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



Harley-Davidson, Inc.

Form 10-Q

For The Quarter Ended March 26, 2017
 
Part I
 
 
 
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
 
March 26,
2017
 
March 27,
2016
Revenue:
 
 
 
Motorcycles and Related Products
$
1,328,711

 
$
1,576,610

Financial Services
173,221

 
173,358

Total revenue
1,501,932

 
1,749,968

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

 
986,330

Financial Services interest expense
43,289

 
45,919

Financial Services provision for credit losses
43,589

 
37,123

Selling, administrative and engineering expense
272,350

 
291,768

Total costs and expenses
1,210,454

 
1,361,140

Operating income
291,478

 
388,828

Investment income
879

 
766

Interest expense
7,673

 
7,168

Income before provision for income taxes
284,684

 
382,426

Provision for income taxes
98,315

 
131,937

Net income
$
186,369

 
$
250,489

Earnings per common share:
 
 
 
Basic
$
1.06

 
$
1.37

Diluted
$
1.05

 
$
1.36

Cash dividends per common share
$
0.365

 
$
0.350

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


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

 
$
250,489

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

 
12,693

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

 
7,571

Total other comprehensive income, net of tax
13,751

 
11,867

Comprehensive income
$
200,120

 
$
262,356

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



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

 
$
759,984

 
$
694,013

Marketable securities
5,004

 
5,519

 
45,122

Accounts receivable, net
335,578

 
285,106

 
311,960

Finance receivables, net
2,354,095

 
2,076,261

 
2,564,608

Inventories
485,476

 
499,917

 
553,750

Restricted cash
75,705

 
52,574

 
93,192

Deferred income taxes

 

 
115,585

Other current assets
142,362

 
174,491

 
113,520

Total current assets
4,237,920

 
3,853,852

 
4,491,750

Finance receivables, net
4,792,027

 
4,759,197

 
4,811,958

Property, plant and equipment, net
953,044

 
981,593

 
932,836

Goodwill
53,967

 
53,391

 
54,585

Deferred income taxes
165,196

 
167,729

 
82,188

Other long-term assets
79,701

 
74,478

 
94,354

 
$
10,281,855

 
$
9,890,240

 
$
10,467,671

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

 
$
235,318

 
$
348,289

Accrued liabilities
547,637

 
486,652

 
587,504

Short-term debt
953,357

 
1,055,708

 
870,073

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

 
1,084,884

 
782,140

Total current liabilities
2,556,739

 
2,862,562

 
2,588,006

Long-term debt, net
5,320,797

 
4,666,975

 
5,460,553

Pension liability
52,559

 
84,442

 
134,679

Postretirement healthcare liability
171,143

 
173,267

 
191,704

Other long-term liabilities
187,208

 
182,836

 
199,909

Commitments and contingencies (Note 15)

 

 

Shareholders’ equity:
 
 
 
 
 
Preferred stock, none issued

 

 

Common stock
1,813

 
1,806

 
3,452

Additional paid-in-capital
1,397,172

 
1,381,862

 
1,333,947

Retained earnings
1,459,431

 
1,337,673

 
9,148,017

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

 
1,920,158

 
1,892,820

 
$
10,281,855

 
$
9,890,240

 
$
10,467,671



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

 
$
225,289

 
$
305,806

Other assets
$
3,204

 
$
2,781

 
$
4,471

Non-current finance receivables, net
$
825,825

 
$
643,047

 
$
1,080,365

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

 
$
57,057

 
$
102,594

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

 
$
241,396

 
$
343,127

Long-term debt, net
$
718,509

 
$
554,879

 
$
943,602

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

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

 
$
41,131

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

 
771,910

Other
52

 
95

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

 
1,193,396

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

 
5,814

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

 
110

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

 
276

Net cash provided by financing activities
11

 
10,295

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

 
3,081

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

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

 
$
722,209

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

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

 
$
694,013

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


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

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

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

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

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

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

 
$
5,519

 
$
45,122

Trading securities: mutual funds
41,674

 
38,119

 
38,567

Total marketable securities
$
46,678

 
$
43,638

 
$
83,689

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

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

 
$
140,639

 
$
158,632

Motorcycle finished goods
263,408

 
285,281

 
291,834

Parts and accessories and general merchandise
117,140

 
122,264

 
152,552

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

 
548,184

 
603,018

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

 
$
499,917

 
$
553,750

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

 
$
250,489

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

 
50,027

Amortization of deferred loan origination costs
20,078

 
21,546

Amortization of financing origination fees
2,076

 
2,802

Provision for long-term employee benefits
7,475

 
9,503

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

 
7,053

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

 
37,123

Deferred income taxes
3,989

 
3,636

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

 
685

Inventories
23,476

 
40,539

Accounts payable and accrued liabilities
182,928

 
222,800

Derivative instruments
3,120

 
1,196

Other
11,413

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

 
$
41,131

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

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

 
$
5,982,211

 
$
6,012,804

Wholesale
1,327,602

 
1,026,590

 
1,519,946

Total finance receivables
7,330,152

 
7,008,801

 
7,532,750

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

 
$
6,835,458

 
$
7,376,566

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

 
$
6,533

 
$
173,343

Provision for credit losses
42,160

 
1,429

 
43,589

Charge-offs
(45,924
)
 

 
(45,924
)
Recoveries
13,022

 

 
13,022

Balance, end of period
$
176,068

 
$
7,962

 
$
184,030

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

 
$
7,858

 
$
147,178

Provision for credit losses
35,524

 
1,599

 
37,123

Charge-offs
(39,644
)
 

 
(39,644
)
Recoveries
11,527

 

 
11,527

Balance, end of period
$
146,727

 
$
9,457

 
$
156,184

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

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

 
$

 
$

Collectively evaluated for impairment
176,068

 
7,962

 
184,030

Total allowance for credit losses
$
176,068

 
$
7,962

 
$
184,030

Finance receivables, ending balance:
 
 
 
 
 
Individually evaluated for impairment
$

 
$

 
$

Collectively evaluated for impairment
6,002,550

 
1,327,602

 
7,330,152

Total finance receivables
$
6,002,550

 
$
1,327,602

 
$
7,330,152

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

 
$

 
$

Collectively evaluated for impairment
166,810

 
6,533

 
173,343

Total allowance for credit losses
$
166,810

 
$
6,533

 
$
173,343

Finance receivables, ending balance:
 
 
 
 
 
Individually evaluated for impairment
$

 
$

 
$

Collectively evaluated for impairment
5,982,211

 
1,026,590

 
7,008,801

Total finance receivables
$
5,982,211

 
$
1,026,590

 
$
7,008,801

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

 
$

 
$

Collectively evaluated for impairment
146,727

 
9,457

 
156,184

Total allowance for credit losses
$
146,727

 
$
9,457

 
$
156,184

Finance receivables, ending balance:
 
 
 
 
 
Individually evaluated for impairment
$

 
$

 
$

Collectively evaluated for impairment
6,012,804

 
1,519,946

 
7,532,750

Total finance receivables
$
6,012,804

 
$
1,519,946

 
$
7,532,750


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

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

 
$
100,471

 
$
33,403

 
$
28,512

 
$
162,386

 
$
6,002,550

Wholesale
1,325,575

 
1,129

 
273

 
625

 
2,027

 
1,327,602

Total
$
7,165,739

 
$
101,600

 
$
33,676

 
$
29,137

 
$
164,413

 
$
7,330,152

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

 
$
131,302

 
$
49,642

 
$
40,449

 
$
221,393

 
$
5,982,211

Wholesale
1,024,995

 
1,000

 
319

 
276

 
1,595

 
1,026,590

Total
$
6,785,813

 
$
132,302

 
$
49,961

 
$
40,725

 
$
222,988

 
$
7,008,801

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

 
$
94,984

 
$
30,094

 
$
22,876

 
$
147,954

 
$
6,012,804

Wholesale
1,517,926

 
1,407

 
135

 
478

 
2,020

 
1,519,946

Total
$
7,382,776

 
$
96,391

 
$
30,229

 
$
23,354

 
$
149,974

 
$
7,532,750

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

 
$
4,768,420

 
$
4,798,394

Sub-prime
1,195,820

 
1,213,791

 
1,214,410

Total
$
6,002,550

 
$
5,982,211

 
$
6,012,804

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

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

 
$
1,333

 
$

Substandard
9,213

 
1,773

 
24,391

Special Mention
19,898

 
30,152

 
7,220

Medium Risk
14,648

 
14,620

 
11,610

Low Risk
1,282,710

 
978,712

 
1,476,725

Total
$
1,327,602

 
$
1,026,590

 
$
1,519,946

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

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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):
 
March 26, 2017
 
Balance
 
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Assets:
 
 
 
 
 
 
 
Cash equivalents
$
628,895

 
$
370,084

 
$
258,811

 
$

Marketable securities
46,678

 
41,674

 
5,004

 

Derivatives
12,446

 

 
12,446

 

Total
$
688,019

 
$
411,758

 
$
276,261

 
$

Liabilities:
 
 
 
 
 
 
 
Derivatives
$
1,052

 
$

 
$
1,052

 
$

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

 
$
426,266

 
$
105,253

 
$

Marketable securities
43,638

 
38,119

 
5,519

 

Derivatives
29,034

 

 
29,034

 

Total
$
604,191

 
$
464,385

 
$
139,806

 
$

Liabilities:
 
 
 
 
 
 
 
Derivatives
$
142

 
$

 
$
142

 
$

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

 
$
426,700

 
$
105,123

 
$

Marketable securities
83,689

 
38,567

 
45,122

 

Derivatives
3,651

 

 
3,651

 

Total
$
619,163

 
$
465,267

 
$
153,896

 
$

Liabilities:
 
 
 
 
 
 
 
