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 July 1, 2018
¨
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 August 3, 2018: 166,554,483 shares



Harley-Davidson, Inc.

Form 10-Q

For The Quarter Ended July 1, 2018
 
Part I
 
 
 
Item 1.
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Part II
 
 
 
Item 1.
 
 
 
Item 2.
 
 
 
Item 5.
 
 
 
Item 6.
 
 
 


Table of Contents

PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
HARLEY-DAVIDSON, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)
 
 
Three months ended
 
Six months ended
 
July 1,
2018
 
June 25,
2017
 
July 1,
2018
 
June 25,
2017
Revenue:
 
 
 
 
 
 
 
Motorcycles and Related Products
$
1,525,121

 
$
1,577,135

 
$
2,889,068

 
$
2,905,846

Financial Services
188,102

 
188,034

 
366,276

 
361,255

Total revenue
1,713,223

 
1,765,169

 
3,255,344

 
3,267,101

Costs and expenses:
 
 
 
 
 
 
 
Motorcycles and Related Products cost of goods sold
993,036

 
1,004,173

 
1,883,210

 
1,858,061

Financial Services interest expense
51,943

 
44,408

 
100,393

 
87,697

Financial Services provision for credit losses
18,880

 
26,217

 
48,932

 
69,806

Selling, administrative and engineering expense
313,047

 
291,084

 
603,233

 
563,068

Restructuring expense
12,370

 

 
59,212

 

Total costs and expenses
1,389,276

 
1,365,882

 
2,694,980

 
2,578,632

Operating income
323,947

 
399,287

 
560,364

 
688,469

Other income (expense), net
645

 
2,295

 
865

 
4,591

Investment income
2,533

 
577

 
3,736

 
1,456

Interest expense
7,728

 
7,726

 
15,418

 
15,399

Income before provision for income taxes
319,397

 
394,433

 
549,547

 
679,117

Provision for income taxes
77,059

 
135,566

 
132,446

 
233,881

Net income
$
242,338

 
$
258,867

 
$
417,101

 
$
445,236

Earnings per common share:
 
 
 
 
 
 
 
Basic
$
1.45

 
$
1.48

 
$
2.49

 
$
2.54

Diluted
$
1.45

 
$
1.48

 
$
2.48

 
$
2.53

Cash dividends per common share
$
0.370

 
$
0.365

 
$
0.740

 
$
0.730

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
 
Six months ended
 
July 1,
2018
 
June 25,
2017
 
July 1,
2018
 
June 25,
2017
Net income
$
242,338

 
$
258,867

 
$
417,101

 
$
445,236

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
  Foreign currency translation adjustments
(26,482
)
 
9,637

 
(19,567
)
 
25,194

  Derivative financial instruments
23,920

 
(10,412
)
 
24,685

 
(19,464
)
  Marketable securities

 
1,204

 

 
1,194

  Pension and postretirement benefit plans
12,402

 
7,256

 
98,167

 
14,512

Total other comprehensive income, net of tax
9,840

 
7,685

 
103,285

 
21,436

Comprehensive income
$
252,178

 
$
266,552

 
$
520,386

 
$
466,672

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)
 
July 1,
2018
 
December 31,
2017
 
June 25,
2017
ASSETS
 
 
 
 
 
Current assets:
 
 
 
 
 
Cash and cash equivalents
$
978,749

 
$
687,521

 
$
988,476

Accounts receivable, net
335,594

 
329,986

 
330,933

Finance receivables, net
2,252,956

 
2,105,662

 
2,338,533

Inventories
465,373

 
538,202

 
372,012

Restricted cash
44,386

 
47,518

 
63,225

Other current assets
166,362

 
175,853

 
151,423

Total current assets
4,243,420

 
3,884,742

 
4,244,602

Finance receivables, net
5,060,246

 
4,859,424

 
4,994,002

Property, plant and equipment, net
904,113

 
967,781

 
946,326

Prepaid pension costs
131,497

 
19,816

 

Goodwill
55,451

 
55,947

 
54,630

Deferred income taxes
67,505

 
109,073

 
170,358

Other long-term assets
83,790

 
75,889

 
77,853

 
$
10,546,022

 
$
9,972,672

 
$
10,487,771

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
 
Current liabilities:
 
 
 
 
 
Accounts payable
$
287,214

 
$
227,597

 
$
327,346

Accrued liabilities
572,440

 
529,822

 
533,412

Short-term debt
1,327,307

 
1,273,482

 
928,445

Current portion of long-term debt, net
945,463

 
1,127,269

 
1,565,558

Total current liabilities
3,132,424

 
3,158,170

 
3,354,761

Long-term debt, net
4,868,346

 
4,587,258

 
4,678,350

Pension liability
55,819

 
54,606

 
51,797

Postretirement healthcare liability
113,464

 
118,753

 
166,023

Other long-term liabilities
214,443

 
209,608

 
190,673

Commitments and contingencies (Note 15)

 

 

Shareholders’ equity:
 
 
 
 
 
Preferred stock, none issued

 

 

Common stock
1,818

 
1,813

 
1,813

Additional paid-in-capital
1,442,580

 
1,422,808

 
1,404,428

Retained earnings
1,906,015

 
1,607,570

 
1,654,457

Accumulated other comprehensive loss
(396,764
)
 
