Annual Statements Open main menu

HARLEY-DAVIDSON, INC. - Quarter Report: 2019 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 31, 2019
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                     to                    
Commission file number 1-9183
 
 
Harley-Davidson, Inc.
(Exact name of registrant as specified in its charter)
 
Wisconsin
 
39-1382325
(State of organization)
 
(I.R.S. Employer Identification No.)
 
 
 
3700 West Juneau Avenue
Milwaukee, Wisconsin
 
53208
(Address of principal executive offices)
 
(Zip code)
Registrants telephone number: (414) 342-4680
None
(Former name, former address and former fiscal year, if changed since last report)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such requirements for the past 90 days.    Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  x   No   ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
x
Accelerated filer
 
¨
Non-accelerated filer
 
¨
Smaller reporting company
 
¨
Emerging growth company
 
¨
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). 
Yes ¨ No  x
Securities Registered Pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol
Name of each exchange on which registered
COMMON STOCK PAR VALUE $.01 PER SHARE
HOG
NEW YORK STOCK EXCHANGE
Number of shares of the registrant’s common stock outstanding at May 3, 2019: 159,072,779 shares



Harley-Davidson, Inc.

Form 10-Q

For The Quarter Ended March 31, 2019
 
Part I
 
 
 
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 31,
2019
 
April 1,
2018
Revenue:
 
 
 
Motorcycles and Related Products
$
1,195,637

 
$
1,363,947

Financial Services
188,743

 
178,174

Total revenue
1,384,380

 
1,542,121

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

 
890,174

Financial Services interest expense
52,324

 
48,450

Financial Services provision for credit losses
34,491

 
30,052

Selling, administrative and engineering expense
268,625

 
290,186

Restructuring expense
13,630

 
46,842

Total costs and expenses
1,217,268

 
1,305,704

Operating income
167,112

 
236,417

Other income (expense), net
4,660

 
220

Investment income
6,358

 
1,203

Interest expense
7,731

 
7,690

Income before provision for income taxes
170,399

 
230,150

Provision for income taxes
42,454

 
55,387

Net income
$
127,945

 
$
174,763

Earnings per common share:
 
 
 
Basic
$
0.80

 
$
1.04

Diluted
$
0.80

 
$
1.03

Cash dividends per common share
$
0.375

 
$
0.370

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


3

Table of Contents

HARLEY-DAVIDSON, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
 
 
Three months ended
 
March 31,
2019
 
April 1,
2018
Net income
$
127,945

 
$
174,763

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

 
6,915

  Derivative financial instruments
(441
)
 
765

  Pension and postretirement benefit plans
7,743

 
85,765

Total other comprehensive income, net of tax
7,633

 
93,445

Comprehensive income
$
135,578

 
$
268,208

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



4

Table of Contents

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

 
$
1,203,766

 
$
753,517

Marketable securities
10,003

 
10,007

 

Accounts receivable, net
353,541

 
306,474

 
355,107

Finance receivables, net
2,443,899

 
2,214,424

 
2,341,918

Inventories
595,806

 
556,128

 
564,571

Restricted cash
43,471

 
49,275

 
54,569

Other current assets
177,761

 
144,368

 
150,472

Total current assets
4,374,081

 
4,484,442

 
4,220,154

Finance receivables, net
4,994,693

 
5,007,507

 
4,784,524

Property, plant and equipment, net
876,003

 
904,132

 
934,645

Prepaid pension costs

 

 
122,230

Goodwill
64,131

 
55,048

 
56,524

Deferred income taxes
132,988

 
141,464

 
77,624

Lease assets
55,305

 

 

Other long-term assets
83,412

 
73,071

 
81,920

 
$
10,580,613

 
$
10,665,664

 
$
10,277,621

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

 
$
284,861

 
$
319,040

Accrued liabilities
644,171

 
601,130

 
566,408

Short-term debt
1,192,925

 
1,135,810

 
1,036,976

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

 
1,575,799

 
1,872,679

Total current liabilities
3,590,064

 
3,597,600

 
3,795,103

Long-term debt, net
4,744,694

 
4,887,667

 
4,108,511

Lease liabilities
39,516

 

 

Pension liabilities
98,862

 
107,776

 
54,921

Postretirement healthcare liabilities
93,897

 
94,453

 
113,031

Other long-term liabilities
215,969

 
204,219

 
210,106

Commitments and contingencies (Note 17)

 

 

Shareholders’ equity:
 
 
 
 
 
Preferred stock, none issued

 

 

Common stock
1,826

 
1,819

 
1,818

Additional paid-in-capital
1,465,581

 
1,459,620

 
1,432,692

Retained earnings
2,074,669

 
2,007,583

 
1,725,626

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

 
1,773,949

 
1,995,949

 
$
10,580,613

 
$
10,665,664

 
$
10,277,621



5

Table of Contents

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

 
$
175,043

 
$
182,033

Other assets
$
1,416

 
$
1,563

 
$
2,175

Non-current finance receivables, net
$
480,936

 
$
591,839

 
$
464,185

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

 
$
47,203

 
$
55,140

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

 
$
189,693

 
$
205,055

Long-term debt, net
$
408,153

 
$
488,191

 
$
361,049

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

6

Table of Contents

HARLEY-DAVIDSON, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
Three months ended
 
March 31,
2019
 
April 1,
2018
Net cash provided by operating activities (Note 8)
$
32,671

 
$
191,594

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

 
809,800

Acquisition of business
(7,000
)
 

Other
603

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

 
347,553

Repayments of medium-term notes
(750,000
)
 

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

 
35,504

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

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

 
1,719

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

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

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

 
$
746,210

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

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

 
$
819,257

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

 
$
753,517

Restricted cash
43,471

 
54,569

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

 
11,171

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

 
$
819,257

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


7

Table of Contents

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

 
$
1,819

 
$
1,459,620

 
$
2,007,583

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

Net income
 

 

 

 
127,945

 

 

 
127,945

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

 

 

 

 
7,633

 

 
7,633

Dividends
 

 

 

 
(60,859
)
 

 

 
(60,859
)
Repurchase of common stock
 

 

 

 

 

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

 
7

 
5,961

 

 

 
4,687

 
10,655

Balance March 31, 2019
 
182,633,912

 
$
1,826

 
$
1,465,581

 
$
2,074,669

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

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

 
$
1,813

 
$
1,422,808

 
$
1,607,570

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

Net income
 

 

 

 
174,763

 

 

 
174,763

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

 

 

 

 
93,445

 

 
93,445

Dividends
 

 

 

 
(62,731
)
 

 

 
(62,731
)
Repurchase of common stock
 

 

 

 

 

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

 
5

 
9,884

 

 

 
3,250

 
13,139

Cumulative effect of change in accounting
 

 

 

 
6,024

 

 

 
6,024

Balance April 1, 2018
 
181,776,443

 
$
1,818

 
$
1,432,692

 
$
1,725,626

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



8

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 31, 2019 and April 1, 2018, the consolidated statements of income for the three month periods then ended, the consolidated statements of comprehensive income for the three month periods then ended, the consolidated statements of cash flows for the three month periods then ended, and the consolidated statements of shareholders' equity for the three month periods then ended.
Certain information and footnote disclosures normally included in complete financial statements have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) and U.S. generally accepted accounting principles (U.S. GAAP) for interim financial reporting. These consolidated financial statements should be read in conjunction with the audited financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.
The Company operates in two reportable segments: Motorcycles and Related Products (Motorcycles) and Financial Services.
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. Actual results could differ from those estimates.
2. New Accounting Standards
Accounting Standards Recently Adopted
In February 2016, the FASB issued ASU No. 2016-02 Leases (Topic 842) (ASU 2016-02). ASU 2016-02 amends the existing lease accounting model by requiring a lessee to recognize the rights and obligations resulting from certain leases as assets and liabilities on the balance sheet. ASU 2016-02 also requires a company to disclose key information about their leasing arrangements. The Company adopted ASU 2016-02 on January 1, 2019 using a modified retrospective approach. Pursuant to ASU 2018-11, Leases (Topic 842): Targeted Improvements, the Company applied the new leases standard at the adoption date and recognized a cumulative effect adjustment to the opening balance sheet on January 1, 2019.
The Company elected the package of practical expedients upon transition that allows entities not to reassess lease identification, classification and initial direct costs for leases that existed prior to adoption. The Company also elected the short-term lease practical expedient that allows entities to recognize lease payments on a straight-line basis over the lease term for leases with a term of 12 months or less. The Company has elected the practical expedient allowing entities to not separate non-lease components from lease components, but instead account for such components as a single lease component for all leases except leases involving assets operated by a third-party.
The adoption of ASU 2016-02 resulted in the initial recognition of right of use assets and lease liabilities related to the Company's leasing arrangements totaling approximately $60 million on January 1, 2019. The adoption of ASU 2016-02 had no impact on opening retained earnings on January 1, 2019 and is not expected to materially impact consolidated net income or cash flows on an on-going basis.

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

9

Table of Contents

Accounting Standards Not Yet Adopted
In July 2016, the FASB issued ASU No. 2016-13 Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (ASU 2016-13). ASU 2016-13 changes how to recognize expected credit losses on financial assets. The standard requires a more timely recognition of credit losses on loans and other financial assets and also provides additional transparency about credit risk. The current credit loss standard generally requires that a loss actually be incurred before it is recognized, while the new standard will require recognition of full lifetime expected losses upon initial recognition of the financial instrument. The Company is required to adopt ASU 2016-13 for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2019 on a modified retrospective basis. Early adoption is permitted for fiscal years beginning after December 15, 2018. An entity should apply the standard by recording a cumulative effect adjustment to retained earnings upon adoption. Adoption of this standard will impact how the Company recognizes credit losses on its financial instruments. The Company is currently evaluating the impact of adoption of ASU 2016-13 but anticipates the adoption of ASU 2016-13 will result in an increase in the annual provision for credit losses and the related allowance for credit losses.

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

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

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


10

Table of Contents

3. Revenue

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

 
$
1,121,673

Parts & Accessories
 
159,703

 
169,075

General Merchandise
 
55,401

 
56,601

Licensing
 
8,577

 
8,358

Other
 
7,381

 
8,240

Revenue from Motorcycles and Related Products
 
1,195,637

 
1,363,947

Financial Services:
 
 
 
 
Interest income
 
159,804

 
154,041

Securitization and servicing fee income
 
189

 
352

Other income
 
28,750

 
23,781

Revenue from Financial Services
 
188,743

 
178,174

Total revenue
 
$
1,384,380

 
$
1,542,121

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

 
$
23,441

Balance, end of period
 
30,228

 
27,624

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

11

Table of Contents

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

 
$

 
$
79

 
$
25,037

 
$
3,461

 
$
28,498

Restructuring expense (benefit)
9

 
8,379

 
5,636

 
14,024

 
(394
)
 
13,630

Utilized - cash
(2,600
)
 

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

 
(8,379
)
 

 
(8,379
)
 

 
(8,379
)
Foreign currency changes
34

 

 

 
34

 
(2
)
 
32

Balance, end of period
$
22,401

 
$

 
$
187

 
$
22,588

 
$
1,051

 
$
23,639

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

 
$

 
$

 
$

 
$

 
$

Restructuring expense
40,791

 
5,613

 
438

 
46,842

 

 
46,842

Utilized - cash
(2,300
)
 

 
(374
)
 
(2,674
)
 

 
(2,674
)
Utilized - non cash

 
(5,613
)
 

 
(5,613
)
 

 
(5,613
)
Foreign currency changes
(204
)
 

 
(1
)
 
(205
)
 

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

 
$

 
$
63

 
$
38,350

 
$

 
$
38,350

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

12

Table of Contents

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

 
$
174,763

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

 
168,139

Effect of dilutive securities - employee stock compensation plan
715

 
1,035

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

 
169,174

Earnings per common share:
 
 
 
Basic
$
0.80

 
$
1.04

Diluted
$
0.80

 
$
1.03

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

 
$
10,007

 
$

Mutual funds
49,896

 
44,243

 
49,402

Total marketable securities
$
59,899

 
$
54,250

 
$
49,402

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

13

Table of Contents

Inventories
Substantially all inventories located in the United States are valued using the last-in, first-out (LIFO) method. Other inventories are valued at the lower of cost or net realizable value using the first-in, first-out (FIFO) method. Inventories consisted of the following (in thousands):
 
March 31,
2019
 
December 31,
2018
 
April 1,
2018
Raw materials and work in process
$
204,759

 
$
177,110

 
$
177,652

Motorcycle finished goods
304,386

 
301,630

 
289,046

Parts & accessories and general merchandise
145,300

 
136,027

 
150,228

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

 
614,767

 
616,926

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

 
$
556,128

 
$
564,571

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

 
$
174,763

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

 
62,473

Amortization of deferred loan origination costs
18,968

 
20,116

Amortization of financing origination fees
2,194

 
2,028

Provision for long-term employee benefits
3,156

 
9,747

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

 
7,962

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

 
30,052

Deferred income taxes
5,981

 
3,188

Other, net
2,731

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

 
4,758

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

 
148,923

Derivative instruments
867

 
702

Other
(28,216
)
 
13,402

Total adjustments
(95,274
)
 
16,831

Net cash provided by operating activities
$
32,671

 
$
191,594

9. Finance Receivables
The Company provides retail financial services to customers of the Company’s independent dealers in the United States and Canada. The origination of retail loans is a separate and distinct transaction between the Company and the retail customer, unrelated to the Company’s sale of product to its dealers. Retail finance receivables consist of secured promissory notes and secured installment sales contracts and are primarily related to sales of motorcycles to the dealers' customers. The Company holds either titles or liens on titles to vehicles financed by promissory notes and installment sales contracts.

14

Table of Contents

The Company offers wholesale financing to the Company’s independent dealers. Wholesale loans to dealers are generally secured by financed inventory or property and are originated in the U.S. and Canada. Wholesale finance receivables are related primarily to sales of motorcycles and related parts and accessories to dealers.
Finance receivables, net, consisted of the following (in thousands):
 
March 31,
2019
 
December 31,
2018
 
April 1,
2018
Retail
$
6,290,036

 
$
6,328,201

 
$
6,064,192

Wholesale
1,339,428

 
1,083,615

 
1,252,600

Total finance receivables
7,629,464

 
7,411,816

 
7,316,792

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

 
$
7,221,931

 
$
7,126,442

A provision for credit losses on finance receivables is charged or credited to earnings in amounts that the Company believes are sufficient to maintain the allowance for credit losses at a level that is adequate to cover losses inherent in the existing portfolio. The allowance for credit losses represents management’s estimate of probable losses inherent in the finance receivable portfolio as of the balance sheet date. However, due to the use of projections and assumptions in estimating the losses, the amount of losses actually incurred by the Company could differ from the amounts estimated.
Changes in the allowance for credit losses on finance receivables by portfolio were as follows (in thousands):
 
Three months ended March 31, 2019
 
Retail
 
Wholesale
 
Total
Balance, beginning of period
$
182,098

 
$
7,787

 
$
189,885

Provision for credit losses
32,832

 
1,659

 
34,491

Charge-offs
(44,721
)
 

 
(44,721
)
Recoveries
11,217

 

 
11,217

Balance, end of period
$
181,426

 
$
9,446

 
$
190,872

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

 
$
6,217

 
$
192,471

Provision for credit losses
28,069

 
1,983

 
30,052

Charge-offs
(45,081
)
 

 
(45,081
)
Recoveries
12,908

 

 
12,908

Balance, end of period
$
182,150

 
$
8,200

 
$
190,350

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

15

Table of Contents

to the Company’s internal risk rating system and collectively evaluated for impairment. The related allowance for credit losses is based on factors such as the specific borrower’s financial performance and ability to repay, the Company’s past loan loss experience, current economic conditions, and the value of the underlying collateral.
Generally, it is the Company’s policy not to change the terms and conditions of finance receivables. However, to minimize the economic loss, the Company may modify certain finance receivables in troubled debt restructurings. Total restructured finance receivables are not significant.
The allowance for credit losses and finance receivables by portfolio, segregated by those amounts that are individually evaluated for impairment and those that are collectively evaluated for impairment, was as follows (in thousands):
 
March 31, 2019
 
Retail
 
Wholesale
 
Total
Allowance for credit losses, ending balance:
 
 
 
 
 
