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HARLEY-DAVIDSON, INC. - Quarter Report: 2016 June (Form 10-Q)


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
 
FORM 10-Q
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 26, 2016
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                     to                    
Commission file number 1-9183
 
 
Harley-Davidson, Inc.
(Exact name of registrant as specified in its charter)
 
Wisconsin
 
39-1382325
(State of organization)
 
(I.R.S. Employer Identification No.)
 
 
 
3700 West Juneau Avenue
Milwaukee, Wisconsin
 
53208
(Address of principal executive offices)
 
(Zip code)
Registrants telephone number: (414) 342-4680
None
(Former name, former address and former fiscal year, if changed since last report)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such requirements for the past 90 days.    Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x   No   ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
x
Accelerated filer
 
¨
 
 
 
 
 
Non-accelerated filer
 
¨
Smaller reporting company
 
¨
Indicate by check mark whether the registrant is a shell company as defined in Rule 12b-2 of the Exchange Act.    Yes ¨ No  x
Number of shares of the registrant’s common stock outstanding at July 29, 2016: 178,797,243 shares


Harley-Davidson, Inc.

Form 10-Q

For The Quarter Ended June 26, 2016
 
Part I
 
 
 
Item 1.
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Part II
 
 
 
Item 1.
 
 
 
Item 2.
 
 
 
Item 6.
 
 
 

Table of Contents

PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
HARLEY-DAVIDSON, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)
 
 
Three months ended
 
Six months ended
 
June 26,
2016
 
June 28,
2015
 
June 26,
2016
 
June 28,
2015
Revenue:
 
 
 
 
 
 
 
Motorcycles and Related Products
$
1,670,113

 
$
1,650,783

 
$
3,246,723

 
$
3,161,353

Financial Services
190,964

 
173,609

 
364,322

 
335,984

Total revenue
1,861,077

 
1,824,392

 
3,611,045

 
3,497,337

Costs and expenses:
 
 
 
 
 
 
 
Motorcycles and Related Products cost of goods sold
1,062,555

 
1,003,569

 
2,048,885

 
1,923,864

Financial Services interest expense
42,895

 
41,188

 
88,814

 
79,724

Financial Services provision for credit losses
23,461

 
15,175

 
60,584

 
41,422

Selling, administrative and engineering expense
319,844

 
301,944

 
611,612

 
579,693

Total costs and expenses
1,448,755

 
1,361,876

 
2,809,895

 
2,624,703

Operating income
412,322

 
462,516

 
801,150

 
872,634

Investment income
688

 
1,450

 
1,454

 
2,772

Interest expense
7,094

 
9

 
14,262

 
18

Income before provision for income taxes
405,916

 
463,957

 
788,342

 
875,388

Provision for income taxes
125,485

 
164,147

 
257,422

 
305,724

Net income
$
280,431

 
$
299,810

 
$
530,920

 
$
569,664

Earnings per common share:
 
 
 
 
 
 
 
Basic
$
1.55

 
$
1.44

 
$
2.92

 
$
2.72

Diluted
$
1.55

 
$
1.44

 
$
2.91

 
$
2.71

Cash dividends per common share
$
0.35

 
$
0.31

 
$
0.70

 
$
0.62

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


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HARLEY-DAVIDSON, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
 
 
Three months ended
 
Six months ended
 
June 26,
2016
 
June 28,
2015
 
June 26,
2016
 
June 28,
2015
Net income
$
280,431

 
$
299,810

 
$
530,920

 
$
569,664

Other comprehensive income (loss), net of tax
 
 
 
 
 
 
 
     Foreign currency translation adjustments
2,628

 
4,251

 
15,321

 
(22,770
)
     Derivative financial instruments
3,009

 
(13,286
)
 
(5,343
)
 
(2,214
)
     Marketable securities
(32
)
 
(128
)
 
(77
)
 
(195
)
     Pension and postretirement benefit plans
7,572

 
8,798

 
15,143

 
17,596

Total other comprehensive income (loss), net of tax
$
13,177

 
$
(365
)
 
$
25,044

 
$
(7,583
)
Comprehensive income
$
293,608

 
$
299,445

 
$
555,964

 
$
562,081

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



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HARLEY-DAVIDSON, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
 
(Unaudited)
 
 
 
(Unaudited)
 
June 26,
2016
 
December 31,
2015
 
June 28,
2015
ASSETS
 
 
 
 
 
Current assets:
 
 
 
 
 
Cash and cash equivalents
$
864,670

 
$
722,209

 
$
1,247,579

Marketable securities
5,070

 
45,192

 
52,516

Accounts receivable, net
311,956

 
247,405

 
277,569

Finance receivables, net
2,457,974

 
2,053,582

 
2,331,723

Inventories
371,196

 
585,907

 
395,044

Restricted cash
78,078

 
88,267

 
136,760

Deferred income taxes
116,214

 
102,769

 
94,778

Other current assets
153,866

 
132,552

 
154,009

Total current assets
4,359,024

 
3,977,883

 
4,689,978

Finance receivables, net
4,824,071

 
4,814,571

 
4,816,772

Property, plant and equipment, net
951,309

 
942,418

 
873,007

Goodwill
54,542

 
54,182

 
26,105

Deferred income taxes
83,047

 
99,614

 
66,755

Other long-term assets
76,447

 
84,309

 
76,577

 
$
10,348,440

 
$
9,972,977

 
$
10,549,194

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
 
Current liabilities:
 
 
 
 
 
Accounts payable
$
273,696

 
$
235,614

 
$
407,636

Accrued liabilities
485,811

 
471,964

 
448,737

Short-term debt
1,020,487

 
1,201,380

 
114,983

Current portion of long-term debt, net
732,773

 
838,349

 
1,544,956

Total current liabilities
2,512,767

 
2,747,307

 
2,516,312

Long-term debt, net
5,308,063

 
4,832,469

 
4,551,083

Pension liability
129,465

 
164,888

 
66,786

Postretirement healthcare liability
188,846

 
193,659

 
196,369

Other long-term liabilities
188,292

 
195,000

 
195,017

Commitments and contingencies (Note 18)

 

 

Shareholders’ equity:
 
 
 
 
 
Preferred stock, none issued
—

 
—

 
—

Common stock
3,453

 
3,449

 
3,448

Additional paid-in-capital
1,349,755

 
1,328,561

 
1,304,855

Retained earnings
9,365,105

 
8,961,985

 
8,898,959

Accumulated other comprehensive loss
(590,161
)
 
(615,205
)
 
(522,526
)
Treasury stock, at cost
(8,107,145
)
 
(7,839,136
)
 
(6,661,109
)
Total shareholders' equity
2,021,007

 
1,839,654

 
3,023,627

 
$
10,348,440

 
$
9,972,977

 
$
10,549,194



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Table of Contents

HARLEY-DAVIDSON, INC.
CONSOLIDATED BALANCE SHEETS (continued)
(In thousands)
 
(Unaudited)
 
 
 
(Unaudited)
 
June 26,
2016
 
December 31,
2015
 
June 28,
2015
Balances held by consolidated variable interest entities (Note 12)
 
 
 
 
 
Current finance receivables, net
$
258,870

 
$
322,768

 
$
409,198

Other assets
$
3,047

 
$
4,706

 
$
3,067

Non-current finance receivables, net
$
884,226

 
$
1,250,919

 
$
1,740,420

Restricted cash - current and non-current
$
79,475

 
$
100,151

 
$
149,418

Current portion of long-term debt, net
$
288,786

 
$
351,123

 
$
459,085

Long-term debt, net
$
786,145

 
$
1,108,254

 
$
1,552,376

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

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HARLEY-DAVIDSON, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
Six months ended
 
June 26,
2016
 
June 28,
2015
Net cash provided by operating activities (Note 3)
$
456,290

 
$
613,944

Cash flows from investing activities:
 
 
 
Capital expenditures
(107,531
)
 
(85,180
)
Origination of finance receivables
(1,991,384
)
 
(1,976,563
)
Collections on finance receivables
1,630,213

 
1,570,431

Proceeds from finance receivables sold
312,571

 
—

Sales and redemptions of marketable securities
40,000

 
4,500

Other
166

 
5,111

Net cash used by investing activities
(115,965
)
 
(481,701
)
Cash flows from financing activities:
 
 
 
Proceeds from issuance of medium-term notes
1,193,396

 
595,386

Repayments of medium-term notes
(450,000
)
 
—

Proceeds from securitization debt
—

 
1,195,668

Repayments of securitization debt
(385,837
)
 
(454,332
)
Net decrease in credit facilities and unsecured commercial paper
(181,259
)
 
(616,586
)
Borrowings of asset-backed commercial paper
33,428

 
40,209

Repayments of asset-backed commercial paper
(34,989
)
 
(35,730
)
Net change in restricted cash
17,992

 
(40,159
)
Dividends paid
(127,800
)
 
(129,745
)
Purchase of common stock for treasury
(269,411
)
 
(358,425
)
Excess tax benefits from share-based payments
331

 
2,401

Issuance of common stock under employee stock option plans
2,367

 
15,664

Net cash (used by) provided by financing activities
(201,782
)
 
214,351

Effect of exchange rate changes on cash and cash equivalents
3,918

 
(5,695
)
Net increase in cash and cash equivalents
$
142,461

 
$
340,899

Cash and cash equivalents:
 
 
 
Cash and cash equivalents—beginning of period
$
722,209

 
$
906,680

Net increase in cash and cash equivalents
142,461

 
340,899

Cash and cash equivalents—end of period
$
864,670

 
$
1,247,579

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


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Table of Contents

HARLEY-DAVIDSON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation and Use of Estimates
The consolidated financial statements include the accounts of Harley-Davidson, Inc. and its wholly-owned subsidiaries (the Company), including the accounts of the groups of companies doing business as Harley-Davidson Motor Company (HDMC) and Harley-Davidson Financial Services (HDFS). In addition, certain variable interest entities (VIEs) related to secured financing are consolidated as the Company is the primary beneficiary. All intercompany accounts and material intercompany transactions are eliminated.
In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the consolidated balance sheets as of June 26, 2016 and June 28, 2015, the consolidated statements of income for the three and six month periods then ended, the consolidated statements of comprehensive income for the three and six month periods then ended and the consolidated statements of cash flows for the six month periods then ended.
Certain information and footnote disclosures normally included in complete financial statements have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) and U.S. generally accepted accounting principles (U.S. GAAP) for interim financial reporting. These consolidated financial statements should be read in conjunction with the audited financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.
The Company operates in two principal reportable segments: Motorcycles & Related Products (Motorcycles) and Financial Services.
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. Actual results could differ from those estimates.
2. New Accounting Standards
Accounting Standards Recently Adopted
In February 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2015-02 Amendments to the Consolidation Analysis (ASU 2015-02). ASU 2015-02 amends the guidance within Accounting Standards Codification (ASC) Topic 810, "Consolidation,” to change the analysis that a reporting entity must perform to determine whether it should consolidate certain legal entities. The Company adopted ASU 2015-02 on January 1, 2016. The adoption of ASU 2015-02 had no impact on the Company's consolidated financial statements.
In April 2015, the FASB issued ASU No. 2015-03 Simplifying the Presentation of Debt Issuance Costs (ASU 2015-03). ASU 2015-03 amends the guidance within ASC Topic 835, "Interest," to require that debt issuance costs related to a recognized debt liability be presented on the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt premiums and discounts. In August 2015, the FASB further clarified its views on debt costs incurred in connection with a line of credit arrangement by issuing ASU 2015-15 Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements (ASU 2015-15). ASU 2015-15 amends the guidance within ASC Topic 835, “Interest,” to allow an entity to defer and present debt issuance costs associated with a line of credit arrangement as an asset, regardless of whether there are any outstanding borrowings on the line of credit arrangement.
The Company adopted ASU 2015-03 and ASU 2015-15 retrospectively on January 1, 2016. As a result, debt issuance costs related to its medium-term notes, senior unsecured notes, and term-asset backed securitizations are now classified as a reduction to the carrying amount of the related debt on the balance sheet. Debt issuance costs previously recorded in other current assets and other long-term assets totaling $18.2 million and $15.7 million as of December 31, 2015 and June 28, 2015, respectively, on the balance sheet have been reclassified to current portion of long-term debt, net and long-term debt, net to reflect the adoption of the new guidance. The required new disclosures are also presented in Note 11. The Company will continue to classify debt issuance costs related to line of credit arrangements, which include its asset-backed commercial paper and unsecured commercial paper programs and its credit facilities, as an asset, regardless of whether it has any outstanding borrowings on the line of credit arrangements.
In April 2015, the FASB issued ASU No. 2015-05 Customer's Accounting for Fees Paid in a Cloud Computing Arrangement, which amends ASC 350-40, Intangibles-Goodwill and Other Internal-Use Software (ASU 2015-05). ASU

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2015-05 provides guidance to customers about whether a cloud computing arrangement includes a software license. If an arrangement includes a software license, the accounting for the license will be consistent with the licenses of other intangible assets. If the arrangement does not include a license, the arrangement will be accounted for as a service contract. The Company adopted ASU 2015-05 prospectively on January 1, 2016. The adoption of ASU 2015-05 had no impact on the Company's consolidated financial statements.
In September 2015, the FASB issued ASU No. 2015-16 Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments (ASU 2015-16). ASU 2015-16 eliminates the requirement for an acquirer in a business combination to account for measurement-period adjustments retrospectively. Acquirers must recognize measurement-period adjustments during the period in which they determine the amounts. This would include any amounts they would have recorded in previous periods if the accounting had been completed at the acquisition date. The Company adopted ASU 2015-16 on January 1, 2016. The adoption of ASU 2015-16 had no impact on the Company's consolidated financial statements.
Accounting Standards Not Yet Adopted
In May 2014, the FASB issued ASU No. 2014-09 Revenue from Contracts with Customers (ASU 2014-09). ASU 2014-09 is a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In August 2015, the FASB issued ASU No. 2015-14 Revenue from Contracts with Customers: Deferral of Effective Date (ASU 2015-14) to defer the effective date of the new revenue recognition standard by one year to fiscal years beginning after December 15, 2017 and for interim periods therein. The guidance may be adopted using either a full retrospective or modified retrospective approach. Early adoption is permitted as early as fiscal years beginning after December 15, 2016 and interim periods therein. The Company is currently evaluating the impact of adoption of ASU 2014-09 and ASU 2015-14.
In July 2015, the FASB issued ASU No. 2015-11 Inventory (Topic 330): Simplifying the Measurement of Inventory (ASU 2015-11). ASU 2015-11 simplifies the subsequent measurement of inventory by using only the lower of cost or net realizable value.  ASU 2015-11 does not apply to inventory measured using the last-in, first-out method.  The Company is required to adopt ASU 2015-11 for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2016 on a prospective basis. Early adoption will be permitted. The Company does not believe adoption of ASU 2015-11 will have a material effect on the Company’s consolidated financial statements.
In November 2015, the FASB issued ASU No. 2015-17 Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes (ASU 2015-17). ASU 2015-17 eliminates the requirement for a Company to separate deferred income tax liabilities and assets into current and noncurrent amounts on a classified statement of financial position and requires that deferred tax liabilities and assets be classified as noncurrent. The Company is required to adopt ASU 2015-17 for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2016 on either a retrospective or prospective basis. Early adoption is permitted. The Company is currently evaluating the timing and basis of adoption of ASU 2015-17.
In January 2016, the FASB issued ASU No. 2016-01 Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities (ASU 2016-01). ASU 2016-01 enhances the existing financial instruments reporting model by modifying fair value measurement tools, simplifying impairment assessments for certain equity instruments, and modifying overall presentation and disclosure requirements. The Company is required to adopt ASU 2016-01 for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2017 on a prospective basis. The Company is currently evaluating the impact of adoption of ASU 2016-01.
In February 2016, the FASB issued ASU No. 2016-02 Leases (Topic 842) (ASU 2016-02). ASU 2016-02 amends the existing lease accounting model by requiring a lessee to recognize the rights and obligations resulting from certain leases as assets and liabilities on the balance sheet. ASU 2016-02 also requires a company to disclose key information about their leasing arrangements. The Company is required to adopt ASU 2016-02 for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018 using a modified retrospective approach. Early adoption is permitted. The Company is currently evaluating the impact of adoption of ASU 2016-02.
In March 2016, the FASB issued ASU No. 2016-09 Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (ASU 2016-09). ASU 2016-09 identifies areas for simplification involving several aspects of accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, an option to recognize gross stock compensation expense with actual forfeitures recognized as they occur, as well as certain classifications on the statement of cash flows. The Company is required to adopt ASU 2016-09 for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2016 using both a retrospective and prospective basis dependent upon the nature of the subtopic. Early adoption is permitted including adoption in an interim period. The Company is currently evaluating the impact of adoption of ASU 2016-09.

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In July 2016, the FASB issued ASU No. 2016-13 Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (ASU 2016-13). ASU 2016-13 changes how to recognize expected credit losses on financial assets. The standard requires a more timely recognition of credit losses on loans and other financial assets and also provides additional transparency about credit risk. The current credit loss standard generally requires that a loss actually be incurred before it is recognized, while the new standard will require recognition of full lifetime expected losses upon initial recognition of the financial instrument. The Company is required to adopt ASU 2016-13 for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2019 on a prospective basis. Early adoption is permitted for fiscal years beginning after December 15, 2018. An entity should apply the standard by recording a cumulative effect adjustment to retained earnings upon adoption. Adoption of this standard will impact how the Company recognizes credit losses on its financial instruments. The Company is currently evaluating the impact of adoption.
3. Additional Balance Sheet and Cash Flow Information
Marketable Securities
The Company’s marketable securities consisted of the following (in thousands):
 
June 26,
2016
 
December 31,
2015
 
June 28,
2015
Available-for-sale: Corporate bonds
$
5,070

 
$
45,192

 
$
52,516

Trading securities: Mutual funds
37,651

 
36,256

 
37,698

 
$
42,721

 
$
81,448

 
$
90,214

The Company’s available-for-sale securities are carried at fair value with any unrealized gains or losses reported in other comprehensive income. During the first half of 2016 and 2015, the Company recognized gross unrealized losses of approximately $122,000 and $310,000, respectively, or $77,000 and $195,000 net of taxes, respectively, to adjust amortized cost to fair value. The marketable securities have contractual maturities that come due over the next 10 months.
The Company's trading securities relate to investments held by the Company to fund certain deferred compensation obligations. The trading securities are carried at fair value with gains and losses recorded in net income, and investments are included in other long-term assets on the consolidated balance sheets.
Inventories
Inventories are valued at the lower of cost or market. Substantially all inventories located in the United States are valued using the last-in, first-out (LIFO) method. Other inventories are valued at the lower of cost or market using the first-in, first-out (FIFO) method. Inventories consist of the following (in thousands):
 
June 26,
2016
 
December 31,
2015
 
June 28,
2015
Components at the lower of FIFO cost or market
 
 
 
 
 
Raw materials and work in process
$
134,702

 
$
161,704

 
$
137,151

Motorcycle finished goods
152,035

 
327,952

 
186,326

Parts and accessories and general merchandise
133,727

 
145,519

 
121,469

Inventory at lower of FIFO cost or market
420,464

 
635,175

 
444,946

Excess of FIFO over LIFO cost
(49,268
)
 
(49,268
)
 
(49,902
)
 
$
371,196

 
$
585,907

 
$
395,044


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Operating Cash Flow
The reconciliation of net income to net cash provided by operating activities is as follows (in thousands):
 
Six months ended
 
June 26,
2016
 
June 28,
2015
Cash flows from operating activities:
 
 
 
Net income
$
530,920

 
$
569,664

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization of intangibles
100,956

 
93,640

Amortization of deferred loan origination costs
43,555

 
47,524

Amortization of financing origination fees
5,146

 
4,820

Provision for employee long-term benefits
18,405

 
24,635

Employee benefit plan contributions and payments
(35,189
)
 
(12,725
)
Stock compensation expense
15,797

 
16,734

Net change in wholesale finance receivables related to sales
(442,254
)
 
(418,969
)
Provision for credit losses
60,584

 
41,422

Gain on off-balance sheet securitization
(9,269
)
 
—

Pension plan settlement expense
600

 
—

Deferred income taxes
(3,548
)
 
(1,195
)
Foreign currency adjustments
(7,966
)
 
11,041

Other, net
(12,542
)
 
(1,964
)
Changes in current assets and liabilities:
 
 
 
Accounts receivable, net
(55,109
)
 
(43,309
)
Finance receivables—accrued interest and other
(125
)
 
(270
)
Inventories
225,586

 
38,012

Accounts payable and accrued liabilities
53,790

 
232,357

Derivative instruments
(1,474
)
 
1,185

Other
(31,573
)
 
11,342

Total adjustments
(74,630
)
 
44,280

Net cash provided by operating activities
$
456,290

 
$
613,944

4. Acquisition
On August 4, 2015, the Company completed its purchase of certain assets and liabilities from Fred Deeley Imports, Ltd. (Deeley Imports) including, among other things, the acquisition of the exclusive right to distribute the Company's motorcycles and other products in Canada (Transaction) for total consideration of $59.9 million. The majority equity owner of Deeley Imports is a member of the Board of Directors of the Company. The Company believes that the acquisition of the Canadian distribution rights will align Harley-Davidson's Canada distribution with the Company's global go-to-market approach.
The financial impact of the acquisition, which is part of the Motorcycles segment, has been included in the Company's consolidated financial statements from the date of acquisition. Proforma information reflecting this acquisition has not been disclosed as the proforma impact on consolidated net income would not be material.

