HOG - 03.30.2014 - 10Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
 
FORM 10-Q
 
Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 30, 2014
£
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  Q    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  Q   No   £
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
Q
Accelerated filer
 
£
 
 
 
 
 
Non-accelerated filer
 
£
Smaller reporting company
 
£
Indicate by check mark whether the registrant is a shell company as defined in Rule 12b-2 of the Exchange Act.    Yes  £    No  Q
Number of shares of the registrant’s common stock outstanding at May 1, 2014: 218,365,592 shares


Harley-Davidson, Inc.

Form 10-Q

For The Quarter Ended March 30, 2014
 
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.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
 
 
Three months ended
 
March 30,
2014
 
March 31,
2013
Revenue:
 
 
 
Motorcycles and Related Products
$
1,571,688

 
$
1,414,248

Financial Services
154,360

 
156,965

Total revenue
1,726,048

 
1,571,213

Costs and expenses:
 
 
 
Motorcycles and Related Products cost of goods sold
979,557

 
894,806

Financial Services interest expense
38,857

 
40,554

Financial Services provision for credit losses
20,331

 
13,110

Selling, administrative and engineering expense
276,421

 
271,499

Restructuring expense
—

 
2,938

Total costs and expenses
1,315,166

 
1,222,907

Operating income
410,882

 
348,306

Investment income
1,659

 
1,615

Interest expense
3,677

 
11,391

Income before provision for income taxes
408,864

 
338,530

Provision for income taxes
142,947

 
114,401

Net income
$
265,917

 
$
224,129

Earnings per common share:
 
 
 
Basic
$
1.21

 
$
1.00

Diluted
$
1.21

 
$
0.99

Cash dividends per common share
$
0.275

 
$
0.210

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


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HARLEY-DAVIDSON, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
 
 
Three months ended
 
March 30,
2014
 
March 31,
2013
Net Income
$
265,917

 
$
224,129

Other comprehensive income, net of tax
 
 
 
     Foreign currency translation adjustments
2,948

 
(10,570
)
     Derivative financial instruments
(227
)
 
10,601

     Marketable securities
(42
)
 
(244
)
     Pension and postretirement benefit plans
6,068

 
10,239

Total other comprehensive income, net of tax
8,747

 
10,026

Comprehensive income
$
274,664

 
$
234,155

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



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HARLEY-DAVIDSON, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
 
(Unaudited)
 
 
 
(Unaudited)
 
March 30,
2014
 
December 31,
2013
 
March 31,
2013
ASSETS
 
 
 
 
 
Current assets:
 
 
 
 
 
Cash and cash equivalents
$
935,820

 
$
1,066,612

 
$
1,018,759

Marketable securities
92,940

 
99,009

 
135,246

Accounts receivable, net
324,979

 
261,065

 
259,673

Finance receivables, net
2,223,199

 
1,773,686

 
2,074,036

Inventories
449,044

 
424,507

 
416,050

Restricted cash
117,883

 
144,807

 
197,025

Deferred income taxes
89,070

 
103,625

 
107,828

Other current assets
127,536

 
115,492

 
124,362

Total current assets
4,360,471

 
3,988,803

 
4,332,979

Finance receivables, net
4,214,496

 
4,225,877

 
3,959,903

Property, plant and equipment, net
823,061

 
842,477

 
790,245

Prepaid pension costs
250,575

 
244,871

 
—

Goodwill
30,427

 
30,452

 
28,861

Deferred income taxes
3,023

 
3,339

 
156,319

Other long-term assets
47,738

 
69,221

 
66,814

 
$
9,729,791

 
$
9,405,040

 
$
9,335,121

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
 
Current liabilities:
 
 
 
 
 
Accounts payable
$
454,366

 
$
239,794

 
$
360,018

Accrued liabilities
566,755

 
427,335

 
464,317

Short-term debt
974,153

 
666,317

 
687,705

Current portion of long-term debt
848,840

 
1,176,140

 
715,143

Total current liabilities
2,844,114

 
2,509,586

 
2,227,183

Long-term debt
3,271,648

 
3,416,713

 
3,892,469

Pension liability
37,261

 
36,371

 
152,132

Postretirement healthcare liability
212,887

 
216,165

 
274,597

Deferred income taxes
35,973

 
49,499

 
—

Other long-term liabilities
168,073

 
167,220

 
131,692

Commitments and contingencies (Note 16)

 

 

Shareholders’ equity:
 
 
 
 
 
Preferred stock, none issued
—

 
—

 
—

Common stock
3,435

 
3,432

 
3,423

Additional paid-in-capital
1,198,655

 
1,175,052

 
1,105,044

Retained earnings
8,058,119

 
7,852,729

 
7,483,248

Accumulated other comprehensive loss
(323,929
)
 
(332,676
)
 
(597,652
)
Treasury stock, at cost
(5,776,445
)
 
(5,689,051
)
 
(5,337,015
)
Total shareholders' equity
3,159,835

 
3,009,486

 
2,657,048

 
$
9,729,791

 
$
9,405,040

 
$
9,335,121



5
Table of Contents


HARLEY-DAVIDSON, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (continued)
(In thousands)
 
(Unaudited)
 
 
 
(Unaudited)
 
March 30,
2014
 
December 31,
2013
 
March 31,
2013
Balances held by consolidated variable interest entities (Note 6)
 
 
 
 
 
     Current finance receivables, net
$
274,797

 
$
352,899

 
$
432,079

     Other assets
$
3,387

 
$
4,149

 
$
5,229

     Non-current finance receivables, net
$
922,060

 
$
1,184,441

 
$
1,402,541

     Restricted cash
$
105,536

 
$
133,053

 
$
185,657

     Current portion of long-term debt
$
309,250

 
$
334,630

 
$
375,835

     Long-term debt
$
787,383

 
$
922,002

 
$
892,737

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

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HARLEY-DAVIDSON, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
Three months ended
 
March 30,
2014
 
March 31,
2013
Net cash provided by (used by) operating activities (Note 3)
$
203,586

 
$
(108,489
)
Cash flows from investing activities:
 
 
 
Capital expenditures
(25,881
)
 
(22,261
)
Origination of finance receivables
(757,965
)
 
(622,373
)
Collections on finance receivables
707,431

 
665,520

Sales and redemptions of marketable securities
6,001

 
—

Other
51

 
6,656

Net cash (used by) provided by investing activities
(70,363
)
 
27,542

Cash flows from financing activities:
 
 
 