Individually evaluated for impairment
$

 
$

 
$

Collectively evaluated for impairment
181,426

 
9,446

 
190,872

Total allowance for credit losses
$
181,426

 
$
9,446

 
$
190,872

Finance receivables, ending balance:
 
 
 
 
 
Individually evaluated for impairment
$

 
$

 
$

Collectively evaluated for impairment
6,290,036

 
1,339,428

 
7,629,464

Total finance receivables
$
6,290,036

 
$
1,339,428

 
$
7,629,464

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

 
$

 
$

Collectively evaluated for impairment
182,098

 
7,787

 
189,885

Total allowance for credit losses
$
182,098

 
$
7,787

 
$
189,885

Finance receivables, ending balance:
 
 
 
 
 
Individually evaluated for impairment
$

 
$

 
$

Collectively evaluated for impairment
6,328,201

 
1,083,615

 
7,411,816

Total finance receivables
$
6,328,201

 
$
1,083,615

 
$
7,411,816

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

 
$
184

 
$
184

Collectively evaluated for impairment
182,150

 
8,016

 
190,166

Total allowance for credit losses
$
182,150

 
$
8,200

 
$
190,350

Finance receivables, ending balance:
 
 
 
 
 
Individually evaluated for impairment
$

 
$
220

 
$
220

Collectively evaluated for impairment
6,064,192

 
1,252,380

 
7,316,572

Total finance receivables
$
6,064,192

 
$
1,252,600

 
$
7,316,792


16

Table of Contents

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

 
$

 
$

 
$

 
$

Related allowance recorded
251

 
220

 
184

 
251

 

Total impaired wholesale finance receivables
$
251

 
$
220

 
$
184

 
$
251

 
$

Retail finance receivables are contractually delinquent if the minimum payment is not received by the specified due date. Retail finance receivables are generally charged-off when the receivable is 120 days or more delinquent, the related asset is repossessed, or the receivable is otherwise deemed uncollectible. All retail finance receivables accrue interest until either collected or charged-off. Accordingly, as of March 31, 2019December 31, 2018 and April 1, 2018, all retail finance receivables were accounted for as interest-earning receivables, of which $39.0 million, $41.2 million and $27.9 million, respectively, were 90 days or more past due.
Wholesale finance receivables are delinquent if the minimum payment is not received by the contractual due date. Wholesale finance receivables are written down once management determines that the specific borrower does not have the ability to repay the loan in full. Interest continues to accrue on past due finance receivables until the date the finance receivable becomes uncollectible and the finance receivable is placed on non-accrual status. The Company will resume accruing interest on these accounts when payments are current according to the terms of the loans and future payments are reasonably assured. While on non-accrual status, all cash received is applied to principal or interest as appropriate. There were no wholesale receivables on non-accrual status at March 31, 2019 or December 31, 2018. The recorded investment in non-accrual status wholesale finance receivables at April 1, 2018 was $0.2 million. At March 31, 2019December 31, 2018 and April 1, 2018, $0.8 million, $1.1 million, and $0.2 million of wholesale finance receivables were 90 days or more past due and accruing interest, respectively.
An analysis of the aging of past due finance receivables was as follows (in thousands):
 
March 31, 2019
 
Current
 
31-60 Days
Past Due
 
61-90 Days
Past Due
 
Greater than
90 Days
Past Due
 
Total
Past Due
 
Total
Finance
Receivables
Retail
$
6,088,894

 
$
119,150

 
$
43,028

 
$
38,964

 
$
201,142

 
$
6,290,036

Wholesale
1,337,429

 
862

 
355

 
782

 
1,999

 
1,339,428

Total
$
7,426,323

 
$
120,012

 
$
43,383

 
$
39,746

 
$
203,141

 
$
7,629,464

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

 
$
136,945

 
$
49,825

 
$
41,245

 
$
228,015

 
$
6,328,201

Wholesale
1,081,729

 
522

 
273

 
1,091

 
1,886

 
1,083,615

Total
$
7,181,915

 
$
137,467

 
$
50,098

 
$
42,336

 
$
229,901

 
$
7,411,816

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

 
$
105,366

 
$
33,275

 
$
27,919

 
$
166,560

 
$
6,064,192

Wholesale
1,247,175

 
549

 
4,705

 
171

 
5,425

 
1,252,600

Total
$
7,144,807

 
$
105,915

 
$
37,980

 
$
28,090

 
$
171,985

 
$
7,316,792

A significant part of managing the Company's finance receivable portfolios includes the assessment of credit risk associated with each borrower. As the credit risk varies between the retail and wholesale portfolios, the Company utilizes different credit risk indicators for each portfolio.

17

Table of Contents

The Company manages retail credit risk through its credit approval policy and ongoing collection efforts. The Company uses FICO scores, a standard credit rating measurement, to differentiate the expected default rates of retail credit applicants, enabling the Company to better evaluate credit applicants for approval and to tailor pricing according to this assessment. Retail loans with a FICO score of 640 or above at origination are considered prime, and loans with a FICO score below 640 are considered sub-prime. These credit quality indicators are determined at the time of loan origination and are not updated subsequent to the loan origination date.
The recorded investment in retail finance receivables, by credit quality indicator, was as follows (in thousands):
 
March 31,
2019
 
December 31,
2018
 
April 1,
2018
Prime
$
5,160,942

 
$
5,183,754

 
$
4,923,237

Sub-prime
1,129,094

 
1,144,447

 
1,140,955

Total
$
6,290,036

 
$
6,328,201

 
$
6,064,192

The Company's credit risk on the wholesale portfolio is different from that of the retail portfolio. Whereas the retail portfolio represents a relatively homogeneous pool of retail finance receivables that exhibit more consistent loss patterns, the wholesale portfolio exposures are less consistent. The Company utilizes an internal credit risk rating system to manage credit risk exposure consistently across wholesale borrowers and individually evaluates credit risk factors for each borrower. The Company uses the following internal credit quality indicators, based on an internal risk rating system, listed from highest level of risk to lowest level of risk for the wholesale portfolio: Doubtful, Substandard, Special Mention, Medium Risk and Low Risk. Based upon management’s review, the dealers classified in the Doubtful category are the dealers with the greatest likelihood of being charged-off, while the dealers classified as Low Risk are least likely to be charged-off. The internal rating system considers factors such as the specific borrower's ability to repay and the estimated value of any collateral. Dealer risk rating classifications are reviewed and updated on a quarterly basis.
The recorded investment in wholesale finance receivables, by internal credit quality indicator, was as follows (in thousands):
 
March 31,
2019
 
December 31,
2018
 
April 1,
2018
Doubtful
$
8,679

 
$
2,210

 
$
1,582

Substandard
7,866

 
9,660

 
3,368

Special Mention
11,484

 
10,299

 
33,085

Medium Risk
917

 
25,802

 
10,512

Low Risk
1,310,482

 
1,035,644

 
1,204,053

Total
$
1,339,428

 
$
1,083,615

 
$
1,252,600

10. Derivative Instruments and Hedging Activities
The Company is exposed to certain risks such as foreign currency exchange rate risk, interest rate risk and commodity price risk. To reduce its exposure to such risks, the Company selectively uses derivative financial instruments. All derivative transactions are authorized and executed pursuant to regularly reviewed policies and procedures which prohibit the use of financial instruments for speculative trading purposes.
The Company sells products in foreign currencies and utilizes foreign currency exchange contracts to mitigate the effects of foreign currency exchange rate fluctuations related to the Euro, the Australian dollar, the Japanese yen, the Brazilian real, the Canadian dollar and the Mexican peso. The foreign currency exchange contracts generally have maturities of less than one year.
The Company utilizes commodity contracts to mitigate the effects of commodity price fluctuations related to metals and fuel consumed in the Company’s motorcycle production and distribution processes. The commodity contracts generally have maturities of less than one year.
The Company periodically utilizes treasury rate lock contracts to fix the interest rate on a portion of the principal related to the anticipated issuance of long-term debt as well as interest rate swaps to reduce the impact of fluctuations in interest rates on long-term debt.

18

Table of Contents

All derivative instruments are recognized on the balance sheet at fair value. In accordance with ASC Topic 815, Derivatives and Hedging, the accounting for changes in the fair value of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and, further, on the type of hedging relationship.
Changes in the fair value of derivatives that are designated as cash flow hedges are initially recorded in other comprehensive income (OCI) and subsequently reclassified into earnings when the hedged item affects income. The Company assesses, both at the inception of each hedge and on an on-going basis, whether the derivatives that are used in cash flow hedging transactions are highly effective in offsetting changes in cash flows of the hedged items. No component of a hedging derivative instrument’s gain or loss is excluded from the assessment of hedge effectiveness. Derivatives not designated as hedges are not speculative and are used to manage the Company’s exposure to foreign currency and commodity risks. Changes in the fair value of derivatives not designated in hedging relationships are recorded directly in earnings.
The following tables summarize the notional and recorded fair values of the Company’s derivative financial instruments (in thousands):
 
 
Derivatives Designated as Cash Flow Hedging
Instruments Under ASC Topic 815
 
 
March 31, 2019
 
December 31, 2018
 
April 1, 2018
Derivative
 
Notional
Value
 
Other Current Assets
 
Accrued Liabil-ities
 
Notional
Value
 
Other Current Assets
 
Accrued Liabil-ities
 
Notional
Value
 
Other Current Assets
 
Accrued Liabil-ities
Foreign currency contracts
 
$
480,937

 
$
15,576

 
$
646

 
$
442,976

 
$
15,071

 
$
313

 
$
720,869

 
$
3,442

 
$
22,807

Commodity contracts
 
589

 

 
6

 
827

 

 
46

 
728

 

 
11

Interest rate swaps
 
900,000

 

 
6,893

 
900,000

 

 
4,494

 

 

 

Total
 
$
1,381,526

 
$
15,576

 
$
7,545


$
1,343,803

 
$
15,071

 
$
4,853


$
721,597

 
$
3,442

 
$
22,818

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

 
$
413

 
$
69

 
$

 
$

 
$

 
$

 
$

 
$

Commodity contracts
 
7,225

 
94

 
119

 
5,239

 

 
463

 
4,577

 
171

 
32

Total
 
$
164,903


$
507

 
$
188

 
$
5,239

 
$

 
$
463

 
$
4,577

 
$
171

 
$
32

 

19

Table of Contents

The following tables summarize the amount of gains and losses related to derivative financial instruments designated as cash flow hedges (in thousands):
 
 
Amount of Gain/(Loss) Recognized in OCI, before tax
 
Amount of Gain/(Loss) Reclassified from AOCL into Income
 
Location of Gain/(Loss) Reclassified from AOCL into Income
 
Total Statement of Income Amount for Line Items in which the Effects of Cash Flow Hedges are Recorded
 
 
Three months ended
 
Three months ended
 
 
 
Three months ended
Cash Flow Hedges
 
March 31,
2019
 
April 1,
2018
 
March 31,
2019
 
April 1,
2018
 
Income statement
line item
 
March 31,
2019
 
April 1,
2018
Foreign currency contracts
 
$
4,152

 
$
(5,890
)
 
$
2,453

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

 
$
890,174

Commodity contracts
 
30

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

 
$
890,174

Treasury rate locks
 

 

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

 
$
7,690

Treasury rate locks
 

 

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

 
$
48,450

Interest rate swaps
 
(3,005
)
 

 
(606
)
 

 
Financial Services interest expense
 
$
52,324

 
$
48,450

Total
 
$
1,177

 
$
(5,906
)
 
$
1,715

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

 
$

Commodity contracts
 
317

 
6

Total
 
$
1,204

 
$
6

The Company is exposed to credit loss risk in the event of non-performance by counterparties to these derivative financial instruments. Although no assurances can be given, the Company does not expect any of the counterparties to these derivative financial instruments to fail to meet its obligations. To manage credit loss risk, the Company evaluates counterparties based on credit ratings and, on a quarterly basis, evaluates each hedge’s net position relative to the counterparty’s ability to cover its position.
11. Leases
The Company determines if an arrangement is or contains a lease at contract inception. Right-of-use (ROU) assets related to leases are recorded in Lease assets and lease liabilities are recorded in Accrued liabilities and Lease liabilities on the consolidated balance sheet. 
ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized at lease commencement date based on the present value of future lease payments over the lease term. The ROU asset also includes prepaid lease payments and initial direct costs and is reduced for lease incentives paid by the lessor. The discount rate used to determine the present value is generally the Company's incremental borrowing rate because the implicit rate in the lease is not readily determinable. The lease term used to calculate the ROU asset and lease liability includes periods covered by options to extend or terminate when the Company is reasonably certain the lease term will include these optional periods.

20

Table of Contents

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

 
 
Accrued liabilities
$
17,391

Lease liabilities
39,516

 
$
56,907

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

2020
15,023

2021
12,467

2022
8,837

2023
3,511

Thereafter
6,291

Total present value of lease payments
60,872

Less present value discount
3,965

Total lease liability
$
56,907

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

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

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

Weighted average discount rate
3.3
%

21

Table of Contents

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

 
$
1,135,810

 
$
1,036,976

Total short-term debt
 
$
1,192,925

 
$
1,135,810

 
$
1,036,976

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

 
$
155,951

 
$
158,162

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

 
582,717

 
281,311

Asset-backed securitization debt
 
18,712

 
95,216

 
285,130

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

 
833,835

 
724,266

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

 

 
877,488

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

 
600,000

 
600,000

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

 
150,000

 
150,000

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

 
600,000

 
600,000

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

 
600,000

 
600,000

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

 
450,000

 

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

 
350,000

 
350,000

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

 
600,000

 
600,000

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

 
450,000

 

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

 
350,000

 

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

 

 

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

 
400,000

 
400,000

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

 
350,000

 
350,000

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

 
450,000

 
450,000

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

 
300,000

 
300,000

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

 
6,463,466

 
5,981,190

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

 
$
4,887,667

 
$
4,108,511

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

22

Table of Contents

13. Asset-Backed Financing
The Company participates in asset-backed financing both through asset-backed securitization transactions and through asset-backed commercial paper conduit facilities. In the Company's asset-backed financing programs, the Company transfers retail motorcycle finance receivables to special purpose entities (SPEs), which are considered VIEs under U.S. GAAP. Each SPE then converts those assets into cash, through the issuance of debt. The Company retains servicing rights for all of the retail motorcycle finance receivables transferred to SPEs as part of an asset-backed financing. The accounting treatment for asset-backed financings depends on the terms of the related transaction and the Company’s continuing involvement with the VIE.
In transactions where the Company has power over the significant activities of the VIE and has an obligation to absorb losses or the right to receive benefits from the VIE that are potentially significant to the VIE, the Company is the primary beneficiary of the VIE and consolidates the VIE within its consolidated financial statements. On a consolidated basis, the asset-backed financing is treated as a secured borrowing in this type of transaction and is referred to as an on-balance sheet asset-backed financing.
In transactions where the Company is not the primary beneficiary of the VIE, the Company must determine whether it can achieve a sale for accounting purposes under ASC Topic 860, Transfers and Servicing. To achieve a sale for accounting purposes, the assets being transferred must be legally isolated, not be constrained by restrictions from further transfer, and be deemed to be beyond the Company’s control. If the Company does not meet all of these criteria for sale accounting, then the transaction is accounted for as a secured borrowing and is referred to as an on-balance sheet asset-backed financing.
If the Company meets all three of the sale criteria above, the transaction is recorded as a sale for accounting purposes and is referred to as an off-balance sheet asset-backed financing. Upon sale, the retail motorcycle finance receivables are removed from the Company’s balance sheet and a gain or loss is recognized for the difference between the cash proceeds received, the assets derecognized, and the liabilities recognized as part of the transaction. The gain or loss on sale is included in Financial Services revenue in the consolidated statements of income.
The Company is not required, and does not currently intend, to provide any additional financial support to the on- or off-balance sheet VIEs associated with these transactions. Investors and creditors in these transactions only have recourse to the assets held by the VIEs.
The following tables show the assets and liabilities related to the on-balance sheet asset-backed financings included in the financial statements (in thousands):
 
March 31, 2019
 
Finance receivables
 
Allowance for credit losses
 
Restricted cash
 
Other assets
 
Total assets
 
Asset-backed debt
On-balance sheet assets and liabilities
 
 
 
 
 
 
 
 
 