Derivatives
$
3,176

 
$

 
$
3,176

 
$

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

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Table of Contents

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

 
$
839,700

 
$
759,984

 
$
759,984

 
$
694,013

 
$
694,013

Marketable securities
$
46,678

 
$
46,678

 
$
43,638

 
$
43,638

 
$
83,689

 
$
83,689

Derivatives
$
12,446

 
$
12,446

 
$
29,034

 
$
29,034

 
$
3,651

 
$
3,651

Finance receivables, net
$
7,225,210

 
$
7,146,122

 
$
6,921,037

 
$
6,835,458

 
$
7,462,125

 
$
7,376,566

Restricted cash
$
90,279

 
$
90,279

 
$
67,147

 
$
67,147

 
$
114,924

 
$
114,924

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
Derivatives
$
1,052

 
$
1,052

 
$
142

 
$
142

 
$
3,176

 
$
3,176

Unsecured commercial paper
$
953,357

 
$
953,357

 
$
1,055,708

 
$
1,055,708

 
$
869,972

 
$
869,972

Global credit facilities
$

 
$

 
$

 
$

 
$
101

 
$
101

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

 
$
286,205

 
$

 
$

 
$

 
$

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

 
$
141,013

 
$
149,338

 
$
149,338

 
$
153,311

 
$
153,311

Medium-term notes
$
4,234,664

 
$
4,163,797

 
$
4,139,462

 
$
4,064,940

 
$
4,217,449

 
$
4,061,832

Senior unsecured notes
$
755,646

 
$
741,469

 
$
744,552

 
$
741,306

 
$
777,336

 
$
740,821

Asset-backed securitization debt
$
685,953

 
$
685,374

 
$
797,688

 
$
796,275

 
$
1,288,292

 
$
1,286,729

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

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Table of Contents

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

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Table of Contents

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

 
$
12,195

 
$
1,015

 
$
554,551

 
$
28,528

 
$
142

 
$
488,193

 
$
3,592

 
$
2,222

Commodity
contracts(c)
 
1,027

 
23

 

 
992

 
177

 

 
895

 

 
135

Total
 
$
535,679

 
$
12,218

 
$
1,015


$
555,543

 
$
28,705

 
$
142


$
489,088

 
$
3,592

 
$
2,357

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

 
$
228

 
$
37

 
$
5,025

 
$
329

 
$

 
$
6,004

 
$
59

 
$
819

Total
 
$
5,046


$
228

 
$
37

 
$
5,025

 
$
329

 
$

 
$
6,004

 
$
59

 
$
819

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

 
$
856

 
$
12,270

Commodity contracts(a)
 
48

 
(215
)
 
23

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

 
$
551

 
$
11,931

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

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

 
$
(292
)
Total
 
$
20

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

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

 
(16
)
 
(11,903
)
 

 
3,714

Income tax (benefit) expense
 
(76
)
 
6

 
4,409

 

 
4,339

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

 
(10
)
 
(7,494
)
 

 
8,053

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

 

 
(2,516
)
 

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

 

 
(48
)
 

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

 

 
90

 

 
90

Prior service credits(b)
 

 

 

 
(289
)
 
(289
)
Actuarial losses(b)
 

 

 

 
11,813

 
11,813

Total reclassifications before tax
 

 

 
(2,474
)
 
11,524

 
9,050

Income tax expense (benefit)
 

 

 
916

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

 

 
(1,558
)
 
7,256

 
5,698

Other comprehensive income (loss)
 
15,557

 
(10
)
 
(9,052
)
 
7,256

 
13,751

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

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

20

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

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

 
(71
)
 
(12,715
)
 

 
1,785

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

 
4,710

 

 
2,858

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

 
(45
)
 
(8,005
)
 

 
4,643

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

 

 
(856
)
 

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

 

 
215

 

 
215

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

 

 
90

 

 
90

Prior service credits(b)
 

 

 

 
(446
)
 
(446
)
Actuarial losses(b)
 

 

 

 
12,471

 
12,471

Total reclassifications before tax
 

 

 
(551
)
 
12,025

 
11,474

Income tax expense (benefit)
 

 

 
204

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

 

 
(347
)
 
7,571

 
7,224

Other comprehensive income (loss)
 
12,693

 
(45
)
 
(8,352
)
 
7,571

 
11,867

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

 
$
1,055,708

 
$
869,972

Bank borrowings - global credit facilities
 

 

 
101

          Total short-term debt
 
$
953,357

 
$
1,055,708

 
$
870,073


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

 
$
149,338

 
$
153,311

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

 

 

Asset-backed securitization debt
 
686,396

 
797,755

 
1,289,792

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

 
945,613

 
1,440,040

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

 
400,000

 
400,000

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

 
400,000

 
400,000

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

 
877,488

 
878,708

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

 
600,000

 
600,000

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

 

 

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

 
600,000

 
600,000

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

 
600,000

 
600,000

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

 

 

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

 
600,000

 
600,000

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

 
450,000

 
450,000

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

 
300,000

 
300,000

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

 
5,751,859

 
6,242,693

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

 
$
4,666,975

 
$
5,460,553

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

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

 
$
(23,239
)
 
$
63,473

 
$
2,532

 
$
814,918

 
$
685,374

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

 
(9,178
)
 
15,781

 
672

 
311,366

 
286,205

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

 
(3,048
)
 
11,025

 
382

 
163,599

 
141,013

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

 
$
(35,465
)
 
$
90,279

 
$
3,586

 
$
1,289,883

 
$
1,112,592

 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2016
 
Finance receivables
 
Allowance for credit losses
 
Restricted cash
 
Other assets
 
Total assets
 
Asset-backed debt
On-balance sheet assets and liabilities
 
 
 
 
 
 
 
 
 
 
 
Consolidated VIEs
 
 
 
 
 
 
 
 
 
 
 
Asset-backed securitizations
$
893,804

 
$
(25,468
)
 
$
57,057

 
$
2,452

 
$
927,845

 
$
796,275

Asset-backed U.S. commercial paper conduit facilities

 

 

 
329

 
329

 

Unconsolidated VIEs
 
 
 
 
 
 
 
 
 
 
 
Asset-backed Canadian commercial paper conduit facility
165,719

 
(3,573
)
 
10,090

 
426

 
172,662

 
149,338

Total on-balance sheet assets and liabilities
$
1,059,523

 
$
(29,041
)
 
$
67,147

 
$
3,207

 
$
1,100,836

 
$
945,613

 
 
 
 
 
 
 
 
 
 
 
 
 
March 27, 2016
 
Finance receivables
 
Allowance for credit losses
 
Restricted cash
 
Other assets
 
Total assets
 
Asset-backed debt
On-balance sheet assets and liabilities
 
 
 
 
 
 
 
 
 
 
 
Consolidated VIEs
 
 
 
 
 
 
 
 
 
 
 
Asset-backed securitizations
$
1,421,332

 
$
(35,161
)
 
$
102,594

 
$
4,169

 
$
1,492,934

 
$
1,286,729

Asset-backed U.S. commercial paper conduit facilities

 

 

 
302

 
302

 

Unconsolidated VIEs
 
 
 
 
 
 
 
 
 
 
 
Asset-backed Canadian commercial paper conduit facility
168,264

 
(3,155
)
 
12,330

 
406

 
177,845

 
153,311

Total on-balance sheet assets and liabilities
$
1,589,596

 
$
(38,316
)
 
$
114,924

 
$
4,877

 
$
1,671,081

 
$
1,440,040

On-Balance Sheet Asset-Backed Securitization VIEs
The Company transfers U.S. retail motorcycle finance receivables to SPEs which in turn issue secured notes to investors, with various maturities and interest rates, secured by future collections of the purchased U.S. retail motorcycle finance receivables. Each on-balance sheet asset-backed securitization SPE is a separate legal entity, and the U.S. retail motorcycle finance receivables included in the asset-backed securitizations are only available for payment of the secured debt and other obligations arising from the asset-backed securitization transaction and are not available to pay other obligations or claims of the Company’s creditors until the associated secured debt and other obligations are satisfied. Restricted cash balances held by the SPEs are used only to support the securitizations. There are no amortization schedules for the secured notes; however, the

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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 2019 to 2022.
The Company is the primary beneficiary of its on-balance sheet asset-backed securitization VIEs because it retains servicing rights and a residual interest in the VIEs in the form of a debt security. As the servicer, the Company is the variable interest holder with the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance. As a residual interest holder, the Company has the obligation to absorb losses and the right to receive benefits which could potentially be significant to the VIE.
There were no on-balance sheet asset-backed securitization transactions during the first quarter of 2017 or 2016.
On-Balance Sheet Asset-Backed U.S. Commercial Paper Conduit Facilities VIE
On December 14, 2016, the Company entered into a new revolving facility agreement with a third party bank-sponsored asset-backed U.S. commercial paper conduit, which provides for a total commitment of up to $300.0 million. Also on that date, the Company renewed its existing $600.0 million revolving facility agreement, which had expired on December 14, 2016, with the same third party bank-sponsored asset-backed U.S. commercial paper conduit. Availability under the revolving facilities (together, the U.S. Conduit Facilities) is based on, among other things, the amount of eligible U.S. retail motorcycle finance receivables held by the SPE as collateral.
Under the U.S. Conduit Facilities, the Company may transfer U.S. retail motorcycle finance receivables to an SPE, which in turn may issue debt to the third party bank-sponsored asset-backed commercial paper conduit. The assets of the SPE are restricted as collateral for the payment of the debt or other obligations arising in the transaction and are not available to pay other obligations or claims of the Company’s creditors. The terms for this debt provide for interest on the outstanding principal based on prevailing commercial paper rates or LIBOR to the extent the advance is not funded by a conduit lender through the issuance of commercial paper plus, in each case, a program fee based on outstanding principal. The U.S. Conduit Facilities also provide for an unused commitment fee based on the unused portion of the total aggregate commitment of $900.0 million. There is no amortization schedule; however, the debt will be reduced monthly as available collections on the related finance receivables are applied to outstanding principal. Upon expiration of the U.S. Conduit Facilities, any outstanding principal will continue to be reduced monthly through available collections. Unless earlier terminated or extended by mutual agreement of the Company and the lenders, as of March 26, 2017, the U.S. Conduit Facilities have an expiration date of December 13, 2017.

The Company is the primary beneficiary of its U.S. Conduit Facilities VIE because it retains servicing rights and a residual interest in the VIE in the form of a debt security. As the servicer, the Company is the variable interest holder with the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance. As a residual interest holder, the Company has the obligation to absorb losses and the right to receive benefits which could potentially be significant to the VIE.
In January 2017, the Company transferred $333.4 million of U.S. retail motorcycle finance receivables to an SPE which, in turn, issued $300.0 million of debt under the U.S. Conduit Facilities. The contractual maturity of the debt is approximately 5 years. The VIE had no borrowings outstanding under the U.S. Conduit at December 31, 2016 or March 27, 2016.
On-Balance Sheet Asset-Backed Canadian Commercial Paper Conduit Facility
In June 2016, 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 March 26, 2017, the Canadian Conduit has 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.

