Document

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 September 24, 2017
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                     to                    
Commission file number 1-9183
 
 
Harley-Davidson, Inc.
(Exact name of registrant as specified in its charter)
 
Wisconsin
 
39-1382325
(State of organization)
 
(I.R.S. Employer Identification No.)
 
 
 
3700 West Juneau Avenue
Milwaukee, Wisconsin
 
53208
(Address of principal executive offices)
 
(Zip code)
Registrants telephone number: (414) 342-4680
None
(Former name, former address and former fiscal year, if changed since last report)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such requirements for the past 90 days.    Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x   No   ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company,” and emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
x
Accelerated filer
 
¨
 
 
 
 
 
Non-accelerated filer
 
¨
Smaller reporting company
 
¨
 
 
 
 
 
 
 
 
 
Emerging growth company
 
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the exchange act. ¨
Indicate by check mark whether the registrant is a shell company as defined in Rule 12b-2 of the Exchange Act.    Yes ¨ No  x
Number of shares of the registrant’s common stock outstanding at October 27, 2017: 168,295,171 shares



Harley-Davidson, Inc.

Form 10-Q

For The Quarter Ended September 24, 2017
 
Part I
 
 
 
Item 1.
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Part II
 
 
 
Item 1.
 
 
 
Item 2.
 
 
 
Item 6.
 
 
 


Table of Contents

PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
HARLEY-DAVIDSON, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)
 
 
Three months ended
 
Nine months ended
 
September 24,
2017
 
September 25,
2016
 
September 24,
2017
 
September 25,
2016
Revenue:
 
 
 
 
 
 
 
Motorcycles and Related Products
$
962,136

 
$
1,091,630

 
$
3,867,982

 
$
4,338,353

Financial Services
189,059

 
183,183

 
550,314

 
547,505

Total revenue
1,151,195

 
1,274,813

 
4,418,296

 
4,885,858

Costs and expenses:
 
 
 
 
 
 
 
Motorcycles and Related Products cost of goods sold
685,161

 
724,611

 
2,537,899

 
2,773,496

Financial Services interest expense
46,169

 
42,573

 
133,866

 
131,387

Financial Services provision for credit losses
29,253

 
36,543

 
99,059

 
97,127

Selling, administrative and engineering expense
293,904

 
292,710

 
857,704

 
904,322

Total costs and expenses
1,054,487

 
1,096,437

 
3,628,528

 
3,906,332

Operating income
96,708

 
178,376

 
789,768

 
979,526

Investment income
1,083

 
2,300

 
2,539

 
3,754

Interest expense
7,896

 
7,706

 
23,295

 
21,968

Income before provision for income taxes
89,895

 
172,970

 
769,012

 
961,312

Provision for income taxes
21,686

 
58,905

 
255,567

 
316,327

Net income
$
68,209

 
$
114,065

 
$
513,445

 
$
644,985

Earnings per common share:
 
 
 
 
 
 
 
Basic
$
0.40

 
$
0.64

 
$
2.96

 
$
3.57

Diluted
$
0.40

 
$
0.64

 
$
2.95

 
$
3.55

Cash dividends per common share
$
0.365

 
$
0.350

 
$
1.095

 
$
1.050

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


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Table of Contents

HARLEY-DAVIDSON, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
 
 
Three months ended
 
Nine months ended
 
September 24,
2017
 
September 25,
2016
 
September 24,
2017
 
September 25,
2016
Net income
$
68,209

 
$
114,065

 
$
513,445

 
$
644,985

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
  Foreign currency translation adjustments
25,013

 
3,853

 
50,207

 
19,174

  Derivative financial instruments
(17,407
)
 
(2,031
)
 
(36,871
)
 
(7,374
)
  Marketable securities

 
(11
)
 
1,194

 
(88
)
  Pension and postretirement benefit plans
7,257

 
7,572

 
21,769

 
22,715

Total other comprehensive income, net of tax
14,863

 
9,383

 
36,299

 
34,427

Comprehensive income
$
83,072

 
$
123,448

 
$
549,744

 
$
679,412

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



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Table of Contents

HARLEY-DAVIDSON, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
 
(Unaudited)
 
 
 
(Unaudited)
 
September 24,
2017
 
December 31,
2016
 
September 25,
2016
ASSETS
 
 
 
 
 
Current assets:
 
 
 
 
 
Cash and cash equivalents
$
683,134

 
$
759,984

 
$
790,284

Marketable securities

 
5,519

 
5,038

Accounts receivable, net
343,124

 
285,106

 
346,176

Finance receivables, net
2,058,168

 
2,076,261

 
2,205,644

Inventories
469,091

 
499,917

 
426,547

Restricted cash
52,209

 
52,574

 
65,088

Deferred income taxes

 

 
123,609

Other current assets
182,416

 
174,491

 
139,958

Total current assets
3,788,142

 
3,853,852

 
4,102,344

Finance receivables, net
5,042,857

 
4,759,197

 
4,944,322

Property, plant and equipment, net
934,615

 
981,593

 
954,475

Goodwill
55,898

 
53,391

 
54,663

Deferred income taxes
180,575

 
167,729

 
80,831

Other long-term assets
86,272

 
74,478

 
75,591

 
$
10,088,359

 
$
9,890,240

 
$
10,212,226

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
 
Current liabilities:
 
 
 
 
 
