10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
 
FORM 10-Q
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 27, 2015
¨
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, 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
 
x
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  x
Number of shares of the registrant’s common stock outstanding at October 30, 2015: 191,860,127 shares



Harley-Davidson, Inc.

Form 10-Q

For The Quarter Ended September 27, 2015
 
Part I
 
 
 
Item 1.
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Part II
 
 
 
Item 1.
 
 
 
Item 2.
 
 
 
Item 6.
 
 
 


Table of Contents

PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
HARLEY-DAVIDSON, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)
 
 
Three months ended
 
Nine months ended
 
September 27,
2015
 
September 28,
2014
 
September 27,
2015
 
September 28,
2014
Revenue:
 
 
 
 
 
 
 
Motorcycles and Related Products
$
1,140,321

 
$
1,130,558

 
$
4,301,674

 
$
4,536,531

Financial Services
177,109

 
171,046

 
513,093

 
491,820

Total revenue
1,317,430

 
1,301,604

 
4,814,767

 
5,028,351

Costs and expenses:
 
 
 
 
 
 
 
Motorcycles and Related Products cost of goods sold
746,282

 
735,958

 
2,670,146

 
2,825,661

Financial Services interest expense
41,214

 
40,141

 
120,938

 
119,739

Financial Services provision for credit losses
27,233

 
21,497

 
68,655

 
57,789

Selling, administrative and engineering expense
286,865

 
279,935

 
866,558

 
842,512

Total costs and expenses
1,101,594

 
1,077,531

 
3,726,297

 
3,845,701

Operating income
215,836

 
224,073

 
1,088,470

 
1,182,650

Investment income
3,211

 
1,509

 
5,983

 
4,940

Interest expense
4,879

 
77

 
4,897

 
4,147

Income before provision for income taxes
214,168

 
225,505

 
1,089,556

 
1,183,443

Provision for income taxes
73,821

 
75,439

 
379,545

 
413,307

Net income
$
140,347

 
$
150,066

 
$
710,011

 
$
770,136

Earnings per common share:
 
 
 
 
 
 
 
Basic
$
0.69

 
$
0.70

 
$
3.43

 
$
3.54

Diluted
$
0.69

 
$
0.69

 
$
3.41

 
$
3.52

Cash dividends per common share
$
0.310

 
$
0.275

 
$
0.930

 
$
0.825

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


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Table of Contents

HARLEY-DAVIDSON, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
 
 
Three months ended
 
Nine months ended
 
September 27,
2015
 
September 28,
2014
 
September 27,
2015
 
September 28,
2014
Net income
$
140,347

 
$
150,066

 
$
710,011

 
$
770,136

Other comprehensive (loss) income, net of tax
 
 
 
 
 
 
 
     Foreign currency translation adjustments
(14,598
)
 
(32,529
)
 
(37,368
)
 
(23,848
)
     Derivative financial instruments
(10,533
)
 
12,595

 
(12,747
)
 
15,518

     Marketable securities
(99
)
 
(148
)
 
(294
)
 
(264
)
     Pension and postretirement benefit plans
8,799

 
6,069

 
26,395

 
18,206

Total other comprehensive (loss) income, net of tax
(16,431
)
 
(14,013
)
 
(24,014
)
 
9,612

Comprehensive income
$
123,916

 
$
136,053

 
$
685,997

 
$
779,748

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



4

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HARLEY-DAVIDSON, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
 
(Unaudited)
 
 
 
(Unaudited)
 
September 27,
2015
 
December 31,
2014
 
September 28,
2014
ASSETS
 
 
 
 
 
Current assets:
 
 
 
 
 
Cash and cash equivalents
$
1,368,554

 
$
906,680

 
$
979,866

Marketable securities
47,358

 
57,325

 
57,579

Accounts receivable, net
294,054

 
247,621

 
286,256

Finance receivables, net
2,068,873

 
1,916,635

 
2,012,466

Inventories
466,657

 
448,871

 
460,958

Restricted cash
113,499

 
98,627

 
142,286

Deferred income taxes
100,558

 
89,916

 
54,962

Other current assets
156,488

 
182,420

 
208,105

Total current assets
4,616,041

 
3,948,095

 
4,202,478

Finance receivables, net
5,009,473

 
4,516,246

 
4,653,034

Property, plant and equipment, net
877,787

 
883,077

 
826,764

Prepaid pension costs

 

 
261,983

Goodwill
54,267

 
27,752

 
28,638

Deferred income taxes
71,952

 
77,835

 
2,559

Other long-term assets
102,038

 
75,092

 
50,050

 
$
10,731,558

 
$
9,528,097

 
$
10,025,506

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
 
Current liabilities:
 
 
 
 
 
Accounts payable
$
316,894

 
$
196,868

 
$
329,288

Accrued liabilities
464,352

 
449,317

 
507,006

Short-term debt
990,049

 
731,786

 
352,430

Current portion of long-term debt
891,710

 
1,011,315

 
1,518,320

Total current liabilities
2,663,005

 
2,389,286

 
2,707,044

Long-term debt
5,054,347

 
3,761,528

 
3,573,118

Pension liability
61,458

 
76,186

 
38,594

Postretirement healthcare liability
193,406

 
203,006

 
204,890

Deferred income taxes

 

 
42,326

Other long-term liabilities
199,669

 
188,805

 
175,171

Commitments and contingencies (Note 18)