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The following table summarizes the fair values of the Deeley Imports assets acquired and liabilities assumed at the date of acquisition (in thousands):
 
August 4, 2015
Current assets
$
11,088

Property, plant and equipment
144

Intangible assets
20,842

Goodwill
28,567

   Total assets
60,641

Current liabilities
731

Net assets acquired
$
59,910

As noted above, in conjunction with the acquisition of certain assets and assumption of certain liabilities of Deeley Imports, the Company recorded goodwill of $28.6 million, all of which the Company believes is tax deductible, and intangible assets with an initial fair value of $20.8 million. Of the total intangible assets acquired, $13.3 million was assigned to reacquired distribution rights with a useful life of two years and $7.5 million was assigned to customer relationships with a useful life of twenty years. The Company agreed to reimburse Deeley Imports for certain severance costs associated with the Transaction, resulting in $3.3 million of expense included in selling, administrative and engineering expense in the third quarter of 2015. The Company did not acquire any cash as part of the Transaction.
5. Goodwill and Intangible Assets
Changes in the carrying amount of goodwill for the Motorcycles segment were as follows (in thousands):
 
Three months ended
 
Six months ended
 
June 26, 2016
 
June 28, 2015
 
June 26, 2016
 
June 28, 2015
Balance, beginning of period
54,585

 
25,632

 
$
54,182

 
$
27,752

Currency translations
(43
)
 
473

 
360

 
(1,647
)
Balance, end of period
54,542

 
26,105

 
$
54,542

 
$
26,105

The Motorcycles segment intangible assets consisted of the following (in thousands):
 
June 26, 2016
 
 
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net
 
Estimated useful life (years)
Other intangible assets
 
 
 
 
 
 
 
   Reacquired distribution rights
$
13,501

 
$
(6,188
)
 
$
7,313

 
2
   Customer relationships
7,617

 
(349
)
 
7,268

 
20
Total other intangible assets
$
21,118

 
$
(6,537
)
 
$
14,581

 
 
 
December 31, 2015
 
 
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net
 
Estimated useful life (years)
Other intangible assets
 
 
 
 
 
 
 
   Reacquired distribution rights
$
12,614

 
$
(2,628
)
 
$
9,986

 
2
   Customer relationships
7,116

 
(148
)
 
6,968

 
20
Total other intangible assets
$
19,730

 
$
(2,776
)
 
$
16,954

 
 
Intangible assets other than goodwill are included in other long-term assets on the Company's consolidated balance sheets. The gross carrying amounts differ from the acquisition date amounts due to changes in foreign currency exchange rates.

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Amortization expense of other intangible assets for the three and six months ended June 26, 2016, was $1.8 million and $3.5 million, respectively. The Company estimates future amortization to be approximately as follows (in thousands):
 
 
Estimated Amortization
2016 (remaining 6 months)
 
$
3,588

2017
 
4,346

2018
 
384

2019
 
384

2020
 
384

2021
 
384

Thereafter
 
5,111

 
 
$
14,581

The Financial Services segment did not have a goodwill or intangible assets balance at June 26, 2016, December 31, 2015 and June 28, 2015.
6. Finance Receivables
The Company provides retail financial services to customers of the Company’s independent dealers in the United States and Canada. The origination of retail loans is a separate and distinct transaction between the Company and the retail customer, unrelated to the Company’s sale of product to its dealers. Retail finance receivables consist of secured promissory notes and secured installment sales contracts. The Company holds either titles or liens on titles to vehicles financed by promissory notes and installment sales contracts.
The Company offers wholesale financing to the Company’s independent dealers. Wholesale loans to dealers are generally secured by financed inventory or property and are originated in the U.S. and Canada.
Finance receivables, net, consisted of the following (in thousands):
 
June 26,
2016
 
December 31,
2015
 
June 28,
2015
Retail
$
6,020,750

 
$
5,991,471

 
$
5,962,685

Wholesale
1,422,648

 
1,023,860

 
1,325,041

Total finance receivables
7,443,398

 
7,015,331

 
7,287,726

Allowance for credit losses
(161,353
)
 
(147,178
)
 
(139,231
)
Finance receivables, net
$
7,282,045

 
$
6,868,153

 
$
7,148,495

A provision for credit losses on finance receivables is charged or credited to earnings in amounts that the Company believes are sufficient to maintain the allowance for credit losses at a level that is adequate to cover losses of principal inherent in the existing portfolio. The allowance for credit losses represents management’s estimate of probable losses inherent in the finance receivable portfolio as of the balance sheet date. However, due to the use of projections and assumptions in estimating the losses, the amount of losses actually incurred by the Company could differ from the amounts estimated.

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Changes in the allowance for credit losses on finance receivables by portfolio were as follows (in thousands):
 
Three months ended June 26, 2016
 
Retail
 
Wholesale
 
Total
Balance, beginning of period
$
146,727

 
$
9,457

 
$
156,184

Provision for credit losses
24,563

 
(1,102
)
 
23,461

Charge-offs
(26,460
)
 
—

 
(26,460
)
Recoveries
11,459

 
—

 
11,459

Other (a)
(3,291
)
 
—

 
(3,291
)
Balance, end of period
$
152,998

 
$
8,355

 
$
161,353

 
 
 
 
 
 
 
Three months ended June 28, 2015
 
Retail
 
Wholesale
 
Total
Balance, beginning of period
$
123,777

 
$
9,043

 
$
132,820

Provision for credit losses
16,890

 
(1,715
)
 
15,175

Charge-offs
(21,003
)
 
—

 
(21,003
)
Recoveries
12,239

 
—

 
12,239

Balance, end of period
$
131,903

 
$
7,328

 
$
139,231

 
 
 
 
 
 
 
Six months ended June 26, 2016
 
Retail
 
Wholesale
 
Total
Balance, beginning of period
$
139,320

 
$
7,858

 
$
147,178

Provision for credit losses
60,087

 
497

 
60,584

Charge-offs
(66,104
)
 
—

 
(66,104
)
Recoveries
22,986

 
—

 
22,986

Other (a)
(3,291
)
 
—

 
(3,291
)
Balance, end of period
$
152,998

 
$
8,355

 
$
161,353

 
 
 
 
 
 
 
Six months ended June 28, 2015
 
Retail
 
Wholesale
 
Total
Balance, beginning of period
$
122,025

 
$
5,339

 
$
127,364

Provision for credit losses
39,433

 
1,989

 
41,422

Charge-offs
(53,736
)
 
—

 
(53,736
)
Recoveries
24,181

 
—

 
24,181

Balance, end of period
$
131,903

 
$
7,328

 
$
139,231

(a)
Related to the sale of finance receivables with a principal balance of $301.8 million through an off-balance sheet asset-backed securitization transaction (see Note 12 for additional information).
Finance receivables are considered impaired when management determines it is probable that the Company will be unable to collect all amounts due according to the terms of the loan agreement. Portions of the allowance for credit losses are established to cover estimated losses on finance receivables specifically identified for impairment. The unspecified portion of the allowance for credit losses covers estimated losses on finance receivables which are collectively reviewed for impairment.
The retail portfolio primarily consists of a large number of small balance, homogeneous finance receivables. The Company performs a periodic and systematic collective evaluation of the adequacy of the retail allowance for credit losses. The Company utilizes loss forecast models which consider a variety of factors including, but not limited to, historical loss trends, origination or vintage analysis, known and inherent risks in the portfolio, the value of the underlying collateral, recovery rates, and current economic conditions including items such as unemployment rates. Retail finance receivables are not evaluated individually for impairment prior to charge-off and therefore are not reported as impaired loans.
The wholesale portfolio is primarily composed of large balance, non-homogeneous loans. The Company’s evaluation for the wholesale allowance for credit losses is first based on a loan-by-loan review. A specific allowance for credit losses is established for wholesale finance receivables determined to be individually impaired when management concludes that the

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borrower will not be able to make full payment of the contractual amounts due based on the original terms of the loan agreement. The impairment is determined based on the cash that the Company expects to receive discounted at the loan’s original interest rate or the fair value of the collateral, if the loan is collateral-dependent. Finance receivables in the wholesale portfolio that are not considered impaired on an individual basis are segregated, based on similar risk characteristics, according to the Company’s internal risk rating system and collectively evaluated for impairment. The related allowance for credit losses is based on factors such as the specific borrower’s financial performance and ability to repay, the Company’s past loan loss experience, current economic conditions, and the value of the underlying collateral.
Generally, it is the Company’s policy not to change the terms and conditions of finance receivables. However, to minimize the economic loss, the Company may modify certain finance receivables in troubled debt restructurings. Total restructured finance receivables are not significant.
The allowance for credit losses and finance receivables by portfolio, segregated by those amounts that are individually evaluated for impairment and those that are collectively evaluated for impairment, was as follows (in thousands):
 
June 26, 2016
 
Retail
 
Wholesale
 
Total
Allowance for credit losses, ending balance:
 
 
 
 
 
Individually evaluated for impairment
$
—

 
$
—

 
$
—

Collectively evaluated for impairment
152,998

 
8,355

 
161,353

Total allowance for credit losses
$
152,998

 
$
8,355

 
$
161,353

Finance receivables, ending balance:
 
 
 
 
 
Individually evaluated for impairment
$
—

 
$
—

 
$
—

Collectively evaluated for impairment
6,020,750

 
1,422,648

 
7,443,398

Total finance receivables
$
6,020,750

 
$
1,422,648

 
$
7,443,398

 
 
 
 
 
 
 
December 31, 2015
 
Retail
 
Wholesale
 
Total
Allowance for credit losses, ending balance:
 
 
 
 
 
Individually evaluated for impairment
$
—

 
$
—

 
$
—

Collectively evaluated for impairment
139,320

 
7,858

 
147,178

Total allowance for credit losses
$
139,320

 
$
7,858

 
$
147,178

Finance receivables, ending balance:
 
 
 
 
 
Individually evaluated for impairment
$
—

 
$
—

 
$
—

Collectively evaluated for impairment
5,991,471

 
1,023,860

 
7,015,331

Total finance receivables
$
5,991,471

 
$
1,023,860

 
$
7,015,331

 
 
 
 
 
 
 
June 28, 2015
 
Retail
 
Wholesale
 
Total
Allowance for credit losses, ending balance:
 
 
 
 
 
Individually evaluated for impairment
$
—

 
$
—

 
$
—

Collectively evaluated for impairment
131,903

 
7,328

 
139,231

Total allowance for credit losses
$
131,903

 
$
7,328

 
$
139,231

Finance receivables, ending balance:
 
 
 
 
 
Individually evaluated for impairment
$
—

 
$
—

 
$
—

Collectively evaluated for impairment
5,962,685

 
1,325,041

 
7,287,726

Total finance receivables
$
5,962,685

 
$
1,325,041

 
$
7,287,726

There were no wholesale finance receivables at June 26, 2016, December 31, 2015, or June 28, 2015 that were individually deemed to be impaired under ASC Topic 310, “Receivables.”
Retail finance receivables are contractually delinquent if the minimum payment is not received by the specified due date. Retail finance receivables are generally charged-off when the receivable is 120 days or more delinquent, the related asset is repossessed or the receivable is otherwise deemed uncollectible. All retail finance receivables accrue interest until either

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Table of Contents

collected or charged-off. Accordingly, as of June 26, 2016, December 31, 2015 and June 28, 2015, all retail finance receivables were accounted for as interest-earning receivables, of which $21.9 million, $32.8 million and $18.3 million, respectively, were 90 days or more past due.
Wholesale finance receivables are delinquent if the minimum payment is not received by the contractual due date. Wholesale finance receivables are written down once management determines that the specific borrower does not have the ability to repay the loan in full. Interest continues to accrue on past due finance receivables until the date the finance receivable becomes uncollectible and the finance receivable is placed on non-accrual status. The Company will resume accruing interest on these accounts when payments are current according to the terms of the loans and future payments are reasonably assured. While on non-accrual status, all cash received is applied to principal or interest as appropriate. There were no wholesale receivables on non-accrual status at June 26, 2016, December 31, 2015 or June 28, 2015. At June 26, 2016, December 31, 2015 and June 28, 2015, $0.2 million, $0.1 million, and $0.2 million of wholesale finance receivables were 90 days or more past due and accruing interest, respectively.
An analysis of the aging of past due finance receivables was as follows (in thousands):
 
June 26, 2016
 
Current
 
31-60 Days
Past Due
 
61-90 Days
Past Due
 
Greater than
90 Days
Past Due
 
Total
Past Due
 
Total
Finance
Receivables
Retail
$
5,852,659

 
$
108,192

 
$
37,961

 
$
21,938

 
$
168,091

 
$
6,020,750

Wholesale
1,421,846

 
457

 
153

 
192

 
802

 
1,422,648

Total
$
7,274,505

 
$
108,649

 
$
38,114

 
$
22,130

 
$
168,893

 
$
7,443,398

 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2015
 
Current
 
31-60 Days
Past Due
 
61-90 Days
Past Due
 
Greater than
90 Days
Past Due
 
Total
Past Due
 
Total
Finance
Receivables
Retail
$
5,796,003

 
$
118,996

 
$
43,680

 
$
32,792

 
$
195,468

 
$
5,991,471

Wholesale
1,022,365

 
888

 
530

 
77

 
1,495

 
1,023,860

Total
$
6,818,368

 
$
119,884

 
$
44,210

 
$
32,869

 
$
196,963

 
$
7,015,331

 
 
 
 
 
 
 
 
 
 
 
 
 
June 28, 2015
 
Current
 
31-60 Days
Past Due
 
61-90 Days
Past Due
 
Greater than
90 Days
Past Due
 
Total
Past Due
 
Total
Finance
Receivables
Retail
$
5,819,279

 
$
96,982

 
$
28,150

 
$
18,274

 
$
143,406

 
$
5,962,685

Wholesale
1,324,174

 
513

 
181

 
173

 
867

 
1,325,041

Total
$
7,143,453

 
$
97,495

 
$
28,331

 
$
18,447

 
$
144,273

 
$
7,287,726

A significant part of managing the Company's finance receivable portfolios includes the assessment of credit risk associated with each borrower. As the credit risk varies between the retail and wholesale portfolios, the Company utilizes different credit risk indicators for each portfolio.
The Company manages retail credit risk through its credit approval policy and ongoing collection efforts. The Company uses FICO scores, a standard credit rating measurement, to differentiate the expected default rates of retail credit applicants enabling the Company to better evaluate credit applicants for approval and to tailor pricing according to this assessment. Retail loans with a FICO score of 640 or above at origination are considered prime, and loans with a FICO score below 640 are considered sub-prime. These credit quality indicators are determined at the time of loan origination and are not updated subsequent to the loan origination date.
The recorded investment in retail finance receivables, by credit quality indicator, was as follows (in thousands):
 
June 26, 2016
 
December 31, 2015
 
June 28, 2015
Prime
$
4,756,479

 
$
4,777,448

 
$
4,718,363

Sub-prime
1,264,271

 
1,214,023

 
1,244,322

Total
$
6,020,750

 
$
5,991,471

 
$
5,962,685

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

16
Table of Contents

wholesale portfolio exposures are less consistent. The Company utilizes an internal credit risk rating system to manage credit risk exposure consistently across wholesale borrowers and individually evaluates credit risk factors for each borrower. The Company uses the following internal credit quality indicators, based on an internal risk rating system, listed from highest level of risk to lowest level of risk for the wholesale portfolio: Doubtful, Substandard, Special Mention, Medium Risk and Low Risk. Based upon management’s review, the dealers classified in the Doubtful category are the dealers with the greatest likelihood of being charged off, while the dealers classified as Low Risk are least likely to be charged off. The internal rating system considers factors such as the specific borrowers’ ability to repay and the estimated value of any collateral. Dealer risk rating classifications are reviewed and updated on a quarterly basis.
The recorded investment in wholesale finance receivables, by internal credit quality indicator, was as follows (in thousands):
 
June 26, 2016
 
December 31, 2015
 
June 28, 2015
Doubtful
$
—

 
$
5,169

 
$
—

Substandard
19,637

 
21,774

 
7,739

Special Mention
4,334

 
6,271

 
15,343

Medium Risk
6,350

 
11,494

 
3,245

Low Risk
1,392,327

 
979,152

 
1,298,714

Total
$
1,422,648

 
$
1,023,860

 
$
1,325,041

7. Fair Value Measurements
Certain assets and liabilities are recorded at fair value in the financial statements; some of these are measured on a recurring basis while others are measured on a non-recurring basis. Assets and liabilities measured on a recurring basis are those that are adjusted to fair value each time a financial statement is prepared. Assets and liabilities measured on a non-recurring basis are those that are adjusted to fair value when required by particular events or circumstances. In determining the fair value of assets and liabilities, the Company uses various valuation techniques. The availability of inputs observable in the market varies from instrument to instrument and depends on a variety of factors including the type of instrument, whether the instrument is actively traded, and other characteristics particular to the transaction. For many financial instruments, pricing inputs are readily observable in the market, the valuation methodology used is widely accepted by market participants, and the valuation does not require significant management discretion. For other financial instruments, pricing inputs are less observable in the market and may require management judgment.
The Company assesses the inputs used to measure fair value using a three-tier hierarchy. The hierarchy indicates the extent to which inputs used in measuring fair value are observable in the market. Level 1 inputs include quoted prices for identical instruments and are the most observable.
Level 2 inputs include quoted prices for similar assets and observable inputs such as interest rates, foreign currency exchange rates and commodity prices. The Company uses the market approach to derive the fair value for its level 2 fair value measurements. Forward contracts for foreign currency, commodities and interest rates are valued using current quoted forward rates and prices; investments in marketable securities and cash equivalents are valued using publicly quoted prices.
Level 3 inputs are not observable in the market and include management’s judgments about the assumptions market participants would use in pricing the asset or liability. The use of observable and unobservable inputs is reflected in the hierarchy assessment disclosed in the following tables.

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Table of Contents

Recurring Fair Value Measurements
The following tables present information about the Company’s assets and liabilities measured at fair value on a recurring basis (in thousands):
 
June 26, 2016
 
Balance
 
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Assets:
 
 
 
 
 
 
 
Cash equivalents
$
549,426

 
$
392,800

 
$
156,626

 
$
—

Marketable securities
42,721

 
37,651

 
5,070

 
—

Derivatives
9,528

 
—

 
9,528

 
—

 
$
601,675

 
$
430,451

 
$
171,224

 
$
—

Liabilities:
 
 
 
 
 
 
 
Derivatives
$
1,605

 
$
—

 
$
1,605

 
$
—

 
 
 
 
 
 
 
 
 
December 31, 2015
 
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
$
555,910

 
$
390,706

 
$
165,204

 
$
—

Marketable securities
81,448

 
36,256

 
45,192

 
—

Derivatives
16,235

 
—

 
16,235

 
—

 
$
653,593

 
$
426,962

 
$
226,631

 
$
—

Liabilities:
 
 
 
 
 
 
 
Derivatives
$
1,300

 
$
—

 
$
1,300

 
$
—

 
 
 
 
 
 
 
 
 
June 28, 2015
 
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
$
1,030,928

 
$
558,660

 
$
472,268

 
$
—

Marketable securities
90,214

 
37,698

 
52,516

 
—

Derivatives
26,501

 
—

 
26,501

 
—

 
$
1,147,643

 
$
596,358

 
$
551,285

 
$
—

Liabilities:
 
 
 
 
 
 
 
Derivatives
$
986

 
$
—

 
$
986

 
$
—

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 $15.3 million, $17.7 million and $13.1 million at June 26, 2016, December 31, 2015 and June 28, 2015, for which the fair value adjustment was $3.6 million, $8.6 million and $1.9 million, respectively. Fair value is estimated using Level 2 inputs based on the recent market values of repossessed inventory.