Accounts payable
$
277,117

 
$
235,318

 
$
291,594

Accrued liabilities
573,958

 
486,652

 
506,533

Short-term debt
834,875

 
1,055,708

 
1,055,428

Current portion of long-term debt, net
1,530,401

 
1,084,884

 
700,152

Total current liabilities
3,216,351

 
2,862,562

 
2,553,707

Long-term debt, net
4,607,791

 
4,666,975

 
5,170,609

Pension liability
52,471

 
84,442

 
120,494

Postretirement healthcare liability
162,925

 
173,267

 
182,825

Other long-term liabilities
192,001

 
182,836

 
192,223

Commitments and contingencies (Note 16)

 

 

Shareholders’ equity:
 
 
 
 
 
Preferred stock, none issued

 

 

Common stock
1,813

 
1,806

 
3,454

Additional paid-in-capital
1,413,254

 
1,381,862

 
1,364,694

Retained earnings
1,660,997

 
1,337,673

 
9,416,583

Accumulated other comprehensive loss
(529,082
)
 
(565,381
)
 
(580,778
)
Treasury stock, at cost
(690,162
)
 
(235,802
)
 
(8,211,585
)
Total shareholders’ equity
1,856,820

 
1,920,158

 
1,992,368

 
$
10,088,359

 
$
9,890,240

 
$
10,212,226



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Table of Contents

HARLEY-DAVIDSON, INC.
CONSOLIDATED BALANCE SHEETS (continued)
(In thousands)
 
(Unaudited)
 
 
 
(Unaudited)
 
September 24,
2017
 
December 31,
2016
 
September 25,
2016
Balances held by consolidated variable interest entities (Note 10)
 
 
 
 
 
Current finance receivables, net
$
204,873

 
$
225,289

 
$
236,561

Other assets
$
2,440

 
$
2,781

 
$
3,043

Non-current finance receivables, net
$
579,936

 
$
643,047

 
$
754,970

Restricted cash - current and non-current
$
55,307

 
$
57,057

 
$
69,364

Current portion of long-term debt, net
$
225,267

 
$
241,396

 
$
261,188

Long-term debt, net
$
484,874

 
$
554,879

 
$
664,431

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

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Table of Contents

HARLEY-DAVIDSON, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
Nine months ended
 
September 24,
2017
 
September 25,
2016
Net cash provided by operating activities (Note 3)
$
949,075

 
$
927,809

Cash flows from investing activities:
 
 
 
Capital expenditures
(114,022
)
 
(162,726
)
Origination of finance receivables
(2,927,372
)
 
(3,009,479
)
Collections on finance receivables
2,480,122

 
2,440,466

Proceeds from finance receivables sold

 
312,571

Sales and redemptions of marketable securities
6,916

 
40,014

Other
356

 
251

Net cash used by investing activities
(554,000
)
 
(378,903
)
Cash flows from financing activities:
 
 
 
Proceeds from issuance of medium-term notes
893,668

 
1,193,396

Repayments of medium-term notes
(400,000
)
 
(451,336
)
Repayments of securitization debt
(367,298
)
 
(535,616
)
Borrowings of asset-backed commercial paper
371,253

 
33,428

Repayments of asset-backed commercial paper
(129,690
)
 
(55,170
)
Net decrease in credit facilities and unsecured commercial paper
(225,038
)
 
(146,328
)
Net change in restricted cash
3,767

 
30,981

Dividends paid
(190,121
)
 
(190,387
)
Purchase of common stock for treasury
(465,167
)
 
(374,234
)
Excess tax benefits from share-based payments

 
1,291

Issuance of common stock under employee stock option plans
7,884

 
6,444

Net cash used by financing activities
(500,742
)
 
(487,531
)
Effect of exchange rate changes on cash and cash equivalents
28,817

 
6,700

Net (decrease) increase in cash and cash equivalents
$
(76,850
)
 
$
68,075

Cash and cash equivalents:
 
 
 
Cash and cash equivalents—beginning of period
$
759,984

 
$
722,209

Net (decrease) increase in cash and cash equivalents
(76,850
)
 