 

 

Shareholders’ equity:
 
 
 
 
 
Preferred stock, none issued

 

 

Common stock
3,448

 
3,442

 
3,439

Additional paid-in-capital
1,314,693

 
1,265,257

 
1,242,676

Retained earnings
8,977,600

 
8,459,040

 
8,443,005

Accumulated other comprehensive loss
(538,957
)
 
(514,943
)
 
(323,064
)
Treasury stock, at cost
(7,197,111
)
 
(6,303,510
)
 
(6,081,693
)
Total shareholders' equity
2,559,673

 
2,909,286

 
3,284,363

 
$
10,731,558

 
$
9,528,097

 
$
10,025,506




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Table of Contents

HARLEY-DAVIDSON, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (continued)
(In thousands)
 
(Unaudited)
 
 
 
(Unaudited)
 
September 27,
2015
 
December 31,
2014
 
September 28,
2014
Balances held by consolidated variable interest entities (Note 7)
 
 
 
 
 
Current finance receivables, net
$
357,713

 
$
312,645

 
$
336,520

Other assets
$
4,492

 
$
3,409

 
$
3,845

Non-current finance receivables, net
$
1,475,179

 
$
1,113,801

 
$
1,279,917

Restricted cash - current and non-current
$
125,561

 
$
110,017

 
$
129,828

Current portion of long-term debt
$
401,344

 
$
366,889

 
$
378,190

Long-term debt
$
1,305,087

 
$
904,644

 
$
1,096,958

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

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Table of Contents

HARLEY-DAVIDSON, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
Nine months ended
 
September 27,
2015
 
September 28,
2014
Net cash provided by operating activities (Note 3)
$
1,020,957

 
$
966,868

Cash flows from investing activities:
 
 
 
Capital expenditures
(139,054
)
 
(120,316
)
Origination of finance receivables
(3,112,827
)
 
(2,918,881
)
Collections on finance receivables
2,393,355

 
2,308,237

Sales and redemptions of marketable securities
9,500

 
41,010

Acquisition of business
(59,910
)
 

Other
5,172

 
275

Net cash used by investing activities
(903,764
)
 
(689,675
)
Cash flows from financing activities:
 
 
 
Proceeds from issuance of senior unsecured notes
740,949

 

Repayments of senior unsecured notes

 
(303,000
)
Proceeds from issuance of medium-term notes
595,386

 
594,431

Repayments of medium-term notes
(600,000
)
 
(7,220
)
Proceeds from securitization debt
1,195,668

 
847,126

Repayments of securitization debt
(764,909
)
 
(631,302
)
Net increase (decrease) in credit facilities and unsecured commercial paper
258,734

 
(315,278
)
Borrowings of asset-backed commercial paper
69,191

 
57,669

Repayments of asset-backed commercial paper
(55,124
)
 
(58,717
)
Net change in restricted cash
(15,165
)
 
2,521

Dividends paid
(191,451
)
 
(179,860
)
Purchase of common stock for treasury
(894,565
)
 
(393,459
)
Excess tax benefits from share-based payments
2,878

 
8,873

Issuance of common stock under employee stock option plans
16,755

 
28,850

Net cash provided by (used by) financing activities
358,347

 
(349,366
)
Effect of exchange rate changes on cash and cash equivalents
(13,666
)
 
(14,573
)
Net increase (decrease) in cash and cash equivalents
$
461,874

 
$
(86,746
)
Cash and cash equivalents:
 
 
 
Cash and cash equivalents—beginning of period
$
906,680

 
$
1,066,612

Net increase (decrease) in cash and cash equivalents
461,874

 
(86,746
)
Cash and cash equivalents—end of period
$
1,368,554

 
$
979,866

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


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Table of Contents

HARLEY-DAVIDSON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation and Use of Estimates
The consolidated financial statements include the accounts of Harley-Davidson, Inc. and its wholly-owned subsidiaries (the Company), including the accounts of the groups of companies doing business as Harley-Davidson Motor Company (HDMC) and Harley-Davidson Financial Services (HDFS). In addition, certain variable interest entities (VIEs) related to secured financing are consolidated as the Company is the primary beneficiary. All intercompany accounts and material intercompany transactions are eliminated.
In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the consolidated balance sheets as of September 27, 2015 and September 28, 2014, the consolidated statements of income for the three and nine month periods then ended, the consolidated statements of comprehensive income for the three and nine month periods then ended and the consolidated statements of cash flows for the nine month periods then ended.
Certain information and footnote disclosures normally included in complete financial statements have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) and U.S. generally accepted accounting principles (U.S. GAAP) for interim financial reporting. These consolidated financial statements should be read in conjunction with the audited financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.
The Company operates in two principal 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 Not Yet Adopted
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09 Revenue from Contracts with Customers (ASU No. 2014-09). ASU No. 2014-09 is a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In August 2015, the FASB issued ASU No. 2015-14 Revenue from Contracts with Customers: Deferral of Effective Date (ASU No. 2015-14) to defer the effective date of the new revenue recognition standard by one year to fiscal years beginning after December 15, 2017 and for interim periods therein. The Company is currently evaluating the impact of adoption.
In February 2015, the FASB issued ASU No. 2015-02 Amendments to the Consolidation Analysis (ASU 2015-02). ASU No. 2015-02 amends the guidance within Accounting Standards Codification (ASC) Topic 810, "Consolidation,” to change the analysis that a reporting entity must perform to determine whether it should consolidate certain legal entities. The Company is required to adopt ASU No. 2015-02 for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. The Company believes the adoption of ASU No. 2015-02 will not have an impact on its financial results and will only impact the content of the current disclosure.
In April 2015, the FASB issued ASU No. 2015-03 Simplifying the Presentation of Debt Issuance Costs (ASU 2015-03). ASU No. 2015-03 amends the guidance within ASC Topic 835, "Interest", to require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt premiums and discounts. The Company is required to adopt ASU No. 2015-03 for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015 on a retrospective basis. Upon adoption, the Company will reclassify its debt issuance costs, other than debt issuance costs related to line of credit arrangements as discussed more fully below, from other assets to debt on the balance sheet. At September 27, 2015, the Company had $21.8 million of debt issuance costs, which includes $2.3 million of debt issuance costs related to line of credit arrangements, recorded as assets on the balance sheet.
In August 2015, the FASB issued ASU No. 2015-15 Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements (ASU 2015-15). ASU No. 2015-15 amends the guidance within ASC Topic 835,