24

Table of Contents

As the Company participates in and does not consolidate the Canadian bank-sponsored, multi-seller conduit VIE, the maximum exposure to loss associated with this VIE, which would only be incurred in the unlikely event that all the finance receivables and underlying collateral have no residual value, was $22.6 million at March 26, 2017. The maximum exposure is not an indication of the Company's expected loss exposure.
The following table includes quarterly transfers of Canadian retail motorcycle finance receivables to the Canadian Conduit and the respective proceeds (in thousands):
 
2017
 
2016
 
Transfers
 
Proceeds
 
Transfers
 
Proceeds
First quarter
$
6,300

 
$
5,500

 
$
6,600

 
$
5,800

Off-Balance Sheet Asset-Backed Securitization VIE
There were no off-balance sheet asset-backed securitization transactions during the first quarter of 2017. During the second quarter of 2016, the Company sold retail motorcycle finance receivables with a principal balance of $301.8 million into a securitization VIE that was not consolidated, recognized a gain of $9.3 million and received cash proceeds of $312.6 million. Similar to an on-balance sheet asset-backed securitization, the Company transferred U.S. retail motorcycle finance receivables to an SPE which in turn issued secured notes to investors, with various maturities and interest rates, secured by future collections of the purchased U.S. retail motorcycle finance receivables. The off-balance sheet asset-backed securitization SPE is a separate legal entity, and the U.S. retail motorcycle finance receivables included in the 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 March 26, 2017, the assets of this off-balance sheet asset-backed securitization VIE were $212.8 million and represented the current unpaid principal balance of the retail motorcycle finance receivables, which was the Company’s maximum exposure to loss in the off-balance sheet VIE at March 26, 2017. This is based on the unlikely event that all the receivables have underwriting defects or other defects that trigger a violation of certain covenants and that the underlying collateral has no residual value. This maximum exposure is not an indication of expected losses.
Servicing Activities
The Company services all retail motorcycle finance receivables that it originates. When the Company transfers retail motorcycle finance receivables to SPEs through asset-backed financings, the Company retains the right to service the finance receivables and receives servicing fees based on the securitized finance receivables balance and certain ancillary fees. In on-balance sheet asset-backed financing, 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 $0.6 million during the three months ended March 26, 2017.
The unpaid principal balance of retail motorcycle finance receivables serviced by the Company was as follows (in thousands):
 
March 26,
2017
 
December 31,
2016
 
March 27,
2016
On-balance sheet retail motorcycle finance receivables
$
5,867,143

 
$
5,839,467

 
$
5,868,921

Off-balance sheet retail motorcycle finance receivables
212,764

 
236,706

 

Total serviced retail motorcycle finance receivables
$
6,079,907

 
$
6,076,173

 
$
5,868,921


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The unpaid principal balance of retail motorcycle finance receivables serviced by the Company 30 days or more delinquent was as follows (in thousands):
 
Amount 30 days or more past due:
 
March 26,
2017
 
December 31,
2016
 
March 27,
2016
On-balance sheet retail motorcycle finance receivables
$
162,386

 
$
221,393

 
$
147,954

Off-balance sheet retail motorcycle finance receivables
1,476

 
1,858

 

Total serviced retail motorcycle finance receivables
$
163,862

 
$
223,251

 
$
147,954

Credit losses, net of recoveries for the retail motorcycle finance receivables serviced by the Company were as follows (in thousands):
 
Three months ended
 
March 26,
2017
 
March 27,
2016
On-balance sheet retail motorcycle finance receivables
$
32,902

 
$
28,117

Off-balance sheet retail motorcycle finance receivables
414

 

Total serviced retail motorcycle finance receivables
$
33,316

 
$
28,117


11. 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
 
March 26,
2017
 
March 27,
2016
Balance, beginning of period
$
79,482

 
$
74,217

Warranties issued during the period
16,752

 
18,012

Settlements made during the period
(19,333
)
 
(18,163
)
Recalls and changes to pre-existing warranty liabilities
1,310

 
770

Balance, end of period
$
78,211

 
$
74,836

The liability for recall campaigns was $10.3 million, $13.6 million and $7.1 million as of March 26, 2017, December 31, 2016 and March 27, 2016, respectively.

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Table of Contents

12. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share amounts):
 
Three months ended
 
March 26,
2017
 
March 27,
2016
Numerator:
 
 
 
Net income used in computing basic and diluted earnings per share
$
186,369

 
$
250,489

Denominator:
 
 
 
Denominator for basic earnings per share - weighted-average common shares
176,001

 
183,429

Effect of dilutive securities - employee stock compensation plan
1,069

 
775

Denominator for diluted earnings per share - adjusted weighted-average shares outstanding
177,070

 
184,204

Earnings per common share:
 
 
 
Basic
$
1.06

 
$
1.37

Diluted
$
1.05

 
$
1.36

Outstanding options to purchase 0.8 million and 1.9 million shares of common stock for the three months ended March 26, 2017 and March 27, 2016, respectively, were not included in the Company’s computation of dilutive securities because the exercise price was greater than the market price and therefore the effect would have been anti-dilutive.
The Company has a share-based compensation plan under which employees may be granted share-based awards including 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 month periods ended March 26, 2017 and March 27, 2016, respectively.

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13. 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
 
March 26,
2017
 
March 27,
2016
Pension and SERPA Benefits
 
 
 
Service cost
$
7,896

 
$
8,359

Interest cost
21,269

 
22,707

Expected return on plan assets
(35,345
)
 
(36,445
)
Amortization of unrecognized:
 
 
 
Prior service cost
254

 
255

Net loss
10,998

 
11,587

Settlement loss

 
300

Net periodic benefit cost
$
5,072

 
$
6,763

Postretirement Healthcare Benefits
 
 
 
Service cost
$
1,875

 
$
1,870

Interest cost
3,412

 
3,704

Expected return on plan assets
(3,156
)
 
(3,017
)
Amortization of unrecognized:
 
 
 
Prior service credit
(543
)
 
(701
)
Net loss
815

 
884

Net periodic benefit cost
$
2,403

 
$
2,740

During the first three months of 2017, 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 2017. The Company expects it will continue to make ongoing benefit payments under the SERPA and postretirement healthcare plans.
14. Business Segments
Harley-Davidson, Inc. is the parent company for the groups of companies doing business as Harley-Davidson Motor Company (HDMC) and Harley-Davidson Financial Services (HDFS). The Company operates in two segments: the Motorcycles & Related Products (Motorcycles) segment and the Financial Services segment. The Company’s reportable segments are strategic business units that offer different products and services and are managed separately based on the fundamental differences in their operations. Selected segment information is set forth below (in thousands):
 
Three months ended
 
March 26,
2017
 
March 27,
2016
Motorcycles net revenue
$
1,328,711

 
$
1,576,610

Gross profit
477,485

 
590,280

Selling, administrative and engineering expense
238,643

 
257,823

Operating income from Motorcycles
238,842

 
332,457

Financial Services revenue
173,221

 
173,358

Financial Services expense
120,585

 
116,987

Operating income from Financial Services
52,636

 
56,371

Operating income
$
291,478

 
$
388,828


28

Table of Contents

15. 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 delivered various additional requests for information to which the Company responded. More recently, in August 2016, the Company entered into a consent decree with the EPA regarding these issues (the Settlement). In the Settlement, the Company agreed to, among other things, pay a fine, fund a three-year emissions mitigation project, and not sell tuning products unless they are approved by the EPA or California Air Resources Board. The Company anticipates the EPA will move the court to finalize the Settlement in the coming months. The Company has a reserve associated with this matter which is included in accrued liabilities in the Consolidated Balance Sheet, and as a result, if it is finalized, the Settlement would not have a material adverse effect on the Company's financial condition or results of operations. The Settlement is not final until it is approved by the court, and if it is not approved by the court, the Company cannot reasonably estimate the impact of any remedies the EPA might seek beyond the Company's current reserve for this matter.
York Environmental Matters:
The Company is involved with government agencies and groups of potentially responsible parties related to a matter involving the cleanup of soil and groundwater contamination at its York, Pennsylvania facility. The York facility was formerly used by the U.S. Navy and AMF prior to the purchase of the York facility by the Company from AMF in 1981. Although the Company is not certain as to the full extent of the environmental contamination at the York facility, it has been working with the Pennsylvania Department of Environmental Protection (PADEP) since 1986 in undertaking environmental investigation and remediation activities, including a site-wide remedial investigation/feasibility study (RI/FS).
In January 1995, the Company entered into a settlement agreement (the Agreement) with the Navy, and the parties amended the Agreement in 2013 to address ordnance and explosive waste. The Agreement calls for the Navy and the Company to contribute amounts into a trust equal to 53% and 47%, respectively, of costs associated with environmental investigation and remediation activities at the York facility (Response Costs). The trust administers the payment of the Response Costs incurred at the York facility as covered by the Agreement.
The Company has a 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. While much of the work on the RI/FS is complete, it is still under agency review and given the uncertainty that exists concerning the nature and scope of additional environmental investigation and remediation that may ultimately be required under the RI/FS that is finally approved or otherwise at the York facility, the Company is unable to make a reasonable estimate of those additional costs, if any, that may result.
The estimate of the Company's future Response Costs that will be incurred at the York facility is based on reports of independent environmental consultants retained by the Company, the actual costs incurred to date and the estimated costs to complete the necessary investigation and remediation activities.
Product Liability Matters:
The Company is involved in product liability suits related to the operation of its business. The Company accrues for claim exposures that are probable of occurrence and can be reasonably estimated. The Company also maintains insurance coverage for product liability exposures. The Company believes that its accruals and insurance coverage are adequate and that product liability suits will not have a material adverse effect on the Company’s consolidated financial statements.

29

Table of Contents

National Highway Traffic Safety Administration Matters:
In July 2016, the National Highway Traffic Safety Administration (NHTSA) began an investigation into certain of the Company's 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.