Repayments of senior unsecured notes
(303,000
)
 
—

Repayments of securitization debt
(159,938
)
 
(178,923
)
Net increase in credit facilities and unsecured commercial paper
307,803

 
392,564

Borrowings of asset-backed commercial paper
13,746

 
—

Repayments of asset-backed commercial paper
(16,981
)
 
(17,063
)
Net change in restricted cash
26,924

 
(9,017
)
Dividends paid
(60,527
)
 
(47,308
)
Purchase of common stock for treasury
(87,690
)
 
(126,411
)
Excess tax benefits from share-based payments
4,763

 
14,468

Issuance of common stock under employee stock option plans
8,894

 
13,887

Net cash (used by) provided by financing activities
(266,006
)
 
42,197

Effect of exchange rate changes on cash and cash equivalents
1,991

 
(10,629
)
Net decrease in cash and cash equivalents
$
(130,792
)
 
$
(49,379
)
Cash and cash equivalents:
 
 
 
Cash and cash equivalents—beginning of period
$
1,066,612

 
$
1,068,138

Net decrease in cash and cash equivalents
(130,792
)
 
(49,379
)
Cash and cash equivalents—end of period
$
935,820

 
$
1,018,759

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


7
Table of Contents

HARLEY-DAVIDSON, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation and Use of Estimates
The condensed consolidated financial statements include the accounts of Harley-Davidson, Inc. and its wholly-owned subsidiaries (the Company), including the accounts of the group 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 condensed consolidated financial statements contain all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the condensed consolidated balance sheets as of March 30, 2014 and March 31, 2013, the condensed consolidated statements of operations for the three month periods then ended, the condensed consolidated statements of comprehensive income for the three month periods then ended and the condensed consolidated statements of cash flows for the three month periods then ended.
Certain information and footnote disclosures normally included in complete financial statements have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) and U.S. generally accepted accounting principles (U.S. GAAP) for interim financial reporting. These condensed 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, 2013.
The Company operates in two business segments: Motorcycles & Related Products (Motorcycles) and Financial Services (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 July 2013, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2013-11 Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (ASU No. 2013-11). ASU No. 2013-11 amends the guidance within Accounting Standards Codification (ASC) Topic 740, "Income Taxes", to require entities to present an unrecognized tax benefit, or a portion of an unrecognized tax benefit in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. The Company adopted ASU No. 2013-11 on January 1, 2014. There were no material presentation changes resulting from the adoption of ASU No. 2013-11.





8
Table of Contents

3. Additional Balance Sheet and Cash Flow Information
Marketable Securities
The Company’s marketable securities consisted of the following (in thousands):
 
March 30,
2014
 
December 31,
2013
 
March 31,
2013
Available-for-sale: Corporate bonds
$
92,940

 
$
99,009

 
$
135,246

Trading securities: Mutual funds
33,182

 
30,172

 
22,473

 
$
126,122

 
$
129,181

 
$
157,719

The Company’s available-for-sale securities are carried at fair value with any unrealized gains or losses reported in other comprehensive income. During the first three months of 2014 and 2013, the Company recognized gross unrealized losses of approximately $67,000 and $388,000, respectively, or $42,000 and $244,000 net of taxes, respectively, to adjust amortized cost to fair value. The marketable securities have contractual maturities that generally come due over the next 2 to 26 months.
The Company's trading securities relate to investments held by the Company to fund certain deferred compensation obligations. The trading securities are carried at fair value with gains and losses recorded in net income and investments are included in other long-term assets on the consolidated balance sheets.
Inventories
Inventories are valued at the lower of cost or market. Substantially all inventories located in the United States are valued using the last-in, first-out (LIFO) method. Other inventories are valued at the lower of cost or market using the first-in, first-out (FIFO) method. Inventories consist of the following (in thousands):
 
March 30,
2014
 
December 31,
2013
 
March 31,
2013
Components at the lower of FIFO cost or market
 
 
 
 
 
Raw materials and work in process
$
141,381

 
$
140,302

 
$
121,481

Motorcycle finished goods
222,649

 
205,416

 
203,275

Parts and accessories and general merchandise
133,740

 
127,515

 
137,184

Inventory at lower of FIFO cost or market
497,770

 
473,233

 
461,940

Excess of FIFO over LIFO cost
(48,726
)
 
(48,726
)
 
(45,890
)
 
$
449,044

 
$
424,507

 
$
416,050



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Table of Contents


Operating Cash Flow
The reconciliation of net income to net cash provided by operating activities is as follows (in thousands):
 
Three months ended
 
March 30,
2014
 
March 31,
2013
Cash flows from operating activities:
 
 
 
Net income
$
265,917

 
$
224,129

Adjustments to reconcile net income to net cash provided by (used by) operating activities:
 
 
 
Depreciation
43,398

 
42,850

Amortization of deferred loan origination costs
22,101

 
19,753

Amortization of financing origination fees
2,085

 
2,204

Provision for employee long-term benefits
8,425

 
16,684

Contributions to pension and postretirement plans
(6,879
)
 
(182,047
)
Stock compensation expense
9,239

 
11,096

Net change in wholesale finance receivables related to sales
(439,422
)
 
(336,927
)
Provision for credit losses
20,331

 
13,110

Deferred income taxes
(474
)
 
6,665

Foreign currency adjustments
(4,172
)
 
9,846

Other, net
3,055

 
(8,470
)
Changes in current assets and liabilities:
 
 
 
Accounts receivable, net
(61,217
)
 
(36,165
)
Finance receivables—accrued interest and other
793

 
1,246

Inventories
(20,317
)
 
(28,613
)
Accounts payable and accrued liabilities
356,430

 
79,861

Restructuring reserves
—

 
(12,388
)
Derivative instruments
1,222

 
(342
)
Other
3,071

 
69,019

Total adjustments
(62,331
)
 
(332,618
)
Net cash provided by (used by) operating activities
$
203,586

 
$
(108,489
)