8

Table of Contents

"Interest", to allow an entity to defer and present debt issuance costs associated with a line of credit arrangement as an asset, regardless of whether there are any outstanding borrowings on the line of credit arrangement. The Company is required to adopt ASU No. 2015-15 for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015 on a retrospective basis. The Company currently has $2.3 million of debt issuance costs related to line of credit arrangements recorded as an asset as of September 27, 2015. The Company intends to continue to classify debt issuance costs related to its line of credit arrangements as an asset, regardless of whether it has any outstanding borrowings on the line of credit arrangement.
In September 2015, the FASB issued ASU No. 2015-16 Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments. ASU No. 2015-16 eliminates the requirement for an acquirer in a business combination to account for measurement-period adjustments retrospectively. Acquirers must recognize measurement-period adjustments during the period in which they determine the amounts. This would include any amounts they would have recorded in previous periods if the accounting had been completed at the acquisition date. The Company is required to adopt ASU 2015-16 for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted. The Company is currently evaluating the impact of adoption.
3. Additional Balance Sheet and Cash Flow Information
Marketable Securities
The Company’s marketable securities consisted of the following (in thousands):
 
September 27,
2015
 
December 31,
2014
 
September 28,
2014
Available-for-sale: Corporate bonds
$
47,358

 
$
57,325

 
$
57,579

Trading securities: Mutual funds
35,258

 
33,815

 
32,727

 
$
82,616

 
$
91,140

 
$
90,306

The Company’s available-for-sale securities are carried at fair value with any unrealized gains or losses reported in other comprehensive income. During the first nine months of 2015 and 2014, the Company recognized gross unrealized losses of approximately $467,000 and $419,000, respectively, or $294,000 and $264,000 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 19 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):
 
September 27,
2015
 
December 31,
2014
 
September 28,
2014
Components at the lower of FIFO cost or market
 
 
 
 
 
Raw materials and work in process
$
153,779

 
$
151,254

 
$
148,267

Motorcycle finished goods
228,243

 
230,309

 
242,133

Parts and accessories and general merchandise
134,537

 
117,210

 
119,284

Inventory at lower of FIFO cost or market
516,559

 
498,773

 
509,684

Excess of FIFO over LIFO cost
(49,902
)
 
(49,902
)
 
(48,726
)
 
$
466,657

 
$
448,871

 
$
460,958


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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):
 
Nine months ended
 
September 27,
2015
 
September 28,
2014
Cash flows from operating activities:
 
 
 
Net income
$
710,011

 
$
770,136

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
142,024

 
130,688

Amortization of deferred loan origination costs
71,012

 
70,330

Amortization of financing origination fees
7,331

 
6,405

Provision for employee long-term benefits
36,954

 
25,281

Contributions to pension and postretirement plans
(19,358
)
 
(22,528
)
Stock compensation expense
23,732

 
27,862

Net change in wholesale finance receivables related to sales
(157,532
)
 
(194,711
)
Provision for credit losses
68,655

 
57,789

Loss on debt extinguishment

 
1,145

Deferred income taxes
(9,272
)
 
(12,030
)
Foreign currency adjustments
22,010

 
12,948

Other, net
5,000

 
11,535

Changes in current assets and liabilities:
 
 
 
Accounts receivable, net
(60,687
)
 
(40,015
)
Finance receivables—accrued interest and other
(98
)
 
(2,077
)
Inventories
(36,109
)
 
(48,095
)
Accounts payable and accrued liabilities
211,045

 
191,354

Derivative instruments
(6,734
)
 
(1,813
)
Other
12,973

 
(17,336
)
Total adjustments
310,946

 
196,732

Net cash provided by operating activities
$
1,020,957

 
$
966,868

4. Acquisition
On August 4, 2015, the Company completed its purchase of certain assets and liabilities from Fred Deeley Imports, Ltd (Deeley Imports) and certain of its affiliates including, among other things, the acquisition of the exclusive right to distribute the Company's motorcycles and other products in Canada (Transaction) for total consideration of $59.9 million. The majority equity owner of Deeley Imports is a member of the Board of Directors of the Company. The Company believes that the acquisition of the Canadian distribution rights will align Harley-Davidson's Canada distribution with the Company's global go-to-market approach.
The financial impact of the acquisition, which is part of the Motorcycles segment, has been included in the Company's consolidated financial statements from the date of acquisition. Proforma information reflecting this acquisition has not been disclosed as the proforma impact on consolidated net income would not be material.

