations, the Company may offer short-term adjustments to customer payment due dates without affecting the associated interest rate or loan term.
9. Goodwill, Intangible and Long-Lived Assets
Goodwill is tested for impairment at least annually and whenever events or changes in circumstances indicate that the carrying value may not be recoverable. The Company also periodically evaluates whether there are indicators that the carrying value of long-lived assets to be held and used may not be recoverable. The Company has assessed the changes in events and circumstances related to the COVID-19 pandemic and determined there was no impairment of goodwill or long-lived assets during the three months ended March 29, 2020.
On March 4, 2019, the Company purchased certain assets and liabilities of StaCyc, Inc. for total consideration of $14.9 million including cash paid at acquisition of $7.0 million. StaCyc produces electric-powered two-wheelers specifically designed for children and supports the Company’s plans to expand its portfolio of electric two-wheeled vehicles. The primary assets acquired and included in the Motorcycles segment were goodwill of $9.5 million, which was tax deductible, and intangible assets of $5.3 million.
10. Derivative Financial Instruments and Hedging Activities
The Company is exposed to certain risks such asfrom fluctuations in foreign currency exchange rate risk,rates, interest rate riskrates and commodity price risk.prices. To reduce its exposure to such risks, the Company selectively uses derivative financial instruments. All derivative transactions are authorized and executed pursuant to regularly reviewed policies and procedures which prohibit the use of financial instruments for speculative trading purposes.
The Company sells products in foreign currencies and utilizes foreign currency exchange contracts to mitigate the effects of foreign currency exchange rate fluctuations related to the Euro, the Australian dollar, the Japanese yen, the Brazilian real, the Canadian dollar, Mexican peso, Indian rupee, and the Mexican peso.Pound sterling. The Company's foreign currency exchange contracts generally have maturities of less than one year.
The Company utilizes commodity contracts to mitigate the effects of commodity price fluctuations related to metals and fuel consumed in the Company’s motorcycle production and distribution processes.operations. The Company's commodity contracts generally have maturities of less than one year.
The Company periodically utilizes treasury rate lock contracts to fix the interest rate on a portion of the principal related to thean anticipated issuance of long-term debt, as well as interest rate swaps to reduce the impact of fluctuations in interest rates on long-termmedium-term notes with floating interest rates, as well as cross-currency swaps to mitigate the effect of foreign currency exchange rate fluctuations on foreign currency-denominated debt. The Company also utilizes interest rate caps to facilitate certain asset-backed securitization transactions.
All derivative financial instruments are recognized on the Consolidated balance sheetsheets at fair value. In accordance with ASC Topic 815, Derivatives and Hedging(ASC Topic 815), the accounting for changes in the fair value of a derivative financial 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 derivativesderivative financial instruments that are designated as cash flow hedges are initially recorded in other comprehensive (loss) 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-goingongoing basis, whether the derivativesderivative financial instruments that are used indesignated as cash flow hedging transactions are highly effective in offsetting changes in cash flows of the hedged items. No component of a designated hedging derivative financial instrument’s gain or loss is excluded from the assessment of hedge effectiveness. DerivativesDerivative financial instruments not designated as hedges are not speculative and are used to manage the Company’s exposure to foreign currency, commodity risks, and commodityinterest rate risks. Changes in the fair value of derivativesderivative financial instruments not designated inas hedging relationshipsinstruments are recorded directly in earnings.income.
The following tables summarize the notional and recorded fair values of the Company’sCompany's derivative financial instruments under ASC Topic 815 were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | Derivative Financial Instruments Designated as Cash Flow Hedging Instruments | |
| | Derivatives Designated as Cash Flow Hedging Instruments Under ASC Topic 815 | | March 29, 2020 | | | December 31, 2019 | | | March 31, 2019 | |
| | March 31, 2019 | | December 31, 2018 | | April 1, 2018 | | Notional Value | | Other Current Assets | | Accrued Liabilities | | Notional Value | | Other Current Assets | | Accrued Liabilities | | Notional Value | | Other Current Assets | | Accrued Liabilities |
Derivative | | Notional Value | | Other Current Assets | | Accrued Liabil-ities | | Notional Value | | Other Current Assets | | Accrued Liabil-ities | | Notional Value | | Other Current Assets | | Accrued Liabil-ities | |
Foreign currency contracts | | $ | 480,937 |
| | $ | 15,576 |
| | $ | 646 |
| | $ | 442,976 |
| | $ | 15,071 |
| | $ | 313 |
| | $ | 720,869 |
| | $ | 3,442 |
| | $ | 22,807 |
| Foreign currency contracts | $ | 414,753 | | | $ | 12,108 | | | $ | 575 | | | $ | 434,321 | | | $ | 3,505 | | | $ | 3,661 | | | $ | 480,937 | | | $ | 15,576 | | | $ | 646 | |
Commodity contracts | | 589 |
| | — |
| | 6 |
| | 827 |
| | — |
| | 46 |
| | 728 |
| | — |
| | 11 |
| Commodity contracts | 482 | | | — | | | 74 | | | 616 | | | — | | | 80 | | | 589 | | | — | | | 6 | |
Cross-currency swap | | Cross-currency swap | 660,780 | | | — | | | 41,283 | | | 660,780 | | | 8,326 | | | — | | | — | | | — | | | — | |
| Interest rate swaps | | 900,000 |
| | — |
| | 6,893 |
| | 900,000 |
| | — |
| | 4,494 |
| | — |
| | — |
| | — |
| Interest rate swaps | 900,000 | | | — | | | 11,398 | | | 900,000 | | | — | | | 9,181 | | | 900,000 | | | — | | | 6,893 | |
Total | | $ | 1,381,526 |
| | $ | 15,576 |
| | $ | 7,545 |
|
| $ | 1,343,803 |
| | $ | 15,071 |
| | $ | 4,853 |
|
| $ | 721,597 |
| | $ | 3,442 |
| | $ | 22,818 |
| |
| | | | | | | | | | | | | | | | | | | | $ | 1,976,015 | | | $ | 12,108 | | | $ | 53,330 | | | $ | 1,995,717 | | | $ | 11,831 | | | $ | 12,922 | | | $ | 1,381,526 | | | $ | 15,576 | | | $ | 7,545 | |
| | Derivatives Not Designated as Hedging Instruments Under ASC Topic 815 | | | | | | | | | | | | | | | | | | |
| | March 31, 2019 | | December 31, 2018 | | April 1, 2018 | |
Derivative | | Notional Value | | Other Current Assets | | Accrued Liabil-ities | | Notional Value | | Other Current Assets | | Accrued Liabil-ities | | Notional Value | | Other Current Assets | | Accrued Liabil-ities | |
Foreign currency contracts | | $ | 157,678 |
| | $ | 413 |
| | $ | 69 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| |
Commodity contracts | | 7,225 |
| | 94 |
| | 119 |
| | 5,239 |
| | — |
| | 463 |
| | 4,577 |
| | 171 |
| | 32 |
| |
Total | | $ | 164,903 |
|
| $ | 507 |
| | $ | 188 |
| | $ | 5,239 |
| | $ | — |
| | $ | 463 |
| | $ | 4,577 |
| | $ | 171 |
| | $ | 32 |
| |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Derivative Financial Instruments Not Designated as Hedging Instruments | | | | | | | | | | | | | | | | |
| March 29, 2020 | | | | | | December 31, 2019 | | | | | | March 31, 2019 | | | | |
| Notional Value | | Other Current Assets | | Accrued Liabilities | | Notional Value | | Other Current Assets | | Accrued Liabilities | | Notional Value | | Other Current Assets | | Accrued Liabilities |
Foreign currency contracts | $ | 182,642 | | | $ | 2,573 | | | $ | 2,194 | | | $ | 220,139 | | | $ | 721 | | | $ | 865 | | | $ | 157,678 | | | $ | 413 | | | $ | 69 | |
Commodity contracts | 7,769 | | | — | | | 1,452 | | | 8,270 | | | 95 | | | 147 | | | 7,225 | | | 94 | | | 119 | |
Interest rate cap | 326,976 | | | 2 | | | — | | | 375,980 | | | 2 | | | — | | | — | | | — | | | — | |
| $ | 517,387 | | | $ | 2,575 | | | $ | 3,646 | | | $ | 604,389 | | | $ | 818 | | | $ | 1,012 | | | $ | 164,903 | | | $ | 507 | | | $ | 188 | |
The following tables summarize the amountamounts of gains and losses related to derivative financial instruments designated as cash flow hedges were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Gain/(Loss) Recognized in OCI | | | | | | | | Gain/(Loss) Reclassified from AOCL into Income | | | | | | |
| Three months ended | | | | | | | | Three months ended | | | | | | |
| March 29, 2020 | | March 31, 2019 | | | | | | March 29, 2020 | | March 31, 2019 | | | | |
Foreign currency contracts | $ | 16,899 | | | $ | 4,152 | | | | | | | $ | 3,400 | | | $ | 2,453 | | | | | |
Commodity contracts | (129) | | | 30 | | | | | | | (135) | | | (10) | | | | | |
Cross-currency swap | (49,609) | | | — | | | | | | | (12,906) | | | — | | | | | |
Treasury rate locks | — | | | — | | | | | | | (124) | | | (122) | | | | | |
Interest rate swaps | (5,333) | | | (3,005) | | | | | | | (3,116) | | | (606) | | | | | |
| $ | (38,172) | | | $ | 1,177 | | | | | | | $ | (12,881) | | | $ | 1,715 | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Amount of Gain/(Loss) Recognized in OCI, before tax | | Amount of Gain/(Loss) Reclassified from AOCL into Income | | Location of Gain/(Loss) Reclassified from AOCL into Income | | Total Statement of Income Amount for Line Items in which the Effects of Cash Flow Hedges are Recorded |
| | Three months ended | | Three months ended | | | | Three months ended |
Cash Flow Hedges | | March 31, 2019 | | April 1, 2018 | | March 31, 2019 | | April 1, 2018 | | Income statement line item | | March 31, 2019 | | April 1, 2018 |
Foreign currency contracts | | $ | 4,152 |
| | $ | (5,890 | ) | | $ | 2,453 |
| | $ | (6,709 | ) | | Motorcycles cost of goods sold | | $ | 848,198 |
| | $ | 890,174 |
|
Commodity contracts | | 30 |
| | (16 | ) | | (10 | ) | | (73 | ) | | Motorcycles cost of goods sold | | $ | 848,198 |
| | $ | 890,174 |
|
Treasury rate locks | | — |
| | — |
| | (90 | ) | | (90 | ) | | Interest expense | | $ | 7,731 |
| | $ | 7,690 |
|
Treasury rate locks | | — |
| | — |
| | (32 | ) | | (36 | ) | | Financial Services interest expense | | $ | 52,324 |
| | $ | 48,450 |
|
Interest rate swaps | | (3,005 | ) | | — |
| | (606 | ) | | — |
| | Financial Services interest expense | | $ | 52,324 |
| | $ | 48,450 |
|
Total | | $ | 1,177 |
| | $ | (5,906 | ) | | $ | 1,715 |
| | $ | (6,908 | ) | | | | | | |
The location and amount of gains and losses recognized in income related to derivative financial instruments designated as cash flow hedges were as follows (in thousands): | | | | | | | | | | | | | | | | | | | | | | | |
| Motorcycles cost of goods sold | | Selling, administrative & engineering expense | | Interest expense | | Financial Services interest expense |
| Three months ended March 29, 2020 | | | | | | |
Line item on the Consolidated statements of income in which the effects of cash flow hedges are recorded | $ | 780,868 | | | $ | 277,971 | | | $ | 7,755 | | | $ | 52,473 | |
| | | | | | | |
Gain/(loss) reclassified from AOCL into income: | | | | | | | |
Foreign currency contracts | $ | 3,400 | | | $ | — | | | $ | — | | | $ | — | |
Commodity contracts | $ | (135) | | | $ | — | | | $ | — | | | $ | — | |
Cross-currency swap | $ | — | | | $ | (12,906) | | | $ | — | | | $ | — | |
Treasury rate locks | $ | — | | | $ | — | | | $ | (91) | | | $ | (33) | |
Interest rate swaps | $ | — | | | $ | — | | | $ | — | | | $ | (3,116) | |
| Three months ended March 31, 2019 | | | | | | |
Line item on the Consolidated statements of income in which the effects of cash flow hedges are recorded | $ | 848,198 | | | $ | 268,625 | | | $ | 7,731 | | | $ | 52,324 | |
| | | | | | | |
Gain/(loss) reclassified from AOCL into income: | | | | | | | |
Foreign currency contracts | $ | 2,453 | | | | $ | — | | | | $ | — | | | | $ | — | |
Commodity contracts | $ | (10) | | | | $ | — | | | | $ | — | | | | $ | — | |
| | | | | | | |
Treasury rate locks | $ | — | | | | $ | — | | | | $ | (90) | | | | $ | (32) | |
Interest rate swaps | $ | — | | | | $ | — | | | | $ | — | | | | $ | (606) | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
The amount of net gain included in accumulatedAccumulated other comprehensive loss (AOCL) at March 31, 2019,29, 2020, estimated to be reclassified into income over the next twelve12 months was $11.6$33.5 million.
The following table summarizes the amount of gains and losses recognized in income related to derivative financial instruments not designated as hedging instruments. The following amountsinstruments were as follows (in thousands). Gain and losses on foreign currency contracts and commodity contracts were recorded in Motorcycles cost of goods sold (in thousands):sold.
| | | | | | | | Amount of Gain/(Loss) Recognized in Income | |
| | Amount of Gain Recognized in Income on Derivative | | Three months ended | |
| | Three months ended | | March 29, 2020 | | March 31, 2019 | |
Derivatives Not Designated as Hedges | | March 31, 2019 | | April 1, 2018 | |
Foreign currency contracts | | $ | 887 |
| | $ | — |
| Foreign currency contracts | $ | 2,194 | | | $ | 887 | | |
Commodity contracts | | 317 |
| | 6 |
| Commodity contracts | (1,551) | | | 317 | | |
Total | | $ | 1,204 |
| | $ | 6 |
| |
| | | | $ | 643 | | | $ | 1,204 | | |
The Company is exposed to credit loss risk in the event of non-performance by counterparties to theseits derivative financial instruments. Although no assurances can be given, the Company does not expect any of the counterparties to theseits derivative financial instruments to fail to meet itstheir 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 itstheir position.
11. Leases
The Company determines if an arrangement is or contains a lease at contract inception. Right-of-use (ROU) assets related to the Company's leases are recorded in Lease assets and lease liabilities are recorded in Accrued liabilities and Lease liabilities on the consolidatedConsolidated balance sheet. sheets.
ROU assets represent the Company’s right to use an underlying asset forover the lease term, and lease liabilities represent the Company's obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized at the lease commencement date based on the present value of future lease payments over the lease term. The ROU asset also includes prepaid lease payments and initial direct costs and is reduced for lease incentives paid by the lessor. The discount rate used to determine the present value is generally the Company's incremental borrowing rate because the implicit rate in the lease is not readily determinable. The lease term used to calculate the ROU asset and lease liabilityliabilities includes periods covered by options to extend or terminate when the Company is reasonably certain the lease term will include these optional periods.
In accordance with ASC Topic 842, Leases (ASC Topic 842),the Company elected the short-term lease practical expedient that allows entities to recognize lease payments on a straight-line basis over the lease term for leases with a term of 12 months or less. The Company has also elected the practical expedient under ASC Topic 842 allowing entities to not separate non-lease components from lease components, but instead account for such components as a single lease component for all leases except leases involving assets operated by a third-party.
The Company has operating lease arrangements for sales and administrative offices, manufacturing and distribution facilities, product testing facilities, equipment and vehicles. All of the Company’s lease arrangements are accounted for as operating leases. The Company’s leases have remaining lease terms ranging from 1 to 1312 years, some of which include options to extend the leaseslease term for periods generally not greater than 5 years and some of which include options to terminate the leases within 1 year. Certain leases also include options to purchase the leased asset. LeasesThe Company's leases do not contain any material residual value guarantees or material restrictive covenants.
Operating lease expense for the three months ended March 29, 2020 and March 31, 2019 was $7.3 million and $6.3 million.million, respectively. This includes variable lease costs related to leases involving assets operated by a third-party of approximately $1.9 million and $1.1 million.million for the three months ended March 29, 2020 and March 31, 2019, respectively. Other variable and short-term lease costs were not material.
Balance sheet information related to the Company's leases was as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| March 29, 2020 | | December 31, 2019 | | March 31, 2019 |
Lease assets | $ | 56,496 | | | $ | 61,618 | | | | $ | 55,305 | |
| | | | | |
Accrued liabilities | $ | 17,939 | | | $ | 19,013 | | | | $ | 17,391 | |
Lease liabilities | 40,053 | | | 44,447 | | | | 39,516 | |
| $ | 57,992 | | | $ | 63,460 | | | | $ | 56,907 | |
|
| | | |
| March 31, 2019 |
Lease assets | $ | 55,305 |
|
| |
Accrued liabilities | $ | 17,391 |
|
Lease liabilities | 39,516 |
|
| $ | 56,907 |
|
Future maturities of the Company's operating lease liabilities as of March 29, 2020 were as follows as of March 31, 2019 (in thousands):
| | | | | | Operating Leases |
| Operating Leases | |
2019 | $ | 14,743 |
| |
2020 | 15,023 |
| 2020 | $ | 14,891 | |
2021 | 12,467 |
| 2021 | 17,819 | |
2022 | 8,837 |
| 2022 | 13,231 | |
2023 | 3,511 |
| 2023 | 6,532 | |
2024 | | 2024 | 4,555 | |
Thereafter | 6,291 |
| Thereafter | 4,707 | |
Total present value of lease payments | 60,872 |
| |
Less present value discount | 3,965 |
| |
Total lease liability | $ | 56,907 |
| |
Future lease payments | | Future lease payments | 61,735 | |
Present value discount | | Present value discount | (3,743) | |
Lease liabilities | | Lease liabilities | $ | 57,992 | |
Other lease information issurrounding the Company's operating leases was as follows:follows (dollars in thousands):
| | | | | | | | | | | | | | | |
| Three months ended | | | | | | |
| March 29, 2020 | | March 31, 2019 | | | | |
Cash outflows for amounts included in the measurement of lease liabilities | $ | 5,378 | | | $ | 5,361 | | | | | |
Right-of-use assets obtained in exchange for lease obligations | $ | 557 | | | $ | 298 | | | | | |
|
| | | |
| Three months ended |
| March 31, 2019 |
Cash paid for amounts included in the measurement of lease liabilities (in millions): | |
Operating cash flows | $ | 5,361 |
|
Right-of-use assets obtained in exchange for lease obligations (in millions) | 298 |
|
| | | | | | | | | | | | | | | | | |
| March 29, 2020 | | December 31, 2019 | | March 31, 2019 |
Weighted-average remaining lease term (in years) | 4.20 | | 4.68 | | 4.61 |
Weighted-average discount rate | 3.3 | % | | 2.1 | % | | 3.3 | % |
|
| | |
| March 31,
2019 |
Weighted average remaining lease term (in years) | 4.61 |
|
Weighted average discount rate | 3.3 | % |
12. Debt
Debt with a contractual term of one year or less than 12 months is generally classified as short-term debt and consisted of the following (in thousands):
| | | | | | | | | | | | | | | | | |
| March 29, 2020 | | December 31, 2019 | | March 31, 2019 |
Unsecured commercial paper | $ | 1,335,664 | | | $ | 571,995 | | | $ | 1,192,925 | |
| | | | | |
| | | | | |
|
| | | | | | | | | | | | |
| | March 31, 2019 | | December 31, 2018 | | April 1, 2018 |
Unsecured commercial paper | | $ | 1,192,925 |
| | $ | 1,135,810 |
| | $ | 1,036,976 |
|
Total short-term debt | | $ | 1,192,925 |
| | $ | 1,135,810 |
| | $ | 1,036,976 |
|
Debt with a contractual term greater than one year12 months is generally classified as long-term debt and consisted of the following (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | March 29, 2020 | | December 31, 2019 | | March 31, 2019 |
Secured debt: | | | | | | |
Asset-backed Canadian commercial paper conduit facility | | $ | 155,243 | | | $ | 114,693 | | | $ | 142,676 | |
Asset-backed U.S. commercial paper conduit facilities | | 600,000 | | | 490,427 | | | 526,947 | |
Asset-backed securitization debt | | 1,161,047 | | | 766,965 | | | 18,712 | |
Unamortized discounts and debt issuance costs | | (4,202) | | | (2,573) | | | (18) | |
| | 1,912,088 | | | 1,369,512 | | | 688,317 | |
|
| | | | | | | | | | | | |
| | March 31, 2019 | | December 31, 2018 | | April 1, 2018 |
Secured debt (Note 13) | | | | | | |
Asset-backed Canadian commercial paper conduit facility | | $ | 142,676 |
| | $ | 155,951 |
| | $ | 158,162 |
|
Asset-backed U.S. commercial paper conduit facilities | | 526,947 |
| | 582,717 |
| | 281,311 |
|
Asset-backed securitization debt | | 18,712 |
| | 95,216 |
| | 285,130 |
|
Less: unamortized discount and debt issuance costs | | (18 | ) | | (49 | ) | | (337 | ) |
Total secured debt | | 688,317 |
| | 833,835 |
| | 724,266 |
|
| | | | | | |
Unsecured notes (at par value) | | | | | | |
6.80% Medium-term notes due in 2018, issued May 2008 | | — |
| | — |
| | 877,488 |
|
2.25% Medium-term notes due in 2019, issued January 2016 | | — |
| | 600,000 |
| | 600,000 |
|
Floating-rate Medium-term notes due in 2019, issued March 2017(a) | | — |
| | 150,000 |
| | 150,000 |
|
2.40% Medium-term notes due in 2019, issued September 2014 | | 600,000 |
| | 600,000 |
| | 600,000 |
|
2.15% Medium-term notes due in 2020, issued February 2015 | | 600,000 |
| | 600,000 |
| | 600,000 |
|
Floating-rate Medium-term notes due in 2020, issued May 2018(b) | | 450,000 |
| | 450,000 |
| | — |
|
2.40% Medium-term notes due in 2020, issued March 2017 | | 350,000 |
| | 350,000 |
| | 350,000 |
|
2.85% Medium-term notes due in 2021, issued January 2016 | | 600,000 |
| | 600,000 |
| | 600,000 |
|
Floating-rate Medium-term notes due in 2021, issued November 2018(c) | | 450,000 |
| | 450,000 |
| | — |
|
3.55% Medium-term notes due in 2021, issued May 2018 | | 350,000 |
| | 350,000 |
| | — |
|
4.05% Medium-term notes due in 2022, issued February 2019 | | 550,000 |
| | — |
| | — |
|
2.55% Medium-term notes due in 2022, issued June 2017 | | 400,000 |
| | 400,000 |
| | 400,000 |
|
3.35% Medium-term notes due in 2023, issued February 2018 | | 350,000 |
| | 350,000 |
| | 350,000 |
|
3.50% Senior unsecured notes due in 2025, issued July 2015 | | 450,000 |
| | 450,000 |
| | 450,000 |
|
4.625% Senior unsecured notes due in 2045, issued July 2015 | | 300,000 |
| | 300,000 |
| | 300,000 |
|
Less: unamortized discount and debt issuance costs | | (21,573 | ) | | (20,369 | ) | | (20,564 | ) |
Gross long-term debt | | 6,116,744 |
| | 6,463,466 |
| | 5,981,190 |
|
Less: current portion of long-term debt, net of unamortized discount and debt issuance costs | | (1,372,050 | ) | | (1,575,799 | ) | | (1,872,679 | ) |
Total long-term debt | | $ | 4,744,694 |
| | $ | 4,887,667 |
| | $ | 4,108,511 |
|
| | | | | | | | | | | | | | | | | | | | |
| | March 29, 2020 | | December 31, 2019 | | March 31, 2019 |
Unsecured notes (at par value): | | | | | | |
Medium-term notes: | | | | | | |
| | | | | | |
| | | | | | |
Due in 2019, issued September 2014 | 2.40 | % | — | | | — | | | 600,000 | |
Due in 2020, issued February 2015 | 2.15 | % | — | | | 600,000 | | | 600,000 | |
Due in 2020, issued May 2018 | LIBOR + 0.50% | 450,000 | | | 450,000 | | | 450,000 | |
Due in 2020, issued March 2017 | 2.40 | % | 350,000 | | | 350,000 | | | 350,000 | |
Due in 2021, issued January 2016 | 2.85 | % | 600,000 | | | 600,000 | | | 600,000 | |
Due in 2021, issued November 2018 | LIBOR + 0.94% | 450,000 | | | 450,000 | | | 450,000 | |
Due in 2021, issued May 2018 | 3.55 | % | 350,000 | | | 350,000 | | | 350,000 | |
Due in 2022, issued February 2019 | 4.05 | % | 550,000 | | | 550,000 | | | 550,000 | |
Due in 2022, issued June 2017 | 2.55 | % | 400,000 | | | 400,000 | | | 400,000 | |
Due in 2023, issued February 2018 | 3.35 | % | 350,000 | | | 350,000 | | | 350,000 | |
Due in 2024, issued November 2019(a) | 3.14 | % | 660,030 | | | 672,936 | | | — | |
Unamortized discounts and debt issuance costs | | (11,046) | | | (12,809) | | | (14,364) | |
| | 4,148,984 | | | 4,760,127 | | | 4,685,636 | |
Senior notes: | | | | | | |
Due in 2025, issued July 2015 | 3.50 | % | 450,000 | | | 450,000 | | | 450,000 | |
Due in 2045, issued July 2015 | 4.625 | % | 300,000 | | | 300,000 | | | 300,000 | |
Unamortized discounts and debt issuance costs | | (6,534) | | | (6,704) | | | (7,209) | |
| | 743,466 | | | 743,296 | | | 742,791 | |
| | 4,892,450 | | | 5,503,423 | | | 5,428,427 | |
Long-term debt | | 6,804,538 | | | 6,872,935 | | | 6,116,744 | |
Current portion of long-term debt, net | | (2,326,460) | | | (1,748,109) | | | (1,372,050) | |
Long-term debt, net | | $ | 4,478,078 | | | $ | 5,124,826 | | | $ | 4,744,694 | |
| |
(a) | Floating interest rate based on LIBOR plus 35 bps. |
| |
(b) | Floating interest rate based on LIBOR plus 50 bps. The Company utilized an interest rate swap designated as a cash flow hedge to convert this from a floating rate basis to a fixed rate basis. Refer to Note 10 of the Notes to the Consolidated Financial Statements for further details. |
| |
(c) | Floating interest rate based on LIBOR plus 94 bps. The Company utilized an interest rate swap designated as a cash flow hedge to convert this from a floating rate basis to a fixed rate basis. Refer to Note 10 of the Notes to the Consolidated Financial Statements for further details. |
(a)Euro denominated, €600.0 millionpar value remeasured to U.S. dollar at March 29, 2020 and December 31, 2019, respectively
13. Asset-Backed Financing
The Company participates in asset-backed financing both through asset-backed securitization transactions and through asset-backed commercial paper conduit facilities. In the Company's asset-backed financing programs, the Company transfers retail motorcycle finance receivables to special purpose entities (SPEs), which are considered VIEs under U.S. GAAP. Each SPE then converts those assets into cash, through the issuance of debt. The Company retains servicing rights for all of the retail motorcycle finance receivables transferred to SPEs as part of an asset-backed financing. The accounting treatment for asset-backed financings depends on the terms of the related transaction and the Company’s continuing involvement with the VIE.