30

Table of Contents

16. 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 March 26, 2017
 
HDMC Entities
 
HDFS Entities
 
Eliminations
 
Consolidated
Revenue:
 
 
 
 
 
 
 
Motorcycles and Related Products
$
1,330,618

 
$

 
$
(1,907
)
 
$
1,328,711

Financial Services

 
173,557

 
(336
)
 
173,221

Total revenue
1,330,618

 
173,557

 
(2,243
)
 
1,501,932

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

 

 

 
851,226

Financial Services interest expense

 
43,289

 

 
43,289

Financial Services provision for credit losses

 
43,589

 

 
43,589

Selling, administrative and engineering expense
238,996

 
35,614

 
(2,260
)
 
272,350

Total costs and expenses
1,090,222

 
122,492

 
(2,260
)
 
1,210,454

Operating income
240,396

 
51,065

 
17

 
291,478

Investment income
106,879

 

 
(106,000
)
 
879

Interest expense
7,673

 

 

 
7,673

Income before provision for income taxes
339,602

 
51,065

 
(105,983
)
 
284,684

Provision for income taxes
79,157

 
19,158

 

 
98,315

Net income
$
260,445

 
$
31,907

 
$
(105,983
)
 
$
186,369

 
Three months ended March 27, 2016
 
HDMC Entities
 
HDFS Entities
 
Eliminations
 
Consolidated
Revenue:
 
 
 
 
 
 
 
Motorcycles and Related Products
$
1,578,639

 
$

 
$
(2,029
)
 
$
1,576,610

Financial Services

 
173,521

 
(163
)
 
173,358

Total revenue
1,578,639

 
173,521

 
(2,192
)
 
1,749,968

Costs and expenses:
 
 
 
 
 
 
 
Motorcycles and Related Products cost of goods sold
986,330

 

 

 
986,330

Financial Services interest expense

 
45,919

 

 
45,919

Financial Services provision for credit losses

 
37,123

 

 
37,123

Selling, administrative and engineering expense
258,231

 
35,974

 
(2,437
)
 
291,768

Total costs and expenses
1,244,561

 
119,016

 
(2,437
)
 
1,361,140

Operating income
334,078

 
54,505

 
245

 
388,828

Investment income
140,766

 

 
(140,000
)
 
766

Interest expense
7,168

 

 

 
7,168

Income before provision for income taxes
467,676

 
54,505

 
(139,755
)
 
382,426

Provision for income taxes
110,574

 
21,363

 

 
131,937

Net income
$
357,102

 
$
33,142

 
$
(139,755
)
 
$
250,489


31

Table of Contents

 
March 26, 2017
 
HDMC Entities
 
HDFS Entities
 
Eliminations
 
Consolidated
ASSETS
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
Cash and cash equivalents
$
479,439

 
$
360,261

 
$

 
$
839,700

Marketable securities
5,004

 

 

 
5,004

Accounts receivable, net
740,231

 

 
(404,653
)
 
335,578

Finance receivables, net

 
2,354,095

 

 
2,354,095

Inventories
485,476

 

 

 
485,476

Restricted cash

 
75,705

 

 
75,705

Other current assets
102,298

 
40,064

 

 
142,362

Total current assets
1,812,448

 
2,830,125

 
(404,653
)
 
4,237,920

Finance receivables, net

 
4,792,027

 

 
4,792,027

Property, plant and equipment, net
913,462

 
39,582

 

 
953,044

Goodwill
53,967

 

 

 
53,967

Deferred income taxes
98,291

 
68,306

 
(1,401
)
 
165,196

Other long-term assets
137,712

 
25,790

 
(83,801
)
 
79,701

 
$
3,015,880

 
$
7,755,830

 
$
(489,855
)
 
$
10,281,855

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
Accounts payable
$
333,227

 
$
430,110

 
$
(404,653
)
 
$
358,684

Accrued liabilities
442,181

 
105,060

 
396

 
547,637

Short-term debt

 
953,357

 

 
953,357

Current portion of long-term debt, net

 
697,061

 

 
697,061

Total current liabilities
775,408

 
2,185,588

 
(404,257
)
 
2,556,739

Long-term debt, net
741,469

 
4,579,328

 

 
5,320,797

Pension liability
52,559

 

 

 
52,559

Postretirement healthcare liability
171,143

 

 

 
171,143

Other long-term liabilities
152,974

 
31,506

 
2,728

 
187,208

Commitments and contingencies (Note 15)
 
 
 
 
 
 
 
Shareholders’ equity
1,122,327

 
959,408

 
(88,326
)
 
1,993,409

 
$
3,015,880

 
$
7,755,830

 
$
(489,855
)
 
$
10,281,855


32

Table of Contents

 
December 31, 2016
 
HDMC Entities
 
HDFS Entities
 
Eliminations
 
Consolidated
ASSETS
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
Cash and cash equivalents
$
425,540

 
$
334,444

 
$

 
$
759,984

Marketable securities
5,019

 
500

 

 
5,519

Accounts receivable, net
450,186

 

 
(165,080
)
 
285,106

Finance receivables, net

 
2,076,261

 

 
2,076,261

Inventories
499,917

 

 

 
499,917

Restricted cash

 
52,574

 

 
52,574

Other current assets
127,606

 
46,934

 
(49
)
 
174,491

Total current assets
1,508,268

 
2,510,713

 
(165,129
)
 
3,853,852

Finance receivables, net

 
4,759,197

 

 
4,759,197

Property, plant and equipment, net
942,634

 
38,959

 

 
981,593

Goodwill
53,391

 

 

 
53,391

Deferred income taxes
103,487

 
66,152

 
(1,910
)
 
167,729

Other long-term assets
132,835

 
24,769

 
(83,126
)
 
74,478

 
$
2,740,615

 
$
7,399,790

 
$
(250,165
)
 
$
9,890,240

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
Accounts payable
$
219,353

 
$
181,045

 
$
(165,080
)
 
$
235,318

Accrued liabilities
395,907

 
90,910

 
(165
)
 
486,652

Short-term debt

 
1,055,708

 

 
1,055,708

Current portion of long-term debt, net

 
1,084,884

 

 
1,084,884

Total current liabilities
615,260

 
2,412,547

 
(165,245
)
 
2,862,562

Long-term debt, net
741,306

 
3,925,669

 

 
4,666,975

Pension liability
84,442

 

 

 
84,442

Postretirement healthcare liability
173,267

 

 

 
173,267

Other long-term liabilities
150,391

 
29,697

 
2,748

 
182,836

Commitments and contingencies (Note 15)
 
 
 
 
 
 
 
Shareholders’ equity
975,949

 
1,031,877

 
(87,668
)
 
1,920,158

 
$
2,740,615

 
$
7,399,790

 
$
(250,165
)
 
$
9,890,240


33

Table of Contents

 
March 27, 2016
 
HDMC Entities
 
HDFS Entities
 
Eliminations
 
Consolidated
ASSETS
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
Cash and cash equivalents
$
349,302

 
$
344,711

 
$

 
$
694,013

Marketable securities
45,122

 

 

 
45,122

Accounts receivable, net
811,276

 

 
(499,316
)
 
311,960

Finance receivables, net

 
2,564,608

 

 
2,564,608

Inventories
553,750

 

 

 
553,750

Restricted cash

 
93,192

 

 
93,192

Deferred income taxes
61,266

 
54,319

 

 
115,585

Other current assets
85,260

 
28,260

 

 
113,520

Total current assets
1,905,976

 
3,085,090

 
(499,316
)
 
4,491,750

Finance receivables, net

 
4,811,958

 

 
4,811,958

Property, plant and equipment, net
898,381

 
34,455

 

 
932,836

Goodwill
54,585

 

 

 
54,585

Deferred income taxes
75,999

 
7,783

 
(1,594
)
 
82,188

Other long-term assets
135,449

 
40,171

 
(81,266
)
 
94,354

 
$
3,070,390

 
$
7,979,457

 
$
(582,176
)
 
$
10,467,671

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
Accounts payable
$
321,028

 
$
526,577

 
$
(499,316
)
 
$
348,289

Accrued liabilities
477,762

 
109,455

 
287

 
587,504

Short-term debt

 
870,073

 

 
870,073

Current portion of long-term debt, net

 
782,140

 

 
782,140

Total current liabilities
798,790

 
2,288,245

 
(499,029
)
 
2,588,006

Long-term debt, net
740,821

 
4,719,732

 

 
5,460,553

Pension liability
134,679

 

 

 
134,679

Postretirement healthcare liability
191,704

 

 

 
191,704

Other long-term liabilities
170,318

 
27,071

 
2,520

 
199,909

Commitments and contingencies (Note 15)
 
 
 
 
 
 
 
Shareholders’ equity
1,034,078

 
944,409

 
(85,667
)
 
1,892,820

 
$
3,070,390

 
$
7,979,457

 
$
(582,176
)
 
$
10,467,671


34

Table of Contents

 
Three months ended March 26, 2017
 
HDMC Entities
 
HDFS Entities
 
Eliminations
 
Consolidated
Cash flows from operating activities:
 
 
 
 
 
 
 
Net income
$
260,445

 
$
31,907

 
$
(105,983
)
 
$
186,369

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
 
 
 
Depreciation and amortization of intangibles
53,241

 
1,659

 

 
54,900

Amortization of deferred loan origination costs

 
20,078

 

 
20,078

Amortization of financing origination fees
163

 
1,913

 

 
2,076

Provision for long-term employee benefits
7,475

 

 

 
7,475

Employee benefit plan contributions and payments
(29,957
)
 

 

 
(29,957
)
Stock compensation expense
6,317

 
675

 

 
6,992

Net change in wholesale finance receivables related to sales

 

 
(317,087
)
 
(317,087
)
Provision for credit losses

 
43,589

 

 
43,589

Deferred income taxes
6,728

 
(2,230
)
 
(509
)
 
3,989

Other, net
(6,728
)
 
1,411

 
(17
)
 
(5,334
)
Changes in current assets and liabilities:
 
 
 
 
 
 
 
Accounts receivable, net
(278,803
)
 

 
239,573

 
(39,230
)
Finance receivables - accrued interest and other

 
5,142

 

 
5,142

Inventories
23,476

 

 

 
23,476

Accounts payable and accrued liabilities
154,372

 
263,011

 
(234,455
)
 
182,928

Derivative instruments
3,120

 

 

 
3,120

Other
5,537

 
5,925

 
(49
)
 
11,413

Total adjustments
(55,059
)
 
341,173

 
(312,544
)
 
(26,430
)
Net cash provided by operating activities
205,386

 
373,080

 
(418,527
)
 
159,939

 
 
 
 
 
 
 
 

35

Table of Contents

 
Three months ended March 26, 2017
 
HDMC Entities
 
HDFS Entities
 
Eliminations
 
Consolidated
Cash flows from investing activities:
 
 
 
 
 
 
 
Capital expenditures
(21,686
)
 
(2,281
)
 

 
(23,967
)
Origination of finance receivables

 
(1,932,599
)
 
1,087,907

 
(844,692
)
Collections on finance receivables

 
1,556,534

 
(775,380
)
 
781,154

Other
52

 

 

 
52

Net cash used by investing activities
(21,634
)
 
(378,346
)
 
312,527

 
(87,453
)
Cash flows from financing activities:
 
 
 
 
 
 
 
Proceeds from issuance of medium-term notes

 
497,406

 

 
497,406

Repayments of medium-term notes

 
(400,000
)
 

 
(400,000
)
Repayments of securitization debt

 
(111,359
)
 

 
(111,359
)
Borrowings of asset-backed commercial paper

 
305,209

 

 
305,209

Repayments of asset-backed commercial paper

 
(29,383
)
 