18
Table of Contents

8. Fair Value of Financial Instruments
The Company’s financial instruments consist primarily of cash and cash equivalents, marketable securities, finance receivables, net, debt, foreign currency exchange and commodity contracts (derivative instruments are discussed further in Note 9).
The following table summarizes the fair value and carrying value of the Company’s financial instruments (in thousands):
 
June 26, 2016
 
December 31, 2015
 
June 28, 2015
 
Fair Value
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
 
Carrying Value
Assets:
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
864,670

 
$
864,670

 
$
722,209

 
$
722,209

 
$
1,247,579

 
$
1,247,579

Marketable securities
$
42,721

 
$
42,721

 
$
81,448

 
$
81,448

 
$
90,214

 
$
90,214

Derivatives
$
9,528

 
$
9,528

 
$
16,235

 
$
16,235

 
$
26,501

 
$
26,501

Finance receivables, net
$
7,369,410

 
$
7,282,045

 
$
6,937,053

 
$
6,868,153

 
$
7,251,671

 
$
7,148,495

Restricted cash
$
92,650

 
$
92,650

 
$
110,642

 
$
110,642

 
$
162,211

 
$
162,211

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
Derivatives
$
1,605

 
$
1,605

 
$
1,300

 
$
1,300

 
$
986

 
$
986

Unsecured commercial paper
$
1,020,487

 
$
1,020,487

 
$
1,201,380

 
$
1,201,380

 
$
114,983

 
$
114,983

Asset-backed Canadian commercial paper conduit facility
$
161,626

 
$
161,626

 
$
153,839

 
$
153,839

 
$
160,940

 
$
160,940

Medium-term notes
$
4,239,390

 
$
4,063,297

 
$
3,410,966

 
$
3,316,949

 
$
4,077,952

 
$
3,923,638

Senior unsecured notes
$
808,227

 
$
740,982

 
$
737,435

 
$
740,653

 
$
—

 
$
—

Term asset-backed securitization debt
$
1,080,416

 
$
1,074,931

 
$
1,455,776

 
$
1,459,377

 
$
2,016,232

 
$
2,011,461

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

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

20
Table of Contents

The following table summarizes the fair value of the Company’s derivative financial instruments (in thousands):
 
June 26, 2016
 
December 31, 2015
 
June 28, 2015
Derivatives Designated As Hedging
Instruments Under ASC Topic 815
Notional
Value
 
Asset
Fair  Value(a)
 
Liability
Fair  Value(b)
 
Notional
Value
 
Asset
Fair  Value(a)
 
Liability
Fair  Value(b)
 
Notional
Value
 
Asset
Fair  Value(a)
 
Liability
Fair  Value(b)
Foreign currency contracts(c)
$
542,788

 
$
9,423

 
$
1,358

 
$
436,352

 
$
16,167

 
$
181

 
$
367,309

 
$
23,136

 
$
—

Commodity
contracts(c)
861

 
88

 
—

 
968

 
—

 
159

 
1,166

 
—

 
98

Treasury rate locks(c)
—

 
—

 
—

 
—

 
—

 
—

 
300,000

 
3,365

 
—

Total
$
543,649

 
$
9,511

 
$
1,358


$
437,320

 
$
16,167

 
$
340


$
668,475

 
$
26,501

 
$
98

 
June 26, 2016
 
December 31, 2015
 
June 28, 2015
Derivatives Not Designated As Hedging
Instruments Under ASC Topic 815
Notional
Value
 
Asset
Fair  Value(a)
 
Liability
Fair  Value(b)
 
Notional
Value
 
Asset
Fair  Value(a)
 
Liability
Fair  Value(b)
 
Notional
Value
 
Asset
Fair  Value(a)
 
Liability
Fair  Value(b)
Commodity contracts
$
4,298

 
$
17

 
$
247

 
$
6,510

 
$
68

 
$
960

 
$
8,218

 
$
—

 
$
888

 
$
4,298


$
17

 
$
247

 
$
6,510

 
$
68

 
$
960

 
$
8,218

 
$
—

 
$
888

 
(a)
Included in other current assets
(b)
Included in accrued liabilities
(c)
Derivative designated as a cash flow hedge
The following tables summarize the amount of gains and losses related to derivative financial instruments designated as cash flow hedges (in thousands):
 
Amount of Gain/(Loss) Recognized in OCI, before tax
 
Three months ended
 
Six months ended
Cash Flow Hedges
June 26,
2016
 
June 28,
2015
 
June 26,
2016
 
June 28,
2015
Foreign currency contracts
$
8,017

 
$
(4,458
)
 
$
(4,507
)
 
$
28,210

Commodity contracts
119

 
(3
)
 
(73
)
 
(123
)
Treasury rate locks
—

 
3,365

 
—

 
3,365

Total
$
8,136

 
$
(1,096
)
 
$
(4,580
)
 
$
31,452

 
Amount of Gain/(Loss) Reclassified from AOCL into Income
 
 
 
Three months ended
 
Six months ended
 
Expected to be Reclassified
Cash Flow Hedges
June 26,
2016
 
June 28,
2015
 
June 26,
2016
 
June 28,
2015
 
Over the Next Twelve Months
Foreign currency contracts(a)
$
3,551

 
$
20,131

 
$
4,407

 
$
35,407

 
$
7,824

Commodity contracts(a)
(104
)
 
(125
)
 
(319
)
 
(439
)
 
88

Treasury rate locks(b)
(90
)
 
—

 
(181
)
 
—

 
(362
)
Total
$
3,357

 
$
20,006

 
$
3,907

 
$
34,968

 
$
7,550

(a)
Gain/(loss) reclassified from accumulated other comprehensive loss (AOCL) to income is included in cost of goods sold
(b)
Gain/(loss) reclassified from accumulated other comprehensive loss (AOCL) to income is included in interest expense
For the three and six months ended June 26, 2016 and June 28, 2015, the cash flow hedges were highly effective and, as a result, the amount of hedge ineffectiveness was not material. No amounts were excluded from effectiveness testing.

21
Table of Contents

The following tables summarize the amount of gains and losses related to derivative financial instruments not designated as hedging instruments (in thousands):
 
Amount of Gain/(Loss) Recognized in Income on Derivative
 
Three months ended
 
Six months ended
Derivatives Not Designated As Hedges
June 26,
2016
 
June 28,
2015
 
June 26,
2016
 
June 28,
2015
Commodity contracts(a)
$
67

 
$
14

 
$
(224
)
 
$
(526
)
Total
$
67

 
$
14

 
$
(224
)
 
$
(526
)
(a)
Gain/(loss) recognized in income is included in cost of goods sold.
The Company is exposed to credit loss risk in the event of non-performance by counterparties to these derivative financial instruments. Although no assurances can be given, the Company does not expect any of the counterparties to these derivative financial instruments to fail to meet its obligations. To manage credit loss risk, the Company evaluates counterparties based on credit ratings and, on a quarterly basis, evaluates each hedge’s net position relative to the counterparty’s ability to cover its position.
10. Accumulated Other Comprehensive Loss
The following tables set forth the changes in accumulated other comprehensive loss (AOCL) (in thousands):
 
 
Three months ended June 26, 2016
 
 
Foreign currency translation adjustments
 
Marketable securities
 
Derivative financial instruments
 
Pension and postretirement benefit plans
 
Total
Balance, beginning of period
 
$
(46,151
)
 
$
(1,139
)
 
$
(2,466
)
 
$
(553,582
)
 
$
(603,338
)
Other comprehensive income (loss) before reclassifications
 
2,516

 
(51
)
 
8,136

 
—

 
10,601

Income tax
 
112

 
19

 
(3,014
)
 
—

 
(2,883
)
Net other comprehensive income (loss) before reclassifications
 
2,628

 
(32
)
 
5,122

 
—

 
7,718

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

 
—

 
(3,551
)
 
—

 
(3,551
)
Realized (gains) losses - commodities contracts(a)
 
—

 
—

 
104

 
—

 
104

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

 
—

 
90

 
—

 
90

Prior service credits(b)
 
—

 
—

 
—

 
(446
)
 
(446
)
Actuarial losses(b)
 
—

 
—

 
—

 
12,472

 
12,472

Total reclassifications before tax
 
—

 
—

 
(3,357
)
 
12,026

 
8,669

Income tax expense (benefit)
 
—

 
—

 
1,244

 
(4,454
)
 
(3,210
)
Net reclassifications
 
—

 
—

 
(2,113
)
 
7,572

 
5,459

Other comprehensive income (loss)
 
2,628

 
(32
)
 
3,009

 
7,572

 
13,177

Balance, end of period
 
$
(43,523
)
 
$
(1,171
)
 
$
543

 
$
(546,010
)
 
$
(590,161
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

22
Table of Contents

 
 
Three months ended June 28, 2015
 
 
Foreign currency translation adjustments
 
Marketable securities
 
Derivative financial instruments
 
Pension and postretirement benefit plans
 
Total
Balance, beginning of period
 
$
(30,503
)
 
$
(767
)
 
$
30,114

 
$
(521,005
)
 
$
(522,161
)
Other comprehensive income (loss) before reclassifications
 
5,040

 
(204
)
 
(1,096
)
 
—

 
3,740

Income tax
 
(789
)
 
76

 
406

 
—

 
(307
)
Net other comprehensive income (loss) before reclassifications
 
4,251

 
(128
)
 
(690
)
 
—

 
3,433

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

 
—

 
(20,131
)
 
—

 
(20,131
)
Realized (gains) losses - commodities contracts(a)
 
—

 
—

 
125

 
—

 
125

Prior service credits(b)
 
—

 
—

 
—

 
(695
)
 
(695
)
Actuarial losses(b)
 
—

 
—

 
—

 
14,670

 
14,670

Total reclassifications before tax
 
—

 
—

 
(20,006
)
 
13,975

 
(6,031
)
Income tax expense (benefit)
 
—

 
—

 
7,410

 
(5,177
)
 
2,233

Net reclassifications
 
—

 
—

 
(12,596
)
 
8,798

 
(3,798
)
Other comprehensive income (loss)
 
4,251

 
(128
)
 
(13,286
)
 
8,798

 
(365
)
Balance, end of period
 
$
(26,252
)
 
$
(895
)
 
$
16,828

 
$
(512,207
)
 
$
(522,526
)
 
 
Six months ended June 26, 2016
 
 
Foreign currency translation adjustments
 
Marketable securities
 
Derivative financial instruments
 
Pension and postretirement benefit plans
 
Total
Balance, beginning of period
 
$
(58,844
)
 
$
(1,094
)
 
$
5,886

 
$
(561,153
)
 
$
(615,205
)
Other comprehensive income (loss) before reclassifications
 
17,087

 
(122
)
 
(4,580
)
 
—

 
12,385

Income tax
 
(1,766
)
 
45

 
1,696

 
—

 
(25
)
Net other comprehensive income (loss) before reclassifications
 
15,321

 
(77
)
 
(2,884
)
 
—

 
12,360

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

 
—

 
(4,407
)
 
—

 
(4,407
)
Realized (gains) losses - commodities contracts(a)
 
—

 
—

 
319

 
—

 
319

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

 
—

 
181

 
—

 
181

Prior service credits(b)
 
—

 
—

 
—

 
(892
)
 
(892
)
Actuarial losses(b)
 
—

 
—

 
—

 
24,944

 
24,944

Total reclassifications before tax
 
—

 
—

 
(3,907
)
 
24,052

 
20,145

Income tax expense (benefit)
 
—

 
—

 
1,448

 
(8,909
)
 
(7,461
)
Net reclassifications
 
—

 
—

 
(2,459
)
 
15,143

 
12,684

Other comprehensive income (loss)
 
15,321

 
(77
)
 
(5,343
)
 
15,143

 
25,044

Balance, end of period
 
$
(43,523
)
 
$
(1,171
)
 
$
543

 
$
(546,010
)
 
$
(590,161
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

23
Table of Contents

 
 
Six months ended June 28, 2015
 
 
Foreign currency translation adjustments
 
Marketable securities
 
Derivative financial instruments
 
Pension and postretirement benefit plans
 
Total
Balance, beginning of period
 
$
(3,482
)
 
$
(700
)
 
$
19,042

 
$
(529,803
)
 
$
(514,943
)
Other comprehensive (loss) income before reclassifications
 
(24,951
)
 
(310
)
 
31,452

 
—

 
6,191

Income tax
 
2,181

 
115

 
(11,650
)
 
—

 
(9,354
)
Net other comprehensive (loss) income before reclassifications
 
(22,770
)
 
(195
)
 
19,802

 
—

 
(3,163
)
Reclassifications:
 
 
 
 
 
 
 
 
 
 
Realized (gains) losses - foreign currency contracts(a)
 
—

 
—

 
(35,407
)
 
—

 
(35,407
)
Realized (gains) losses - commodities contracts(a)
 
—

 
—

 
439

 
—

 
439

Prior service credits(b)
 
—

 
—

 
—

 
(1,390
)
 
(1,390
)
Actuarial losses(b)
 
—

 
—

 
—

 
29,340

 
29,340

Total reclassifications before tax
 
—

 
—

 
(34,968
)
 
27,950

 
(7,018
)
Income tax expense (benefit)
 
—

 
—

 
12,952

 
(10,354
)
 
2,598

Net reclassifications
 
—

 
—

 
(22,016
)
 
17,596

 
(4,420
)
Other comprehensive (loss) income
 
(22,770
)
 
(195
)
 
(2,214
)
 
17,596

 
(7,583
)
Balance, end of period
 
$
(26,252
)
 
$
(895
)
 
$
16,828

 
$
(512,207
)
 
$
(522,526
)
(a)
Amounts reclassified to net income are included in Motorcycles and Related Products cost of goods sold.
(b)
Amounts reclassified are included in the computation of net periodic period cost. See Note 16 for information related to pension and postretirement benefit plans.
(c)
Amounts reclassified to net income are included in interest expense.
11. Debt
Debt with a contractual term less than one year is generally classified as short-term debt and consisted of the following (in thousands):
 
 
June 26,
2016
 
December 31,
2015
 
June 28,
2015
Unsecured commercial paper
 
$
1,020,487

 
$
1,201,380

 
$
114,983

          Total short-term debt
 
$
1,020,487

 
$
1,201,380

 
$
114,983


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Table of Contents

Debt with a contractual term greater than one year is generally classified as long-term debt and consisted of the following (in thousands): 
 
 
June 26,
2016
 
December 31,
2015
 
June 28,
2015
Secured debt
 
 
 
 
 
 
Asset-backed Canadian commercial paper conduit facility
 
$
161,626

 
$
153,839

 
$
160,940

Term asset-backed securitization debt
 
1,077,317

 
1,463,154

 
2,017,079

Less: unamortized discount and debt issuance costs
 
(2,386
)
 
(3,777
)
 
(5,618
)
Total secured debt
 
1,236,557

 
1,613,216

 
2,172,401

 
 
 
 
 
 
 
Unsecured notes
 
 
 
 
 
 
1.15% Medium-term notes due in 2015 par value
 
—

 
—

 
600,000

3.88% Medium-term notes due in 2016 par value
 
—

 
450,000

 
450,000

2.70% Medium-term notes due in 2017 par value
 
400,000

 
400,000

 
400,000

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

 
400,000

 
400,000

6.80% Medium-term notes due in 2018 par value
 
878,708

 
878,708

 
887,958

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

 
600,000

 
600,000

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

 
—

 
—

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

 
600,000

 
600,000

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

 
—

 
—

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

 
450,000

 
—

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

 
300,000

 
—

Less: unamortized discount and debt issuance costs
 
(24,429
)
 
(21,106
)
 
(14,320
)
Gross long-term debt
 
6,040,836

 
5,670,818

 
6,096,039

Less: current portion of long-term debt, net of unamortized discount and issuance costs
 
(732,773
)
 
(838,349
)
 
(1,544,956
)
Total long-term debt
 
$
5,308,063

 
$
4,832,469

 
$
4,551,083

The Company adopted ASU No. 2015-03 and ASU No. 2015-15 on January 1, 2016. Upon adoption, the Company reclassified debt issuance costs, other than debt issuance costs related to line of credit arrangements (which include its asset-backed commercial paper and unsecured commercial paper programs and its credit facilities), from other assets to debt on the balance sheet. Refer to Note 2 for further discussion of newly adopted ASUs.
12. Asset-Backed Financing
The Company participates in asset-backed financing both through asset-backed securitization transactions and through asset-backed commercial paper conduit facilities. In the Company's asset-backed financing programs, the Company transfers retail motorcycle finance receivables to special purpose entities (SPE), which are considered VIEs under U.S. GAAP. Each SPE then converts those assets into cash, through the issuance of debt. The Company retains servicing rights for all of the retail motorcycle finance receivables transferred to SPEs as part of an asset-backed financing. The accounting treatment for asset-backed financings depends on the terms of the related transaction and the Company’s continuing involvement with the VIE.
In transactions where the Company has power over the significant activities of the VIE and has an obligation to absorb losses or the right to receive benefits from the VIE that are potentially significant to the VIE, the Company is the primary beneficiary of the VIE and consolidates the VIE within its consolidated financial statements. On a consolidated basis, the asset-backed financing is treated as a secured borrowing in this type of transaction and is referred to as an on-balance sheet asset-backed financing.
In transactions where the Company is not the primary beneficiary of the VIE, the Company must determine whether it can achieve a sale for accounting purposes under ASC Topic 860, "Transfers and Servicing". To achieve a sale for accounting purposes, the assets being transferred must be legally isolated, not be constrained by restrictions from further transfer, and be deemed to be beyond the Company’s control. If the Company does not meet all these criteria for sale accounting, then the transaction is accounted for as a secured borrowing and is referred to as an on-balance sheet asset-backed financing.

25
Table of Contents

If the Company meets all three of the sale criteria above, the transaction is recorded as a sale for accounting purposes and is referred to as an off-balance sheet asset-backed financing. Upon sale, the retail motorcycle finance receivables are removed from the Company’s balance sheet and a gain or loss is recognized for the difference between the cash proceeds received, the assets derecognized, and the liabilities recognized as part of the transaction. The gain or loss on sale is included in Financial Services revenue in the Consolidated Statement of Income.
The Company is not required, and does not currently intend, to provide any additional financial support to the on or off-balance sheet VIEs associated with these transactions. Investors and creditors in these transactions only have recourse to the assets held by the VIEs.
The Company adopted ASU No. 2015-03 and ASU No. 2015-15 on January 1, 2016. Upon adoption, the Company reclassified debt issuance costs, other than debt issuance costs related to line of credit arrangements (including the asset-backed commercial paper programs), from other assets to debt on the balance sheet. Refer to Note 2 for further discussion of newly adopted ASUs.    


26
Table of Contents

The following table shows the assets and liabilities related to the on-balance sheet asset-backed financings included in the financial statements (in thousands):
 
June 26, 2016
 
Finance receivables
 
Allowance for credit losses
 
Restricted cash
 
Other assets
 
Total assets
 
Asset-backed debt
On-balance sheet assets and liabilities
 
 
 
 
 
 
 
 
 
 
 
Consolidated VIEs
 
 
 
 
 
 
 
 
 
 
 
Term asset-backed securitizations
$
1,173,527

 
$
(30,431
)
 
$
79,475

 
$
2,825

 
$
1,225,396

 
$
1,074,931

Asset-backed U.S. commercial paper conduit facility
—

 
—

 
—

 
222

 
222

 
—

Unconsolidated VIEs
 
 
 
 
 
 
 
 
 
 
 
Asset-backed Canadian commercial paper conduit facility
177,360

 
(3,620
)
 
13,175

 
332

 
187,247

 
161,626

Total on-balance sheet assets and liabilities
$
1,350,887

 
$
(34,051
)
 
$
92,650

 
$
3,379

 
$
1,412,865

 
$
1,236,557

 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2015
 
Finance receivables
 
Allowance for credit losses
 
Restricted cash
 
Other assets
 
Total assets
 
Asset-backed debt
On-balance sheet assets and liabilities
 
 
 
 
 
 
 
 
 
 
 
Consolidated VIEs
 
 
 
 
 
 
 
 
 
 
 
Term asset-backed securitizations
$
1,611,624

 
$
(37,937
)
 
$
100,151

 
$
4,383

 
$
1,678,221

 
$
1,459,377

Asset-backed U.S. commercial paper conduit facility
—

 
—

 
—

 
323

 
323

 
—

Unconsolidated VIEs
 
 
 
 
 
 
 
 
 
 
 
Asset-backed Canadian commercial paper conduit facility
170,708

 
(3,061
)
 
10,491

 
393

 
178,531

 
153,839

Total on-balance sheet assets and liabilities
$
1,782,332

 
$
(40,998
)
 
$
110,642

 
$
5,099

 
$
1,857,075

 
$
1,613,216

 
 
 
 
 
 
 
 
 
 
 
 
 
June 28, 2015
 
Finance receivables
 
Allowance for credit losses
 
Restricted cash
 
Other assets
 
Total assets
 
Asset-backed debt
On-balance sheet assets and liabilities
 
 
 
 
 
 
 
 
 
 
 
Consolidated VIEs
 
 
 
 
 
 
 
 
 
 
 
Term asset-backed securitizations
$
2,199,018

 
$
(49,400
)
 
$
149,418

 
$
2,857

 
$
2,301,893

 
$
2,011,461

Asset-backed U.S. commercial paper conduit facility
—

 
—

 
—

 
210

 
210

 
—

Unconsolidated VIEs
 
 
 
 
 
 
 
 
 
 
 
Asset-backed Canadian commercial paper conduit facility
176,730

 
(2,657
)
 
12,793

 
340

 
187,206

 
160,940

Total on-balance sheet assets and liabilities
$
2,375,748

 
$
(52,057
)
 
$
162,211

 
$
3,407

 
$
2,489,309

 
$
2,172,401

On-Balance Sheet Term 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 term asset-backed securitization SPE is a separate legal entity, and the U.S. retail motorcycle finance receivables included in the term asset-backed securitizations are only available for payment of the secured debt and other obligations arising from the term asset-backed securitization transaction and are not available to pay other obligations or claims of the Company’s creditors until the associated secured debt and other obligations are satisfied. Restricted cash balances held by the SPEs are used only to support the securitizations. There are no amortization schedules for the secured notes; however, the debt is reduced monthly as available collections on the related U.S. retail motorcycle finance receivables are applied to outstanding principal. The secured notes’ contractual lives have various maturities ranging from 2016 to 2022.
The Company is the primary beneficiary of its on-balance sheet term 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

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interest holder with the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance. As a residual interest holder, the Company has the obligation to absorb losses and the right to receive benefits which could potentially be significant to the VIE.
There were no on-balance sheet term asset-backed securitization transactions during the first and second quarters of 2016. During the first and second quarters of 2015, the Company issued $700.0 million and $500.0 million ($697.6 million and $498.1 million net of discount and issuance costs), respectively, of secured notes through on-balance sheet term asset-backed securitization transactions.
On-Balance Sheet Asset-Backed U.S. Commercial Paper Conduit Facility VIE
On December 14, 2015, the Company entered into a new revolving facility agreement (U.S. Conduit) with a third party bank-sponsored asset-backed U.S. commercial paper conduit, which provides for a total aggregate commitment of up to $600.0 million based on, among other things, the amount of eligible U.S. retail motorcycle finance receivables held by the SPE as collateral. The prior facility agreement expired on December 14, 2015 and had similar terms.
Under the facility, the Company may transfer U.S. retail motorcycle finance receivables to a SPE, which in turn may issue debt to third-party bank-sponsored asset-backed commercial paper conduits. The assets of the SPE are restricted as collateral for the payment of the debt or other obligations arising in the transaction and are not available to pay other obligations or claims of the Company’s creditors. The terms for this debt provide for interest on the outstanding principal based on prevailing commercial paper rates or LIBOR to the extent the advance is not funded by a conduit lender through the issuance of commercial paper plus, in each case, a program fee based on outstanding principal. The U.S. Conduit also provides for an unused commitment fee based on the unused portion of the total aggregate commitment of $600.0 million. There is no amortization schedule; however, the debt will be reduced monthly as available collections on the related finance receivables are applied to outstanding principal. Upon expiration of the U.S. Conduit, any outstanding principal will continue to be reduced monthly through available collections. Unless earlier terminated or extended by mutual agreement of the Company and the lenders, the U.S. Conduit expires on December 14, 2016.
The Company is the primary beneficiary of its U.S. Conduit VIE 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.
The VIE had no borrowings outstanding under the U.S. Conduit at June 26, 2016, December 31, 2015 or June 28, 2015; therefore, assets that the U.S. Conduit holds are restricted as collateral for the payment of fees associated with the unused portion of the total aggregate commitment.
On-Balance Sheet Asset-Backed Canadian Commercial Paper Conduit Facility
In June 2015, the Company amended its facility agreement (Canadian Conduit) with a Canadian bank-sponsored asset-backed commercial paper conduit. Under the agreement, the Canadian Conduit is contractually committed, at the Company's option, to purchase eligible Canadian retail motorcycle finance receivables for proceeds up to C$240.0 million. The transferred assets are restricted as collateral for the payment of the debt. The terms for this debt provide for interest on the outstanding principal based on prevailing market interest rates plus a specified margin. The Canadian Conduit also provides for a program fee and an unused commitment fee based on the unused portion of the total aggregate commitment of C$240.0 million. There is no amortization schedule; however, the debt is reduced monthly as available collections on the related finance receivables are applied to outstanding principal. Upon expiration of the Canadian Conduit, any outstanding principal will continue to be reduced monthly through available collections. The contractual maturity of the debt is approximately 5 years. Unless earlier terminated or extended by mutual agreement of the Company and the lenders, as of June 26, 2016, the Canadian Conduit had an expiration date of June 30, 2016. The Canadian Conduit was renewed on June 30, 2016 with similar terms and for the same amount with an expiration date of June 30, 2017.
The Company is not the primary beneficiary of the Canadian bank-sponsored, multi-seller conduit VIE; therefore, the Company doesn’t consolidate the VIE. However, the Company treats the conduit facility as a secured borrowing as it maintains effective control over the assets transferred to the VIE and therefore doesn’t 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 $25.6 million at June 26, 2016. The maximum exposure is not an indication of the Company's expected loss exposure.