In transactions where the Company has power over the significant activities of the VIE and has an obligation to absorb losses or the right to receive benefits from the VIE that are potentially significant to the VIE, the Company is the primary beneficiary of the VIE and consolidates the VIE within its consolidated financial statements. On a consolidated basis, the asset-backed financing is treated as a secured borrowing in this type of transaction and is referred to as an on-balance sheet asset-backed financing.
In transactions where the Company is not the primary beneficiary of the VIE, the Company must determine whether it can achieve a sale for accounting purposes under ASC Topic 860, Transfers and Servicing.Servicing (ASC Topic 860). 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 Consolidated balance sheetsheets 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 on the consolidatedConsolidated statements of income.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 statementsConsolidated balance sheets were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 29, 2020 | | | | | | | | | | |
| 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 | $ | 1,250,382 | | | $ | (62,159) | | | $ | 61,945 | | | $ | 852 | | | $ | 1,251,020 | | | $ | 1,156,845 | |
Asset-backed U.S. commercial paper conduit facilities | 662,385 | | | (32,872) | | | 37,290 | | | 1,410 | | | 668,213 | | | 600,000 | |
Unconsolidated VIEs: | | | | | | | | | | | |
Asset-backed Canadian commercial paper conduit facility | 207,538 | | | (6,671) | | | 10,552 | | | 148 | | | 211,567 | | | 155,243 | |
| $ | 2,120,305 | | | $ | (101,702) | | | $ | 109,787 | | | $ | 2,410 | | | $ | 2,130,800 | | | $ | 1,912,088 | |
| | | | | | | | | | | |
| December 31, 2019 | | | | | | | | | | |
| Finance receivables | | Allowance for credit losses | | Restricted cash | | Other assets | | Total assets | | Asset-backed debt |
On-balance sheet assets and liabilities: | | | | | | | | | | | |
Consolidated VIEs: | | | | | | | | | | | |
Asset-backed securitizations | $ | 826,047 | | | $ | (24,935) | | | $ | 36,037 | | | $ | 778 | | | $ | 837,927 | | | $ | 764,392 | |
Asset-backed U.S. commercial paper conduit facilities | 533,587 | | | (16,076) | | | 27,775 | | | 1,642 | | | 546,928 | | | 490,427 | |
Unconsolidated VIEs: | | | | | | | | | | | |
Asset-backed Canadian commercial paper conduit facility | 232,699 | | | (2,786) | | | 7,686 | | | 296 | | | 237,895 | | | 114,693 | |
| $ | 1,592,333 | | | $ | (43,797) | | | $ | 71,498 | | | $ | 2,716 | | | $ | 1,622,750 | | | $ | 1,369,512 | |
| | | | | | | | | | | |
| March 31, 2019 | | | | | | | | | | |
| Finance receivables | | Allowance for credit losses | | Restricted cash | | Other assets | | Total assets | | Asset-backed debt |
On-balance sheet assets and liabilities: | | | | | | | | | | | |
Consolidated VIEs: | | | | | | | | | | | |
Asset-backed securitizations | $ | 62,771 | | | $ | (1,855) | | | $ | 8,199 | | | $ | 134 | | | $ | 69,249 | | | $ | 18,694 | |
Asset-backed U.S. commercial paper conduit facilities | 567,295 | | | (16,821) | | | 31,565 | | | 1,282 | | | 583,321 | | | 526,947 | |
Unconsolidated VIEs: | | | | | | | | | | | |
Asset-backed Canadian commercial paper conduit facility | 164,779 | | | (3,003) | | | 9,767 | | | 282 | | | 171,825 | | | 142,676 | |
| $ | 794,845 | | | $ | (21,679) | | | $ | 49,531 | | | $ | 1,698 | | | $ | 824,395 | | | $ | 688,317 | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2019 |
| Finance receivables | | Allowance for credit losses | | Restricted cash | | Other assets | | Total assets | | Asset-backed debt |
On-balance sheet assets and liabilities | | | | | | | | | | | |
Consolidated VIEs | | | | | | | | | | | |
Asset-backed securitizations | $ | 62,771 |
| | $ | (1,855 | ) | | $ | 8,199 |
| | $ | 134 |
| | $ | 69,249 |
| | $ | 18,694 |
|
Asset-backed U.S. commercial paper conduit facilities | 567,295 |
| | (16,821 | ) | | 31,565 |
| | 1,282 |
| | 583,321 |
| | 526,947 |
|
Unconsolidated VIEs | | | | | | | | | | | |
Asset-backed Canadian commercial paper conduit facility | 164,779 |
| | (3,003 | ) | | 9,767 |
| | 282 |
| | 171,825 |
| | 142,676 |
|
Total on-balance sheet assets and liabilities | $ | 794,845 |
| | $ | (21,679 | ) | | $ | 49,531 |
| | $ | 1,698 |
| | $ | 824,395 |
| | $ | 688,317 |
|
| | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2018 |
| 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 | $ | 158,718 |
| | $ | (4,691 | ) | | $ | 17,191 |
| | $ | 329 |
| | $ | 171,547 |
| | $ | 95,167 |
|
Asset-backed U.S. commercial paper conduit facilities | 631,588 |
| | (18,733 | ) | | 30,012 |
| | 1,234 |
| | 644,101 |
| | 582,717 |
|
Unconsolidated VIEs | | | | | | | | | | | |
Asset-backed Canadian commercial paper conduit facility | 181,774 |
| | (3,130 | ) | | 8,779 |
| | 343 |
| | 187,766 |
| | 155,951 |
|
Total on-balance sheet assets and liabilities | $ | 972,080 |
| | $ | (26,554 | ) | | $ | 55,982 |
| | $ | 1,906 |
| | $ | 1,003,414 |
| | $ | 833,835 |
|
| | | | | | | | | | | |
| April 1, 2018 |
| 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 | $ | 367,584 |
| | $ | (11,387 | ) | | $ | 38,207 |
| | $ | 1,207 |
| | $ | 395,611 |
| | $ | 284,793 |
|
Asset-backed U.S. commercial paper conduit facilities | 299,318 |
| | (9,297 | ) | | 16,933 |
| | 968 |
| | 307,922 |
| | 281,311 |
|
Unconsolidated VIEs | | | | | | | | | | | |
Asset-backed Canadian commercial paper conduit facility | 183,073 |
| | (3,085 | ) | | 10,600 |
| | 320 |
| | 190,908 |
| | 158,162 |
|
Total on-balance sheet assets and liabilities | $ | 849,975 |
| | $ | (23,769 | ) | | $ | 65,740 |
| | $ | 2,495 |
| | $ | 894,441 |
| | $ | 724,266 |
|
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 have avarious contractual life maturing in 2022.maturities ranging from 2021 to 2027.
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.
During the first quarter of 2020, the Company transferred $580.2 million of U.S. retail motorcycle finance receivables to an SPE which, in turn, issued $525.0 million, or $522.7 million net of discounts and issuance costs, of secured notes through an on-balance sheet asset-backed securitization transaction. There were no0 on-balance sheet asset-backed securitization transactions during the first quarter of 2019 or 2018.2019.
On-Balance Sheet Asset-Backed U.S. Commercial Paper Conduit Facilities VIE
– The Company has two separate agreements, a $300.0 million revolving facility agreement and a $600.0 million revolving facility agreement, with third-party bank-sponsored asset-backed U.S. commercial paper conduits under which it may transfer U.S. retail motorcycle finance receivables to an SPE, which in turn may issue debt to those third-party bank-sponsored asset-backed U.S. commercial paper conduits. In May 2019, the Company amended its $300.0 million revolving facility agreement to allow for incremental borrowings, at the lender's discretion, of up to an additional $300.0 million in excess of the $300.0 million commitment. In November 2018,2019, the Company renewed its existing $600.0 million and the amended $300.0 million revolving facility agreementagreements with third-party bank-sponsored asset-backed U.S. commercial paper conduits. Also at that time, the Company amended its existing $300.0 million revolving facility agreement with third-party bank-sponsored asset-backed U.S. commercial paper conduits, increasing the aggregate initial commitment to $600.0 million. The aggregate commitment under this agreement is reduced monthly as collections on the related finance receivables are applied to the outstanding
principal until the outstanding principal balance is less than or equal to $300.0 million, at which point the aggregate commitment will equal $300.0 million. 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 SPE as collateral.
Under the U.S. Conduit Facilities, 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 toif funded by a conduit lender through the extent the advance isissuance of commercial paper. If not funded by a conduit lender through the issuance of commercial paper, plus, inthe terms of the interest are based on LIBOR. In each case,of these cases, a program fee is assessed based on the outstanding principal. The U.S. Conduit Facilities also provide for an unused commitment fee based on the unused portion of the total aggregate commitment. When calculating the unused fee, the aggregate commitment for the $300.0 million agreement does not include any unused portion of the $300.0 million incremental borrowings allowed. 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 U.S. Conduit Facilities, any outstanding principal will continue to be reduced monthly through available collections. The expected remaining term of the related receivables held by the SPE is approximately 5 years. Unless earlier terminated or extended by mutual agreement of the Company and the lenders, as of March 31, 2019,29, 2020, the U.S. Conduit Facilities have an expiration date of November 29, 2019.
25, 2020.
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.
During the first quarter of 2020, the Company transferred $195.3 million of U.S. retail motorcycle finance receivables to an SPE which, in turn, issued $163.6 million of debt under the U.S. Conduit Facilities. There were no finance receivable transfers under the U.S. Conduit Facilities during the first quarter of 2019. During the first quarter of 2018, the Company transferred $32.9 million of U.S. retail motorcycle finance receivables to an SPE which, in turn, issued $29.3 million of debt under the U.S. Conduit Facilities.
On-Balance Sheet Asset-Backed Canadian Commercial Paper Conduit Facility
– In June 2018,2019, the Company renewed 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$220.0 million. The transferred assets are restricted as collateral for the payment of the associated 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$220.0 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 expected remaining term of the related receivables is approximately 5 years. Unless earlier terminated or extended by mutual agreement between the Company and the lenders, as of March 31, 2019,29, 2020, the Canadian Conduit has an expiration date of June 28, 2019.26, 2020.
The Company is not the primary beneficiary of the Canadian bank-sponsored, multi-seller conduit VIE; therefore, the Company does 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, does 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 $29.1$56.3 million at March 31, 2019.29, 2020. The maximum exposure is not an indication of the Company's expected loss exposure.
There were no finance receivable transfers under the Canadian Conduit Facilities during the first quarter of 2019. During the first quarter of 2018,2020, the Company transferred $7.6$77.9 million of Canadian retail motorcycle finance receivables to the Canadian Conduit for proceeds of $6.2$61.6 million. There were no finance receivable transfers under the Canadian Conduit Facility during the first quarter of 2019.
Off-Balance Sheet Asset-Backed Securitization VIE
– There were no0 off-balance sheet asset-backed securitization transactions during the first quarter of 20192020 or 2018.2019. 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 Consolidated balance sheetsheets 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 on the consolidatedConsolidated statements of income.income.
At March 31, 2019,29, 2020, the assets of this off-balance sheet asset-backed securitization VIE were $67.1$27.4 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 March 31, 2019.29, 2020. 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 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 on the consolidatedConsolidated statements of income.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 $0.2$0.1 million and $0.4$0.2 million during the first quarter of 2020 and 2019, and 2018, respectively.
The unpaid principal balance of retail motorcycle finance receivables serviced by the Company was as follows (in thousands):
| | | March 31, 2019 | | December 31, 2018 | | April 1, 2018 | | March 29, 2020 | | December 31, 2019 | | March 31, 2019 |
On-balance sheet retail motorcycle finance receivables | $ | 6,159,058 |
| | $ | 6,185,350 |
| | $ | 5,923,564 |
| On-balance sheet retail motorcycle finance receivables | $ | 6,132,225 | | | $ | 6,274,551 | | | $ | 6,159,058 | |
Off-balance sheet retail motorcycle finance receivables | 67,062 |
| | 79,613 |
| | 127,643 |
| Off-balance sheet retail motorcycle finance receivables | 27,421 | | | 35,197 | | | 67,062 | |
Total serviced retail motorcycle finance receivables | $ | 6,226,120 |
| | $ | 6,264,963 |
| | $ | 6,051,207 |
| |
| | | $ | 6,159,646 | | | $ | 6,309,748 | | | $ | 6,226,120 | |
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: | | | | | | | | | | | | | | | | |
| March 31, 2019 | | December 31, 2018 | | April 1, 2018 | | March 29, 2020 | | December 31, 2019 | | March 31, 2019 |
On-balance sheet retail motorcycle finance receivables | $ | 201,142 |
| | $ | 228,015 |
| | $ | 166,560 |
| On-balance sheet retail motorcycle finance receivables | $ | 177,928 | | | $ | 244,498 | | | $ | 201,142 | |
Off-balance sheet retail motorcycle finance receivables | 1,194 |
| | 1,658 |
| | 1,652 |
| Off-balance sheet retail motorcycle finance receivables | 712 | | | 885 | | | 1,194 | |
Total serviced retail motorcycle finance receivables | $ | 202,336 |
| | $ | 229,673 |
| | $ | 168,212 |
| |
| | | $ | 178,640 | | | $ | 245,383 | | | $ | 202,336 | |
Credit losses, net of recoveries for the retail motorcycle finance receivables serviced by the Company were as follows (in thousands):
| | | | | | | | | | | | | | | |
| Three months ended | | | | | | |
| March 29, 2020 | | March 31, 2019 | | | | |
On-balance sheet retail motorcycle finance receivables | $ | 43,108 | | | $ | 33,504 | | | | | |
Off-balance sheet retail motorcycle finance receivables | 13 | | | 231 | | | | | |
| $ | 43,121 | | | $ | 33,735 | | | | | |
|
| | | | | | | |
| Three months ended |
| March 31, 2019 | | April 1, 2018 |
On-balance sheet retail motorcycle finance receivables | $ | 33,504 |
| | $ | 32,173 |
|
Off-balance sheet retail motorcycle finance receivables | 231 |
| | 361 |
|
Total serviced retail motorcycle finance receivables | $ | 33,735 |
| | $ | 32,534 |
|
14. 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, commodity prices, and yield curves. The Company uses the market approach to derive the fair value for its Level 2 fair value measurements. ForwardForeign currency contracts, for foreign currency, commodities,commodity contracts, cross-currency swaps and treasury rate locks are valued using quoted forward rates and prices; interest rate swaps and caps are valued using quoted interest rates and yield curves; investments in marketable securities and cash equivalents are valued using quoted prices.
Level 3 inputs are not observable in the market and include management’sthe Company'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 were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | |
| March 29, 2020 | | | | | | |
| Balance | | Level 1 | | Level 2 | | |
Assets: | | | | | | | |
Cash equivalents | $ | 1,207,799 | | | $ | 1,144,800 | | | $ | 62,999 | | | |
Marketable securities | 44,144 | | | 44,144 | | | — | | | |
Derivative financial instruments | 14,683 | | | — | | | 14,683 | | | |
| $ | 1,266,626 | | | $ | 1,188,944 | | | $ | 77,682 | | | |
Liabilities: | | | | | | | |
Derivative financial instruments | $ | 56,976 | | | $ | — | | | $ | 56,976 | | | |
| | | March 31, 2019 | | December 31, 2019 | |
| Balance | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Balance | | Level 1 | | Level 2 | |
Assets: | | | | | | | | Assets: | | | | | | |
Cash equivalents | $ | 498,207 |
| | $ | 321,300 |
| | $ | 176,907 |
| | $ | — |
| Cash equivalents | $ | 624,832 | | | $ | 459,885 | | | $ | 164,947 | | |
Marketable securities | 59,899 |
| | 49,896 |
| | 10,003 |
| | — |
| Marketable securities | 52,575 | | | 52,575 | | | — | | |
Derivatives | 16,083 |
| | — |
| | 16,083 |
| | — |
| |
Total | $ | 574,189 |
| | $ | 371,196 |
| | $ | 202,993 |
| | $ | — |
| |
Derivative financial instruments | | Derivative financial instruments | 12,649 | | | — | | | 12,649 | | |
| | | $ | 690,056 | | | $ | 512,460 | | | $ | 177,596 | | |
Liabilities: | | | | | | | | Liabilities: | | | | | | |
Derivatives | $ | 7,733 |
| | $ | — |
| | $ | 7,733 |
| | $ | — |
| |
| | | | | | | | |
Derivative financial instruments | | Derivative financial instruments | $ | 13,934 | | | $ | — | | | $ | 13,934 | | |
| December 31, 2018 | | March 31, 2019 | |
| Balance | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Balance | | Level 1 | | Level 2 | |
Assets: | | | | | | | | Assets: | | | | | | |
Cash equivalents | $ | 998,601 |
| | $ | 728,800 |
| | $ | 269,801 |
| | $ | — |
| Cash equivalents | $ | 498,207 | | | $ | 321,300 | | | $ | 176,907 | | |
Marketable securities | 54,250 |
| | 44,243 |
| | 10,007 |
| | — |
| Marketable securities | 59,899 | | | 49,896 | | | 10,003 | | |
Derivatives | 15,071 |
| | — |
| | 15,071 |
| | — |
| |
Total | $ | 1,067,922 |
| | $ | 773,043 |
| | $ | 294,879 |
| | $ | — |
| |
Derivative financial instruments | | Derivative financial instruments | 16,083 | | | — | | | 16,083 | | |
| | | $ | 574,189 | | | $ | 371,196 | | | $ | 202,993 | | |
Liabilities: | | | | | | | | Liabilities: | | | | | | |
Derivatives | $ | 5,316 |
| | $ | — |
| | $ | 5,316 |
| | $ | — |
| |
| | | | | | | | |
Derivative financial instruments | | Derivative financial instruments | $ | 7,733 | | | $ | — | | | $ | 7,733 | | |
|
| | | | | | | | | | | | | | | |
| 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 |
| | $ | — |
|
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 $22.2 million, $21.4 million $20.2 million and $23.8$21.4 million at March 29, 2020, December 31, 2019 Decemberand March 31, 2018 and April 1, 2018,2019, respectively, for which the fair value adjustment was $9.3$10.9 million, $9.7$11.9 million and $8.3$9.3 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 cashCash and cash equivalents and restrictedRestricted 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 were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 29, 2020 | | | | December 31, 2019 | | | | March 31, 2019 | | |
| Fair Value | | Carrying Value | | Fair Value | | Carrying Value | | Fair Value | | Carrying Value |
Assets: | | | | | | | | | | | |
Finance receivables, net | $ | 7,391,948 | | | $ | 7,292,407 | | | $ | 7,419,627 | | | $ | 7,374,366 | | | $ | 7,520,418 | | | $ | 7,438,592 | |
Liabilities: | | | | | | | | | | | |
Debt: | | | | | | | | | | | |
Unsecured commercial paper | $ | 1,335,664 | | | $ | 1,335,664 | | | $ | 571,995 | | | $ | 571,995 | | | $ | 1,192,925 | | | $ | 1,192,925 | |
| | | | | | | | | | | |
Asset-backed U.S. commercial paper conduit facilities | $ | 600,000 | | | $ | 600,000 | | | $ | 490,427 | | | $ | 490,427 | | | $ | 526,947 | | | $ | 526,947 | |
Asset-backed Canadian commercial paper conduit facility | $ | 155,243 | | | $ | 155,243 | | | $ | 114,693 | | | $ | 114,693 | | | $ | 142,676 | | | $ | 142,676 | |
Asset-backed securitization debt | $ | 1,139,076 | | | $ | 1,156,845 | | | $ | 768,094 | | | $ | 764,392 | | | $ | 18,674 | | | $ | 18,694 | |
Medium-term notes | $ | 4,013,409 | | | $ | 4,148,984 | | | $ | 4,816,153 | | | $ | 4,760,127 | | | $ | 4,675,767 | | | $ | 4,685,636 | |
Senior notes | $ | 685,805 | | | $ | 743,466 | | | $ | 774,949 | | | $ | 743,296 | | | $ | 719,544 | | | $ | 742,791 | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2019 | | December 31, 2018 | | April 1, 2018 |
| Fair Value | | Carrying Value | | Fair Value | | Carrying Value | | Fair Value | | Carrying Value |
Assets: | | | | | | | | | | | |
Finance receivables, net | $ | 7,520,418 |
| | $ | 7,438,592 |
| | $ | 7,304,334 |
| | $ | 7,221,931 |
| | $ | 7,195,908 |
| | $ | 7,126,442 |
|
Liabilities: | | | | | | | | | | | |
Unsecured commercial paper | $ | 1,192,925 |
| | $ | 1,192,925 |
| | $ | 1,135,810 |
| | $ | 1,135,810 |
| | $ | 1,036,976 |
| | $ | 1,036,976 |
|
Asset-backed U.S. commercial paper conduit facilities | $ | 526,947 |
| | $ | 526,947 |
| | $ | 582,717 |
| | $ | 582,717 |
| | $ | 281,311 |
| | $ | 281,311 |
|
Asset-backed Canadian commercial paper conduit facility | $ | 142,676 |
| | $ | 142,676 |
| | $ | 155,951 |
| | $ | 155,951 |
| | $ | 158,162 |
| | $ | 158,162 |
|
Medium-term notes | $ | 4,675,767 |
| | $ | 4,685,636 |
| | $ | 4,829,671 |
| | $ | 4,887,007 |
| | $ | 4,486,399 |
| | $ | 4,514,798 |
|
Senior unsecured notes | $ | 719,544 |
| | $ | 742,791 |
| | $ | 707,198 |
| | $ | 742,624 |
| | $ | 750,440 |
| | $ | 742,126 |
|
Asset-backed securitization debt | $ | 18,674 |
| | $ | 18,694 |
| | $ | 94,974 |
| | $ | 95,167 |
| | $ | 283,591 |
| | $ | 284,793 |
|
Finance Receivables, Netnet – 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 are generally 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 carryingfair value of unsecured commercial paper is calculated using Level 2 inputs and approximates faircarrying value due to its short maturity. The carryingfair value of debt provided under the U.S. Conduit Facilities and Canadian Conduit Facility is calculated using Level 2 inputs and approximates faircarrying 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).
15. Product Warranty and Recall Campaigns
The Company currently provides a standard two-yeartwo-year limited warranty on all new motorcycles sold worldwide, except forin Japan, where the Company currently provides a standard three-yearthree-year limited warranty. The Company also provides a five-year unlimited warranty on allthe battery for new motorcycles sold.electric motorcycles. In addition, the Company provides a one-yearone-year warranty for Parts & Accessories (P&A).parts and accessories. The warranty coverage for the retail customer generally begins when the product is sold to a retail customer. The Company accrues for future warranty claims at the time of sale using an estimated cost based primarily on historical Company claim information.
Additionally, the Company has from time to time initiated certain voluntary recall campaigns. The Company accrues forrecords estimated recall costs when the estimated cost associated with voluntary recalls inliability is both probable and estimable. This generally occurs when the period thatCompany's management approves and commits to thea recall. Changes in the Company’s warranty and recall liabilityliabilities were as follows (in thousands):
| | | | | | | | | | | | | | | |
| Three months ended | | | | | | |
| March 29, 2020 | | March 31, 2019 | | | | |
Balance, beginning of period | $ | 89,793 | | | $ | 131,740 | | | | | |
Warranties issued during the period | 11,025 | | | 11,617 | | | | | |
Settlements made during the period | (14,157) | | | (19,617) | | | | | |
Recalls and changes to pre-existing warranty liabilities | (353) | | | (1,353) | | | | | |
Balance, end of period | $ | 86,308 | | | $ | 122,387 | | | | | |
|
| | | | | | | |
| Three months ended |
| March 31, 2019 | | April 1, 2018 |
Balance, beginning of period | $ | 131,740 |
| | $ | 94,202 |
|
Warranties issued during the period | 11,617 |
| | 14,606 |
|
Settlements made during the period | (19,617 | ) | | (16,638 | ) |
Recalls and changes to pre-existing warranty liabilities | (1,353 | ) | | 2,905 |
|
Balance, end of period | $ | 122,387 |
| | $ | 95,075 |
|
The liability for recall campaigns was $64.1$33.6 million,, $73.3 $36.4 million and $32.3$64.1 million as of at March 29, 2020, December 31, 2019 and March 31, 2019,, December respectively. Additionally, during the three months ended March 31, 2018 and April 1, 2018, respectively. The2019 the Company recorded supplier recoveries within operating expenses separate from the amounts disclosed above of $28.0 million for the three months ended March 31, 2019.million.