 
(29,383
)
Net decrease in credit facilities and unsecured commercial paper

 
(101,702
)
 

 
(101,702
)
Net change in restricted cash

 
(23,132
)
 

 
(23,132
)
Dividends paid
(64,611
)
 
(106,000
)
 
106,000

 
(64,611
)
Purchase of common stock for treasury
(79,753
)
 

 

 
(79,753
)
Issuance of common stock under employee stock option plans
7,336

 

 

 
7,336

Net cash (used by) provided by financing activities
(137,028
)
 
31,039

 
106,000

 
11

Effect of exchange rate changes on cash and cash equivalents
7,175

 
44

 

 
7,219

Net increase in cash and cash equivalents
$
53,899

 
$
25,817

 
$

 
$
79,716

Cash and cash equivalents:
 
 
 
 
 
 
 
Cash and cash equivalents—beginning of period
$
425,540

 
$
334,444

 
$

 
$
759,984

Net increase in cash and cash equivalents
53,899

 
25,817

 

 
79,716

Cash and cash equivalents—end of period
$
479,439

 
$
360,261

 
$

 
$
839,700


36

Table of Contents

 
Three months ended March 27, 2016
 
HDMC Entities
 
HDFS Entities
 
Eliminations
 
Consolidated
Cash flows from operating activities:
 
 
 
 
 
 
 
Net income
$
357,102

 
$
33,142

 
$
(139,755
)
 
$
250,489

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
 
 
 
Depreciation and amortization of intangibles
48,056

 
1,971

 

 
50,027

Amortization of deferred loan origination costs

 
21,546

 

 
21,546

Amortization of financing origination fees
168

 
2,634

 

 
2,802

Provision for long-term employee benefits
9,503

 

 

 
9,503

Employee benefit plan contributions and payments
(29,641
)
 

 

 
(29,641
)
Stock compensation expense
6,389

 
664

 

 
7,053

Net change in wholesale finance receivables related to sales

 

 
(507,731
)
 
(507,731
)
Provision for credit losses

 
37,123

 

 
37,123

Deferred income taxes
6,034

 
(1,850
)
 
(548
)
 
3,636

Other, net
(7,576
)
 
519

 
(245
)
 
(7,302
)
Changes in current assets and liabilities:
 
 
 
 
 
 
 
Accounts receivable, net
(413,807
)
 

 
355,922

 
(57,885
)
Finance receivables - accrued interest and other

 
685

 

 
685

Inventories
40,539

 

 

 
40,539

Accounts payable and accrued liabilities
189,425

 
387,010

 
(353,635
)
 
222,800

Derivative instruments
1,196

 

 

 
1,196

Other
(8,910
)
 
5,201

 

 
(3,709
)
Total adjustments
(158,624
)
 
455,503

 
(506,237
)
 
(209,358
)
Net cash provided by operating activities
198,478

 
488,645

 
(645,992
)
 
41,131

Cash flows from investing activities:
 
 
 
 
 
 
 
Capital expenditures
(38,031
)
 
(980
)
 

 
(39,011
)
Origination of finance receivables

 
(2,123,079
)
 
1,307,382

 
(815,697
)
Collections on finance receivables

 
1,573,300

 
(801,390
)
 
771,910

Other
95

 

 

 
95

Net cash used by investing activities
(37,936
)
 
(550,759
)
 
505,992

 
(82,703
)
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

 
(173,363
)
 

 
(173,363
)
Borrowings of asset-backed commercial paper

 
5,814

 

 
5,814

Repayments of asset-backed commercial paper

 
(15,740
)
 

 
(15,740
)
Net decrease in credit facilities and unsecured commercial paper

 
(331,090
)
 

 
(331,090
)
Net change in restricted cash

 
(4,282
)
 

 
(4,282
)
Dividends paid
(64,457
)
 
(140,000
)
 
140,000

 
(64,457
)
Purchase of common stock for treasury
(150,369
)
 

 

 
(150,369
)
Excess tax benefits from share-based payments
110

 

 

 
110

Issuance of common stock under employee stock option plans
276

 

 

 
276

Net cash (used by) provided by financing activities
(214,440
)
 
84,735

 
140,000

 
10,295

Effect of exchange rate changes on cash and cash equivalents
2,757

 
324

 

 
3,081

Net (decrease) increase in cash and cash equivalents
$
(51,141
)
 
$
22,945

 
$

 
$
(28,196
)
Cash and cash equivalents:
 
 
 
 
 
 
 
Cash and cash equivalents—beginning of period
$
400,443

 
$
321,766

 
$

 
$
722,209

Net (decrease) increase in cash and cash equivalents
(51,141
)
 
22,945

 

 
(28,196
)
Cash and cash equivalents—end of period
$
349,302

 
$
344,711

 
$

 
$
694,013


37

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 United States, Canada, Latin America, Europe/Middle East/Africa (EMEA) and the Asia Pacific region.
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
As the Company expected, its first quarter 2017 results were adversely impacted by its decision to significantly reduce motorcycle shipments in the quarter. This action limited the availability of the Company's model-year 2017 motorcycles; in particular, its Milwaukee-EightTM powered motorcycles, during the first quarter of 2017. The Company took this action to help enable its U.S. dealers to sell-through the model-year 2016 motorcycles that were in their retail inventory at the end of 2016. As a result, retail inventory in the U.S. at the end of the first quarter of 2017 was significantly lower than at the end of the first quarter of 2016. In addition, the mix of model-year 2017 motorcycles to model-year 2016 motorcycles in U.S. dealer inventory improved from year end 2016. The Company believes the financial impact of this decision will be to shift profit from the first quarter of 2017 to the second half of 2017, as compared to the prior year.(1) 
The Company’s net income was $186.4 million, or $1.05 per diluted share, for the first quarter of 2017 compared to $250.5 million, or $1.36 per diluted share, in the first quarter of 2016. Operating income from the Motorcycles segment decreased $93.6 million or 28.2% compared to last year’s first quarter due primarily to lower motorcycle shipments. Operating income from the Financial Services segment in the first quarter of 2017 was $52.6 million, down 6.6% compared to $56.4 million in the year-ago quarter.
Worldwide retail sales of new Harley-Davidson motorcycles were down 4.2% compared to the first quarter of 2016. During the first quarter of 2017, independent dealer retail sales of new Harley-Davidson motorcycles were 5.7% lower in the U.S. behind weak industry sales, while retail sales in international markets were down 1.8% compared to the prior year first quarter. The global competitive environment remains intense and the Company continues work to protect and reinforce the strength of the Harley-Davidson brand. In addition to the recently introduced Road King® Special and Street RodTM the Company expects worldwide retail sales growth for the remainder of 2017 to be driven by:
Improved availability of Milwaukee-EightTM powered bikes, and the introduction of MY 2018 motorcycles
Strong execution of U.S. ridership growth initiatives
Expansion of the international dealer network
Easing of year-over-year sales comparisons in both the U.S. and international markets
(1)
Note Regarding Forward-Looking Statements
The Company intends that certain matters discussed in this report are “forward-looking statements” intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. These forward-looking statements can generally be identified as such by reference to this footnote or because the context of the statement will include words such as the Company “believes,” “anticipates,” “expects,” “plans,” or “estimates” or words of similar meaning. Similarly, statements that describe future plans, objectives, outlooks, targets, guidance or goals are also forward-looking statements. Such forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those anticipated as of the date of this report. Certain of such risks and uncertainties are described in close proximity to such statements or elsewhere in this report, including under the caption “Cautionary Statements” and in Item 1A “Risk Factors” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2016. Shareholders,

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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 April 18, 2017 and the remaining forward-looking statements in this report are only made as of the date of the filing of this report (May 4, 2017) and the Company disclaims any obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances.

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Outlook(1) 
On April 18, 2017, the Company provided the following information concerning its expectations for the remainder of 2017:
The Company continues to expect its 2017 shipments of Harley-Davidson motorcycles to dealers to be flat to down modestly compared to its 2016 shipments. In addition, the Company announced that it expects shipments of 80,000 to 85,000 motorcycles in the second quarter of 2017 compared to 88,160 motorcycles shipped in the second quarter of 2016 which is down approximately 4% to 9%.
The Company continues to expect gross margin as a percent of revenue for the full-year to be approximately in line with 2016.
The impact of foreign currency on gross profit will be dependent on future exchange rates. Hypothetically, if foreign currency rates experienced recently remained constant throughout the remainder of 2017 the Company estimates the adverse impact to its expected Motorcycles segment full-year revenue from currency exchange rates would be approximately 0.75% on a year-over-year basis. Under this scenario, the Company would also expect the year-over-year impact to gross margin to be flat to down $10 million. This is a hypothetical expectation in what is a very volatile foreign currency exchange environment,
The Company continues to expect its full-year selling, administrative and engineering expenses to be approximately in line with its 2016 expenses. The Company also continues to expect its selling, administrative and engineering expense as a percent of revenue to be approximately in line with 2016.
The Company continues to expect 2017 full-year operating margin percent for the Motorcycles segment to be in line with 2016 operating margin percent.
The Company continues to expect operating income for the Financial Services segment to be down in 2017 as compared to 2016 as a result of the 2016 off-balance sheet asset-backed securitization gain of $9.3 million that it does not expect to recur in 2017.
The Company continues to estimate capital expenditures for 2017 to be between $200 million and $220 million. The Company anticipates it will have the ability to fund all capital expenditures in 2017 with cash flows generated by operations.
The Company continues to expect its full-year 2017 effective income tax rate to be approximately 34.5%. This guidance excludes the effect of any potential future adjustments such as new tax legislation or audit settlements which are recorded as discrete tax items in the period in which they are settled.
Results of Operations for the Three Months Ended March 26, 2017
Compared to the Three Months Ended March 27, 2016
Consolidated Results
 
Three months ended
 
 
 
 
(in thousands, except earnings per share)
March 26,
2017
 
March 27,
2016
 
(Decrease)
Increase
 
%
Change
Operating income from Motorcycles & Related Products
$
238,842

 
$
332,457

 
$
(93,615
)
 
(28.2
)%
Operating income from Financial Services
52,636

 
56,371

 
(3,735
)
 
(6.6
)
Operating income
291,478

 
388,828

 
(97,350
)
 
(25.0
)
Investment income
879

 
766

 
113

 
14.8

Interest expense
7,673

 
7,168

 
505

 
7.0

Income before income taxes
284,684

 
382,426

 
(97,742
)
 
(25.6
)
Provision for income taxes
98,315

 
131,937

 
(33,622
)
 
(25.5
)
Net income
$
186,369

 
$
250,489

 
$
(64,120
)
 