(500,049
)
 
(543,945
)
Treasury stock, at cost
(792,123
)
 
(687,865
)
 
(470,586
)
Total shareholders’ equity
2,161,526

 
1,844,277

 
2,046,167

 
$
10,546,022

 
$
9,972,672

 
$
10,487,771



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Table of Contents

HARLEY-DAVIDSON, INC.
CONSOLIDATED BALANCE SHEETS (continued)
(In thousands)
 
(Unaudited)
 
 
 
(Unaudited)
 
July 1,
2018
 
December 31,
2017
 
June 25,
2017
Balances held by consolidated variable interest entities (Note 11)
 
 
 
 
 
Current finance receivables, net
$
139,405

 
$
194,813

 
$
217,348

Other assets
$
1,280

 
$
2,148

 
$
2,170

Non-current finance receivables, net
$
392,901

 
$
521,940

 
$
653,683

Restricted cash - current and non-current
$
39,757

 
$
48,706

 
$
62,973

Current portion of long-term debt, net
$
155,631

 
$
209,247

 
$
241,754

Long-term debt, net
$
313,799

 
$
422,834

 
$
559,379

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)
 
Six months ended
 
July 1,
2018
 
June 25,
2017
Net cash provided by operating activities (Note 7)
$
735,859

 
$
627,068

Cash flows from investing activities:
 
 
 
Capital expenditures
(69,293
)
 
(69,816
)
Origination of finance receivables
(1,999,786
)
 
(1,977,839
)
Collections on finance receivables
1,712,884

 
1,647,799

Other
(11,758
)
 
7,031

Net cash used by investing activities
(367,953
)
 
(392,825
)
Cash flows from financing activities:
 
 
 
Proceeds from issuance of medium-term notes
1,144,018

 
893,668

Repayments of medium-term notes
(877,488
)
 
(400,000
)
Repayments of securitization debt
(183,453
)
 
(275,659
)
Borrowings of asset-backed commercial paper
120,903

 
341,625

Repayments of asset-backed commercial paper
(100,660
)
 
(77,732
)
Net increase (decrease) in credit facilities and unsecured commercial paper
56,280

 
(128,787
)
Dividends paid
(124,680
)
 
(128,452
)
Purchase of common stock for treasury
(111,227
)
 
(243,055
)
Issuance of common stock under employee stock option plans
1,965

 
7,432

Net cash used by financing activities
(74,342
)
 
(10,960
)
Effect of exchange rate changes on cash, cash equivalents and restricted cash
(10,091
)
 
12,457

Net increase in cash, cash equivalents and restricted cash
$
283,473

 
$
235,740

Cash, cash equivalents and restricted cash:
 
 
 
Cash, cash equivalents and restricted cash—beginning of period
$
746,210

 
$
827,131

Net increase in cash, cash equivalents and restricted cash
283,473

 
235,740

Cash, cash equivalents and restricted cash—end of period
$
1,029,683

 
$
1,062,871

 
 
 
 
Reconciliation of cash, cash equivalents and restricted cash to the Consolidated Balance Sheet:
Cash and cash equivalents
$
978,749

 
$
988,476

Restricted cash
44,386

 
63,225

Restricted cash included in other long-term assets
6,548

 
11,170

Total cash, cash equivalents and restricted cash shown in the Statement of Cash Flows
$
1,029,683

 
$
1,062,871

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 July 1, 2018 and June 25, 2017, the consolidated statements of income for the three and six month periods then ended, the consolidated statements of comprehensive income for the three and six month periods then ended and the consolidated statements of cash flows for the six month periods then ended.
Certain information and footnote disclosures normally included in complete financial statements have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) and U.S. generally accepted accounting principles (U.S. GAAP) for interim financial reporting. These consolidated financial statements should be read in conjunction with the audited financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.
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 May 2014, the FASB issued Accounting Standards Update (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. The Company adopted ASU 2014-09 on January 1, 2018. The Company applied the standard to all contracts using the modified retrospective method. As such, the Company recognized the cumulative effect of the adoption as an adjustment to the opening balance of retained earnings. The comparative information has not been restated.
The majority of the Company’s Motorcycles and Related Products revenue will continue to be recognized when products are shipped to customers. For a limited number of vehicle sales where revenue was previously deferred due to a guaranteed resale value the Company will now recognize revenue when those vehicles are shipped in accordance with ASU 2014-09. The Company recorded a net increase to the opening balance of retained earnings of $6.0 million, net of income taxes, as of January 1, 2018 as a result of adopting ASU 2014-09. The Company also adjusted other assets and accrued liabilities associated with these vehicle sales in connection with its adoption of ASU 2014-09.
The majority of the Financial Services segment’s revenues relate to loan and servicing activities which are outside the scope of this guidance. Financial Services revenues that fall under the scope of ASU 2014-09 continue to be recognized at the point of sale, or over the estimated life of the contract, as appropriate.