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The following table includes quarterly transfers of Canadian retail motorcycle finance receivables to the Canadian Conduit and the respective proceeds (in thousands):
 
2016
 
2015
 
Transfers
 
Proceeds
 
Transfers
 
Proceeds
First quarter
$
6,600

 
$
5,800

 
$
19,200

 
$
16,800

Second quarter
$
31,400

 
$
27,500

 
$
26,800

 
$
23,400

Off-Balance Sheet Asset-Backed Securitization VIE
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 term 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 term asset-backed securitization are only available for payment of the secured debt and other obligations arising from the asset-backed securitization transaction and are not available to pay other obligations or claims of the Company’s creditors. In an on-balance sheet asset-backed securitization, the Company retains a financial interest in the VIE in the form of a debt security. As part of this off-balance sheet securitization, the Company did not retain any financial interest in the VIE beyond servicing rights and ordinary representations and warranties and related covenants.
The Company is not the primary beneficiary of the off-balance sheet asset-backed securitization VIE because it only retained servicing rights and does not have the obligation to absorb losses or the right to receive benefits from the VIE which could potentially be significant to the VIE. Accordingly, this transaction met the accounting sale requirements under ASC Topic 860 and was recorded as a sale for accounting purposes. Upon the sale, the retail motorcycle finance receivables were removed from the Company’s balance sheet and a gain was recognized for the difference between the cash proceeds received, the assets derecognized and the liabilities recognized as part of the transaction. The gain on sale was included in financial services revenue in the Consolidated Statement of Income.
At June 26, 2016, the assets of this off-balance sheet asset-backed securitization VIE were $292.2 million and represented the current unpaid principal balance of the retail motorcycle finance receivables, which was the Company’s maximum exposure to loss in the off-balance sheet VIE at June 26, 2016. This is based on the unlikely event that that all the receivables have underwriting defects or other defects that trigger a violation of certain covenants and that the underlying collateral has no residual value. This maximum exposure is not an indication of expected losses.
Servicing Activities
The Company services all retail motorcycle finance receivables that it originates. When the Company transfers retail motorcycle finance receivables to SPEs through asset-backed financings, the Company retains the right to service the finance receivables and receives servicing fees based on the securitized finance receivables balance and certain ancillary fees. In on-balance sheet asset-backed financing, servicing fees are eliminated in consolidation and therefore are not recorded on a consolidated basis. In off-balance sheet asset-backed financings, servicing fees and ancillary fees are recorded in Financial Services revenue in the Consolidated Statement of Income. The fees the Company is paid for servicing represent adequate compensation, and, consequently, the Company does not recognize a servicing asset or liability. The Company recognized servicing fee income of $0.3 million during the six months ended June 26, 2016.
The current unpaid principal balance of serviced retail motorcycle finance receivables was as follows (in thousands):
 
June 26,
2016
 
December 31,
2015
 
June 28,
2015
On-balance sheet retail motorcycle finance receivables
$
5,872,668

 
$
5,843,352

 
$
5,799,682

Off-balance sheet retail motorcycle finance receivables
292,176

 
—

 
—

Total serviced retail motorcycle finance receivables
$
6,164,844

 
$
5,843,352

 
$
5,799,682


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The balance of serviced finance receivables 30 days or more delinquent was as follows (in thousands):
 
Amount 30 days or more past due:
 
June 26,
2016
 
December 31,
2015
 
June 28,
2015
On-balance sheet retail motorcycle finance receivables
$
168,091

 
$
195,468

 
$
143,406

Off-balance sheet retail motorcycle finance receivables
460

 
—

 
—

Total serviced retail motorcycle finance receivables
$
168,551

 
$
195,468

 
$
143,406

Credit losses, net of recoveries for the serviced finance receivables were as follows (in thousands):
 
Three months ended
 
Six months ended
 
June 26,
2016
 
June 28,
2015
 
June 26,
2016
 
June 28,
2015
On-balance sheet retail motorcycle finance receivables
$
15,001

 
$
8,764

 
$
43,118

 
$
29,555

Off-balance sheet retail motorcycle finance receivables
15

 
—

 
15

 
—

Total serviced retail motorcycle finance receivables
$
15,016

 
$
8,764

 
$
43,133

 
$
29,555


13. Income Taxes
The Company’s 2016 income tax rate for the six months ended June 26, 2016 was 32.7% compared to 34.9% for the same period last year. The year-to-date tax provision for income taxes included a discrete benefit of $14.6 million associated with the release of a portion of the Company's liability for unrecognized tax benefits following the closure of various audits during the second quarter of 2016.
14. Product Warranty and Recall Campaigns
The Company currently provides a standard two-year limited warranty on all new motorcycles sold worldwide, except for Japan, where the Company currently provides a standard three-year limited warranty on all new motorcycles sold. In addition, the Company provides a one-year warranty for Parts & Accessories (P&A). The warranty coverage for the retail customer generally begins when the product is sold to a retail customer. The Company maintains reserves for future warranty claims using an estimated cost, which is based primarily on historical Company claim information maintained by the Company. Additionally, the Company has from time to time initiated voluntary recall campaigns. The Company reserves for all estimated costs associated with recalls in the period that management approves and commits to the recall.
Changes in the Company’s warranty and recall liability were as follows (in thousands):
 
Three months ended
 
Six months ended
 
June 26,
2016
 
June 28,
2015
 
June 26,
2016
 
June 28,
2015
Balance, beginning of period
$
74,836

 
$
71,073

 
$
74,217

 
$
69,250

Warranties issued during the period
20,202

 
21,843

 
38,214

 
36,954

Settlements made during the period
(22,679
)
 
(23,554
)
 
(40,842
)
 
(37,119
)
Recalls and changes to pre-existing warranty liabilities
10,121

 
14,054

 
10,891

 
14,331

Balance, end of period
$
82,480

 
$
83,416

 
$
82,480

 
$
83,416

The liability for recall campaigns was $14.3 million, $10.2 million and $16.6 million as of June 26, 2016, December 31, 2015 and June 28, 2015, respectively.

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15. Earnings Per Share
The following table sets forth the computation for basic and diluted earnings per share (in thousands, except per share amounts):
 
Three months ended
 
Six months ended
 
June 26,
2016
 
June 28,
2015
 
June 26,
2016
 
June 28,
2015
Numerator:
 
 
 
 
 
 
 
Net income used in computing basic and diluted earnings per share
$
280,431

 
$
299,810

 
$
530,920

 
$
569,664

Denominator:
 
 
 
 
 
 
 
Denominator for basic earnings per share - weighted-average common shares
180,587

 
207,650

 
181,976

 
209,115

Effect of dilutive securities - employee stock compensation plan
752

 
940

 
764

 
1,050

Denominator for diluted earnings per share - adjusted weighted-average shares outstanding
181,339

 
208,590

 
182,740

 
210,165

Earnings per common share:
 
 
 
 
 
 
 
Basic
$
1.55

 
$
1.44

 
$
2.92

 
$
2.72

Diluted
$
1.55

 
$
1.44

 
$
2.91

 
$
2.71

Outstanding options to purchase 1.5 million and 1.0 million shares of common stock for the three months ended June 26, 2016 and June 28, 2015, respectively, and 1.7 million and 0.8 million shares of common stock for the six months ended June 26, 2016 and June 28, 2015, respectively, were not included in the Company’s computation of dilutive securities because the exercise price was greater than the market price and therefore the effect would have been anti-dilutive.
The Company has a share-based compensation plan under which employees may be granted share-based awards including shares of restricted stock and restricted stock units (RSUs). Non-forfeitable dividends are paid on unvested shares of restricted stock and non-forfeitable dividend equivalents are paid on unvested RSUs. As such, shares of restricted stock and RSUs are considered participating securities under the two-class method of calculating earnings per share as described in ASC Topic 260, “Earnings per Share.” The two-class method of calculating earnings per share did not have a material impact on the Company’s earnings per share calculation for the three and six month periods ended June 26, 2016 and June 28, 2015, respectively.

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16. Employee Benefit Plans
The Company has a defined benefit qualified pension plan and postretirement healthcare benefit plans that cover certain employees of the Motorcycles segment. The Company also has unfunded supplemental employee retirement plan agreements (SERPA) with certain employees which were instituted to replace benefits lost under the Tax Revenue Reconciliation Act of 1993. Net periodic benefit costs are allocated among selling, administrative and engineering expense, cost of goods sold and inventory. Amounts capitalized in inventory are not significant. Components of net periodic benefit costs were as follows (in thousands):
 
Three months ended
 
Six months ended
 
June 26,
2016
 
June 28,
2015
 
June 26,
2016
 
June 28,
2015
Pension and SERPA Benefits
 
 
 
 
 
 
 
Service cost
$
8,359

 
$
10,010

 
$
16,718

 
$
20,020

Interest cost
22,707

 
21,836

 
45,414

 
43,672

Expected return on plan assets
(36,445
)
 
(36,232
)
 
(72,890
)
 
(72,465
)
Amortization of unrecognized:
 
 
 
 
 
 
 
Prior service cost
255

 
109

 
510

 
218

Net loss
11,588

 
13,677

 
23,176

 
27,354

Settlement loss
300

 
—

 
600

 
—

Net periodic benefit cost
$
6,764

 
$
9,400

 
$
13,528

 
$
18,799

Postretirement Healthcare Benefits
 
 
 
 
 
 
 
Service cost
$
1,870

 
$
2,065

 
$
3,740

 
$
4,130

Interest cost
3,704

 
3,541

 
7,408

 
7,082

Expected return on plan assets
(3,017
)
 
(2,877
)
 
(6,034
)
 
(5,754
)
Amortization of unrecognized:
 
 
 
 
 
 
 
Prior service credit
(701
)
 
(804
)
 
(1,402
)
 
(1,608
)
Net loss
884

 
993

 
1,768

 
1,986

Net periodic benefit cost
$
2,740

 
$
2,918

 
$
5,480

 
$
5,836

During the first half of 2016, the Company voluntarily contributed $25.0 million in cash to further fund its qualified pension plan. There are no required or planned contributions to the qualified pension plan for the remainder of 2016. The Company expects it will continue to make ongoing benefit payments under the SERPA and postretirement healthcare plans.
17. Business Segments
Harley-Davidson, Inc. is the parent company for the groups of companies doing business as Harley-Davidson Motor Company (HDMC) and Harley-Davidson Financial Services (HDFS). The Company operates in two segments: the Motorcycles & Related Products (Motorcycles) segment and the Financial Services segment. The Company’s reportable segments are strategic business units that offer different products and services and are managed separately based on the fundamental differences in their operations. Selected segment information is set forth below (in thousands):
 
Three months ended
 
Six months ended
 
June 26,
2016
 
June 28,
2015
 
June 26,
2016
 
June 28,
2015
Motorcycles net revenue
$
1,670,113

 
$
1,650,783

 
$
3,246,723

 
$
3,161,353

Gross profit
607,558

 
647,214

 
1,197,838

 
1,237,489

Selling, administrative and engineering expense
284,809

 
266,611

 
542,632

 
511,432

Operating income from Motorcycles
322,749

 
380,603

 
655,206

 
726,057

Financial Services revenue
190,964

 
173,609

 
364,322

 
335,984

Financial Services expense
101,391

 
91,696

 
218,378

 
189,407

Operating income from Financial Services
89,573

 
81,913

 
145,944

 
146,577

Operating income
$
412,322

 
$
462,516

 
$
801,150

 
$
872,634


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18. Commitments and Contingencies
The Company is subject to lawsuits and other claims related to environmental, product and other matters. In determining required reserves related to these items, the Company carefully analyzes cases and considers the likelihood of adverse judgments or outcomes, as well as the potential range of possible loss. The required reserves are monitored on an ongoing basis and are updated based on new developments or new information in each matter.
Environmental Protection Agency Notice:
In December 2009, the Company received formal, written requests for information from the United States Environmental Protection Agency (EPA) regarding: (i) certificates of conformity for motorcycle emissions and related designations and labels, (ii) aftermarket parts, and (iii) warranty claims on emissions related components. The Company promptly submitted written responses to the EPA’s inquiry and has engaged in discussions with the EPA. Since that time, the EPA has delivered various additional requests for information to which the Company has responded. It is probable that a result of the EPA’s investigation will be some form of enforcement action by the EPA that will seek a fine and/or other relief or a negotiated resolution with the EPA that will involve a fine and/or other relief. The Company has a reserve associated with this matter which is included in accrued liabilities in the Consolidated Balance Sheet. Based on the status of discussions with the EPA, the Company believes resolution of this matter will not have a material adverse effect on its business or financial condition.
York Environmental Matters:
The Company is involved with government agencies and groups of potentially responsible parties in various environmental matters, including a matter involving the cleanup of soil and groundwater contamination at its York, Pennsylvania facility. The York facility was formerly used by the U.S. Navy and AMF prior to the purchase of the York facility by the Company from AMF in 1981. Although the Company is not certain as to the full extent of the environmental contamination at the York facility, it has been working with the Pennsylvania Department of Environmental Protection (PADEP) since 1986 in undertaking environmental investigation and remediation activities, including an ongoing site-wide remedial investigation/feasibility study (RI/FS). In January 1995, the Company entered into a settlement agreement (the Agreement) with the Navy, and the parties amended the Agreement in 2013 to address ordnance and explosive waste.
The Agreement calls for the Navy and the Company to contribute amounts into a trust equal to 53% and 47%, respectively, of future costs associated with environmental investigation and remediation activities at the York facility (Response Costs). The trust administers the payment of the Response Costs incurred at the York facility as covered by the Agreement.
The Company has a reserve for its estimate of its share of the future Response Costs at the York facility which is included in accrued liabilities in the Consolidated Balance Sheets. As noted above, the RI/FS is still underway and given the uncertainty that exists concerning the nature and scope of additional environmental investigation and remediation that may ultimately be required under the RI/FS or otherwise at the York facility, the Company is unable to make a reasonable estimate of those additional costs, if any, that may result.
The estimate of the Company’s future Response Costs that will be incurred at the York facility is based on reports of independent environmental consultants retained by the Company, the actual costs incurred to date and the estimated costs to complete the necessary investigation and remediation activities. Response Costs are expected to be paid primarily through 2017 although certain Response Costs may continue for some time beyond 2017.
Product Liability Matters:
The Company is involved in product liability suits related to the operation of its business. The Company accrues for claim exposures that are probable of occurrence and can be reasonably estimated. The Company also maintains insurance coverage for product liability exposures. The Company believes that its accruals and insurance coverage are adequate and that product liability suits will not have a material adverse effect on the Company’s consolidated financial statements.
National Highway Traffic Safety Administration Matters:
On July 8, 2016, the National Highway Traffic Safety Administration (NHTSA) announced that it will investigate certain of the Company's model-year 2008-2011 motorcycles equipped with anti-lock braking systems (ABS).  NHTSA’s investigation is in response to rider complaints related to brake failures.  NHTSA noted that Harley-Davidson has a two-year brake fluid replacement interval that owners either are unaware of or ignore.  The Company does not believe that a loss related to this matter is probable and no reserve has been established.  However, it is possible that the outcome of NHTSA’s investigation could result in future costs to the Company.  Given the uncertainty that still exists concerning the resolution of this matter, the Company cannot reasonably estimate these possible future costs, if any.

33
Table of Contents

19. 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 reporting segments. All supplemental data is presented in thousands.
 