68,075

Cash and cash equivalents—end of period
$
683,134

 
$
790,284

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


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Table of Contents

HARLEY-DAVIDSON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation and Use of Estimates
The consolidated financial statements include the accounts of Harley-Davidson, Inc. and its wholly-owned subsidiaries (the Company), including the accounts of the groups of companies doing business as Harley-Davidson Motor Company (HDMC) and Harley-Davidson Financial Services (HDFS). In addition, certain variable interest entities (VIEs) related to secured financing are consolidated as the Company is the primary beneficiary. All intercompany accounts and material intercompany transactions are eliminated.
In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the consolidated balance sheets as of September 24, 2017 and September 25, 2016, the consolidated statements of income for the three and nine month periods then ended, the consolidated statements of comprehensive income for the three and nine month periods then ended and the consolidated statements of cash flows for the nine month periods then ended.
Certain information and footnote disclosures normally included in complete financial statements have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) and U.S. generally accepted accounting principles (U.S. GAAP) for interim financial reporting. These consolidated financial statements should be read in conjunction with the audited financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.
The Company operates in two reportable segments: Motorcycles & Related Products (Motorcycles) and Financial Services.
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. Actual results could differ from those estimates.
2. New Accounting Standards
Accounting Standards Recently Adopted
In March 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-09 Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (ASU 2016-09). ASU 2016-09 amends the guidance on several aspects of accounting for share-based payment transactions, including income tax consequences, classification of awards as either equity or liabilities, accounting for forfeitures, and classification on the statement of cash flows. The Company adopted ASU 2016-09 on January 1, 2017. The Company elected to apply the amendments related to the classification of excess tax benefits on the statement of cash flows on a prospective basis, and prior periods were not adjusted. The adoption of ASU 2016-09 did not have a material impact on the Company's consolidated financial statements.
In July 2015, the FASB issued ASU No. 2015-11 Inventory (Topic 330): Simplifying the Measurement of Inventory (ASU 2015-11). ASU 2015-11 simplifies the subsequent measurement of inventory by using only the lower of cost or net realizable value. ASU 2015-11 does not apply to inventory measured using the last-in, first-out method. The Company adopted ASU 2015-11 on January 1, 2017. The adoption of ASU 2015-11 did not have a material impact on the Company’s consolidated financial statements.
Accounting Standards Not Yet Adopted
In May 2014, the FASB issued ASU No. 2014-09 Revenue from Contracts with Customers (ASU 2014-09). ASU 2014-09 is a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In August 2015, the FASB issued ASU No. 2015-14 Revenue from Contracts with Customers: Deferral of Effective Date (ASU 2015-14) to defer the effective date of the new revenue recognition standard by one year to fiscal years beginning after December 15, 2017 and interim periods therein. The guidance may be adopted using either a full retrospective or modified retrospective approach. The Company expects to adopt the new revenue recognition guidance using the modified retrospective method. The Company's efforts to evaluate the impact of the standard and to prepare for its adoption on January 1, 2018 are well underway. Based on the work completed to date (which includes the review of significant revenue sources), the Company expects the recognition of revenue for sales of motorcycles, parts and accessories and general

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

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

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restricted cash would be excluded from the change in cash flows from financing activities and included in the change in total cash, restricted cash and cash equivalents as reported in the statement of cash flows.

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

In March 2017, the FASB issued ASU No. 2017-07 Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost (ASU 2017-07). ASU 2017-07 amends ASC 715, Compensation - Retirement Benefits by requiring employers to present the service cost component of net periodic benefit cost in the same income statement line item as other employee compensation costs arising from services rendered during the period. Other components of the net periodic benefit cost will be presented separately from the line item that includes the service cost and outside of any subtotal of operating income. The guidance also limits the components that are eligible for capitalization in assets. The Company is required to adopt ASU 2017-07 for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted as of the beginning of an annual period for which interim or annual financial statements have not been issued or made available for issuance. The amendments related to the presentation of the components of net periodic benefit cost should be applied retrospectively. The amendments related to the capitalization of certain components in assets should be applied prospectively. The Company's net periodic benefit cost components are disclosed in Note 14.

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 is required to adopt ASU 2017-12 for fiscal years beginning after December 15, 2018, and for interim periods within those fiscal years. Early adoption is permitted in any interim period after issuance of the ASU. For cash flow and net investment hedges existing at the date of adoption, the Company must apply a cumulative-effect adjustment as of the beginning of the fiscal year in which the standard is adopted. The amendments related to presentation and disclosure are required prospectively. The Company is currently evaluating the impact of adoption of ASU 2017-12.
3. Additional Balance Sheet and Cash Flow Information
Marketable Securities
The Company’s marketable securities consisted of the following (in thousands):
 
September 24,
2017
 
December 31,
2016
 
September 25,
2016
Available-for-sale securities: corporate bonds
$

 
$
5,519

 
$
5,038

Trading securities: mutual funds
45,726

 
38,119

 
39,063

Total marketable securities
$
45,726

 
$
43,638

 
$
44,101

The Company’s available-for-sale securities are carried at fair value with any unrealized gains or losses reported in other comprehensive income. During the first nine months of 2017 and 2016, unrealized losses were not material. There were no available-for-sale securities outstanding at September 24, 2017.
The Company's trading securities relate to investments held by the Company to fund certain deferred compensation obligations. The trading securities are carried at fair value with gains and losses recorded in net income, and investments are included in other long-term assets on the consolidated balance sheets.



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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):
 
September 24,
2017
 
December 31,
2016
 
September 25,
2016
Raw materials and work in process
$
155,947

 
$
140,639

 
$
159,209

Motorcycle finished goods
232,141

 
285,281

 
182,019

Parts and accessories and general merchandise
129,270

 
122,264

 
134,587

Inventory at lower of FIFO cost or net realizable value
517,358

 
548,184

 
475,815

Excess of FIFO over LIFO cost
(48,267
)
 
(48,267
)
 
(49,268
)
Total inventories, net
$
469,091

 
$
499,917

 
$
426,547

Operating Cash Flow
The reconciliation of net income to net cash provided by operating activities is as follows (in thousands):
 
Nine months ended
 
September 24,
2017
 
September 25,
2016
Cash flows from operating activities:
 
 
 
Net income
$
513,445

 
$
644,985

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization of intangibles
163,974

 
154,565

Amortization of deferred loan origination costs
62,052

 
65,445

Amortization of financing origination fees
6,112

 
7,212

Provision for long-term employee benefits
22,427

 
28,508

Employee benefit plan contributions and payments
(43,060
)
 
(47,658
)
Stock compensation expense
25,581

 
24,909

Net change in wholesale finance receivables related to sales
36,678

 
(169,599
)
Provision for credit losses
99,059

 
97,127

Gain on off-balance sheet asset-backed securitization

 
(9,269
)
Loss on debt extinguishment

 
118

Deferred income taxes
(5,151
)
 
(11,261
)
Other, net
(11,122
)
 
(23,270
)
Changes in current assets and liabilities:
 
 
 
Accounts receivable, net
(29,167
)
 