 
 
Consolidated VIEs
 
 
 
 
 
 
 
 
 
 
 
Asset-backed securitizations
$
62,771

 
$
(1,855
)
 
$
8,199

 
$
134

 
$
69,249

 
$
18,694

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

 
(16,821
)
 
31,565

 
1,282

 
583,321

 
526,947

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

 
(3,003
)
 
9,767

 
282

 
171,825

 
142,676

Total on-balance sheet assets and liabilities
$
794,845

 
$
(21,679
)
 
$
49,531

 
$
1,698

 
$
824,395

 
$
688,317

 
 
 
 
 
 
 
 
 
 
 
 

23

Table of Contents

 
December 31, 2018
 
Finance receivables
 
Allowance for credit losses
 
Restricted cash
 
Other assets
 
Total assets
 
Asset-backed debt
On-balance sheet assets and liabilities
 
 
 
 
 
 
 
 
 
 
 
Consolidated VIEs
 
 
 
 
 
 
 
 
 
 
 
Asset-backed securitizations
$
158,718

 
$
(4,691
)
 
$
17,191

 
$
329

 
$
171,547

 
$
95,167

Asset-backed U.S. commercial paper conduit facilities
631,588

 
(18,733
)
 
30,012

 
1,234

 
644,101

 
582,717

Unconsolidated VIEs
 
 
 
 
 
 
 
 
 
 
 
Asset-backed Canadian commercial paper conduit facility
181,774

 
(3,130
)
 
8,779

 
343

 
187,766

 
155,951

Total on-balance sheet assets and liabilities
$
972,080

 
$
(26,554
)
 
$
55,982

 
$
1,906

 
$
1,003,414

 
$
833,835

 
 
 
 
 
 
 
 
 
 
 
 
 
April 1, 2018
 
Finance receivables
 
Allowance for credit losses
 
Restricted cash
 
Other assets
 
Total assets
 
Asset-backed debt
On-balance sheet assets and liabilities
 
 
 
 
 
 
 
 
 
 
 
Consolidated VIEs
 
 
 
 
 
 
 
 
 
 
 
Asset-backed securitizations
$
367,584

 
$
(11,387
)
 
$
38,207

 
$
1,207

 
$
395,611

 
$
284,793

Asset-backed U.S. commercial paper conduit facilities
299,318

 
(9,297
)
 
16,933

 
968

 
307,922

 
281,311

Unconsolidated VIEs
 
 
 
 
 
 
 
 
 
 
 
Asset-backed Canadian commercial paper conduit facility
183,073

 
(3,085
)
 
10,600

 
320

 
190,908

 
158,162

Total on-balance sheet assets and liabilities
$
849,975

 
$
(23,769
)
 
$
65,740

 
$
2,495

 
$
894,441

 
$
724,266

On-Balance Sheet Asset-Backed Securitization VIEs
The Company transfers U.S. retail motorcycle finance receivables to SPEs which in turn issue secured notes to investors, with various maturities and interest rates, secured by future collections of the purchased U.S. retail motorcycle finance receivables. Each on-balance sheet asset-backed securitization SPE is a separate legal entity, and the U.S. retail motorcycle finance receivables included in the asset-backed securitizations are only available for payment of the secured debt and other obligations arising from the asset-backed securitization transaction and are not available to pay other obligations or claims of the Company’s creditors until the associated secured debt and other obligations are satisfied. Restricted cash balances held by the SPEs are used only to support the securitizations. There are no amortization schedules for the secured notes; however, the debt is reduced monthly as available collections on the related U.S. retail motorcycle finance receivables are applied to outstanding principal. The secured notes have a contractual life maturing in 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 2019 or 2018.
On-Balance Sheet Asset-Backed U.S. Commercial Paper Conduit Facilities VIE
The Company has agreements with third-party bank-sponsored asset-backed U.S. commercial paper conduits under which it may transfer U.S. retail motorcycle finance receivables to an SPE, which in turn may issue debt to those third-party bank-sponsored asset-backed U.S. commercial paper conduits. In November 2018, the Company renewed its existing $600.0 million revolving facility agreement with third-party bank-sponsored asset-backed U.S. commercial paper conduits. Also at that time, the Company amended its existing $300.0 million revolving facility agreement with third-party bank-sponsored asset-backed U.S. commercial paper conduits, increasing the aggregate initial commitment to $600.0 million. The aggregate commitment under this agreement is reduced monthly as collections on the related finance receivables are applied to the outstanding

24

Table of Contents

principal until the outstanding principal balance is less than or equal to $300.0 million, at which point the aggregate commitment will equal $300.0 million. Availability under the revolving facilities (together, the U.S. Conduit Facilities) is based on, among other things, the amount of eligible U.S. retail motorcycle finance receivables held by the SPE as collateral.
Under the U.S. Conduit Facilities, the assets of the SPE are restricted as collateral for the payment of the debt or other obligations arising in the transaction and are not available to pay other obligations or claims of the Company’s creditors. The terms for this debt provide for interest on the outstanding principal based on prevailing commercial paper rates or LIBOR 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. There is no amortization schedule; however, the debt is reduced monthly as available collections on the related finance receivables are applied to outstanding principal. Upon expiration of the U.S. Conduit Facilities, any outstanding principal will continue to be reduced monthly through available collections. The expected remaining term of the related receivables held by the SPE is approximately 5 years. Unless earlier terminated or extended by mutual agreement of the Company and the lenders, as of March 31, 2019, the U.S. Conduit Facilities have an expiration date of November 29, 2019.

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.
There were no finance receivable transfers under the U.S. Conduit Facilities during the first quarter of 2019. During the first quarter of 2018, the Company transferred $32.9 million of U.S. retail motorcycle finance receivables to an SPE which, in turn, issued $29.3 million of debt under the U.S. Conduit Facilities.
On-Balance Sheet Asset-Backed Canadian Commercial Paper Conduit Facility
In June 2018, the Company renewed its facility agreement (Canadian Conduit) with a Canadian bank-sponsored asset-backed commercial paper conduit. Under the agreement, the Canadian Conduit is contractually committed, at the Company's option, to purchase eligible Canadian retail motorcycle finance receivables for proceeds up to C$220.0 million. The transferred assets are restricted as collateral for the payment of the debt. The terms for this debt provide for interest on the outstanding principal based on prevailing market interest rates plus a specified margin. The Canadian Conduit also provides for a program fee and an unused commitment fee based on the unused portion of the total aggregate commitment of C$220.0 million. There is no amortization schedule; however, the debt is reduced monthly as available collections on the related finance receivables are applied to outstanding principal. Upon expiration of the Canadian Conduit, any outstanding principal will continue to be reduced monthly through available collections. The expected remaining term of the related receivables is approximately 5 years. Unless earlier terminated or extended by mutual agreement between the Company and the lenders, as of March 31, 2019, the Canadian Conduit has an expiration date of June 28, 2019.
The Company is not the primary beneficiary of the Canadian bank-sponsored, multi-seller conduit VIE; therefore, the Company does not consolidate the VIE. However, the Company treats the conduit facility as a secured borrowing as it maintains effective control over the assets transferred to the VIE and, therefore, does not meet the requirements for sale accounting.
As the Company participates in and does not consolidate the Canadian bank-sponsored, multi-seller conduit VIE, the maximum exposure to loss associated with this VIE, which would only be incurred in the unlikely event that all the finance receivables and underlying collateral have no residual value, was $29.1 million at March 31, 2019. The maximum exposure is not an indication of the Company's expected loss exposure.
There were no finance receivable transfers under the Canadian Conduit Facilities during the first quarter of 2019. During the first quarter of 2018, the Company transferred $7.6 million of Canadian retail motorcycle finance receivables to the Canadian Conduit for proceeds of $6.2 million.
Off-Balance Sheet Asset-Backed Securitization VIE
There were no off-balance sheet asset-backed securitization transactions during the first quarter of 2019 or 2018. 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

25

Table of Contents

future collections of the purchased U.S. retail motorcycle finance receivables. The off-balance sheet asset-backed securitization SPE is a separate legal entity, and the U.S. retail motorcycle finance receivables included in the asset-backed securitization are only available for payment of the secured debt and other obligations arising from the asset-backed securitization transaction and are not available to pay other obligations or claims of the Company’s creditors. In an on-balance sheet asset-backed securitization, the Company retains a financial interest in the VIE in the form of a debt security. As part of this off-balance sheet securitization, the Company did not retain any financial interest in the VIE beyond servicing rights and ordinary representations and warranties and related covenants.
The Company is not the primary beneficiary of the off-balance sheet asset-backed securitization VIE because it only retained servicing rights and does not have the obligation to absorb losses or the right to receive benefits from the VIE which could potentially be significant to the VIE. Accordingly, this transaction met the accounting sale requirements under ASC Topic 860 and was recorded as a sale for accounting purposes. Upon the sale, the retail motorcycle finance receivables were removed from the Company’s balance sheet and a gain was recognized for the difference between the cash proceeds received, the assets derecognized and the liabilities recognized as part of the transaction. The gain on sale was included in Financial Services revenue in the consolidated statements of income.
At March 31, 2019, the assets of this off-balance sheet asset-backed securitization VIE were $67.1 million and represented the current unpaid principal balance of the retail motorcycle finance receivables, which was the Company’s maximum exposure to loss in the off-balance sheet VIE at March 31, 2019. This is based on the unlikely event that all the receivables have underwriting defects or other defects that trigger a violation of certain covenants and that the underlying collateral has no residual value. This maximum exposure is not an indication of expected losses.
Servicing Activities
The Company services all retail motorcycle finance receivables that it originates. When the Company transfers retail motorcycle finance receivables to SPEs through asset-backed financings, the Company retains the right to service the finance receivables and receives servicing fees based on the securitized finance receivables balance and certain ancillary fees. In on-balance sheet asset-backed financings, servicing fees are eliminated in consolidation and therefore are not recorded on a consolidated basis. In off-balance sheet asset-backed financings, servicing fees and ancillary fees are recorded in Financial Services revenue in the consolidated statements 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 $0.2 million and $0.4 million during the first quarter of 2019 and 2018, respectively.
The unpaid principal balance of retail motorcycle finance receivables serviced by the Company was as follows (in thousands):
 
March 31,
2019
 
December 31,
2018
 
April 1,
2018
On-balance sheet retail motorcycle finance receivables
$
6,159,058

 
$
6,185,350

 
$
5,923,564

Off-balance sheet retail motorcycle finance receivables
67,062

 
79,613

 
127,643

Total serviced retail motorcycle finance receivables
$
6,226,120

 
$
6,264,963

 
$
6,051,207

The unpaid principal balance of retail motorcycle finance receivables serviced by the Company 30 days or more delinquent was as follows (in thousands):
 
Amount 30 days or more past due:
 
March 31,
2019
 
December 31,
2018
 
April 1,
2018
On-balance sheet retail motorcycle finance receivables
$
201,142

 
$
228,015

 
$
166,560

Off-balance sheet retail motorcycle finance receivables
1,194

 
1,658

 
1,652

Total serviced retail motorcycle finance receivables
$
202,336

 
$
229,673

 
$
168,212


26

Table of Contents

Credit losses, net of recoveries for the retail motorcycle finance receivables serviced by the Company were as follows (in thousands):
 
Three months ended
 
March 31,
2019
 
April 1,
2018
On-balance sheet retail motorcycle finance receivables
$
33,504

 
$
32,173

Off-balance sheet retail motorcycle finance receivables
231

 
361

Total serviced retail motorcycle finance receivables
$
33,735

 
$
32,534

14. Fair Value
The Company assesses the inputs used to measure fair value using a three-tier hierarchy.
Level 1 inputs include quoted prices for identical instruments and are the most observable.
Level 2 inputs include quoted prices for similar assets and observable inputs such as interest rates, foreign currency exchange rates, commodity prices, and yield curves. The Company uses the market approach to derive the fair value for its Level 2 fair value measurements. Forward contracts for foreign currency, commodities, and treasury rate locks are valued using quoted forward rates and prices; interest rate swaps are valued using quoted interest rates and yield curves; investments in marketable securities and cash equivalents are valued using quoted prices.
Level 3 inputs are not observable in the market and include management’s judgments about the assumptions market participants would use in pricing the asset or liability.
Recurring Fair Value Measurements
The following tables present information about the Company’s assets and liabilities measured at fair value on a recurring basis (in thousands):
 
March 31, 2019
 
Balance
 
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Assets:
 
 
 
 
 
 
 
Cash equivalents
$
498,207

 
$
321,300

 
$
176,907

 
$

Marketable securities
59,899

 
49,896

 
10,003

 

Derivatives
16,083

 

 
16,083

 

Total
$
574,189

 
$
371,196

 
$
202,993

 
$

Liabilities:
 
 
 
 
 
 
 
Derivatives
$
7,733

 
$

 
$
7,733

 
$

 
 
 
 
 
 
 
 
 
December 31, 2018
 
Balance
 
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Assets:
 
 
 
 
 
 
 
Cash equivalents
$
998,601

 
$
728,800

 
$
269,801

 
$

Marketable securities
54,250

 
44,243

 
10,007

 

Derivatives
15,071

 

 
15,071

 

Total
$
1,067,922

 
$
773,043

 
$
294,879

 
$

Liabilities:
 
 
 
 
 
 
 
Derivatives
$
5,316

 
$

 
$
5,316

 
$

 
 
 
 
 
 
 
 

27

Table of Contents

 
April 1, 2018
 
Balance
 
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Assets:
 
 
 
 
 
 
 
Cash equivalents
$
653,124

 
$
326,324

 
$
326,800

 
$

Marketable securities
49,402

 
49,402

 

 

Derivatives
3,613

 

 
3,613

 

Total
$
706,139

 
$
375,726

 
$
330,413

 
$

Liabilities:
 
 
 
 
 
 
 
Derivatives
$
22,850

 
$

 
$
22,850

 
$

Nonrecurring Fair Value Measurements
Repossessed inventory is recorded at the lower of cost or net realizable value through a nonrecurring fair value measurement. Repossessed inventory was $21.4 million, $20.2 million and $23.8 million at March 31, 2019, December 31, 2018 and April 1, 2018, respectively, for which the fair value adjustment was $9.3 million, $9.7 million and $8.3 million, respectively. Fair value is estimated using Level 2 inputs based on the recent market values of repossessed inventory.
Fair Value of Financial Instruments Measured at Cost
The carrying value of the Company's cash and cash equivalents and restricted cash approximates their fair values.
The following table summarizes the fair value and carrying value of the Company’s remaining financial instruments that are measured at cost or amortized cost (in thousands):
 
March 31, 2019
 
December 31, 2018
 
April 1, 2018
 
Fair Value
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
 
Carrying Value
Assets:
 
 
 
 
 
 
 
 
 
 
 
Finance receivables, net
$
7,520,418

 
$
7,438,592

 
$
7,304,334

 
$
7,221,931

 
$
7,195,908

 
$
7,126,442

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
Unsecured commercial paper
$
1,192,925

 
$
1,192,925

 
$
1,135,810

 
$
1,135,810

 
$
1,036,976

 
$
1,036,976

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

 
$
526,947

 
$
582,717

 
$
582,717

 
$
281,311

 
$
281,311

Asset-backed Canadian commercial paper conduit facility
$
142,676

 
$
142,676

 
$
155,951

 
$
155,951

 
$
158,162

 
$
158,162

Medium-term notes
$
4,675,767

 
$
4,685,636

 
$
4,829,671

 
$
4,887,007

 
$
4,486,399

 
$
4,514,798

Senior unsecured notes
$
719,544

 
$
742,791

 
$
707,198

 
$
742,624

 
$
750,440

 
$
742,126

Asset-backed securitization debt
$
18,674

 
$
18,694

 
$
94,974

 
$
95,167

 
$
283,591

 
$
284,793

Finance Receivables, 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.