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The following table summarizes the preliminary fair values of the Deeley Imports assets acquired and liabilities assumed at the date of acquisition (in thousands):
 
August 4, 2015
Current assets
$
11,088

Property, plant and equipment
144

Intangible assets
20,842

Goodwill
28,567

   Total assets
60,641

Current liabilities
731

Net assets acquired
$
59,910

The fair values are preliminary and still under review by the Company, and may be subsequently adjusted to reflect final appraisals.
As noted above, in conjunction with the acquisition of certain assets and assumption of certain liabilities of Deeley Imports, the Company recorded goodwill of $28.6 million and intangible assets with an initial fair value of $20.8 million. Of the total intangible assets acquired, $13.3 million was assigned to reacquired distribution rights with a useful life of two years and $7.5 million was assigned to customer relationships with a useful life of twenty years. The Company agreed to reimburse Deeley Imports for severance costs associated with the Transaction resulting in $3.3 million of expense included in selling, administrative and engineering expense in the third quarter of 2015. The Company did not acquire any cash as part of the Transaction.
5. Goodwill and Intangible Assets
Changes in the carrying amount of goodwill for the Motorcycles segment were as follows (in thousands):
 
 
Nine Months Ended
 
 
September 27, 2015
 
September 28, 2014
Balance, beginning of year
 
$
27,752

 
$
30,452

Business acquisitions
 
28,567

 

Currency translations
 
(2,052
)
 
(1,814
)
Balance, end of period
 
$
54,267

 
$
28,638

The Motorcycles segment intangible assets consisted of the following (in thousands):
 
 
September 27, 2015
 
 
 
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net
 
Estimated useful life (years)
Other intangible assets
 
 
 
 
 
 
 
 
   Reacquired distribution rights
 
$
13,117

 
$
(1,093
)
 
$
12,024

 
2
   Customer relationships
 
7,399

 
(62
)
 
7,337

 
20
Total other intangible assets(a)
 
$
20,516

 
$
(1,155
)
 
$
19,361

 
 
(a)
Other intangible assets are included in other long-term assets on the Company's consolidated balance sheets.



11

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Amortization expense of other intangible assets for the three and nine months ended September 27, 2015, was $1.2 million. The Company estimates future amortization to be approximately as follows (in thousands):
 
 
Estimated Amortization
2015 (remaining 3 months)
 
$
1,746

2016
 
6,984

2017
 
4,229

2018
 
372

2019
 
372

2020
 
372

Thereafter
 
5,286

 
 
$
19,361

The Financial Services segment did not have a goodwill or intangible assets balance at September 27, 2015 and September 28, 2014.
6. Finance Receivables
The Company provides retail financial services to customers of the Company’s independent dealers in the United States and Canada. The origination of retail loans is a separate and distinct transaction between the Company and the retail customer, unrelated to the Company’s sale of product to its dealers. Retail finance receivables consist of secured promissory notes and secured installment sales contracts. The Company holds either titles or liens on titles to vehicles financed by promissory notes and installment sales contracts.
The Company offers wholesale financing to the Company’s independent dealers. Wholesale loans to dealers are generally secured by financed inventory or property and are originated in the U.S. and Canada.
Finance receivables, net, consisted of the following (in thousands):
 
September 27,
2015
 
December 31,
2014
 
September 28,
2014
Retail
$
6,194,332

 
$
5,607,924

 
$
5,757,927

Wholesale
1,029,397

 
952,321

 
1,033,576

Total finance receivables
7,223,729

 
6,560,245

 
6,791,503

Allowance for credit losses
(145,383
)
 
(127,364
)
 
(126,003
)
Finance receivables, net
$
7,078,346

 
$
6,432,881

 
$
6,665,500

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.

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Changes in the allowance for credit losses on finance receivables by portfolio were as follows (in thousands):
 
Three months ended September 27, 2015
 
Retail
 
Wholesale
 
Total
Balance, beginning of period
$
131,903

 
$
7,328

 
$
139,231

Provision for credit losses
28,309

 
(1,076
)
 
27,233

Charge-offs
(30,203
)
 

 
(30,203
)
Recoveries
9,122

 

 
9,122

Balance, end of period
$
139,131

 
$
6,252

 
$
145,383

 
 
 
 
 
 
 
Three months ended September 28, 2014
 
Retail
 
Wholesale
 
Total
Balance, beginning of period
$
114,899

 
$
7,456

 
$
122,355

Provision for credit losses
23,612

 
(2,115
)
 
21,497

Charge-offs
(26,093
)
 

 
(26,093
)
Recoveries
8,244

 

 
8,244

Balance, end of period
$
120,662

 
$
5,341

 
$
126,003

 
 
 
 
 
 
 
Nine months ended September 27, 2015
 
Retail
 
Wholesale
 
Total
Balance, beginning of period
$
122,025

 
$
5,339

 
$
127,364

Provision for credit losses
67,742

 
913

 
68,655

Charge-offs
(83,939
)
 

 
(83,939
)
Recoveries
33,303

 

 
33,303

Balance, end of period
$
139,131

 
$
6,252

 
$
145,383

 
 