(86,796
)
Finance receivables - accrued interest and other
317

 
364

Inventories
50,016

 
173,975

Accounts payable and accrued liabilities
88,758

 
97,190

Derivative instruments
2,752

 
(1,992
)
Other
(33,596
)
 
(16,744
)
Total adjustments
435,630

 
282,824

Net cash provided by operating activities
$
949,075

 
$
927,809


11

Table of Contents

4. Finance Receivables
The Company provides retail financial services to customers of the Company’s independent dealers in the United States and Canada. The origination of retail loans is a separate and distinct transaction between the Company and the retail customer, unrelated to the Company’s sale of product to its dealers. Retail finance receivables consist of secured promissory notes and secured installment sales contracts. The Company holds either titles or liens on titles to vehicles financed by promissory notes and installment sales contracts.
The Company offers wholesale financing to the Company’s independent dealers. Wholesale loans to dealers are generally secured by financed inventory or property and are originated in the U.S. and Canada.
Finance receivables, net, consisted of the following (in thousands):
 
September 24,
2017
 
December 31,
2016
 
September 25,
2016
Retail
$
6,336,447

 
$
5,982,211

 
$
6,165,999

Wholesale
960,160

 
1,026,590

 
1,155,483

Total finance receivables
7,296,607

 
7,008,801

 
7,321,482

Allowance for credit losses
(195,582
)
 
(173,343
)
 
(171,516
)
Finance receivables, net
$
7,101,025

 
$
6,835,458

 
$
7,149,966

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

12

Table of Contents

Changes in the allowance for credit losses on finance receivables by portfolio were as follows (in thousands):
 
Three months ended September 24, 2017
 
Retail
 
Wholesale
 
Total
Balance, beginning of period
$
185,899

 
$
7,629

 
$
193,528

Provision for credit losses
30,964

 
(1,711
)
 
29,253

Charge-offs
(37,783
)
 

 
(37,783
)
Recoveries
10,584

 

 
10,584

Balance, end of period
$
189,664

 
$
5,918

 
$
195,582

 
 
 
 
 
 
 
Three months ended September 25, 2016
 
Retail
 
Wholesale
 
Total
Balance, beginning of period
$
152,998

 
$
8,355

 
$
161,353

Provision for credit losses
38,143

 
(1,600
)
 
36,543

Charge-offs
(35,749
)
 

 
(35,749
)
Recoveries
9,369

 

 
9,369

Balance, end of period
$
164,761

 
$
6,755

 
$
171,516

 
 
 
 
 
 
 
Nine months ended September 24, 2017
 
Retail
 
Wholesale
 
Total
Balance, beginning of period
$
166,810

 
$
6,533

 
$
173,343

Provision for credit losses
99,674

 
(615
)
 
99,059

Charge-offs
(114,081
)
 

 
(114,081
)
Recoveries
37,261

 

 
37,261

Balance, end of period
$
189,664

 
$
5,918

 
$
195,582

 
 
 
 
 
 
 
Nine months ended September 25, 2016
 
Retail
 
Wholesale
 
Total
Balance, beginning of period
$
139,320

 
$
7,858

 
$
147,178

Provision for credit losses
98,230

 
(1,103
)
 
97,127

Charge-offs
(101,853
)
 

 
(101,853
)
Recoveries
32,355

 

 
32,355

Other (a)
(3,291
)
 

 
(3,291
)
Balance, end of period
$
164,761

 
$
6,755

 
$
171,516

(a)
Related to the sale of finance receivables with a principal balance of $301.8 million through an off-balance sheet asset-backed securitization transaction (see Note 10 for additional information).
Finance receivables are considered impaired when management determines it is probable that the Company will be unable to collect all amounts due according to the terms of the loan agreement. Portions of the allowance for credit losses are established to cover estimated losses on finance receivables specifically identified for impairment. The unspecified portion of the allowance for credit losses covers estimated losses on finance receivables which are collectively reviewed for impairment.
The retail portfolio primarily consists of a large number of small balance, homogeneous finance receivables. The Company performs a periodic and systematic collective evaluation of the adequacy of the retail allowance for credit losses. The Company utilizes loss forecast models which consider a variety of factors including, but not limited to, historical loss trends, origination or vintage analysis, known and inherent risks in the portfolio, the value of the underlying collateral, recovery rates, and current economic conditions including items such as unemployment rates. Retail finance receivables are not evaluated individually for impairment prior to charge-off and, therefore, are not reported as impaired loans.
The wholesale portfolio is primarily composed of large balance, non-homogeneous loans. The Company’s evaluation for the wholesale allowance for credit losses is first based on a loan-by-loan review. A specific allowance for credit losses is established for wholesale finance receivables determined to be individually impaired when management concludes that the borrower will not be able to make full payment of the contractual amounts due based on the original terms of the loan

13

Table of Contents

agreement. The impairment is determined based on the cash that the Company expects to receive discounted at the loan’s original interest rate or the fair value of the collateral, if the loan is collateral-dependent. Finance receivables in the wholesale portfolio that are not considered impaired on an individual basis are segregated, based on similar risk characteristics, according to the Company’s internal risk rating system and collectively evaluated for impairment. The related allowance for credit losses is based on factors such as the specific borrower’s financial performance and ability to repay, the Company’s past loan loss experience, current economic conditions, and the value of the underlying collateral.
Generally, it is the Company’s policy not to change the terms and conditions of finance receivables. However, to minimize the economic loss, the Company may modify certain finance receivables in troubled debt restructurings. Total restructured finance receivables are not significant.
The allowance for credit losses and finance receivables by portfolio, segregated by those amounts that are individually evaluated for impairment and those that are collectively evaluated for impairment, was as follows (in thousands):
 