28

Table of Contents

Debt – The carrying value of debt in the financial statements is generally amortized cost, net of discounts and debt issuance costs. The carrying value of unsecured commercial paper calculated using Level 2 inputs approximates fair value due to its short maturity. The carrying value of debt provided under the U.S. Conduit Facilities and Canadian Conduit Facility calculated using Level 2 inputs approximates fair value since the interest rates charged under the facility are tied directly to market rates and fluctuate as market rates change. The fair values of the medium-term notes and senior unsecured notes are estimated based upon rates currently available for debt with similar terms and remaining maturities (Level 2 inputs). The fair value of the debt related to on-balance sheet asset-backed securitization transactions is estimated based on pricing currently available for transactions with similar terms and maturities (Level 2 inputs).
15. 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 accrues for future warranty claims using an estimated cost based primarily on historical Company claim information. Additionally, the Company has from time to time initiated certain voluntary recall campaigns. The Company accrues for the estimated cost associated with voluntary recalls in the period that management approves and commits to the recall. Changes in the Company’s warranty and recall liability were as follows (in thousands):
 
Three months ended
 
March 31,
2019
 
April 1,
2018
Balance, beginning of period
$
131,740

 
$
94,202

Warranties issued during the period
11,617

 
14,606

Settlements made during the period
(19,617
)
 
(16,638
)
Recalls and changes to pre-existing warranty liabilities
(1,353
)
 
2,905

Balance, end of period
$
122,387

 
$
95,075

The liability for recall campaigns was $64.1 million, $73.3 million and $32.3 million as of March 31, 2019, December 31, 2018 and April 1, 2018, respectively. The Company recorded supplier recoveries within operating expenses separate from the amounts disclosed above of $28.0 million for the three months ended March 31, 2019.

29

Table of Contents

16. Employee Benefit Plans
The Company has a defined benefit qualified pension plan and postretirement healthcare benefit plans that cover certain employees of the Motorcycles segment. The Company also has unfunded supplemental employee retirement plan agreements (SERPA) with certain employees which were instituted to replace benefits lost under the Tax Revenue Reconciliation Act of 1993. Service cost is allocated among Selling, administrative and engineering expense, Cost of goods sold and Inventory. Amounts capitalized in inventory are not significant. Non-service cost components of net periodic benefit cost are presented in Other income (expense), net. Components of net periodic benefit cost were as follows (in thousands):
 
Three months ended
 
March 31,
2019
 
April 1,
2018
Pension and SERPA Benefits
 
 
 
Service cost
$
6,632

 
$
8,155

Interest cost
21,371

 
20,590

Expected return on plan assets
(35,581
)
 
(36,891
)
Amortization of unrecognized:
 
 
 
Prior service credit
(483
)
 
(106
)
Net loss
11,128

 
15,819

Curtailment loss

 
1,018

Net periodic benefit cost
$
3,067

 
$
8,585

Postretirement Healthcare Benefits
 
 
 
Service cost
$
1,184

 
$
1,812

Interest cost
2,938

 
2,897

Expected return on plan assets
(3,507
)
 
(3,541
)
Amortization of unrecognized:
 
 
 
Prior service credit
(595
)
 
(460
)
Net loss
69

 
454

Net periodic benefit cost
$
89

 
$
1,162

During the three months ended April 1, 2018, the qualified pension plan and certain postretirement healthcare plan assets and obligations were remeasured as a result of a curtailment of benefits related to the planned closure of the Company's motorcycle assembly plant in Kansas City, Missouri, discussed further in Note 4. As a result of the remeasurement, the Company recorded a benefit of $96.4 million before income taxes in other comprehensive income during the three months ended April 1, 2018.
There are no required or planned qualified pension plan contributions for 2019. The Company expects it will continue to make ongoing benefit payments under the SERPA and postretirement healthcare plans.
17. Commitments and Contingencies
The Company is subject to lawsuits and other claims related to environmental, product and other matters. In determining costs to accrue related to these items, the Company carefully analyzes cases and considers the likelihood of adverse judgments or outcomes, as well as the potential range of possible loss. Any amounts accrued for these matters are monitored on an ongoing basis and are updated based on new developments or new information as it becomes available for each matter.

30

Table of Contents

Environmental Protection Agency Notice:
In December 2009, the Company received formal, written requests for information from the United States Environmental Protection Agency (EPA) regarding: (i) certificates of conformity for motorcycle emissions and related designations and labels, (ii) aftermarket parts, and (iii) warranty claims on emissions related components. The Company promptly submitted written responses to the EPA’s inquiry and has engaged in information exchanges and discussions with the EPA. In August 2016, the Company entered into a consent decree with the EPA regarding these issues, and the consent decree was subsequently revised in July 2017 (the Settlement). In the Settlement, the Company agreed to, among other things, pay a fine, and not sell tuning products unless they are approved by the EPA or California Air Resources Board. In December 2017, the Department of Justice (DOJ), on behalf of the EPA, filed the Settlement with the U.S. District Court for the District of Columbia for the purpose of obtaining court approval of the Settlement. Three amicus briefs opposing portions of the Settlement were filed with the court by the deadline of January 31, 2018. On March 1, 2018, the Company and the DOJ each filed separate response briefs. The Company is awaiting the court's decision on whether or not to finalize the Settlement, and on February 8, 2019 the DOJ filed a status update reminding the court of the current status of the outstanding matter. The Company has an accrual associated with this matter which is included in Accrued liabilities on the consolidated balance sheets, and as a result, if it is finalized, the Settlement would not have a material adverse effect on the Company's financial condition or results of operations. The Settlement is not final until it is approved by the court, and if it is not approved by the court, the Company cannot reasonably estimate the impact of any remedies the EPA might seek beyond the Company's current reserve for this matter.
York Environmental Matters:
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. The Company has been working with the Pennsylvania Department of Environmental Protection (PADEP) since 1986 and with the U.S. Environmental Protection Agency (EPA) in undertaking environmental investigation and remediation activities, including a site-wide remedial investigation/feasibility study (RI/FS).

In January 1995, the Company entered into a settlement agreement (the Agreement) with the Navy, and the parties amended the Agreement in 2013 to address ordnance and explosive waste. The 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 an accrual for its estimate of its share of the future Response Costs at the York facility which is included in Other long-term liabilities on the consolidated balance sheets. While the work on the RI/FS is now complete and the final remedy was proposed in late 2018, it has not yet been approved, and given the uncertainty that exists concerning the nature and scope of additional environmental remediation that may ultimately be required under the approved final remedy, 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.

31

Table of Contents

18. Accumulated Other Comprehensive Loss
The following tables set forth the changes in accumulated other comprehensive loss (AOCL) (in thousands):
 
 
Three months ended March 31, 2019
 
 
Foreign currency translation adjustments
 
Derivative financial instruments
 
Pension and postretirement benefit plans
 
Total
Balance, beginning of period
 
$
(49,608
)
 
$
1,785

 
$
(581,861
)
 
$
(629,684
)
Other comprehensive income before reclassifications
 
606

 
1,177

 

 
1,783

Income tax expense
 
(275
)
 
(314
)
 

 
(589
)
Net other comprehensive income before reclassifications
 
331

 
863

 

 
1,194

Reclassifications:
 
 
 
 
 
 
 
 
Realized gains - foreign currency contracts(a)
 

 
(2,453
)
 

 
(2,453
)
Realized losses - commodity contracts(a)
 

 
10

 

 
10

Realized losses - treasury rate locks(b)
 

 
122

 

 
122

Realized losses - interest rate swap(b)
 

 
606

 

 
606

Prior service credits(c)
 

 

 
(1,078
)
 
(1,078
)
Actuarial losses(c)
 

 

 
11,197

 
11,197

Total reclassifications before tax
 

 
(1,715
)
 
10,119

 
8,404

Income tax benefit (expense)
 

 
411

 
(2,376
)
 
(1,965
)
Net reclassifications
 

 
(1,304
)
 
7,743

 
6,439

Other comprehensive income (loss)
 
331

 
(441
)
 
7,743

 
7,633

Balance, end of period
 
$
(49,277
)
 
$
1,344

 
$
(574,118
)
 
$
(622,051
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended April 1, 2018
 
 
Foreign currency translation adjustments
 
Derivative financial instruments
 
Pension and postretirement benefit plans
 
Total
Balance, beginning of period
 
$
(21,852
)
 
$
(17,254
)
 
$
(460,943
)
 
$
(500,049
)
Other comprehensive income (loss) before reclassifications
 
6,915

 
(5,906
)
 
96,374

 
97,383

Income tax benefit (expense)
 

 
1,387

 
(22,629
)
 
(21,242
)
Net other comprehensive income (loss) before reclassifications
 
6,915

 
(4,519
)
 
73,745

 
76,141

Reclassifications:
 
 
 
 
 
 
 
 
Realized losses - foreign currency contracts(a)
 

 
6,709

 

 
6,709

Realized losses - commodity contracts(a)
 

 
73

 

 
73

Realized losses - treasury rate locks(b)
 

 
126

 

 
126

Prior service credits(c)
 

 

 
(566
)
 
(566
)
Actuarial losses(c)
 

 

 
16,273

 
16,273

Total reclassifications before tax
 

 
6,908

 
15,707

 
22,615

Income tax expense
 

 
(1,624
)
 
(3,687
)
 
(5,311
)
Net reclassifications
 

 
5,284

 
12,020

 
17,304

Other comprehensive income
 
6,915

 
765

 
85,765

 
93,445

Balance, end of period
 
$
(14,937
)
 
$
(16,489
)
 
$
(375,178
)
 
$
(406,604
)
 
 
(a)
Amounts reclassified to net income are included in Motorcycles and Related Products cost of goods sold
(b)
Amounts reclassified to net income are included in Interest expense and Financial Services interest expense
(c)
Amounts reclassified are included in the computation of net periodic benefit cost; see Note 16 for information related to pension and postretirement benefit plans

32

Table of Contents

19. Business Segments
Harley-Davidson, Inc. is the parent company for the groups of companies doing business as Harley-Davidson Motor Company (HDMC) and Harley-Davidson Financial Services (HDFS). The Company operates in two segments: the Motorcycles and Related Products (Motorcycles) segment and the Financial Services segment. The Company’s reportable segments are 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 31,
2019
 
April 1,
2018
Motorcycles net revenue
$
1,195,637

 
$
1,363,947

Gross profit
347,439

 
473,773

Selling, administrative and engineering expense
225,428

 
254,093

Restructuring expense
13,630

 
46,842

Operating income from Motorcycles
108,381

 
172,838

Financial Services revenue
188,743

 
178,174

Financial Services expense
130,012

 
114,595

Operating income from Financial Services
58,731

 
63,579

Operating income
$
167,112

 
$
236,417


33

Table of Contents

20. Supplemental Consolidating Data
The supplemental consolidating data for the periods noted is presented for informational purposes. The supplemental consolidating data may be different than segment information presented elsewhere due to the allocation of intercompany eliminations to the reportable segments. All supplemental data is presented in thousands.
 
Three months ended March 31, 2019
 
HDMC Entities
 
HDFS Entities
 
Eliminations
 
Consolidated
Revenue:
 
 
 
 
 
 
 
Motorcycles and Related Products
$
1,200,009

 
$

 
$
(4,372
)
 
$
1,195,637

Financial Services

 
186,753

 
1,990

 
188,743

Total revenue
1,200,009

 
186,753

 
(2,382
)
 
1,384,380

Costs and expenses:
 
 
 
 
 
 
 
Motorcycles and Related Products cost of goods sold
848,703

 

 
(505
)
 
848,198

Financial Services interest expense

 
52,324

 

 
52,324

Financial Services provision for credit losses

 
34,491

 

 
34,491

Selling, administrative and engineering expense
227,992

 
42,588

 
(1,955
)
 
268,625

Restructuring expense
13,630

 

 

 
13,630

Total costs and expenses
1,090,325

 
129,403

 
(2,460
)
 
1,217,268

Operating income
109,684

 
57,350

 
78

 
167,112

Other income (expense), net
4,660

 

 

 
4,660

Investment income
51,358

 

 
(45,000
)
 
6,358

Interest expense
7,731

 

 

 
7,731

Income before provision for income taxes
157,971

 
57,350

 
(44,922
)
 
170,399

Provision for income taxes
28,557

 
13,897

 

 
42,454

Net income
$
129,414

 
$
43,453

 
$
(44,922
)
 
$
127,945

 
 
 
 
 
 
 
 
 
Three months ended April 1, 2018
 
HDMC Entities
 
HDFS Entities
 
Eliminations
 
Consolidated
Revenue:
 
 
 
 
 
 
 
Motorcycles and Related Products
$
1,366,246

 
$

 
$
(2,299
)
 
$
1,363,947

Financial Services

 
178,460

 
(286
)
 
178,174

Total revenue
1,366,246

 
178,460

 
(2,585
)
 
1,542,121

Costs and expenses:
 
 
 
 
 
 
 
Motorcycles and Related Products cost of goods sold
890,174

 

 

 
890,174

Financial Services interest expense

 
48,450

 

 
48,450

Financial Services provision for credit losses

 
30,052

 

 
30,052

Selling, administrative and engineering expense
254,401

 
38,391

 
(2,606
)
 
290,186

Restructuring expense
46,842

 

 

 
46,842

Total costs and expenses
1,191,417

 
116,893

 
(2,606
)
 
1,305,704

Operating income
174,829

 
61,567

 
21

 
236,417

Other income (expense), net
220

 

 

 
220

Investment income
111,203

 

 
(110,000
)
 
1,203

Interest expense
7,690

 

 

 
7,690

Income before provision for income taxes
278,562

 
61,567

 
(109,979
)
 
230,150

Provision for income taxes
40,233

 
15,154

 

 
55,387

Net income
$
238,329

 
$
46,413

 
$
(109,979
)
 
$
174,763


34

Table of Contents

 
March 31, 2019
 
HDMC Entities
 
HDFS Entities
 
Eliminations
 
Consolidated
ASSETS
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
Cash and cash equivalents
$
384,390

 
$
365,210

 
$

 
$
749,600

Marketable securities
10,003

 

 

 
10,003

Accounts receivable, net
666,782

 

 
(313,241
)
 
353,541

Finance receivables, net

 
2,443,899

 

 
2,443,899

Inventories
595,806

 

 

 
595,806

Restricted cash

 
43,471

 

 
43,471

Other current assets
137,167

 
40,594

 

 
177,761

Total current assets
1,794,148

 
2,893,174

 
(313,241
)
 
4,374,081

Finance receivables, net

 
4,994,693

 

 
4,994,693

Property, plant and equipment, net
820,634

 
55,369

 


 
876,003

Goodwill
64,131

 

 


 
64,131

Deferred income taxes
96,500

 
37,487

 
(999
)
 
132,988

Lease assets
48,513

 
6,792

 

 
55,305

Other long-term assets
154,687

 
19,149

 
(90,424
)
 
83,412

 
$
2,978,613

 
$
8,006,664

 
$
(404,664
)
 
$
10,580,613

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
Accounts payable
$
351,831

 
$
342,328

 
$
(313,241
)
 
$
380,918

Accrued liabilities
544,560

 
98,778

 
833

 
644,171

Short-term debt

 
1,192,925

 

 
1,192,925

Current portion of long-term debt, net

 
1,372,050

 

 
1,372,050

Total current liabilities
896,391

 
3,006,081

 
(312,408
)
 
3,590,064

Long-term debt, net
742,791

 
4,001,903

 

 
4,744,694

Lease liabilities
32,520

 
6,996

 

 
39,516

Pension liability
98,862

 

 

 
98,862

Postretirement healthcare liability
93,897

 

 

 
93,897

Other long-term liabilities
174,150

 
39,070

 
2,749

 
215,969

Commitments and contingencies (Note 17)
 
 
 
 
 
 
 
Shareholders’ equity
940,002

 
952,614

 
(95,005
)
 
1,797,611

 
$
2,978,613

 
$
8,006,664

 
$
(404,664
)
 
$
10,580,613


35

Table of Contents

 
December 31, 2018
 
HDMC Entities
 
HDFS Entities
 
Eliminations
 
Consolidated
ASSETS
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
Cash and cash equivalents
$
544,548

 
$
659,218

 
$

 
$
1,203,766

Marketable securities
10,007

 

 

 
10,007

Accounts receivable, net
425,727

 

 
(119,253
)
 
306,474

Finance receivables, net

 
2,214,424

 

 
2,214,424

Inventories
556,128

 

 

 
556,128

Restricted cash

 
49,275

 

 
49,275

Other current assets
91,172

 
59,070

 
(5,874
)
 
144,368

Total current assets
1,627,582

 
2,981,987

 
(125,127
)
 
4,484,442

Finance receivables, net

 
5,007,507

 