 
 
 
 
 
Nine months ended September 28, 2014
 
Retail
 
Wholesale
 
Total
Balance, beginning of period
$
106,063

 
$
4,630

 
$
110,693

Provision for credit losses
57,078

 
711

 
57,789

Charge-offs
(72,454
)
 

 
(72,454
)
Recoveries
29,975

 

 
29,975

Balance, end of period
$
120,662

 
$
5,341

 
$
126,003

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

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is based on factors such as the specific borrower’s financial performance and ability to repay, the Company’s past loan loss experience, current economic conditions, and the value of the underlying collateral.
Generally, it is the Company’s policy not to change the terms and conditions of finance receivables. However, to minimize the economic loss, the Company may modify certain finance receivables in troubled debt restructurings. Total restructured finance receivables are not significant.
The allowance for credit losses and finance receivables by portfolio, segregated by those amounts that are individually evaluated for impairment and those that are collectively evaluated for impairment, was as follows (in thousands):
 
September 27, 2015
 
Retail
 
Wholesale
 
Total
Allowance for credit losses, ending balance:
 
 
 
 
 
Individually evaluated for impairment
$

 
$

 
$

Collectively evaluated for impairment
139,131

 
6,252

 
145,383

Total allowance for credit losses
$
139,131

 
$
6,252

 
$
145,383

Finance receivables, ending balance:
 
 
 
 
 
Individually evaluated for impairment
$

 
$

 
$

Collectively evaluated for impairment
6,194,332

 
1,029,397

 
7,223,729

Total finance receivables
$
6,194,332

 
$
1,029,397

 
$
7,223,729

 
 
 
 
 
 
 
December 31, 2014
 
Retail
 
Wholesale
 
Total
Allowance for credit losses, ending balance:
 
 
 
 
 
Individually evaluated for impairment
$

 
$

 
$

Collectively evaluated for impairment
122,025

 
5,339

 
127,364

Total allowance for credit losses
$
122,025

 
$
5,339

 
$
127,364

Finance receivables, ending balance:
 
 
 
 
 
Individually evaluated for impairment
$

 
$

 
$

Collectively evaluated for impairment
5,607,924

 
952,321

 
6,560,245

Total finance receivables
$
5,607,924

 
$
952,321

 
$
6,560,245

 
 
 
 
 
 
 
September 28, 2014
 
Retail
 
Wholesale
 
Total
Allowance for credit losses, ending balance:
 
 
 
 
 
Individually evaluated for impairment
$

 
$

 
$

Collectively evaluated for impairment
120,662

 
5,341

 
126,003

Total allowance for credit losses
$
120,662

 
$
5,341

 
$
126,003

Finance receivables, ending balance:
 
 
 
 
 
Individually evaluated for impairment
$

 
$

 
$

Collectively evaluated for impairment
5,757,927

 
1,033,576

 
6,791,503

Total finance receivables
$
5,757,927

 
$
1,033,576

 
$
6,791,503

There were no wholesale finance receivables at September 27, 2015, December 31, 2014, or September 28, 2014 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 September 27, 2015December 31, 2014 and September 28, 2014, all retail finance receivables were accounted for as interest-earning receivables, of which $23.8 million, $28.7 million and $20.3 million, respectively, were 90 days or more past due.

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Wholesale finance receivables are delinquent if the minimum payment is not received by the contractual due date. 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. 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 September 27, 2015, December 31, 2014 or September 28, 2014. At September 27, 2015December 31, 2014 and September 28, 2014, $0.1 million, $0.2 million, and $0.2 million of wholesale finance receivables were 90 days or more past due and accruing interest, respectively.
An analysis of the aging of past due finance receivables was as follows (in thousands):
 
September 27, 2015
 
Current
 
31-60 Days
Past Due
 
61-90 Days
Past Due
 
Greater than
90 Days
Past Due
 
Total
Past Due
 
Total
Finance
Receivables
Retail
$
6,024,620

 
$
111,393

 
$
34,511

 
$
23,808

 
$
169,712

 
$
6,194,332

Wholesale
1,028,981

 
106

 
162

 
148

 
416

 
1,029,397

Total
$
7,053,601

 
$
111,499

 
$
34,673

 
$
23,956

 
$
170,128

 
$
7,223,729

 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 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
$
5,427,719

 
$
113,007

 
$
38,486

 
$
28,712

 
$
180,205

 
$
5,607,924

Wholesale
951,660

 
383

 
72

 
206

 
661

 
952,321

Total
$
6,379,379

 
$
113,390

 
$
38,558

 
$
28,918

 
$
180,866

 
$
6,560,245

 
 
 
 
 
 
 
 
 
 
 
 
 
September 28, 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
$
5,607,089

 
$
99,489

 
$
31,006

 
$
20,343

 
$
150,838

 
$
5,757,927

Wholesale
1,032,846

 
496

 
77

 
157

 
730

 
1,033,576

Total
$
6,639,935

 
$
99,985

 
$
31,083

 
$
20,500

 
$
151,568

 
$
6,791,503

A significant part of managing the Company's finance receivable portfolios includes the assessment of credit risk associated with each borrower. As the credit risk varies between the retail and wholesale portfolios, the Company utilizes different credit risk indicators for each portfolio.
The Company manages retail credit risk through its credit approval policy and ongoing collection efforts. The Company uses FICO scores, a standard credit rating measurement, to differentiate the expected default rates of retail credit applicants enabling the Company to better evaluate credit applicants for approval and to tailor pricing according to this assessment. Retail loans with a FICO score of 640 or above at origination are considered prime, and loans with a FICO score below 640 are considered sub-prime. These credit quality indicators are determined at the time of loan origination and are not updated subsequent to the loan origination date.
The recorded investment in retail finance receivables, by credit quality indicator, was as follows (in thousands):
 