Three months ended June 26, 2016
 
HDMC Entities
 
HDFS Entities
 
Eliminations
 
Consolidated
Revenue:
 
 
 
 
 
 
 
Motorcycles and Related Products
$
1,673,379

 
$
—

 
$
(3,266
)
 
$
1,670,113

Financial Services
—

 
191,935

 
(971
)
 
190,964

Total revenue
1,673,379

 
191,935

 
(4,237
)
 
1,861,077

Costs and expenses:
 
 
 
 
 
 
 
Motorcycles and Related Products cost of goods sold
1,062,555

 
—

 
—

 
1,062,555

Financial Services interest expense
—

 
42,895

 
—

 
42,895

Financial Services provision for credit losses
—

 
23,461

 
—

 
23,461

Selling, administrative and engineering expense
285,367

 
38,301

 
(3,824
)
 
319,844

Total costs and expenses
1,347,922

 
104,657

 
(3,824
)
 
1,448,755

Operating income
325,457

 
87,278

 
(413
)
 
412,322

Investment income
43,688

 
—

 
(43,000
)
 
688

Interest expense
7,094

 
—

 
—

 
7,094

Income before provision for income taxes
362,051

 
87,278

 
(43,413
)
 
405,916

Provision for income taxes
93,788

 
31,697

 
—

 
125,485

Net income
$
268,263

 
$
55,581

 
$
(43,413
)
 
$
280,431

 
Six months ended June 26, 2016
 
HDMC Entities
 
HDFS Entities
 
Eliminations
 
Consolidated
Revenue:
 
 
 
 
 
 
 
Motorcycles and Related Products
$
3,252,018

 
$
—

 
$
(5,295
)
 
$
3,246,723

Financial Services
—

 
365,456

 
(1,134
)
 
364,322

Total revenue
3,252,018

 
365,456

 
(6,429
)
 
3,611,045

Costs and expenses:
 
 
 
 
 
 
 
Motorcycles and Related Products cost of goods sold
2,048,885

 
—

 
—

 
2,048,885

Financial Services interest expense
—

 
88,814

 
—

 
88,814

Financial Services provision for credit losses
—

 
60,584

 
—

 
60,584

Selling, administrative and engineering expense
543,598

 
74,275

 
(6,261
)
 
611,612

Total costs and expenses
2,592,483

 
223,673

 
(6,261
)
 
2,809,895

Operating income
659,535

 
141,783

 
(168
)
 
801,150

Investment income
184,454

 
—

 
(183,000
)
 
1,454

Interest expense
14,262

 
—

 
—

 
14,262

Income before provision for income taxes
829,727

 
141,783

 
(183,168
)
 
788,342

Provision for income taxes
204,361

 
53,061

 
—

 
257,422

Net income
$
625,366

 
$
88,722

 
$
(183,168
)
 
$
530,920


34
Table of Contents

 
Three months ended June 28, 2015
 
HDMC Entities
 
HDFS Entities
 
Eliminations
 
Consolidated
Revenue:
 
 
 
 
 
 
 
Motorcycles and Related Products
$
1,653,759

 
$
—

 
$
(2,976
)
 
$
1,650,783

Financial Services
—

 
174,147

 
(538
)
 
173,609

Total revenue
1,653,759

 
174,147

 
(3,514
)
 
1,824,392

Costs and expenses:
 
 
 
 
 
 
 
Motorcycles and Related Products cost of goods sold
1,003,569

 
—

 
—

 
1,003,569

Financial Services interest expense
—

 
41,188

 
—

 
41,188

Financial Services provision for credit losses
—

 
15,175

 
—

 
15,175

Selling, administrative and engineering expense
267,149

 
38,309

 
(3,514
)
 
301,944

Total costs and expenses
1,270,718

 
94,672

 
(3,514
)
 
1,361,876

Operating income
383,041

 
79,475

 
—

 
462,516

Investment income
1,450

 
—

 
—

 
1,450

Interest expense
9

 
—

 
—

 
9

Income before provision for income taxes
384,482

 
79,475

 
—

 
463,957

Provision for income taxes
134,633

 
29,514

 
—

 
164,147

Net income
$
249,849

 
$
49,961

 
$
—

 
$
299,810

 
Six months ended June 28, 2015
 
HDMC Entities
 
HDFS Entities
 
Eliminations
 
Consolidated
Revenue:
 
 
 
 
 
 
 
Motorcycles and Related Products
$
3,166,641

 
$
—

 
$
(5,288
)
 
$
3,161,353

Financial Services
—

 
336,837

 
(853
)
 
335,984

Total revenue
3,166,641

 
336,837

 
(6,141
)
 
3,497,337

Costs and expenses:
 
 
 
 
 
 
 
Motorcycles and Related Products cost of goods sold
1,923,864

 
—

 
—

 
1,923,864

Financial Services interest expense
—

 
79,724

 
—

 
79,724

Financial Services provision for credit losses
—

 
41,422

 
—

 
41,422

Selling, administrative and engineering expense
512,284

 
73,550

 
(6,141
)
 
579,693

Total costs and expenses
2,436,148

 
194,696

 
(6,141
)
 
2,624,703

Operating income
730,493

 
142,141

 
—

 
872,634

Investment income
102,772

 
—

 
(100,000
)
 
2,772

Interest expense
18

 
—

 
—

 
18

Income before provision for income taxes
833,247

 
142,141

 
(100,000
)
 
875,388

Provision for income taxes
256,149

 
49,575

 
—

 
305,724

Net income
$
577,098

 
$
92,566

 
$
(100,000
)
 
$
569,664


35
Table of Contents

 
June 26, 2016
 
HDMC Entities
 
HDFS Entities
 
Eliminations
 
Consolidated
ASSETS
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
Cash and cash equivalents
$
445,662

 
$
419,008

 
$
—

 
$
864,670

Marketable securities
5,070

 
—

 
—

 
5,070

Accounts receivable, net
816,439

 
—

 
(504,483
)
 
311,956

Finance receivables, net
—

 
2,457,974

 
—

 
2,457,974

Inventories
371,196

 
—

 
—

 
371,196

Restricted cash
—

 
78,078

 
—

 
78,078

Deferred income taxes
60,497

 
55,717

 
—

 
116,214

Other current assets
124,923

 
38,203

 
(9,260
)
 
153,866

Total current assets
1,823,787

 
3,048,980

 
(513,743
)
 
4,359,024

Finance receivables, net
—

 
4,824,071

 
—

 
4,824,071

Property, plant and equipment, net
916,388

 
34,921

 
—

 
951,309

Goodwill
54,542

 
—

 
—

 
54,542

Deferred income taxes
76,194

 
8,555

 
(1,702
)
 
83,047

Other long-term assets
133,540

 
24,744

 
(81,837
)
 
76,447

 
$
3,004,451

 
$
7,941,271

 
$
(597,282
)
 
$
10,348,440

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
Accounts payable
$
239,380

 
$
538,799

 
$
(504,483
)
 
$
273,696

Accrued liabilities
397,645

 
97,150

 
(8,984
)
 
485,811

Short-term debt
—

 
1,020,487

 
—

 
1,020,487

Current portion of long-term debt, net
—

 
732,773

 
—

 
732,773

Total current liabilities
637,025

 
2,389,209

 
(513,467
)
 
2,512,767

Long-term debt, net
740,982

 
4,567,081

 
—

 
5,308,063

Pension liability
129,465

 
—

 
—

 
129,465

Postretirement healthcare benefits
188,846

 
—

 
—

 
188,846

Other long-term liabilities
157,835

 
27,621

 
2,836

 
188,292

Shareholders’ equity
1,150,298

 
957,360

 
(86,651
)
 
2,021,007

 
$
3,004,451

 
$
7,941,271

 
$
(597,282
)
 
$
10,348,440


36
Table of Contents

 
December 31, 2015
 
HDMC Entities
 
HDFS Entities
 
Eliminations
 
Consolidated
ASSETS
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
Cash and cash equivalents
$
400,443

 
$
321,766

 
$
—

 
$
722,209

Marketable securities
45,192

 
—

 
—

 
45,192

Accounts receivable, net
390,799

 
—

 
(143,394
)
 
247,405

Finance receivables, net
—

 
2,053,582

 
—

 
2,053,582

Inventories
585,907

 
—

 
—

 
585,907

Restricted cash
—

 
88,267

 
—

 
88,267

Deferred income taxes
56,319

 
46,450

 
—

 
102,769

Other current assets
90,824

 
43,807

 
(2,079
)
 
132,552

Total current assets
1,569,484

 
2,553,872

 
(145,473
)
 
3,977,883

Finance receivables, net
—

 
4,814,571

 
—

 
4,814,571

Property, plant and equipment, net
906,972

 
35,446

 
—

 
942,418

Goodwill
54,182

 
—

 
—

 
54,182

Deferred income taxes
86,075

 
15,681

 
(2,142
)
 
99,614

Other long-term assets
133,753

 
31,158

 
(80,602
)
 
84,309

 
$
2,750,466

 
$
7,450,728

 
$
(228,217
)
 
$
9,972,977

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
Accounts payable
$
220,050

 
$
158,958

 
$
(143,394
)
 
$
235,614

Accrued liabilities
387,137

 
89,048

 
(4,221
)
 
471,964

Short-term debt
—

 
1,201,380

 
—

 
1,201,380

Current portion of long-term debt
—

 
838,349

 
—

 
838,349

Total current liabilities
607,187

 
2,287,735

 
(147,615
)
 
2,747,307

Long-term debt
740,653

 
4,091,816

 
—

 
4,832,469

Pension liability
164,888

 
—

 
—

 
164,888

Postretirement healthcare benefits
193,659

 
—

 
—

 
193,659

Other long-term liabilities
166,440

 
28,560

 
—

 
195,000

Shareholders’ equity
877,639

 
1,042,617

 
(80,602
)
 
1,839,654

 
$
2,750,466

 
$
7,450,728

 
$
(228,217
)
 
$
9,972,977


37
Table of Contents

 
June 28, 2015
 
HDMC Entities
 
HDFS Entities
 
Eliminations
 
Consolidated
ASSETS
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
Cash and cash equivalents
$
828,289

 
$
419,290

 
$
—

 
$
1,247,579

Marketable securities
52,516

 
—

 
—

 
52,516

Accounts receivable, net
743,341

 
—

 
(465,772
)
 
277,569

Finance receivables, net
—

 
2,331,723

 
—

 
2,331,723

Inventories
395,044

 
—

 
—

 
395,044

Restricted cash
—

 
136,760

 
—

 
136,760

Deferred income taxes
51,667

 
43,111

 
—

 
94,778

Other current assets
126,856

 
34,029

 
(6,876
)
 
154,009

Total current assets
2,197,713

 
2,964,913

 
(472,648
)
 
4,689,978

Finance receivables, net
—

 
4,816,772

 
—

 
4,816,772

Property, plant and equipment, net
841,361

 
31,646

 
—

 
873,007

Goodwill
26,105

 
—

 
—

 
26,105

Deferred income taxes
57,587

 
10,861

 
(1,693
)
 
66,755

Other long-term assets
121,264

 
34,576

 
(79,263
)
 
76,577

 
$
3,244,030

 
$
7,858,768

 
$
(553,604
)
 
$
10,549,194

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
Accounts payable
$
306,335

 
$
567,073

 
$
(465,772
)
 
$
407,636

Accrued liabilities
369,467

 
87,839

 
(8,569
)
 
448,737

Short-term debt
—

 
114,983

 
—

 
114,983

Current portion of long-term debt
—

 
1,544,956

 
—

 
1,544,956

Total current liabilities
675,802

 
2,314,851

 
(474,341
)
 
2,516,312

Long-term debt
—

 
4,551,083

 
—

 
4,551,083

Pension liability
66,786

 
—

 
—

 
66,786

Postretirement healthcare liability
196,369

 
—

 
—

 
196,369

Other long-term liabilities
168,043

 
26,974

 
—

 
195,017

Shareholders’ equity
2,137,030

 
965,860

 
(79,263
)
 
3,023,627

 
$
3,244,030

 
$
7,858,768

 
$
(553,604
)
 
$
10,549,194


38
Table of Contents

 
Six months ended June 26, 2016
 
HDMC Entities
 
HDFS Entities
 
Eliminations
 
Consolidated
Cash flows from operating activities:
 
 
 
 
 
 
 
Net income
$
625,366

 
$
88,722

 
$
(183,168
)
 
$
530,920

Adjustments to reconcile net income to cash provided by operating activities:
 
 
 
 
 
 
 
Depreciation and amortization of intangibles
97,025

 
3,931

 
—

 
100,956

Amortization of deferred loan origination costs
—

 
43,555

 
—

 
43,555

Amortization of financing origination fees
330

 
4,816

 
—

 
5,146

Provision for employee long-term benefits
18,405

 
—

 
—

 
18,405

Employee benefit plan contributions and payments
(35,189
)
 
—

 
—

 
(35,189
)
Stock compensation expense
14,562

 
1,235

 
—

 
15,797

Net change in wholesale finance receivables related to sales
—

 
—

 
(442,254
)
 
(442,254
)
Provision for credit losses
—

 
60,584

 
—

 
60,584

Gain on off-balance sheet securitization
—

 
(9,269
)
 
—

 
(9,269
)
Pension plan settlement expense
600

 
—

 
—

 
600

Deferred income taxes
798

 
(3,906
)
 
(440
)
 
(3,548
)
Foreign currency adjustments
(7,966
)
 
—

 
—

 
(7,966
)
Other, net
(12,539
)
 
(171
)
 
168

 
(12,542
)
Change in current assets and current liabilities:
 
 
 
 
 
 
 
Accounts receivable, net
(416,198
)
 
—

 
361,089

 
(55,109
)
Finance receivables—accrued interest and other
—

 
(125
)
 
—

 
(125
)
Inventories
225,586

 
—

 
—

 
225,586

Accounts payable and accrued liabilities
23,420

 
385,992

 
(355,622
)
 
53,790

Derivative instruments
(1,474
)
 
—

 
—

 
(1,474
)
Other
(33,237
)
 
1,664

 
—

 
(31,573
)
Total adjustments
(125,877
)
 
488,306

 
(437,059
)
 
(74,630
)
Net cash provided by operating activities
499,489

 
577,028

 
(620,227
)
 
456,290

 
 
 
 
 
 
 
 

39
Table of Contents

 
Six months ended June 26, 2016
 
HDMC Entities
 
HDFS Entities
 
Eliminations
 
Consolidated
Cash flows from investing activities:
 
 
 
 
 
 
 
Capital expenditures
(104,125
)
 
(3,406
)
 
—

 
(107,531
)
Origination of finance receivables
—

 
(4,507,717
)
 
2,516,333

 
(1,991,384
)
Collections of finance receivables
—

 
3,709,319

 
(2,079,106
)
 
1,630,213

Proceeds from finance receivables sold
—

 
312,571

 
—

 
312,571

Sales and redemptions of marketable securities
40,000

 
—

 
—

 
40,000

Other
166

 
—

 
—

 
166

Net cash used by investing activities
(63,959
)
 
(489,233
)
 
437,227

 
(115,965
)
Cash flows from financing activities:
 
 
 
 
 
 
 
Proceeds from issuance of medium-term notes
—

 
1,193,396

 
—

 
1,193,396

Repayments of medium-term notes
—

 
(450,000
)
 
—

 
(450,000
)
Repayments of securitization debt
—

 
(385,837
)
 
—

 
(385,837
)
Net decrease in credit facilities and unsecured commercial paper
—

 
(181,259
)
 
—

 
(181,259
)
Borrowings of asset-backed commercial paper
—

 
33,428

 
—

 
33,428

Repayments of asset-backed commercial paper
—

 
(34,989
)
 
—

 
(34,989
)
Net change in restricted cash
—

 
17,992

 
—

 
17,992

Dividends paid
(127,800
)
 
(183,000
)
 
183,000

 
(127,800
)
Purchase of common stock for treasury
(269,411
)
 
—

 
—

 
(269,411
)
Excess tax benefits from share-based payments
331

 
—

 
—

 
331

Issuance of common stock under employee stock option plans
2,367

 
—

 
—

 
2,367

Net cash (used by) provided by financing activities
(394,513
)
 
9,731

 
183,000

 
(201,782
)
Effect of exchange rate changes on cash and cash equivalents
4,202

 
(284
)
 
—

 
3,918

Net increase in cash and cash equivalents
$
45,219

 
$
97,242

 
$
—

 
$
142,461

Cash and cash equivalents:
 
 
 
 
 
 
 
Cash and cash equivalents—beginning of period
$
400,443

 
$
321,766

 
$
—

 
$
722,209

Net increase in cash and cash equivalents
45,219

 
97,242

 
—

 
142,461

Cash and cash equivalents—end of period
$
445,662

 
$
419,008

 
$
—

 
$
864,670


40
Table of Contents

 
Six months ended June 28, 2015
 
HDMC Entities
 
HDFS Entities
 
Eliminations
 
Consolidated
Cash flows from operating activities:
 
 
 
 
 
 
 
Net income
$
577,098

 
$
92,566

 
$
(100,000
)
 
$
569,664

Adjustments to reconcile net income to cash provided by operating activities:
 
 
 
 
 
 
 
Depreciation and amortization of intangibles
88,996

 
4,644

 
—

 
93,640

Amortization of deferred loan origination costs
—

 
47,524

 
—

 
47,524

Amortization of financing origination fees
—

 
4,820

 
—

 
4,820

Provision for employee long-term benefits
24,635

 
—

 
—

 
24,635

Employee benefit plan contributions and payments
(12,725
)
 
—

 
—

 
(12,725
)
Stock compensation expense
15,415

 
1,319

 
—

 
16,734

Net change in wholesale finance receivables related to sales
—

 
—

 
(418,969
)
 
(418,969
)
Provision for credit losses
—

 
41,422

 
—

 
41,422

Deferred income taxes
5,832

 
(7,027
)
 
—

 
(1,195
)
Foreign currency adjustments
11,041

 
—

 
—

 
11,041

Other, net
(2,671
)
 
707

 
—

 
(1,964
)
Change in current assets and current liabilities:
 
 
 
 
 
 
 
Accounts receivable, net
(347,967
)
 
—

 
304,658

 
(43,309
)
Finance receivables—accrued interest and other
—

 
(270
)
 
—

 
(270
)
Inventories
38,012

 
—

 
—

 
38,012

Accounts payable and accrued liabilities
144,784

 
385,999

 
(298,426
)
 
232,357

Derivative instruments
1,185

 
—

 
—

 
1,185

Other
9,625

 
1,717

 
—

 
11,342

Total adjustments
(23,838
)
 
480,855

 
(412,737
)
 
44,280

Net cash provided by operating activities
553,260

 
573,421

 
(512,737
)
 
613,944


41
Table of Contents

 
Six months ended June 28, 2015
 
HDMC Entities
 
HDFS Entities
 
Eliminations
 
Consolidated
Cash flows from investing activities:
 
 
 
 
 
 
 
Capital expenditures
(83,282
)
 
(1,898
)
 
—

 
(85,180
)
Origination of finance receivables
—

 
(4,526,313
)
 
2,549,750

 
(1,976,563
)
Collections of finance receivables
—

 
3,707,444

 
(2,137,013
)
 
1,570,431

Sales and redemptions of marketable securities
4,500

 
—

 
—

 
4,500

Other
5,111

 
—

 
—

 
5,111

Net cash used by investing activities
(73,671
)
 
(820,767
)
 
412,737

 
(481,701
)
Cash flows from financing activities:
 
 
 
 
 
 
 
Proceeds from issuance of medium-term notes
—

 
595,386

 
—

 
595,386

Intercompany borrowing activity
250,000

 
(250,000
)
 
—

 
—

Proceeds from securitization debt
—

 
1,195,668

 
—

 
1,195,668

Repayments of securitization debt
—

 
(454,332
)
 
—

 
(454,332
)
Net decrease in credit facilities and unsecured commercial paper
—

 
(616,586
)
 
—

 
(616,586
)
Borrowings of asset-backed commercial paper
—

 
40,209

 
—

 
40,209

Repayments of asset-backed commercial paper
—

 
(35,730
)
 
—

 
(35,730
)
Net change in restricted cash
—

 
(40,159
)
 
—

 
(40,159
)
Dividends paid
(129,745
)
 
(100,000
)
 
100,000

 
(129,745
)
Purchase of common stock for treasury
(358,425
)
 
—

 
—

 
(358,425
)
Excess tax benefits from share-based payments
2,401

 
—

 
—

 
2,401

Issuance of common stock under employee stock option plans
15,664

 
—

 
—

 
15,664

Net cash (used by) provided by financing activities
(220,105
)
 
334,456

 
100,000

 
214,351

Effect of exchange rate changes on cash and cash equivalents
(5,090
)
 
(605
)
 
—

 
(5,695
)
Net increase in cash and cash equivalents
$
254,394

 
$
86,505

 
$
—

 
$
340,899

Cash and cash equivalents:
 
 
 
 
 
 
 
Cash and cash equivalents—beginning of period
$
573,895

 
$
332,785

 
$
—

 
$
906,680

Net increase in cash and cash equivalents
254,394

 
86,505

 
—

 
340,899

Cash and cash equivalents—end of period
$
828,289

 
$
419,290

 
$
—

 
$
1,247,579


42
Table of Contents

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 business segments: Motorcycles & Related Products (Motorcycles) and Financial Services. The Company’s reportable segments are strategic business units that offer different products and services and are managed separately based on the fundamental differences in their operations.
The Motorcycles segment consists of HDMC which designs, manufactures and sells at wholesale on-road Harley-Davidson motorcycles as well as a line of motorcycle parts, accessories, general merchandise and related services. The Company's products are sold to retail customers through a network of independent dealers. The Company conducts business on a global basis, with sales in the following regions: Americas, Europe/Middle East/Africa (EMEA) and Asia-Pacific.
The Financial Services segment consists of HDFS which primarily provides wholesale and retail financing and insurance-related programs to Harley-Davidson dealers and their retail customers. HDFS conducts business principally in the United States and Canada.
The “% Change” figures included in the “Results of Operations” section were calculated using unrounded dollar amounts and may differ from calculations using the rounded dollar amounts presented.
Overview
The Company’s net income was $280.4 million, or $1.55 per diluted share, for the second quarter of 2016 compared to $299.8 million, or $1.44 per diluted share, in the second quarter of 2015. Operating income from Motorcycles decreased $57.9 million or 15.2% compared to last year’s second quarter. The favorable impact of higher motorcycle shipments in the second quarter of 2016 was more than offset by unfavorable product mix, adverse foreign currency exchange impacts, higher manufacturing costs and higher selling, administrative and engineering expenses. Operating income from Financial Services in the second quarter of 2016 was $89.6 million, up 9.4% compared to $81.9 million in the year-ago quarter driven in part by a gain related to the sale of retail finance receivables.
Worldwide retail sales of new Harley-Davidson motorcycles were down 1.9% compared to the second quarter of 2015. During the second quarter of 2016, independent dealer retail sales of new Harley-Davidson motorcycles were 5.2% lower in the U.S. behind weak industry sales while retail sales in international markets were up 4.3% compared to the prior year second quarter. While the Company expected the U.S. motorcycle industry to be down in the first half of 2016, given the strong industry growth in 2015 along with the continued weakness in oil-dependent areas, it did not expect the extent to which it was down. Although the Company's U.S. market share gains helped offset the full impact of the weak U.S. market, the lower industry sales have had an impact on the Company's results and forward expectations. As a result, the Company has taken the prudent step to lower expected 2016 wholesale motorcycle shipments. This is largely due to what the Company believes will be continued pressure on industry growth in the U.S., coupled with caution as it considers the potential impact of global macro-economic uncertainty. The Company remains steadfast in its commitment to keep supply in line with demand to protect the premium nature of its brand, and it believes these steps will help ensure U.S. dealer inventory is appropriate by year end to support the expected sales environment.
(1)
Note Regarding Forward-Looking Statements
The Company intends that certain matters discussed in this report are “forward-looking statements” intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. These forward-looking statements can generally be identified as such by reference to this footnote or because the context of the statement will include words such as the Company “believes,” “anticipates,” “expects,” “plans,” or “estimates” or words of similar meaning. Similarly, statements that describe future plans, objectives, outlooks, targets, guidance or goals are also forward-looking statements. Such forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those anticipated as of the date of this report. Certain of such risks and uncertainties are described in close proximity to such statements or elsewhere in this report, including under the caption “Cautionary Statements” and in Item 1A “Risk Factors” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2015. Shareholders, potential investors, and other readers are urged to consider these factors in evaluating the forward-looking statements and cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements included in the Overview and Outlook section are only made as of July 28, 2016 and the remaining forward looking statements in this report are only made as of the date of the filing of this report (August 4, 2016) and the Company disclaims any obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances.