16. Employee Benefit Plans
The Company has a defined benefit qualified pension plan and postretirement healthcare benefit plans. The plans that cover certain eligible employees and retirees 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.employees. Service cost is allocated among Selling, administrative and engineering expense, CostMotorcycles cost of goods sold and Inventory Inventories, net. Amounts capitalized in inventory are not significant. Non-service cost components of net periodic benefit cost are presented in Other income, (expense), net. Components of net periodic benefit cost for the Company's defined benefit plans were as follows (in thousands):
| | | | | | | | | | | | | | | |
| Three months ended | | | | | | |
| March 29, 2020 | | March 31, 2019 | | | | |
Pension and SERPA Benefits: | | | | | | | |
Service cost | $ | 6,806 | | | $ | 6,632 | | | | | |
Interest cost | 19,112 | | | 21,371 | | | | | |
Expected return on plan assets | (33,764) | | | (35,581) | | | | | |
Amortization of unrecognized: | | | | | | | |
Prior service credit | (272) | | | (483) | | | | | |
Net loss | 16,372 | | | 11,128 | | | | | |
| | | | | | | |
| | | | | | | |
Net periodic benefit cost | $ | 8,254 | | | $ | 3,067 | | | | | |
| | | | | | | |
| | | | | | | |
Postretirement Healthcare Benefits: | | | | | | | |
Service cost | $ | 1,201 | | | $ | 1,184 | | | | | |
Interest cost | 2,336 | | | 2,938 | | | | | |
Expected return on plan assets | (3,467) | | | (3,507) | | | | | |
Amortization of unrecognized: | | | | | | | |
Prior service credit | (595) | | | (595) | | | | | |
Net loss | 123 | | | 69 | | | | | |
| | | | | | | |
| | | | | | | |
Net periodic benefit cost | $ | (402) | | | $ | 89 | | | | | |
|
| | | | | | | |
| Three months ended |
| March 31, 2019 | | April 1, 2018 |
Pension and SERPA Benefits | | | |
Service cost | $ | 6,632 |
| | $ | 8,155 |
|
Interest cost | 21,371 |
| | 20,590 |
|
Expected return on plan assets | (35,581 | ) | | (36,891 | ) |
Amortization of unrecognized: | | | |
Prior service credit | (483 | ) | | (106 | ) |
Net loss | 11,128 |
| | 15,819 |
|
Curtailment loss | — |
| | 1,018 |
|
Net periodic benefit cost | $ | 3,067 |
| | $ | 8,585 |
|
Postretirement Healthcare Benefits | | | |
Service cost | $ | 1,184 |
| | $ | 1,812 |
|
Interest cost | 2,938 |
| | 2,897 |
|
Expected return on plan assets | (3,507 | ) | | (3,541 | ) |
Amortization of unrecognized: | | | |
Prior service credit | (595 | ) | | (460 | ) |
Net loss | 69 |
| | 454 |
|
Net periodic benefit cost | $ | 89 |
| | $ | 1,162 |
|
During the three months ended April 1, 2018, the qualified pension plan and certain postretirement healthcare plan assets and obligations were remeasured as a result of 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 recorded a benefit of $96.4 million before income taxes in other comprehensive income during the three months ended April 1, 2018.
There are no required or planned qualified pension plan contributions for 2019.2020. The Company expects it will continue to make ongoing benefit payments under the SERPA and postretirement healthcare plans.
17. Commitments and Contingencies
The Company is subject to lawsuits and other claims related to environmental, product and other matters. In determining costs 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. Any amounts accrued for these matters are monitored on an ongoing basis and are updated based on new developments or new information as it becomes available for each matter.
Environmental Protection Agency Notice:
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. In December 2017, the Department of Justice (DOJ), on behalf of the 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 DOJ each filed separate response briefs. The Company is awaiting the court's decision on whether or not to finalize the Settlement, and on February 8, 2019 the DOJ filed a status update reminding the court of the current status of the outstanding matter. The Company has an accrual associated with this matter which is includedrecorded in Accrued liabilities on the consolidatedConsolidated balance 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:
Matter – The Company is involved with government agencies and groups of potentially responsible partiesthe U.S. Navy 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. The Company has been working with the Pennsylvania Department of Environmental Protection (PADEP) since 1986 andan agreement with the U.S. Environmental Protection Agency (EPA) 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 Agreementwhich calls for the U.S. 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 atA site wide remedial investigation/feasibility study and a proposed final remedy for the York facility as coveredhave been completed and approved by the Agreement.
Pennsylvania Department of Environmental Protection and the EPA. The associated cleanup plan documents were approved in February 2020 and the remaining cleanup activities will begin in 2020. The Company has an accrual for its estimate of its share of the estimated future Response Costs at the York facility which is includedrecorded in Other long-term liabilities on the consolidatedConsolidated balance sheets. While the work on the RI/FS is now complete and the final remedy was proposed in late 2018, it has not yet been approved, and given the uncertainty that exists concerning the nature and scope of additional environmental remediation that may ultimately be required under the approved final remedy, thesheets.
Product Liability Matters – 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 isperiodically 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 consolidatedConsolidated financial statements.statements.
18. Accumulated Other Comprehensive Loss
The following tables set forth the changesChanges in accumulatedAccumulated other comprehensive loss (AOCL) were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended March 29, 2020 | | | | | | | | |
| Foreign currency translation adjustments | | | | Derivative financial instruments | | Pension and postretirement benefit plans | | Total |
Balance, beginning of period | $ | (40,813) | | | | | $ | (14,586) | | | $ | (481,550) | | | $ | (536,949) | |
Other comprehensive loss, before reclassifications | (35,821) | | | | | (38,172) | | | — | | | (73,993) | |
Income tax benefit | 1,366 | | | | | 8,267 | | | — | | | 9,633 | |
| (34,455) | | | | | (29,905) | | | — | | | (64,360) | |
Reclassifications: | | | | | | | | | |
| | | | | | | | | |
Net loss on derivative financial instruments | — | | | | | 12,881 | | | — | | | 12,881 | |
Prior service credits(a) | — | | | | | — | | | (867) | | | (867) | |
Actuarial losses(a) | — | | | | | — | | | 16,495 | | | 16,495 | |
Reclassifications before tax | — | | | | | 12,881 | | | 15,628 | | | 28,509 | |
Income tax expense | — | | | | | (2,821) | | | (3,669) | | | (6,490) | |
| — | | | | | 10,060 | | | 11,959 | | | 22,019 | |
Other comprehensive (loss) income | (34,455) | | | | | (19,845) | | | 11,959 | | | (42,341) | |
Balance, end of period | $ | (75,268) | | | | | $ | (34,431) | | | $ | (469,591) | | | $ | (579,290) | |
| | | | | | | | | |
|
| | | | | | | | | | | | | | | | |
| | Three months ended March 31, 2019 |
| | Foreign currency translation adjustments | | Derivative financial instruments | | Pension and postretirement benefit plans | | Total |
Balance, beginning of period | | $ | (49,608 | ) | | $ | 1,785 |
| | $ | (581,861 | ) | | $ | (629,684 | ) |
Other comprehensive income before reclassifications | | 606 |
| | 1,177 |
| | — |
| | 1,783 |
|
Income tax expense | | (275 | ) | | (314 | ) | | — |
| | (589 | ) |
Net other comprehensive income before reclassifications | | 331 |
| | 863 |
| | — |
| | 1,194 |
|
Reclassifications: | | | | | | | | |
Realized gains - foreign currency contracts(a) | | — |
| | (2,453 | ) | | — |
| | (2,453 | ) |
Realized losses - commodity contracts(a) | | — |
| | 10 |
| | — |
| | 10 |
|
Realized losses - treasury rate locks(b) | | — |
| | 122 |
| | — |
| | 122 |
|
Realized losses - interest rate swap(b) | | — |
| | 606 |
| | — |
| | 606 |
|
Prior service credits(c) | | — |
| | — |
| | (1,078 | ) | | (1,078 | ) |
Actuarial losses(c) | | — |
| | — |
| | 11,197 |
| | 11,197 |
|
Total reclassifications before tax | | — |
| | (1,715 | ) | | 10,119 |
| | 8,404 |
|
Income tax benefit (expense) | | — |
| | 411 |
| | (2,376 | ) | | (1,965 | ) |
Net reclassifications | | — |
| | (1,304 | ) | | 7,743 |
| | 6,439 |
|
Other comprehensive income (loss) | | 331 |
| | (441 | ) | | 7,743 |
| | 7,633 |
|
Balance, end of period | | $ | (49,277 | ) | | $ | 1,344 |
| | $ | (574,118 | ) | | $ | (622,051 | ) |
| | | | | | | | |
| | | | | | | | |
| | Three months ended April 1, 2018 |
| | Foreign currency translation adjustments | | 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 losses - foreign currency contracts(a) | | — |
| | 6,709 |
| | — |
| | 6,709 |
|
Realized losses - commodity contracts(a) | | — |
| | 73 |
| | — |
| | 73 |
|
Realized 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 | ) |
32
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended March 31, 2019 | | | | | | | | |
| Foreign currency translation adjustments | | | | Derivative financial instruments | | Pension and postretirement benefit plans | | Total |
Balance, beginning of period | $ | (49,608) | | | | | $ | 1,785 | | | $ | (581,861) | | | $ | (629,684) | |
Other comprehensive income, before reclassifications | 606 | | | | | 1,177 | | | — | | | 1,783 | |
Income tax expense | (275) | | | | | (314) | | | — | | | (589) | |
| 331 | | | | | 863 | | | — | | | 1,194 | |
Reclassifications: | | | | | | | | | |
| | | | | | | | | |
Net gain on derivative financial instruments | — | | | | | (1,715) | | | — | | | (1,715) | |
Prior service credits(a) | — | | | | | — | | | (1,078) | | | (1,078) | |
Actuarial losses(a) | — | | | | | — | | | 11,197 | | | 11,197 | |
Reclassifications before tax | — | | | | | (1,715) | | | 10,119 | | | 8,404 | |
Income tax benefit (expense) | — | | | | | 411 | | | (2,376) | | | (1,965) | |
| — | | | | | (1,304) | | | 7,743 | | | 6,439 | |
Other comprehensive income (loss) | 331 | | | | | (441) | | | 7,743 | | | 7,633 | |
Balance, end of period | $ | (49,277) | | | | | $ | 1,344 | | | $ | (574,118) | | | $ | (622,051) | |
(a)Amounts reclassified are included in the computation of net periodic benefit cost, discussed further in Note 16 | |
(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 and Financial Services interest expense
|
| |
(c) | Amounts reclassified are included in the computation of net periodic benefit cost; see Note 16 for information related to pension and postretirement benefit plans |
19. 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 and Related Products (Motorcycles) segment and the Financial Services segment. The Company’s reportable segments are strategic2 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 |
| March 31, 2019 | | April 1, 2018 |
Motorcycles net revenue | $ | 1,195,637 |
| | $ | 1,363,947 |
|
Gross profit | 347,439 |
| | 473,773 |
|
Selling, administrative and engineering expense | 225,428 |
| | 254,093 |
|
Restructuring expense | 13,630 |
| | 46,842 |
|
Operating income from Motorcycles | 108,381 |
| | 172,838 |
|
Financial Services revenue | 188,743 |
| | 178,174 |
|
Financial Services expense | 130,012 |
| | 114,595 |
|
Operating income from Financial Services | 58,731 |
| | 63,579 |
|
Operating income | $ | 167,112 |
| | $ | 236,417 |
|
20. 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 the reportable segments. All supplemental data is presented in thousands.
|
| | | | | | | | | | | | | | | |
| Three months ended March 31, 2019 |
| HDMC Entities | | HDFS Entities | | Eliminations | | Consolidated |
Revenue: | | | | | | | |
Motorcycles and Related Products | $ | 1,200,009 |
| | $ | — |
| | $ | (4,372 | ) | | $ | 1,195,637 |
|
Financial Services | — |
| | 186,753 |
| | 1,990 |
| | 188,743 |
|
Total revenue | 1,200,009 |
| | 186,753 |
| | (2,382 | ) | | 1,384,380 |
|
Costs and expenses: | | | | | | | |
Motorcycles and Related Products cost of goods sold | 848,703 |
| | — |
| | (505 | ) | | 848,198 |
|
Financial Services interest expense | — |
| | 52,324 |
| | — |
| | 52,324 |
|
Financial Services provision for credit losses | — |
| | 34,491 |
| | — |
| | 34,491 |
|
Selling, administrative and engineering expense | 227,992 |
| | 42,588 |
| | (1,955 | ) | | 268,625 |
|
Restructuring expense | 13,630 |
| | — |
| | — |
| | 13,630 |
|
Total costs and expenses | 1,090,325 |
| | 129,403 |
| | (2,460 | ) | | 1,217,268 |
|
Operating income | 109,684 |
| | 57,350 |
| | 78 |
| | 167,112 |
|
Other income (expense), net | 4,660 |
| | — |
| | — |
| | 4,660 |
|
Investment income | 51,358 |
| | — |
| | (45,000 | ) | | 6,358 |
|
Interest expense | 7,731 |
| | — |
| | — |
| | 7,731 |
|
Income before provision for income taxes | 157,971 |
| | 57,350 |
| | (44,922 | ) | | 170,399 |
|
Provision for income taxes | 28,557 |
| | 13,897 |
| | — |
| | 42,454 |
|
Net income | $ | 129,414 |
| | $ | 43,453 |
| | $ | (44,922 | ) | | $ | 127,945 |
|
| | | | | | | |
|
| | | | | | | | | | | | | | | |
| 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 |
|
|
| | | | | | | | | | | | | | | |
| March 31, 2019 |
| HDMC Entities | | HDFS Entities | | Eliminations | | Consolidated |
ASSETS | | | | | | | |
Current assets: | | | | | | | |
Cash and cash equivalents | $ | 384,390 |
| | $ | 365,210 |
| | $ | — |
| | $ | 749,600 |
|
Marketable securities | 10,003 |
| | — |
| | — |
| | 10,003 |
|
Accounts receivable, net | 666,782 |
| | — |
| | (313,241 | ) | | 353,541 |
|
Finance receivables, net | — |
| | 2,443,899 |
| | — |
| | 2,443,899 |
|
Inventories | 595,806 |
| | — |
| | — |
| | 595,806 |
|
Restricted cash | — |
| | 43,471 |
| | — |
| | 43,471 |
|
Other current assets | 137,167 |
| | 40,594 |
| | — |
| | 177,761 |
|
Total current assets | 1,794,148 |
| | 2,893,174 |
| | (313,241 | ) | | 4,374,081 |
|
Finance receivables, net | — |
| | 4,994,693 |
| | — |
| | 4,994,693 |
|
Property, plant and equipment, net | 820,634 |
| | 55,369 |
| |
|
| | 876,003 |
|
Goodwill | 64,131 |
| | — |
| |
|
| | 64,131 |
|
Deferred income taxes | 96,500 |
| | 37,487 |
| | (999 | ) | | 132,988 |
|
Lease assets | 48,513 |
| | 6,792 |
| | — |
| | 55,305 |
|
Other long-term assets | 154,687 |
| | 19,149 |
| | (90,424 | ) | | 83,412 |
|
| $ | 2,978,613 |
| | $ | 8,006,664 |
| | $ | (404,664 | ) | | $ | 10,580,613 |
|
LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | | | |
Current liabilities: | | | | | | | |
Accounts payable | $ | 351,831 |
| | $ | 342,328 |
| | $ | (313,241 | ) | | $ | 380,918 |
|
Accrued liabilities | 544,560 |
| | 98,778 |
| | 833 |
| | 644,171 |
|
Short-term debt | — |
| | 1,192,925 |
| | — |
| | 1,192,925 |
|
Current portion of long-term debt, net | — |
| | 1,372,050 |
| | — |
| | 1,372,050 |
|
Total current liabilities | 896,391 |
| | 3,006,081 |
| | (312,408 | ) | | 3,590,064 |
|
Long-term debt, net | 742,791 |
| | 4,001,903 |
| | — |
| | 4,744,694 |
|
Lease liabilities | 32,520 |
| | 6,996 |
| | — |
| | 39,516 |
|
Pension liability | 98,862 |
| | — |
| | — |
| | 98,862 |
|
Postretirement healthcare liability | 93,897 |
| | — |
| | — |
| | 93,897 |
|
Other long-term liabilities | 174,150 |
| | 39,070 |
| | 2,749 |
| | 215,969 |
|
Commitments and contingencies (Note 17) | | | | | | | |
Shareholders’ equity | 940,002 |
| | 952,614 |
| | (95,005 | ) | | 1,797,611 |
|
| $ | 2,978,613 |
| | $ | 8,006,664 |
| | $ | (404,664 | ) | | $ | 10,580,613 |
|
|
| | | | | | | | | | | | | | | |
| December 31, 2018 |
| HDMC Entities | | HDFS Entities | | Eliminations | | Consolidated |
ASSETS | | | | | | | |
Current assets: | | | | | | | |
Cash and cash equivalents | $ | 544,548 |
| | $ | 659,218 |
| | $ | — |
| | $ | 1,203,766 |
|
Marketable securities | 10,007 |
| | — |
| | — |
| | 10,007 |
|
Accounts receivable, net | 425,727 |
| | — |
| | (119,253 | ) | | 306,474 |
|
Finance receivables, net | — |
| | 2,214,424 |
| | — |
| | 2,214,424 |
|
Inventories | 556,128 |
| | — |
| | — |
| | 556,128 |
|
Restricted cash | — |
| | 49,275 |
| | — |
| | 49,275 |
|
Other current assets | 91,172 |
| | 59,070 |
| | (5,874 | ) | | 144,368 |
|
Total current assets | 1,627,582 |
| | 2,981,987 |
| | (125,127 | ) | | 4,484,442 |
|
Finance receivables, net | — |
| | 5,007,507 |
| | — |
| | 5,007,507 |
|
Property, plant and equipment, net | 847,176 |
| | 56,956 |
| | — |
| | 904,132 |
|
Goodwill | 55,048 |
| | — |
| | — |
| | 55,048 |
|
Deferred income taxes | 105,388 |
| | 37,603 |
| | (1,527 | ) | | 141,464 |
|
Other long-term assets | 144,122 |
| | 18,680 |
| | (89,731 | ) | | 73,071 |
|
| $ | 2,779,316 |
| | $ | 8,102,733 |
| | $ | (216,385 | ) | | $ | 10,665,664 |
|
LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | | | |
Current liabilities: | | | | | | | |
Accounts payable | $ | 258,587 |
| | $ | 145,527 |
| | $ | (119,253 | ) | | $ | 284,861 |
|
Accrued liabilities | 496,643 |
| | 110,063 |
| | (5,576 | ) | | 601,130 |
|
Short-term debt | — |
| | 1,135,810 |
| | — |
| | 1,135,810 |
|
Current portion of long-term debt, net | — |
| | 1,575,799 |
| | — |
| | 1,575,799 |
|
Total current liabilities | 755,230 |
| | 2,967,199 |
| | (124,829 | ) | | 3,597,600 |
|
Long-term debt, net | 742,624 |
| | 4,145,043 |
| | — |
| | 4,887,667 |
|
Pension liability | 107,776 |
| | — |
| | — |
| | 107,776 |
|
Postretirement healthcare liability | 94,453 |
| | — |
| | — |
| | 94,453 |
|
Other long-term liabilities | 164,243 |
| | 37,142 |
| | 2,834 |
| | 204,219 |
|
Commitments and contingencies (Note 17) | | | | | | | |
Shareholders’ equity | 914,990 |
| | 953,349 |
| | (94,390 | ) | | 1,773,949 |
|
| $ | 2,779,316 |
| | $ | 8,102,733 |
| | $ | (216,385 | ) | | $ | 10,665,664 |
|
|
| | | | | | | | | | | | | | | |
| 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 17) | | | | | | | |
Shareholders’ equity | 1,169,310 |
| | 918,299 |
| | (91,660 | ) | | 1,995,949 |
|
| $ | 3,010,218 |
| | $ | 7,689,423 |
| | $ | (422,020 | ) | | $ | 10,277,621 |
|
|
| | | | | | | | | | | | | | | |
| Three months ended March 31, 2019 |
| HDMC Entities | | HDFS Entities | | Eliminations | | Consolidated |
Cash flows from operating activities: | | | | | | | |
Net income | $ | 129,414 |
| | $ | 43,453 |
| | $ | (44,922 | ) | | $ | 127,945 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | |
Depreciation and amortization of intangibles | 62,187 |
| | 2,185 |
| | — |
| | 64,372 |
|
Amortization of deferred loan origination costs | — |
| | 18,968 |
| | — |
| | 18,968 |
|
Amortization of financing origination fees | 167 |
| | 2,027 |
| | — |
| | 2,194 |
|
Provision for long-term employee benefits | 3,156 |
| | — |
| | — |
| | 3,156 |
|
Employee benefit plan contributions and payments | (2,507 | ) | | — |
| | — |
| | (2,507 | ) |
Stock compensation expense | 5,845 |
| | 692 |
| | — |
| | 6,537 |
|
Net change in wholesale finance receivables related to sales | — |
| | — |
| | (237,569 | ) | | (237,569 | ) |
Provision for credit losses | — |
| | 34,491 |
| | — |
| | 34,491 |
|
Deferred income taxes | 6,195 |
| | 314 |
| | (528 | ) | | 5,981 |
|
Other, net | 1,886 |
| | 922 |
| | (77 | ) | | 2,731 |
|
Changes in current assets and liabilities: | | | | | | | |
Accounts receivable, net | (243,734 | ) | | — |
| | 193,988 |
| | (49,746 | ) |
Finance receivables - accrued interest and other | — |
| | 92 |
| | — |
| | 92 |
|
Inventories | (40,600 | ) | | — |
| | — |
| | (40,600 | ) |
Accounts payable and accrued liabilities | 122,462 |
| | 180,980 |
| | (179,467 | ) | | 123,975 |
|
Derivative instruments | 834 |
| | 33 |
| | — |
| | 867 |
|
Other | (41,339 | ) | | 18,997 |
| | (5,874 | ) | | (28,216 | ) |
Total adjustments | (125,448 | ) | | 259,701 |
| | (229,527 | ) | | (95,274 | ) |
Net cash provided by operating activities | 3,966 |
| | 303,154 |
| | (274,449 | ) | | 32,671 |
|
|
| | | | | | | | | | | | | | | |
| Three months ended March 31, 2019 |
| HDMC Entities | | HDFS Entities | | Eliminations | | Consolidated |
Cash flows from investing activities: | | | | | | | |
Capital expenditures | (34,657 | ) | | (598 | ) | | — |
| | (35,255 | ) |
Origination of finance receivables | — |
| | (1,691,416 | ) | | 840,044 |
| | (851,372 | ) |
Collections on finance receivables | — |
| | 1,426,419 |
| | (610,595 | ) | | 815,824 |
|
Acquisition of business | (7,000 | ) | | — |
| | — |
| | (7,000 | ) |
Other | 603 |
| | — |
| | — |
| | 603 |
|
Net cash used by investing activities | (41,054 | ) | | (265,595 | ) | | 229,449 |
| | (77,200 | ) |
Cash flows from financing activities: | | | | | | | |
Proceeds from issuance of medium-term notes | — |
| | 546,655 |
| | — |
| | 546,655 |
|
Repayments of medium-term notes | — |
| | (750,000 | ) | | — |
| | (750,000 | ) |
Repayments of securitization debt | — |
| | (76,505 | ) | | — |
| | (76,505 | ) |
Repayments of asset-backed commercial paper | — |
| | (72,401 | ) | | — |
| | (72,401 | ) |
Net increase in credit facilities and unsecured commercial paper | — |
| | 58,527 |
| | — |
| | 58,527 |
|
Dividends paid | (60,859 | ) | | (45,000 | ) | | 45,000 |
| | (60,859 | ) |
Purchase of common stock for treasury | (61,712 | ) | | — |
| | — |
| | (61,712 | ) |
Issuance of common stock under employee stock option plans | 616 |
| | — |
| | — |
| | 616 |
|
Net cash used by financing activities | (121,955 | ) | | (338,724 | ) | | 45,000 |
| | (415,679 | ) |
Effect of exchange rate changes on cash, cash equivalents and restricted cash | (1,115 | ) | | 706 |
| | — |
| | (409 | ) |
Net decrease in cash, cash equivalents and restricted cash | $ | (160,158 | ) | | $ | (300,459 | ) | | $ | — |
| | $ | (460,617 | ) |
Cash, cash equivalents and restricted cash: | | | | | | | |
Cash, cash equivalents and restricted cash—beginning of period | $ | 544,548 |
| | $ | 715,200 |
| | $ | — |
| | $ | 1,259,748 |
|
Net decrease in cash, cash equivalents and restricted cash | (160,158 | ) | | (300,459 | ) | | — |
| | (460,617 | ) |
Cash, cash equivalents and restricted cash—end of period | $ | 384,390 |
| | $ | 414,741 |
| | $ | — |
| | $ | 799,131 |
|
|
| | | | | | | | | | | | | | | |
| 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 |
|
|
| | | | | | | | | | | | | | | |
| 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 |
|
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 and Related Products (Motorcycles) and Financial Services. The Company’sCompany'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 primarily 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 is engaged in the business of financing and servicing wholesale inventory receivables and retail consumer loans, primarily for the purchase of Harley-Davidson motorcycles. HDFS also works with certain unaffiliated insurance companies to provide motorcycle insurance and protection products to motorcycle owners. HDFS conducts business principally
Select segment information is set forth below (in thousands):
| | | | | | | | | | | | | | | |
| | | | | Three months ended | | |
| | | | | March 29, 2020 | | March 31, 2019 |
Motorcycles and Related Products: | | | | | | | |
Motorcycles revenue | | | | | $ | 1,099,788 | | | $ | 1,195,637 | |
Gross profit | | | | | 318,920 | | | 347,439 | |
Selling, administrative and engineering expense | | | | | 234,353 | | | 225,428 | |
Restructuring expense | | | | | — | | | 13,630 | |
Operating income | | | | | 84,567 | | | 108,381 | |
Financial Services: | | | | | | | |
Financial Services revenue | | | | | 198,456 | | | 188,743 | |
Financial Services expense | | | | | 175,510 | | | 130,012 | |
Operating income | | | | | 22,946 | | | 58,731 | |
Operating income | | | | | $ | 107,513 | | | $ | 167,112 | |
20. Supplemental Consolidating Data
The supplemental consolidating data is presented for informational purposes and is different than segment information due to the allocation of consolidating reporting adjustments to the reportable segments. Supplemental consolidating data is as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended March 29, 2020 | | | | | | |
| HDMC Entities | | HDFS Entities | | Consolidating Adjustments | | Consolidated |
Revenue: | | | | | | | |
Motorcycles and Related Products | $ | 1,103,258 | | | $ | — | | | $ | (3,470) | | | $ | 1,099,788 | |