 
5,007,507

Property, plant and equipment, net
847,176

 
56,956

 

 
904,132

Goodwill
55,048

 

 

 
55,048

Deferred income taxes
105,388

 
37,603

 
(1,527
)
 
141,464

Other long-term assets
144,122

 
18,680

 
(89,731
)
 
73,071

 
$
2,779,316

 
$
8,102,733

 
$
(216,385
)
 
$
10,665,664

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
Accounts payable
$
258,587

 
$
145,527

 
$
(119,253
)
 
$
284,861

Accrued liabilities
496,643

 
110,063

 
(5,576
)
 
601,130

Short-term debt

 
1,135,810

 

 
1,135,810

Current portion of long-term debt, net

 
1,575,799

 

 
1,575,799

Total current liabilities
755,230

 
2,967,199

 
(124,829
)
 
3,597,600

Long-term debt, net
742,624

 
4,145,043

 

 
4,887,667

Pension liability
107,776

 

 

 
107,776

Postretirement healthcare liability
94,453

 

 

 
94,453

Other long-term liabilities
164,243

 
37,142

 
2,834

 
204,219

Commitments and contingencies (Note 17)
 
 
 
 
 
 
 
Shareholders’ equity
914,990

 
953,349

 
(94,390
)
 
1,773,949

 
$
2,779,316

 
$
8,102,733

 
$
(216,385
)
 
$
10,665,664


36

Table of Contents

 
April 1, 2018
 
HDMC Entities
 
HDFS Entities
 
Eliminations
 
Consolidated
ASSETS
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
Cash and cash equivalents
$
403,009

 
$
350,508

 
$

 
$
753,517

Accounts receivable, net
686,265

 

 
(331,158
)
 
355,107

Finance receivables, net

 
2,341,918

 

 
2,341,918

Inventories
564,571

 

 

 
564,571

Restricted cash

 
54,569

 

 
54,569

Other current assets
108,613

 
44,724

 
(2,865
)
 
150,472

Total current assets
1,762,458

 
2,791,719

 
(334,023
)
 
4,220,154

Finance receivables, net

 
4,784,524

 

 
4,784,524

Property, plant and equipment, net
887,522

 
47,123

 

 
934,645

Prepaid pension costs
122,230

 

 

 
122,230

Goodwill
56,524

 

 

 
56,524

Deferred income taxes
36,140

 
42,543

 
(1,059
)
 
77,624

Other long-term assets
145,344

 
23,514

 
(86,938
)
 
81,920

 
$
3,010,218

 
$
7,689,423

 
$
(422,020
)
 
$
10,277,621

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
Accounts payable
$
297,162

 
$
353,036

 
$
(331,158
)
 
$
319,040

Accrued liabilities
462,279

 
106,149

 
(2,020
)
 
566,408

Short-term debt

 
1,036,976

 

 
1,036,976

Current portion of long-term debt, net

 
1,872,679

 

 
1,872,679

Total current liabilities
759,441

 
3,368,840

 
(333,178
)
 
3,795,103

Long-term debt, net
742,126

 
3,366,385

 

 
4,108,511

Pension liability
54,921

 

 

 
54,921

Postretirement healthcare liability
113,031

 

 

 
113,031

Other long-term liabilities
171,389

 
35,899

 
2,818

 
210,106

Commitments and contingencies (Note 17)
 
 
 
 
 
 
 
Shareholders’ equity
1,169,310

 
918,299

 
(91,660
)
 
1,995,949

 
$
3,010,218

 
$
7,689,423

 
$
(422,020
)
 
$
10,277,621


37

Table of Contents

 
Three months ended March 31, 2019
 
HDMC Entities
 
HDFS Entities
 
Eliminations
 
Consolidated
Cash flows from operating activities:
 
 
 
 
 
 
 
Net income
$
129,414

 
$
43,453

 
$
(44,922
)
 
$
127,945

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
 
 
 
Depreciation and amortization of intangibles
62,187

 
2,185

 

 
64,372

Amortization of deferred loan origination costs

 
18,968

 

 
18,968

Amortization of financing origination fees
167

 
2,027

 

 
2,194

Provision for long-term employee benefits
3,156

 

 

 
3,156

Employee benefit plan contributions and payments
(2,507
)
 

 

 
(2,507
)
Stock compensation expense
5,845

 
692

 

 
6,537

Net change in wholesale finance receivables related to sales

 

 
(237,569
)
 
(237,569
)
Provision for credit losses

 
34,491

 

 
34,491

Deferred income taxes
6,195

 
314

 
(528
)
 
5,981

Other, net
1,886

 
922

 
(77
)
 
2,731

Changes in current assets and liabilities:
 
 
 
 
 
 
 
Accounts receivable, net
(243,734
)
 

 
193,988

 
(49,746
)
Finance receivables - accrued interest and other

 
92

 

 
92

Inventories
(40,600
)
 

 

 
(40,600
)
Accounts payable and accrued liabilities
122,462

 
180,980

 
(179,467
)
 
123,975

Derivative instruments
834

 
33

 

 
867

Other
(41,339
)
 
18,997

 
(5,874
)
 
(28,216
)
Total adjustments
(125,448
)
 
259,701

 
(229,527
)
 
(95,274
)
Net cash provided by operating activities
3,966

 
303,154

 
(274,449
)
 
32,671


38

Table of Contents

 
Three months ended March 31, 2019
 
HDMC Entities
 
HDFS Entities
 
Eliminations
 
Consolidated
Cash flows from investing activities:
 
 
 
 
 
 
 
Capital expenditures
(34,657
)
 
(598
)
 

 
(35,255
)
Origination of finance receivables

 
(1,691,416
)
 
840,044

 
(851,372
)
Collections on finance receivables

 
1,426,419

 
(610,595
)
 
815,824

Acquisition of business
(7,000
)
 

 

 
(7,000
)
Other
603

 

 

 
603

Net cash used by investing activities
(41,054
)
 
(265,595
)
 
229,449

 
(77,200
)
Cash flows from financing activities:
 
 
 
 
 
 
 
Proceeds from issuance of medium-term notes

 
546,655

 

 
546,655

Repayments of medium-term notes

 
(750,000
)
 

 
(750,000
)
Repayments of securitization debt

 
(76,505
)
 

 
(76,505
)
Repayments of asset-backed commercial paper

 
(72,401
)
 

 
(72,401
)
Net increase in credit facilities and unsecured commercial paper

 
58,527

 

 
58,527

Dividends paid
(60,859
)
 
(45,000
)
 
45,000

 
(60,859
)
Purchase of common stock for treasury
(61,712
)
 

 

 
(61,712
)
Issuance of common stock under employee stock option plans
616

 

 

 
616

Net cash used by financing activities
(121,955
)
 
(338,724
)
 
45,000

 
(415,679
)
Effect of exchange rate changes on cash, cash equivalents and restricted cash
(1,115
)
 
706

 

 
(409
)
Net decrease in cash, cash equivalents and restricted cash
$
(160,158
)
 
$
(300,459
)
 
$

 
$
(460,617
)
Cash, cash equivalents and restricted cash:
 
 
 
 
 
 
 
Cash, cash equivalents and restricted cash—beginning of period
$
544,548

 
$
715,200

 
$

 
$
1,259,748

Net decrease in cash, cash equivalents and restricted cash
(160,158
)
 
(300,459
)
 

 
(460,617
)
Cash, cash equivalents and restricted cash—end of period
$
384,390

 
$
414,741

 
$

 
$
799,131


39

Table of Contents

 
Three months ended April 1, 2018
 
HDMC Entities
 
HDFS Entities
 
Eliminations
 
Consolidated
Cash flows from operating activities:
 
 
 
 
 
 
 
Net income
$
238,329

 
$
46,413

 
$
(109,979
)
 
$
174,763

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
 
 
 
Depreciation and amortization of intangibles
61,405

 
1,068

 

 
62,473

Amortization of deferred loan origination costs

 
20,116

 

 
20,116

Amortization of financing origination fees
165

 
1,863

 

 
2,028

Provision for long-term employee benefits
9,747

 

 

 
9,747

Employee benefit plan contributions and payments
(5,486
)
 

 

 
(5,486
)
Stock compensation expense
7,072

 
890

 

 
7,962

Net change in wholesale finance receivables related to sales

 

 
(239,902
)
 
(239,902
)
Provision for credit losses

 
30,052

 

 
30,052

Deferred income taxes
2,469

 
979

 
(260
)
 
3,188

Other, net
(2,081
)
 
200

 
(21
)
 
(1,902
)
Changes in current assets and liabilities:
 
 
 
 
 
 
 
Accounts receivable, net
(195,123
)
 

 
177,435

 
(17,688
)
Finance receivables - accrued interest and other

 
4,758

 

 
4,758

Inventories
(21,542
)
 

 

 
(21,542
)
Accounts payable and accrued liabilities
121,833

 
201,056

 
(173,966
)
 
148,923

Derivative instruments
666

 
36

 

 
702

Other
9,935

 
6,269

 
(2,802
)
 
13,402

Total adjustments
(10,940
)
 
267,287

 
(239,516
)
 
16,831

Net cash provided by operating activities
227,389

 
313,700

 
(349,495
)
 
191,594


40

Table of Contents

 
Three months ended April 1, 2018
 
HDMC Entities
 
HDFS Entities
 
Eliminations
 
Consolidated
Cash flows from investing activities:
 
 
 
 
 
 
 
Capital expenditures
(25,746
)
 
(2,690
)
 

 
(28,436
)
Origination of finance receivables

 
(1,786,309
)
 
988,242

 
(798,067
)
Collections on finance receivables

 
1,558,547

 
(748,747
)
 
809,800

Other
(4,948
)
 

 

 
(4,948
)
Net cash used by investing activities
(30,694
)
 
(230,452
)
 
239,495

 
(21,651
)
Cash flows from financing activities:
 
 
 
 
 
 
 
Proceeds from issuance of medium-term notes

 
347,553

 

 
347,553

Repayments of securitization debt

 
(67,955
)
 

 
(67,955
)
Borrowings of asset-backed commercial paper

 
35,504

 

 
35,504

Repayments of asset-backed commercial paper

 
(45,907
)
 

 
(45,907
)
Net decrease in credit facilities and unsecured commercial paper

 
(234,145
)
 

 
(234,145
)
Dividends paid
(62,731
)
 
(110,000
)
 
110,000

 
(62,731
)
Purchase of common stock for treasury
(72,968
)
 

 

 
(72,968
)
Issuance of common stock under employee stock option plans
1,719

 

 

 
1,719

Net cash used by financing activities
(133,980
)
 
(74,950
)
 
110,000

 
(98,930
)
Effect of exchange rate changes on cash, cash equivalents and restricted cash
2,108

 
(74
)
 

 
2,034

Net increase in cash, cash equivalents and restricted cash
$
64,823

 
$
8,224

 
$

 
$
73,047

Cash, cash equivalents and restricted cash:
 
 
 
 
 
 
 
Cash, cash equivalents and restricted cash—beginning of period
$
338,186

 
$
408,024

 
$

 
$
746,210

Net increase in cash, cash equivalents and restricted cash
64,823

 
8,224

 

 
73,047

Cash, cash equivalents and restricted cash—end of period
$
403,009

 
$
416,248

 
$

 
$
819,257


41

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 segments: Motorcycles and 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 is engaged in the business of financing and servicing wholesale inventory receivables and retail consumer loans, primarily for the purchase of Harley-Davidson motorcycles. HDFS also works with certain unaffiliated insurance companies to provide motorcycle insurance and protection products to motorcycle owners. HDFS conducts business principally in the United States and Canada.
The “% Change” figures included in the “Results of Operations” section were calculated using unrounded dollar amounts and may differ from calculations using the rounded dollar amounts presented.
(1) Note Regarding Forward-Looking Statements
The Company intends that certain matters discussed in this report are “forward-looking statements” intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. These forward-looking statements can generally be identified as such by reference to this footnote or because the context of the statement will include words such as the Company “believes,” “anticipates,” “expects,” “plans,” or “estimates” or words of similar meaning. Similarly, statements that describe future plans, objectives, outlooks, targets, guidance or goals are also forward-looking statements. Such forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those anticipated as of the date of this report. Certain of such risks and uncertainties are described in close proximity to such statements or elsewhere in this report, including under the caption “Cautionary Statements” and in Item 1A “Risk Factors” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2018. Shareholders, potential investors, and other readers are urged to consider these factors in evaluating the forward-looking statements and are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements included in the Overview and Outlook sections are only made as of April 23, 2019 and the remaining forward-looking statements in this report are made as of the date of the filing of this report (May 9, 2019), and the Company disclaims any obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances.
Overview(1) 
The Company’s net income was $127.9 million, or $0.80 per diluted share, for the first quarter of 2019 compared to $174.8 million, or $1.03 per diluted share, in the first quarter of 2018. Operating income from the Motorcycles segment decreased $64.5 million compared to last year’s first quarter and was impacted by lower shipments, unfavorable mix and incremental tariffs, partially offset by lower operating expenses. Operating income from the Financial Services segment in the first quarter of 2019 was $58.7 million, down 7.6% compared to the year-ago quarter on a higher provision for credit losses and higher operating expenses.
Worldwide dealer retail sales of new Harley-Davidson motorcycles in the first quarter of 2019 were down 3.8% compared to the first quarter of 2018. Retail sales were down 4.2% in the U.S. and down 3.3% in international markets compared to the prior year first quarter. Retail sales results in the first quarter improved significantly from recent trends despite limited availability of Street motorcycles. During the first quarter of 2019, retail sales of Street motorcycles were adversely impacted by limited availability following a recent recall. Excluding retail sales of Street motorcycles from both 2018 and 2019, worldwide retail sales were up 0.4% in the first quarter of 2019 compared to the same period last year. Retail sales of Street motorcycles resumed in late March 2019.

42

Table of Contents

The Company was encouraged by first quarter retail sales performance, but remains cautious as it moves into the height of its selling season. The Company expects its business to remain under pressure in 2019 driven by continuing challenges in the U.S. motorcycle industry. The Company will continue to aggressively manage supply in line with demand and execute marketing efforts to encourage trial, create new riders and increase conversion to sale. In addition, the Company continues work to accelerate its strategy to build the next generation of Harley-Davidson riders through 2022 through its More Roads to Harley-Davidson (More Roads) plan.
Finally, unionized workers at the Company’s operations in the Milwaukee area and Tomahawk, Wisconsin ratified new five-year labor agreements in April 2019. The Company believes the new contracts will enable it to compete in a challenging business environment and advance its strategy to build the next generation of riders globally.
Outlook(1) 

On April 23, 2019, the Company provided the following information concerning its expectations for the remainder of 2019:
Motorcycles and Related Products Segment - Full Year
The Company expects the U.S. industry to continue to decline in 2019, but at a more tempered pace than in 2018. The Company expects international retail sales growth during 2019. As a result, the Company expects to ship between 217,000 and 222,000 motorcycles to dealers in 2019 which is down approximately 3% to 5% from 2018. The Company also expects year-end U.S. dealer inventory of new motorcycles to be down compared to 2018.
The Company expects Motorcycles segment gross margin as a percent of revenue to be lower than 2018 driven by a significant increase in the impact of incremental tariffs, lower shipment volumes and unfavorable product mix, partially offset by aggressive cost reductions, including the benefit of $25 million to $30 million of savings from the Company's Manufacturing Optimization plan. Refer to "Restructuring Plan Costs and Savings" below for further information regarding the Manufacturing Optimization Plan.
The Company expects selling, administrative and engineering expenses for the Motorcycles segment to be lower in 2019 behind aggressive cost management and lower recall costs.
Incremental tariffs include incremental European Union and China tariffs imposed on the Company's products shipped from the U.S., as well as incremental U.S. tariffs on certain items imported from certain international markets. Incremental tariff costs exclude metals cost resulting from the U.S. steel and aluminum tariffs, although the Company does expect higher metals cost which are included in the 2019 gross margin guidance above.
As previously disclosed, the Company expects the impact of incremental tariff costs to be approximately $100 million to $120 million in 2019. While the Company's preference has always been to serve the EU market from its U.S. manufacturing operations, the Company plans to mitigate the impact of the incremental European Union and China tariffs by the end of 2019 by serving those markets with motorcycles from its Thailand facility.
The Company is pursuing regulatory approval in the European Union to that end; however, there is material risk that regulatory approval will not be granted. As a result, the Company is considering multiple other options to serve the EU market should they be required. These other options to serve the EU market would most likely not mitigate the full impact of the current incremental European Union tariff by the end of 2019.
For 2019, the Motorcycles segment operating margin as a percent of revenue is expected to be between 8.0% and 9.0%. Based on its current plans, the Company expects Motorcycles segment operating income in 2020 to improve by approximately $170 to $200 million compared to 2019. This expectation assumes that the Company will complete its Manufacturing Optimization Plan and successfully execute its plan to mitigate the impact of incremental tariffs by the end of 2019.
Motorcycles and Related Products Segment - Second Quarter
In the second quarter of 2019, the Company expects to ship between 65,500 and 70,500 motorcycles, which is down approximately 3% to 10% compared to the second quarter of 2018. Motorcycles segment operating margin as a percent of revenue is expected to be down approximately 4 percentage points compared to the second quarter of 2018 driven in part by the impact of incremental tariffs, lower planned shipments and unfavorable mix.