43
Table of Contents

Outlook(1) 
On July 28, 2016, the Company provided the following information concerning its expectations for the remainder of 2016:
The Company stated its expectation to ship 264,000 to 269,000 Harley-Davidson motorcycles to dealers in 2016, approximately down 1% to up 1% compared to 2015. The Company's previous guidance was 269,000 to 274,000 motorcycles. In addition, the Company announced that its full-year shipment estimate included expected shipments of 48,500 to 53,500 motorcycles in the third quarter of 2016 compared to 53,472 motorcycles shipped in the third quarter of 2015 which is approximately flat to down 9%. The lower third quarter 2016 shipment guidance is partially the result of shipping ahead of the third quarter 2016 ERP implementation in the second quarter of 2016.
The Company expects 2016 full-year operating margin percent for the Motorcycles segment to be between 15% and 16% compared to 16.5% in 2015. The Company's previous guidance was between 16% and 17%. The Company lowered its expectations due to lost absorption on actual and expected lower production, unfavorable shipment mix and higher manufacturing expense.
The Company continues to expect gross margin to be down in 2016 compared to 2015. The Company expects gross margin to be negatively impacted by unfavorable foreign currency exchange, unfavorable mix and higher manufacturing costs, including start-up costs associated with the implementation of its ERP system at its Kansas City manufacturing facility.
The Company continues to expect third quarter manufacturing cost to be unfavorable behind lower absorption and higher year-over-year start-up costs. Conversely, the Company expects fourth quarter manufacturing cost to be favorable compared to 2015. The Company believes that the increased manufacturing costs that it experienced in the first half of 2016 are largely temporary in nature and it does not expect the majority of these costs to recur in 2017.
The impact of foreign currency is dependent on exchange rates. If foreign currency exchange rates experienced recently remained constant throughout the remainder of 2016, which is a hypothetical expectation in what is a very volatile foreign currency exchange environment, the Company estimates the adverse impact to its expected Motorcycles segment full-year revenue from currency exchange rates would be slightly unfavorable on a year-over-year basis. Under this scenario, the Company would also expect an unfavorable year-over-year impact to gross margin of approximately $45 million, or approximately 0.8 percentage points.
The Company continues to expect its full-year selling, administrative and engineering expenses to be flat to up modestly from 2015, but lower as a percent of revenue. Selling, administrative and engineering expenses are expected to be higher than the prior year in the third quarter of 2016, due primarily to the timing of expenses which corresponds with the motorcycle selling season in its largest markets.
As previously disclosed, the Company is significantly increasing its investments to drive demand. For 2016, the Company expects to increase its investments in customer-facing marketing and new product development. These investments began in the first quarter and will continue throughout 2016 and consist of primarily selling, administrative and engineering expenses. The Company plans to offset these increased investments with reduced costs in other areas, following the reorganizations actions taken in the fourth quarter of 2015.
The Company continues to expect operating income for the Financial Services segment to be down modestly in 2016 as compared to 2015 as a result of a higher provision for credit losses and increased borrowing costs, partially offset by higher revenues.
The Company continues to estimate capital expenditures for 2016 to be between $255 million and $275 million. The Company anticipates it will have the ability to fund all capital expenditures in 2016 with cash flows generated by operations.
The Company expects its full-year 2016 effective income tax rate will be approximately 33%. The Company's previous guidance was approximately 34.5%. The 2015 effective tax rate was 34.6%.

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Results of Operations for the Three Months Ended June 26, 2016
Compared to the Three Months Ended June 28, 2015
Consolidated Results
 
Three months ended
 
 
 
 
(in thousands, except earnings per share)
June 26,
2016
 
June 28,
2015
 
(Decrease) Increase
 
% Change
Operating income from Motorcycles & Related Products
$
322,749

 
$
380,603

 
$
(57,854
)
 
(15.2
)%
Operating income from Financial Services
89,573

 
81,913

 
7,660

 
9.4

Operating income
412,322

 
462,516

 
(50,194
)
 
(10.9
)
Investment income
688

 
1,450

 
(762
)
 
(52.6
)
Interest expense
7,094

 
9

 
7,085

 
NM

Income before income taxes
405,916

 
463,957

 
(58,041
)
 
(12.5
)
Provision for income taxes
125,485

 
164,147

 
(38,662
)
 
(23.6
)
Net income
$
280,431

 
$
299,810

 
$
(19,379
)
 
(6.5
)%
Diluted earnings per share
$
1.55

 
$
1.44

 
$
0.11

 
7.6
 %
Consolidated operating income was down 10.9% in the second quarter of 2016 due to a decrease in operating income from the Motorcycles segment which declined by $57.9 million, or 15.2%, compared to the second quarter of 2015 partially offset by an increase in operating income from the Financial Services segment which increased $7.7 million, or 9.4%, compared to the second quarter of 2015. Please refer to the “Motorcycles and Related Products Segment” and “Financial Services Segment” discussions following for a more detailed discussion of the factors affecting operating income.
Corporate interest expense was $7.1 million higher in the second quarter of 2016 compared to the second quarter of 2015 due to the issuance of debt in the third quarter of 2015. The Company issued $750.0 million of senior unsecured notes in the third quarter of 2015 and utilized the proceeds to fund the purchase of its common stock in the third and fourth quarters of 2015.
The effective income tax rate for the second quarter of 2016 was 30.9% compared to 35.4% for the second quarter of 2015. The second quarter 2016 income tax provision included discrete tax benefits following the closure of various tax audits during the quarter.
Diluted earnings per share were $1.55 in the second quarter of 2016, up 7.6% from the same period in the prior year. Diluted earnings per share were adversely impacted by the 6.5% decrease in net income, but benefited from lower diluted weighted average shares outstanding. Diluted weighted average shares outstanding decreased from 208.6 million in the second quarter of 2015 to 181.3 million in the second quarter of 2016, driven by the Company's repurchases of common stock. Please refer to "Liquidity and Capital Resources" for additional information concerning the Company's share repurchase activity.
Harley-Davidson Motorcycle Worldwide Retail Sales(a) 
Worldwide independent dealer retail sales of Harley-Davidson motorcycles during the second quarter of 2016 decreased 1.9% compared to the second quarter of 2015. Retail sales of Harley-Davidson motorcycles decreased 5.2% in the United States and increased 4.3% internationally in the second quarter of 2016. Despite the ongoing challenging macro-economic and motorcycle industry conditions, the Company was encouraged with its U.S. and Europe market share gains in the second quarter of 2016. The Company's ability to grow internationally and partially offset the industry headwinds in the U.S. in the quarter reinforced its intensified focus on driving demand and enhancing its strong brand.
The Company believes its increased investment in driving demand drove positive market share results in the U.S. and in Europe in the first half of 2016. In addition, the positive response to the Company's new 2016 motorcycle models continued during the second quarter of 2016.
The Company's U.S. retail sales decreased by 5.2% in the second quarter of 2016 compared to the second quarter of 2015. The impact of the weak U.S. industry on the Company's retail sales was partially offset by gains in market share. U.S. industry registrations of 601+cc motorcycles in the second quarter of 2016 decreased 8.6%. The Company expected U.S. industry sales to be lower in the second quarter of 2016 compared to the second quarter of 2015, although it did not expect the extent to which the second quarter of 2016 declined, especially considering the high level of competitive discounting that continued during the

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quarter. The Company believes the decrease was due to strong prior year industry growth driven by the onset of aggressive competitive discounting and weak sales in oil-dependent areas.
Although the overall industry was down 8.6%, the Company's U.S. market share of 601+cc motorcycles for the second quarter of 2016 was 49.5%, up 2.0 percentage points compared to the same period last year (Source: Motorcycle Industry Council). The Company believes its second quarter market share gains were driven by its demand driving investments focused on growing product awareness and growing ridership in the U.S. and a strong reception to its new 2016 motorcycle models.
In the EMEA region, retail sales of Harley-Davidson motorcycles in the second quarter of 2016 increased 8.2% compared to the prior year driven by a positive reception to the Company's new 2016 motorcycle models and increased demand driving investments.
Second quarter 2016 retail sales in the Asia Pacific region were up 0.8% compared to the second quarter of 2015. The Company believes growth in the Asia Pacific region slowed due to strong prior-year sales that were up nearly 17%. The retail sales in the region were also negatively impacted as the Company exited retail sales in Indonesia in 2016 to establish a new dealer network and improve the customer experience in that market.
Latin America retail sales trends improved from the first quarter of 2016 as the Company continued to experience strong growth in Mexico. However, overall retail sales in Latin America were down 5.0% in the second quarter of 2016 compared to the prior year as a result of lower retail sales in Brazil. The Company believes retail sales in the Brazil market continued to be impacted by a challenging economy and consumer uncertainty. In response to the nearly 50% devaluation of the Brazilian Real in 2015, the Company raised prices for model-year 2016 motorcycles over 20% to improve its profitability per motorcycle. The Company continues to expect retail sales in Latin America to be lower in 2016 compared to 2015(1).
Retail sales in Canada were 2.0% higher in the second quarter of 2016 compared to the second quarter of 2015. The Company believes the market continued to respond well to the change to a direct distribution model and pricing adjustments that were made with the model-year 2016 motorcycles.
In support of the Company's strategic focus on increasing brand access, it plans to continue to expand its international distribution. The Company added six new international dealerships in the second quarter of 2016.(1) 
The following table includes retail unit sales of Harley-Davidson motorcycles:
 
Three months ended
 
 
 
 
 
June 30,
2016
 
June 30,
2015
 
(Decrease)
Increase
 
%
Change
Americas Region
 
 
 
 
 
 
 
United States
54,786

 
57,790

 
(3,004
)
 
(5.2
)%
Canada
3,813

 
3,737

 
76

 
2.0
 %
Latin America
2,573

 
2,708

 
(135
)
 
(5.0
)%
Total Americas Region
61,172

 
64,235

 
(3,063
)
 
(4.8
)%
Europe, Middle East and Africa Region (EMEA)
 
 
 
 
 
 
 
Europe(b)
15,188

 
14,150

 
1,038

 
7.3
 %
Other
2,325

 
2,029

 
296

 
14.6
 %
Total EMEA Region
17,513

 
16,179

 
1,334

 
8.2
 %
Asia Pacific Region
 
 
 
 
 
 
 
Japan
2,763

 
2,580

 
183

 
7.1
 %
Other
5,818

 
5,937

 
(119
)
 
(2.0
)%
Total Asia Pacific Region
8,581

 
8,517

 
64

 
0.8
 %
Total Worldwide Retail Sales
87,266

 
88,931

 
(1,665
)
 
(1.9
)%
Total International Retail Sales
32,480

 
31,141

 
1,339

 
4.3
 %
 
(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 retail sales and this information is subject to revision.

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Table of Contents

(b)
Includes Austria, Belgium, Denmark, Finland, France, Germany, Greece, Italy, Luxembourg, Netherlands, Norway, Portugal, Spain, Sweden, Switzerland and the United Kingdom.


Motorcycles & Related Products Segment
Motorcycle Unit Shipments
The following table includes wholesale motorcycle unit shipments for the Motorcycles segment:
 
Three months ended
 
 
 
 
 
June 26, 2016
 
June 28, 2015
 
Unit
 
Unit
 
Units
 
Mix %
 
Units
 
Mix %
 
Increase (Decrease)
 
%
Change
United States
57,804

 
65.6
%
 
55,128

 
64.7
%
 
2,676

 
4.9
 %
International
30,356

 
34.4
%
 
30,044

 
35.3
%
 
312

 
1.0

Harley-Davidson motorcycle units
88,160

 
100.0
%
 
85,172

 
100.0
%
 
2,988

 
3.5
 %
Touring motorcycle units
27,675

 
31.4
%
 
34,563

 
40.6
%
 
(6,888
)
 
(19.9
)%
Cruiser motorcycle units
37,655

 
42.7
%
 
29,952

 
35.2
%
 
7,703

 
25.7

Sportster® / Street motorcycle units
22,830

 
25.9
%
 
20,657

 
24.2
%
 
2,173

 
10.5

Harley-Davidson motorcycle units
88,160

 
100.0
%
 
85,172

 
100.0
%
 
2,988

 
3.5
 %
 The Company shipped 88,160 Harley-Davidson motorcycles worldwide during the second quarter of 2016, which was 3.5% higher than the second quarter of 2015 and slightly above Company expectations.
Shipments of Cruiser and Sportster® / Street motorcycles as a percentage of total shipments increased in the second quarter of 2016 compared to the prior year while shipments of Touring motorcycles as a percentage of total shipments decreased. The Company believes the higher shipment mix of Cruiser and Sportster® / Street motorcycles was a result strong consumer demand driven by the Company's investment in its model-year 2016 product.
U.S. dealer retail inventory of Harley-Davidson motorcycles was higher at the end of the second quarter of 2016 compared to the second quarter of 2015. The increase was partially driven by five incremental motorcycle models compared to 2015 and lower-than-expected retail sales in the quarter. Also, during the second quarter of 2016, the Company shipped all remaining model-year 2016 motorcycles to dealers in the U.S. in advance of its third quarter 2016 ERP implementation at its Kansas City manufacturing facility. As the Company continues to manage supply in line with demand, the Company now expects 2016 year-end U.S. retail inventory to be in line with the prior year.(1) The Company had previously expected 2016 year-end retail inventory to be higher compared to 2015.

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Table of Contents

Segment Results
The following table includes the condensed statements of operations for the Motorcycles segment (in thousands):
 
Three months ended
 
 
 
 
 
June 26, 2016
 
June 28, 2015
 
(Decrease)
Increase
 
%
Change
Revenue:
 
 
 
 
 
 
 
Motorcycles
$
1,330,632

 
$
1,308,837

 
$
21,795

 
1.7
 %
Parts & Accessories
258,208

 
256,840

 
1,368

 
0.5

General Merchandise
75,757

 
77,518

 
(1,761
)
 
(2.3
)
Other
5,516

 
7,588

 
(2,072
)
 
(27.3
)
Total revenue
1,670,113

 
1,650,783

 
19,330

 
1.2

Cost of goods sold
1,062,555

 
1,003,569

 
58,986

 
5.9

Gross profit
607,558

 
647,214

 
(39,656
)
 
(6.1
)
Selling & administrative expense
236,428

 
228,148

 
8,280

 
3.6

Engineering expense
48,381

 
38,463

 
9,918

 
25.8

Operating expense
284,809

 
266,611

 
18,198

 
6.8

Operating income from Motorcycles
$
322,749

 
$
380,603

 
$
(57,854
)
 
(15.2
)%
The following table includes the estimated impact of significant factors affecting the comparability of net revenue, cost of goods sold and gross profit from the second quarter of 2015 to the second quarter of 2016 (in millions):
 
Net
Revenue
 
Cost of
Goods Sold
 
Gross
Profit
Three months ended June 28, 2015
$
1,650.8

 
$
1,003.6

 
$
647.2

Volume
40.0

 
25.0

 
15.0

Price, net of related cost
28.7

 
13.8

 
14.9

Foreign currency exchange rates and hedging
(2.8
)
 
20.6

 
(23.4
)
Shipment mix
(46.6
)
 
(29.0
)
 
(17.6
)
Raw material prices
—

 
(7.6
)
 
7.6

Manufacturing and other costs
—

 
36.1

 
(36.1
)
Total
19.3

 
58.9

 
(39.6
)
Three months ended June 26, 2016
$
1,670.1

 
$
1,062.5

 
$
607.6

The following factors affected the comparability of net revenue, cost of goods sold and gross profit from the second quarter of 2015 to the second quarter of 2016:

•
Volume increases were driven by an increase in wholesale motorcycle shipments in the second quarter of 2016.
•
On average, wholesale prices for the Company’s 2016 model-year motorcycles are higher than the prior model-year resulting in the favorable impact on revenue during the period. The impact of revenue favorability resulting from model-year price increases on gross profit was partially offset by increases in cost related to the additional content added to the 2016 model-year motorcycles.
•
Gross profit was negatively impacted by foreign currency due to lower hedge gains, given the significant gains experienced in the prior year's second quarter, and lower revenues behind a slightly stronger U.S. dollar.
•
Shipment mix changes negatively impacted gross profit. Strong demand for Cruisers and Sportster® motorcycles led to higher-than-expected mix unfavorability during the quarter.
•
Raw material prices were lower in the second quarter of 2016 relative to the second quarter of 2015.
•
Manufacturing costs in the second quarter of 2016 were negatively impacted by higher year-over-year start-up costs, including costs related to the implementation of the ERP system at the Company's Kansas City manufacturing facility, significant plant re-tooling and lower efficiencies related to plant disruptions and lost absorption. The Company's fixed cost absorption was unfavorable as a result of lower production in the second quarter of 2016 compared to the second quarter of 2015.

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Table of Contents

The net increase in operating expense was primarily due to the Company's increased investments in marketing and product development to drive demand. Selling and administrative expenses were also higher in 2016 due to costs associated with managing the Canadian operations that the Company acquired in August 2015.
Financial Services Segment
Segment Results
The following table includes the condensed statements of operations for the Financial Services segment (in thousands):
 
Three months ended
 
 
 
 
 
June 26, 2016
 
June 28, 2015
 
Increase
(Decrease)
 
%
Change
Interest income
$
157,009

 
$
150,284

 
$
6,725

 
4.5
 %
Other income
24,434

 
23,325

 
1,109

 
4.8

Securitization income
9,521

 
—

 
9,521

 
—

Financial Services revenue
190,964

 
173,609

 
17,355

 
10.0

Interest expense
42,895

 
41,188

 
1,707

 
4.1

Provision for credit losses
23,461

 
15,175

 
8,286

 
54.6

Operating expenses
35,035

 
35,333

 
(298
)
 
(0.8
)
Financial Services expense
101,391

 
91,696

 
9,695

 
10.6

Operating income from Financial Services
$
89,573

 
$
81,913

 
$
7,660

 
9.4
 %
Interest income for the second quarter of 2016 increased primarily due to higher average receivables, partially offset by lower yields on retail finance receivables due in part to low-rate retail promotional activity primarily in 2015. Other income was slightly favorable on increased credit card licensing revenue and insurance commission revenue. Securitization income was higher due to a $9.3 million gain on the sale of finance receivables with a principal balance of $301.8 million through an off-balance sheet asset-backed securitization during the second quarter of 2016. There was no comparable transaction in the prior year.
Interest expense for the second quarter of 2016 increased slightly due to higher average outstanding debt, partially offset by a lower cost of funds.
The provision for credit losses increased $8.3 million in the second quarter of 2016 as compared to the second quarter of 2015. The retail motorcycle provision increased as a result of higher credit losses and an associated increase in the retail reserve rate. Credit losses were higher as a result of higher losses on loans in oil-dependent areas, normalizing loan performance, and lower used motorcycle values at auction.
Changes in the allowance for credit losses on finance receivables were as follows (in thousands):
 
Three months ended
 
June 26,
2016
 
June 28,
2015
Balance, beginning of period
$
156,184

 
$
132,820

Provision for finance credit losses
23,461

 
15,175

Charge-offs
(26,460
)
 
(21,003
)
Recoveries
11,459

 
12,239

Other (a)
(3,291
)
 
—

Balance, end of period
$
161,353

 
$
139,231


(a) Related to the sale of finance receivables with a principal balance of $301.8 million through an off-balance sheet asset-backed securitization transaction.

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Table of Contents

Results of Operations for the Six Months Ended June 26, 2016
Compared to the Six Months Ended June 28, 2015
Consolidated Results
 
Six months ended
 
 
 
 
(in thousands, except earnings per share)
June 26,
2016
 
June 28,
2015
 
(Decrease)
Increase
 
%
Change
Operating income from Motorcycles & Related Products
$
655,206

 
$
726,057

 
$
(70,851
)
 
(9.8
)%
Operating income from Financial Services
145,944

 
146,577

 
(633
)
 
(0.4
)
Operating income
801,150

 
872,634

 
(71,484
)
 
(8.2
)
Investment income
1,454

 
2,772

 
(1,318
)
 
(47.5
)
Interest expense
14,262

 
18

 
14,244

 
NM

Income before income taxes
788,342

 
875,388

 
(87,046
)
 
(9.9
)
Provision for income taxes
257,422

 
305,724

 
(48,302
)
 
(15.8
)
Net income
$
530,920

 
$
569,664

 
$
(38,744
)
 
(6.8
)%
Diluted earnings per share
$
2.91

 
$
2.71

 
$
0.20

 
7.4
 %
Consolidated operating income was down 8.2% in the first six months of 2016 primarily driven by a decrease in operating income from the Motorcycles segment which declined by $70.9 million, or 9.8%, compared to the first six months of 2015. Operating income from the Financial Services segment declined by $0.6 million in the first six months of 2016 compared to the first six months of 2015. Please refer to the “Motorcycles and Related Products Segment” and “Financial Services Segment” discussions following for a more detailed discussion of the factors affecting operating income.
Corporate interest expense was higher in the first six months of 2016 compared to the first six months of 2015 due to the issuance of debt in the third quarter of 2015. The Company issued $750.0 million of senior unsecured notes in the third quarter of 2015 and utilized the proceeds to fund the purchase of its common stock in the third and fourth quarters of 2015.
The effective income tax rate for the first six months of 2016 was 32.7% compared to 34.9% for the first six months of 2015. The 2016 income tax provision included discrete tax benefits following the closure of various tax audits during the second quarter of 2016.
Diluted earnings per share were $2.91 in the first six months of 2016, up 7.4% from the same period in the prior year. Diluted earnings per share benefited from lower diluted weighted average shares outstanding. Diluted weighted average shares outstanding decreased from 210.2 million in the first six months of 2015 to 182.7 million in the first six months of 2016, driven by the Company's repurchases of common stock. Please refer to "Liquidity and Capital Resources" for additional information concerning the Company's share repurchase activity.
Motorcycles Retail Sales and Registration Data
Worldwide independent dealer retail sales of Harley-Davidson motorcycles decreased 0.6% during the first half of 2016 compared to the first half of 2015. Retail sales of Harley-Davidson motorcycles increased 4.4% internationally and decreased 3.4% in the United States in the first half of 2016.
The Company's U.S. market share of 601+cc motorcycles for the first six months of 2016 was 50.0%, up 1.2 percentage points compared to the same period last year (Source: Motorcycle Industry Council). The Company's U.S. market share continued to stabilize as the industry was down 5.2% in the first six months of 2016.
Retail sales in the first six months of 2016 in the EMEA region were up 8.4% compared to the first six months of 2015 reflecting a significant increase in demand driving investments in that market. During the first six months of 2016, the Company's market share of 601+cc motorcycles in Europe was 10.4%, up 0.3 percentage points compared to the same period last year (Source: Association des Constructeurs Europeens de Motocycles).
In the Asia-Pacific region, retail sales increased 3.4% in the first six months of 2016 compared to the same period last year.
Latin America retail sales in the first six months of 2016 were down 15.4% compared to the first six months of 2015 primarily due to a decline in Brazil, partially offset by growth in Mexico.