4. Restructuring Expense
In 2013, the Company completed the activities related to its 2009, 2010, and 2011 Restructuring Plans.
2011 Restructuring Plans
In December 2011, the Company made a decision to cease operations at New Castalloy, its Australian subsidiary and producer of cast motorcycle wheels and wheel hubs, and source those components through other existing suppliers by the end of 2013 (2011 New Castalloy Restructuring Plan). Under this plan, the Company successfully transitioned a significant amount of wheel production to other existing suppliers. However, during the second quarter of 2013, the Company made a decision to retain limited operations at New Castalloy focused on the production of certain complex, high-finish wheels in a cost-effective and competitive manner. At that time, the Company also entered into a new agreement with the unionized labor force at New Castalloy.
In connection with the modified 2011 New Castalloy Restructuring Plan, the New Castalloy workforce was reduced by approximately 100 employees, leaving approximately 100 remaining employees to support the ongoing operations. The original plan would have resulted in a workforce reduction of approximately 200 employees.
Under the modified 2011 New Castalloy Restructuring Plan, restructuring expenses consisted of employee severance and termination costs, accelerated depreciation and other related costs. On a cumulative basis, the Company incurred $22.1 million of restructuring expense under the modified 2011 New Castalloy Restructuring Plan, of which approximately 35% was non-

10
Table of Contents

cash. This includes a benefit related to restructuring reserves released in the second quarter of 2013 in connection with the decision to retain a limited operation at the New Castalloy facility, as described above.
In February 2011, the Company’s unionized employees at its facility in Kansas City, Missouri ratified a new seven-year labor agreement. The new agreement took effect on August 1, 2011. The new contract is similar to the labor agreements ratified at the Company’s Wisconsin facilities in September 2010 and its York, Pennsylvania production facility in December 2009, and allows for similar flexibility, increased production efficiency and the addition of a flexible workforce component.
The actions to implement the new ratified labor agreement (2011 Kansas City Restructuring Plan) resulted in approximately 145 fewer full-time hourly unionized employees in its Kansas City facility than would have been required under the previous contract.
Under the 2011 Kansas City Restructuring Plan, restructuring expenses consisted of employee severance and termination costs and other related costs. On a cumulative basis, the Company incurred $6.0 million of restructuring expense under the 2011 Kansas City Restructuring Plan, of which approximately 10% was non-cash.

The following table summarizes the Motorcycles segment’s 2011 Kansas City Restructuring Plan and modified 2011 New Castalloy Restructuring Plan reserve activity and balances as recorded in accrued liabilities as of March 31, 2013 (in thousands):
 
Three months ended March 31, 2013
 
Kansas City
 
New Castalloy
 
Consolidated
 
Employee
Severance and
Termination
Costs
 
Other
 
Total
 
Employee
Severance and
Termination
Costs
 
Accelerated
Depreciation
 
Other
 
Total
 
Total
Balance, beginning of period
$
2,259

 
$
—

 
$
2,259

 
$
9,306

 
$
—

 
$
145

 
$
9,451

 
$
11,710

Restructuring expense
—

 
—

 
—

 
474

 
2,092

 
444

 
3,010

 
3,010

Utilized—cash
—

 
—

 
—

 
(1,416
)
 
—

 
(456
)
 
(1,872
)
 
(1,872
)
Utilized—non-cash
(790
)
 
—

 
(790
)
 
—

 
(2,092
)
 
—

 
(2,092
)
 
(2,882
)
Balance, end of period
$
1,469

 
$
—

 
$
1,469

 
$
8,364

 
$
—

 
$
133

 
$
8,497

 
$
9,966

2010 Restructuring Plan
In September 2010, the Company’s unionized employees in Wisconsin ratified three separate new seven-year labor agreements which took effect in April 2012 when the prior contracts expired. The new contracts are similar to the labor agreement ratified at the Company's York, Pennsylvania production facility in December 2009 and allow for similar flexibility and increased production efficiency and the addition of a flexible workforce component.
The actions to implement the new ratified labor agreements (2010 Restructuring Plan) resulted in approximately 250 fewer full-time hourly unionized employees in its Milwaukee-area facilities than would have been required under the previous contracts and approximately 75 fewer full-time hourly unionized employees in its Tomahawk, Wisconsin facility than would have been required under the previous contract.
Under the 2010 Restructuring Plan, restructuring expenses consisted of employee severance and termination costs and other related costs. On a cumulative basis, the Company incurred $59.2 million of restructuring expense under the 2010 Restructuring Plan, of which approximately 45% was non-cash.


11
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The following table summarizes the Motorcycles segment’s 2010 Restructuring Plan reserve activity and balances as recorded in accrued liabilities as of March 31, 2013 (in thousands):
 
Three months ended
 
March 31, 2013
 
Employee
Severance and
Termination Costs
Balance, beginning of period
$
10,156

Restructuring expense
—

Utilized—cash
(9,607
)
Balance, end of period
$
549

2009 Restructuring Plan
During 2009, in response to the U.S. economic recession and worldwide slowdown in consumer demand, the Company committed to a volume reduction and a combination of restructuring actions (2009 Restructuring Plan) expected to be completed at various dates between 2009 and 2013. The actions were designed to reduce administrative costs, eliminate excess capacity and exit non-core business operations. The Company’s announced actions include the restructuring and transformation of its York, Pennsylvania production facility including the implementation of a new more flexible unionized labor agreement which allows for the addition of a flexible workforce component; consolidation of facilities related to engine and transmission production; outsourcing of certain distribution and transportation activities and exiting the Buell product line. In addition, the Company implemented projects under this plan involving the outsourcing of select information technology activities and the consolidation of an administrative office in Michigan into its corporate headquarters in Milwaukee, Wisconsin.
The 2009 Restructuring Plan resulted in a reduction of approximately 2,900 hourly production positions and approximately 800 non-production, primarily salaried positions within the Motorcycles segment and approximately 100 salaried positions in the Financial Services segment.
Under the 2009 Restructuring Plan, restructuring expenses consisted of employee severance and termination costs, accelerated depreciation on the long-lived assets that were exited as part of the 2009 Restructuring Plan and other related costs. On a cumulative basis, the Company incurred $393.8 million of restructuring and impairment expense under the 2009 Restructuring Plan, of which approximately 30% was non-cash.


The following table summarizes the Company’s 2009 Restructuring Plan reserve activity and balances recorded in accrued liabilities as of March 31, 2013 (in thousands):
 
Three months ended March 31, 2013
 
Motorcycles & Related Products
 
Employee
Severance and
Termination Costs
 
Accelerated
Depreciation
 
Other
 
Total
Balance, beginning of period
$
5,196

 
$
—

 
$
161

 
$
5,357

Restructuring expense
—

 
—

 
638

 
638

Utilized—cash
(808
)
 
—

 
(623
)
 
(1,431
)
Non-cash reserve release
(710
)
 
—

 
—

 
(710
)
Balance, end of period
$
3,678

 
$
—


$
176

 
$
3,854

Other restructuring costs include items such as the exit costs for terminating supply contracts, lease termination costs and moving costs.
5. Finance Receivables
HDFS 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 HDFS and the retail customer, unrelated to the Company’s sale of product to its dealers. Retail finance receivables consist of secured promissory notes and installment loans. HDFS holds either titles or liens on titles to vehicles financed by promissory notes and installment loans.