8

Table of Contents

The following tables illustrate the impact of adoption of ASU 2014-09 on the consolidated statements of income and the consolidated balance sheet (in thousands):

Consolidated Statements of Income
 
Three months ended July 1, 2018
 
Six months ended July 1, 2018
 
As Reported
 
Without Adoption of ASC 606
 
Effect of Change
 
As Reported
 
Without Adoption of ASC 606
 
Effect of Change
Revenue:
 
 
 
 
 
 
 
 
 
 
 
Motorcycles and Related Products
$
1,525,121

 
$
1,500,384

 
$
24,737

 
$
2,889,068

 
$
2,868,368

 
$
20,700

Costs and expenses:
 
 
 
 
 
 
 
 
 
 
 
Motorcycles and Related Products cost of goods sold
$
993,036

 
$
974,385

 
$
18,651

 
$
1,883,210

 
$
1,864,623

 
$
18,587

Operating income
$
323,947

 
$
317,861

 
$
6,086

 
$
560,364

 
$
558,251

 
$
2,113

Income before provision for income taxes
$
319,397

 
$
313,311

 
$
6,086

 
$
549,547

 
$
547,434

 
$
2,113

Provision for income taxes
$
77,059

 
$
75,584

 
$
1,475

 
$
132,446

 
$
131,934

 
$
512

Net income
$
242,338

 
$
237,727

 
$
4,611

 
$
417,101

 
$
415,500

 
$
1,601


Consolidated Balance Sheet
 
July 1, 2018
 
As Reported
 
Without Adoption of ASC 606
 
Effect of Change
ASSETS
 
 
 
 
 
Other current assets
$
166,362

 
$
201,405

 
$
(35,043
)
Deferred income taxes
$
67,505

 
$
69,353

 
$
(1,848
)
 
 
 
 
 
 
LIABILITIES AND SHAREHOLDERS' EQUITY
 
 
 
 
 
Accrued liabilities
$
572,440

 
$
616,956

 
$
(44,516
)
Retained earnings
$
1,906,015

 
$
1,898,390

 
$
7,625


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 adopted ASU 2017-07 retrospectively on January 1, 2018. As a result, the non-service cost components of net periodic benefit cost have been presented in Other income (expense), net and the prior period has been recast to reflect the new presentation. The Company elected the practical expedient allowing the use of previously disclosed benefit components as the basis for the retrospective application. Net periodic benefit credit (cost) previously recorded in Motorcycles and Related Products cost of goods sold and Selling, administrative and engineering expense of $2.7 million and $(0.4) million, respectively, for the three months ended June 25, 2017, and $5.3 million and $(0.7) million, respectively, for the six months ended June 25, 2017, has been reclassified to Other income (expense), net.

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 adopted ASU 2016-18 on January 1, 2018 on a retrospective basis. As a result, the change in restricted cash has been excluded from financing activities and included in the change in cash, cash equivalents and restricted cash and the prior period has been recast to reflect the new presentation.

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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 ASU was subsequently amended by ASU No. 2018-03 and ASU No. 2018-04. The Company adopted ASU 2016-01 on January 1, 2018 on a prospective basis. The adoption of ASU 2016-01 did not have a material impact on its financial statements.
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 items 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 Company adopted ASU 2016-15 on January 1, 2018 on a retrospective basis. The adoption of ASU 2016-15 did not 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. The Company adopted ASU 2016-16 on January 1, 2018 using a modified retrospective approach. The adoption of ASU 2016-16 did not have a material impact on its financial statements.
Accounting Standards Not Yet 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 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 in the process of gathering and analyzing information necessary to quantify the impact of adopting ASU 2016-02 and evaluating the transition practical expedients it will apply upon adoption. The Company anticipates the adoption of ASU 2016-02 will result in an increase in assets and liabilities recognized on the balance sheet related to its lease arrangements.
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 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

10

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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.

In February 2018, the FASB issued ASU No. 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (ASU 2018-02). Under existing U.S. GAAP, the effects of changes in tax rates and laws on deferred tax balances are recorded as a component of income tax expense in the period in which the law was enacted. When deferred tax balances related to items originally recorded in accumulated other comprehensive income are adjusted, certain tax effects become stranded in accumulated other comprehensive income. The amendments in ASU 2018-02 allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the 2017 Tax Cuts and Jobs Act. The amendments in this ASU also require certain disclosures about stranded tax effects. The guidance is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption in any period is permitted. The Company’s provisional adjustments recorded in 2017 to account for the impact of the 2017 Tax Cuts and Jobs Act resulted in stranded tax effects. The Company is currently evaluating the impact of adopting ASU 2018-02.
3. Revenue

The Company recognizes revenue when it satisfies a performance obligation by transferring control of a good or service to a customer. Revenue is measured based on the consideration that the Company expects to be entitled to in exchange for the goods or services transferred. Taxes that are collected from a customer concurrent with revenue-producing activities are excluded from revenue.

The following table includes revenue disaggregated by major source (in thousands):
 
 
Three months ended
 
Six months ended
 
 
July 1, 2018
 
July 1, 2018
Motorcycles and Related Products:
 
 
 
 
Motorcycles
 
$
1,201,453

 
$
2,323,126

Parts & Accessories
 
231,014

 
400,089

General Merchandise
 
68,653

 
125,254

Licensing
 
10,407

 
18,765

Other
 
13,594

 
21,834

Revenue from Motorcycles and Related Products
 
1,525,121

 
2,889,068

Financial Services:
 
 
 
 
Interest income
 
158,639

 
312,680

Securitization and servicing fee income
 
304

 
656

Other income
 
29,159

 
52,940

Revenue from Financial Services
 
188,102

 
366,276

Total revenue
 
$
1,713,223

 
$
3,255,344


The following is a description of principal activities from which the Company generates its revenue, by reportable segment.