September 24, 2017
 
Retail
 
Wholesale
 
Total
Allowance for credit losses, ending balance:
 
 
 
 
 
Individually evaluated for impairment
$

 
$

 
$

Collectively evaluated for impairment
189,664

 
5,918

 
195,582

Total allowance for credit losses
$
189,664

 
$
5,918

 
$
195,582

Finance receivables, ending balance:
 
 
 
 
 
Individually evaluated for impairment
$

 
$

 
$

Collectively evaluated for impairment
6,336,447

 
960,160

 
7,296,607

Total finance receivables
$
6,336,447

 
$
960,160

 
$
7,296,607

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

 
$

 
$

Collectively evaluated for impairment
166,810

 
6,533

 
173,343

Total allowance for credit losses
$
166,810

 
$
6,533

 
$
173,343

Finance receivables, ending balance:
 
 
 
 
 
Individually evaluated for impairment
$

 
$

 
$

Collectively evaluated for impairment
5,982,211

 
1,026,590

 
7,008,801

Total finance receivables
$
5,982,211

 
$
1,026,590

 
$
7,008,801

 
 
 
 
 
 
 
September 25, 2016
 
Retail
 
Wholesale
 
Total
Allowance for credit losses, ending balance:
 
 
 
 
 
Individually evaluated for impairment
$

 
$

 
$

Collectively evaluated for impairment
164,761

 
6,755

 
171,516

Total allowance for credit losses
$
164,761

 
$
6,755

 
$
171,516

Finance receivables, ending balance:
 
 
 
 
 
Individually evaluated for impairment
$

 
$

 
$

Collectively evaluated for impairment
6,165,999

 
1,155,483

 
7,321,482

Total finance receivables
$
6,165,999

 
$
1,155,483

 
$
7,321,482

There were no wholesale finance receivables at September 24, 2017, December 31, 2016, or September 25, 2016 that were individually deemed to be impaired under ASC Topic 310, “Receivables.”
Retail finance receivables are contractually delinquent if the minimum payment is not received by the specified due date. Retail finance receivables are generally charged-off when the receivable is 120 days or more delinquent, the related asset is repossessed or the receivable is otherwise deemed uncollectible. All retail finance receivables accrue interest until either

14

Table of Contents

collected or charged-off. Accordingly, as of September 24, 2017December 31, 2016 and September 25, 2016, all retail finance receivables were accounted for as interest-earning receivables, of which $32.7 million, $40.4 million and $31.3 million, respectively, were 90 days or more past due.
Wholesale finance receivables are delinquent if the minimum payment is not received by the contractual due date. Wholesale finance receivables are written down once management determines that the specific borrower does not have the ability to repay the loan in full. Interest continues to accrue on past due finance receivables until the date the finance receivable becomes uncollectible and the finance receivable is placed on non-accrual status. The Company will resume accruing interest on these accounts when payments are current according to the terms of the loans and future payments are reasonably assured. While on non-accrual status, all cash received is applied to principal or interest as appropriate. There were no wholesale receivables on non-accrual status at September 24, 2017, December 31, 2016 or September 25, 2016. At September 24, 2017December 31, 2016 and September 25, 2016, $1.3 million, $0.3 million, and $0.4 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):
 
September 24, 2017
 
Current
 
31-60 Days
Past Due
 
61-90 Days
Past Due
 
Greater than
90 Days
Past Due
 
Total
Past Due
 
Total
Finance
Receivables
Retail
$
6,132,997

 
$
126,705

 
$
44,083

 
$
32,662

 
$
203,450

 
$
6,336,447

Wholesale
958,429

 
329

 
95

 
1,307

 
1,731

 
960,160

Total
$
7,091,426

 
$
127,034

 
$
44,178

 
$
33,969

 
$
205,181

 
$
7,296,607

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

 
$
131,302

 
$
49,642

 
$
40,449

 
$
221,393

 
$
5,982,211

Wholesale
1,024,995

 
1,000

 
319

 
276

 
1,595

 
1,026,590

Total
$
6,785,813

 
$
132,302

 
$
49,961

 
$
40,725

 
$
222,988

 
$
7,008,801

 
 
 
 
 
 
 
 
 
 
 
 
 
September 25, 2016
 
Current
 
31-60 Days
Past Due
 
61-90 Days
Past Due
 
Greater than
90 Days
Past Due
 
Total
Past Due
 
Total
Finance
Receivables
Retail
$
5,973,108

 
$
119,709

 
$
41,866

 
$
31,316

 
$
192,891

 
$
6,165,999

Wholesale
1,154,617

 
366

 
114

 
386

 
866

 
1,155,483

Total
$
7,127,725

 
$
120,075

 
$
41,980

 
$
31,702

 
$
193,757

 
$
7,321,482

A significant part of managing the Company's finance receivable portfolios includes the assessment of credit risk associated with each borrower. As the credit risk varies between the retail and wholesale portfolios, the Company utilizes different credit risk indicators for each portfolio.
The Company manages retail credit risk through its credit approval policy and ongoing collection efforts. The Company uses FICO scores, a standard credit rating measurement, to differentiate the expected default rates of retail credit applicants, enabling the Company to better evaluate credit applicants for approval and to tailor pricing according to this assessment. Retail loans with a FICO score of 640 or above at origination are considered prime, and loans with a FICO score below 640 are considered sub-prime. These credit quality indicators are determined at the time of loan origination and are not updated subsequent to the loan origination date.
The recorded investment in retail finance receivables, by credit quality indicator, was as follows (in thousands):
 