12
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HDFS 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):
 
March 30,
2014
 
December 31,
2013
 
March 31,
2013
Retail
$
5,254,133

 
$
5,265,044

 
$
4,981,488

Wholesale
1,298,091

 
845,212

 
1,159,243

 
6,552,224

 
6,110,256

 
6,140,731

Allowance for credit losses
(114,529
)
 
(110,693
)
 
(106,792
)
 
$
6,437,695

 
$
5,999,563

 
$
6,033,939

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

Changes in the allowance for credit losses on finance receivables by portfolio were as follows (in thousands):
 
Three months ended March 30, 2014
 
Retail
 
Wholesale
 
Total
Balance, beginning of period
$
106,063

 
$
4,630

 
$
110,693

Provision for credit losses
17,208

 
3,123

 
20,331

Charge-offs
(27,343
)
 
—

 
(27,343
)
Recoveries
10,848

 
—

 
10,848

Balance, end of period
$
106,776

 
$
7,753

 
$
114,529

 
Three months ended March 31, 2013
 
Retail
 
Wholesale
 
Total
Balance, beginning of period
$
101,442

 
$
6,225

 
$
107,667

Provision for credit losses
11,085

 
2,025

 
13,110

Charge-offs
(25,243
)
 
—

 
(25,243
)
Recoveries
11,258

 
—

 
11,258

Balance, end of period
$
98,542

 
$
8,250

 
$
106,792

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

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to the Company’s internal risk rating system and collectively evaluated for impairment. The related allowance for credit losses is based on factors such as the specific borrower’s financial performance and ability to repay, the Company’s past loan loss experience, current economic conditions, and the value of the underlying collateral.
Generally, it is the Company’s policy not to change the terms and conditions of finance receivables. However, to minimize the economic loss, the Company may modify certain finance receivables in troubled debt restructurings. Total restructured finance receivables are not significant.
The allowance for credit losses and finance receivables by portfolio, segregated by those amounts that are individually evaluated for impairment and those that are collectively evaluated for impairment, was as follows (in thousands):
 
March 30, 2014
 
Retail
 
Wholesale
 
Total
Allowance for credit losses, ending balance:
 
 
 
 
 
Individually evaluated for impairment
$
—

 
$
—

 
$
—

Collectively evaluated for impairment
106,776

 
7,753

 
114,529

Total allowance for credit losses
$
106,776

 
$
7,753

 
$
114,529

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

 
$
—

 
$
—

Collectively evaluated for impairment
5,254,133

 
1,298,091

 
6,552,224

Total finance receivables
$
5,254,133

 
$
1,298,091

 
$
6,552,224

 
December 31, 2013
 
Retail
 
Wholesale
 
Total
Allowance for credit losses, ending balance:
 
 
 
 
 
Individually evaluated for impairment
$
—

 
$
—

 
$
—

Collectively evaluated for impairment
106,063

 
4,630

 
110,693

Total allowance for credit losses
$
106,063

 
$
4,630

 
$
110,693

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

 
$
—

 
$
—

Collectively evaluated for impairment
5,265,044

 
845,212

 
6,110,256

Total finance receivables
$
5,265,044

 
$
845,212

 
$
6,110,256

 
March 31, 2013
 
Retail
 
Wholesale
 
Total
Allowance for credit losses, ending balance:
 
 
 
 
 
Individually evaluated for impairment
$
—

 
$
—

 
$
—

Collectively evaluated for impairment
98,542

 
8,250

 
106,792

Total allowance for credit losses
$
98,542

 
$
8,250

 
$
106,792

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

 
$
—

 
$
—

Collectively evaluated for impairment
4,981,488

 
1,159,243

 
6,140,731

Total finance receivables
$
4,981,488

 
$
1,159,243

 
$
6,140,731



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There were no wholesale finance receivables at March 30, 2014, December 31, 2013, or March 31, 2013 that were individually deemed to be impaired under ASC Topic 310, “Receivables.”
Retail finance receivables are contractually delinquent if the minimum payment is not received by the specified due date. Retail finance receivables are generally charged-off when the receivable is 120 days or more delinquent, the related asset is repossessed or the receivable is otherwise deemed uncollectible. All retail finance receivables accrue interest until either collected or charged-off. Accordingly, as of March 30, 2014, December 31, 2013 and March 31, 2013, all retail finance receivables were accounted for as interest-earning receivables, of which $17.0 million, $24.6 million and $20.3 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. 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. HDFS 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. Wholesale finance receivables are written down once management determines that the specific borrower does not have the ability to repay the loan in full. There were no wholesale receivables on non-accrual status at March 30, 2014, December 31, 2013 or March 31, 2013. At March 30, 2014, December 31, 2013 and March 31, 2013, $0.1 million, $0.2 million, and $0.8 million of wholesale finance receivables were 90 days or more past due and accruing interest, respectively.
An analysis of the aging of past due finance receivables was as follows (in thousands):
 
March 30, 2014
 
Current
 
31-60 Days
Past Due
 
61-90 Days
Past Due
 
Greater than
90 Days
Past Due
 
Total
Past Due
 
Total
Finance
Receivables
Retail
$
5,134,053

 
$
80,344

 
$
22,767

 
$
16,969

 
$
120,080

 
$
5,254,133

Wholesale
1,297,761

 
144

 
96

 
90

 
330

 
1,298,091

Total
$
6,431,814

 
$
80,488

 
$
22,863

 
$
17,059

 
$
120,410

 
$
6,552,224

 
December 31, 2013
 
Current
 
31-60 Days
Past Due
 
61-90 Days
Past Due
 
Greater than
90 Days
Past Due
 
Total
Past Due
 
Total
Finance
Receivables
Retail
$
5,094,615

 
$
109,806

 
$
36,029

 
$
24,594

 
$
170,429

 
$
5,265,044

Wholesale
844,033

 
791

 
181

 
207

 
1,179

 
845,212

Total
$
5,938,648

 
$
110,597

 
$
36,210

 
$
24,801

 
$
171,608

 
$
6,110,256

 
March 31, 2013
 
Current
 
31-60 Days
Past Due
 
61-90 Days
Past Due
 
Greater than
90 Days
Past Due
 
Total
Past Due
 
Total
Finance
Receivables
Retail
$
4,855,128

 
$
83,265

 
$
22,837

 
$
20,258

 
$
126,360

 
$
4,981,488

Wholesale
1,157,596

 
535

 
310

 
802

 
1,647

 
1,159,243

Total
$
6,012,724

 
$
83,800

 
$
23,147

 
$
21,060

 
$
128,007

 
$
6,140,731

A significant part of managing HDFS’ finance receivable portfolios includes the assessment of credit risk associated with each borrower. As the credit risk varies between the retail and wholesale portfolios, HDFS utilizes different credit risk indicators for each portfolio.
HDFS manages retail credit risk through its credit approval policy and ongoing collection efforts. HDFS 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 of retail finance receivables, by credit quality indicator, was as follows (in thousands):
 