Motorcycles and Related Products

Motorcycles, Parts and Accessories, and General Merchandise - Sales of motorcycles, parts and accessories, and general merchandise are recorded when control is transferred to wholesale customers (independent dealers). This generally takes place upon shipment of the products. The sale of products to independent dealers outside the U.S. and Canada is generally on open account with terms that generally approximate 30-120 days and the resulting receivables are included in accounts receivable in the consolidated balance sheets. The sale of products in the U.S. and Canada is financed by the purchasing dealers through HDFS and the related receivables are included in finance receivables in the consolidated balance sheets.

The Company offers sales incentive programs to dealers and retail customers designed to promote the sale of motorcycles, parts and accessories, and general merchandise. The Company estimates its variable consideration related to motorcycles and related products sold under its sales incentive programs using the expected value method. Further, the Company accounts for consideration payable to a customer as part of its sales incentives as a reduction of revenue, which is

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accrued at the later of the date the related sale is recorded or the date the incentive program is both approved and communicated.

The Company offers to its dealers the right to return eligible parts and accessories and general merchandise. When the Company offers a right to return, it estimates returns based on an analysis of historical trends and records revenue on the initial sale only in the amount that it expects to be entitled. The remaining consideration is deferred in a refund liability account. The refund liability is remeasured for changes in the estimate at each reporting date with a corresponding adjustment to revenue.     

Variable consideration related to sales incentives and rights to return is adjusted at the earliest of when the amount of consideration the Company expects to receive changes or the consideration becomes fixed. Adjustments for variable consideration related to previously recognized sales decreased revenue by an immaterial amount during the three and six months ended July 1, 2018.
 
Shipping and handling costs associated with freight after control of a product has transferred to a customer are accounted for as fulfillment costs. The Company accrues for the shipping and handling in the same period that the related revenue is recognized.

The Company offers standard, limited warranties on its motorcycles and parts and accessories. These warranties provide assurance that the product will function as expected and are not separate performance obligations. The Company accounts for estimated warranty costs as a liability when control of the product transfers to the customer.

Licensing - The Company licenses the name “Harley-Davidson” and other trademarks owned by the Company and collects royalties from its customers (licensees). The trademark licenses are considered symbolic intellectual property, which grant the customer a right to access the Company’s intellectual property. The Company satisfies its performance obligation over the license period, as the Company fulfills its promise to grant the customer rights to use and benefit from the intellectual property as well as maintain the intellectual property.

Payment is typically due within thirty days of the end of each quarter, for the royalties earned in that quarter. Revenue, in the form of sales-based royalties, is recognized when the customers’ subsequent sales occur. The Company applies the practical expedient in ASC 606-10-55-18 to recognize licensing revenues in the amount that the Company has the right to invoice because the royalties due each period correspond directly with the value of the Company’s performance to date. Revenue will be recognized over the remaining contract terms which range up to 6 years.

Other Revenue - Other Revenue consists primarily of revenue from Harley Ownership Group (H.O.G.) membership sales, motorcycle rental commissions, dealer software sales, museum admissions and events, and other miscellaneous products and services.

Financial Services

Interest income - Interest income on finance receivables is recorded as earned and is based on the average outstanding daily balance for wholesale and retail receivables. Accrued and uncollected interest is classified with finance receivables. Certain loan origination costs related to finance receivables, including payments made to dealers for certain retail loans, are deferred and recorded within finance receivables, and amortized over the estimated life of the contract.

Securitization and servicing fee income - Securitization and servicing fee income consists of revenue from servicing and ancillary fees associated with HDFS' off-balance sheet asset-backed securitization transaction. Refer to Note 11 of the Notes to Consolidated Financial Statements for further discussion regarding asset-backed financing.

Other income - Other income consists primarily of insurance and licensing revenues. HDFS works with certain unaffiliated insurance companies to offer motorcycle insurance and protection products through most Harley-Davidson dealers in the U.S. and Canada. HDFS also works with third-party financial institutions that issue credit cards, or offer other financial products bearing the Harley-Davidson brand in the U.S and internationally. For many of these contracts, the Company grants temporary rights to use the licensed trademarks owned by the Company and collects royalties from its customers in connection with sales of their products. The trademark licenses are considered symbolic intellectual property, which grant the customer a right to access the intellectual property. The Company satisfies its performance obligation over the license period, as it fulfills its promise to grant the customer rights to use and benefit from the intellectual property as well as maintain the intellectual property. Royalty and profit sharing amounts are received either quarterly or per annum, based upon the contract. Revenue, in the form of sales-based royalties, is recognized when the customers’ subsequent sales occur. Revenue will be recognized over

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the remaining contract terms which range up to 6 years. The Company is the primary obligor for certain other insurance related contracts and, as a result, revenue is recognized over the life of the contract as the Company fulfills its performance obligation.