43

Table of Contents

Financial Services Segment
The Company expects Financial Services segment operating income in 2019 to be down compared to 2018 driven by a higher cost of debt and higher depreciation associated with its 2018 investment in a new loan management system which went into service in January 2019.
Harley-Davidson, Inc.
Capital expenditures in 2019 are expected to be $225 million to $245 million, which includes approximately $20 million to support the Manufacturing Optimization Plan. The Company anticipates it will have the ability to fund all capital expenditures in 2019 with cash flows generated by operations.
The Company expects its 2019 full year effective tax rate will be approximately 24% to 25%. This guidance excludes the effect of potential future adjustments, including items associated with any potential new tax legislation or audit settlements.
Restructuring Plan Costs and Savings(1) 
In January 2018, the Company commenced a significant, multi-year Manufacturing Optimization Plan anchored by the consolidation of its final assembly plant in Kansas City, Missouri into its plant in York, Pennsylvania by mid-2019. As the operations are consolidated, the Company expects approximately 800 jobs will be eliminated with the closure of Kansas City operations and approximately 450 jobs will be added in York through 2019 (Manufacturing Optimization Plan). As part of the Manufacturing Optimization Plan, the Company will also close its wheel operations in Adelaide, Australia resulting in the elimination of approximately 90 jobs.
In November 2018, the Company implemented a workforce reorganization plan (Reorganization Plan). As a result, approximately 70 employees left the Company on an involuntary basis.
The following table summarizes the expected costs and savings associated with these plans as of April 23, 2019:
(in millions)
2018 Actual
 
2019 Estimated
 
2020 Estimated
 
Total
Manufacturing Optimization Plan
 
 
 
 
 
 
 
Cost related to temporary inefficiencies
$ 12.9
 
$10 - $15
 
n/a
 
$ 23 - $ 28
Restructuring expenses
$ 89.5
 
$40 - $45
 
n/a
 
$129 - $134
 
$102.4
 
$50 - $60
 
 
 
$152 - $162
% cash
70%
 
70%
 
 
 
70%
Reorganization Plan - restructuring expenses
$3.9
 
$1
 
 
 
$5
% cash
100%
 
100%
 
 
 
100%
 
 
 
 
 
 
 
 
Annual cash savings
 
 
2019 Estimated
 
2020 Estimated
 
Annual
Ongoing
Manufacturing Optimization Plan
 
 
$25 - $30
 
$45 - $50
 
$65 - $75
Reorganization Plan
 
 
$7
 
$7
 
$7
The expected restructuring expenses include the estimated cost of employee termination benefits, accelerated depreciation, and other project implementation costs of $40 million to $41 million, $51 million to $53 million and $38 million to $40 million, respectively. The timing of cash payments for restructuring costs may not occur in the same fiscal period that the Company records the expense.
Refer to Note 4 of the Notes to Consolidated Financial Statements for additional information concerning restructuring expenses. The Company expects total capital expenditures of $65 million associated with the Manufacturing Optimization Plan through 2019, including $20 million in 2019.

44

Table of Contents

Results of Operations for the Three Months Ended March 31, 2019
Compared to the Three Months Ended April 1, 2018
Consolidated Results
 
Three months ended
 
 
 
 
(in thousands, except earnings per share)
March 31,
2019
 
April 1,
2018
 
(Decrease)
Increase
 
%
Change
Operating income from Motorcycles and Related Products
$
108,381

 
$
172,838

 
$
(64,457
)
 
(37.3
)%
Operating income from Financial Services
58,731

 
63,579

 
(4,848
)
 
(7.6
)
Operating income
167,112

 
236,417

 
(69,305
)
 
(29.3
)
Other income (expense), net
4,660

 
220

 
4,440

 
2,018.2

Investment income
6,358

 
1,203

 
5,155

 
428.5

Interest expense
7,731

 
7,690

 
41

 
0.5

Income before provision for income taxes
170,399

 
230,150

 
(59,751
)
 
(26.0
)
Provision for income taxes
42,454

 
55,387

 
(12,933
)
 
(23.4
)
Net income
$
127,945

 
$
174,763

 
$
(46,818
)
 
(26.8
)%
Diluted earnings per share
$
0.80

 
$
1.03

 
$
(0.23
)
 
(22.3
)%
Consolidated operating income was down 29.3% in the first three months of 2019 due to a decrease in operating income from the Motorcycles segment of $64.5 million and a $4.8 million decrease in operating income from Financial Services, compared to the same period last year. Please refer to the “Motorcycles and Related Products Segment” and “Financial Services Segment” discussions following for a more detailed analysis of the factors affecting operating income.
Other income in the first quarter of 2019 was favorably impacted by lower amortization of actuarial losses related to the Company's defined benefit plans. Investment income was up in the first quarter of 2019 compared to the same period last year driven by higher income from investments in marketable securities and cash equivalents.
The Company's effective income tax rate for the first three months of 2019 was 24.9% up slightly from 24.1% in the same period in 2018 due to slightly higher discrete income tax amounts recorded during the first quarter of 2019.
Diluted earnings per share were $0.80 in the first quarter of 2019, down 22.3% from the same period last year on lower net income and lower diluted weighted average shares outstanding. Diluted weighted average shares outstanding decreased from 169.2 million in the first quarter of 2018 to 160.0 million in the first quarter of 2019, 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.

45

Table of Contents

Motorcycles Retail Sales and Registration Data
Harley-Davidson Motorcycle Retail Sales(a) 
The following table includes retail unit sales of Harley-Davidson motorcycles:
 
Three months ended
 
 
 
 
 
March 31,
2019
 
March 31,
2018
 
(Decrease)
Increase
 
%
Change
United States
28,091

 
29,309

 
(1,218
)
 
(4.2
)%
 
 
 
 
 
 
 
 
Europe(b)
9,508

 
9,716

 
(208
)
 
(2.1
)
EMEA - Other
1,289

 
1,146

 
143

 
12.5

Total EMEA
10,797

 
10,862

 
(65
)
 
(0.6
)
 
 
 
 
 
 
 
 
Asia Pacific(c)
3,786

 
4,452

 
(666
)
 
(15.0
)
Asia Pacific - Other
2,288

 
1,877

 
411

 
21.9

Total Asia Pacific
6,074

 
6,329

 
(255
)
 
(4.0
)
 
 
 
 
 
 
 
 
Latin America
2,241

 
2,506

 
(265
)
 
(10.6
)
Canada
1,948

 
2,080

 
(132
)
 
(6.3
)
Total International Retail Sales
21,060

 
21,777

 
(717
)
 
(3.3
)
Total Worldwide Retail Sales
49,151

 
51,086

 
(1,935
)
 
(3.8
)%
 
(a)
Data source for retail sales figures shown above is new sales warranty and registration information provided by Harley-Davidson dealers and compiled by the Company. The Company must rely on information that its dealers supply concerning new retail sales, and the Company does not regularly verify the information that its dealers supply. This information is subject to revision.
(b)
Includes Austria, Belgium, Denmark, Finland, France, Germany, Greece, Italy, Luxembourg, Netherlands, Norway, Portugal, Spain, Sweden, Switzerland and the United Kingdom.
(c)
Includes Japan, Australia, New Zealand and Korea.
Retail sales of new Harley-Davidson motorcycles in the U.S. were down 4.2% in the first quarter of 2019 on a weak U.S. industry, partially offset by an increase in market share. The first quarter retail sales decline of 4.2% represents the lowest rate of decline for retail sales of new Harley-Davidson motorcycles in the U.S. over the last nine quarters. The U.S. industry was down 4.7% percent in the first quarter of 2019, which also represented an improvement compared to recent industry sales trends. The Company believes the U.S. industry for new motorcycles continues to be challenged by soft used motorcycle prices and that the improvement in the U.S. industry sales trend was due in part to a highly competitive and promotional marketplace.
Prices for used Harley-Davidson motorcycles in the U.S. remained at near historical low levels compared to new; however, the Company is encouraged by the firming of used motorcycle prices over the past several quarters. Prices of used Harley-Davidson motorcycles in the Company's dealer network were higher in the first quarter of 2019 than the prior year quarter for the seventh consecutive quarter.
The Company's U.S. market share of new 601+cc motorcycles for the first quarter of 2019 was 51.1%, up 0.6 percentage points compared to the same period last year. The Company believes its U.S. market share gains were due in part to the execution of its "stronger dealer" growth catalyst under its More Roads plan which included increased marketing and sales support. The Company believes its share gains were partially offset by increased competitive promotional activity and stronger performance in segments in which it does not currently compete. In the Touring and Cruiser segments, which represent approximately 70% of the 601+cc market, the Company's market share was up 2.5 percentage points in the first quarter of 2019 compared to the same quarter last year. (Market share source: Motorcycle Industry Council)
International retail sales of new Harley-Davidson motorcycles were down 3.3% in the first quarter of 2019. In the first quarter of 2019 international retail sales were down in developed markets, partially offset by increases in emerging markets. Overall, international retail sales were adversely impacted by the limited availability of Street motorcycles during the first quarter of 2019. Excluding Street motorcycles from both 2018 and 2019, first quarter international retail sales were up 4.7% in 2019 compared to the same quarter last year.

46

Table of Contents

During the first quarter of 2019, international emerging market retail sales were up 5.2% driven by growth in numerous markets. Retail sales in developed international markets were down 6.2% in the first quarter. Retail sales in Japan and Australia continued to be weak in the first quarter of 2019 behind contracting industry sales and competitive new product introductions in segments outside of touring and cruisers. The Company continues to support its dealers in these markets with incentives and a strong focus on national test ride campaigns.
The Company's 2019 market share of new 601+cc motorcycles in Europe was 8.8% through March, compared to 10.4% for the same period last year (Source: Association des Constructeurs Europeens de Motocycles).
The Company remains confident in, and committed to, the great potential that international markets offer Harley-Davidson. Furthermore, with its Thailand facility up and running, the Company is excited about the growth opportunities in the ASEAN (Association of Southeast Asian Nations) region now that it can offer more competitive pricing. The Company believes its brand, products and distribution will drive sustainable growth in international markets.(1) 
Motorcycle Registration Data(a) 
The following table includes industry retail motorcycle registration data:
 
Three months ended
 
 
 
 
 
March 31,
2019
 
March 31,
2018
 
(Decrease)
Increase
 
%
Change
United States(b)
54,324

 
57,026

 
(2,702
)
 
(4.7
)%
Europe(c)
111,317

 
93,217

 
18,100

 
19.4
 %
 
(a)
Data includes on-road 601+cc models. On-road 601+cc models include dual purpose models, three-wheeled motorcycles and autocycles. Registration data for Harley-Davidson Street® 500 motorcycles is not included in this table.
(b)
United States industry data is derived from information provided by Motorcycle Industry Council (MIC). This third-party data is subject to revision and update.
(c)
Europe data includes Austria, Belgium, Denmark, Finland, France, Germany, Greece, Italy, Luxembourg, Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, and the United Kingdom. Industry retail motorcycle registration data includes 601+cc models derived from information provided by Association des Constructeurs Europeens de Motocycles (ACEM), an independent agency. This third-party data is subject to revision and update.
Motorcycles and Related Products Segment
Motorcycle Unit Shipments
The following table includes wholesale motorcycle unit shipments for the Motorcycles segment:
 
Three months ended
 
 
 
 
 
March 31, 2019
 
April 1, 2018
 
 
 
 
 
Units
 
Mix %
 
Units
 
Mix %
 
Unit
(Decrease)
Increase
 
Unit
%
Change
United States
34,505

 
58.6
%
 
38,797

 
60.7
%
 
(4,292
)
 
(11.1
)%
International
24,386

 
41.4
%
 
25,147

 
39.3
%
 
(761
)
 
(3.0
)
Harley-Davidson motorcycle units
58,891

 
100.0
%
 
63,944

 
100.0
%
 
(5,053
)
 
(7.9
)%
Touring motorcycle units
25,043

 
42.5
%
 
30,857

 
48.3
%
 
(5,814
)
 
(18.8
)%
Cruiser motorcycle units
20,451

 
34.7
%
 
21,554

 
33.7
%
 
(1,103
)
 
(5.1
)
Sportster® / Street motorcycle units
13,397

 
22.8
%
 
11,533

 
18.0
%
 
1,864

 
16.2

Harley-Davidson motorcycle units
58,891

 
100.0
%
 
63,944

 
100.0
%
 
(5,053
)
 
(7.9
)%
 
 The Company shipped 58,891 Harley-Davidson motorcycles worldwide during the first quarter of 2019, which was 7.9% lower than the same period in 2018. The mix of Touring motorcycles decreased as a percent of total shipments while the mix of Cruiser and Sportster®/Street motorcycles increased compared to the same period last year. The mix of Touring motorcycles in 2019 was down compared to 2018 due to the relatively high shipment mix of Touring motorcycles in the first quarter of 2018. In addition, during the first quarter of 2019, Sportster shipments as a percent of total shipments were up behind an improved retail sales rate compared to the same period last year.

47

Table of Contents

U.S. retail inventory of new Harley-Davidson motorcycles at the end of the first quarter of 2019 was down approximately 3,450 motorcycles compared to the end of the first quarter of 2018. The Company is very pleased with dealer inventory levels and the mix of products in the field as it moves into the height of the selling season. The Company believes its market discipline is important in maintaining customer and dealer value and will ultimately result in stronger retail sales of new motorcycles.(1) 
Segment Results
The following table includes the condensed statements of operations for the Motorcycles segment (in thousands):
 
Three months ended
 
 
 
 
 
March 31, 2019
 
April 1, 2018
 
(Decrease)
Increase
 
%
Change
Revenue:
 
 
 
 
 
 
 
Motorcycles
$
964,575

 
$
1,121,673

 
$
(157,098
)
 
(14.0
)%
Parts & Accessories
159,703

 
169,075

 
(9,372
)
 
(5.5
)
General Merchandise
55,401

 
56,601

 
(1,200
)
 
(2.1
)
Licensing
8,577

 
8,358

 
219

 
2.6

Other
7,381

 
8,240

 
(859
)
 
(10.4
)
Total revenue
1,195,637

 
1,363,947

 
(168,310
)
 
(12.3
)
Cost of goods sold
848,198

 
890,174

 
(41,976
)
 
(4.7
)
Gross profit
347,439

 
473,773

 
(126,334
)
 
(26.7
)
Operating expenses:
 
 
 
 
 
 
 
Selling & administrative expense
176,544

 
207,544

 
(31,000
)
 
(14.9
)
Engineering expense
48,884

 
46,549

 
2,335

 
5.0

Restructuring expense
13,630

 
46,842

 
(33,212
)
 
(70.9
)
Operating expense
239,058

 
300,935

 
(61,877
)
 
(20.6
)
Operating income from Motorcycles
$
108,381

 
$
172,838

 
$
(64,457
)
 
(37.3
)%
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 2018 to the first quarter of 2019 (in millions):
 
Net
Revenue
 
Cost of
Goods Sold
 
Gross
Profit
Three months ended April 1, 2018
$
1,363.9

 
$
890.1

 
$
473.8

Volume
(108.1
)
 
(66.7
)
 
(41.4
)
Price, net of related costs
23.2

 
6.8

 
16.4

Foreign currency exchange rates and hedging
(29.8
)
 
(14.7
)
 
(15.1
)
Shipment mix
(53.6
)
 
(14.3
)
 
(39.3
)
Raw material prices

 
3.1

 
(3.1
)
Manufacturing and other costs

 
43.9

 
(43.9
)
Total
(168.3
)
 
(41.9
)
 
(126.4
)
Three months ended March 31, 2019
$
1,195.6

 
$
848.2

 
$
347.4

The following factors affected the comparability of net revenue, cost of goods sold and gross profit from the first quarter of 2018 to the first quarter of 2019:
The decrease in revenue and gross profit related to volume was due primarily to lower wholesale motorcycle shipments, lower P&A sales and an increased level of motorcycle sales support.
On average, wholesale prices for motorcycles shipped in the current period were higher than in the same period last year resulting in a favorable impact on revenue. The positive impact on revenue was partially offset by increased costs related to the additional content added to motorcycles shipped in the current period as compared to the same period last year.
Revenue was adversely impacted by weaker foreign currency exchange rates, relative to the U.S. dollar, as compared to the same period last year. The unfavorable revenue impact was partially offset by higher net foreign currency gains due primarily to foreign currency hedging, as compared to the prior year.