Financial Services | — | | | 195,886 | | | 2,570 | | | 198,456 | |
| 1,103,258 | | | 195,886 | | | (900) | | | 1,298,244 | |
Costs and expenses: | | | | | | | |
Motorcycles and Related Products cost of goods sold | 780,868 | | | — | | | — | | | 780,868 | |
Financial Services interest expense | — | | | 52,473 | | | — | | | 52,473 | |
Financial Services provision for credit losses | — | | | 79,419 | | | — | | | 79,419 | |
Selling, administrative and engineering expense | 237,746 | | | 41,439 | | | (1,214) | | | 277,971 | |
| | | | | | | |
| 1,018,614 | | | 173,331 | | | (1,214) | | | 1,190,731 | |
Operating income | 84,644 | | | 22,555 | | | 314 | | | 107,513 | |
Other income, net | 155 | | | — | | | — | | | 155 | |
Investment income (loss) | 94,653 | | | — | | | (100,000) | | | (5,347) | |
Interest expense | 7,755 | | | — | | | — | | | 7,755 | |
Income before provision for income taxes | 171,697 | | | 22,555 | | | (99,686) | | | 94,566 | |
Provision for income taxes | 19,271 | | | 5,600 | | | — | | | 24,871 | |
Net income | $ | 152,426 | | | $ | 16,955 | | | $ | (99,686) | | | $ | 69,695 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended March 31, 2019 | | | | | | |
| HDMC Entities | | HDFS Entities | | Consolidating Adjustments | | Consolidated |
Revenue: | | | | | | | |
Motorcycles and Related Products | $ | 1,200,009 | | | $ | — | | | $ | (4,372) | | | $ | 1,195,637 | |
Financial Services | — | | | 186,753 | | | 1,990 | | | 188,743 | |
| 1,200,009 | | | 186,753 | | | (2,382) | | | 1,384,380 | |
Costs and expenses: | | | | | | | |
Motorcycles and Related Products cost of goods sold | 848,703 | | | — | | | (505) | | | 848,198 | |
Financial Services interest expense | — | | | 52,324 | | | — | | | 52,324 | |
Financial Services provision for credit losses | — | | | 34,491 | | | — | | | 34,491 | |
Selling, administrative and engineering expense | 227,992 | | | 42,588 | | | (1,955) | | | 268,625 | |
Restructuring expense | 13,630 | | | — | | | — | | | 13,630 | |
| 1,090,325 | | | 129,403 | | | (2,460) | | | 1,217,268 | |
Operating income | 109,684 | | | 57,350 | | | 78 | | | 167,112 | |
Other income, net | 4,660 | | | — | | | — | | | 4,660 | |
Investment income | 51,358 | | | — | | | (45,000) | | | 6,358 | |
Interest expense | 7,731 | | | — | | | — | | | 7,731 | |
Income before provision for income taxes | 157,971 | | | 57,350 | | | (44,922) | | | 170,399 | |
Provision for income taxes | 28,557 | | | 13,897 | | | — | | | 42,454 | |
Net income | $ | 129,414 | | | $ | 43,453 | | | $ | (44,922) | | | $ | 127,945 | |
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| March 29, 2020 | | | | | | |
| HDMC Entities | | HDFS Entities | | Consolidating Adjustments | | Consolidated |
ASSETS | | | | | | | |
Current assets: | | | | | | | |
Cash and cash equivalents | $ | 415,514 | | | $ | 1,049,547 | | | $ | — | | | $ | 1,465,061 | |
| | | | | | | |
Accounts receivable, net | 551,786 | | | — | | | (252,638) | | | 299,148 | |
Finance receivables, net | — | | | 2,358,989 | | | — | | | 2,358,989 | |
Inventories, net | 610,924 | | | — | | | — | | | 610,924 | |
Restricted cash | — | | | 99,903 | | | — | | | 99,903 | |
Other current assets | 103,630 | | | 43,055 | | | (4,328) | | | 142,357 | |
| 1,681,854 | | | 3,551,494 | | | (256,966) | | | 4,976,382 | |
Finance receivables, net | — | | | 4,933,418 | | | — | | | 4,933,418 | |
Property, plant and equipment, net | 774,985 | | | 51,860 | | | — | | | 826,845 | |
Prepaid pension costs | 64,802 | | | — | | | — | | | 64,802 | |
Goodwill | 64,063 | | | — | | | — | | | 64,063 | |
Deferred income taxes | 49,906 | | | 79,026 | | | (1,076) | | | 127,856 | |
Lease assets | 50,907 | | | 5,589 | | | — | | | 56,496 | |
Other long-term assets | 163,319 | | | 20,815 | | | (94,049) | | | 90,085 | |
| $ | 2,849,836 | | | $ | 8,642,202 | | | $ | (352,091) | | | $ | 11,139,947 | |
LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | | | |
Current liabilities: | | | | | | | |
Accounts payable | $ | 306,677 | | | $ | 279,372 | | | $ | (252,638) | | | $ | 333,411 | |
Accrued liabilities | 446,792 | | | 141,287 | | | (3,544) | | | 584,535 | |
Short-term debt | — | | | 1,335,664 | | | — | | | 1,335,664 | |
Current portion of long-term debt, net | — | | | 2,326,460 | | | — | | | 2,326,460 | |
| 753,469 | | | 4,082,783 | | | (256,182) | | | 4,580,070 | |
Long-term debt, net | 743,466 | | | 3,734,612 | | | — | | | 4,478,078 | |
Lease liabilities | 34,848 | | | 5,205 | | | — | | | 40,053 | |
Pension liabilities | 56,900 | | | — | | | — | | | 56,900 | |
Postretirement healthcare liabilities | 71,154 | | | — | | | — | | | 71,154 | |
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Other long-term liabilities | 176,109 | | | 43,277 | | | 2,323 | | | 221,709 | |
Commitments and contingencies (Note 17) | | | | | | | |
Shareholders’ equity | 1,013,890 | | | 776,325 | | | (98,232) | | | 1,691,983 | |
| $ | 2,849,836 | | | $ | 8,642,202 | | | $ | (352,091) | | | $ | 11,139,947 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2019 | | | | | | |
| HDMC Entities | | HDFS Entities | | Consolidating Adjustments | | Consolidated |
ASSETS | | | | | | | |
Current assets: | | | | | | | |
Cash and cash equivalents | $ | 470,649 | | | $ | 363,219 | | | $ | — | | | $ | 833,868 | |
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Accounts receivable, net | 369,717 | | | — | | | (110,383) | | | 259,334 | |
Finance receivables, net | — | | | 2,272,522 | | | — | | | 2,272,522 | |
Inventories, net | 603,571 | | | — | | | — | | | 603,571 | |
Restricted cash | — | | | 64,554 | | | — | | | 64,554 | |
Other current assets | 110,145 | | | 59,665 | | | (836) | | | 168,974 | |
| 1,554,082 | | | 2,759,960 | | | (111,219) | | | 4,202,823 | |
Finance receivables, net | — | | | 5,101,844 | | | — | | | 5,101,844 | |
Property, plant and equipment, net | 794,131 | | | 53,251 | | | — | | | 847,382 | |
Prepaid pension costs | 56,014 | | | — | | | — | | | 56,014 | |
Goodwill | 64,160 | | | — | | | — | | | 64,160 | |
Deferred income taxes | 62,768 | | | 39,882 | | | (1,446) | | | 101,204 | |
Lease assets | 55,722 | | | 5,896 | | | — | | | 61,618 | |
Other long-term assets | 166,972 | | | 19,211 | | | (93,069) | | | 93,114 | |
| $ | 2,753,849 | | | $ | 7,980,044 | | | $ | (205,734) | | | $ | 10,528,159 | |
LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | | | |
Current liabilities: | | | | | | | |
Accounts payable | $ | 266,710 | | | $ | 138,053 | | | $ | (110,383) | | | $ | 294,380 | |
Accrued liabilities | 463,491 | | | 119,186 | | | (389) | | | 582,288 | |
Short-term debt | — | | | 571,995 | | | — | | | 571,995 | |
Current portion of long-term debt, net | — | | | 1,748,109 | | | — | | | 1,748,109 | |
| 730,201 | | | 2,577,343 | | | (110,772) | | | 3,196,772 | |
Long-term debt, net | 743,296 | | | 4,381,530 | | | — | | | 5,124,826 | |
Lease liabilities | 38,783 | | | 5,664 | | | — | | | 44,447 | |
Pension liabilities | 56,138 | | | — | | | — | | | 56,138 | |
Postretirement healthcare liabilities | 72,513 | | | — | | | — | | | 72,513 | |
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Other long-term liabilities | 186,252 | | | 40,609 | | | 2,603 | | | 229,464 | |
Commitments and contingencies (Note 17) | | | | | | | |
Shareholders’ equity | 926,666 | | | 974,898 | | | (97,565) | | | 1,803,999 | |
| $ | 2,753,849 | | | $ | 7,980,044 | | | $ | (205,734) | | | $ | 10,528,159 | |
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| March 31, 2019 | | | | | | |
| HDMC Entities | | HDFS Entities | | Consolidating Adjustments | | Consolidated |
ASSETS | | | | | | | |
Current assets: | | | | | | | |
Cash and cash equivalents | $ | 384,390 | | | $ | 365,210 | | | $ | — | | | $ | 749,600 | |
Marketable securities | 10,003 | | | — | | | — | | | 10,003 | |
Accounts receivable, net | 666,782 | | | — | | | (313,241) | | | 353,541 | |
Finance receivables, net | — | | | 2,443,899 | | | — | | | 2,443,899 | |
Inventories, net | 595,806 | | | — | | | — | | | 595,806 | |
Restricted cash | — | | | 43,471 | | | — | | | 43,471 | |
Other current assets | 137,167 | | | 40,594 | | | — | | | 177,761 | |
| 1,794,148 | | | 2,893,174 | | | (313,241) | | | 4,374,081 | |
Finance receivables, net | — | | | 4,994,693 | | | — | | | 4,994,693 | |
Property, plant and equipment, net | 820,634 | | | 55,369 | | | — | | | 876,003 | |
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Goodwill | 64,131 | | | — | | | — | | | 64,131 | |
Deferred income taxes | 96,500 | | | 37,487 | | | (999) | | | 132,988 | |
Lease assets | 48,513 | | | 6,792 | | | — | | | 55,305 | |
Other long-term assets | 154,687 | | | 19,149 | | | (90,424) | | | 83,412 | |
| $ | 2,978,613 | | | $ | 8,006,664 | | | $ | (404,664) | | | $ | 10,580,613 | |
LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | | | |
Current liabilities: | | | | | | | |
Accounts payable | $ | 351,831 | | | $ | 342,328 | | | $ | (313,241) | | | $ | 380,918 | |
Accrued liabilities | 544,560 | | | 98,778 | | | 833 | | | 644,171 | |
Short-term debt | — | | | 1,192,925 | | | — | | | 1,192,925 | |
Current portion of long-term debt, net | — | | | 1,372,050 | | | — | | | 1,372,050 | |
| 896,391 | | | 3,006,081 | | | (312,408) | | | 3,590,064 | |
Long-term debt, net | 742,791 | | | 4,001,903 | | | — | | | 4,744,694 | |
Lease liabilities | 32,520 | | | 6,996 | | | — | | | 39,516 | |
Pension liabilities | 98,862 | | | — | | | — | | | 98,862 | |
Postretirement healthcare liabilities | 93,897 | | | — | | | — | | | 93,897 | |
| | | | | | | |
Other long-term liabilities | 174,150 | | | 39,070 | | | 2,749 | | | 215,969 | |
Commitments and contingencies (Note 17) | | | | | | | |
Shareholders’ equity | 940,002 | | | 952,614 | | | (95,005) | | | 1,797,611 | |
| $ | 2,978,613 | | | $ | 8,006,664 | | | $ | (404,664) | | | $ | 10,580,613 | |
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| Three months ended March 29, 2020 | | | | | | |
| HDMC Entities | | HDFS Entities | | Consolidating Adjustments | | Consolidated |
Cash flows from operating activities: | | | | | | | |
Net income | $ | 152,426 | | | $ | 16,955 | | | $ | (99,686) | | | $ | 69,695 | |
Adjustments to reconcile Net income to Net cash provided (used) by operating activities: | | | | | | | |
Depreciation and amortization | 45,383 | | | 2,044 | | | — | | | 47,427 | |
Amortization of deferred loan origination costs | — | | | 16,739 | | | — | | | 16,739 | |
Amortization of financing origination fees | 170 | | | 2,829 | | | — | | | 2,999 | |
Provision for long-term employee benefits | 7,852 | | | — | | | — | | | 7,852 | |
Employee benefit plan contributions and payments | (1,608) | | | — | | | — | | | (1,608) | |
Stock compensation expense | 2,915 | | | 981 | | | — | | | 3,896 | |
Net change in wholesale finance receivables related to sales | — | | | — | | | (208,183) | | | (208,183) | |
Provision for credit losses | — | | | 79,419 | | | — | | | 79,419 | |
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Deferred income taxes | 5,137 | | | (8,570) | | | (370) | | | (3,803) | |
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Other, net | (2,247) | | | 6,139 | | | (313) | | | 3,579 | |
Changes in current assets and liabilities: | | | | | | | |
Accounts receivable, net | (189,527) | | | — | | | 142,255 | | | (47,272) | |
Finance receivables - accrued interest and other | — | | | 4,007 | | | — | | | 4,007 | |
Inventories, net | (23,943) | | | — | | | — | | | (23,943) | |
Accounts payable and accrued liabilities | 32,736 | | | 122,438 | | | (144,612) | | | 10,562 | |
Derivative financial instruments | 2,779 | | | 33 | | | — | | | 2,812 | |
Other | 16,200 | | | 7,549 | | | 3,491 | | | 27,240 | |
| (104,153) | | | 233,608 | | | (207,732) | | | (78,277) | |
Net cash provided (used) by operating activities | 48,273 | | | 250,563 | | | (307,418) | | | (8,582) | |
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Cash flows from investing activities: | | | | | | | |
Capital expenditures | (32,275) | | | (653) | | | — | | | (32,928) | |
Origination of finance receivables | — | | | (1,598,240) | | | 818,179 | | | (780,061) | |
Collections on finance receivables | — | | | 1,452,022 | | | (610,761) | | | 841,261 | |
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Other investing activities | 16 | | | — | | | — | | | 16 | |
Net cash (used) provided by investing activities | (32,259) | | | (146,871) | | | 207,418 | | | 28,288 | |
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| Three months ended March 29, 2020 | | | | | | |
| HDMC Entities | | HDFS Entities | | Consolidating Adjustments | | Consolidated |
Cash flows from financing activities: | | | | | | | |
| | | | | | | |
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Repayments of medium-term notes | — | | | (600,000) | | | — | | | (600,000) | |
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Proceeds from securitization debt | — | | | 522,694 | | | — | | | 522,694 | |
Repayments of securitization debt | — | | | (130,918) | | | — | | | (130,918) | |
Borrowings of asset-backed commercial paper | — | | | 225,187 | | | — | | | 225,187 | |
Repayments of asset-backed commercial paper | — | | | (67,809) | | | — | | | (67,809) | |
Net increase in unsecured commercial paper | — | | | 772,208 | | | — | | | 772,208 | |
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Dividends paid | (58,817) | | | (100,000) | | | 100,000 | | | (58,817) | |
Repurchase of common stock | (7,071) | | | — | | | — | | | (7,071) | |
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Issuance of common stock under share-based plans | 34 | | | — | | | — | | | 34 | |
Net cash (used) provided by financing activities | (65,854) | | | 621,362 | | | 100,000 | | | 655,508 | |
Effect of exchange rate changes on cash, cash equivalents and restricted cash | (5,295) | | | (437) | | | — | | | (5,732) | |
Net (decrease) increase in cash, cash equivalents and restricted cash | $ | (55,135) | | | $ | 724,617 | | | $ | — | | | $ | 669,482 | |
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Cash, cash equivalents and restricted cash: | | | | | | | |
Cash, cash equivalents and restricted cash, beginning of period | $ | 470,649 | | | $ | 434,717 | | | $ | — | | | $ | 905,366 | |
Net (decrease) increase in cash, cash equivalents and restricted cash | (55,135) | | | 724,617 | | | — | | | 669,482 | |
Cash, cash equivalents and restricted cash, end of period | $ | 415,514 | | | $ | 1,159,334 | | | $ | — | | | $ | 1,574,848 | |
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| Three months ended March 31, 2019 | | | | | | |
| HDMC Entities | | HDFS Entities | | Consolidating Adjustments | | Consolidated |
Cash flows from operating activities: | | | | | | | |
Net income | $ | 129,414 | | | $ | 43,453 | | | $ | (44,922) | | | $ | 127,945 | |
Adjustments to reconcile Net income to Net cash provided by operating activities: | | | | | | | |
Depreciation and amortization | 62,187 | | | 2,185 | | | — | | | 64,372 | |
Amortization of deferred loan origination costs | — | | | 18,968 | | | — | | | 18,968 | |
Amortization of financing origination fees | 167 | | | 2,027 | | | — | | | 2,194 | |
Provision for long-term employee benefits | 3,156 | | | — | | | — | | | 3,156 | |
Employee benefit plan contributions and payments | (2,507) | | | — | | | — | | | (2,507) | |
Stock compensation expense | 5,845 | | | 692 | | | — | | | 6,537 | |
Net change in wholesale finance receivables related to sales | — | | | — | | | (237,569) | | | (237,569) | |
Provision for credit losses | — | | | 34,491 | | | — | | | 34,491 | |
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Deferred income taxes | 6,195 | | | 314 | | | (528) | | | 5,981 | |
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Other, net | 1,886 | | | 922 | | | (77) | | | 2,731 | |
Changes in current assets and liabilities: | | | | | | | |
Accounts receivable, net | (243,734) | | | — | | | 193,988 | | | (49,746) | |
Finance receivables - accrued interest and other | — | | | 92 | | | — | | | 92 | |
Inventories, net | (40,600) | | | — | | | — | | | (40,600) | |
Accounts payable and accrued liabilities | 122,462 | | | 180,980 | | | (179,467) | | | 123,975 | |
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Derivative financial instruments | 834 | | | 33 | | | — | | | 867 | |
Other | (41,339) | | | 18,997 | | | (5,874) | | | (28,216) | |
| (125,448) | | | 259,701 | | | (229,527) | | | (95,274) | |
Net cash provided by operating activities | 3,966 | | | 303,154 | | | (274,449) | | | 32,671 | |
Cash flows from investing activities: | | | | | | | |
Capital expenditures | (34,657) | | | (598) | | | — | | | (35,255) | |
Origination of finance receivables | — | | | (1,691,416) | | | 840,044 | | | (851,372) | |
Collections on finance receivables | — | | | 1,426,419 | | | (610,595) | | | 815,824 | |
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Acquisition of business | (7,000) | | | — | | | — | | | (7,000) | |
Other investing activities | 603 | | | — | | | — | | | 603 | |
Net cash used by investing activities | (41,054) | | | (265,595) | | | 229,449 | | | (77,200) | |
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| Three months ended March 31, 2019 | | | | | | |
| HDMC Entities | | HDFS Entities | | Consolidating Adjustments | | Consolidated |
Cash flows from financing activities: | | | | | | | |
| | | | | | | |
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Proceeds from issuance of medium-term notes | — | | | 546,655 | | | — | | | 546,655 | |
Repayments of medium-term notes | — | | | (750,000) | | | — | | | (750,000) | |
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Repayments of securitization debt | — | | | (76,505) | | | — | | | (76,505) | |
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Repayments of asset-backed commercial paper | — | | | (72,401) | | | — | | | (72,401) | |
Net increase in credit facilities and unsecured commercial paper | — | | | 58,527 | | | — | | | 58,527 | |
Dividends paid | (60,859) | | | (45,000) | | | 45,000 | | | (60,859) | |
Repurchase of common stock | (61,712) | | | — | | | — | | | (61,712) | |
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Issuance of common stock under share-based plans | 616 | | | — | | | — | | | 616 | |
Net cash used by financing activities | (121,955) | | | (338,724) | | | 45,000 | | | (415,679) | |
Effect of exchange rate changes on cash, cash equivalents and restricted cash | (1,115) | | | 706 | | | — | | | (409) | |
Net decrease in cash, cash equivalents and restricted cash | $ | (160,158) | | | $ | (300,459) | | | $ | — | | | $ | (460,617) | |
| | | | | | | |
Cash, cash equivalents and restricted cash: | | | | | | | |
Cash, cash equivalents and restricted cash, beginning of period | $ | 544,548 | | | $ | 715,200 | | | $ | — | | | $ | 1,259,748 | |
Net decrease in cash, cash equivalents and restricted cash | (160,158) | | | (300,459) | | | — | | | (460,617) | |
Cash, cash equivalents and restricted cash, end of period | $ | 384,390 | | | $ | 414,741 | | | $ | — | | | $ | 799,131 | |
21. Subsequent Event
In April 2020, the Company issued $300.0 million of floating-rate secured notes through an on-balance sheet asset-backed securitization transaction.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Harley-Davidson, Inc. is the parent company of 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 of its subsidiaries. The Company operates in the United Statestwo segments: Motorcycles and Canada.Related Products (Motorcycles) and Financial Services.
The “% Change” figures included in the “ResultsResults of Operations” sectionOperations sections 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“may,” “will,” “estimates” or words of similar meaning. Similarly, statements that describe or refer to future expectations, future plans, strategies, objectives, outlooks, targets, guidance, commitments 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, unfavorably or favorably, 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” in this Item 2 and in Item 1A “Risk Factors”1A. Risk Factors, as well as in Item 1A. Risk Factors of the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.2019. 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“Overview” and Outlook“Outlook” sections in this Item 2 are only made as of April 23, 201928, 2020 and the remaining forward-looking statements in this report are made as of the date of the filing of this report (May 9, 2019)7, 2020), and the Company disclaims any obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances.
Overview(1)
During the first quarter of 2020, the Company's operations and financial results and independent dealer retail sales results were significantly hindered as consumer and governmental concerns over a novel strain of coronavirus (COVID-19) spread throughout most of the Company's worldwide markets. The Company’s net income was $127.9$69.7 million, or $0.80 per diluted share, for the first quarter of 2019 compared to $174.8 million, or $1.03$0.45 per diluted share, in the first quarter of 2018.2020, compared to $127.9 million, or $0.80 per diluted share, in the first quarter of 2019. Operating income from the Motorcycles segment decreased $64.5$23.8 million compared to last year’sthe prior year first quarter behind a 10% decline in wholesale motorcycle shipments. Motorcycles segment shipments and revenue were down in the first quarter compared to the prior year reflecting the Company's temporary suspension of its global manufacturing operations in March 2020 and lower demand resulting from the COVID-19 pandemic. Motorcycles segment operating income was also impacted by lower shipments, unfavorable mix and incremental tariffs,foreign currency, partially offset by lower operating expenses. favorable manufacturing costs and the positive impact of not incurring restructuring expenses in 2020.
Operating income from the Financial Services segment in the first quarter of 20192020 was $58.7$22.9 million, down 7.6%60.9% compared to the year-ago quarter ondue primarily to a higher provision for credit losses, partially offset by an increase in net interest income. The provision for credit losses was adversely affected by the impact of the COVID-19 pandemic and higher operating expenses.also reflects the impact of a new accounting standard that changes how companies recognize expected credit losses on financial instruments. The new standard requires recognition of full lifetime expected credit losses upon initial recognition of a financial instrument, replacing the prior, incurred loss methodology. The Company adopted the new accounting standard on January 1, 2020 using a modified retrospective approach. As a result, prior period results were not restated.
Worldwide independent dealer retail sales of new Harley-Davidson motorcycles in the first quarter of 20192020 were down 3.8%17.7% compared to the first quarter of 2018. Retail2019. During the first quarter of 2020, worldwide retail sales results started strong compared to the prior year, but were significantly hindered by the impact of the COVID-19 pandemic as it spread throughout most of the Company's markets. During the first quarter of 2020, retail sales were down 4.2%20.7% in international markets and down 15.5% in the U.S. and down 3.3% in international markets, compared to the prior year first quarter. RetailAs of April 2020 approximately 59% of the independent dealer network was closed for motorcycle sales. Month-to-date retail sales through late-April 2020 were down compared to the prior year in line with the percentage of dealers closed for motorcycle sales, suggesting that open dealers are selling at year-ago levels.
Outlook(1)
As a result of the uncertainty surrounding the magnitude and duration of the COVID-19 pandemic, the Company withdrew all of its forward-looking guidance on March 26, 2020. The Company’s operations and demand for its products have already been adversely impacted as a result of the COVID-19 pandemic. While the impact on demand, facility closures and other restrictions are expected to be temporary, the duration and financial impact to the Company are unknown at this time. To the extent these impacts continue, they will have an adverse effect on the Company's results of operations, financial condition and liquidity.