March 30, 2014
 
December 31, 2013
 
March 31, 2013
Prime
$
4,128,996

 
$
4,141,559

 
$
3,942,294

Sub-prime
1,125,137

 
1,123,485

 
1,039,194

Total
$
5,254,133

 
$
5,265,044

 
$
4,981,488

HDFS’ 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. HDFS 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.
HDFS uses the following internal credit quality indicators, based on the Company’s internal risk rating system, listed from highest level of risk to lowest level of risk for the wholesale portfolio: Doubtful, Substandard, Special Mention, Medium Risk and Low Risk. Based upon management’s review, the dealers classified in the Doubtful category are the dealers with the greatest likelihood of being charged off, while the dealers classified as Low Risk are least likely to be charged off. The internal rating system considers factors such as the specific borrowers’ ability to repay and the estimated value of any collateral. Dealer risk rating classifications are reviewed and updated on a quarterly basis.
The recorded investment of wholesale finance receivables, by internal credit quality indicator, was as follows (in thousands):
 
March 30, 2014
 
December 31, 2013
 
March 31, 2013
Doubtful
$
5,508

 
$
—

 
$
4,843

Substandard
3,888

 
8,383

 
10,441

Special Mention
10,950

 
2,076

 
11,125

Medium Risk
11,103

 
5,205

 
7,804

Low Risk
1,266,642

 
829,548

 
1,125,030

Total
$
1,298,091

 
$
845,212

 
$
1,159,243

6. Asset-Backed Financing

HDFS participates in asset-backed financing through both term asset-backed securitization transactions and through asset-backed commercial paper conduit facilities. HDFS treats these transactions as secured borrowing because either they are transferred to consolidated variable interest entities (VIEs) or HDFS maintains effective control over the assets and does not meet the accounting sale requirements under ASC Topic 860, "Transfers and Servicing" (ASC Topic 860). In HDFS' asset-backed financing programs, HDFS transfers retail motorcycle finance receivables to special purpose entities (SPE), which are considered VIEs under U.S. GAAP. Each SPE then converts those assets into cash, through the issuance of debt.

HDFS is required to consolidate any VIE in which it is deemed to be the primary beneficiary through having power over the significant activities of the entity and having an obligation to absorb losses or the right to receive benefits from the VIE which are potentially significant to the VIE. HDFS is considered to have the power over the significant activities of its term asset-backed securitization and asset-backed U.S. commercial paper conduit facility VIEs due to its role as servicer. Servicing fees are typically not considered potentially significant variable interests in a VIE. However, HDFS retains a residual interest in the VIEs in the form of a debt security, which gives HDFS the right to receive benefits that could be potentially significant to the VIE. Therefore, the Company is the primary beneficiary and consolidates all of these VIEs within its consolidated financial statements.
HDFS is not the primary beneficiary of the asset-backed Canadian commercial paper conduit facility VIE; therefore, HDFS does not consolidate this VIE. However, HDFS treats the conduit facility as a secured borrowing as it maintains effective control over the assets transferred to the VIE and therefore does not meet the requirements for sale accounting under ASC Topic 860. As such, the Company retains the transferred assets and the related debt within its Consolidated Balance Sheet.
    
Servicing fees paid by VIEs to HDFS are eliminated in consolidation and therefore are not recorded on a consolidated basis. HDFS is not required, and does not currently intend, to provide any additional financial support to its VIEs. Investors and creditors only have recourse to the assets held by the VIEs.

The following table shows the assets and liabilities related to the asset-backed financings that were included in the financial statements (in thousands):

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March 30, 2014
 
Finance receivables
 
Allowance for credit losses
 
Restricted cash
 
Other assets
 
Total assets
 
Asset-backed debt
On-balance sheet assets and liabilities
 
 
 
 
 
 
 
 
 
 
 
Consolidated VIEs
 
 
 
 
 
 
 
 
 
 
 
Term asset-backed securitizations
$
1,221,855

 
$
(24,998
)
 
$
105,536

 
$
3,083

 
$
1,305,476

 
$
1,096,633

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

 
—

 
—

 
304

 
304

 
—

Unconsolidated VIEs
 
 
 
 
 
 
 
 
 
 
 
Asset-backed Canadian commercial paper conduit facility
200,147

 
(3,257
)
 
12,347

 
238

 
209,475

 
164,704

Total On-balance sheet assets and liabilities
$
1,422,002

 
$
(28,255
)
 
$
117,883

 
$
3,625

 
$
1,515,255

 
$
1,261,337

 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2013
 
Finance receivables
 
Allowance for credit losses
 
Restricted cash
 
Other assets
 
Total assets
 
Asset-backed debt
On-balance sheet assets and liabilities
 
 
 
 
 
 
 
 
 
 
 
Consolidated VIEs
 
 
 
 
 
 
 
 
 
 
 
Term asset-backed securitizations
$
1,569,118

 
$
(31,778
)
 
$
133,053

 
$
3,720

 
$
1,674,113

 
$
1,256,632

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

 
—

 
—

 
429

 
429

 
—

Unconsolidated VIEs
 
 
 
 
 
 
 
 
 
 
 
Asset-backed Canadian commercial paper conduit facility
204,092

 
(3,361
)
 
11,754

 
589

 
213,074

 
174,241

Total On-balance sheet assets and liabilities
$
1,773,210

 
$
(35,139
)
 
$
144,807

 
$
4,738

 
$
1,887,616

 
$
1,430,873

 
 
 
 
 
 
 
 
 
 
 
 
 
March 31, 2013
 
Finance receivables
 
Allowance for credit losses
 
Restricted cash
 
Other assets
 
Total assets
 
Asset-backed debt
On-balance sheet assets and liabilities
 
 
 