September 27, 2015
 
December 31, 2014
 
September 28, 2014
Prime
$
4,936,438

 
$
4,435,352

 
$
4,550,126

Sub-prime
1,257,894

 
1,172,572

 
1,207,801

Total
$
6,194,332

 
$
5,607,924

 
$
5,757,927

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.

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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 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 in wholesale finance receivables, by internal credit quality indicator, was as follows (in thousands):
 
September 27, 2015
 
December 31, 2014
 
September 28, 2014
Doubtful
$

 
$
954

 
$
1,297

Substandard
14,949

 
7,025

 
6,682

Special Mention
3,706

 

 

Medium Risk
6,496

 
11,557

 
5,714

Low Risk
1,004,246

 
932,785

 
1,019,883

Total
$
1,029,397

 
$
952,321

 
$
1,033,576

7. Asset-Backed Financing
The Company participates in asset-backed financing through both term asset-backed securitization transactions and through asset-backed commercial paper conduit facilities. The Company treats these transactions as secured borrowings because either they are transferred to consolidated variable interest entities (VIEs) or the Company 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 the Company's asset-backed financing programs, the Company transfers retail motorcycle finance receivables to special purpose entities (SPE), which are considered VIEs under U.S. GAAP. Each SPE then converts those assets into cash, through the issuance of debt.
The Company 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. The Company 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, the Company retains a residual interest in the VIEs in the form of a debt security, which gives the Company 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.
The Company is not the primary beneficiary of the asset-backed Canadian commercial paper conduit facility VIE; therefore, the Company does not consolidate this VIE. However, the Company treats the conduit facility as a secured borrowing as it maintains effective control over the assets transferred to the VIE and therefore does not meet the requirements for sale accounting 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 the Company are eliminated in consolidation and therefore are not recorded on a consolidated basis. The Company 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.


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The following table shows the assets and liabilities related to the asset-backed financings that were included in the financial statements (in thousands):
 
September 27, 2015
 
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
$
1,875,571

 
$
(42,679
)
 
$
125,561

 
$
4,383

 
$
1,962,836

 
$
1,706,431

Asset-backed U.S. commercial paper conduit facility

 

 

 
109

 
109

 

Unconsolidated VIEs
 
 
 
 
 
 
 
 
 
 
 
Asset-backed Canadian commercial paper conduit facility
175,173

 
(3,090
)
 
11,656

 
473

 
184,212

 
158,712

Total on-balance sheet assets and liabilities
$
2,050,744

 
$
(45,769
)
 
$
137,217

 
$
4,965

 
$
2,147,157

 
$
1,865,143

 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 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
$
1,458,602

 
$
(32,156
)
 
$
110,017

 
$
2,987

 
$
1,539,450

 
$
1,271,533

Asset-backed U.S. commercial paper conduit facility

 

 

 
422

 
422

 

Unconsolidated VIEs
 
 
 
 
 
 
 
 
 
 
 
Asset-backed Canadian commercial paper conduit facility
185,099

 
(2,965
)
 
12,035

 
262

 
194,431

 
166,912

Total on-balance sheet assets and liabilities
$
1,643,701

 
$
(35,121
)
 
$
122,052

 
$
3,671

 
$
1,734,303

 
$
1,438,445

 
 
 
 
 
 
 
 
 
 
 
 
 
September 28, 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
$
1,651,552

 
$
(35,115
)
 
$
129,828

 
$
3,313

 
$
1,749,578

 
$
1,475,148

Asset-backed U.S. commercial paper conduit facility

 

 

 
532

 
532

 

Unconsolidated VIEs
 
 
 
 
 
 
 
 
 
 
 
Asset-backed Canadian commercial paper conduit facility
203,933

 
(3,259
)
 
12,458

 
213

 
213,345

 
165,166

Total on-balance sheet assets and liabilities
$
1,855,485

 
$
(38,374
)
 
$
142,286

 
$
4,058

 
$
1,963,455

 
$
1,640,314

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 2016 to 2022.

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Table of Contents

The following table includes quarterly issuances of secured notes, each through one term asset-backed securitization transaction (in thousands):
 
2015
 
2014
First quarter
$
700,000

 
$

Second quarter
500,000

 
850,000

Third quarter

 