September 24, 2017
 
December 31, 2016
 
September 25, 2016
Prime
$
5,107,718

 
$
4,768,420

 
$
4,900,752

Sub-prime
1,228,729

 
1,213,791

 
1,265,247

Total
$
6,336,447

 
$
5,982,211

 
$
6,165,999


15

Table of Contents

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):
 
September 24, 2017
 
December 31, 2016
 
September 25, 2016
Doubtful
$
4,666

 
$
1,333

 
$

Substandard
8,724

 
1,773

 
16,244

Special Mention
5,261

 
30,152

 

Medium Risk
4,987

 
14,620

 
7,667

Low Risk
936,522

 
978,712

 
1,131,572

Total
$
960,160

 
$
1,026,590

 
$
1,155,483

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

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Table of Contents

Recurring Fair Value Measurements
The following tables present information about the Company’s assets and liabilities measured at fair value on a recurring basis (in thousands):
 
September 24, 2017
 
Balance
 
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Assets:
 
 
 
 
 
 
 
Cash equivalents
$
425,000

 
$
425,000

 
$

 
$

Marketable securities
45,726

 
45,726

 

 

Derivatives
724

 

 
724

 

Total
$
471,450

 
$
470,726

 
$
724

 
$

Liabilities:
 
 
 
 
 
 
 
Derivatives
$
32,414

 
$

 
$
32,414

 
$

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

 
$
426,266

 
$
105,253

 
$

Marketable securities
43,638

 
38,119

 
5,519

 

Derivatives
29,034

 

 
29,034

 

Total
$
604,191

 
$
464,385

 
$
139,806

 
$

Liabilities:
 
 
 
 
 
 
 
Derivatives
$
142

 
$

 
$
142

 
$

 
 
 
 
 
 
 
 
 
September 25, 2016
 
Balance
 
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Assets:
 
 
 
 
 
 
 
Cash equivalents
$
526,228

 
$
372,850

 
$
153,378

 
$

Marketable securities
44,101

 
39,063

 
5,038

 

Derivatives
6,606

 

 
6,606

 

Total
$
576,935

 
$
411,913

 
$
165,022

 
$

Liabilities:
 
 
 
 
 
 
 
Derivatives
$
1,388

 
$

 
$
1,388

 
$

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 $21.3 million, $19.3 million and $18.5 million at September 24, 2017, December 31, 2016 and September 25, 2016, respectively, for which the fair value adjustment was $9.0 million, $9.3 million and $8.2 million, respectively. Fair value is estimated using Level 2 inputs based on the recent market values of repossessed inventory.

17

Table of Contents

6. Fair Value of Financial Instruments
The Company’s financial instruments consist primarily of cash and cash equivalents, marketable securities, finance receivables, net, debt, foreign currency exchange and commodity contracts (derivative instruments are discussed further in Note 7).
The following table summarizes the fair value and carrying value of the Company’s financial instruments (in thousands):
 
September 24, 2017
 
December 31, 2016
 
September 25, 2016
 
Fair Value
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
 
Carrying Value
Assets:
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
683,134