COVID-19 Response and Recovery Actions(1)
The Company is executing a plan to address the impacts of the COVID-19 pandemic and to begin its recovery through a multitude of recent actions across the following areas:
Cash Preservation – The Company has reduced planned capital and planned non-capital spending across every part of the organization through actions including freezing hiring, temporarily reducing salaries and eliminating merit compensation increases for employees in 2020. The Company also implemented other aggressive cost management efforts such as re-timing the first quarter improved significantlymodel year change-over from recent trends despite limited availability of Street motorcycles. DuringAugust 2020 to the first quarter of 2019, retail sales2021. In total, the Company expects that its efforts to reduce spending will preserve approximately $250 million of Street motorcycles were adversely impacted by limited availability followingcash in 2020, including approximately 15% related to capital spending. Also, the Company has suspended discretionary share repurchases, and the Company's Board of Directors approved a recent recall. Excluding retail salescash dividend of Street motorcycles$0.02 per share for the second quarter of 2020, down from both 2018 and 2019, worldwide retail sales were up 0.4% inthe amount of the first quarter 2020 dividend of $0.38 per share.
Liquidity – At the end of the first quarter of 2020, the Company had cash, cash equivalents and availability under its credit and conduit facilities of $2.47 billion and remains compliant with all covenants under its debt agreements. Subsequent to the end of the first quarter, the Company secured additional liquidity as discussed in more detail under Liquidity and Capital Resources.
Supporting Dealers and Riders – The Company is helping ease the burden of the COVID-19 pandemic on its independent dealers by providing support based on the unique needs of each region, including financial support for dealer motorcycle inventory, extending credit payment due dates on parts & accessories and general merchandise and adjusting dealer requirements for warranty and training. The Company also offered dealer discounts on certain general merchandise products and is engaging with dealership staff via live chat sessions to share unique ways to stay connected during the COVID-19 crisis. To support retail consumers, many dealers remain open for service support, and the Company continues to sell parts & accessories and general merchandise online. In addition, the Company is working with dealers to offer home delivery of new motorcycles in states and countries where it is permitted. HDFS is also working with retail borrowers who have been impacted by the COVID-19 pandemic. In certain situations, HDFS may offer short-term adjustments to customer payment due dates without affecting the associated interest rate or loan term.
Community Strength – The Company acted quickly and in alignment with government efforts to protect the safety and health of its employees and the Harley-Davidson community. The Company implemented travel restrictions, enhanced sanitation practices, cancelled events and closed facilities including temporarily suspending global manufacturing starting in March 2020. In support of relief efforts, the Harley-Davidson Foundation donated $150,000 to the United Way’s COVID-19 relief fund. Also, through its “United We Will Ride” efforts, the Company is connecting riders who want to help provide relief through food drives, blood donations and other ways to make a difference in their communities.
Recovery – As the Company focuses on recovery efforts for the business, it has prepared and started implementing rigorous protocols and procedures for employee safety and is working with its supply chain to be ready to resume operations. While the impact of the COVID-19 pandemic continues to evolve, the Company has restarted some manufacturing operations and will gradually ease work-at-home restrictions at the appropriate time, which will vary by region.
Reevaluating the Business and Strategic Plan
The Company is executing a set of actions, referred to as The Rewire, that will be further developed over the coming months, leading to a new strategic plan. The Rewire will address top priority opportunities, drive consistent execution and reset the Company’s operating model to reduce complexity, sharpen focus and increase the speed of decision making. The Company expects The Rewire actions, those already taken and those that will be implemented over the coming months, to lead to the definition of a new 5-year strategic plan that will incorporate key products and initiatives from the More Roads plan (discussed in the Company’s Annual Report Form 10-K for the period ended December 31, 2019), but will focus more on
the markets and products that can drive performance through profitability and long-term growth. Key elements of The Rewire include:
Enhance core strengths and better balance expansion into new spaces
•Return focus to the strength of the brand and the Company, starting with dealers, customers, stronghold products and committed employees globally.
•Re-evaluate strategies to reach new riders and build ridership.
Prioritize the markets that matter
•Narrow focus and invest in the markets, products and customer segments that offer the most profit and potential. This includes building on Harley-Davidson’s strong position in the U.S.
•Establish a simplified market coverage model and take cost out of the process.
Reset product launches and product line up for simplicity and maximum impact
•Continue to be guided by the voice of customers and dealers to optimize value and profit delivery.
•Simplify and retime launches to reflect the new reality, align with the start of the riding season and better suit the capacity of the Company and its independent dealers.
•Expand profitable iconic motorcycles to excite existing customers.
•Remain committed to Adventure Touring and Streetfighter motorcycles and advancing electric motorcycles.
Build the parts & accessories (P&A) and general merchandise businesses to full potential
•Develop a comprehensive strategy across P&A and general merchandise businesses that focuses on assortment and distribution opportunities, maximizes channels, improves ecommerce capabilities and grows revenue and margins for both the Company and dealers.
•Align P&A and general merchandise strategies with motorcycle strategy for a holistic presentation to the market.
Adjust and align the organizational structure, cost structure and operating model to reduce complexity and drive efficiency to set Harley-Davidson up for stability and success
•Create a framework including an organization that is more focused, profitable and nimble; a cost structure that is adjusted to the new realities of the market post crisis; and an operating model designed to increase empowerment and accountability.
•Establish commercially led central and new regional structures to gain a deeper understanding of customers and to return focus to dealers and selling.
•Elevate the role of the Company's motorcycle management team and sharpen marketing strategy and execution to enable a bigger impact with an improved go-to-market process.
Each of these key elements of The Rewire playbook includes actions that have been implemented or are currently being developed. The Company plans to share more about The Rewire later in 2020.
Results of Operations for the Three Months Ended March 29, 2020
Compared to the Three Months Ended March 31, 2019
Consolidated Results
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended | | | | | | |
(in thousands, except earnings per share) | March 29, 2020 | | March 31, 2019 | | (Decrease) Increase | | % Change |
Operating income from Motorcycles and Related Products | $ | 84,567 | | | $ | 108,381 | | | $ | (23,814) | | | (22.0) | % |
Operating income from Financial Services | 22,946 | | | 58,731 | | | (35,785) | | | (60.9) | |
Operating income | 107,513 | | | 167,112 | | | (59,599) | | | (35.7) | |
Other income, net | 155 | | | 4,660 | | | (4,505) | | | (96.7) | |
Investment (loss) income | (5,347) | | | 6,358 | | | (11,705) | | | (184.1) | |
Interest expense | 7,755 | | | 7,731 | | | 24 | | | 0.3 | |
Income before provision for income taxes | 94,566 | | | 170,399 | | | (75,833) | | | (44.5) | |
Provision for income taxes | 24,871 | | | 42,454 | | | (17,583) | | | (41.4) | |
Net income | $ | 69,695 | | | $ | 127,945 | | | $ | (58,250) | | | (45.5) | % |
Diluted earnings per share | $ | 0.45 | | | $ | 0.80 | | | $ | (0.35) | | | (43.8) | % |
Consolidated operating income was down 35.7% in the first three months of 2020 due to a decrease in operating income from the Motorcycles segment of $23.8 million and a $35.8 million decrease in operating income from Financial Services compared to the same period last year. Refer to the Motorcycles and Related Products Segment and Financial Services Segment discussions for a more detailed analysis of the factors affecting operating income.
Other income in the first quarter of 2020 was unfavorably impacted by lower non-operating income related to its defined benefit plans. The Company recorded a loss on its investments in marketable securities and cash equivalents during the first quarter of 2020 compared to investment income during the same period last year.
The Company's effective income tax rate for the first three months of 2020 was 26.3% compared to 24.9% for the same period in 2019. The increase in the 2020 effective income tax rate over 2019 was due to discrete income tax expenses recorded during the three months ended March 29, 2020. The first quarter 2020 effective income tax rate was determined based on the Company's current projection for full-year 2020 financial results. Given uncertainty surrounding the impact of the COVID-19 pandemic, the Company's projections for full-year 2020 financial results, in total and across its numerous tax jurisdictions, are likely to evolve and ultimately impact the Company's 2020 full-year effective income tax rate(1).
Diluted earnings per share were $0.45 in the first quarter of 2020, down 43.8% from the same period last year on lower net income and lower diluted weighted average shares outstanding. Diluted weighted average shares outstanding decreased from 160.0 million in the first quarter of 2019 to 153.7 million in the first quarter of 2020, driven by the Company's repurchases of common stock during 2019. 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)
Retail unit sales of Harley-Davidson motorcycles were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended | | | | | | |
| March 31, 2020 | | March 31, 2019 | | Decrease | | % Change |
United States | 23,732 | | | 28,091 | | | (4,359) | | | (15.5) | % |
| | | | | | | |
Europe(b) | 6,534 | | | 9,427 | | | (2,893) | | | (30.7) | |
EMEA – Other | 1,196 | | | 1,370 | | | (174) | | | (12.7) | |
Total EMEA | 7,730 | | | 10,797 | | | (3,067) | | | (28.4) | |
| | | | | | | |
Asia Pacific(c) | 3,709 | | | 3,786 | | | (77) | | | (2.0) | |
Asia Pacific – Other | 2,043 | | | 2,288 | | | (245) | | | (10.7) | |
Total Asia Pacific | 5,752 | | | 6,074 | | | (322) | | | (5.3) | |
| | | | | | | |
Latin America | 1,759 | | | 2,241 | | | (482) | | | (21.5) | |
Canada | 1,466 | | | 1,948 | | | (482) | | | (24.7) | |
International retail sales | 16,707 | | | 21,060 | | | (4,353) | | | (20.7) | |
Worldwide retail sales | 40,439 | | | 49,151 | | | (8,712) | | | (17.7) | % |
(a)Data source for retail sales figures shown above is new sales warranty and registration information provided by independent Harley-Davidson dealers and compiled by the Company. The Company must rely on information that its independent dealers supply concerning new retail sales, and the Company does not regularly verify the information that its independent dealers supply. This information is subject to revision.
(b)Includes Austria, Belgium, Denmark, Finland, France, Germany, Italy, Luxembourg, Netherlands, Norway, Spain, Sweden, Switzerland and the United Kingdom. Retail sales for Greece and Portugal were reclassified from Europe to EMEA – Other for 2019 to be consistent with the 2020 presentation.
(c)Includes Japan, Australia, New Zealand and South Korea
Retail sales of Streetnew Harley-Davidson motorcycles resumedin the U.S. were down 15.5% during the first three months of 2020 compared to the same period last year. U.S. retail sales fell significantly in late March 2019.
of 2020 due to the impact of the COVID-19 pandemic on consumers and the temporary closure of approximately 50% of U.S. independent dealers for motorcycle sales. Prior to being impacted by the COVID-19 pandemic, quarter-to-date U.S. retail sales were up 6.6% through mid-March 2020 compared to the same period last year. The Company believes retail sales through mid-March were up behind the success of the Company's efforts to work with independent dealers to build stronger capabilities and the introduction of several new motorcycle models.
The CompanyU.S. industry also showed strong growth in the quarter before the COVID-19 pandemic. Through February 2020, the industry was encouraged byup 6.1% over the same period last year; however, for the full first quarter retail sales performance, but remains cautious as it moves intoof 2020 the heightindustry fell 13.1% compared to the prior year, reflecting the adverse impact of its selling season.the COVID-19 pandemic.
The Company's U.S. market share of new 601+cc motorcycles for the first three months of 2020 was 48.9%, down 2.2 percentage points compared to the same period last year. The Company's U.S. market share reflected aggressive competitor discounting, strength in 2019 due to the Company's prior year financing offers, and the adverse impact of relatively strong growth in segments in which the Company does not currently compete. The Company expects to begin competing in these segments with the introduction of its business to remain under pressure in 2019 driven by continuing challengesnew Pan America™ and Harley-Davidson Bronx™ motorcycles. In the Touring and Cruiser segments, which represent approximately 70% of the 601+cc market and where the Company currently competes, its market share was also down 1.9 percentage points during the first three months of 2020 from the same period last year (Source: Motorcycle Industry Council).
International retail sales of new Harley-Davidson motorcycles were down 20.7% in the U.S. motorcycle industry. The Company will continuefirst three months of 2020 compared to aggressively manage supply in line with demand and execute marketing efforts to encourage trial, create new riders and increase conversion to sale. In addition, the Company continues work to accelerate its strategy to build the next generation of Harley-Davidson riders through 2022 through its More Roads to Harley-Davidson (More Roads) plan.
Finally, unionized workers at the Company’s operations in the Milwaukee area and Tomahawk, Wisconsin ratified new five-year labor agreements in April 2019.same period last year. The Company believes the decline in retail sales was the result of the COVID-19 pandemic causing consumer concerns and the temporary closure of approximately 55% of independent dealers. Retail sales
declined across all of the Company's markets within EMEA and Latin America. Retail sales also declined in most of the Company's markets within Asia Pacific; however, these declines were partially offset by retail sales growth in Japan and India.
The Company's 2020 market share of new contracts will enable it601+cc motorcycles in Europe was 7.6% through March, compared to compete8.9% for the same period last year (Source: Management Services Helwig Schmitt GmbH). The Company's European market share was adversely impacted by growth in a challenging business environment and advance its strategy to build the next generation of riders globally.
Outlook(1)
On April 23, 2019,segments in which the Company does not currently compete and increased competition in the segments in which it does currently complete.
Motorcycle Registration Data – 601+cc(a)
Industry retail motorcycle registration data was as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended | | | | | | |
| March 31, 2020 | | March 31, 2019 | | Decrease | | % Change |
United States(b) | 47,232 | | | 54,324 | | | (7,092) | | | (13.1) | % |
Europe(c) | 95,307 | | | 109,282 | | | (13,975) | | | (12.8) | % |
(a)Data includes on-road models with internal combustion engines with displacements greater than 600cc's and electric motorcycles with kilowatt (kW) peak power equivalents greater than 600cc's (601+cc). 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. This third-party data is subject to revision and update.
(c)Europe data includes Austria, Belgium, Denmark, Finland, France, Germany, Italy, Luxembourg, Netherlands, Norway, Spain, Sweden, Switzerland, and the followingUnited Kingdom. Industry data is derived from information concerning its expectations for the remainder of 2019:provided by Management Services Helwig Schmitt GmbH. Prior year registrations have been revised to exclude Greece and Portugal registrations. This third-party data is subject to revision and update.
Motorcycles and Related Products Segment - Full Year
Motorcycle Unit Shipments
Wholesale Harley-Davidson motorcycle unit shipments were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended | | | | | | | | | | |
| March 29, 2020 | | | | March 31, 2019 | | | | Unit | | Unit |
| Units | | Mix % | | Units | | Mix % | | Decrease | | % Change |
Motorcycle Units: | | | | | | | | | | | |
United States | 33,024 | | | 62.3 | % | | 34,505 | | | 58.6 | % | | (1,481) | | | (4.3) | % |
International | 19,949 | | | 37.7 | % | | 24,386 | | | 41.4 | % | | (4,437) | | | (18.2) | |
| 52,973 | | | 100.0 | % | | 58,891 | | | 100.0 | % | | (5,918) | | | (10.0) | % |
Motorcycle Units: | | | | | | | | | | | |
Touring motorcycle units | 21,597 | | | 40.8 | % | | 25,043 | | | 42.5 | % | | (3,446) | | | (13.8) | % |
Cruiser motorcycle units(a) | 20,131 | | | 38.0 | % | | 20,451 | | | 34.7 | % | | (320) | | | (1.6) | |
Sportster® / Street motorcycle units | 11,245 | | | 21.2 | % | | 13,397 | | | 22.8 | % | | (2,152) | | | (16.1) | |
| 52,973 | | | 100.0 | % | | 58,891 | | | 100.0 | % | | (5,918) | | | (10.0) | % |
(a) Includes Softail®, CVOTM, and LiveWireTM
The Company expectsshipped 52,973 Harley-Davidson motorcycles worldwide during the U.S. industryfirst three months of 2020, which was 10.0% lower than the same period in 2019. Motorcycle shipments were lower than prior year during the first quarter of 2020 due to continue to declinethe temporary suspension of the Company's global manufacturing operations in 2019, but at a more tempered pace than in 2018.March 2020 and lower demand resulting from the COVID-19 pandemic. The Company expects international retail sales growth during 2019. As a result, the Company expects to ship between 217,000mix of Touring and 222,000Sportster®/Street motorcycles to dealers in 2019 which is down approximately 3% to 5% from 2018. The Company also expects year-end U.S. dealer inventory of new motorcycles to be down compared to 2018.
The Company expects Motorcycles segment gross margindecreased as a percent of revenuetotal shipments while the mix of Cruiser motorcycles increased compared to be lower than 2018 driven by a significant increasethe same period last year.
At the end of the first quarter of 2020, U.S. independent dealer retail inventory of new Harley-Davidson motorcycles was up approximately 1,600 motorcycles compared to the first quarter of 2019. Dealer inventory levels increased over prior year as retail sales decreased late in the impact of incremental tariffs, lower shipment volumes and unfavorable product mix, partially offset by aggressive cost reductions, including the benefit of $25 million to $30 million of savings from the Company's Manufacturing Optimization plan. Refer to "Restructuring Plan Costs and Savings" below for further information regarding the Manufacturing Optimization Plan.
March 2020. The Company expects selling, administrative and engineering expensesplans to aggressively manage the supply of motorcycles in line with demand through the COVID-19 crisis.
Segment Results
Condensed statements of operations for the Motorcycles segment were as follows (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended | | | | | | |
| March 29, 2020 | | March 31, 2019 | | (Decrease) Increase | | % Change |
Revenue: | | | | | | | |
Motorcycles | $ | 899,365 | | | $ | 964,575 | | | $ | (65,210) | | | (6.8) | % |
Parts & accessories | 134,685 | | | 159,703 | | | (25,018) | | | (15.7) | |
General merchandise | 49,160 | | | 55,401 | | | (6,241) | | | (11.3) | |
Licensing | 8,029 | | | 8,577 | | | (548) | | | (6.4) | |
Other | 8,549 | | | 7,381 | | | 1,168 | | | 15.8 | |
| 1,099,788 | | | 1,195,637 | | | (95,849) | | | (8.0) | |
Cost of goods sold | 780,868 | | | 848,198 | | | (67,330) | | | (7.9) | |
Gross profit | 318,920 | | | 347,439 | | | (28,519) | | | (8.2) | |
Operating expenses: | | | | | | | |
Selling & administrative expense | 185,577 | | | 176,544 | | | 9,033 | | | 5.1 | |
Engineering expense | 48,776 | | | 48,884 | | | (108) | | | (0.2) | |
Restructuring expense | — | | | 13,630 | | | (13,630) | | | (100.0) | |
| 234,353 | | | 239,058 | | | (4,705) | | | (2.0) | |
Operating income | $ | 84,567 | | | $ | 108,381 | | | $ | (23,814) | | | (22.0) | % |
Operating margin | 7.7 | % | | 9.1 | % | | (1.4) | | | pts. | |
The estimated impact of significant factors affecting the comparability of net revenue, cost of goods sold and gross profit from the first three months of 2019 to bethe first three months of 2020 were as follows (in millions):
| | | | | | | | | | | | | | | | | |
| Net Revenue | | Cost of Goods Sold | | Gross Profit |
Three months ended March 31, 2019 | $ | 1,195.6 | | | $ | 848.2 | | | $ | 347.4 | |
Volume | (112.0) | | | (77.1) | | | (34.9) | |
Price, net of related costs | 10.4 | | | 6.9 | | | 3.5 | |
Foreign currency exchange rates and hedging | (9.6) | | | 1.2 | | | (10.8) | |
Shipment mix | 15.4 | | | 18.8 | | | (3.4) | |
Raw material prices | — | | | (1.1) | | | 1.1 | |
Manufacturing and other costs | — | | | (16.0) | | | 16.0 | |
| (95.8) | | | (67.3) | | | (28.5) | |
Three months ended March 29, 2020 | $ | 1,099.8 | | | $ | 780.9 | | | $ | 318.9 | |
Factors affecting the comparability of net revenue, cost of goods sold and gross profit from the first three months of 2019 to the first three months of 2020 were as follows:
•The decrease in volume was due to lower in 2019 behind aggressive cost managementwholesale motorcycle shipments and lower recall costs.parts & accessories and general merchandise sales.
Incremental tariffs include incremental•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 and gross profit were adversely impacted by weaker foreign currency exchange rates, relative to the U.S. dollar, as compared to the same period last year.
•Changes in the shipment mix between motorcycle families had an adverse impact on gross profit during the first three months of 2020. Additionally, unfavorable mix within parts & accessories contributed to the negative impact.
•Manufacturing and other costs were favorable due to increased productivity, lower tariff costs and the absence of temporary inefficiencies related to the Company's restructuring activities that were incurred in the prior year. These favorable impacts were partially offset by a higher fixed cost per unit due to lower production levels in the first quarter
of 2020 compared to the same period last year. The impact of recent European Union (EU) and China tariffs was $12.6 million in the first quarter of 2020 compared to $21.0 million in the first quarter of 2019. The impact of recent EU and China tariffs includes incremental EU and China tariffs imposed beginning in 2018 on the Company's products shipped from the U.S., as well as incremental U.S. tariffs imposed beginning in 2018 on certain items imported from certain international markets. Incremental tariff costs exclude metals cost resulting from the U.S. steel and aluminum tariffs, although the Company does expect higher metals cost which are includedChina.
Operating expenses were lower in the 2019 gross margin guidance above.
As previously disclosed, the Company expects the impactfirst three months of incremental tariff costs to be approximately $100 million to $120 million in 2019. While the Company's preference has always been to serve the EU market from its U.S. manufacturing operations, the Company plans to mitigate the impact of the incremental European Union and China tariffs by the end of 2019 by serving those markets with motorcycles from its Thailand facility.
The Company is pursuing regulatory approval in the European Union to that end; however, there is material risk that regulatory approval will not be granted. As a result, the Company is considering multiple other options to serve the EU market should they be required. These other options to serve the EU market would most likely not mitigate the full impact of the current incremental European Union tariff by the end of 2019.
For 2019, the Motorcycles segment operating margin as a percent of revenue is expected to be between 8.0% and 9.0%. Based on its current plans, the Company expects Motorcycles segment operating income in 2020 to improve by approximately $170 to $200 million compared to 2019. This expectation assumes that the Company will complete its Manufacturing Optimization Plan and successfully execute its plan to mitigate the impact of incremental tariffs by the end of 2019.
Motorcycles and Related Products Segment - Second Quarter
In the second quarter of 2019, the Company expects to ship between 65,500 and 70,500 motorcycles, which is down approximately 3% to 10% compared to the second quartersame period in 2019 due to lower restructuring expenses following the completion of 2018. Motorcycles segment operating marginthe Company's restructuring activities in late 2019. Operating expenses in the first three months of 2020 also benefited from lower spending as the Company aggressively managed cost. However, the benefits of the Company's aggressive cost management were more than offset by higher net recall costs as the prior year benefited from a percentrecall-related supplier recovery of revenue is expected to be down approximately 4 percentage points compared to the second quarter of 2018 driven in part by the impact of incremental tariffs, lower planned shipments and unfavorable mix.$28.0 million.
Financial Services SegmentMotorcycles Retail Sales and Registration Data
Harley-Davidson Motorcycle Retail Sales(a)
Retail unit sales of Harley-Davidson motorcycles were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended | | | | | | |
| March 31, 2020 | | March 31, 2019 | | Decrease | | % Change |
United States | 23,732 | | | 28,091 | | | (4,359) | | | (15.5) | % |
| | | | | | | |
Europe(b) | 6,534 | | | 9,427 | | | (2,893) | | | (30.7) | |
EMEA – Other | 1,196 | | | 1,370 | | | (174) | | | (12.7) | |
Total EMEA | 7,730 | | | 10,797 | | | (3,067) | | | (28.4) | |
| | | | | | | |
Asia Pacific(c) | 3,709 | | | 3,786 | | | (77) | | | (2.0) | |
Asia Pacific – Other | 2,043 | | | 2,288 | | | (245) | | | (10.7) | |
Total Asia Pacific | 5,752 | | | 6,074 | | | (322) | | | (5.3) | |
| | | | | | | |
Latin America | 1,759 | | | 2,241 | | | (482) | | | (21.5) | |
Canada | 1,466 | | | 1,948 | | | (482) | | | (24.7) | |
International retail sales | 16,707 | | | 21,060 | | | (4,353) | | | (20.7) | |
Worldwide retail sales | 40,439 | | | 49,151 | | | (8,712) | | | (17.7) | % |
(a)Data source for retail sales figures shown above is new sales warranty and registration information provided by independent Harley-Davidson dealers and compiled by the Company. The Company expects Financial Services segment operating income inmust rely on information that its independent dealers supply concerning new retail sales, and the Company does not regularly verify the information that its independent dealers supply. This information is subject to revision.
(b)Includes Austria, Belgium, Denmark, Finland, France, Germany, Italy, Luxembourg, Netherlands, Norway, Spain, Sweden, Switzerland and the United Kingdom. Retail sales for Greece and Portugal were reclassified from Europe to EMEA – Other for 2019 to be down compared to 2018 driven by a higher cost of debt and higher depreciation associated with its 2018 investment in a new loan management system which went into service in January 2019.
Harley-Davidson, Inc.
Capital expenditures in 2019 are expected to be $225 million to $245 million, which includes approximately $20 million to support the Manufacturing Optimization Plan. The Company anticipates it will have the ability to fund all capital expenditures in 2019 with cash flows generated by operations.
The Company expects its 2019 full year effective tax rate will be approximately 24% to 25%. This guidance excludes the effect of potential future adjustments, including items associated with any potential new tax legislation or audit settlements.
Restructuring Plan Costs and Savings(1)
In January 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 by mid-2019. As the operations are consolidated, the Company expects approximately 800 jobs will be eliminatedconsistent with the closure2020 presentation.