Contract Liabilities

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 H.O.G. memberships and extended service plan contracts. Deferred revenue is recognized as revenue as the Company performs under the contract. On January 1, 2018, $23.4 million of deferred revenue was included in Accrued liabilities and Other long-term liabilities in the consolidated balance sheet. $5.1 million and $9.1 million of this was recognized as revenue in the three and six months ended July 1, 2018, respectively. At July 1, 2018, the unearned revenue balance was $30.8 million. The Company expects to recognize approximately $10.8 million of the remaining unearned revenue in 2018, $9.8 million in 2019 and $10.2 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. 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 by 2019. Approximately 90 jobs will be eliminated in Adelaide.
The Company expects to incur restructuring and other consolidation costs of $170 million to $200 million in the Motorcycles segment related to this plan through 2019, of which approximately 70% will be cash charges. This includes $135 million to $155 million of restructuring expense and $35 million to $45 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 $50 million to $60 million, $45 million to $50 million and $40 million to $45 million, respectively. Restructuring expense is recorded as a separate line item in the consolidated statement of income and the accrued restructuring liability is recorded in accrued liabilities in the consolidated balance sheet. The Company expects the plan to be completed by mid-2019. Changes in the accrued restructuring liability (in thousands) were as follows:
 
Three months ended July 1, 2018
 
Employee Termination Benefits
 
Accelerated Depreciation
 
Other
 
Total
Balance, beginning of period
$
38,287

 
$

 
$
63

 
$
38,350

Restructuring (benefit) expense
(1,186
)
 
9,746

 
3,810

 
12,370

Utilized - cash
(133
)
 

 
(3,793
)
 
(3,926
)
Utilized - non cash

 
(9,746
)
 

 
(9,746
)
Foreign currency changes
(210
)
 

 
(3
)
 
(213
)
Balance, end of period
$
36,758

 
$

 
$
77

 
$
36,835

 
Six months ended July 1, 2018
 
Employee Termination Benefits
 
Accelerated Depreciation
 
Other
 
Total
Balance, beginning of period
$

 
$

 
$

 
$

Restructuring expense
39,605

 
15,359

 
4,248

 
59,212

Utilized - cash
(2,433
)
 

 
(4,167
)
 
(6,600
)
Utilized - non cash

 
(15,359
)
 

 
(15,359
)
Foreign currency changes
(414
)
 

 
(4
)
 
(418
)
Balance, end of period
$
36,758

 
$

 
$
77

 
$
36,835

During the three months ended July 1, 2018, the Company adjusted its termination benefit liability to reflect updated assumptions resulting in a reversal of approximately $1.7 million of previously recognized restructuring expense.

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During the three and six month periods ended July 1, 2018, the Company incurred $2.4 million and $3.1 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 2018 effective income tax rate for the six months ended July 1, 2018 was 24.1% compared to 34.4% for the six months ended June 25, 2017. The Company's effective income tax rate was lower in 2018 due primarily to the impact of the 2017 Tax Cuts and Jobs Act (2017 Tax Act) that was enacted in December of 2017. The 2017 Tax Act included broad and complex changes to the U.S. tax code including a reduction of the corporate income tax rate from 35% to 21%, the move toward a territorial tax system and the elimination of the domestic manufacturing deduction. During the three months ended December 31, 2017, the Company recorded a $53.1 million tax expense to recognize the initial effects of the 2017 Tax Act relating primarily to the remeasurement of deferred tax assets. The Company has deemed its income tax estimates related to the 2017 Tax Act to be provisional under SEC Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (SAB 118). The Company believes future guidance, interpretations and pronouncements will add clarity to the numerous aspects of the 2017 Tax Act that may impact the Company which may result in revisions to the Company’s provisional estimates. There were no material changes to these provisional estimates during the six month period ended July 1, 2018.
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
 
Six months ended
 
July 1,
2018
 
June 25,
2017
 
July 1,
2018
 
June 25,
2017
Numerator:
 
 
 
 
 
 
 
Net income used in computing basic and diluted earnings per share
$
242,338

 
$
258,867

 
$
417,101

 
$
445,236

Denominator:
 
 
 
 
 
 
 
Denominator for basic earnings per share - weighted-average common shares
166,589

 
174,409

 
167,364

 
175,178

Effect of dilutive securities - employee stock compensation plan
615

 
915

 
825

 
992

Denominator for diluted earnings per share - adjusted weighted-average shares outstanding
167,204

 
175,324

 
168,189

 
176,170

Earnings per common share:
 
 
 
 
 
 
 
Basic
$
1.45

 
$
1.48

 
$
2.49

 
$
2.54

Diluted
$
1.45

 
$
1.48

 
$
2.48

 
$
2.53

Outstanding options to purchase 1.5 million and 0.6 million shares of common stock for the three months ended July 1, 2018 and June 25, 2017, respectively, and 1.3 million and 0.7 million shares of common stock for the six months ended July 1, 2018 and June 25, 2017, 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 and six month periods ended July 1, 2018 and June 25, 2017.