(25.6
)%
Diluted earnings per share
$
1.05

 
$
1.36

 
$
(0.31
)
 
(22.8
)%
Consolidated operating income was down 25.0% in the first quarter of 2017 primarily driven by a decrease in operating income from the Motorcycles segment which declined by $93.6 million, or 28.2%, compared to the first quarter of 2016. Operating income from the Financial Services segment declined by $3.7 million in the first quarter of 2017 compared to the

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first quarter of 2016. 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.
The effective income tax rate for the first quarter of 2017 was 34.5% compared to 34.5% for the first quarter of 2016.
Diluted earnings per share were $1.05 in the first quarter of 2017, down 22.8% from the same period in the prior year on lower net income partially offset by the positive impact of lower diluted weighted average shares outstanding. Diluted weighted average shares outstanding decreased from 184.2 million in the first quarter of 2016 to 177.1 million in the first quarter of 2017, driven by the Company's repurchases of common stock. Please refer to "Liquidity and Capital Resources" for additional information concerning the Company's share repurchase activity.
Motorcycles Retail Sales and Registration Data
Worldwide Harley-Davidson Motorcycle Retail Sales(a) 
The following table includes retail unit sales of Harley-Davidson motorcycles:
 
Three months ended
 
 
 
 
 
March 31,
2017
 
March 31,
2016
 
(Decrease)
Increase
 
%
Change
United States
33,316

 
35,326

 
(2,010
)
 
(5.7
)%
 
 
 
 
 
 
 
 
Europe(b)
8,984

 
8,846

 
138

 
1.6

EMEA - Other
1,183

 
1,364

 
(181
)
 
(13.3
)
     Total EMEA
10,167

 
10,210

 
(43
)
 
(0.4
)
 
 
 
 
 
 
 
 
Japan
1,986

 
2,106

 
(120
)
 
(5.7
)
Asia Pacific - Other
4,877

 
5,460

 
(583
)
 
(10.7
)
     Total Asia Pacific
6,863

 
7,566

 
(703
)
 
(9.3
)
 
 
 
 
 
 
 
 
Latin America
2,342

 
1,886

 
456

 
24.2

Canada
2,361

 
2,470

 
(109
)
 
(4.4
)
     Total International Retail Sales
21,733

 
22,132

 
(399
)
 
(1.8
)%
     Total Worldwide Retail Sales
55,049

 
57,458

 
(2,409
)
 
(4.2
)%
 
(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. The EMEA Europe total for March 31, 2016 includes 251 units originally reported in the EMEA-Other total.
(b)
Includes Austria, Belgium, Denmark, Finland, France, Germany, Greece, Italy, Luxembourg, Netherlands, Norway, Portugal, Spain, Sweden, Switzerland and the United Kingdom.
The Company believes 2017 U.S. retail sales of its motorcycles were negatively impacted by lower industry sales and limited availability of its model-year 2017 motorcycles. As discussed, the Company significantly reduced shipments of its model-year 2017 motorcycles in the first quarter of 2017 to help enable U.S. dealers to sell through the model-year 2016 Harley-Davidson motorcycles that remained in dealer inventory at the end of 2016.
The Company's U.S. market share of 601+cc motorcycles for the first quarter of 2017 was 51.3%, up 0.4 percentage points compared to the same period last year (Source: Motorcycle Industry Council) in spite of a competitor's unexpected discontinuation and liquidation of a competitive line of motorcycles. Although the liquidation benefited industry performance, the industry was down 5.9% in the first quarter of 2017. The Company believes sales of new motorcycles in the U.S. motorcycle industry continue to be adversely affected by lower used motorcycle prices and weakness in the oil-dependent areas, and it continues to expect the industry will remain soft for the full year. However, year-over-year comparisons are expected to ease beginning in the second quarter of 2017 given that the initial industry declines started in the second quarter of 2016.(1)

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Retail sales in the first quarter of 2017 in EMEA were down 0.4% compared to the first quarter of 2016. The year-over-year comparison of retail sales results in EMEA was impacted by strong prior-year sales which were up 8.8% in the first quarter of 2016. The Company believes the underlying demand for its motorcycles remains healthy, especially for its S Model motorcycles and its new Milwaukee-EightTM powered motorcycles. During the first quarter of 2017, the Company's market share of 601+cc motorcycles in Europe was 9.1%, down 1.2 percentage points compared to the same period last year (Source: Association des Constructeurs Europeens de Motocycles).
In the Asia Pacific region, retail sales decreased 9.3% in the first quarter of 2017 compared to the same period last year. Sales were adversely impacted by softness in Japan and the Company's emerging markets, including India. In India, the Company believes retail sales of Harley-Davidson motorcycles continue to be negatively impacted by India's currency demonetization which occurred in the fourth quarter of 2016. The Company believes retail sales of Harley-Davidson motorcycles in Japan were lower as a result of lower overall industry sales. The Company expects that retail sales of Harley-Davidson motorcycles in the Asia Pacific region will return to growth in the second half of 2017, largely behind expanded distribution, the recent introduction of the new Street RodTM and increased marketing spending for the remainder of 2017.(1)
Latin America retail sales in the first three months of 2017 were up 24.2% compared to the first three months of 2016 driven by strength in Brazil. This compares to a decline of 26.5% in 2016 which was adversely impacted by price increases in Brazil.
Retail sales in Canada were down 4.4% in the first quarter of 2017 compared to year-ago growth of 16.3%.
The Company believes it can continue to support international growth opportunities by expanding its dealer network. In the first quarter of 2017, the Company added seven new international dealerships, and it plans to add a total of 150 to 200 from 2016 through 2020.(1) 


Motorcycle Registration Data(a) 
The following table includes industry retail motorcycle registration data:
 
Three months ended
 
 
 
 
 
March 31,
2017
 
March 31,
2016
 
(Decrease)Increase
 
%
Change
United States(b)
64,250

 
68,305

 
(4,055
)
 
(5.9
)%
Europe(c)
100,533

 
95,480

 
5,053

 
5.3
 %
 
(a)
Data includes on-road 601+cc models. On-road 601+cc models include dual purpose models, three-wheeled motorcycles and autocycles. Registration data for Harley-Davidson Street® 500 motorcycles is not included in this table.
(b)
United States industry data is derived from information provided by Motorcycle Industry Council (MIC). This third-party data is subject to revision and update.
(c)
Europe data includes Austria, Belgium, Denmark, Finland, France, Germany, Greece, Italy, Luxembourg, Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, and the United Kingdom. Industry retail motorcycle registration data includes 601+cc models derived from information provided by Association des Constructeurs Europeens de Motocycles (ACEM), an independent agency. This third-party data is subject to revision and update.

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Motorcycles & Related Products Segment
Motorcycle Unit Shipments
The following table includes wholesale motorcycle unit shipments for the Motorcycles segment:
 
Three months ended
 
 
 
 
 
March 26, 2017
 
March 27, 2016
 
Unit
 
Unit
 
Units
 
Mix %
 
Units
 
Mix %
 
Decrease
 
%
Change
United States
45,784

 
64.6
%
 
57,635

 
69.4
%
 
(11,851
)
 
(20.6
)%
International
25,047

 
35.4
%
 
25,401

 
30.6
%
 
(354
)
 
(1.4
)
Harley-Davidson motorcycle units
70,831

 
100.0
%
 
83,036

 
100.0
%
 
(12,205
)
 
(14.7
)%
Touring motorcycle units
29,068

 
41.0
%
 
38,497

 
46.4
%
 
(9,429
)
 
(24.5
)%
Cruiser motorcycle units
25,154

 
35.5
%
 
26,929

 
32.4
%
 
(1,775
)
 
(6.6
)
Sportster® / Street motorcycle units
16,609

 
23.5
%
 
17,610

 
21.2
%
 
(1,001
)
 
(5.7
)
Harley-Davidson motorcycle units
70,831

 
100.0
%
 
83,036

 
100.0
%
 
(12,205
)
 
(14.7
)%
 
The Company's decision to limit availability of its model-year 2017 motorcycles in the first quarter of 2017 had an adverse impact on shipment volumes and resulted in a lower mix of Touring motorcycles as compared to the same quarter last year. However, this action allowed U.S. dealers to focus on selling model-year 2016 inventory, resulting in an improved inventory mix compared to the beginning of the first quarter, and lower overall inventory compared to the first quarter of last year, ahead of the spring selling season.
U.S. dealer inventory of Harley-Davidson motorcycles at the end of the first quarter of 2017 was lower by approximately 8,200 motorcycles compared to the first quarter of the prior year. The Company expects U.S. dealer inventory of Harley-Davidson motorcycles to be lower at the end of the second quarter of 2017 compared to the second quarter of 2016.(1) The Company also continues to expect 2017 year-end U.S. dealer inventory to be essentially flat to year-end 2016 as the Company remains committed to aggressively managing supply in line with demand.(1) 

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Segment Results
The following table includes the condensed statements of operations for the Motorcycles segment (in thousands):
 
Three months ended
 
 
 
 
 
March 26, 2017
 
March 27, 2016
 
Decrease
 
%
Change
Revenue:
 
 
 
 
 
 
 
Motorcycles
$
1,099,702

 
$
1,317,578

 
$
(217,876
)
 
(16.5
)%
Parts & Accessories
169,025

 
183,705

 
(14,680
)
 
(8.0
)
General Merchandise
55,836

 
70,618

 
(14,782
)
 
(20.9
)
Other
4,148

 
4,709

 
(561
)
 
(11.9
)
Total revenue
1,328,711

 
1,576,610

 
(247,899
)
 
(15.7
)
Cost of goods sold
851,226

 
986,330

 
(135,104
)
 
(13.7
)
Gross profit
477,485

 
590,280

 
(112,795
)
 
(19.1
)
Selling & administrative expense
200,382

 
215,712

 
(15,330
)
 
(7.1
)
Engineering expense
38,261

 
42,111

 
(3,850
)
 
(9.1
)
Operating expense
238,643

 
257,823

 
(19,180
)
 
(7.4
)
Operating income from Motorcycles
$
238,842

 
$
332,457

 
$
(93,615
)
 
(28.2
)%
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 first quarter of 2016 to the first quarter of 2017 (in millions):
 
Net
Revenue
 
Cost of
Goods Sold
 
Gross
Profit
Three months ended March 27, 2016
$
1,576.6

 
$
986.3

 
$
590.3

Volume
(233.1
)
 
(140.2
)
 
(92.9
)
Price, net of related costs
26.9

 
14.3

 
12.6

Foreign currency exchange rates and hedging
(1.2
)
 
(7.8
)
 
6.6

Shipment mix
(40.5
)
 
(14.1
)
 