(c)Includes Japan, Australia, New Zealand and South Korea
Retail sales of Kansas City operations and approximately 450 jobs will be added in York through 2019 (Manufacturing Optimization Plan). As part of the Manufacturing Optimization Plan, the Company will also close its wheel operations in Adelaide, Australia resultingnew Harley-Davidson motorcycles in the elimination of approximately 90 jobs.
In November 2018, the Company implemented a workforce reorganization plan (Reorganization Plan). As a result, approximately 70 employees left the Company on an involuntary basis.
The following table summarizes the expected costs and savings associated with these plans as of April 23, 2019:
|
| | | | | | | |
(in millions) | 2018 Actual | | 2019 Estimated | | 2020 Estimated | | Total |
Manufacturing Optimization Plan | | | | | | | |
Cost related to temporary inefficiencies | $ 12.9 | | $10 - $15 | | n/a | | $ 23 - $ 28 |
Restructuring expenses | $ 89.5 | | $40 - $45 | | n/a | | $129 - $134 |
| $102.4 | | $50 - $60 | | | | $152 - $162 |
% cash | 70% | | 70% | | | | 70% |
Reorganization Plan - restructuring expenses | $3.9 | | $1 | | | | $5 |
% cash | 100% | | 100% | | | | 100% |
| | | | | | | |
Annual cash savings | | | 2019 Estimated | | 2020 Estimated | | Annual Ongoing |
Manufacturing Optimization Plan | | | $25 - $30 | | $45 - $50 | | $65 - $75 |
Reorganization Plan | | | $7 | | $7 | | $7 |
The expected restructuring expenses include the estimated cost of employee termination benefits, accelerated depreciation, and other project implementation costs of $40 million to $41 million, $51 million to $53 million and $38 million to $40 million, respectively. The timing of cash payments for restructuring costs may not occur in the same fiscal period that the Company records the expense.
Refer to Note 4 of the Notes to Consolidated Financial Statements for additional information concerning restructuring expenses. The Company expects total capital expenditures of $65 million associated with the Manufacturing Optimization Plan through 2019, including $20 million in 2019.
Results of Operations for the Three Months EndedMarch 31, 2019
Compared to the Three Months EndedApril 1, 2018
Consolidated Results
|
| | | | | | | | | | | | | | |
| Three months ended | | | | |
(in thousands, except earnings per share) | March 31, 2019 | | April 1, 2018 | | (Decrease) Increase | | % Change |
Operating income from Motorcycles and Related Products | $ | 108,381 |
| | $ | 172,838 |
| | $ | (64,457 | ) | | (37.3 | )% |
Operating income from Financial Services | 58,731 |
| | 63,579 |
| | (4,848 | ) | | (7.6 | ) |
Operating income | 167,112 |
| | 236,417 |
| | (69,305 | ) | | (29.3 | ) |
Other income (expense), net | 4,660 |
| | 220 |
| | 4,440 |
| | 2,018.2 |
|
Investment income | 6,358 |
| | 1,203 |
| | 5,155 |
| | 428.5 |
|
Interest expense | 7,731 |
| | 7,690 |
| | 41 |
| | 0.5 |
|
Income before provision for income taxes | 170,399 |
| | 230,150 |
| | (59,751 | ) | | (26.0 | ) |
Provision for income taxes | 42,454 |
| | 55,387 |
| | (12,933 | ) | | (23.4 | ) |
Net income | $ | 127,945 |
| | $ | 174,763 |
| | $ | (46,818 | ) | | (26.8 | )% |
Diluted earnings per share | $ | 0.80 |
| | $ | 1.03 |
| | $ | (0.23 | ) | | (22.3 | )% |
Consolidated operating income wasU.S. were down 29.3% in15.5% during the first three months of 2019 due to a decrease in operating income from the Motorcycles segment of $64.5 million and a $4.8 million decrease in operating income from Financial Services,2020 compared to the same period last year. Please referU.S. retail sales fell significantly in late March of 2020 due to the “Motorcycles and Related Products Segment” and “Financial Services Segment” discussions following for a more detailed analysisimpact of the factors affecting operating income.
Other income inCOVID-19 pandemic on consumers and the first quartertemporary closure of 2019 was favorablyapproximately 50% of U.S. independent dealers for motorcycle sales. Prior to being impacted by lower amortization of actuarial losses related to the Company's defined benefit plans. Investment income wasCOVID-19 pandemic, quarter-to-date U.S. retail sales were up in the first quarter of 20196.6% through mid-March 2020 compared to the same period last year. The Company believes retail sales through mid-March were up behind the success of the Company's efforts to work with independent dealers to build stronger capabilities and the introduction of several new motorcycle models.
The U.S. industry also showed strong growth in the quarter before the COVID-19 pandemic. Through February 2020, the industry was up 6.1% over the same period last year; however, for the full first quarter of 2020 the industry fell 13.1% compared to the prior year, driven by higher income from investments in marketable securities and cash equivalents.reflecting the adverse impact of the COVID-19 pandemic.
The Company's effective income tax rateU.S. market share of new 601+cc motorcycles for the first three months of 20192020 was 24.9% up slightly from 24.1% in48.9%, down 2.2 percentage points compared to the same period last year. The Company's U.S. market share reflected aggressive competitor discounting, strength in 20182019 due to slightly higher discrete income tax amounts recordedthe Company's prior year financing offers, and the adverse impact of relatively strong growth in segments in which the Company does not currently compete. The Company expects to begin competing in these segments with the introduction of its new Pan America™ and Harley-Davidson Bronx™ motorcycles. In the Touring and Cruiser segments, which represent approximately 70% of the 601+cc market and where the Company currently competes, its market share was also down 1.9 percentage points during the first quarterthree months of 2019.
Diluted earnings per share were $0.80 in the first quarter of 2019, down 22.3%2020 from the same period last year on(Source: Motorcycle Industry Council).
International retail sales of new Harley-Davidson motorcycles were down 20.7% in the first three months of 2020 compared to the same period last year. The Company believes the decline in retail sales was the result of the COVID-19 pandemic causing consumer concerns and the temporary closure of approximately 55% of independent dealers. Retail sales
declined across all of the Company's markets within EMEA and Latin America. Retail sales also declined in most of the Company's markets within Asia Pacific; however, these declines were partially offset by retail sales growth in Japan and India.
The Company's 2020 market share of new 601+cc motorcycles in Europe was 7.6% through March, compared to 8.9% for the same period last year (Source: Management Services Helwig Schmitt GmbH). The Company's European market share was adversely impacted by growth in segments in which the Company does not currently compete and increased competition in the segments in which it does currently complete.
Motorcycle Registration Data – 601+cc(a)
Industry retail motorcycle registration data was as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended | | | | | | |
| March 31, 2020 | | March 31, 2019 | | Decrease | | % Change |
United States(b) | 47,232 | | | 54,324 | | | (7,092) | | | (13.1) | % |
Europe(c) | 95,307 | | | 109,282 | | | (13,975) | | | (12.8) | % |
(a)Data includes on-road models with internal combustion engines with displacements greater than 600cc's and electric motorcycles with kilowatt (kW) peak power equivalents greater than 600cc's (601+cc). 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. This third-party data is subject to revision and update.
(c)Europe data includes Austria, Belgium, Denmark, Finland, France, Germany, Italy, Luxembourg, Netherlands, Norway, Spain, Sweden, Switzerland, and the United Kingdom. Industry data is derived from information provided by Management Services Helwig Schmitt GmbH. Prior year registrations have been revised to exclude Greece and Portugal registrations. This third-party data is subject to revision and update.
Motorcycles and Related Products Segment
Motorcycle Unit Shipments
Wholesale Harley-Davidson motorcycle unit shipments were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended | | | | | | | | | | |
| March 29, 2020 | | | | March 31, 2019 | | | | Unit | | Unit |
| Units | | Mix % | | Units | | Mix % | | Decrease | | % Change |
Motorcycle Units: | | | | | | | | | | | |
United States | 33,024 | | | 62.3 | % | | 34,505 | | | 58.6 | % | | (1,481) | | | (4.3) | % |
International | 19,949 | | | 37.7 | % | | 24,386 | | | 41.4 | % | | (4,437) | | | (18.2) | |
| 52,973 | | | 100.0 | % | | 58,891 | | | 100.0 | % | | (5,918) | | | (10.0) | % |
Motorcycle Units: | | | | | | | | | | | |
Touring motorcycle units | 21,597 | | | 40.8 | % | | 25,043 | | | 42.5 | % | | (3,446) | | | (13.8) | % |
Cruiser motorcycle units(a) | 20,131 | | | 38.0 | % | | 20,451 | | | 34.7 | % | | (320) | | | (1.6) | |
Sportster® / Street motorcycle units | 11,245 | | | 21.2 | % | | 13,397 | | | 22.8 | % | | (2,152) | | | (16.1) | |
| 52,973 | | | 100.0 | % | | 58,891 | | | 100.0 | % | | (5,918) | | | (10.0) | % |
(a) Includes Softail®, CVOTM, and LiveWireTM
The Company shipped 52,973 Harley-Davidson motorcycles worldwide during the first three months of 2020, which was 10.0% lower net incomethan the same period in 2019. Motorcycle shipments were lower than prior year during the first quarter of 2020 due to the temporary suspension of the Company's global manufacturing operations in March 2020 and lower diluted weighteddemand resulting from the COVID-19 pandemic. The mix of Touring and Sportster®/Street motorcycles decreased as a percent of total shipments while the mix of Cruiser motorcycles increased compared to the same period last year.
At the end of the first quarter of 2020, U.S. independent dealer retail inventory of new Harley-Davidson motorcycles was up approximately 1,600 motorcycles compared to the first quarter of 2019. Dealer inventory levels increased over prior year as retail sales decreased late in March 2020. The Company plans to aggressively manage the supply of motorcycles in line with demand through the COVID-19 crisis.
Segment Results
Condensed statements of operations for the Motorcycles segment were as follows (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended | | | | | | |
| March 29, 2020 | | March 31, 2019 | | (Decrease) Increase | | % Change |
Revenue: | | | | | | | |
Motorcycles | $ | 899,365 | | | $ | 964,575 | | | $ | (65,210) | | | (6.8) | % |
Parts & accessories | 134,685 | | | 159,703 | | | (25,018) | | | (15.7) | |
General merchandise | 49,160 | | | 55,401 | | | (6,241) | | | (11.3) | |
Licensing | 8,029 | | | 8,577 | | | (548) | | | (6.4) | |
Other | 8,549 | | | 7,381 | | | 1,168 | | | 15.8 | |
| 1,099,788 | | | 1,195,637 | | | (95,849) | | | (8.0) | |
Cost of goods sold | 780,868 | | | 848,198 | | | (67,330) | | | (7.9) | |
Gross profit | 318,920 | | | 347,439 | | | (28,519) | | | (8.2) | |
Operating expenses: | | | | | | | |
Selling & administrative expense | 185,577 | | | 176,544 | | | 9,033 | | | 5.1 | |
Engineering expense | 48,776 | | | 48,884 | | | (108) | | | (0.2) | |
Restructuring expense | — | | | 13,630 | | | (13,630) | | | (100.0) | |
| 234,353 | | | 239,058 | | | (4,705) | | | (2.0) | |
Operating income | $ | 84,567 | | | $ | 108,381 | | | $ | (23,814) | | | (22.0) | % |
Operating margin | 7.7 | % | | 9.1 | % | | (1.4) | | | pts. | |
The estimated impact of significant factors affecting the comparability of net revenue, cost of goods sold and gross profit from the first three months of 2019 to the first three months of 2020 were as follows (in millions):
| | | | | | | | | | | | | | | | | |
| Net Revenue | | Cost of Goods Sold | | Gross Profit |
Three months ended March 31, 2019 | $ | 1,195.6 | | | $ | 848.2 | | | $ | 347.4 | |
Volume | (112.0) | | | (77.1) | | | (34.9) | |
Price, net of related costs | 10.4 | | | 6.9 | | | 3.5 | |
Foreign currency exchange rates and hedging | (9.6) | | | 1.2 | | | (10.8) | |
Shipment mix | 15.4 | | | 18.8 | | | (3.4) | |
Raw material prices | — | | | (1.1) | | | 1.1 | |
Manufacturing and other costs | — | | | (16.0) | | | 16.0 | |
| (95.8) | | | (67.3) | | | (28.5) | |
Three months ended March 29, 2020 | $ | 1,099.8 | | | $ | 780.9 | | | $ | 318.9 | |
Factors affecting the comparability of net revenue, cost of goods sold and gross profit from the first three months of 2019 to the first three months of 2020 were as follows:
•The decrease in volume was due to lower wholesale motorcycle shipments and lower parts & accessories and general merchandise sales.
•On average, shares outstanding. Diluted weighted average shares outstanding decreased from 169.2wholesale 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 and gross profit were adversely impacted by weaker foreign currency exchange rates, relative to the U.S. dollar, as compared to the same period last year.
•Changes in the shipment mix between motorcycle families had an adverse impact on gross profit during the first three months of 2020. Additionally, unfavorable mix within parts & accessories contributed to the negative impact.
•Manufacturing and other costs were favorable due to increased productivity, lower tariff costs and the absence of temporary inefficiencies related to the Company's restructuring activities that were incurred in the prior year. These favorable impacts were partially offset by a higher fixed cost per unit due to lower production levels in the first quarter
of 2020 compared to the same period last year. The impact of recent European Union (EU) and China tariffs was $12.6 million in the first quarter of 20182020 compared to 160.0$21.0 million in the first quarter of 2019, driven by2019. The impact of recent EU and China tariffs includes incremental EU and China tariffs imposed beginning in 2018 on the Company's repurchasesproducts shipped from the U.S., as well as incremental U.S. tariffs imposed beginning in 2018 on certain items imported from China.
Operating expenses were lower in the first three months of common stock. Please refer2020 compared to "Liquidity and Capital Resources" for additional information concerningthe same period in 2019 due to lower restructuring expenses following the completion of the Company's share repurchase activity.restructuring activities in late 2019. Operating expenses in the first three months of 2020 also benefited from lower spending as the Company aggressively managed cost. However, the benefits of the Company's aggressive cost management were more than offset by higher net recall costs as the prior year benefited from a recall-related supplier recovery of $28.0 million.
Motorcycles Retail Sales and Registration Data
Harley-Davidson Motorcycle Retail Sales(a)
The following table includes retailRetail unit sales of Harley-Davidson motorcycles:motorcycles were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended | | | | | | |
| March 31, 2020 | | March 31, 2019 | | Decrease | | % Change |
United States | 23,732 | | | 28,091 | | | (4,359) | | | (15.5) | % |
| | | | | | | |
Europe(b) | 6,534 | | | 9,427 | | | (2,893) | | | (30.7) | |
EMEA – Other | 1,196 | | | 1,370 | | | (174) | | | (12.7) | |
Total EMEA | 7,730 | | | 10,797 | | | (3,067) | | | (28.4) | |
| | | | | | | |
Asia Pacific(c) | 3,709 | | | 3,786 | | | (77) | | | (2.0) | |
Asia Pacific – Other | 2,043 | | | 2,288 | | | (245) | | | (10.7) | |
Total Asia Pacific | 5,752 | | | 6,074 | | | (322) | | | (5.3) | |
| | | | | | | |
Latin America | 1,759 | | | 2,241 | | | (482) | | | (21.5) | |
Canada | 1,466 | | | 1,948 | | | (482) | | | (24.7) | |
International retail sales | 16,707 | | | 21,060 | | | (4,353) | | | (20.7) | |
Worldwide retail sales | 40,439 | | | 49,151 | | | (8,712) | | | (17.7) | % |
|
| | | | | | | | | | | |
| Three months ended | | | | |
| March 31, 2019 | | March 31, 2018 | | (Decrease) Increase | | % Change |
United States | 28,091 |
| | 29,309 |
| | (1,218 | ) | | (4.2 | )% |
| | | | | | | |
Europe(b) | 9,508 |
| | 9,716 |
| | (208 | ) | | (2.1 | ) |
EMEA - Other | 1,289 |
| | 1,146 |
| | 143 |
| | 12.5 |
|
Total EMEA | 10,797 |
| | 10,862 |
| | (65 | ) | | (0.6 | ) |
| | | | | | | |
Asia Pacific(c) | 3,786 |
| | 4,452 |
| | (666 | ) | | (15.0 | ) |
Asia Pacific - Other | 2,288 |
| | 1,877 |
| | 411 |
| | 21.9 |
|
Total Asia Pacific | 6,074 |
| | 6,329 |
| | (255 | ) | | (4.0 | ) |
| | | | | | | |
Latin America | 2,241 |
| | 2,506 |
| | (265 | ) | | (10.6 | ) |
Canada | 1,948 |
| | 2,080 |
| | (132 | ) | | (6.3 | ) |
Total International Retail Sales | 21,060 |
| | 21,777 |
| | (717 | ) | | (3.3 | ) |
Total Worldwide Retail Sales | 49,151 |
| | 51,086 |
| | (1,935 | ) | | (3.8 | )% |
(a)Data source for retail sales figures shown above is new sales warranty and registration information provided by independent Harley-Davidson dealers and compiled by the Company. The Company must rely on information that its independent dealers supply concerning new retail sales, and the Company does not regularly verify the information that its independent dealers supply. This information is subject to revision.(b)Includes Austria, Belgium, Denmark, Finland, France, Germany, Italy, Luxembourg, Netherlands, Norway, Spain, Sweden, Switzerland and the United Kingdom. Retail sales for Greece and Portugal were reclassified from Europe to EMEA – Other for 2019 to be consistent with the 2020 presentation.
| |
(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. |
(c)Includes Japan, Australia, New Zealand and South Korea
Retail sales of new Harley-Davidson motorcycles in the U.S. were down 4.2%15.5% during the first three months of 2020 compared to the same period last year. U.S. retail sales fell significantly in late March of 2020 due to the impact of the COVID-19 pandemic on consumers and the temporary closure of approximately 50% of U.S. independent dealers for motorcycle sales. Prior to being impacted by the COVID-19 pandemic, quarter-to-date U.S. retail sales were up 6.6% through mid-March 2020 compared to the same period last year. The Company believes retail sales through mid-March were up behind the success of the Company's efforts to work with independent dealers to build stronger capabilities and the introduction of several new motorcycle models.
The U.S. industry also showed strong growth in the quarter before the COVID-19 pandemic. Through February 2020, the industry was up 6.1% over the same period last year; however, for the full first quarter of 2019 on a weak U.S.2020 the industry partially offset by an increase in market share. The first quarter retail sales decline of 4.2% represents the lowest rate of decline for retail sales of new Harley-Davidson motorcycles in the U.S. over the last nine quarters. The U.S. industry was down 4.7% percent in the first quarter of 2019, which also represented an improvementfell 13.1% compared to recent industry sales trends. The Company believes the U.S. industry for new motorcycles continues to be challenged by soft used motorcycle prices and that the improvement in the U.S. industry sales trend was due in part to a highly competitive and promotional marketplace.
Prices for used Harley-Davidson motorcycles in the U.S. remained at near historical low levels compared to new; however, the Company is encouraged by the firming of used motorcycle prices over the past several quarters. Prices of used Harley-Davidson motorcycles in the Company's dealer network were higher in the first quarter of 2019 than the prior year, quarter forreflecting the seventh consecutive quarter.adverse impact of the COVID-19 pandemic.
The Company's U.S. market share of new 601+cc motorcycles for the first quarterthree months of 20192020 was 51.1%48.9%, up 0.6down 2.2 percentage points compared to the same period last year. The Company believes itsCompany's U.S. market share gains werereflected aggressive competitor discounting, strength in 2019 due in part to the executionCompany's prior year financing offers, and the adverse impact of its "stronger dealer"relatively strong growth catalyst under its More Roads plan which included increased marketing and sales support. The Company believes its share gains were partially offset by increased competitive promotional activity and stronger performance in segments in which itthe Company does not currently compete. The Company expects to begin competing in these segments with the introduction of its new Pan America™ and Harley-Davidson Bronx™ motorcycles. In the Touring and Cruiser segments, which represent approximately 70% of the 601+cc market and where the Company'sCompany currently competes, its market share was up 2.5also down 1.9 percentage points induring the first quarterthree months of 2019 compared to2020 from the same quarterperiod last year. (Market share source:year (Source: Motorcycle Industry Council).
International retail sales of new Harley-Davidson motorcycles were down 3.3%20.7% in the first quarterthree months of 2019. In the first quarter of 2019 international retail sales were down in developed markets, partially offset by increases in emerging markets. Overall, international retail sales were adversely impacted by the limited availability of Street motorcycles during the first quarter of 2019. Excluding Street motorcycles from both 2018 and 2019, first quarter international retail sales were up 4.7% in 20192020 compared to the same quarterperiod last year.
During The Company believes the first quarter of 2019, international emerging marketdecline in retail sales were up 5.2% driven by growth in numerous markets.was the result of the COVID-19 pandemic causing consumer concerns and the temporary closure of approximately 55% of independent dealers. Retail sales
declined across all of the Company's markets within EMEA and Latin America. Retail sales also declined in developed internationalmost of the Company's markets within Asia Pacific; however, these declines were down 6.2% in the first quarter. Retailpartially offset by retail sales growth in Japan and Australia continued to be weak in the first quarter of 2019 behind contracting industry sales and competitive new product introductions in segments outside of touring and cruisers. The Company continues to support its dealers in these markets with incentives and a strong focus on national test ride campaigns.India.
The Company's 20192020 market share of new 601+cc motorcycles in Europe was 8.8%7.6% through March, compared to 10.4%8.9% for the same period last year (Source: Association des Constructeurs Europeens de Motocycles)Management Services Helwig Schmitt GmbH).
The Company remains confidentCompany's European market share was adversely impacted by growth in and committed to, the great potential that international markets offer Harley-Davidson. Furthermore, with its Thailand facility up and running,segments in which the Company is excited about the growth opportunitiesdoes not currently compete and increased competition in the ASEAN (Association of Southeast Asian Nations) region now thatsegments in which it can offer more competitive pricing. The Company believes its brand, products and distribution will drive sustainable growth in international markets.(1)does currently complete.
Motorcycle Registration Data – 601+cc(a)
The following table includes industryIndustry retail motorcycle registration data:data was as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended | | | | | | |
| March 31, 2020 | | March 31, 2019 | | Decrease | | % Change |
United States(b) | 47,232 | | | 54,324 | | | (7,092) | | | (13.1) | % |
Europe(c) | 95,307 | | | 109,282 | | | (13,975) | | | (12.8) | % |
|
| | | | | | | | | | | |
| Three months ended | | | | |
| March 31, 2019 | | March 31, 2018 | | (Decrease) Increase | | % Change |
United States(b) | 54,324 |
| | 57,026 |
| | (2,702 | ) | | (4.7 | )% |
Europe(c) | 111,317 |
| | 93,217 |
| | 18,100 |
| | 19.4 | % |
(a)Data includes on-road models with internal combustion engines with displacements greater than 600cc's and electric motorcycles with kilowatt (kW) peak power equivalents greater than 600cc's (601+cc). 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. This third-party data is subject to revision and update.
| |
(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.(c)Europe data includes Austria, Belgium, Denmark, Finland, France, Germany, Italy, Luxembourg, Netherlands, Norway, Spain, Sweden, Switzerland, and the United Kingdom. Industry data is derived from information provided by Management Services Helwig Schmitt GmbH. Prior year registrations have been revised to exclude Greece and Portugal registrations. This third-party data is subject to revision and update. |
| |
(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 and Related Products Segment
Motorcycle Unit Shipments
The following table includes wholesaleWholesale Harley-Davidson motorcycle unit shipments for the Motorcycles segment:were as follows:
| | | | | | | | | | | | | | | Three months ended | | | | | |
| Three months ended | | | | | | March 29, 2020 | | | March 31, 2019 | | | Unit | | Unit |
| March 31, 2019 | | April 1, 2018 | | | | | | Units | | Mix % | | Units | | Mix % | | Decrease | | % Change |
| Units | | Mix % | | Units | | Mix % | | Unit (Decrease) Increase | | Unit % Change | |
Motorcycle Units: | | Motorcycle Units: | | | | | | | | | | | |
United States | 34,505 |
| | 58.6 | % | | 38,797 |
| | 60.7 | % | | (4,292 | ) | | (11.1 | )% | United States | 33,024 | | | 62.3 | % | | 34,505 | | | 58.6 | % | | (1,481) | | | (4.3) | % |
International | 24,386 |
| | 41.4 | % | | 25,147 |
| | 39.3 | % | | (761 | ) | | (3.0 | ) | International | 19,949 | | | 37.7 | % | | 24,386 | | | 41.4 | % | | (4,437) | | | (18.2) | |
Harley-Davidson motorcycle units | 58,891 |
| | 100.0 | % | | 63,944 |
| | 100.0 | % | | (5,053 | ) | | (7.9 | )% | |
| | | 52,973 | | | 100.0 | % | | 58,891 | | | 100.0 | % | | (5,918) | | | (10.0) | % |
Motorcycle Units: | | Motorcycle Units: | | | | | | | | | | |
Touring motorcycle units | 25,043 |
| | 42.5 | % | | 30,857 |
| | 48.3 | % | | (5,814 | ) | | (18.8 | )% | Touring motorcycle units | 21,597 | | | 40.8 | % | | 25,043 | | | 42.5 | % | | (3,446) | | | (13.8) | % |
Cruiser motorcycle units | 20,451 |
| | 34.7 | % | | 21,554 |
| | 33.7 | % | | (1,103 | ) | | (5.1 | ) | |
Sportster® / Street motorcycle units | 13,397 |
| | 22.8 | % | | 11,533 |
| | 18.0 | % | | 1,864 |
| | 16.2 |
| |
Harley-Davidson motorcycle units | 58,891 |
| | 100.0 | % | | 63,944 |
| | 100.0 | % | | (5,053 | ) | | (7.9 | )% | |
Cruiser motorcycle units(a) | | Cruiser motorcycle units(a) | 20,131 | | | 38.0 | % | | 20,451 | | | 34.7 | % | | (320) | | | (1.6) | |
Sportster® / Street motorcycle units | | Sportster® / Street motorcycle units | 11,245 | | | 21.2 | % | | 13,397 | | | 22.8 | % | | (2,152) | | | (16.1) | |
| | | 52,973 | | | 100.0 | % | | 58,891 | | | 100.0 | % | | (5,918) | | | (10.0) | % |
(a) Includes Softail®, CVOTM, and LiveWireTM
The Company shipped 58,89152,973 Harley-Davidson motorcycles worldwide during the first quarterthree months of 2019,2020, which was 7.9%10.0% lower than the same period in 2018.2019. Motorcycle shipments were lower than prior year during the first quarter of 2020 due to the temporary suspension of the Company's global manufacturing operations in March 2020 and lower demand resulting from the COVID-19 pandemic. The mix of Touring and Sportster®/Street motorcycles decreased as a percent of total shipments while the mix of Cruiser and Sportster®/Street motorcycles increased compared to the same period last year. The mix of Touring motorcycles in 2019 was down compared to 2018 due to the relatively high shipment mix of Touring motorcycles in the first quarter of 2018. In addition, during the first quarter of 2019, Sportster shipments as a percent of total shipments were up behind an improved retail sales rate compared to the same period last year.