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7. Additional Balance Sheet and Cash Flow Information
Marketable Securities
The Company’s marketable securities consisted of the following (in thousands):
 
July 1,
2018
 
December 31,
2017
 
June 25,
2017
Mutual funds
$
49,537

 
$
48,006

 
$
44,156

Total marketable securities
$
49,537

 
$
48,006

 
$
44,156

The mutual fund investments are held by the Company to fund certain deferred compensation obligations. These investments are carried at fair value with gains and losses recorded in net income and are included in other long-term assets on the consolidated balance sheets.
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):
 
July 1,
2018
 
December 31,
2017
 
June 25,
2017
Raw materials and work in process
$
154,921

 
$
161,664

 
$
117,199

Motorcycle finished goods
222,711

 
289,530

 
186,244

Parts and accessories and general merchandise
140,096

 
139,363

 
116,836

Inventory at lower of FIFO cost or net realizable value
517,728

 
590,557

 
420,279

Excess of FIFO over LIFO cost
(52,355
)
 
(52,355
)
 
(48,267
)
Total inventories, net
$
465,373

 
$
538,202

 
$
372,012


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Operating Cash Flow
The reconciliation of net income to net cash provided by operating activities is as follows (in thousands):
 
Six months ended
 
July 1,
2018
 
June 25,
2017
Cash flows from operating activities:
 
 
 
Net income
$
417,101

 
$
445,236

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization of intangibles
130,061

 
107,578

Amortization of deferred loan origination costs
39,396

 
40,771

Amortization of financing origination fees
4,133

 
4,079

Provision for long-term employee benefits
18,954

 
14,950

Employee benefit plan contributions and payments
(6,422
)
 
(37,307
)
Stock compensation expense
19,081

 
17,497

Net change in wholesale finance receivables related to sales
(171,195
)
 
(271,927
)
Provision for credit losses
48,932

 
69,806

Deferred income taxes
1,515

 
178

Other, net
20,894

 
(4,163
)
Changes in current assets and liabilities:
 
 
 
Accounts receivable, net
(14,882
)
 
(28,239
)
Finance receivables - accrued interest and other
4,228

 
2,067

Inventories
63,957

 
138,942

Accounts payable and accrued liabilities
161,101

 
133,120

Derivative instruments
(136
)
 
3,114

Other
(859
)
 
(8,634
)
Total adjustments
318,758

 
181,832

Net cash provided by operating activities
$
735,859

 
$
627,068

8. 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):
 
July 1,
2018
 
December 31,
2017
 
June 25,
2017
Retail
$
6,373,926

 
$
6,140,600

 
$
6,267,211

Wholesale
1,133,206

 
1,016,957

 
1,258,852

Total finance receivables
7,507,132

 
7,157,557

 
7,526,063

Allowance for credit losses
(193,930
)
 
(192,471
)
 
(193,528
)
Finance receivables, net
$
7,313,202

 
$
6,965,086

 
$
7,332,535

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

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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 July 1, 2018
 
Retail
 
Wholesale
 
Total
Balance, beginning of period
$
182,150

 
$
8,200

 
$
190,350

Provision for credit losses
20,652

 
(1,772
)
 
18,880

Charge-offs
(28,947
)
 

 
(28,947
)
Recoveries
13,647

 

 
13,647

Balance, end of period
$
187,502

 
$
6,428

 
$
193,930

 
 
 
 
 
 
 
Three months ended June 25, 2017
 
Retail
 
Wholesale
 
Total
Balance, beginning of period
$
176,068

 
$
7,962

 
$
184,030

Provision for credit losses
26,550

 
(333
)
 
26,217

Charge-offs
(30,374
)
 

 
(30,374
)
Recoveries
13,655

 

 
13,655

Balance, end of period
$
185,899

 
$
7,629

 
$
193,528

 
 
 
 
 
 
 
Six months ended July 1, 2018
 
Retail
 
Wholesale
 
Total
Balance, beginning of period
$
186,254

 
$
6,217

 
$
192,471

Provision for credit losses
48,721

 
211

 
48,932

Charge-offs
(74,028
)
 

 
(74,028
)
Recoveries
26,555

 

 
26,555

Balance, end of period
$
187,502

 
$
6,428

 
$
193,930

 
 
 
 
 
 
 
Six months ended June 25, 2017
 
Retail
 
Wholesale
 
Total
Balance, beginning of period
$
166,810

 
$
6,533

 
$
173,343

Provision for credit losses
68,710

 
1,096

 
69,806

Charge-offs
(76,298
)
 

 
(76,298
)
Recoveries
26,677

 

 
26,677

Balance, end of period
$
185,899

 
$
7,629

 
$
193,528


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

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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.

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

 
$
184

 
$
184

Collectively evaluated for impairment
187,502

 
6,244

 
193,746

Total allowance for credit losses
$
187,502

 
$
6,428

 
$
193,930

Finance receivables, ending balance:
 
 
 
 
 
Individually evaluated for impairment
$

 
$
220

 
$
220

Collectively evaluated for impairment
6,373,926

 
1,132,986

 
7,506,912

Total finance receivables
$
6,373,926

 
$
1,133,206

 
$
7,507,132

 
 
 
 
 
 
 
December 31, 2017
 
Retail
 
Wholesale
 
Total
Allowance for credit losses, ending balance:
 
 
 
 
 
Individually evaluated for impairment
$

 
$

 
$

Collectively evaluated for impairment
186,254

 
6,217

 
192,471

Total allowance for credit losses
$
186,254

 
$
6,217

 
$
192,471

Finance receivables, ending balance:
 
 
 
 
 