(26.4
)
Raw material prices

 
2.4

 
(2.4
)
Manufacturing and other costs

 
10.3

 
(10.3
)
Total
(247.9
)
 
(135.1
)
 
(112.8
)
Three months ended March 26, 2017
$
1,328.7

 
$
851.2

 
$
477.5

The following factors affected the comparability of net revenue, cost of goods sold and gross profit from the first quarter of 2016 to the first quarter of 2017:

Volume decreases in 2017 were driven by the decrease in wholesale motorcycle shipments as well as decreases in sales of parts & accessories and general merchandise.
On average, wholesale prices for the Company’s model-year 2017 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 model-year 2017 motorcycles.
Gross profit was positively impacted by foreign currency driven by a favorable remeasurement of foreign-denominated balance sheet accounts at the end of the quarter.
Shipment mix changes negatively impacted gross profit primarily due to a reduced mix of touring motorcycles following the Company's decision to reduce shipments of its model-year 2017 motorcycles.
Raw material prices were higher in the first quarter of 2017 relative to the first quarter of 2016.
Manufacturing costs in the first quarter of 2017 were negatively impacted by lower fixed cost absorption and higher depreciation, partially offset by favorable productivity.
The net decrease in operating expense was primarily due to the timing of marketing and engineering spending compared to prior year. The Company continues to expect full-year selling, administrative and engineering expense to be approximately in line with 2016.(1) 

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Financial Services Segment
Segment Results
The following table includes the condensed statements of operations for the Financial Services segment (in thousands):
 
Three months ended
 
 
 
 
 
March 26, 2017
 
March 27, 2016
 
(Decrease)
Increase
 
%
Change
Interest income
$
150,728

 
$
152,526

 
$
(1,798
)
 
(1.2
)%
Other income
21,919

 
20,832

 
1,087

 
5.2

Securitization and servicing income
574

 

 
574

 

Financial Services revenue
173,221

 
173,358

 
(137
)
 
(0.1
)
Interest expense
43,289

 
45,919

 
(2,630
)
 
(5.7
)
Provision for credit losses
43,589

 
37,123

 
6,466

 
17.4

Operating expenses
33,707

 
33,945

 
(238
)
 
(0.7
)
Financial Services expense
120,585

 
116,987

 
3,598

 
3.1

Operating income from Financial Services
$
52,636

 
$
56,371

 
$
(3,735
)
 
(6.6
)%
Interest income for the first quarter of 2017 decreased due to lower average wholesale receivables and a lower yield in the wholesale portfolio. Other income was slightly favorable primarily on increased insurance commission revenue.
Interest expense for the first quarter of 2017 decreased due to lower average outstanding debt and a favorable cost of funds.
The total provision for retail and wholesale credit losses increased $6.5 million in the first quarter of 2017. The retail motorcycle provision increased $6.6 million driven by higher credit losses and a related increase in the retail reserve rate. Credit losses were higher as a result of unfavorable performance across the retail portfolio.
Annualized credit losses for the Company's retail motorcycle loans were 2.31% through March 26, 2017 compared to 1.98% through March 27, 2016. The 30-day delinquency rate for on-balance sheet retail motorcycle loans at March 26, 2017 was 3.17% compared to 2.88% at March 27, 2016.
Changes in the allowance for credit losses on finance receivables were as follows (in thousands):
 
Three months ended
 
March 26,
2017
 
March 27,
2016
Balance, beginning of period
$
173,343

 
$
147,178

Provision for credit losses
43,589

 
37,123

Charge-offs, net of recoveries
(32,902
)
 
(28,117
)
Balance, end of period
$
184,030

 
$
156,184


Other Matters

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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, 2016 as of March 26, 2017 to reflect the new projected principal and interest payments for the remainder of 2017 and beyond as follows (in thousands):
 
2017
 
2018-2019
 
2020-2021
 
Thereafter
 
Total
Principal payments on debt
$
1,586,756

 
$
2,900,081

 
$
1,733,160

 
$
774,462

 
$
6,994,459

Interest payments on debt
132,825

 
236,755

 
95,704

 
396,087

 
861,371

 
$
1,719,581

 
$
3,136,836

 
$
1,828,864

 
$
1,170,549

 
$
7,855,830

Interest obligations for floating rate instruments, as calculated above, assume rates in effect at March 26, 2017 remain constant. For purposes of the above, the principal payment balances for medium-term notes, on-balance sheet asset-backed securitizations and senior unsecured notes are shown gross of debt issuance costs. Refer to Note 9 for a breakout of the finance costs consistent with ASU No. 2015-03.
As of March 26, 2017, there have been no other material changes to the Company’s summary of expected payments for significant contractual obligations in the contractual obligations table in the Company's Annual Report on Form 10-K for the year ended December 31, 2016.
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 delivered various additional requests for information to which the Company responded. More recently, in August 2016, the Company entered into a consent decree with the EPA regarding these issues (the Settlement). In the Settlement, the Company agreed to, among other things, pay a fine, fund a three-year emissions mitigation project, and not sell tuning products unless they are approved by the EPA or California Air Resources Board. The Company anticipates the EPA will move the court to finalize the Settlement in the coming months. The Company has a reserve associated with this matter which is included in accrued liabilities in the Consolidated Balance Sheet, and as a result, if it is finalized, the Settlement would not have a material adverse effect on the Company's financial condition or results of operations. The Settlement is not final until it is approved by the court, and if it is not approved by the court, the Company cannot reasonably estimate the impact of any remedies the EPA might seek beyond the Company's current reserve for this matter.
York Environmental Matters:
The Company is involved with government agencies and groups of potentially responsible parties related to a matter involving the cleanup of soil and groundwater contamination at its York, Pennsylvania facility. The York facility was formerly used by the U.S. Navy and AMF prior to the purchase of the York facility by the Company from AMF in 1981. Although the Company is not certain as to the full extent of the environmental contamination at the York facility, it has been working with the Pennsylvania Department of Environmental Protection (PADEP) since 1986 in undertaking environmental investigation and remediation activities, including a site-wide remedial investigation/feasibility study (RI/FS).
In January 1995, the Company entered into a settlement agreement (the Agreement) with the Navy, and the parties amended the Agreement in 2013 to address ordnance and explosive waste. The Agreement calls for the Navy and the Company to contribute amounts into a trust equal to 53% and 47%, respectively, of costs associated with environmental investigation and remediation activities at the York facility (Response Costs). The trust administers the payment of the Response Costs incurred at the York facility as covered by the Agreement.
The Company has a 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. While much of the work on the RI/FS is complete, it is still under

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agency review and given the uncertainty that exists concerning the nature and scope of additional environmental investigation and remediation that may ultimately be required under the RI/FS that is finally approved or otherwise at the York facility, the Company is unable to make a reasonable estimate of those additional costs, if any, that may result.
The estimate of the Company's future Response Costs that will be incurred at the York facility is based on reports of independent environmental consultants retained by the Company, the actual costs incurred to date and the estimated costs to complete the necessary investigation and remediation activities.
Product Liability Matters:
The Company is involved in product liability suits related to the operation of its business. The Company accrues for claim exposures that are probable of occurrence and can be reasonably estimated. The Company also maintains insurance coverage for product liability exposures. The Company believes that its accruals and insurance coverage are adequate and that product liability suits will not have a material adverse effect on the Company’s consolidated financial statements.(1) 
National Highway Traffic Safety Administration Matters:
In July 2016, the National Highway Traffic Safety Administration (NHTSA) began an investigation into certain of the Company's 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.
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 treated as a sale for accounting purposes because, in addition to retaining servicing rights, the Company retains a financial interest in the VIE in the form of a debt security. These transactions are treated as secured borrowings. As secured borrowings, the retail motorcycle finance receivables remain on the balance sheet with a corresponding obligation reflected as debt.
During the second quarter of 2016, the Company sold finance receivables with a principal balance of $301.8 million into a securitization VIE. The transaction met the criteria to be treated as a sale for accounting purposes and resulted in an off-balance sheet arrangement because the Company did not retain any financial interest in the VIE beyond servicing rights and ordinary representations and warranties and related covenants. Upon sale, the retail motorcycle finance receivables were removed from the Company’s balance sheet, and a gain of $9.3 million was recognized in Financial Services Revenue. For more information see Note 10.
Liquidity and Capital Resources as of March 26, 2017(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 asset-backed securitizations.

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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):
 
March 26, 2017
Cash and cash equivalents
$
839,700

Current marketable securities
5,004

Total cash and cash equivalents and marketable securities
844,704

 
 
Credit facilities
511,643

Asset-backed U.S. commercial paper conduit facilities(a)
613,795

Asset-backed Canadian commercial paper conduit facility(b)
39,097

Total availability under credit facilities
1,164,535

Total
$
2,009,239


(a)
The U.S. commercial paper conduit facilities expire on December 13, 2017. The Company anticipates that it will renew these facilities prior to expiration.
(b)
The Canadian commercial paper conduit facility expires on June 30, 2017 and is limited to Canadian denominated borrowings. The Company anticipates that it will renew this facility prior to expiration.
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):
 
Three months ended
 
March 26, 2017
 
March 27, 2016
Net cash provided by operating activities
$
159,939

 
$
41,131

Net cash used by investing activities
(87,453
)
 
(82,703
)
Net cash provided by financing activities
11

 
10,295

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

 
3,081

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

 
$
(28,196
)
Operating Activities
The increase in cash provided by operating activities for the first quarter of 2017 compared to the first quarter of 2016 was driven by an increase in cash flows related to wholesale financing, partially offset by lower net income. During the first quarter of 2017 and 2016, the Company made a $25.0 million voluntary contribution to its qualified pension plan; the Company expects that no additional contributions will be required in 2017.(1) The Company also expects it will continue to make ongoing payments related to benefits 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 $24.0 million in the first quarter of 2017 compared to $39.0 million in the same period last year. Net cash outflows for finance receivables for the first quarter of 2017 were $19.8 million higher than in the same period last year due primarily to an increase in retail motorcycle loan originations during the first three months of 2017.