 
 
 
 
 
 
 
 
Consolidated VIEs
 
 
 
 
 
 
 
 
 
 
 
Term asset-backed securitizations
$
1,871,419

 
$
(36,799
)
 
$
185,657

 
$
4,935

 
$
2,025,212

 
$
1,268,572

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

 
—

 
—

 
294

 
294

 
—

Unconsolidated VIEs
 
 
 
 
 
 
 
 
 
 
 
Asset-backed Canadian commercial paper conduit facility
174,420

 
(2,923
)
 
11,368

 
167

 
183,032

 
154,596

Total On-balance sheet assets and liabilities
$
2,045,839

 
$
(39,722
)
 
$
197,025

 
$
5,396

 
$
2,208,538

 
$
1,423,168

Term Asset-Backed Securitization VIEs
The Company transfers U.S. retail motorcycle finance receivables to SPEs which in turn issue secured notes to investors, with various maturities and interest rates, secured by future collections of the purchased U.S. retail motorcycle finance receivables. Each term asset-backed securitization SPE is a separate legal entity and the U.S. retail motorcycle finance receivables included in the term asset-backed securitizations are only available for payment of the secured debt and other obligations arising from the term asset-backed securitization transaction and are not available to pay other obligations or claims of the Company’s creditors until the associated secured debt and other obligations are satisfied. Restricted cash balances held by the SPEs are used only to support the securitizations. There are no amortization schedules for the secured notes; however, the debt is reduced monthly as available collections on the related U.S. retail motorcycle finance receivables are applied to outstanding principal. The secured notes’ contractual lives have various maturities ranging from 2014 to 2020.

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During 2012, the Company issued $89.5 million of secured notes through the sale of notes that had been previously retained as part of certain 2009 and 2011 term asset-backed securitization transactions. These notes were sold at a premium. The unaccreted premium associated with the issuance of these secured notes was $0.4 million and $1.0 million at March 30, 2014 and March 31, 2013, respectively.
There were no term asset-backed securitization transactions during the three months ended March 30, 2014 or March 31, 2013.
Asset-Backed U.S. Commercial Paper Conduit Facility VIE
In September 2013, the Company amended and restated its third-party bank sponsored asset-backed commercial paper conduit facility (U.S. Conduit) which provides for a total aggregate commitment of $600.0 million based on, among other things, the amount of eligible U.S. retail motorcycle loans held by a SPE as collateral. Under the facility, HDFS may transfer U.S. retail motorcycle finance receivables to a SPE, which in turn may issue debt to third-party bank-sponsored asset-backed commercial paper conduits.
The assets of the SPE are restricted as collateral for the payment of the debt or other obligations arising in the transaction and are not available to pay other obligations or claims of the Company’s creditors. The terms for this debt provide for interest on the outstanding principal based on prevailing commercial paper rates, or LIBOR plus a specified margin to the extent the advance is not funded by a conduit lender through the issuance of commercial paper. The U.S. Conduit also provides for an unused commitment fee based on the unused portion of the total aggregate commitment of $600.0 million. There is no amortization schedule; however, the debt is reduced monthly as available collections on the related finance receivables are applied to outstanding principal. Upon expiration of the U.S. Conduit, any outstanding principal will continue to be reduced monthly through available collections. Unless earlier terminated or extended by mutual agreement of HDFS and the lenders, the U.S. Conduit has an expiration date of September 12, 2014.
The SPE had no borrowings outstanding under the U.S. Conduit at March 30, 2014, December 31, 2013 or March 31, 2013; therefore, U.S. Conduit assets are restricted as collateral for the payment of fees associated with the unused portion of the total aggregate commitment.
Asset-Backed Canadian Commercial Paper Conduit Facility
In June 2013, HDFS amended its agreement with a Canadian bank-sponsored asset-backed commercial paper conduit facility (Canadian Conduit). The amended agreement has terms that are similar to those of the original agreement, entered into in August 2012, and is for the same amount. Under the agreement, the Canadian Conduit is contractually committed, at HDFS' option, to purchase from HDFS eligible Canadian retail motorcycle finance receivables for proceeds up to C$200.0 million. The terms for this debt provide for interest on the outstanding principal based on prevailing market interest rates plus a specified margin. The Canadian Conduit also provides for a program fee and an unused commitment fee based on the unused portion of the total aggregate commitment of C$200.0 million. There is no amortization schedule; however, the debt is reduced monthly as available collections on the related finance receivables are applied to outstanding principal. Upon expiration of the Canadian Conduit, any outstanding principal will continue to be reduced monthly through available collections. Unless earlier terminated or extended by mutual agreement of HDFS and the lenders, the Canadian Conduit expires on June 30, 2014. The contractual maturity of the debt is approximately 5 years.
As HDFS participates in and does not consolidate the Canadian bank-sponsored, multi-seller conduit VIE, the maximum exposure to loss associated with this VIE, which would only be incurred in the unlikely event that all the finance receivables and underlying collateral have no residual value, was $44.8 million at March 30, 2014. The maximum exposure is not an indication of the Company's expected loss exposure.
During the first quarter of 2014, HDFS transferred $15.7 million of Canadian retail motorcycle finance receivables to the Canadian Conduit for proceeds of $13.8 million. HDFS did not transfer any Canadian retail motorcycle finance receivables during the first quarter of 2013.
7. Fair Value Measurements
Certain assets and liabilities are recorded at fair value in the financial statements; some of these are measured on a recurring basis while others are measured on a non-recurring basis. Assets and liabilities measured on a recurring basis are those that are adjusted to fair value each time a financial statement is prepared. Assets and liabilities measured on a non-recurring basis are those that are adjusted to fair value when a significant event occurs. In determining 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

18
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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, commodity rates and yield curves. The Company uses the market approach to derive the fair value for its level 2 fair value measurements. Foreign currency exchange contracts are valued using publicly quoted spot and forward prices; commodity contracts are valued using publicly quoted prices, where available, or dealer quotes; interest rate swaps are valued using publicized swap curves; and investments in marketable securities and cash equivalents are valued using publicly quoted prices.
Level 3 inputs are not observable in the market and include management’s judgments about the assumptions market participants would use in pricing the asset or liability. The use of observable and unobservable inputs is reflected in the hierarchy assessment disclosed in the following tables.