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Table of Contents

Retail sales in Canada were up 7.2% in the first six months of 2016 compared to the same period last year. The Company believes the market continued to respond well to the change to a direct distribution model and pricing adjustments that were made with the model-year 2016 motorcycles.
Worldwide Harley-Davidson Motorcycle Retail Sales(a) 
The following table includes retail unit sales of Harley-Davidson motorcycles:
 
Six months ended
 
 
 
 
 
June 30,
2016
 
June 30,
2015
 
(Decrease)
Increase
 
%
Change
Americas Region
 
 
 
 
 
 
 
United States
90,112

 
93,278

 
(3,166
)
 
(3.4
)%
Canada
6,283

 
5,860

 
423

 
7.2

Latin America
4,459

 
5,273

 
(814
)
 
(15.4
)
Total Americas Region
100,854

 
104,411

 
(3,557
)
 
(3.4
)
Europe, Middle East and Africa Region (EMEA)
 
 
 
 
 
 
 
Europe(b)
23,783

 
22,279

 
1,504

 
6.8

Other
3,940

 
3,288

 
652

 
19.8

Total EMEA Region
27,723

 
25,567

 
2,156

 
8.4

Asia Pacific Region
 
 
 
 
 
 
 
Japan
4,869

 
4,552

 
317

 
7.0

Other
11,278

 
11,062

 
216

 
2.0

Total Asia Pacific Region
16,147

 
15,614

 
533

 
3.4

Total Worldwide Retail Sales
144,724

 
145,592

 
(868
)
 
(0.6
)%
Total International Retail Sales
54,612

 
52,314

 
2,298

 
4.4
 %
 
(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 retail sales and 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.

Motorcycle Registration Data(a) 
The following table includes industry retail motorcycle registration data:
 
Six months ended
 
 
 
 
 
June 30,
2016
 
June 30,
2015
 
(Decrease)Increase
 
%
Change
United States(b)
177,447

 
187,163

 
(9,716
)
 
(5.2
)%
Europe(c)
248,519

 
229,277

 
19,242

 
8.4
 %
 
(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 500TM motorcycles is not included in this table.
(b)
United States industry data is derived from information provided by Motorcycle Industry Council (MIC). This third party data is subject to revision and update.
(c)
Europe data includes Austria, Belgium, Denmark, Finland, France, Germany, Greece, Italy, Luxembourg, Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, and the United Kingdom. Industry retail motorcycle registration data includes 601+cc models derived from information provided by Association des Constructeurs Europeens de Motocycles (ACEM), an independent agency. This third-party data is subject to revision and update.

51
Table of Contents

Motorcycles & Related Products Segment
Motorcycle Unit Shipments
The following table includes wholesale motorcycle unit shipments for the Motorcycles segment:
 
Six months ended
 
 
 
 
 
June 26, 2016
 
June 28, 2015
 
Unit
 
Unit
 
Units
 
Mix %
 
Units
 
Mix %
 
Increase
(Decrease)
 
%
Change
United States
115,439

 
67.4
%
 
111,792

 
67.9
%
 
3,647

 
3.3
 %
International
55,757

 
32.6
%
 
52,969

 
32.1
%
 
2,788

 
5.3

Harley-Davidson motorcycle units
171,196

 
100.0
%
 
164,761

 
100.0
%
 
6,435

 
3.9
 %
Touring motorcycle units
66,172

 
38.7
%
 
73,360

 
44.5
%
 
(7,188
)
 
(9.8
)%
Cruiser motorcycle units
64,584

 
37.7
%
 
53,348

 
32.4
%
 
11,236

 
21.1

Sportster® / Street motorcycle units
40,440

 
23.6
%
 
38,053

 
23.1
%
 
2,387

 
6.3

Harley-Davidson motorcycle units
171,196

 
100.0
%
 
164,761

 
100.0
%
 
6,435

 
3.9
 %
 
The Company shipped 171,196 motorcycles worldwide during the first half of 2016, which was 3.9% higher than the first half of 2015. International shipments as a percent of total shipments were 32.6% in the first half of 2016 compared to 32.1% for the first half of 2015.
The shipment mix percentage of Cruiser and Sportster® / Street motorcycles increased in the first half of 2016 while the shipment mix percentage of Touring motorcycles decreased compared to the same period last year. The Company believes the higher shipment mix of Cruiser and Sportster® / Street motorcycles is a result of strong consumer demand driven by the Company's investment in its model-year 2016 product.
Segment Results
The following table includes the condensed statements of operations for the Motorcycles segment (in thousands):
 
Six months ended
 
 
 
 
 
June 26, 2016
 
June 28, 2015
 
Increase
(Decrease)
 
%
Change
Revenue:
 
 
 
 
 
 
 
Motorcycles
$
2,648,210

 
$
2,563,958

 
$
84,252

 
3.3
 %
Parts & Accessories
441,913

 
440,712

 
1,201

 
0.3

General Merchandise
146,375

 
143,946

 
2,429

 
1.7

Other
10,225

 
12,737

 
(2,512
)
 
(19.7
)
Total revenue
3,246,723

 
3,161,353

 
85,370

 
2.7

Cost of goods sold
2,048,885

 
1,923,864

 
125,021

 
6.5

Gross profit
1,197,838

 
1,237,489

 
(39,651
)
 
(3.2
)
Selling & administrative expense
452,140

 
433,655

 
18,485

 
4.3

Engineering expense
90,492

 
77,777

 
12,715

 
16.3

Operating expense
542,632

 
511,432

 
31,200

 
6.1

Operating income from Motorcycles
$
655,206

 
$
726,057

 
$
(70,851
)
 
(9.8
)%
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 half of 2015 to the first half of 2016 (in millions):

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Net
Revenue
 
Cost of
Goods Sold
 
Gross
Profit
Six months ended June 28, 2015
$
3,161.4

 
$
1,923.9

 
$
1,237.5

Volume
96.6

 
61.0

 
35.6

Price, net of related costs
51.1

 
23.2

 
27.9

Foreign currency exchange rates and hedging
(16.9
)
 
17.1

 
(34.0
)
Shipment mix
(45.5
)
 
(16.5
)
 
(29.0
)
Raw material prices
—

 
(15.0
)
 
15.0

Manufacturing and other costs
—

 
55.2

 
(55.2
)
Total
85.3

 
125.0

 
(39.7
)
Six months ended June 26, 2016
$
3,246.7

 
$
2,048.9

 
$
1,197.8

The following factors affected the comparability of net revenue, cost of goods sold and gross profit from the first half of 2015 to first half of 2016:

•
Volume increases in the first half of 2016 were driven by the increase in wholesale motorcycle shipments.
•
On average, wholesale prices for the Company’s 2016 model-year motorcycles are higher than the prior model-year resulting in the favorable impact on revenue during the period. The impact of revenue favorability resulting from model-year price increases on gross profit was partially offset by increases in costs related to the additional content added to the 2016 model-year motorcycles.
•
Gross profit was negatively impacted by foreign currency due to lower hedge gains, given the significant gains experienced in the prior year, and lower revenues behind a slightly stronger U.S. dollar.
•
Shipment mix changes negatively impacted gross profit primarily due to changes in motorcycle family mix.
•
Raw material prices were lower in the first half of 2016 relative to the first half of 2015.
•
Manufacturing costs in the first six months of 2016 were negatively impacted by higher year-over-year start-up costs, including costs related to the implementation of the ERP system at the Company's Kansas City manufacturing facility, significant plant re-tooling and lower efficiencies related to plant disruptions and lost absorption. The Company's fixed cost absorption was unfavorable as a result of lower production in the six months of 2016 compared to the first six months of 2015.
The net increase in operating expense was primarily due to the Company's increased investments in marketing and product development to drive demand. Selling and administrative expenses were also higher in 2016 due to costs associated with managing the Canadian operations that the Company acquired in August 2015.
Financial Services Segment
Segment Results
The following table includes the condensed statements of operations for the Financial Services segment (in thousands):
 
Six months ended
 
 
 
 
 
June 26, 2016
 
June 28, 2015
 
Increase
(Decrease)
 
%
Change
Interest income
$
309,535

 
$
293,852

 
$
15,683

 
5.3
 %
Other income
45,266

 
42,132

 
3,134

 
7.4

Securitization income
9,521

 
—

 
9,521

 
—

Financial Services revenue
364,322

 
335,984

 
28,338

 
8.4

Interest expense
88,814

 
79,724

 
9,090

 
11.4

Provision for credit losses
60,584

 
41,422

 
19,162

 
46.3

Operating expenses
68,980

 
68,261

 
719

 
1.1

Financial Services expense
218,378

 
189,407

 
28,971

 
15.3

Operating income from Financial Services
$
145,944

 
$
146,577

 
$
(633
)
 
(0.4
)%
Interest income was higher in the first six months of 2016 as compared to the first six months of 2015 due to higher average receivables in the retail and wholesale portfolios, partially offset by lower retail yields due in part to low rate

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promotional activity primarily in 2015. Other income was favorable primarily due to increased credit card licensing revenue. Securitization income was higher due to a $9.3 million gain on the sale of finance receivables with a principal balance of $301.8 million through an off-balance sheet asset-backed securitization during the second quarter of 2016. There was no comparable transaction in the prior year.
Interest expense increased due to higher average outstanding debt and an unfavorable cost of funds.
The provision for credit losses increased $19.2 million in the first six months of 2016. The retail motorcycle provision increased $21.1 million in the first six months of 2016 driven by higher credit losses and an associated increase in the retail reserve rate. Credit losses were higher as a result of higher losses on loans in oil-dependent areas, normalizing loan performance, and lower used motorcycle values at auction. The wholesale provision was favorable by $1.5 million.
On a year-to-date basis, retail loan originations were comprised of approximately 80% prime loans and 20% sub-prime. The Company believes sub-prime originations continue to represent a significant number of retail sales to the Company at attractive returns which further reinforces the competitive advantage that HDFS brings to the Company.
Annualized credit losses for HDFS' on-balance sheet retail motorcycle loans were 1.50% through June 26, 2016 compared to 1.08% through June 28, 2015. The 30-day delinquency rate for on-balance sheet retail motorcycle loans at June 26, 2016 was 3.16% compared to 2.71% at June 28, 2015.
The Company’s serviced retail motorcycle portfolio includes both on-balance sheet and off-balance sheet retail motorcycle finance receivables at June 26, 2016 as a result of the Company’s second quarter 2016 off-balance sheet securitization.  Total annualized credit losses for serviced retail motorcycle loans were 1.49% through June 26, 2016.  The 30-day delinquency rate for serviced retail motorcycle loans at June 26, 2016 was 3.02%.  As there were no comparable transactions in recent years, the Company’s finance receivables were all on-balance sheet in 2015. 
Changes in the allowance for credit losses on finance receivables were as follows (in thousands):
 
Six months ended
 
June 26,
2016
 
June 28,
2015
Balance, beginning of period
$
147,178

 
$
127,364

Provision for credit losses
60,584

 
41,422

Charge-offs
(66,104
)
 
(53,736
)
Recoveries
22,986

 
24,181

Other (a)
(3,291
)
 
—

Balance, end of period
$
161,353

 
$
139,231

(a) Related to the sale of finance receivables with a principal balance of $301.8 million through an off-balance sheet asset-backed securitization transaction.
Other Matters
Contractual Obligations
The Company has updated the contractual obligations table under the caption “Contractual Obligations” in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations of the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 as of June 26, 2016 to reflect the new projected principal and interest payments for the remainder of 2016 and beyond as follows (in thousands):
 
2016
 
2017 - 2018
 
2019 - 2020
 
Thereafter
 
Total
Principal payments on debt
$
1,169,085

 
$
2,385,835

 
$
2,183,218

 
$
1,347,045

 
$
7,085,183

Interest payments on debt
92,544

 
301,409

 
133,279

 
428,153

 
955,385

 
$
1,261,629

 
$
2,687,244

 
$
2,316,497

 
$
1,775,198

 
$
8,040,568

Interest obligations for floating rate instruments, as calculated above, assume rates in effect at June 26, 2016 remain constant. For purposes of the above, the principal payment balances for medium-term notes, on-balance sheet term-asset

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backed securitizations and senior unsecured notes are shown gross of debt issuance costs. Refer to Note 11 for a breakout of the finance costs consistent with ASU No. 2015-03.
As of June 26, 2016, 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, 2015.
Commitments and Contingencies
The Company is subject to lawsuits and other claims related to environmental, product and other matters. In determining required reserves related to these items, the Company carefully analyzes cases and considers the likelihood of adverse judgments or outcomes, as well as the potential range of possible loss. The required reserves are monitored on an ongoing basis and are updated based on new developments or new information in each matter.
Environmental Protection Agency Notice:
In December 2009, the Company received formal, written requests for information from the United States Environmental Protection Agency (EPA) regarding: (i) certificates of conformity for motorcycle emissions and related designations and labels, (ii) aftermarket parts, and (iii) warranty claims on emissions related components. The Company promptly submitted written responses to the EPA’s inquiry and has engaged in discussions with the EPA. Since that time, the EPA has delivered various additional requests for information to which the Company has responded. It is probable that a result of the EPA’s investigation will be some form of enforcement action by the EPA that will seek a fine and/or other relief or a negotiated resolution with the EPA that will involve a fine and/or other relief. The Company has a reserve associated with this matter which is included in accrued liabilities in the Consolidated Balance Sheet. Based on the status of discussions with the EPA, the Company believes resolution of this matter will not have a material adverse effect on its business or financial condition.
York Environmental Matters:
The Company is involved with government agencies and groups of potentially responsible parties in various environmental matters, including a matter involving the cleanup of soil and groundwater contamination at its York, Pennsylvania facility. The York facility was formerly used by the U.S. Navy and AMF prior to the purchase of the York facility by the Company from AMF in 1981. Although the Company is not certain as to the full extent of the environmental contamination at the York facility, it has been working with the Pennsylvania Department of Environmental Protection (PADEP) since 1986 in undertaking environmental investigation and remediation activities, including an ongoing site-wide remedial investigation/feasibility study (RI/FS). In January 1995, the Company entered into a settlement agreement (the Agreement) with the Navy, and the parties amended the Agreement in 2013 to address ordnance and explosive waste. The Agreement calls for the Navy and the Company to contribute amounts into a trust equal to 53% and 47%, respectively, of future costs associated with environmental investigation and remediation activities at the York facility (Response Costs). The trust administers the payment of the Response Costs incurred at the York facility as covered by the Agreement.
The Company has a reserve for its estimate of its share of the future Response Costs at the York facility which is included in accrued liabilities in the Consolidated Balance Sheets. As noted above, the RI/FS is still underway and given the uncertainty that exists concerning the nature and scope of additional environmental investigation and remediation that may ultimately be required under the RI/FS or otherwise at the York facility, the Company is unable to make a reasonable estimate of those additional costs, if any, that may result.
The estimate of the Company’s future Response Costs that will be incurred at the York facility is based on reports of independent environmental consultants retained by the Company, the actual costs incurred to date and the estimated costs to complete the necessary investigation and remediation activities. Response Costs are expected to be paid primarily over a period of several years ending in 2017 although certain Response Costs may continue for some time beyond 2017.
Product Liability Matters:
The Company is involved in product liability suits related to the operation of its business. The Company accrues for claim exposures that are probable of occurrence and can be reasonably estimated. The Company also maintains insurance coverage for product liability exposures. The Company believes that its accruals and insurance coverage are adequate and that product liability suits will not have a material adverse effect on the Company’s consolidated financial statements.(1) 
National Highway Traffic Safety Administration Matters:
On July 8, 2016, the National Highway Traffic Safety Administration (NHTSA) announced that it will investigate certain of the Company's model-year 2008-2011 motorcycles equipped with anti-lock braking systems (ABS).  NHTSA’s investigation

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Table of Contents

is in response to rider complaints related to brake failures.  NHTSA noted that Harley-Davidson has a two-year brake fluid replacement interval that owners either are unaware of or ignore.  The Company does not believe that a loss related to this matter is probable and no reserve has been established.  However, it is possible that the outcome of NHTSA’s investigation could result in future costs to the Company.  Given the uncertainty that still exists concerning the resolution of this matter, the Company cannot reasonably estimate these possible future costs, if any.
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 (SPE), which are considered VIEs under U.S. GAAP. Each SPE then converts those assets into cash, through the issuance of debt. The Company retains servicing rights for all of the retail motorcycle finance receivables transferred to SPEs as part of an asset-backed financing.
The 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 accounted for as a sale and do not result in off-balance sheet arrangements because, in addition to retaining servicing rights, the Company retains a financial interest in the VIE in the form of a debt security. These transactions are treated as secured borrowings. As secured borrowings, the retail motorcycle finance receivables remain on the balance sheet with a corresponding obligation reflected as debt.
During the second quarter of 2016, the Company sold finance receivables with a principal balance of $301.8 million into a securitization VIE and the transaction met the criteria to be accounted for as a sale that resulted in an off-balance sheet arrangement because the Company did not retain any financial interest in the VIE beyond servicing rights and ordinary representations and warranties and related covenants. Upon sale, the retail motorcycle finance receivables were removed from the Company’s balance sheet and a gain of $9.3 million was recognized in Financial Services Revenue. For more information see Note 12.
Liquidity and Capital Resources as of June 26, 2016(1) 
Over the long-term, the Company expects that its business model will continue to generate cash that will allow it to invest in the business, fund future growth opportunities and return value to shareholders(1). The Company will evaluate opportunities to enhance value for its shareholders through increasing dividends and repurchasing shares. The Company believes the Motorcycles operations will continue to be primarily funded through cash flows generated by operations(1). The Financial Services operations have been funded with unsecured debt, unsecured commercial paper, asset-backed commercial paper conduit facilities, committed unsecured bank facilities and term asset-backed securitizations.

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Table of Contents

The Company’s strategy is to maintain a minimum of twelve months of its projected liquidity needs through a combination of cash and marketable securities and availability under credit facilities. The following table summarizes the Company’s cash and marketable securities and availability under credit facilities (in thousands):
 
June 26, 2016
Cash and cash equivalents
$
864,670

Current marketable securities
5,070

Total cash and cash equivalents and marketable securities
869,740

 
 
Credit facilities
444,513

Asset-backed U.S. commercial paper conduit facility(a)
600,000

Asset-backed Canadian commercial paper conduit facility(b)
22,908

Total availability under credit facilities
1,067,421

Total
$
1,937,161


(a)
The U.S. commercial paper conduit facility expires on December 14, 2016. The Company anticipates that it will renew this facility prior to expiration.
(b)
The Canadian commercial paper conduit facility, which is limited to Canadian denominated borrowings, expired on June 30, 2016. The Company renewed this facility and the new facility expires June 30, 2017.
The Company recognizes that it must continue to monitor and adjust its business to changes in the lending environment. The Company intends to continue with a diversified funding profile through a combination of short-term and long-term funding vehicles and to pursue a variety of sources to obtain cost-effective funding. The Financial Services operations could be negatively affected by higher costs of funding and increased difficulty of raising, or potential unsuccessful efforts to raise, funding in the short-term and long-term capital markets.(1) These negative consequences could in turn adversely affect the Company’s business and results of operations in various ways, including through higher costs of capital, reduced funds available through its Financial Services operations to provide loans to independent dealers and their retail customers, and dilution to existing shareholders through the use of alternative sources of capital.
Cash Flow Activity
The following table summarizes the cash flow activity for the periods indicated (in thousands):
 
Six months ended
 
June 26, 2016
 
June 28, 2015
Net cash provided by operating activities
$
456,290

 
$
613,944

Net cash used by investing activities
(115,965
)
 
(481,701
)
Net cash (used by) provided by financing activities
(201,782
)
 
214,351

Effect of exchange rate changes on cash and cash equivalents
3,918

 
(5,695
)
Net increase in cash and cash equivalents
$
142,461

 
$
340,899

Operating Activities
The decrease in cash provided by operating activities for the first six months of 2016 compared to the first six months of 2015 was driven by lower net income, unfavorable changes in working capital and higher net wholesale lending activity. In addition, operating cash flow in 2016 was impacted by a $25.0 million voluntary contribution to the Company's qualified pension plan. No voluntary contributions were made to the pension plan in 2015. There are no required or planned contributions to the qualified pension plan for the remainder of 2016.(1) The Company expects it will continue to make on-going benefit payments under the SERPA and postretirement healthcare plans.(1) 
Investing Activities
The Company’s investing activities consist primarily of capital expenditures and net changes in finance receivables. Capital expenditures were $107.5 million in the first six months of 2016 compared to $85.2 million in the same period last year. Net cash outflows for finance receivables for the first six months of 2016 were $45.0 million higher than in the same period last year as a result of an increase in retail motorcycle loan originations during the first six months of 2016. In the second quarter of 2016, the Company completed a sale of finance receivables through an off-balance sheet asset backed securitization transaction. The proceeds from the sale of finance receivables were $312.6 million.