Individually evaluated for impairment
$

 
$

 
$

Collectively evaluated for impairment
6,140,600

 
1,016,957

 
7,157,557

Total finance receivables
$
6,140,600

 
$
1,016,957

 
$
7,157,557

 
 
 
 
 
 
 
June 25, 2017
 
Retail
 
Wholesale
 
Total
Allowance for credit losses, ending balance:
 
 
 
 
 
Individually evaluated for impairment
$

 
$

 
$

Collectively evaluated for impairment
185,899

 
7,629

 
193,528

Total allowance for credit losses
$
185,899

 
$
7,629

 
$
193,528

Finance receivables, ending balance:
 
 
 
 
 
Individually evaluated for impairment
$

 
$

 
$

Collectively evaluated for impairment
6,267,211

 
1,258,852

 
7,526,063

Total finance receivables
$
6,267,211

 
$
1,258,852

 
$
7,526,063

Additional information related to the wholesale finance receivables that are individually deemed to be impaired under ASC Topic 310, “Receivables,” includes (in thousands):
 
As of July 1, 2018
 
Three months ended July 1, 2018
 
Six months ended July 1, 2018
 
Recorded
Investment
 
Unpaid
Principal
Balance
 
Related
Allowance
 
Average
Recorded
Investment
 
Interest
Income
Recognized
 
Average
Recorded
Investment
 
Interest
Income
Recognized
Wholesale:
 
 
 
 
 
 
 
 
 
 
 
 
 
No related allowance recorded
$

 
$

 
$

 
$

 
$

 
$

 
$

Related allowance recorded
251

 
220

 
184

 
251

 

 
251

 

 
$
251

 
$
220

 
$
184

 
$
251

 
$

 
$
251

 
$


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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 July 1, 2018December 31, 2017 and June 25, 2017, all retail finance receivables were accounted for as interest-earning receivables, of which $22.4 million, $40.0 million and $25.1 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. The recorded investment of non-accrual status wholesale finance receivables at July 1, 2018 was $0.2 million. There were no wholesale receivables on non-accrual status at December 31, 2017 or June 25, 2017. At July 1, 2018December 31, 2017 and June 25, 2017, $0.1 million, $0.1 million, and $1.1 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):
 
July 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
$
6,198,906

 
$
116,828

 
$
35,763

 
$
22,429

 
$
175,020

 
$
6,373,926

Wholesale
1,132,472

 
516

 
134

 
84

 
734

 
1,133,206

       Total
$
7,331,378

 
$
117,344

 
$
35,897

 
$
22,513

 
$
175,754

 
$
7,507,132

 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2017
 
Current
 
31-60 Days
Past Due
 
61-90 Days
Past Due
 
Greater than
90 Days
Past Due
 
Total
Past Due
 
Total
Finance
Receivables
Retail
$
5,913,473

 
$
139,629

 
$
47,539

 
$
39,959

 
$
227,127

 
$
6,140,600

Wholesale
1,016,000

 
595

 
245

 
117

 
957

 
1,016,957

        Total
$
6,929,473

 
$
140,224

 
$
47,784

 
$
40,076

 
$
228,084

 
$
7,157,557

 
 
 
 
 
 
 
 
 
 
 
 
 
June 25, 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
$
6,086,592

 
$
118,616

 
$
36,914

 
$
25,089

 
$
180,619

 
$
6,267,211

Wholesale
1,257,301

 
281

 
142

 
1,128

 
1,551

 
1,258,852

       Total
$
7,343,893

 
$
118,897

 
$
37,056

 
$
26,217

 
$
182,170

 
$
7,526,063

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.

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The recorded investment in retail finance receivables, by credit quality indicator, was as follows (in thousands):
 
July 1,
2018
 
December 31,
2017
 
June 25,
2017
Prime
$
5,193,641

 
$
4,966,193

 
$
5,034,187

Sub-prime
1,180,285

 
1,174,407

 
1,233,024

       Total
$
6,373,926

 
$
6,140,600

 
$
6,267,211

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):
 
July 1,
2018
 
December 31,
2017
 
June 25,
2017
Doubtful
$
251

 
$
688

 
$
5,203

Substandard
803

 
3,837

 
10,458

Special Mention
2,154

 
26,866

 
4,953

Medium Risk
37,045

 
9,917

 
8,115

Low Risk
1,092,953

 
975,649

 
1,230,123

       Total
$
1,133,206

 
$
1,016,957

 
$
1,258,852

9. Derivative Instruments and Hedging Activities
The Company is exposed to certain risks such as foreign currency exchange rate risk, interest rate risk and commodity price risk. To reduce its exposure to such risks, the Company selectively uses derivative financial instruments. All derivative transactions are authorized and executed pursuant to regularly reviewed policies and procedures, which prohibit the use of financial instruments for speculative trading purposes.
All derivative instruments are recognized on the balance sheet at fair value. 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.