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Table of Contents

Recurring Fair Value Measurements
The following tables present information about the Company’s assets and liabilities measured at fair value on a recurring basis (in thousands):
 
 
March 30, 2014
 
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
$
602,421

 
$
359,438

 
$
242,983

 
$
—

Marketable securities
126,122

 
33,182

 
92,940

 
—

Derivatives
105

 
—

 
105

 
—

 
$
728,648

 
$
392,620

 
$
336,028

 
$
—

Liabilities:
 
 
 
 
 
 
 
Derivatives
$
3,681

 
$
—

 
$
3,681

 
$
—

 
December 31, 2013
 
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
$
836,387

 
$
516,173

 
$
320,214

 
$
—

Marketable securities
129,181

 
30,172

 
99,009

 
—

Derivatives
1,932

 
—

 
1,932

 
—

 
$
967,500

 
$
546,345

 
$
421,155

 
$
—

Liabilities:
 
 
 
 
 
 
 
Derivatives
$
3,925

 
$
—

 
$
3,925

 
$
—

 
March 31, 2013
 
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
$
790,252

 
$
584,249

 
$
206,003

 
$
—

Marketable securities
157,719

 
22,473

 
135,246

 
—

Derivatives
11,737

 
—

 
11,737

 
—

 
$
959,708

 
$
606,722

 
$
352,986

 
$
—

Liabilities:
 
 
 
 
 
 
 
Derivatives
$
2,165

 
$
—

 
$
2,165

 
$
—


    

20
Table of Contents

8. Fair Value of Financial Instruments
The Company’s financial instruments consist primarily of cash and cash equivalents, marketable securities, trade receivables, finance receivables, net, trade payables, debt, and foreign currency contracts and interest rate swaps (derivative instruments are discussed further in Note 9).
The following table summarizes the fair value and carrying value of the Company’s financial instruments (in thousands):
 
 
March 30, 2014
 
December 31, 2013
 
March 31, 2013
 
Fair Value
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
 
Carrying Value
Assets:
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
935,820

 
$
935,820

 
$
1,066,612

 
$
1,066,612

 
$
1,018,759

 
$
1,018,759

Marketable securities
$
126,122

 
$
126,122

 
$
129,181

 
$
129,181

 
$
157,719

 
$
157,719

Accounts receivable, net
$
324,979

 
$
324,979

 
$
261,065

 
$
261,065

 
$
259,673

 
$
259,673

Derivatives
$
105

 
$
105

 
$
1,932

 
$
1,932

 
$
11,737

 
$
11,737

Finance receivables, net
$
6,531,145

 
$
6,437,695

 
$
6,086,441

 
$
5,999,563

 
$
6,108,934

 
$
6,033,939

Restricted cash
$
117,883

 
$
117,883

 
$
144,807

 
$
144,807

 
$
197,025

 
$
197,025

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
Accounts payable
$
454,366

 
$
454,366

 
$
239,794

 
$
239,794

 
$
360,018

 
$
360,018

Derivatives
$
3,681

 
$
3,681

 
$
3,925

 
$
3,925

 
$
2,165

 
$
2,165

Unsecured commercial paper
$
974,153

 
$
974,153

 
$
666,317

 
$
666,317

 
$
687,705

 
$
687,705

Asset-backed Canadian commercial paper conduit facility
$
164,704

 
$
164,704

 
$
174,241

 
$
174,241

 
$
154,596

 
$
154,596

Medium-term notes
$
3,060,408

 
$
2,859,151

 
$
3,087,852

 
$
2,858,980

 
$
3,169,807

 
$
2,881,444

Senior unsecured notes
$
—

 
$
—

 
$
305,958

 
$
303,000

 
$
337,600

 
$
303,000

Term asset-backed securitization debt
$
1,099,596

 
$
1,096,633

 
$
1,259,314

 
$
1,256,632

 
$
1,276,046

 
$
1,268,572

Cash and Cash Equivalents, Restricted Cash, Accounts Receivable, Net and Accounts Payable – 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 – Interest rate swaps, foreign currency exchange contracts and commodity contracts are derivative financial instruments and are carried at fair value on the balance sheet. The fair value of interest rate swaps is determined using pricing models that incorporate quoted prices for similar assets and observable inputs such as interest rates and yield curves. The fair value of foreign currency exchange and commodity contracts is determined using publicly quoted prices. Fair value is calculated using Level 2 inputs.
Debt – The carrying value of debt in the financial statements is generally amortized cost. The carrying value of unsecured commercial paper approximates fair value due to its short maturity. Fair value is calculated using Level 2 inputs.

The carrying value of debt provided under the Canadian Conduit approximates fair value since the interest rates charged under the facility are tied directly to market rates and fluctuate as market rates change. Fair value is calculated using Level 2 inputs.

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The fair values of the medium-term notes are estimated based upon rates currently available for debt with similar terms and remaining maturities. Fair value is calculated using Level 2 inputs.
The fair value of the senior unsecured notes is estimated based upon rates currently available for debt with similar terms and remaining maturities. Fair value is calculated using Level 2 inputs.
The fair value of the debt related to term asset-backed securitization transactions is estimated based on pricing currently available for transactions with similar terms and maturities. Fair value is calculated using Level 2 inputs.
9. Derivative Instruments and Hedging Activities
The Company is exposed to certain risks such as foreign currency exchange rate risk, interest rate risk and commodity price risk. To reduce its exposure to such risks, the Company selectively uses derivative financial instruments. All derivative transactions are authorized and executed pursuant to regularly reviewed policies and procedures, which prohibit the use of financial instruments for speculative trading purposes.
All derivative instruments are recognized on the balance sheet at fair value (see Note 7). In accordance with ASC Topic 815, “Derivatives and Hedging,” the accounting for changes in the fair value of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and, further, on the type of hedging relationship. Changes in the fair value of derivatives that are designated as fair value hedges, along with the gain or loss on the hedged item, are recorded in current period earnings. For derivative instruments that are designated as cash flow hedges, the effective portion of gains and losses that result from changes in the fair value of derivative instruments is initially recorded in other comprehensive income (OCI) and subsequently reclassified into earnings when the hedged item affects income. The Company assesses, both at the inception of each hedge and on an on-going basis, whether the derivatives that are used in its hedging transactions are highly effective in offsetting changes in cash flows of the hedged items. Any ineffective portion is immediately recognized in earnings. No component of a hedging derivative instrument’s gain or loss is excluded from the assessment of hedge effectiveness. Derivative instruments that do not qualify for hedge accounting are recorded at fair value, and any changes in fair value are recorded in current period earnings.
The Company sells its products internationally and in most markets those sales are made in the foreign country’s local currency. As a result, the Company’s earnings can be affected by fluctuations in the value of the U.S. dollar relative to foreign currency. The Company’s most significant foreign currency risk relates to the Euro, the Australian dollar, the Japanese yen and the Brazilian real. The Company utilizes foreign currency contracts to mitigate the effects of certain currencies’ fluctuations on earnings. The foreign currency contracts are entered into with banks and allow the Company to exchange a specified amount of foreign currency for U.S. dollars at a future date, based on a fixed exchange rate.
The Company 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 contracts and commodity contracts generally have maturities of less than one year.
The Company’s earnings are affected by changes in interest rates. HDFS utilized interest rate swaps to reduce the impact of fluctuations in interest rates on its unsecured commercial paper by converting a portion from a floating rate basis to a fixed rate basis. The swaps expired during the second quarter of 2013, and as of March 30, 2014, HDFS had no interest rate swaps outstanding. The fair value of HDFS’s interest rate swaps at March 31, 2013 was determined using pricing models that incorporate quoted prices for similar assets and observable inputs such as interest rates and yield curves.