 
$
1,200,000

 
$
850,000

Asset-Backed U.S. Commercial Paper Conduit Facility VIE
In September 2014, the Company amended and restated its facility (U.S. Conduit) with a third-party bank sponsored asset-backed commercial paper 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, the Company 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 generally based on prevailing commercial paper rates plus a program fee based on outstanding principal, 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 the Company and the lenders, as of September 27, 2015, the U.S. Conduit has an expiration date of October 30, 2015.
The SPE had no borrowings outstanding under the U.S. Conduit at September 27, 2015December 31, 2014 or September 28, 2014; 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 2015, the Company amended its facility agreement (Canadian Conduit) with a Canadian bank-sponsored asset-backed commercial paper conduit. Under the agreement, the Canadian Conduit is contractually committed, at the Company's option, to purchase eligible Canadian retail motorcycle finance receivables for proceeds up to C$240.0 million. The transferred assets are restricted as collateral for the payment of the debt. The terms for this debt provide for interest on the outstanding principal based on prevailing market interest rates plus a specified margin. The Canadian Conduit also provides for a program fee and an unused commitment fee based on the unused portion of the total aggregate commitment of C$240.0 million. There is no amortization schedule; however, the debt is reduced monthly as available collections on the related finance receivables are applied to outstanding principal. Upon expiration of the Canadian Conduit, any outstanding principal will continue to be reduced monthly through available collections. Unless earlier terminated or extended by mutual agreement of the Company and the lenders, as of September 27, 2015, the Canadian Conduit has an expiration date of June 30, 2016. The contractual maturity of the debt is approximately 5 years.
As the Company participates in and does not consolidate the Canadian bank-sponsored, multi-seller conduit VIE, the maximum exposure to loss associated with this VIE, which would only be incurred in the unlikely event that all the finance receivables and underlying collateral have no residual value, was $25.5 million at September 27, 2015. The maximum exposure is not an indication of the Company's expected loss exposure.

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Table of Contents

The following table includes quarterly transfers of Canadian retail motorcycle finance receivables to the Canadian Conduit and the respective proceeds (in thousands):
 
2015
 
2014
 
Transfers
 
Proceeds
 
Transfers
 
Proceeds
First quarter
$
19,200

 
$
16,800

 
$
15,727

 
$
13,761

Second quarter
26,761

 
23,416

 
26,400

 
23,100

Third quarter
33,100

 
29,000

 
24,400

 
21,400

 
$
79,061

 
$
69,216

 
$
66,527

 
$
58,261

8. Fair Value Measurements
Certain assets and liabilities are recorded at fair value in the financial statements; some of these are measured on a recurring basis while others are measured on a non-recurring basis. Assets and liabilities measured on a recurring basis are those that are adjusted to fair value each time a financial statement is prepared. Assets and liabilities measured on a non-recurring basis are those that are adjusted to fair value when required by particular events or circumstances. In determining the fair value of assets and liabilities, the Company uses various valuation techniques. The availability of inputs observable in the market varies from instrument to instrument and depends on a variety of factors including the type of instrument, whether the instrument is actively traded, and other characteristics particular to the transaction. For many financial instruments, pricing inputs are readily observable in the market, the valuation methodology used is widely accepted by market participants, and the valuation does not require significant management discretion. For other financial instruments, pricing inputs are less observable in the market and may require management judgment.
The Company assesses the inputs used to measure fair value using a three-tier hierarchy. The hierarchy indicates the extent to which inputs used in measuring fair value are observable in the market. Level 1 inputs include quoted prices for identical instruments and are the most observable.
Level 2 inputs include quoted prices for similar assets and observable inputs such as interest rates, foreign currency exchange rates and commodity prices. The Company uses the market approach to derive the fair value for its level 2 fair value measurements. Forward contracts for foreign currency, commodities and interest rates are valued using current quoted forward rates and prices; 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):
 
September 27, 2015
 
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
$
1,111,571

 
$
719,854

 
$
391,717

 
$

Marketable securities
82,616

 
35,258

 
47,358

 

Derivatives
18,015

 

 
18,015

 

 
$
1,212,202

 
$
755,112

 
$
457,090

 
$

Liabilities:
 
 
 
 
 
 
 
Derivatives
$
1,309

 
$

 
$
1,309

 
$

 
 
 
 
 
 
 
 
 
December 31, 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
$
737,024

 
$
482,686

 
$
254,338

 
$

Marketable securities
91,140

 
33,815

 
57,325

 

Derivatives
32,244

 

 
32,244

 

 
$
860,408

 
$
516,501

 
$
343,907

 
$

Liabilities:
 
 
 
 
 
 
 
Derivatives
$
2,027

 
$

 
$
2,027

 
$

 
 
 
 
 
 
 
 
 
September 28, 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
$
687,259

 
$
366,942

 
$
320,317

 
$

Marketable securities
90,306

 
32,727

 
57,579

 

Derivatives
24,908

 

 
24,908

 

 
$
802,473

 
$
399,669

 
$
402,804

 
$

Liabilities:
 
 
 
 
 
 
 
Derivatives
$
441

 
$

 
$
441

 
$

Nonrecurring Fair Value Measurements
Repossessed inventory is recorded at the lower of cost or net realizable value through a nonrecurring fair value measurement. Repossessed inventory was $16.6 million, $13.4 million and $13.5 million at September 27, 2015, December 31, 2014 and September 28, 2014, for which the fair value adjustment was $6.7 million, $5.0 million and $5.6 million at September 27, 2015, December 31, 2014 and September 28, 2014, respectively. Fair value is estimated using Level 2 inputs based on the recent market values of repossessed inventory.