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Financing Activities
The Company’s financing activities consist primarily of share repurchases, dividend payments and debt activity. Cash outflows for share repurchases were $79.8 million in the first quarter of 2017 compared to $150.4 million in the same period last year. Share repurchases during the first three months of 2017 included 1.4 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 March 26, 2017, there were 18.0 million shares remaining on board-approved share repurchase authorizations.
The Company paid dividends of $0.365 and $0.350 per share totaling $64.6 million and $64.5 million during the first three months of 2017 and 2016, respectively.
Financing cash flows related to debt activity resulted in net cash inflows of $160.2 million in the first three months of 2017 compared to net cash inflows of $229.0 million in the first three months of 2016. The Company’s total outstanding debt consisted of the following (in thousands):
 
March 26,
2017
 
March 27,
2016
Global credit facilities
$

 
$
101

Unsecured commercial paper
953,357

 
869,972

Asset-backed Canadian commercial paper conduit facility
141,013

 
153,311

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

 

Medium-term notes, net
4,163,797

 
4,061,832

Senior unsecured notes, net
741,469

 
740,821

Asset-backed securitization debt, net
685,374

 
1,286,729

Total debt
$
6,971,215

 
$
7,112,766

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 March 26, 2017 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 March 26, 2017 supported by the Global Credit Facilities, as discussed above. Outstanding unsecured commercial paper may not exceed the unused portion of the Global Credit Facilities. Maturities may range up to 365 days from the issuance date. The Company intends to repay unsecured commercial paper as it matures with additional unsecured commercial paper or through other means, such as borrowing under the Global Credit Facilities, borrowing under its asset-backed U.S. commercial paper conduit facility or through the use of operating cash flow and cash on hand.(1) 
Medium-Term Notes – The Company had the following medium-term notes (collectively, the Notes) issued and outstanding at March 26, 2017 (in thousands):

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Principal Amount
 
Rate
 
Issue Date
 
Maturity Date
$400,000
 
1.55%
 
November 2014
 
November 2017
$877,488
 
6.80%
 
May 2008
 
June 2018
$600,000
 
2.25%
 
January 2016
 
January 2019
$150,000
 
Floating-rate(a)
 
March 2017
 
March 2019
$600,000
 
2.40%
 
September 2014
 
September 2019
$600,000
 
2.15%
 
February 2015
 
February 2020
$350,000
 
2.40%
 
March 2017
 
June 2020
$600,000
 
2.85%
 
January 2016
 
January 2021

(a)
Floating interest rate based on LIBOR plus 35 bps.
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 $13.7 million and $16.9 million at March 26, 2017 and March 27, 2016, respectively. During the first quarter of 2017 and 2016, $400.0 million of 2.70% and $450.0 million of 3.88% medium-term notes matured, respectively, and the principal and accrued interest were paid in full.
Senior Unsecured Notes – In July 2015, the Company issued $750.0 million of senior unsecured notes. The senior unsecured notes provide for semi-annual interest payments and principal due at maturity. $450.0 million ($444.4 million net of discount and issuance costs) of the senior unsecured notes mature in July 2025 and have an interest rate of 3.50%, and $300.0 million ($296.0 million net of discount and issuance costs) of the senior unsecured notes mature in July 2045 and have an interest rate of 4.625%. The Company used the proceeds from the debt to repurchase shares of its common stock in 2015.
On-Balance Sheet Asset-Backed Canadian Commercial Paper Conduit Facility – The Company has a revolving facility agreement (Canadian Conduit) with a Canadian bank-sponsored asset-backed commercial paper conduit. Under the agreement, the Canadian Conduit is contractually committed, at the Company's option, to purchase from the Company eligible Canadian retail motorcycle finance receivables for proceeds up to C$240.0 million. The transferred assets are restricted as collateral for the payment of the debt. The terms for this facility provide for interest on the outstanding principal based on prevailing market interest rates plus a specified margin. The Canadian Conduit also provides for a program fee and an unused commitment fee based on the unused portion of the total aggregate commitment of C$240.0 million. There is no amortization schedule; however, the debt is reduced monthly as available collections on the related finance receivables are applied to outstanding principal. Upon expiration of the Canadian Conduit, any outstanding principal will continue to be reduced monthly through available collections. Unless earlier terminated or extended by mutual agreement of the Company and the lenders, as of March 26, 2017, the Canadian Conduit has an expiration date of June 30, 2017.
The following table includes quarterly transfers of Canadian retail motorcycle finance receivables to the Canadian Conduit and the respective proceeds (in thousands):
 
2017
 
2016
 
Transfers
 
Proceeds
 
Transfers
 
Proceeds
First quarter
$
6,300

 
$
5,500

 
$
6,600

 
$
5,800

On-Balance Sheet Asset-Backed U.S. Commercial Paper Conduit Facilities VIE – On December 14, 2016, the Company entered into a new revolving facility agreement with a third party bank-sponsored asset-backed U.S. commercial paper conduit, which provides for a total commitment of up to $300.0 million. Also on that date, the Company renewed its existing $600.0 million revolving facility agreement, which had expired on December 14, 2016 with the same third party bank-sponsored asset-backed U.S. commercial paper conduit. In January 2017, the Company transferred $333.4 million of U.S. retail motorcycle finance receivables to an SPE which, in turn, issued $300.0 million of debt under the U.S. Conduit Facilities. The contractual maturity of the debt is approximately 5 years. The VIE had no borrowings outstanding under the U.S. Conduit at December 31, 2016 or March 27, 2016.
The terms for this debt provide for interest on the outstanding principal based on prevailing commercial paper rates or LIBOR to the extent the advance is not funded by a conduit lender through the issuance of commercial paper plus, in each case, a program fee based on outstanding principal. The U.S. Conduit Facilities also provide for an unused commitment fee based on the unused portion of the total aggregate commitment of $900.0 million. There is no amortization schedule; however, the debt will be reduced monthly as available collections on the related finance receivables are applied to outstanding principal. Upon expiration of the U.S. Conduit Facilities, any outstanding principal will continue to be reduced monthly through available

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collections. Unless earlier terminated or extended by mutual agreement of the Company and the lenders, as of March 26, 2017, the U.S. Conduit Facilities have an expiration date of December 13, 2017.
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 2019 to 2022.
There were no on or off-balance sheet term asset-backed securitization transactions during the first quarter of 2017 or 2016.
Intercompany Borrowing – HDFS and the Company have had in effect term loan agreements under which HDFS borrowed from the Company. As of March 26, 2017, and March 27, 2016, there were no intercompany loans outstanding.
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.
At March 26, 2017, 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 and business conditions, including changing capital, credit and retail markets, and the changing political environment,
(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,

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(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)
develop and introduce products, services and experiences that are successful in the marketplace,
(vii)
manage the credit quality, the loan servicing and collection activities, and the recovery rates of HDFS' loan portfolio,
(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)
adjust to tax reform, healthcare inflation and reform and pension reform,
(xiv)
manage through the effects inconsistent and unpredictable weather patterns may have on retail sales of motorcycles,
(xv)
manage supply chain issues, including quality issues and any unexpected interruptions or price increases caused by raw material shortages or natural disasters,
(xvi)
implement and manage enterprise-wide information technology systems, including systems at its manufacturing facilities,
(xvii)
manage changes and prepare for requirements in legislative and regulatory environments for its products, services and operations,
(xviii)
manage its exposure to product liability claims and commercial or contractual disputes,
(xix)
execute its flexible production strategy,
(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.
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

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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, 2016 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, 2016 for further information concerning the Company's market risk. There have been no material changes to the market risk information included in the Company's Annual Report on Form 10-K for the year ended December 31, 2016.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
In accordance with Rule 13a-15(b) of the Securities Exchange Act of 1934 (the Exchange Act), as of the end of the period covered by this Quarterly Report on Form 10-Q, the Company’s management evaluated, with the participation of the Company’s President and Chief Executive Officer and the Senior Vice President and Chief Financial Officer, the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act). Based upon their evaluation of these disclosure controls and procedures, the President and Chief Executive Officer and the Senior Vice President and Chief Financial Officer have concluded that the disclosure controls and procedures were effective as of the end of the period covered by this Quarterly Report on Form 10-Q to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time period specified in the Securities and Exchange Commission rules and forms, and to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its President and Chief Executive Officer and Senior Vice President and Chief Financial Officer, as appropriate, to allow timely decisions regarding disclosure.
Changes in Internal Controls
There were no changes in the Company's internal control over financial reporting during the quarter ended March 26, 2017 that materially affected, or are 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 15 of the Notes to Consolidated Financial Statements, and such information is incorporated herein by reference in this Item 1 of Part II.
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds
The following table contains detail related to the Company's repurchase of its common stock based on the date of trade during the quarter ended March 26, 2017:
2017 Fiscal Month
Total Number of
Shares Purchased (a)
 
Average Price
Paid per Share
 
Total Number of Shares
Purchased as Part of
Publicly Announced
Plans or Programs
 
Maximum Number of
Shares that May Yet Be
Purchased Under the
Plans or Programs
January 1 to January 29
1,136

 
$
59

 
1,136

 
19,272,516

January 30 to February 26
900,348

 
$
57

 
900,348

 
18,527,379

February 27 to March 26
494,124

 
$
58

 
494,124

 
18,034,516

Total
1,395,608

 
$
57

 
1,395,608

 
 
 
(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 February 2016, the Company's Board of Directors authorized the Company to repurchase up to 20.0 million shares of its common stock with no dollar limit or expiration date which superseded the share repurchase authority granted by the Board of Directors in December 1997. The Company repurchased 1.2 million shares on a discretionary basis during the quarter ended March 26, 2017 under this authorization. As of March 26, 2017, 18.0 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 first quarter of 2017, the Company acquired 157,608 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 56 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: May 4, 2017
/s/ John A. Olin
 
John A. Olin
 
Senior Vice President and
 
Chief Financial Officer
 
(Principal financial officer)
 
Date: May 4, 2017
/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*
 
Form of Notice of Award of Performance Shares and Performance Share Agreement (Standard) of Harley-Davidson, Inc. under the Harley-Davidson, Inc. 2014 Incentive Stock Plan first approved for use in February 2017
10.2*
 
Form of Notice of Award of Performance Shares and Performance Share Agreement (Standard International) of Harley-Davidson, Inc. under the Harley-Davidson, Inc. 2014 Incentive Stock Plan first approved for use in February 2017
10.3*
 
Form of Notice of Award of Performance Shares and Performance Share Agreement (Transition Agreement) of Harley-Davidson, Inc. under the Harley-Davidson, Inc. 2014 Incentive Stock Plan first approved for use in February 2017
10.4*
 
Form of Notice of Award of Performance Shares and Performance Share Agreement (Special Retention) of Harley-Davidson, Inc. under the Harley-Davidson, Inc. 2014 Incentive Stock Plan first approved for use in February 2017
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 March 26, 2017, filed on May 4, 2017, formatted in XBRL: (i) the Consolidated Statements of Income; (ii) the Consolidated Statements of Comprehensive Income; (iii) the Consolidated Balance Sheets; (iv) the Consolidated Statements of Cash Flows; and (v) the Notes to Consolidated Financial Statements.

























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

56