22
Table of Contents


The following table summarizes the fair value of the Company’s derivative financial instruments (in thousands):
 
March 30, 2014
 
December 31, 2013
 
March 31, 2013
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)
$
269,342

 
$
5

 
$
3,589

 
$
299,550

 
$
1,672

 
$
3,842

 
$
449,078

 
$
11,528

 
$
944

Commodity
contracts(c)
1,167

 
94

 
—

 
1,286

 
76

 
—

 
969

 
97

 
—

Interest rate swaps(c)
—

 
—

 
—

 
—

 
—

 
—

 
33,200

 
—

 
97

Total
$
270,509

 
$
99

 
$
3,589


$
300,836

 
$
1,748

 
$
3,842


$
483,247

 
$
11,625

 
$
1,041

 
March 30, 2014
 
December 31, 2013
 
March 31, 2013
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
$
9,348

 
$
6

 
$
92

 
$
9,855

 
$
184

 
$
83

 
$
15,390

 
$
112

 
$
1,124

 
$
9,348


$
6

 
$
92

 
$
9,855

 
$
184

 
$
83

 
$
15,390

 
$
112

 
$
1,124

 
(a)
Included in other current assets
(b)
Included in accrued liabilities
(c)
Derivative designated as a cash flow hedge
The following tables summarize the amount of gains and losses related to derivative financial instruments designated as cash flow hedges (in thousands):
 
Amount of Gain/(Loss) Recognized in OCI, before tax
 
Three Months Ended
Cash Flow Hedges
March 30,
2014
 
March 31,
2013
Foreign currency contracts
$
(1,438
)
 
$
15,720

Commodity contracts
215

 
159

Interest rate swaps
—

 
(2
)
Total
$
(1,223
)
 
$
15,877

 
 
Amount of Gain/(Loss) Reclassified from AOCL into Income
 
 
 
Three Months Ended
 
Expected to be Reclassified
Cash Flow Hedges
March 30,
2014
 
March 31,
2013
 
Over the Next Twelve Months
Foreign currency contracts(a)
$
(1,058
)
 
$
(740
)
 
$
(3,124
)
Commodity contracts(a)
196

 
47

 
94

Interest rate swaps(b)
—

 
(263
)
 
—

Total
$
(862
)
 
$
(956
)
 
$
(3,030
)
 
(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 financial services interest expense.

The following tables summarize the amount of gains and losses related to derivative financial instruments not designated as hedging instruments (in thousands):

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Table of Contents

 
Amount of Gain/(Loss) Recognized in Income on Derivative
 
Three Months Ended
Derivatives Not Designated As Hedges
March 30,
2014
 
March 31,
2013
Commodity contracts(a)
$
(328
)
 
$
(630
)
Total
$
(328
)
 
$
(630
)

(a)
Gain/(loss) recognized in income is included in cost of goods sold.

For the three months ended March 30, 2014 and March 31, 2013, 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 Company is exposed to credit loss risk in the event of non-performance by counterparties to these derivative financial instruments. Although no assurances can be given, the Company does not expect any of the counterparties to these derivative financial instruments to fail to meet its obligations. To manage credit loss risk, the Company evaluates counterparties based on credit ratings and, on a quarterly basis, evaluates each hedge’s net position relative to the counterparty’s ability to cover its position.
10. Accumulated Other Comprehensive Loss
The following tables set forth the changes in accumulated other comprehensive loss (AOCL) (in thousands):
 
 
 
 
Three months ended March 30, 2014
 
 
Foreign currency translation adjustments
 
Marketable securities
 
Derivative financial instruments
 
Pension and postretirement benefit plans
 
Total
Beginning balance
 
$
33,326

 
$
(276
)
 
$
(1,680
)
 
$
(364,046
)
 
$
(332,676
)
Other comprehensive income (loss) before reclassifications
 
1,755

 
(67
)
 
(1,223
)
 
—

 
465

Income tax
 
1,193

 
25

 
453

 
—

 
1,671

Net other comprehensive income (loss) before reclassifications
 
2,948

 
(42
)
 
(770
)
 
—

 
2,136

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

 
—

 
1,058

 
—

 
1,058

Realized (gains) losses - commodities contracts(a)
 
—

 
—

 
(196
)
 
—

 
(196
)
     Prior service credits(c)
 
—

 
—

 
—

 
(684
)
 
(684
)
     Actuarial losses(c)
 
—

 
—

 
—

 
10,322

 
10,322

Total before tax
 
—

 
—

 
862

 
9,638

 
10,500

Income tax benefit
 
—

 
—

 
(319
)
 
(3,570
)
 
(3,889
)
Net reclassifications
 
—

 
—

 
543

 
6,068

 
6,611

Other comprehensive income (loss)
 
2,948

 
(42
)
 
(227
)
 
6,068

 
8,747

Ending Balance
 
$
36,274

 
$
(318
)
 
$
(1,907
)
 
$
(357,978
)
 
$
(323,929
)

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Table of Contents

 
 
Three months ended March 31, 2013
 
 
Foreign currency translation adjustments
 
Marketable securities
 
Derivative financial instruments
 
Pension and postretirement benefit plans
 
Total
Beginning balance
 
$
51,335

 
$
677

 
$
(3,837
)
 
$
(655,853
)
 
$
(607,678
)
Other comprehensive (loss) income before reclassifications