U.S. retail inventory of new Harley-Davidson motorcycles atAt the end of the first quarter of 20192020, U.S. independent dealer retail inventory of new Harley-Davidson motorcycles was downup approximately 3,4501,600 motorcycles compared to the end of the first quarter of 2018.2019. Dealer inventory levels increased over prior year as retail sales decreased late in March 2020. The Company is very pleasedplans to aggressively manage the supply of motorcycles in line with dealer inventory levels anddemand through the mix COVID-19 crisis.
Segment Results
The following table includes the condensedCondensed statements of operations for the Motorcycles segment (inwere as follows (dollars in thousands):
| | | Three months ended | | | | | | Three months ended | | | | | |
| March 31, 2019 | | April 1, 2018 | | (Decrease) Increase | | % Change | | March 29, 2020 | | March 31, 2019 | | (Decrease) Increase | | % Change |
Revenue: | | | | | | | | Revenue: | | | | | | | |
Motorcycles | $ | 964,575 |
| | $ | 1,121,673 |
| | $ | (157,098 | ) | | (14.0 | )% | Motorcycles | $ | 899,365 | | | $ | 964,575 | | | $ | (65,210) | | | (6.8) | % |
Parts & Accessories | 159,703 |
| | 169,075 |
| | (9,372 | ) | | (5.5 | ) | |
General Merchandise | 55,401 |
| | 56,601 |
| | (1,200 | ) | | (2.1 | ) | |
Parts & accessories | | Parts & accessories | 134,685 | | | 159,703 | | | (25,018) | | | (15.7) | |
General merchandise | | General merchandise | 49,160 | | | 55,401 | | | (6,241) | | | (11.3) | |
Licensing | 8,577 |
| | 8,358 |
| | 219 |
| | 2.6 |
| Licensing | 8,029 | | | 8,577 | | | (548) | | | (6.4) | |
Other | 7,381 |
| | 8,240 |
| | (859 | ) | | (10.4 | ) | Other | 8,549 | | | 7,381 | | | 1,168 | | | 15.8 | |
Total revenue | 1,195,637 |
| | 1,363,947 |
| | (168,310 | ) | | (12.3 | ) | |
| | | 1,099,788 | | | 1,195,637 | | | (95,849) | | | (8.0) | |
Cost of goods sold | 848,198 |
| | 890,174 |
| | (41,976 | ) | | (4.7 | ) | Cost of goods sold | 780,868 | | | 848,198 | | | (67,330) | | | (7.9) | |
Gross profit | 347,439 |
| | 473,773 |
| | (126,334 | ) | | (26.7 | ) | Gross profit | 318,920 | | | 347,439 | | | (28,519) | | | (8.2) | |
Operating expenses: | | | | | | | | Operating expenses: | |
Selling & administrative expense | 176,544 |
| | 207,544 |
| | (31,000 | ) | | (14.9 | ) | Selling & administrative expense | 185,577 | | | 176,544 | | | 9,033 | | | 5.1 | |
Engineering expense | 48,884 |
| | 46,549 |
| | 2,335 |
| | 5.0 |
| Engineering expense | 48,776 | | | 48,884 | | | (108) | | | (0.2) | |
Restructuring expense | 13,630 |
| | 46,842 |
| | (33,212 | ) | | (70.9 | ) | Restructuring expense | — | | | 13,630 | | | (13,630) | | | (100.0) | |
Operating expense | 239,058 |
| | 300,935 |
| | (61,877 | ) | | (20.6 | ) | |
Operating income from Motorcycles | $ | 108,381 |
| | $ | 172,838 |
| | $ | (64,457 | ) | | (37.3 | )% | |
| | | 234,353 | | | 239,058 | | | (4,705) | | | (2.0) | |
Operating income | | Operating income | $ | 84,567 | | | $ | 108,381 | | | $ | (23,814) | | | (22.0) | % |
Operating margin | | Operating margin | 7.7 | % | | 9.1 | % | | (1.4) | | | pts. | |
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 quarterthree months of 20182019 to the first quarterthree months of 20192020 were as follows (in millions):
| | | | | | | | | | | | | | | | | |
| Net Revenue | | Cost of Goods Sold | | Gross Profit |
Three months ended March 31, 2019 | $ | 1,195.6 | | | $ | 848.2 | | | $ | 347.4 | |
Volume | (112.0) | | | (77.1) | | | (34.9) | |
Price, net of related costs | 10.4 | | | 6.9 | | | 3.5 | |
Foreign currency exchange rates and hedging | (9.6) | | | 1.2 | | | (10.8) | |
Shipment mix | 15.4 | | | 18.8 | | | (3.4) | |
Raw material prices | — | | | (1.1) | | | 1.1 | |
Manufacturing and other costs | — | | | (16.0) | | | 16.0 | |
| (95.8) | | | (67.3) | | | (28.5) | |
Three months ended March 29, 2020 | $ | 1,099.8 | | | $ | 780.9 | | | $ | 318.9 | |
|
| | | | | | | | | | | |
| Net Revenue | | Cost of Goods Sold | | Gross Profit |
Three months ended April 1, 2018 | $ | 1,363.9 |
| | $ | 890.1 |
| | $ | 473.8 |
|
Volume | (108.1 | ) | | (66.7 | ) | | (41.4 | ) |
Price, net of related costs | 23.2 |
| | 6.8 |
| | 16.4 |
|
Foreign currency exchange rates and hedging | (29.8 | ) | | (14.7 | ) | | (15.1 | ) |
Shipment mix | (53.6 | ) | | (14.3 | ) | | (39.3 | ) |
Raw material prices | — |
| | 3.1 |
| | (3.1 | ) |
Manufacturing and other costs | — |
| | 43.9 |
| | (43.9 | ) |
Total | (168.3 | ) | | (41.9 | ) | | (126.4 | ) |
Three months ended March 31, 2019 | $ | 1,195.6 |
| | $ | 848.2 |
| | $ | 347.4 |
|
The following factors affectedFactors affecting the comparability of net revenue, cost of goods sold and gross profit from the first quarterthree months of 20182019 to the first quarterthree months of 2019:2020 were as follows:
•The decrease in revenue and gross profit related to volume was due primarily to lower wholesale motorcycle shipments and lower P&A salesparts & accessories and an increased level of motorcycle sales support.general merchandise sales.
•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 wasand gross profit were adversely impacted by weaker foreign currency exchange rates, relative to the U.S. dollar, as compared to the same period last year. The unfavorable revenue impact was partially offset by higher net foreign currency gains due primarily to foreign currency hedging, as compared to the prior year.
•Changes in the shipment mix of motorcycle families, as well as the mix of models withinbetween motorcycle families had an adverse impact on revenue and gross profit during the quarter.first three months of 2020. Additionally, unfavorable mix within parts & accessories contributed to the negative impact.
Raw material prices were higher primarily due to increased steel costs.
•Manufacturing and other costs were negatively impactedfavorable due to increased productivity, lower tariff costs and the absence of temporary inefficiencies related to the Company's restructuring activities that were incurred in the prior year. These favorable impacts were partially offset by lowera higher fixed cost absorptionper unit due to lower production temporary inefficiencieslevels in the first quarter
of 2020 compared to the same period last year. The impact of recent European Union (EU) and China tariffs was $12.6 million in the costfirst quarter of incremental tariffs. Costs associated with incremental tariffs implemented in mid-2018 were2020 compared to $21.0 million duringin the first quarter of 2019. Temporary inefficiencies associated withThe impact of recent EU and China tariffs includes incremental EU and China tariffs imposed beginning in 2018 on the Manufacturing Optimization Plan were $3.6 million and $0.7 millionCompany's products shipped from the U.S., as well as incremental U.S. tariffs imposed beginning in the first quarters of 2019 and 2018 respectively.on certain items imported from China.
Operating expenses were lower in the first quarterthree months of 20192020 compared to the prior year driven bysame period in 2019 due to lower restructuring expenses and favorable net warranty and recall costs. Infollowing the completion of the Company's restructuring activities in late 2019. Operating expenses in the first quarterthree months of 2019,2020 also benefited from lower spending as the Company aggressively managed cost. However, the benefits of the Company's aggressive cost management were more than offset by higher net warranty and recall costs were approximately $35 million lower thanas the prior year driven by higher than normal recoveries and lower warranty costs.benefited from a recall-related supplier recovery of $28.0 million.
Financial Services Segment
Segment Results
The following table includes the condensedCondensed statements of operations for the Financial Services segment were as follows (in thousands):
|
| | | | | | | | | | | | | | |
| Three months ended | | | | |
| March 31, 2019 | | April 1, 2018 | | Increase (Decrease) | | % Change |
Interest income | $ | 159,804 |
| | $ | 154,041 |
| | $ | 5,763 |
| | 3.7 | % |
Other income | 28,750 |
| | 23,781 |
| | 4,969 |
| | 20.9 |
|
Securitization and servicing fee income | 189 |
| | 352 |
| | (163 | ) | | (46.3 | ) |
Financial Services revenue | 188,743 |
| | 178,174 |
| | 10,569 |
| | 5.9 |
|
Interest expense | 52,324 |
| | 48,450 |
| | 3,874 |
| | 8.0 |
|
Provision for credit losses | 34,491 |
| | 30,052 |
| | 4,439 |
| | 14.8 |
|
Operating expenses | 43,197 |
| | 36,093 |
| | 7,104 |
| | 19.7 |
|
Financial Services expense | 130,012 |
| | 114,595 |
| | 15,417 |
| | 13.5 |
|
Operating income from Financial Services | $ | 58,731 |
| | $ | 63,579 |
| | $ | (4,848 | ) | | (7.6 | )% |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended | | | | | | |
| March 29, 2020 | | March 31, 2019 | | Increase (Decrease) | | % Change |
Revenue: | | | | | | | |
Interest income | $ | 170,001 | | | $ | 159,804 | | | $ | 10,197 | | | 6.4 | % |
Other income | 28,455 | | | 28,939 | | | (484) | | | (1.7) | |
| 198,456 | | | 188,743 | | | 9,713 | | | 5.1 | |
Expenses: | | | | | | | |
Interest expense | 52,473 | | | 52,324 | | | 149 | | | 0.3 | |
Provision for credit losses | 79,419 | | | 34,491 | | | 44,928 | | | 130.3 | |
Operating expense | 43,618 | | | 43,197 | | | 421 | | | 1.0 | |
| 175,510 | | | 130,012 | | | 45,498 | | | 35.0 | |
Operating income | $ | 22,946 | | | $ | 58,731 | | | $ | (35,785) | | | (60.9) | % |
Interest income was favorable in the first quarter of 20192020 primarily due to higher average retailoutstanding finance receivables at a higher average yield. Other income was favorable primarily due to higher investment income and insurance related revenue.
Interest expense increased due to higher average outstanding debt and a higher cost of funds.
The provision for credit losses increased $4.4$44.9 million compared to the first quarter of 2018. The retail motorcycle provision increased $4.9 million2019 driven by higher retail credit losses and a flat retail reserve rate as compared to a decrease$36.0 million increase in the reserve rate duringallowance for credit losses. The increased retail credit losses were primarily due to the first quarterimpacts of 2018,the COVID-19 pandemic, including lower recovery values, slowed repossessions and a smaller decrease indelayed consumer payments at the end of the quarter. The retail receivablesand wholesale allowance for credit losses increased $28.7 million and $7.3 million, respectively, as compared to the first quarter of 2018.2019 driven by the economic impact of the COVID-19 pandemic as well as the adoption of ASU 2016-13, the new accounting standard for credit losses, which considers the estimated lifetime losses of the finance receivable portfolio. The economic impact of the COVID-19 pandemic included recessionary conditions at the end of the quarter which the Company expects to extend into 2021. The Company’s expectations surrounding its economic forecasts may change in future periods as additional information becomes available.
Annualized credit losses for the Company's retail motorcycle loans were 2.73% through March 29, 2020 compared to 2.22% through March 31, 2019 compared to 2.15% through April 1, 2018.2019. The 30-day delinquency rate for retail motorcycle loans at March 31, 201929, 2020 was 3.73%3.37% compared to 3.31%3.73% at April 1, 2018. The Company believes inefficiencies resulting from the implementation of a new loan management system were a driver for the higher delinquency rate. The Company expects these inefficiencies to be temporary.March 31, 2019.
Operating expenses increased $7.1 million compared to the first quarter
Changes in the allowance for credit losses on finance receivables were as follows (in thousands):
| | | | | | | | | | | |
| Three months ended | | |
| March 29, 2020 | | March 31, 2019 |
Balance, beginning of period | $ | 198,581 | | | $ | 189,885 | |
Cumulative effect of change in accounting(a) | 100,604 | | | — | |
Provision for credit losses | 79,419 | | | 34,491 | |
Charge-offs, net of recoveries | (43,108) | | | (33,504) | |
Balance, end of period | $ | 335,496 | | | $ | 190,872 | |
|
| | | | | | | |
| Three months ended |
| March 31, 2019 | | April 1, 2018 |
Balance, beginning of period | $ | 189,885 |
| | $ | 192,471 |
|
Provision for credit losses | 34,491 |
| | 30,052 |
|
Charge-offs, net of recoveries | (33,504 | ) | | (32,173 | ) |
Balance, end of period | $ | 190,872 |
| | $ | 190,350 |
|
(a)On January 1, 2020, the Company adopted ASU 2016-13 and increased the allowance for loan loss through retained earnings, net of income taxes, to establish an allowance that represents expected lifetime credit losses on the finance receivable portfolio at date of adoption.
Other Matters
Contractual ObligationsCritical Accounting Estimates
TheAs a result of the January 1, 2020 adoption ASU 2016-13, the Company has updated the contractual obligations table under the caption “Contractual Obligations” in Critical Accounting Estimate disclosure from 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, 2019 as follows:
Allowance for Credit Losses on Retail Finance Receivables – The allowance for credit losses represents the Company’s estimate of future lifetime losses for its retail finance receivables portfolio. The Company performs a collective evaluation of the adequacy of its retail allowance for credit losses. Subsequent to the January 1, 2020 adoption of ASU 2016-13, the Company utilizes a vintage-based loss forecast methodology that includes decompositions for probability of default, exposure at default, attrition rate, and recovery balance rate. Reasonable and supportable economic forecasts for a two-year period are incorporated into the methodology to reflect the estimated impact of changes in future economic conditions, such as unemployment rates, household obligations or other relevant factors, over the expected life of the retail portfolio. For periods beyond the Company��s reasonable and supportable forecasts, the Company reverts to its average historical loss experience for a three-year period using a mean-reversion process. Adjustments to historical loss information are made for differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, or term as well as other relevant factors.
Contractual Obligations
As of March 29, 2020, the Company has updated the contractual obligations table from 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, 2018 as of March 31, 2019 to reflect the new projected principal and interest payments for the remainder of 20192020 and beyond as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2020 | | 2021-2022 | | 2023-2024 | | Thereafter | | Total |
Debt: | | | | | | | | | |
Principal payments on debt | $ | 2,532,787 | | | $ | 3,394,232 | | | $ | 1,484,965 | | | $ | 750,000 | | | $ | 8,161,984 | |
Interest payments on debt | 140,781 | | | 240,199 | | | 132,249 | | | 310,983 | | | 824,212 | |
| $ | 2,673,568 | | | $ | 3,634,431 | | | $ | 1,617,214 | | | $ | 1,060,983 | | | $ | 8,986,196 | |
|
| | | | | | | | | | | | | | | | | | | |
| 2019 | | 2020-2021 | | 2022-2023 | | Thereafter | | Total |
Principal payments on debt | $ | 1,912,597 |
| | $ | 3,104,227 |
| | $ | 1,564,436 |
| | $ | 750,000 |
| | $ | 7,331,260 |
|
Interest payments on debt | 142,180 |
| | 272,995 |
| | 112,046 |
| | 336,750 |
| | 863,971 |
|
| $ | 2,054,777 |
| | $ | 3,377,222 |
| | $ | 1,676,482 |
| | $ | 1,086,750 |
| | $ | 8,195,231 |
|
Interest obligations for floating rate instruments, as calculated above, assume rates in effect at March 31, 201929, 2020 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 without reduction for unamortized discounts and debt issuance costs. Refer to Note 12 of the Notes to the Consolidated financial statements for a breakout of the finance costs consistent with ASU No. 2015-03.costs.
As of March 31, 2019,29, 2020, 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, 2018.2019.
Commitments and Contingencies
The Company is subject to lawsuits and other claims related to environmental, product and other matters. In determining costs 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. Any amounts accrued for these matters are monitored on an ongoing basis and are updated based on new developments or new information as it becomes available for each matter.
Environmental Protection Agency Notice:
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. In December 2017, the Department of Justice (DOJ), on behalf of the 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 DOJ each filed separate response briefs. The Company is awaiting the court's decision on whether or not to finalize the Settlement, and on February 8, 2019, the DOJ filed a status update reminding the court of the current status of the outstanding matter. The Company has an accrual associated with this matter which is includedrecorded in Accrued liabilities on the consolidatedConsolidated balance 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:
Matter – The Company is involved with government agencies and groups of potentially responsible partiesthe U.S. Navy 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. The Company has been working with the Pennsylvania Department of Environmental Protection (PADEP) since 1986 andan agreement with the U.S. Environmental Protection Agency (EPA) 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 Agreementwhich calls for the U.S. 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 atA site wide remedial investigation/feasibility study and a proposed final remedy for the York facility as coveredhave been completed and approved by the Agreement.
Pennsylvania Department of Environmental Protection and the EPA. The associated cleanup plan documents were approved in February 2020 and the remaining cleanup activities will begin in 2020. The Company has an accrual for its estimate of its share of the estimated future Response Costs at the York facility which is includedrecorded in Other long-term liabilities on the consolidatedConsolidated balance sheets. While the work on the RI/FS is now complete and the final remedy was proposed in late 2018, it has not yet been approved, and given the uncertainty that exists concerning the nature and scope of additional environmental remediation that may ultimately be required under the approved final remedy, thesheets.
Product Liability Matters – 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 isperiodically 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 consolidatedConsolidated financial statements.statements.(1)
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 special purpose entities (SPEs), which are considered VIEsvariable interest entities (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,as the Company, 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 becauseas the Company did not retain any financial interest in the VIE beyond servicing rights and ordinary representations and warranties and related covenants. For more information, see Refer to Note 13.13 of the Notes to Consolidated financial statements for additional information.
Liquidity and Capital Resources as of March 31, 201929, 2020(1)
OverThe Company's response to the long-term, theCOVID-19 pandemic includes actions to preserve cash and secure additional liquidity. The Company expects that its business model will continuehas taken a number of specific actions to generate cash that will allow itreduce spending while continuing to invest in the business, fund future growth opportunities, and return value to shareholders.(1) The Company will evaluate opportunities to return 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)new products. The Company expects its planned reductions in spending will preserve approximately $250 million of cash in 2020.In addition, the Financial Services operations to continue to be funded with unsecured debt, unsecured commercial paper, asset-backed commercial paper conduit facilities, committed unsecured bank facilities,Company has suspended discretionary share repurchases, and asset-backed securitizations.the Company's Board of Directors approved a cash dividend of $0.02 per share for the second quarter of 2020, down from the first quarter 2020 dividend of $0.38 per share.
The Company’s strategy is to maintain a minimum ofAt March 29, 2020 the Company maintained twelve months of its projected liquidity needs through a combination of cash and cash equivalents and availability under its credit facilities. The following table summarizes the Company’s cash and availability under credit and conduit facilities, as follows (in thousands):
|
| | | |
| March 31, 2019 |
Cash and cash equivalents | $ | 749,600 |
|
Current marketable securities | 10,003 |
|
Total cash and cash equivalents and marketable securities | 759,603 |
|
| |
Credit facilities | 352,075 |
|
Asset-backed U.S. commercial paper conduit facilities(a) | 600,000 |
|
Asset-backed Canadian commercial paper conduit facility(a) | 22,111 |
|
Total availability under credit and conduit facilities | 974,186 |
|
Total | $ | 1,733,789 |
|
| | | | | |
| March 29, 2020 |
Cash and cash equivalents | $ | 1,465,061 | |
| |
(a) | |
| |
Availability under credit and conduit facilities: | |
Credit facilities | 404,336 | |
IncludesAsset-backed U.S. commercial paper conduit facilities expiring in the next twelve months which the Company expects to renew prior to expiration.(1)(a)
| 600,000 | |
| |
| 1,004,336 | |
| $ | 2,469,397 | |
(a)Includes facilities expiring in the next 12 months which the Company expects to renew prior to expiration.(1)
On April 1, 2020, immediately following the close of the first quarter of 2020, the Company amended its two five-year credit facilities totaling $1.42 billion, and on April 23, 2020, the Company extended its $195 million 364-day credit facility as discussed below under Credit Facilities. In addition, on April 29, 2020, the Company issued $300 million of secured notes through an on-balance sheet asset-backed securitization transaction as discussed below under Asset-Backed Securitization VIEs. The Company believes that its current cash and available credit provide sufficient liquidity to fund the Company’s operations for at least the next twelve months from the issuance date of this Form 10-Q. To further support the Company's liquidity position, it is also in discussions with a major U.S. bank to secure an additional $1 billion in liquidity. Additionally, the Company expects to access the capital markets in the near future.
To access the debt capital markets, the Company relies on credit rating agencies to assign short-term and long-term credit ratings. The Company’s short-term debt ratings affect its ability to issue unsecured commercial paper. Generally, lower credit ratings result in higher borrowing costs and reduced access to debt capital markets. The Company’s credit ratings all remain investment grade, as of the issuance date of this Form 10-Q, allowing it to maintain access to commercial paper markets, which is an efficient source of funding for the Company. The Company’s short- and long-term debt ratings as of the issuance date of this Form 10-Q, were as follows:
| | | | | | | | | | | | | | | | | |
| Short-Term | | Long-Term | | Outlook |
Moody’s | P2 | | Baa2 | | Negative |
Standard & Poor’s | A2 | | BBB | | Negative |
Fitch | F2 | | A- | | Negative |
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 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.(1) 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 theCompany's cash flow activity for the periods indicatedactivities were as follows (in thousands):
|
| | | | | | | |
| Three months ended |
| March 31, 2019 | | April 1, 2018 |
Net cash provided by operating activities | $ | 32,671 |
| | $ | 191,594 |
|
Net cash used by investing activities | (77,200 | ) | | (21,651 | ) |
Net cash used by financing activities | (415,679 | ) | | (98,930 | ) |
Effect of exchange rate changes on cash, cash equivalents and restricted cash | (409 | ) | | 2,034 |
|
Net (decrease) increase in cash, cash equivalents and restricted cash | $ | (460,617 | ) | | $ | 73,047 |
|
| | | | | | | | | | | |
| Three months ended | | |
| March 29, 2020 | | March 31, 2019 |
Net cash (used) provided by operating activities | $ | (8,582) | | | $ | 32,671 | |
Net cash provided (used) by investing activities | 28,288 | | | (77,200) | |
Net cash provided (used) by financing activities | 655,508 | | | (415,679) | |
Effect of exchange rate changes on cash, cash equivalents and restricted cash | (5,732) | | | (409) | |
Net increase (decrease) in cash, cash equivalents and restricted cash | $ | 669,482 | | | $ | (460,617) | |
Operating Activities
The decrease in net cash provided byfrom operating activities for the first quarter of 20192020 compared to the same period in 20182019 was primarily due to lowerthe reduction in sales and unfavorable changes in working capital.volume. There were no voluntary qualified pension plan contributions in the first quarter of 20182020 or 2019 and no contributions are planned for the remainder of 2019.2020.(1)
Investing Activities
The Company’s most significant investing activities consist of capital expenditures and retail finance originations and collections. Capital expenditures were $35.3$32.9 million in the first quarterthree months of 20192020 compared to $28.4$35.3 million in the same period last year. Net cash outflows forinflows from finance receivables for the first quarterthree months of 20192020 were $47.3$96.7 million higher than the same period last year on higher collections and lower originations. Other investing cash inflows were $6.4 million favorable in the first three months of 2020 compared to the same period last year.
Financing Activities
The Company’s financing activities consist primarily of share repurchases, dividend payments, and debt activity. Cash outflows for share repurchases were $61.7$7.1 million in the first quarterthree months of 20192020 compared to $73.0$61.7 million in the same period last year. In the first quarter of 2020, the Company temporarily suspended its discretionary share repurchase program. Share repurchases during the first three months of 20192020 included 1.5$7.1 million shares of common stock related to discretionary share repurchases andor 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 March 31, 2019,29, 2020, there were 14.918.2 million shares remaining on a board-approved share repurchase authorization.authorizations. The Company paid dividends of $0.375$0.380 and $0.370$0.375 per share totaling $60.9$58.8 million and $62.7$60.9 million during the first quarter of 20192020 and 2018,2019, respectively.