 
$
683,134

 
$
759,984

 
$
759,984

 
$
790,284

 
$
790,284

Marketable securities
$
45,726

 
$
45,726

 
$
43,638

 
$
43,638

 
$
44,101

 
$
44,101

Derivatives
$
724

 
$
724

 
$
29,034

 
$
29,034

 
$
6,606

 
$
6,606

Finance receivables, net
$
7,159,632

 
$
7,101,025

 
$
6,921,037

 
$
6,835,458

 
$
7,233,923

 
$
7,149,966

Restricted cash
$
63,380

 
$
63,380

 
$
67,147

 
$
67,147

 
$
79,661

 
$
79,661

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
Derivatives
$
32,414

 
$
32,414

 
$
142

 
$
142

 
$
1,388

 
$
1,388

Unsecured commercial paper
$
834,875

 
$
834,875

 
$
1,055,708

 
$
1,055,708

 
$
1,055,428

 
$
1,055,428

Asset-backed U.S. commercial paper conduit facilities
$
280,308

 
$
280,308

 
$

 
$

 
$

 
$

Asset-backed Canadian commercial paper conduit facility
$
122,130

 
$
122,130

 
$
149,338

 
$
149,338

 
$
140,488

 
$
140,488

Medium-term notes
$
4,612,083

 
$
4,564,124

 
$
4,139,462

 
$
4,064,940

 
$
4,199,753

 
$
4,063,510

Senior unsecured notes
$
774,693

 
$
741,797

 
$
744,552

 
$
741,306

 
$
800,818

 
$
741,144

Asset-backed securitization debt
$
430,038

 
$
429,833

 
$
797,688

 
$
796,275

 
$
929,775

 
$
925,619

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

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Table of Contents

The fair values of the medium-term notes and senior unsecured notes are estimated based upon rates available at the end of the period for debt with similar terms and remaining maturities. Fair value is calculated using Level 2 inputs.
The fair value of the debt related to on-balance sheet asset-backed securitization transactions is estimated based on pricing available at the end of the period for transactions with similar terms and maturities. Fair value is calculated using Level 2 inputs.
7. Derivative Instruments and Hedging Activities
The Company is exposed to certain risks such as foreign currency exchange rate risk, interest rate risk and commodity price risk. To reduce its exposure to such risks, the Company selectively uses derivative financial instruments. All derivative transactions are authorized and executed pursuant to regularly reviewed policies and procedures, which prohibit the use of financial instruments for speculative trading purposes.
All derivative instruments are recognized on the balance sheet at fair value (see Note 6). In accordance with ASC Topic 815, “Derivatives and Hedging,” the accounting for changes in the fair value of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and, further, on the type of hedging relationship. Changes in the fair value of derivatives that are designated as fair value hedges, along with the gain or loss on the hedged item, are recorded in current period earnings. For derivative instruments that are designated as cash flow hedges, the effective portion of gains and losses that result from changes in the fair value of derivative instruments is initially recorded in other comprehensive income (OCI) and subsequently reclassified into earnings when the hedged item affects income. The Company assesses, both at the inception of each hedge and on an on-going basis, whether the derivatives that are used in its hedging transactions are highly effective in offsetting changes in cash flows of the hedged items. Any ineffective portion is immediately recognized in earnings. No component of a hedging derivative instrument’s gain or loss is excluded from the assessment of hedge effectiveness. Derivative instruments that do not qualify for hedge accounting are recorded at fair value, and any changes in fair value are recorded in current period earnings.
The Company sells its products internationally, and in most markets those sales are made in the foreign country’s local currency. As a result, the Company’s earnings can be affected by fluctuations in the value of the U.S. dollar relative to foreign currency. The Company utilizes foreign currency exchange contracts to mitigate the effects of the Euro, the Australian dollar, the Japanese yen, the Brazilian real, the Canadian dollar and the Mexican peso. The foreign currency exchange contracts are entered into with banks and allow the Company to exchange a specified amount of foreign currency for U.S. dollars at a future date, based on a fixed exchange rate.
The Company utilizes commodity contracts to hedge portions of the cost of certain commodities consumed in the Company’s motorcycle production and distribution operations.
The Company’s foreign currency exchange contracts and commodity contracts generally have maturities of less than one year.
During the second quarter of 2017, the Company entered into a treasury rate lock to fix the interest rate on a portion of the principal related to its anticipated issuance of medium-term notes during the second quarter of 2017. The treasury rate lock contract was settled in June 2017. The loss at settlement was recorded in accumulated other comprehensive loss and will be reclassified into earnings over the life of the debt.
During the second quarter of 2015, the Company entered into treasury rate locks to fix the interest rate on a portion of the principal related to its anticipated issuance of senior unsecured debt during the third quarter of 2015. The treasury rate lock contracts were settled in July 2015. The loss at settlement was recorded in accumulated other comprehensive loss and will be reclassified into earnings over the life of the debt.

19

Table of Contents

The following tables summarize the fair value of the Company’s derivative financial instruments (in thousands):
 
 
September 24, 2017
 
December 31, 2016
 
September 25, 2016
Derivatives Designated As Hedging
Instruments Under ASC Topic 815
 
Notional
Value
 
Asset
Fair  Value(a)
 
Liability
Fair  Value(b)
 
Notional
Value
 
Asset
Fair  Value(a)
 
Liability
Fair  Value(b)
 
Notional
Value
 
Asset
Fair  Value(a)
 
Liability
Fair  Value(b)
Foreign currency contracts(c)
 
$
746,378

 
$
439

 
$
32,352

 
$
554,551

 
$
28,528

 
$
142

 
$
615,251

 
$
6,337

 
$
1,193

Commodity
contracts(c)
 
1,273

 

 
62

 
992

 
177

 

 
1,154

 
110

 

Total
 
$
747,651

 
$
439

 
$
32,414


$
555,543

 
$
28,705

 
$
142


$
616,405

 
$
6,447

 
$
1,193

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
September 24, 2017
 
December 31, 2016
 
September 25, 2016
Derivatives Not Designated As Hedging
Instruments Under ASC Topic 815
 
Notional
Value
 
Asset
Fair  Value(a)
 
Liability
Fair  Value(b)
 
Notional
Value
 
Asset
Fair  Value(a)
 
Liability
Fair  Value(b)
 
Notional
Value
 
Asset
Fair  Value(a)
 
Liability
Fair  Value(b)
Commodity contracts
 
$
4,234

 
$
285

 
$

 
$
5,025

 
$
329

 
$

 
$
4,488

 
$
159

 
$
195

Total
 
$
4,234


$
285

 
$

 
$
5,025

 
$
329

 
$

 
$
4,488

 
$
159

 
$
195

 
(a)
Included in other current assets
(b)
Included in accrued liabilities
(c)
Derivative designated as a cash flow hedge
The following tables summarize the amount of gains and losses related to derivative financial instruments designated as cash flow hedges (in thousands):
 
 
Amount of Gain/(Loss) Recognized in OCI, before tax
 
 
Three months ended
 
Nine months ended
Cash Flow Hedges
 
September 24,
2017
 
September 25,
2016
 
September 24,
2017
 
September 25,
2016
Foreign currency contracts
 
$
(35,687
)
 
$
(938
)
 
$
(59,335
)
 
$
(5,445
)
Commodity contracts
 
(5
)
 
43

 
(191
)
 
(30
)
Treasury rate locks
 

 

 
(719
)
 

Total
 
$
(35,692
)
 
$
(895
)
 
$
(60,245
)
 
$
(5,475
)
 
 
Amount of Gain/(Loss) Reclassified from AOCL into Income
 
 
 