48

Table of Contents

Changes in the shipment mix of motorcycle families, as well as the mix of models within motorcycle families, had an adverse impact on revenue and gross profit during the quarter.
Raw material prices were higher primarily due to increased steel costs.
Manufacturing and other costs were negatively impacted by lower fixed cost absorption due to lower production, temporary inefficiencies and the cost of incremental tariffs. Costs associated with incremental tariffs implemented in mid-2018 were $21.0 million during the first quarter of 2019. Temporary inefficiencies associated with the Manufacturing Optimization Plan were $3.6 million and $0.7 million in the first quarters of 2019 and 2018, respectively.
Operating expenses were lower in the first quarter of 2019 compared to the prior year driven by lower restructuring expenses and favorable net warranty and recall costs. In the first quarter of 2019, net warranty and recall costs were approximately $35 million lower than prior year, driven by higher than normal recoveries and lower warranty costs.
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 31, 2019
 
April 1, 2018
 
Increase
(Decrease)
 
%
Change
Interest income
$
159,804

 
$
154,041

 
$
5,763

 
3.7
 %
Other income
28,750

 
23,781

 
4,969

 
20.9

Securitization and servicing fee income
189

 
352

 
(163
)
 
(46.3
)
Financial Services revenue
188,743

 
178,174

 
10,569

 
5.9

Interest expense
52,324

 
48,450

 
3,874

 
8.0

Provision for credit losses
34,491

 
30,052

 
4,439

 
14.8

Operating expenses
43,197

 
36,093

 
7,104

 
19.7

Financial Services expense
130,012

 
114,595

 
15,417

 
13.5

Operating income from Financial Services
$
58,731

 
$
63,579

 
$
(4,848
)
 
(7.6
)%
Interest income was favorable in the first quarter of 2019 primarily due to higher average retail receivables at a higher average yield. Other income was favorable primarily due to higher investment income and insurance related revenue.
Interest expense increased due to higher average outstanding debt and a higher cost of funds.
The provision for credit losses increased $4.4 million compared to the first quarter of 2018. The retail motorcycle provision increased $4.9 million driven by higher retail credit losses, a flat retail reserve rate as compared to a decrease in the reserve rate during the first quarter of 2018, and a smaller decrease in retail receivables as compared to the first quarter of 2018.
Annualized credit losses for the Company's retail motorcycle loans were 2.22% through March 31, 2019 compared to 2.15% through April 1, 2018. The 30-day delinquency rate for retail motorcycle loans at March 31, 2019 was 3.73% compared to 3.31% at April 1, 2018. The Company believes inefficiencies resulting from the implementation of a new loan management system were a driver for the higher delinquency rate. The Company expects these inefficiencies to be temporary.
Operating expenses increased $7.1 million compared to the first quarter of 2018 driven by higher depreciation associated with the implementation of a new loan management system as well as higher consulting expenses.
Changes in the allowance for credit losses on finance receivables were as follows (in thousands):
 
Three months ended
 
March 31,
2019
 
April 1,
2018
Balance, beginning of period
$
189,885

 
$
192,471

Provision for credit losses
34,491

 
30,052

Charge-offs, net of recoveries
(33,504
)
 
(32,173
)
Balance, end of period
$
190,872

 
$
190,350


49

Table of Contents

Other Matters
Contractual Obligations
The Company has updated the contractual obligations table under the caption “Contractual Obligations” in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations of the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 as of March 31, 2019 to reflect the new projected principal and interest payments for the remainder of 2019 and beyond as follows (in thousands):
 
2019
 
2020-2021
 
2022-2023
 
Thereafter
 
Total
Principal payments on debt
$
1,912,597

 
$
3,104,227

 
$
1,564,436

 
$
750,000

 
$
7,331,260

Interest payments on debt
142,180

 
272,995

 
112,046

 
336,750

 
863,971

 
$
2,054,777

 
$
3,377,222

 
$
1,676,482

 
$
1,086,750

 
$
8,195,231

Interest obligations for floating rate instruments, as calculated above, assume rates in effect at March 31, 2019 remain constant. For purposes of the above, the principal payment balances for medium-term notes, on-balance sheet asset-backed securitizations, and senior unsecured notes are shown without reduction for debt issuance costs. Refer to Note 12 for a breakout of the finance costs consistent with ASU No. 2015-03.
As of March 31, 2019, there have been no other material changes to the Company’s summary of expected payments for significant contractual obligations in the contractual obligations table in the Company's Annual Report on Form 10-K for the year ended December 31, 2018.
Commitments and Contingencies
The Company is subject to lawsuits and other claims related to environmental, product and other matters. In determining costs to accrue related to these items, the Company carefully analyzes cases and considers the likelihood of adverse judgments or outcomes, as well as the potential range of possible loss. Any amounts accrued for these matters are monitored on an ongoing basis and are updated based on new developments or new information as it becomes available for each matter.
Environmental Protection Agency Notice:
In December 2009, the Company received formal, written requests for information from the United States Environmental Protection Agency (EPA) regarding: (i) certificates of conformity for motorcycle emissions and related designations and labels, (ii) aftermarket parts, and (iii) warranty claims on emissions related components. The Company promptly submitted written responses to the EPA’s inquiry and has engaged in information exchanges and discussions with the EPA. In August 2016, the Company entered into a consent decree with the EPA regarding these issues, and the consent decree was subsequently revised in July 2017 (the Settlement). In the Settlement, the Company agreed to, among other things, pay a fine, and not sell tuning products unless they are approved by the EPA or California Air Resources Board. In December 2017, the Department of Justice (DOJ), on behalf of the EPA, filed the Settlement with the U.S. District Court for the District of Columbia for the purpose of obtaining court approval of the Settlement. Three amicus briefs opposing portions of the Settlement were filed with the court by the deadline of January 31, 2018. On March 1, 2018, the Company and the DOJ each filed separate response briefs. The Company is awaiting the court's decision on whether or not to finalize the Settlement, and on February 8, 2019, the DOJ filed a status update reminding the court of the current status of the outstanding matter. The Company has an accrual associated with this matter which is included in Accrued liabilities on the consolidated balance sheets, and as a result, if it is finalized, the Settlement would not have a material adverse effect on the Company's financial condition or results of operations. The Settlement is not final until it is approved by the court, and if it is not approved by the court, the Company cannot reasonably estimate the impact of any remedies the EPA might seek beyond the Company's current reserve for this matter.
York Environmental Matters:
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. The Company has been working with the Pennsylvania Department of Environmental Protection (PADEP) since 1986 and with the U.S. Environmental Protection Agency (EPA) in undertaking environmental investigation and remediation activities, including a site-wide remedial investigation/feasibility study (RI/FS).

50

Table of Contents

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 an accrual for its estimate of its share of the future Response Costs at the York facility which is included in Other long-term liabilities on the consolidated balance sheets. While the work on the RI/FS is now complete and the final remedy was proposed in late 2018, it has not yet been approved, and given the uncertainty that exists concerning the nature and scope of additional environmental remediation that may ultimately be required under the approved final remedy, 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.
Off-Balance Sheet Arrangements
The Company participates in asset-backed financing both through asset-backed securitization transactions and through asset-backed commercial paper conduit facilities. In the Company's asset-backed financing programs, the Company transfers retail motorcycle finance receivables to special purpose entities (SPEs), which are considered 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. For more information, see Note 13.
Liquidity and Capital Resources as of March 31, 2019(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 return cash to its shareholders through increasing dividends and repurchasing shares. The Company believes the Motorcycles operations will continue to be primarily funded through cash flows generated by operations.(1) The Company expects the Financial Services operations to continue to be funded with unsecured debt, unsecured commercial paper, asset-backed commercial paper conduit facilities, committed unsecured bank facilities, and asset-backed securitizations.

51

Table of Contents

The Company’s strategy is to maintain a minimum of twelve months of its projected liquidity needs through a combination of cash and cash equivalents and availability under credit facilities. The following table summarizes the Company’s cash and availability under credit and conduit facilities (in thousands):
 
March 31, 2019
Cash and cash equivalents
$
749,600

Current marketable securities
10,003

Total cash and cash equivalents and marketable securities
759,603

 
 
Credit facilities
352,075

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

Asset-backed Canadian commercial paper conduit facility(a)
22,111

Total availability under credit and conduit facilities
974,186

Total
$
1,733,789

(a)
Includes facilities expiring in the next twelve months which the Company expects to renew prior to expiration.(1) 
The Company recognizes that it must continue to monitor and adjust its business to changes in the lending environment. The Company intends to continue with a diversified funding profile through a combination of short-term and long-term funding vehicles and to pursue a variety of sources to obtain cost-effective funding. The Financial Services operations could be negatively affected by higher costs of funding and increased difficulty of raising, or potential unsuccessful efforts to raise, funding in the short-term and long-term capital markets.(1) These negative consequences could in turn adversely affect the Company’s business and results of operations in various ways, including through higher costs of capital, reduced funds available through its Financial Services operations to provide loans to independent dealers and their retail customers, and dilution to existing shareholders through the use of alternative sources of capital.
Cash Flow Activity
The following table summarizes the cash flow activity for the periods indicated (in thousands):
 
Three months ended
 
March 31, 2019
 
April 1, 2018
Net cash provided by operating activities
$
32,671

 
$
191,594

Net cash used by investing activities
(77,200
)
 
(21,651
)
Net cash used by financing activities
(415,679
)
 
(98,930
)
Effect of exchange rate changes on cash, cash equivalents and restricted cash
(409
)
 
2,034

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


Operating Activities
The decrease in cash provided by operating activities for the first quarter of 2019 compared to the same period in 2018 was primarily due to lower sales and unfavorable changes in working capital. There were no voluntary qualified pension plan contributions in the first quarter of 2018 or 2019 and no contributions are planned for the remainder of 2019.(1) 
Investing Activities
The Company’s most significant investing activities consist of capital expenditures and retail finance originations and collections. Capital expenditures were $35.3 million in the first quarter of 2019 compared to $28.4 million in the same period last year. Net cash outflows for finance receivables for the first quarter of 2019 were $47.3 million higher than the same period last year.

52

Table of Contents

Financing Activities
The Company’s financing activities consist primarily of share repurchases, dividend payments, and debt activity. Cash outflows for share repurchases were $61.7 million in the first quarter of 2019 compared to $73.0 million in the same period last year. Share repurchases during the first three months of 2019 included 1.5 million shares of common stock related to discretionary share repurchases and 0.2 million shares of common stock that employees surrendered to satisfy withholding taxes in connection with the vesting of restricted stock units. As of March 31, 2019, there were 14.9 million shares remaining on a board-approved share repurchase authorization. The Company paid dividends of $0.375 and $0.370 per share totaling $60.9 million and $62.7 million during the first quarter of 2019 and 2018, respectively.
Financing cash flows related to debt activity resulted in net cash outflows of $293.7 million in the first three months of 2019 compared to net cash inflows of $35.1 million in the first three months of 2018. The Company’s total outstanding debt consisted of the following (in thousands):
 
March 31,
2019
 
April 1,
2018
Unsecured commercial paper
$
1,192,925

 
$
1,036,976

Asset-backed Canadian commercial paper conduit facility
142,676

 
158,162

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

 
281,311

Medium-term notes, net
4,685,636

 
4,514,798

Senior unsecured notes, net
742,791

 
742,126

Asset-backed securitization debt, net
18,694

 
284,793

Total debt
$
7,309,669

 
$
7,018,166

To access the debt capital markets, the Company relies on credit rating agencies to assign short-term and long-term credit ratings. Generally, lower credit ratings result in higher borrowing costs and reduced access to debt capital markets. A credit rating agency may change or withdraw the Company’s ratings based on its assessment of the Company’s current and future ability to meet interest and principal repayment obligations. The Company’s short-term debt ratings affect its ability to issue unsecured commercial paper. The Company’s short- and long-term debt ratings as of April 5, 2019 were as follows:
 
Short-Term
 
Long-Term
 
Outlook
Moody’s
P2
 
A3
 
Stable
Standard & Poor’s
A2
 
BBB+
 
Negative
Fitch
F1
 
A
 
Negative
Credit Facilities – In April 2018, the Company entered into a $780.0 million five-year credit facility to replace the $675.0 million five-year credit facility that was due to mature in April 2019 and also terminated the $100.0 million 364-day credit facility that would have matured at the end of April 2018. The new five-year credit facility matures in April 2023. The Company also has a $765.0 million five-year credit facility which matures in April 2021. The two five-year credit facilities (together, the Global Credit Facilities) bear interest at variable rates, which may be adjusted upward or downward depending on certain criteria, such as credit ratings. The Global Credit Facilities also require the Company to pay a fee based on the average daily unused portion of the aggregate commitments under the Global Credit Facilities. The Global Credit Facilities are committed facilities primarily used to support the Company's unsecured commercial paper program. In February 2019, the Company terminated its 364-day $25.0 million credit facility that was due to mature in May 2019.
Unsecured Commercial Paper – Subject to limitations, the Company could issue unsecured commercial paper of up to $1.55 billion as of March 31, 2019 supported by the Global Credit Facilities, as discussed above. Outstanding unsecured commercial paper may not exceed the unused portion of the Global Credit Facilities. Maturities may range up to 365 days from the issuance date. The Company intends to repay unsecured commercial paper as it matures with additional unsecured commercial paper or through other means, such as borrowing under the Global Credit Facilities, borrowing under its asset-backed U.S. commercial paper conduit facilities or through the use of operating cash flow and cash on hand.(1) 

53

Table of Contents

Medium-Term Notes – The Company had the following medium-term notes (collectively, the Notes) issued and outstanding at March 31, 2019 (in thousands):
Principal Amount
 
Rate
 
Issue Date
 
Maturity Date
$600,000
 
2.40%
 
September 2014
 
September 2019
$600,000
 
2.15%
 
February 2015
 
February 2020
$450,000
 
Floating-rate (a)
 
May 2018
 
May 2020
$350,000
 
2.40%
 
March 2017
 
June 2020
$600,000
 
2.85%
 
January 2016
 
January 2021
$450,000
 
Floating-rate(b)
 