Financing cash flows related to debt activity resulted in net cash inflows of $721.4 million in the first three months of 2020 compared to net cash outflows of $293.7 million in the first three months of 2019 compared to net cash inflows of $35.1 million in the first three months of 2018.2019. The Company’s total outstanding debt consisted of the following (in thousands):
| | | | | | | | | | | |
| March 29, 2020 | | March 31, 2019 |
| | | |
Unsecured commercial paper | $ | 1,335,664 | | | $ | 1,192,925 | |
Asset-backed Canadian commercial paper conduit facility | 155,243 | | | 142,676 | |
Asset-backed U.S. commercial paper conduit facilities | 600,000 | | | 526,947 | |
Asset-backed securitization debt, net | 1,156,845 | | | 18,694 | |
Medium-term notes, net | 4,148,984 | | | 4,685,636 | |
Senior notes, net | 743,466 | | | 742,791 | |
| $ | 8,140,202 | | | $ | 7,309,669 | |
|
| | | | | | | |
| March 31, 2019 | | April 1, 2018 |
Unsecured commercial paper | $ | 1,192,925 |
| | $ | 1,036,976 |
|
Asset-backed Canadian commercial paper conduit facility | 142,676 |
| | 158,162 |
|
Asset-backed U.S. commercial paper conduit facilities | 526,947 |
| | 281,311 |
|
Medium-term notes, net | 4,685,636 |
| | 4,514,798 |
|
Senior unsecured notes, net | 742,791 |
| | 742,126 |
|
Asset-backed securitization debt, net | 18,694 |
| | 284,793 |
|
Total debt | $ | 7,309,669 |
| | $ | 7,018,166 |
|
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 ofCredit Facilities – On April 5, 2019 were as follows:
|
| | | | | |
| Short-Term | | Long-Term | | Outlook |
Moody’s | P2 | | A3 | | Stable |
Standard & Poor’s | A2 | | BBB+ | | Negative |
Fitch | F1 | | A | | Negative |
Credit Facilities – In April 2018,1, 2020, the Company entered into a $780.0$707.5 million five-year credit facility to replace the $675.0$765.0 million five-year credit facility that was due to mature in April 20192021 and also terminatedamended the $100.0$780.0 million 364-dayfive-year credit facility that would have matured atto $707.5 million with no change to the endmaturity date of April 2018.2023. The new five-year credit facility matures in April 2023. 2025. The Company also has a $765.0$195.0 million five-year364-day credit facility which matureswas due to mature in May 2020. On April 2021.23, 2020, the Company extended the maturity date of this credit facility to August 2020. The two 364-day credit facility and the five-year credit facilities (together, the Global Credit Facilities) bear interest at variable 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 primarily used to support the Company's unsecured commercial paper program. In February 2019, the Company terminated its 364-day $25.0 million credit facility that was due to mature in May 2019.
Unsecured Commercial Paper – Subject to limitations, the Company could issue unsecured commercial paper of up to $1.55$1.74 billion as of March 31, 201929, 2020 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 facilities or through the use of operating cash flow and cash on hand.(1)
Medium-Term Notes – The Company had the following unsecured medium-term notes (collectively, the Notes) issued and outstanding at March 31, 201929, 2020 (in thousands):
| | | | | | | | | | | | | | | | | | | | |
Principal Amount | | Rate | | Issue Date | | Maturity Date |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
$450,000 | | LIBOR + 0.50% | | May 2018 | | May 2020 |
$350,000 | | 2.40% | | March 2017 | | June 2020 |
$600,000 | | 2.85% | | January 2016 | | January 2021 |
$450,000 | | LIBOR + 0.94% | | November 2018 | | March 2021 |
$350,000 | | 3.55% | | May 2018 | | May 2021 |
$550,000 | | 4.05% | | February 2019 | | February 2022 |
$400,000 | | 2.55% | | June 2017 | | June 2022 |
$350,000 | | 3.35% | | February 2018 | | February 2023 |
$660,030 (a) | | 3.14% | | November 2019 | | November 2024 |
|
| | | | | | |
Principal Amount | | Rate | | Issue Date | | Maturity Date |
$600,000 | | 2.40% | | September 2014 | | September 2019 |
$600,000 | | 2.15% | | February 2015 | | February 2020 |
$450,000 | | Floating-rate (a) | | May 2018 | | May 2020 |
$350,000 | | 2.40% | | March 2017 | | June 2020 |
$600,000 | | 2.85% | | January 2016 | | January 2021 |
$450,000 | | Floating-rate(b) | | November 2018 | | March 2021 |
$350,000 | | 3.55% | | May 2018 | | May 2021 |
$550,000 | | 4.05% | | February 2019 | | February 2022 |
$400,000 | | 2.55% | | June 2017 | | June 2022 |
$350,000 | | 3.35% | | February 2018 | | February 2023 |
(a)Euro denominated, €600.0 million par value remeasured to U.S. dollar at March 29, 2020 | |
(a) | Floating interest rate based on LIBOR plus 50 bps. The Company utilized an interest rate swap designated as a cash flow hedge to convert this from a floating rate basis to a fixed rate basis. Refer to Note 10 of the Notes to the Consolidated Financial Statements for further details. |
| |
(b) | Floating interest rate based on LIBOR plus 94 bps. The Company utilized an interest rate swap designated as a cash flow hedge to convert this from a floating rate basis to a fixed rate basis. Refer to Note 10 of the Notes to the Consolidated Financial Statements for further details. |
The fixed-rate NotesU.S. dollar-denominated medium-term notes provide for semi-annual interest payments, the fixed-rate foreign currency-denominated medium-term notes provide for annual interest payments, and the floating-rate Notesmedium-term notes provide for quarterly interest payments. Principal on the Notesmedium-term notes is due at maturity. Unamortized discountdiscounts and debt issuance costs on the Notesmedium-term notes reduced the outstanding balance by $14.4$11.0 million and $12.7$14.4 million at March 29, 2020 and March 31, 2019, respectively. During the first quarter of 2020, $600.0 million of 2.15% medium-term notes matured, and April 1, 2018, respectively.the principal and accrued interest were paid in full. During the first quarter of 2019, $600.0 million of 2.25% and $150.0 million of floating-rate medium-term notes matured, and the principal and accrued interest were paid in full. There were no medium-term note maturities during the first quarter of 2018.
Senior Unsecured Notes – In July 2015, the Company issued $750.0 million of unsecured senior unsecured notes in an underwritten offering. The senior unsecured notes provide for semi-annual interest payments and principal due at maturity. $450.0 million of the senior unsecured notes mature in July 2025 and have an interest rate of 3.50%, and $300.0 million 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$220.0 million. The transferred assets are restricted as collateral for the payment of the associated 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$220.0 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 expected remaining term of the related receivables is approximately 5 years. Unless earlier terminated or extended by mutual agreement between the Company and the lenders, as of March 31, 2019,29, 2020, the Canadian Conduit has an expiration date of June 28, 2019.26, 2020.
There were no finance receivable transfers under the Canadian Conduit Facilities during the first quarter
During the first quarter of 2018,2020, the Company transferred $7.6$77.9 million of Canadian retail motorcycle finance receivables to the Canadian Conduit for proceeds of $6.2$61.6 million. There were no finance receivable transfers under the Canadian Conduit Facility during the first quarter of 2019.
On-Balance Sheet Asset-Backed U.S. Commercial Paper Conduit Facilities VIE – The Company has two separate agreements, a $300.0 million revolving facility agreement and a $600.0 million revolving facility agreement, with third-party bank-sponsored asset-backed U.S. commercial paper conduits under which it may transfer U.S. retail motorcycle finance receivables to an SPE, which in turn may issue debt to those third-party bank-sponsored asset-backed U.S. commercial paper conduits. In May 2019, the Company amended its $300.0 million revolving facility agreement to allow for incremental borrowings, at the lender's discretion, of up to an additional $300.0 million in excess of the $300.0 million commitment. In November 2018,2019, the Company renewed its existing $600.0 million and the amended $300.0 million revolving facility agreementagreements with third-party bank-sponsored asset-backed U.S. commercial paper conduits. Also at that time, the Company amended its existing $300.0 million revolving facility agreement with third-party bank-sponsored asset-backed U.S. commercial paper conduits, increasing the aggregate initial commitment to $600.0 million. The aggregate commitment under this agreement is reduced
monthly as collections on the related finance receivables are applied to the outstanding principal until the outstanding principal balance is less than or equal to $300.0 million, at which point the aggregate commitment will equal $300.0 million. 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 SPE as collateral.
During the first quarter of 2020, the Company transferred $195.3 million of U.S. retail motorcycle finance receivables to an SPE which, in turn, issued $163.6 million of debt under the U.S. Conduit Facilities. There were no finance receivable transfers under the U.S. Conduit Facilities during the first quarter of 2019. During the first quarter of 2018, the Company transferred $32.9 million of U.S. retail motorcycle finance receivables to an SPE which, in turn, issued $29.3 million of debt under the U.S. Conduit Facilities.
The terms for this debt provide for interest on the outstanding principal based on prevailing commercial paper rates or LIBOR toif funded by a conduit lender through the extent the advance isissuance of commercial paper. If not funded by a conduit lender through the issuance of commercial paper, plus, inthe terms of the interest are based on LIBOR. In each case,of these cases, a program fee is assessed based on the outstanding principal. The U.S. Conduit Facilities also provide for an unused commitment fee based on the unused portion of the total aggregate commitment. When calculating the unused fee, the aggregate commitment for the $300.0 million agreement does not include any unused portion of the $300.0 million incremental borrowings. 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 U.S. Conduit Facilities, any outstanding principal will continue to be reduced monthly through available collections. The expected remaining term of the related receivables held by the SPE is approximately 5 years. Unless earlier terminated or extended by mutual agreement of the Company and the lenders, as of March 31, 2019,29, 2020, the U.S. Conduit Facilities have an expiration date of November 29, 2019.25, 2020.
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 have avarious contractual life maturingmaturities ranging from 2021 to 2027.
During the first quarter of 2020, the Company transferred $580.2 million of U.S. retail motorcycle finance receivables to an SPE which, in 2022.
turn, issued $525.0 million, or $522.7 million net of discounts and issuance costs, of secured notes through an on-balance sheet asset-backed securitization transaction. There were no on or off-balanceon-balance sheet asset-backed securitization transactions during the first quarter of 20192019. There were no off-balance sheet asset-backed securitization transactions during the three months ended March 29, 2020 or 2018.March 31, 2019. On April 29, 2020, the Company transferred $352.9 million of U.S. retail motorcycle finance receivables to an SPE which, in turn, issued $300.0 million, or $296.7 million net of issuance costs, of secured notes through an on-balance sheet asset-backed securitization transaction.
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 Notesmedium-term and senior 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’ consolidated debt, excluding secured debt, to HDFS’ consolidated shareholders' equity, excluding accumulated other comprehensive income (loss)loss (AOCL), cannot exceed 10.0 to 1.0 as of the end of any fiscal quarter. As of the end of the first quarter of 2020, the actual ratio was 6.6 to 1.0. 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 excludes that of HDFS and its subsidiaries, and the Company's consolidated shareholders’ equity excludes accumulated other comprehensive income (loss))excluding AOCL), cannot exceed 0.7 to 1.0 as of the end of any fiscal quarter. No financial covenants are required under the Notesmedium-term or senior notes or the U.S. or Canadian asset-backed commercial paper conduit facilities.
At As of March 31, 2019,29, 2020, HDFS and the Company remained in compliance with all of the then existing covenants.covenants and expects to remain in compliance for the foreseeable future.
Cautionary Statements
The Company's abilityImportant factors that could affect future results and cause those results to meetdiffer materially from those expressed in the targetsforward-looking statements include, among others, the following: (i) the COVID-19 pandemic including the length and expectations noted above depends upon, amongseverity of the pandemic across the globe and the pace of recovery following the pandemic; (ii) adverse economic, political or market conditions in the U.S. and international markets and other factors such as natural disasters; and (iii) the Company's ability to (i)to: (a) execute its business plans and strategies, including the elements of the More Roads to Harley-Davidson plan for growth that the Company disclosed on July 30, 2018, and strengthen its existing business while enabling growth, (ii)long-term growth; (b) manage and predict the impact that new or adjusted tariffs may have on ourthe Company's ability to sell productproducts internationally, and the cost of raw materials and components, (iii)components; (c) execute its strategy of growing ridership, globally, (iv) effectively execute the Company’s manufacturing optimization initiative within expected costs and timing and(d) successfully carry out its global manufacturing and assembly operations, (v)operations; (e) accurately analyze, predict and react to changing market conditions and successfully adjust to shifting global consumer needs and interests, (vi) negotiate(f) successfully access the capital and/or credit markets on terms that are acceptable to the Company and successfully implementwithin its expectations; (g) develop and maintain a strategic allianceproductive relationship with Zhejiang Qianjiang Motorcycle Co., Ltd. and launch related products in a local partner in Asia, (vii)timely manner; (h) develop and introduce products, services and experiences on a timely basis that the market accepts, that enable the Company to generate desired sales levels and that provide the desired financial returns, (viii)returns; (i) perform in a manner that enables the Company to benefit from market opportunities while competing against existing and new competitors, (ix)competitors; (j) realize expectations concerning market demand for electric models, which maywill depend in part on the building of necessary infrastructure, (x)infrastructure; (k) prevent, detect, and remediate any issues with its motorcycles or any issues associated with the 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, and carry out any product programs or recalls within expected costs and timing, (xi)timing; (l) manage supply chain issues, including quality issues and any unexpected interruptions or price increases caused by raw material shortages or natural disasters, (xii)disasters; (m) manage the impact that prices for and supply of used motorcycles may have on its business, including on retail sales of new motorcycles, (xiii)motorcycles; (n) reduce other costs to offset costs of the More Roads to Harley-Davidson planproduct development initiatives and redirect capital without adversely affecting its existing business, (xiv)business; (o) balance production volumes for its new motorcycles with consumer demand, (xv)demand; (p) manage risks that arise through expanding international manufacturing, operations and sales, (xvi)sales; (q) manage through changes in general economic and business conditions, including changing capital, credit and retail markets, and the changing political environment, (xvii) continueenvironment; (r) successfully determine, implement on a timely basis, and maintain a manner in which to managesell motorcycles in the relationshipsEuropean Union, China, and agreementsthe Company's ASEAN countries that the Company has withdoes not subject its labor unionsmotorcycles to help drive long-term competitiveness, (xviii)incremental tariffs; (s) accurately estimate and adjust to fluctuations in foreign currency exchange rates, interest rates and commodity prices, (xix)prices; (t) continue to develop the capabilities of its distributors and dealers, effectively implement changes relating to its dealers and distribution methods and manage the risks that its independent dealers may have difficulty obtaining capital and managing through changing economic conditions and consumer demand, (xx)demand; (u) retain and attract talented employees, (xxi)employees; (v) prevent a cybersecurity breach involving consumer, employee, dealer, supplier, or Company data and respond to evolving regulatory requirements regarding data security, (xxii)security; (w) manage the credit quality, the loan servicing and collection activities, and the recovery rates of HDFS' loan portfolio, (xxiii)portfolio; (x) adjust to tax reform, healthcare inflation and reform and pension reform, and successfully estimate the impact of any such reform on the Company’s business, (xxiv)business; (y) manage through the effects inconsistent and unpredictable weather patterns may have on retail sales of motorcycles, (xxv)motorcycles; (z) implement and manage enterprise-wide information technology systems, including systems at its manufacturing facilities, (xxvi)facilities; (aa) manage changes and prepare for requirements in legislative and regulatory environments for its products, services and operations, (xxvii)
operations; (bb) manage its exposure to product liability claims and commercial or contractual disputes, (xxviii) successfully access the capital and/or credit markets on terms (including interest rates) that are acceptable to the Companydisputes; (cc) manage its Thailand corporate and within its expectations, (xxix) conduct itsmanufacturing operations in Thailand in a manner that allows the Company to avail itself of preferential free trade agreements and duty rates, and sufficiently mitigates certain international tariffs and lowerslower prices of its motorcycles in certain markets, (xxx) accuratelymarkets; (dd) continue to manage the relationships and successfully determine, implement, and maintain a manner in which to sell motorcycles in the E.U., China, and ASEAN countriesagreements that is not subject to tariffs; (xxxi) have its application to mitigate E.U. tariffs approved, or the appeal of a denied application acted on in a manner favorable to the Company has with its labor unions to help drive long-term competitiveness; and (xxxii)(ee) accurately predict the margins of its Motorcycles and Related Products segment in light of, among other things, tariffs, the cost associated with the More Roads to Harley-Davidson plan, the Company's Manufacturing Optimization Plan,product development initiatives and the Company's complex global supply chain.
The CompanyCompany's operations, demand for its products, and its liquidity could experience delays or disruptions in its operations as a result ofbe adversely impacted by work stoppages, facility closures, strikes, natural causes, widespread infectious disease, terrorism or other factors. Further, actual foreign currency exchange rates may vary from underlying assumptions. Other factors are described inItem 1A. Risk Factors and 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, the impact of the COVID-19 pandemic, 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 1A1A. Risk Factors of this report and the Company’s Annual Report on Form 10-K for the year ended December 31, 20182019 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 is exposed to market risk from changes in foreign currency exchange rates, commodity prices and interest rates. To reduce such risks, the Company selectively uses derivative financial instruments. All hedging transactions are authorized and executed pursuant to regularly reviewed policies and procedures, which prohibit the use of financial instruments for speculative trading purposes. Sensitivity analysis is used to manage and monitor foreign currency exchange rate and interest rate risk. Further disclosure relating to the fair value of derivative financial instruments is included in Note 10 of the Notes to the Consolidated financial statements.
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 are affected by fluctuations in the value of the U.S. dollar relative to foreign currency.currencies. The Company’s most significant foreign currency exchange rate risk relates to the Euro, the Australian dollar, the Japanese yen, the Brazilian real, the Canadian dollar, Mexican peso, Indian rupee, and the Mexican peso.Pound sterling. The Company utilizes foreign currency contracts to mitigate the effect of certain currencies' fluctuations on earnings. The foreign currency 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's earnings are affected by changes in the prices of commodities used in the production of motorcycles. The Company uses derivative financial instruments on a limited basis to hedge the prices of certain commodities.
HDFS’ earnings are affected by changes in interest rates. HDFS’ interest-rateinterest rate sensitive financial instruments include finance receivables, debt and interest rate derivatives. HDFS utilizes interest rate swaps and caps to reduce the impact of fluctuations in interest rates on its debt. HDFS also has currency exposure related to financing in currencies other than the functional currency. HDFS utilizes cross-currency swaps to mitigate the effect of the foreign currency exchange rate fluctuations.
Refer to the Company's Annual Report on Form 10-K for the year ended December 31, 20182019 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, 2018.2019.
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 March 31, 201929, 2020 that materially affected, or are reasonably likely to materially affect, the Company’sCompany's internal control over financial reporting.
PART II – OTHER INFORMATION
Item 1 –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 17 of the Notes to Consolidated Financial Statements,financial statements, and such information is incorporated herein by reference in this Item 1 of Part II.
Item 2 –1A. Risk Factors
The recent COVID-19 outbreak has adversely impacted the Company's business and may have a material adverse impact on the Company's future business, results of operations, financial condition and liquidity.
During the first quarter of 2020, the outbreak of a novel strain of coronavirus (COVID-19) spread throughout the world and was subsequently recognized as a pandemic. This outbreak has severely restricted the level of economic activity around the world, including in the U.S. Globally, the continued spread of COVID-19 has led to supply chain destabilization, facility closures, workforce disruption, and volatility in the economy, and its full impact is not yet known. These impacts expanded significantly during March 2020 and may continue to expand in scope, type and severity.
The Company’s operations and demand for its products have already been adversely impacted as a result of the COVID-19 pandemic. The Company acted quickly and in alignment with government efforts to protect the safety and health of its employees and the Harley-Davidson community. The Company implemented travel restrictions, enhanced sanitation practices, cancelled events and closed facilities including temporarily suspending global manufacturing starting in March 2020. While the impact on demand, facility closures and other restrictions are expected to be temporary, the duration and financial impact to the Company are unknown at this time. To the extent these impacts continue, they will have an adverse effect on the Company's future business, results of operations, financial condition and liquidity.
It is likely that the COVID-19 pandemic will continue to have the following adverse impacts, each of which could be material: (i) disruption of the Company’s supply chain; (ii) disruption of the Company's manufacturing and distribution capabilities; (iii) limitation of the ability of the Company’s global independent dealers to operate including their ability to purchase and sell the Company’s products and meet their loan obligations to the Company; (iv) delay or elimination of retail customer purchases, resulting in decreased demand for the Company’s products; (v) reduction of the Company’s retail credit customers' ability to meet their loan obligations on a timely basis or at all; (vi) disruption of global capital markets impacting the Company’s access to capital, cost of capital, and overall liquidity levels; (vii) delay of the Company’s new product development efforts; and/or (viii) other unpredictable impacts. The overall impact to the Company's future business, results of operations, financial condition and liquidity will depend on the duration and severity of the COVID-19 pandemic.
In addition, refer to Item 1A. Risk Factors of the Company’s Annual Report on Form 10-K for the year ended December, 31, 2019.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table contains detailDetail related to the Company's repurchaserepurchases of its common stock based on the date of trade during the quarter ended March 31, 2019:29, 2020 is as follows:
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2020 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 2 | | 1,099 | | | $ | 36 | | | 1,099 | | | 8,246,721 | |
February 3 to March 1 | | 197,139 | | | $ | 34 | | | 197,139 | | | 18,246,721 | |
March 2 to March 29 | | 25,200 | | | $ | 16 | | | 25,200 | | | 18,246,721 | |
| | 223,438 | | | $ | 32 | | | 223,438 | | | |
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2019 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 3 | 457,779 |
| | $ | 34 |
| | 457,779 |
| | 15,952,906 |
|
February 4 to March 3 | 1,254,645 |
| | $ | 37 |
| | 1,254,645 |
| | 14,943,706 |
|
March 4 to March 31 | 1,588 |
| | $ | 37 |
| | 1,588 |
| | 14,943,706 |
|
Total | 1,714,012 |
| | $ | 36 |
| | 1,714,012 |
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| |
(a) | (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 that employees surrendered to satisfy withholding taxes in connection with no dollar limit or expiration date which superseded the share repurchase authority granted by the Boardvesting of Directors in December 1997. The Company repurchased 1.4 million shares on a discretionary basis during the quarter ended March 31, 2019 exhausting the remaining shares under this authorization. restricted stock units
In February 2018, the Company's Board of Directors authorized the Company to repurchase up to 15.0 million shares of its common stock with no dollar limit or expiration date. In February 2020, the Company's Board of Directors authorized the Company to repurchase up to 10.0 million additional shares of its common stock with no dollar limit or expiration date. As of March 29, 2020, 18.2 million shares remained under these authorizations. The Company repurchased 56,294no shares on a discretionary basis during the quarter ended March 31, 2019 under this authorization. As 29, 2020.
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 first quarter of 2019,2020, the Company acquired 247,408223,438 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 –6. Exhibits
Refer to the Exhibit Indexexhibit index immediately following this page.
Harley-Davidson, Inc.
Exhibit Index to Form 10-Q
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Exhibit No. | | Description |
| | Harley-Davidson, Inc. Amended By-laws, as amended through April 6, 2020 |
| | Officers' Certificate,Amendment No. 2 to 5-Year Credit Agreement, dated February 4, 2019, pursuant to Sections 102 and 301as of April 1, 2020, among the Company, certain subsidiaries of the Indenture,Company, the financial institutions parties thereto and JPMorgan Chase Bank, N.A., as, among other things, global administrative agent, relating to the 5-Year Credit Agreement, dated as of April 7, 2016, among the Company, certain subsidiaries of the Company, the financial institutions parties thereto and JPMorgan Chase Bank, N.A., as among other things, global administrative agent.
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| | Amendment No. 2 to 5-Year Credit Agreement, dated as of April 1, 2020, among the Company, certain subsidiaries of the Company, the financial institutions parties thereto and JPMorgan Chase Bank, N.A., as, among other things, global administrative agent, relating to the 5-Year Credit Agreement, dated as of April 6, 2018, among the Company, certain subsidiaries of the Company, the financial institutions parties thereto and JPMorgan Chase Bank, N.A., as among other things, global administrative agent. |
| | Amendment No. 1 to 364-Day Credit Agreement, dated as of April 23, 2020, among the Company, certain subsidiaries of the Company, the financial institutions parties thereto, and JPMorgan Chase Bank, N.A., as, among other things, global administrative agent, relating to the 364-Day Credit Agreement, dated as of May 13, 2019, among the Company, certain subsidiaries of the Company, the financial institutions parties thereto and JPMorgan Chase Bank, N.A., as among other things, global administrative agent. |
| | Settlement Agreement, dated March 4, 2011, with27, 2020, by and among Harley-Davidson, Inc., and Impala Master Fund Ltd. and Impala Asset Management LLC (incorporated herein by reference to Exhibit 10.1 to the form of 4.05% Medium-Term Notes due 2022
Registrant’s Current Report on Form 8-K filed March 30, 2020 (File No. 1-9183)) |
| | Acting President and Chief Executive Officer offer letter |
| | 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 - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL 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 |
104 | | | Cover Page Interactive Data File - formatted in Inline XBRL and contained in Exhibit 101 |
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.
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| HARLEY-DAVIDSON, INC. |
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| HARLEY-DAVIDSON, INC. |
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Date: May 9, 20197, 2020 | /s/ John A. Olin |
| John A. Olin |
| Senior Vice President and |
| Chief Financial Officer |
| (Principal financial officer) |
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Date: May 9, 20197, 2020 | /s/ Mark R. Kornetzke |
| Mark R. Kornetzke |
| Chief Accounting Officer |
| (Principal accounting officer) |