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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.
The Company has periodically utilized treasury rate lock contracts to fix the interest rate on a portion of the principal related to the issuance of long-term debt. All such treasury rate lock contracts have since settled and the gain or loss at settlement was recorded in accumulated other comprehensive loss which is being reclassified into earnings over the life of the debt.
The Company has also periodically utilized interest rate swaps to reduce the impact of fluctuations in interest rates. The Company utilized an interest rate swap designated as a cash flow hedge of one of its medium-term note issuances to convert it from a floating rate basis to a fixed rate basis.
The following tables summarize the fair value of the Company’s derivative financial instruments (in thousands):
 
 
July 1, 2018
 
December 31, 2017
 
June 25, 2017
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)
 
$
591,901

 
$
13,238

 
$

 
$
675,724

 
$
1,388

 
$
21,239

 
$
544,601

 
$
409

 
$
4,622

Commodity
contracts(c)
 
803

 
4

 

 
915

 

 
69

 
1,102

 

 
75

Interest rate swap - medium-term notes(c)
 
450,000

 

 
597

 

 

 

 

 

 

Total
 
$
1,042,704

 
$
13,242

 
$
597


$
676,639

 
$
1,388

 
$
21,308


$
545,703

 
$
409

 
$
4,697

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
July 1, 2018
 
December 31, 2017
 
June 25, 2017
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
 
$
4,421

 
$
204

 
$
28

 
$
4,532

 
$
381

 
$

 
$
4,336

 
$
49

 
$
168

Total
 
$
4,421


$
204

 
$
28

 
$
4,532

 
$
381

 
$

 
$
4,336

 
$
49

 
$
168

 
(a)
Included in other current assets
(b)
Included in accrued liabilities
(c)
Derivative designated as a cash flow hedge
The following tables summarize the amount of gains and losses related to derivative financial instruments designated as cash flow hedges (in thousands):
 
 
Amount of Gain/(Loss) Recognized in OCI, before tax
 
 
Three months ended
 
Six months ended
Cash Flow Hedges
 
July 1,
2018
 
June 25,
2017
 
July 1,
2018
 
June 25,
2017
Foreign currency contracts
 
$
32,635

 
$
(11,851
)
 
$
26,745

 
$
(23,648
)
Commodity contracts
 
4

 
(80
)
 
(12
)
 
(186
)
Treasury rate locks
 
41

 
(719
)
 
41

 
(719
)
Interest rate swap - medium-term notes
 
(886
)
 

 
(886
)
 

Total
 
$
31,794

 
$
(12,650
)
 
$
25,888

 
$
(24,553
)

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Table of Contents

 
 
Amount of Gain/(Loss) Reclassified from AOCL into Income
 
 
 
 
Three months ended
 
Six months ended
 
Expected to be Reclassified
Cash Flow Hedges
 
July 1,
2018
 
June 25,
2017
 
July 1,
2018
 
June 25,
2017
 
Over the Next Twelve Months
Foreign currency contracts(a)
 
$
956

 
$
3,957

 
$
(5,753
)
 
$
6,473

 
$
15,895

Commodity contracts(a)
 
(12
)
 
17

 
(85
)
 
65

 
16

Treasury rate locks(b)
 
(125
)
 
(99
)
 
(251
)
 
(189
)
 
(492
)
Interest rate swap - medium-term notes(b)
 
(289
)
 

 
(289
)
 

 
(939
)
Total
 
$
530

 
$
3,875

 
$
(6,378
)
 
$
6,349

 
$
14,480

(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 six months ended July 1, 2018 and June 25, 2017, 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.
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
 
Six months ended
Derivatives Not Designated As Hedges
 
July 1,
2018
 
June 25,
2017
 
July 1,
2018
 
June 25,
2017
Commodity contracts(a)
 
$
195

 
$
(193
)
 
$
201

 
$
(173
)
Total
 
$
195

 
$
(193
)
 
$
201

 
$
(173
)
(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.

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Table of Contents

10. 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):
 
 
July 1,
2018
 
December 31,
2017
 
June 25,
2017
Unsecured commercial paper
 
$
1,327,307

 
$
1,273,482

 
$
928,445

          Total short-term debt
 
$
1,327,307

 
$
1,273,482

 
$
928,445

Debt with a contractual term greater than one year is generally classified as long-term debt and consisted of the following (in thousands): 
 
 
July 1,
2018
 
December 31,
2017
 
June 25,
2017
Secured debt (Note 11)
 
 
 
 
 
 
Asset-backed Canadian commercial paper conduit facility
 
$
166,638

 
$
174,779

 
$
138,739

Asset-backed U.S. commercial paper conduit facilities
 
300,000

 
279,457

 
279,833

Asset-backed securitization debt
 
169,632

 
353,085

 
522,095

Less: unamortized discount and debt issuance costs
 
(202
)
 
(461
)
 
(795
)
Total secured debt
 
636,068

 
806,860

 
939,872

 
 
 
 
 
 
 
Unsecured notes (at par value)
 
 
 
 
 
 
1.55% Medium-term notes due in 2017, issued November 2014
 

 

 
400,000

6.80% Medium-term notes due in 2018, issued May 2008
 

 
877,488

 
877,488

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

 
600,000

 
600,000

Floating-rate Medium-term notes due in 2019, issued March 2017(a)
 
150,000

 
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

 

 

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

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

 

 

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

 

 

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
 
(22,259
)
 
(19,821
)
 
(23,452
)
Gross long-term debt
 
5,813,809

 
5,714,527

 
6,243,908

Less: current portion of long-term debt, net of unamortized discount and debt issuance costs
 
(945,463
)
 
(1,127,269
)
 
(1,565,558
)
Total long-term debt
 
$
4,868,346