 
Three months ended
 
Nine months ended
 
Expected to be Reclassified
Cash Flow Hedges
 
September 24,
2017
 
September 25,
2016
 
September 24,
2017
 
September 25,
2016
 
Over the Next Twelve Months
Foreign currency contracts(a)
 
$
(7,901
)
 
$
2,399

 
$
(1,428
)
 
$
6,806

 
$
(31,324
)
Commodity contracts(a)
 
(16
)
 
21

 
49

 
(298
)
 
(62
)
Treasury rate locks(b)
 
(126
)
 
(90
)
 
(315
)
 
(271
)
 
(506
)
Total
 
$
(8,043
)
 
$
2,330

 
$
(1,694
)
 
$
6,237

 
$
(31,892
)
(a)
Gain/(loss) reclassified from accumulated other comprehensive loss (AOCL) to income is included in cost of goods sold
(b)
Gain/(loss) reclassified from AOCL to income is included in interest expense
For the three and nine months ended September 24, 2017 and September 25, 2016, the cash flow hedges were highly effective and, as a result, the amount of hedge ineffectiveness was not material. No amounts were excluded from effectiveness testing.

20

Table of Contents

The following table summarizes the amount of gains and losses related to derivative financial instruments not designated as hedging instruments (in thousands):
 
 
Amount of Gain/(Loss) Recognized in Income on Derivative
 
 
Three months ended
 
Nine months ended
Derivatives Not Designated As Hedges
 
September 24,
2017
 
September 25,
2016
 
September 24,
2017
 
September 25,
2016
Commodity contracts(a)
 
$
433

 
$
45

 
$
259

 
$
(179
)
Total
 
$
433

 
$
45

 
$
259

 
$
(179
)
(a)
Gain/(loss) recognized in income is included in cost of goods sold
The Company is exposed to credit loss risk in the event of non-performance by counterparties to these derivative financial instruments. Although no assurances can be given, the Company does not expect any of the counterparties to these derivative financial instruments to fail to meet its obligations. To manage credit loss risk, the Company evaluates counterparties based on credit ratings and, on a quarterly basis, evaluates each hedge’s net position relative to the counterparty’s ability to cover its position.
8. Accumulated Other Comprehensive Loss
The following tables set forth the changes in accumulated other comprehensive loss (AOCL) (in thousands):
 
 
Three months ended September 24, 2017
 
 
Foreign currency translation adjustments
 
Marketable securities
 
Derivative financial instruments
 
Pension and postretirement benefit plans
 
Total
Balance, beginning of period
 
$
(42,938
)
 
$

 
$
(6,940
)
 
$
(494,067
)
 
$
(543,945
)
Other comprehensive income (loss) before reclassifications
 
26,754

 

 
(35,692
)
 

 
(8,938
)
Income tax (benefit) expense
 
(1,741
)
 

 
13,220

 

 
11,479

Net other comprehensive income (loss) before reclassifications
 
25,013

 

 
(22,472
)
 

 
2,541

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

 

 
7,901

 

 
7,901

Realized (gains) losses - commodities contracts(a)
 

 

 
16

 

 
16

Realized (gains) losses - treasury rate locks(b)
 

 

 
126

 

 
126

Prior service credits(c)
 

 

 

 
(287
)
 
(287
)
Actuarial losses(c)
 

 

 

 
11,813

 
11,813

Total reclassifications before tax
 

 

 
8,043

 
11,526

 
19,569

Income tax benefit
 

 

 
(2,978
)
 
(4,269
)
 
(7,247
)
Net reclassifications
 

 

 
5,065

 
7,257

 
12,322

Other comprehensive income (loss)
 
25,013

 

 
(17,407
)
 
7,257

 
14,863

Balance, end of period
 
$
(17,925
)
 
$

 
$
(24,347
)
 
$
(486,810
)
 
$
(529,082
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

21

Table of Contents

 
 
Three months ended September 25, 2016
 
 
Foreign currency translation adjustments
 
Marketable securities
 
Derivative financial instruments
 
Pension and postretirement benefit plans
 
Total
Balance, beginning of period
 
$
(43,523
)
 
$
(1,171
)
 
$
543

 
$
(546,010
)
 
$
(590,161
)
Other comprehensive income (loss) before reclassifications
 
3,574

 
(18
)
 
(895
)
 

 
2,661

Income tax expense
 
279

 
7

 
332

 

 
618

Net other comprehensive income (loss) before reclassifications
 
3,853

 
(11
)
 
(563
)
 

 
3,279

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

 

 
(2,399
)
 

 
(2,399
)
Realized (gains) losses - commodities contracts(a)
 

 

 
(21
)
 

 
(21
)
Realized (gains) losses - treasury rate locks(b)
 

 

 
90

 

 
90

Prior service credits(c)
 

 

 

 
(446
)
 
(446
)
Actuarial losses(c)
 

 

 

 
12,472

 
12,472

Total reclassifications before tax
 

 

 
(2,330
)
 
12,026

 
9,696

Income tax expense (benefit)
 

 

 
862

 
(4,454
)
 
(3,592
)
Net reclassifications
 

 

 
(1,468
)
 
7,572

 
6,104

Other comprehensive income (loss)
 
3,853

 
(11
)
 
(2,031
)
 
7,572

 
9,383

Balance, end of period
 
$
(39,670
)
 
$
(1,182
)
 
$
(1,488
)
 
$
(538,438
)
 
$
(580,778
)
 
 
Nine months ended September 24, 2017
 
 
Foreign currency translation adjustments
 
Marketable securities