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Table of Contents

Financing Activities
The Company’s financing activities consist primarily of share repurchases, dividend payments and debt activity. Cash outflows for share repurchases were $269.4 million in the first six months of 2016 compared to $358.4 million in the same period last year. Share repurchases during the first six months of 2016 included 6.1 million shares of common stock related to discretionary share repurchases as well as shares of common stock that employees surrendered to satisfy withholding taxes in connection with the vesting of restricted stock awards. As of June 26, 2016, there were 23.0 million shares remaining on board-approved share repurchase authorizations.
The Company paid dividends of $0.70 and $0.62 per share totaling $127.8 million and $129.7 million during the first six months of 2016 and 2015, respectively.
Financing cash flows related to debt activity resulted in net cash inflows of $174.7 million in the first six months of 2016 compared to net cash inflows of $724.6 million in the first six months of 2015. The Company’s total outstanding debt consisted of the following (in thousands):
 
June 26,
2016
 
June 28,
2015
Unsecured commercial paper
$
1,020,487

 
$
114,983

Asset-backed Canadian commercial paper conduit facility
161,626

 
160,940

Medium-term notes, net
4,063,297

 
3,923,638

Senior unsecured notes, net
740,982

 
—

Term asset-backed securitization debt, net
1,074,931

 
2,011,461

Total debt
$
7,061,323

 
$
6,211,022

To access the debt capital markets, the Company relies on credit rating agencies to assign short-term and long-term credit ratings. Generally, lower credit ratings result in higher borrowing costs and reduced access to debt capital markets. A credit rating agency may change or withdraw the Company’s ratings based on its assessment of the Company’s current and future ability to meet interest and principal repayment obligations. The Company’s short-term debt ratings affect its ability to issue unsecured commercial paper. The Company’s short- and long-term debt ratings as of June 26, 2016 were as follows:
 
Short-Term
 
Long-Term
 
Outlook
Moody’s
P2
 
A3
 
Stable
Standard & Poor’s
A2
 
A-
 
Stable
Fitch
F1
 
A
 
Stable
Credit Facilities – On April 7, 2016, the Company entered into a $765.0 million five-year credit facility to refinance and replace a $675.0 million five-year credit facility that was due to mature in April 2017. The new five-year credit facility matures in April 2021. The Company also has a $675.0 million five-year credit facility which matures in April 2019. The new five-year credit facility and the existing five-year credit facility (together, the Global Credit Facilities) bear interest at variable interest rates, which may be adjusted upward or downward depending on certain criteria, such as credit ratings. The Global Credit Facilities also require the Company to pay a fee based on the average daily unused portion of the aggregate commitments under the Global Credit Facilities. The Global Credit Facilities are committed facilities and primarily used to support the Company's unsecured commercial paper program. During the second quarter of 2016, the Company entered into an additional $25.0 million credit facility which expires May 24, 2017. The $25.0 million credit facility bears interest at variable interest rates, and the Company must pay a fee based on the unused portion of the $25.0 million commitment.
Unsecured Commercial Paper – Subject to limitations, the Company could issue unsecured commercial paper of up to $1.44 billion as of June 26, 2016 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 or borrowing under its asset-backed U.S. commercial paper conduit facility or through the use of operating cash flow and cash on hand.(1) 
Medium-Term Notes – The Company had the following medium-term notes (collectively, the Notes) issued and outstanding at June 26, 2016 (in thousands):

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Table of Contents

Principal Amount
 
Rate
 
Issue Date
 
Maturity Date
$400,000
 
2.70%
 
January 2012
 
March 2017
$400,000
 
1.55%
 
November 2014
 
November 2017
$878,708
 
6.80%
 
May 2008
 
June 2018
$600,000
 
2.25%
 
January 2016
 
January 2019
$600,000
 
2.40%
 
September 2014
 
September 2019
$600,000
 
2.15%
 
February 2015
 
February 2020
$600,000
 
2.85%
 
January 2016
 
January 2021
The Notes provide for semi-annual interest payments and principal due at maturity. Unamortized discount and debt issuance costs on the Notes reduced the outstanding balance by $15.4 million and $14.3 million at June 26, 2016 and June 28, 2015, respectively.
There were no medium-term notes issued or repurchased during the second quarter of 2016. During the first quarter of 2016, the Company issued $600.0 million ($597.2 million net of discount and issuance costs) of medium-term notes that mature in January 2019 and have an annual interest rate of 2.25%, and $600.0 million ($596.3 million net of discount and issuance costs) of medium-term notes that mature in January 2021 and have an annual interest rate of 2.85%. There were no medium-term notes issued or repurchased during the second quarter of 2015. During the first quarter of 2015, the Company issued $600.0 million ($595.4 million net of discount and issuance costs) of medium-term notes which mature in February 2020 and have an annual interest rate of 2.15%. There were no medium-term note maturities during the second quarter of 2016. During the first quarter of 2016, $450.0 million of 3.88% medium-term notes matured, and the principal and accrued interest were paid in full. There were no medium-term note maturities during the first half of 2015.
Senior Unsecured Notes – In July 2015, the Company issued $750.0 million of senior unsecured notes. The senior unsecured notes provide for semi-annual interest payments and principal due at maturity. $450.0 million ($444.4 million net of discount and issuance costs) of the senior unsecured notes mature in July 2025 and have an interest rate of 3.50%, and $300.0 million ($296.0 million net of discount and issuance costs) of the senior unsecured notes mature in July 2045 and have an interest rate of 4.625%. The Company used the proceeds from the debt to repurchase shares of its common stock in 2015.
Asset-Backed Canadian Commercial Paper Conduit Facility –The Company has a revolving facility agreement (Canadian Conduit) with a Canadian bank-sponsored asset-backed commercial paper conduit. Under the agreement, the Canadian Conduit is contractually committed, at the Company's option, to purchase from the Company eligible Canadian retail motorcycle finance receivables for proceeds up to C$240 million. The transferred assets are restricted as collateral for the payment of the debt. The terms for this facility provide for interest on the outstanding principal based on prevailing market interest rates plus a specified margin. The Canadian Conduit also provides for a program fee and an unused commitment fee based on the unused portion of the total aggregate commitment of C$240 million. There is no amortization schedule; however, the debt is reduced monthly as available collections on the related finance receivables are applied to outstanding principal. Upon expiration of the Canadian Conduit, any outstanding principal will continue to be reduced monthly through available collections. Unless earlier terminated or extended by mutual agreement of the Company and the lender, as of June 26, 2016, the Canadian Conduit had an expiration date of June 30, 2016. The Canadian Conduit was renewed on June 30, 2016 with similar terms and for the same amount with an expiration date of June 30, 2017. The contractual maturity of the debt is approximately 5 years.
The following table includes quarterly transfers of Canadian retail motorcycle finance receivables to the Canadian Conduit and the respective proceeds (in thousands):
 
2016
 
2015
 
Transfers
 
Proceeds
 
Transfers
 
Proceeds
First Quarter
$
6,600

 
$
5,800

 
$
19,200

 
$
16,800

Second Quarter
31,400

 
27,500

 
26,800

 
23,400

 
$
38,000

 
$
33,300

 
$
46,000

 
$
40,200

Asset-Backed U.S. Commercial Paper Conduit Facility VIE – On December 14, 2015, the Company entered into a new revolving facility agreement (U.S. Conduit) with a third party bank-sponsored asset-backed U.S. commercial paper conduit, which provides for a total aggregate commitment of $600.0 million. The prior agreement expired on December 14, 2015 and had similar terms. At June 26, 2016 and June 28, 2015, the Company had no outstanding borrowings under the U.S. Conduit.

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This debt provides for interest on outstanding principal based generally on prevailing commercial paper rates or LIBOR to the extent the advance is not funded by a conduit lender through the issuance of commercial paper plus, in each case, a program fee based on outstanding principal. The U.S. Conduit also provides for an unused commitment fee based on the unused portion of the total aggregate commitment of $600.0 million. There is no amortization schedule; however, the debt will be reduced monthly as available collections on the related finance receivable collateral are applied to outstanding principal. Upon expiration of the U.S. Conduit, any outstanding principal will continue to be reduced monthly through available collections. Unless earlier terminated or extended by mutual agreement of the Company and the lenders, as of June 26, 2016, the U.S. Conduit expires December 14, 2016.
Asset-Backed Securitization VIEs – For all of its asset-backed securitization transactions, the Company transfers U.S. retail motorcycle finance receivables to separate VIEs, which in turn issue secured notes with various maturities and interest rates to investors. All of the notes held by the VIEs are secured by future collections of the purchased U.S. retail motorcycle finance receivables. The U.S. retail motorcycle finance receivables included in the asset-backed securitization transactions are not available to pay other obligations or claims of the Company's creditors until the associated debt and other obligations are satisfied. Restricted cash balances held by the VIEs are used only to support the securitizations.

The accounting treatment for asset-backed securitizations depends on the terms of the related transaction and the Company’s continuing involvement with the VIE. Most of the Company’s asset backed securitizations do not meet the criteria to be accounted for as a sale because, in addition to retaining servicing rights, the Company retains a financial interest in the VIE in the form of a debt security. These transactions are treated as secured borrowings. As secured borrowings, the retail motorcycle finance receivables remain on the balance sheet with a corresponding obligation reflected as debt. There is no amortization schedule for the secured notes; however, the debt is reduced monthly as available collections on the related retail motorcycle finance receivables are applied to outstanding principal. The secured notes’ contractual lives have various maturities ranging from 2016 to 2022.
There were no on-balance sheet term asset-backed securitization transactions during the first half of 2016. During the first half of 2015, the Company issued $700.0 million and $500.0 million ($697.6 million and $498.1 million net of discount and issuance costs), respectively, of secured notes through on-balance sheet term asset-backed securitization transactions.
During the second quarter of 2016, the Company sold U.S. retail motorcycle finance receivables with a principal balance of $301.8 million into a asset-backed securitization VIE, and the transaction met the criteria to be accounted for as a sale because the Company did not retain any financial interest in the VIE beyond servicing rights and ordinary representations and warranties and related covenants. Upon the sale, the retail motorcycle finance receivables were removed from the Company’s balance sheet and a gain of $9.3 million was recognized in Financial Services Revenue. For more information see Note 12.
Intercompany Borrowing – HDFS and the Company have had in effect term loan agreements under which HDFS borrowed from the Company. As of June 26, 2016, there were no intercompany loans outstanding. As of June 28, 2015, there were no intercompany loans outstanding, and the intercompany loan balance of $250 million outstanding as of December 31, 2014 was repaid during the first quarter of 2015. The term loan balances and related interest are eliminated in the Company's consolidated financial statements.
Support Agreement - The Company has a support agreement with HDFS whereby, if required, the Company agrees to provide HDFS with financial support to maintain HDFS’ fixed-charge coverage at 1.25 and minimum net worth of $40.0 million. Support may be provided at the Company’s option as capital contributions or loans. Accordingly, certain debt covenants may restrict the Company’s ability to withdraw funds from HDFS outside the normal course of business. No amount has ever been provided to HDFS under the support agreement.
Operating and Financial Covenants – HDFS and the Company are subject to various operating and financial covenants related to the credit facilities and various operating covenants under the Notes and the U.S. and Canadian asset-backed commercial paper conduit facilities. The more significant covenants are described below.
The operating covenants limit the Company’s and HDFS’ ability to:
•
assume or incur certain liens;
•
participate in certain mergers or consolidations; and
•
purchase or hold margin stock.
Under the current financial covenants of the Global Credit Facilities, the consolidated debt to equity ratio of HDFS cannot exceed 10.00 to 1.00 as of the end of any fiscal quarter. In addition, the ratio of the Company's consolidated debt to the Company's consolidated debt and equity, in each case excluding the debt of HDFS and its subsidiaries, cannot exceed 0.70 to 1.00 as of the end of any fiscal quarter. No financial covenants are required under the Notes or the U.S. or Canadian asset-backed commercial paper conduit facilities.

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At June 26, 2016, HDFS and the Company remained in compliance with all of the then existing covenants.
Cautionary Statements
The Company’s ability to meet the targets and expectations noted depends upon, among other factors, the Company’s ability to:
(i)
execute its business strategy,
(ii)
manage through changes in general economic conditions, including changing capital, credit and retail markets, and political events,
(iii)
accurately estimate and adjust to fluctuations in foreign currency exchange rates, interest rates and commodity prices,
(iv)
prevent a cybersecurity breach involving consumer, employee, dealer, supplier, or Company data and respond to evolving regulatory requirements regarding data security,
(v)
drive demand by executing its marketing strategy of appealing to and growing sales to multi-generational and multi-cultural customers worldwide in an increasingly competitive marketplace,
(vi)
manage the credit quality, the loan servicing and collection activities, and the recovery rates of HDFS' loan portfolio,
(vii)
develop and introduce products, services and experiences that are successful in the marketplace,
(viii)
balance production volumes for its new motorcycles with consumer demand, including in circumstances where competitors may be supplying new motorcycles to the market in excess of demand at reduced prices,
(ix)
manage the impact that prices for and supply of used motorcycles may have on its business, including on retail sales of new motorcycles,
(x)
prevent and detect any issues with its motorcycles or any associated manufacturing processes to avoid delays in new model launches, recall campaigns, regulatory agency investigations, increased warranty costs or litigation and adverse effects on its reputation and brand strength,
(xi)
continue to develop the capabilities of its distributors and dealers and manage the risks that its independent dealers may have difficulty obtaining capital and managing through changing economic conditions and consumer demand,
(xii)
manage risks that arise through expanding international manufacturing, operations and sales,
(xiii)
manage through the effects inconsistent and unpredictable weather patterns may have on retail sales of motorcycles,
(xiv)
manage supply chain issues, including quality issues and any unexpected interruptions or price increases caused by raw material shortages or natural disasters,
(xv)
implement and manage enterprise-wide information technology systems, including systems at its manufacturing facilities,
(xvi)
manage changes and prepare for requirements in legislative and regulatory environments for its products, services and operations,
(xvii)
manage its exposure to product liability claims and commercial or contractual disputes,
(xviii)
execute its flexible production strategy,
(xix)
adjust to healthcare inflation and reform, pension reform and tax changes,
(xx)
retain and attract talented employees,
(xxi)
successfully access the capital and/or credit markets on terms (including interest rates) that are acceptable to the Company and within its expectations, and
(xxii)
continue to manage the relationships and agreements that the Company has with its labor unions to help drive long-term competitiveness.
In addition, the Company could experience delays or disruptions in its operations as a result of work stoppages, strikes, natural causes, terrorism or other factors. Further, actual foreign currency exchange rates may vary from underlying assumptions. Other factors are described in risk factors that the Company has disclosed in documents previously filed with the Securities and Exchange Commission.

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Many of these risk factors are impacted by the current changing capital, credit and retail markets and the Company's ability to manage through inconsistent economic conditions.
The Company’s ability to sell its motorcycles and related products and services and to meet its financial expectations also depends on the ability of the Company’s independent dealers to sell its motorcycles and related products and services to retail customers. The Company depends on the capability and financial capacity of its independent dealers to develop and implement effective retail sales plans to create demand for the motorcycles and related products and services they purchase from the Company.
In addition, the Company’s independent dealers and distributors may experience difficulties in operating their businesses and selling Harley-Davidson motorcycles and related products and services as a result of weather, economic conditions or other factors.
In recent years, HDFS has experienced historically low levels of retail credit losses, but there is no assurance that this will continue. The Company believes that HDFS' retail credit losses may increase over time due to changing consumer credit behavior and HDFS' efforts to increase prudently structured loan approvals to sub-prime borrowers, as well as actions that Harley-Davidson has taken and could take that impact motorcycle values.
Refer to “Risk Factors” under Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 for a discussion of additional risk factors and a more complete discussion of some of the cautionary statements noted above.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company’s earnings related to its operations outside the U.S. are impacted by changes in foreign currency exchange rates. The majority of the Company’s exposure relates to the Euro, the Australian dollar, the Japanese yen, Canadian dollar, Mexican peso and the Brazilian real. A weakening in foreign currencies relative to the U.S. dollar will generally have an adverse effect on revenue related to sales made in those foreign currencies offset by a corresponding positive impact from natural hedges created by the operating costs incurred in those same foreign currencies. As the majority of the Company’s manufacturing occurs in the U.S., the Company’s operating expenses paid in foreign currencies generally include limited manufacturing costs and the selling and administrative costs incurred at the Company’s international locations. In addition, to the extent the Company carries foreign-denominated cash, receivables or accounts payable, those amounts are also exposed to foreign currency revaluations that can impact the Company’s earnings.
The Company also uses derivative financial instruments to hedge a portion of the forecasted cash flows in its key foreign currencies. These instruments generally have terms of up to 12 months and are purchased over time so that at any point in time some portion of the next 12 months of expected foreign currency exposure is hedged. The hedging instruments allow the Company to lock in the exchange rate on future foreign currency cash flows based on the forward rates available at the time of purchase. The level of gain or loss on these instruments will depend on the spread between the forward rate and the corresponding spot rate at the date the instruments are settled.
Refer to the Company's Annual Report on Form 10-K for the year ended December 31, 2015 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, 2015.

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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 was no change in the Company’s internal control over financial reporting during the quarter ended June 26, 2016 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II – OTHER INFORMATION
Item 1 – Legal Proceedings
The information required under this Item 1 of Part II is contained in Item 1 of Part I of this Quarterly report on Form 10-Q in Note 18 of the Notes to Consolidated Financial Statements, and such information is incorporated herein by reference in this Item 1 of Part II.
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds
The following table contains detail related to the Company's repurchase of its common stock based on the date of trade during the quarter ended June 26, 2016:
2016 Fiscal Month
Total Number of
Shares Purchased (a)
 
Average Price
Paid per Share
 
Total Number of Shares
Purchased as Part of
Publicly Announced
Plans or Programs
 
Maximum Number of
Shares that May Yet Be
Purchased Under the
Plans or Programs
March 28 to May 1
1,035,753

 
$
48

 
1,035,753

 
24,557,192

May 2 to May 29
742,712

 
$
46

 
742,712

 
23,815,214

May 30 to June 26
786,347

 
$
45

 
786,347

 
23,028,965

Total
2,564,812

 
$
46

 
2,564,812

 
 
 
(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 awards
In June 2015, 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. The Company repurchased 2.6 million shares on a discretionary basis during the quarter ended June 26, 2016 under this authorization. As of June 26, 2016, 3.0 million shares remained under this authorization.
Additionally, in February 2016, the Company's Board of Directors authorized the Company to repurchase up to 20.0 million shares of its common stock with no dollar limit or expiration date which superseded the share repurchase authority granted by the Board of Directors in December 1997. The Company made no discretionary share repurchases during the quarter ended June 26, 2016 under this authorization. As of June 26, 2016, 20.0 million shares remained under this authorization.
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 second quarter of 2016, the Company acquired 1,885 shares of common stock that employees presented to the Company to satisfy withholding taxes in connection with the vesting of restricted stock awards.
Item 6 – Exhibits
Refer to the Exhibit Index on page 65 of this report.

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SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
HARLEY-DAVIDSON, INC.
 
 
Date: 8/4/2016
/s/ John A. Olin
 
John A. Olin
 
Senior Vice President and
 
Chief Financial Officer
 
(Principal financial officer)
 
Date: 8/4/2016
/s/ Mark R. Kornetzke
 
Mark R. Kornetzke
 
Chief Accounting Officer
 
(Principal accounting officer)


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Harley-Davidson, Inc.
Exhibit Index to Form 10-Q
 
Exhibit No.
 
Description
10.1*
 
Director Compensation Policy (revised) effective April 29, 2016
31.1
 
Chief Executive Officer Certification pursuant to Rule 13a-14(a)
31.2
 
Chief Financial Officer Certification pursuant to Rule 13a-14(a)
32.1
 
Written Statement of the Chief Executive Officer and the Chief Financial Officer pursuant to 18 U.S.C. §1350
101
 
Financial statements from the quarterly report on Form 10-Q of Harley-Davidson, Inc. for the quarter ended June 26, 2016, filed on August 4, 2016, formatted in XBRL: (i) the Consolidated Statements of Income; (ii) the Consolidated Statements of Comprehensive Income; (iii) the Consolidated Balance Sheets; (iv) the Consolidated Statements of Cash Flows; and (v) the Notes to Consolidated Financial Statements.


































*
Represents management contract or compensatory plan, contract or arrangement in which a director or named executive officer of the Company participated.





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