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Table of Contents

9. 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 exchange and commodity contracts (derivative instruments are discussed further in Note 10).
The following table summarizes the fair value and carrying value of the Company’s financial instruments (in thousands):
 
September 27, 2015
 
December 31, 2014
 
September 28, 2014
 
Fair Value
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
 
Carrying Value
Assets:
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
1,368,554

 
$
1,368,554

 
$
906,680

 
$
906,680

 
$
979,866

 
$
979,866

Marketable securities
$
82,616

 
$
82,616

 
$
91,140

 
$
91,140

 
$
90,306

 
$
90,306

Derivatives
$
18,015

 
$
18,015

 
$
32,244

 
$
32,244

 
$
24,908

 
$
24,908

Finance receivables, net
$
7,170,873

 
$
7,078,346

 
$
6,519,500

 
$
6,432,881

 
$
6,760,096

 
$
6,665,500

Restricted cash
$
137,217

 
$
137,217

 
$
122,052

 
$
122,052

 
$
142,286

 
$
142,286

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
Derivatives
$
1,309

 
$
1,309

 
$
2,027

 
$
2,027

 
$
441

 
$
441

Unsecured commercial paper
$
990,049

 
$
990,049

 
$
731,786

 
$
731,786

 
$
352,430

 
$
352,430

Asset-backed Canadian commercial paper conduit facility
$
158,712

 
$
158,712

 
$
166,912

 
$
166,912

 
$
165,166

 
$
165,166

Medium-term notes
$
3,468,459

 
$
3,334,035

 
$
3,502,536

 
$
3,334,398

 
$
3,641,946

 
$
3,451,124

Senior unsecured notes
$
752,494

 
$
746,879

 
$

 
$

 
$

 
$

Term asset-backed securitization debt
$
1,707,076

 
$
1,706,431

 
$
1,270,656

 
$
1,271,533

 
$
1,476,300

 
$
1,475,148

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

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The fair value of the senior unsecured notes was estimated based upon rates then available for debt with similar terms and remaining maturities. Fair value was 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.
10. Derivative Instruments and Hedging Activities
The Company is exposed to certain risks such as foreign currency exchange rate risk, interest rate risk and commodity price risk. To reduce its exposure to such risks, the Company selectively uses derivative financial instruments. All derivative transactions are authorized and executed pursuant to regularly reviewed policies and procedures, which prohibit the use of financial instruments for speculative trading purposes.
All derivative instruments are recognized on the balance sheet at fair value (see Note 8). 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 exchange contracts to mitigate the effects of these currencies’ fluctuations on earnings. The foreign currency exchange contracts are entered into with banks and allow the Company to exchange a specified amount of foreign currency for U.S. dollars at a future date, based on a fixed exchange rate.
The Company utilizes commodity contracts to hedge portions of the cost of certain commodities consumed in the Company’s motorcycle production and distribution operations.
The Company’s foreign currency exchange contracts and commodity contracts generally have maturities of less than one year.
During the second quarter of 2015, the Company entered into treasury rate locks to fix the interest rate on a portion of the principal related to its anticipated issuance of senior unsecured debt during the third quarter of 2015. The treasury rate lock contracts were settled in July 2015. The loss at settlement was recorded in accumulated other comprehensive loss and will be reclassified into earnings over the life of the debt.

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The following table summarizes the fair value of the Company’s derivative financial instruments (in thousands):
 
September 27, 2015
 
December 31, 2014
 
September 28, 2014
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)
$
460,323

 
$
18,015

 
$
19

 
$
339,077

 
$
32,244

 
$

 
$
367,077

 
$
24,908

 
$

Commodity
contracts(c)
1,297

 

 
168

 
1,728

 

 
414

 
1,599

 

 
100

Total
$
461,620

 
$
18,015

 
$
187


$
340,805

 
$
32,244

 
$
414


$
368,676

 
$
24,908

 
$
100

 
September 27, 2015
 
December 31, 2014
 
September 28, 2014
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
$
7,027

 
$

 
$
1,122

 
$
11,804

 
$

 
$
1,613

 
$
7,711

 
$

 
$
341

 
$
7,027


$

 
$
1,122

 
$
11,804

 
$

 
$
1,613

 
$
7,711

 
$

 
$
341

 
(a)
Foreign currency and commodity contract fair value included in other current assets
(b)
Included in accrued liabilities
(c)
Derivative designated as a cash flow hedge
The following tables summarize the amount of gains and losses related to derivative financial instruments designated as cash flow hedges (in thousands):
 
Amount of Gain/(Loss) Recognized in OCI, before tax
 
Three months ended
 
Nine months ended
Cash Flow Hedges
September 27,
2015
 
September 28,
2014
 
September 27,
2015
 
September 28,
2014
Foreign currency contracts
$
6,796

 
$
26,941

 
$
35,004

 
$
29,434

Commodity contracts
(138
)
 
(100
)
 
(284
)
 
91

Treasury rate locks
(10,746
)
 

 
(7,381
)
 

Total
$
(4,088
)
 
$
26,841

 
$
27,339

 
$
29,525

 
Amount of Gain/(Loss) Reclassified from AOCL into Income
 
 
 
Three months ended
 
Nine months ended
 
Expected to be Reclassified
Cash Flow Hedges
September 27,
2015
 
September 28,
2014
 
September 27,
2015
 
September 28,
2014
 
Over the Next Twelve Months
Foreign currency contracts(a)
$
12,771

 
$
6,852

 
$
48,175

 
$
4,611

 
$
17,487

Commodity contracts(a)
(68
)
 
(17
)
 
(530
)
 
266

 
(168
)
Treasury rate locks(b)
(60
)