November 2018
 
March 2021
$350,000
 
3.55%
 
May 2018
 
May 2021
$550,000
 
4.05%
 
February 2019
 
February 2022
$400,000
 
2.55%
 
June 2017
 
June 2022
$350,000
 
3.35%
 
February 2018
 
February 2023
(a)
Floating interest rate based on LIBOR plus 50 bps. The Company utilized an interest rate swap designated as a cash flow hedge to convert this from a floating rate basis to a fixed rate basis. Refer to Note 10 of the Notes to the Consolidated Financial Statements for further details.
(b)
Floating interest rate based on LIBOR plus 94 bps. The Company utilized an interest rate swap designated as a cash flow hedge to convert this from a floating rate basis to a fixed rate basis. Refer to Note 10 of the Notes to the Consolidated Financial Statements for further details.
The fixed-rate Notes provide for semi-annual interest payments and the floating-rate Notes provide for quarterly interest payments. Principal on the Notes is due at maturity. Unamortized discount and debt issuance costs on the Notes reduced the outstanding balance by $14.4 million and $12.7 million at March 31, 2019 and April 1, 2018, respectively. During the first quarter of 2019, $600.0 million of 2.25% and $150.0 million of floating-rate medium-term notes matured, and the principal and accrued interest were paid in full. There were no medium-term note maturities during the first quarter of 2018.
Senior Unsecured Notes – In July 2015, the Company issued $750.0 million of senior unsecured notes in an underwritten offering. The senior unsecured notes provide for semi-annual interest payments and principal due at maturity. $450.0 million of the senior unsecured notes mature in July 2025 and have an interest rate of 3.50%, and $300.0 million of the senior unsecured notes mature in July 2045 and have an interest rate of 4.625%. The Company used the proceeds from the debt to repurchase shares of its common stock in 2015.
On-Balance Sheet Asset-Backed Canadian Commercial Paper Conduit Facility – The Company has a revolving facility agreement (Canadian Conduit) with a Canadian bank-sponsored asset-backed commercial paper conduit. Under the agreement, the Canadian Conduit is contractually committed, at the Company's option, to purchase from the Company eligible Canadian retail motorcycle finance receivables for proceeds up to C$220.0 million. The transferred assets are restricted as collateral for the payment of the debt. The terms for this facility provide for interest on the outstanding principal based on prevailing market interest rates plus a specified margin. The Canadian Conduit also provides for a program fee and an unused commitment fee based on the unused portion of the total aggregate commitment of C$220.0 million. There is no amortization schedule; however, the debt is reduced monthly as available collections on the related finance receivables are applied to outstanding principal. Upon expiration of the Canadian Conduit, any outstanding principal will continue to be reduced monthly through available collections. The expected remaining term of the related receivables is approximately 5 years. Unless earlier terminated or extended by mutual agreement between the Company and the lenders, as of March 31, 2019, the Canadian Conduit has an expiration date of June 28, 2019.
There were no finance receivable transfers under the Canadian Conduit Facilities during the first quarter of 2019. During the first quarter of 2018, the Company transferred $7.6 million of Canadian retail motorcycle finance receivables to the Canadian Conduit for proceeds of $6.2 million.
On-Balance Sheet Asset-Backed U.S. Commercial Paper Conduit Facilities VIE – The Company has agreements with third-party bank-sponsored asset-backed U.S. commercial paper conduits under which it may transfer U.S. retail motorcycle finance receivables to an SPE, which in turn may issue debt to those third-party bank-sponsored asset-backed U.S. commercial paper conduits. In November 2018, the Company renewed its existing $600.0 million revolving facility agreement with third-party bank-sponsored asset-backed U.S. commercial paper conduits. Also at that time, the Company amended its existing $300.0 million revolving facility agreement with third-party bank-sponsored asset-backed U.S. commercial paper conduits, increasing the aggregate initial commitment to $600.0 million. The aggregate commitment under this agreement is reduced

54

Table of Contents

monthly as collections on the related finance receivables are applied to the outstanding principal until the outstanding principal balance is less than or equal to $300.0 million, at which point the aggregate commitment will equal $300.0 million. Availability under the revolving facilities (together, the U.S. Conduit Facilities) is based on, among other things, the amount of eligible U.S. retail motorcycle finance receivables held by the SPE as collateral.
There were no finance receivable transfers under the U.S. Conduit Facilities during the first quarter of 2019. During the first quarter of 2018, the Company transferred $32.9 million of U.S. retail motorcycle finance receivables to an SPE which, in turn, issued $29.3 million of debt under the U.S. Conduit Facilities.
The terms for this debt provide for interest on the outstanding principal based on prevailing commercial paper rates or LIBOR 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. There is no amortization schedule; however, the debt is reduced monthly as available collections on the related finance receivables are applied to outstanding principal. Upon expiration of the U.S. Conduit Facilities, any outstanding principal will continue to be reduced monthly through available collections. The expected remaining term of the related receivables held by the SPE is approximately 5 years. Unless earlier terminated or extended by mutual agreement of the Company and the lenders, as of March 31, 2019, the U.S. Conduit Facilities have an expiration date of November 29, 2019.
Asset-Backed Securitization VIEs – For all of its asset-backed securitization transactions, the Company transfers U.S. retail motorcycle finance receivables to separate VIEs, which in turn issue secured notes with various maturities and interest rates to investors. All of the notes held by the VIEs are secured by future collections of the purchased U.S. retail motorcycle finance receivables. The U.S. retail motorcycle finance receivables included in the asset-backed securitization transactions are not available to pay other obligations or claims of the Company's creditors until the associated debt and other obligations are satisfied. Restricted cash balances held by the VIEs are used only to support the securitizations.

The accounting treatment for asset-backed securitizations depends on the terms of the related transaction and the Company’s continuing involvement with the VIE. Most of the Company’s asset-backed securitizations do not meet the criteria to be accounted for as a sale because, in addition to retaining servicing rights, the Company retains a financial interest in the VIE in the form of a debt security. These transactions are treated as secured borrowings. As secured borrowings, the retail motorcycle finance receivables remain on the balance sheet with a corresponding obligation reflected as debt. There is no amortization schedule for the secured notes; however, the debt is reduced monthly as available collections on the related retail motorcycle finance receivables are applied to outstanding principal. The secured notes have a contractual life maturing in 2022.
There were no on or off-balance sheet asset-backed securitization transactions during the first quarter of 2019 or 2018.
Support Agreement - The Company has a support agreement with HDFS whereby, if required, the Company agrees to provide HDFS with financial support to maintain HDFS’ fixed-charge coverage at 1.25 and minimum net worth of $40.0 million. Support may be provided at the Company’s option as capital contributions or loans. Accordingly, certain debt covenants may restrict the Company’s ability to withdraw funds from HDFS outside the normal course of business. No amount has ever been provided to HDFS under the support agreement.
Operating and Financial Covenants – HDFS and the Company are subject to various operating and financial covenants related to the credit facilities and various operating covenants under the Notes and the U.S. and Canadian asset-backed commercial paper conduit facilities. The more significant covenants are described below.
The operating covenants limit the Company’s and HDFS’ ability to:
Assume or incur certain liens;
Participate in certain mergers or consolidations; and
Purchase or hold margin stock.
Under the current financial covenants of the Global Credit Facilities, the ratio of HDFS’ consolidated debt, excluding secured debt, to HDFS’ consolidated shareholders' equity, excluding accumulated other comprehensive income (loss), cannot exceed 10.0 to 1.0 as of the end of any fiscal quarter. In addition, the ratio of the Company's consolidated debt to the Company's consolidated debt and consolidated shareholders’ equity (where the Company's consolidated debt in each case excludes that of HDFS and its subsidiaries, and the Company's consolidated shareholders’ equity excludes accumulated other comprehensive income (loss)), cannot exceed 0.7 to 1.0 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 31, 2019, HDFS and the Company remained in compliance with all of the then existing covenants.

55

Table of Contents

Cautionary Statements
The Company's ability to meet the targets and expectations noted above depends upon, among other factors, the Company's ability to (i) execute its business plans and strategies, including the elements of the More Roads to Harley-Davidson plan for growth that the Company disclosed on July 30, 2018, and strengthen its existing business while enabling growth, (ii) manage and predict the impact that new or adjusted tariffs may have on our ability to sell product internationally, and the cost of raw materials and components, (iii) execute its strategy of growing ridership, globally, (iv) effectively execute the Company’s manufacturing optimization initiative within expected costs and timing and successfully carry out its global manufacturing and assembly operations, (v) accurately analyze, predict and react to changing market conditions and successfully adjust to shifting global consumer needs and interests, (vi) negotiate and successfully implement a strategic alliance relationship with a local partner in Asia, (vii) develop and introduce products, services and experiences on a timely basis that the market accepts, that enable the Company to generate desired sales levels and that provide the desired financial returns, (viii) perform in a manner that enables the Company to benefit from market opportunities while competing against existing and new competitors, (ix) realize expectations concerning market demand for electric models, which may depend in part on the building of necessary infrastructure, (x) prevent, detect, and remediate any issues with its motorcycles or any issues associated with manufacturing processes to avoid delays in new model launches, recall campaigns, regulatory agency investigations, increased warranty costs or litigation and adverse effects on its reputation and brand strength, and carry out any product programs or recalls within expected costs and timing, (xi) manage supply chain issues, including quality issues and any unexpected interruptions or price increases caused by raw material shortages or natural disasters, (xii) manage the impact that prices for and supply of used motorcycles may have on its business, including on retail sales of new motorcycles, (xiii) reduce other costs to offset costs of the More Roads to Harley-Davidson plan and redirect capital without adversely affecting its existing business, (xiv) balance production volumes for its new motorcycles with consumer demand, (xv) manage risks that arise through expanding international manufacturing, operations and sales, (xvi) manage through changes in general economic and business conditions, including changing capital, credit and retail markets, and the changing political environment, (xvii) continue to manage the relationships and agreements that the Company has with its labor unions to help drive long-term competitiveness, (xviii) accurately estimate and adjust to fluctuations in foreign currency exchange rates, interest rates and commodity prices, (xix) continue to develop the capabilities of its distributors and dealers, effectively implement changes relating to its dealers and distribution methods and manage the risks that its independent dealers may have difficulty obtaining capital and managing through changing economic conditions and consumer demand, (xx) retain and attract talented employees, (xxi) prevent a cybersecurity breach involving consumer, employee, dealer, supplier, or Company data and respond to evolving regulatory requirements regarding data security, (xxii) manage the credit quality, the loan servicing and collection activities, and the recovery rates of HDFS' loan portfolio, (xxiii) adjust to tax reform, healthcare inflation and reform and pension reform, and successfully estimate the impact of any such reform on the Company’s business, (xxiv) manage through the effects inconsistent and unpredictable weather patterns may have on retail sales of motorcycles, (xxv) implement and manage enterprise-wide information technology systems, including systems at its manufacturing facilities, (xxvi) manage changes and prepare for requirements in legislative and regulatory environments for its products, services and operations, (xxvii) manage its exposure to product liability claims and commercial or contractual disputes, (xxviii) successfully access the capital and/or credit markets on terms (including interest rates) that are acceptable to the Company and within its expectations, (xxix) conduct its operations in Thailand in a manner that sufficiently mitigates certain international tariffs and lowers prices of its motorcycles in certain markets, (xxx) accurately and successfully determine, implement, and maintain a manner in which to sell motorcycles in the E.U., China, and ASEAN countries that is not subject to tariffs; (xxxi) have its application to mitigate E.U. tariffs approved, or the appeal of a denied application acted on in a manner favorable to the Company, and (xxxii) accurately predict the margins of its Motorcycles and Related Products segment in light of, among other things, tariffs, the cost associated with the More Roads to Harley-Davidson plan, the Company's Manufacturing Optimization Plan, and the Company's global supply chain.
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.

56

Table of Contents

In recent years, HDFS has experienced historically low levels of retail credit losses, but there is no assurance that this will continue. The Company believes that HDFS' retail credit losses may increase over time due to changing consumer credit behavior and HDFS' efforts to increase prudently structured loan approvals to sub-prime borrowers, as well as actions that the Company has taken and could take that impact motorcycle values.
Refer to “Risk Factors” under Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 for a discussion of additional risk factors and a more complete discussion of some of the cautionary statements noted above.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to market risk from changes in foreign exchange rates, commodity prices and interest rates. To reduce such risks, the Company selectively uses derivative financial instruments. All hedging transactions are authorized and executed pursuant to regularly reviewed policies and procedures, which prohibit the use of financial instruments for speculative trading purposes. Sensitivity analysis is used to manage and monitor foreign exchange and interest rate risk.
The Company sells its products internationally and in most markets those sales are made in the foreign country’s local currency. As a result, the Company’s earnings are affected by fluctuations in the value of the U.S. dollar relative to foreign currency. The Company’s most significant foreign currency risk relates to the Euro, the Australian dollar, the Japanese yen, the Brazilian real, the Canadian dollar, and the Mexican peso. The Company utilizes foreign currency contracts to mitigate the effect of certain currencies' fluctuations on earnings. The foreign currency contracts are entered into with banks and allow the Company to exchange a specified amount of foreign currency for U.S. dollars at a future date, based on a fixed exchange rate.
The Company's earnings are affected by changes in the prices of commodities used in the production of motorcycles. The Company uses derivative instruments on a limited basis to hedge the prices of certain commodities.
HDFS’ earnings are affected by changes in interest rates. HDFS’ interest-rate sensitive financial instruments include finance receivables, debt and interest rate derivatives. HDFS utilizes interest rate swaps to reduce the impact of fluctuations in interest rates on its debt.
Refer to the Company's Annual Report on Form 10-K for the year ended December 31, 2018 for further information concerning the Company's market risk. There have been no material changes to the market risk information included in the Company's Annual Report on Form 10-K for the year ended December 31, 2018.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
In accordance with Rule 13a-15(b) of the Securities Exchange Act of 1934 (the Exchange Act), as of the end of the period covered by this Quarterly Report on Form 10-Q, the Company’s management evaluated, with the participation of the Company’s President and Chief Executive Officer and the Senior Vice President and Chief Financial Officer, the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act). Based upon their evaluation of these disclosure controls and procedures, the President and Chief Executive Officer and the Senior Vice President and Chief Financial Officer have concluded that the disclosure controls and procedures were effective as of the end of the period covered by this Quarterly Report on Form 10-Q to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time period specified in the Securities and Exchange Commission rules and forms, and to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its President and Chief Executive Officer and Senior Vice President and Chief Financial Officer, as appropriate, to allow timely decisions regarding disclosure.
Changes in Internal Controls
There were no changes in the Company's internal control over financial reporting during the quarter ended March 31, 2019 that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

57

Table of Contents

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 17 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 31, 2019:
2019 Fiscal Month
Total Number of
Shares Purchased (a)
 
Average Price
Paid per Share
 
Total Number of Shares
Purchased as Part of
Publicly Announced
Plans or Programs
 
Maximum Number of
Shares that May Yet Be
Purchased Under the
Plans or Programs
January 1 to February 3
457,779

 
$
34

 
457,779

 
15,952,906

February 4 to March 3
1,254,645

 
$
37

 
1,254,645

 
14,943,706

March 4 to March 31
1,588

 
$
37

 
1,588

 
14,943,706

Total
1,714,012

 
$
36

 
1,714,012

 
 
 
(a)
Includes discretionary share repurchases and shares of common stock that employees surrendered to satisfy withholding taxes in connection with the vesting of restricted stock units
In February 2016, the Company's Board of Directors authorized the Company to repurchase up to 20.0 million shares of its common stock with no dollar limit or expiration date which superseded the share repurchase authority granted by the Board of Directors in December 1997. The Company repurchased 1.4 million shares on a discretionary basis during the quarter ended March 31, 2019 exhausting the remaining shares under this authorization. In February 2018, the Company's Board of Directors authorized the Company to repurchase up to 15.0 million additional shares of its common stock with no dollar limit or expiration date. The Company repurchased 56,294 shares on a discretionary basis during the quarter ended March 31, 2019 under this authorization. As of March 31, 2019, 14.9 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 2019, the Company acquired 247,408 shares of common stock that employees presented to the Company to satisfy withholding taxes in connection with the vesting of restricted stock units.
Item 6 – Exhibits
Refer to the Exhibit Index immediately following this page.


58

Table of Contents

Harley-Davidson, Inc.
Exhibit Index to Form 10-Q

Exhibit No.
 
Description
 
Officers' Certificate, dated February 4, 2019, pursuant to Sections 102 and 301 of the Indenture, dated March 4, 2011, with the form of 4.05% Medium-Term Notes due 2022

 
Chief Executive Officer Certification pursuant to Rule 13a-14(a)
 
Chief Financial Officer Certification pursuant to Rule 13a-14(a)
 
Written Statement of the Chief Executive Officer and the Chief Financial Officer pursuant to 18 U.S.C. §1350
101.INS
 
XBRL Instance Document
101.SCH
 
XBRL Taxonomy Extension Schema Document
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document


59

Table of Contents

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 9, 2019
/s/ John A. Olin
 
John A. Olin
 
Senior Vice President and
 
Chief Financial Officer
 
(Principal financial officer)
 
Date: May 9, 2019
/s/ Mark R. Kornetzke
 
Mark R. Kornetzke
 
Chief Accounting Officer
 
(Principal accounting officer)


60