NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation and Use of Estimates
Principles of Consolidation and Basis of Presentation – The consolidated financial statements include the accounts of Harley-Davidson, Inc. and its subsidiaries, all of which are wholly-owned (the Company), including the accounts of the groups of companies referred to as Harley-Davidson Motor Company and Harley-Davidson Financial Services. 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 have been eliminated.
The Company operates in two reportable segments: Motorcycles and Related Products (Motorcycles) and Financial Services.
In the opinion of the Company's 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 June 26, 2022 and June 27, 2021, the Consolidated statements of operations for the three and six month periods then ended, the Consolidated statements of comprehensive income for the three and six month periods then ended, the Consolidated statements of cash flows for the six month periods then ended, and the Consolidated statements of shareholders' equity for the three month periods within the six month periods ended June 26, 2022 and June 27, 2021.
Certain information and disclosures normally included in complete financial statements have been condensed or omitted pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (SEC) and U.S. generally accepted accounting principles (U.S. GAAP) for interim financial reporting. The consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.
Use of Estimates – The preparation of financial statements in conformity with U.S. GAAP requires the Company's management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and the accompanying notes. Actual results could differ from those estimates.
2. New Accounting Standards
Accounting Standards Not Yet Adopted
In March 2022, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2022-02, Financial Instruments-Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures (ASU 2022-02). ASU 2022-02 addresses areas identified by the FASB as part of its post-implementation review of its previously issued credit losses standard (ASU 2016-13) that introduced the current expected credit losses (CECL) model. ASU 2022-02 eliminates the accounting guidance for troubled debt restructurings by creditors that have adopted the CECL model and enhances disclosure requirements for certain loan refinancings and restructurings made with borrowers experiencing financial difficulty. In addition, ASU 2022-02 requires a public business entity to disclose current-period gross write-offs for financing receivables and net investment in leases by year of origination in the vintage disclosures. As the Company has already adopted ASU 2016-13, the new guidance is effective for the fiscal years beginning after December 15, 2022 and for interim periods within those fiscal years. Early adoption is permitted. The adoption of ASU 2022-02 is not expected to have a material impact on the Company's consolidated financial statements.
3. Revenue
The Company recognizes revenue when it satisfies a performance obligation by transferring control of a good or service to a customer. Revenue is measured based on the consideration that the Company expects to be entitled to in exchange for the goods or services transferred. Taxes that are collected from a customer concurrent with revenue-producing activities are excluded from revenue.
Disaggregated revenue by major source was as follows (in thousands): | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended | | Six months ended |
| June 26, 2022 | | June 27, 2021 | | June 26, 2022 | | June 27, 2021 |
Motorcycles and Related Products Revenue: | | | | | | | |
Motorcycles | $ | 940,046 | | | $ | 1,029,709 | | | $ | 1,999,159 | | | $ | 2,046,043 | |
Parts and accessories | 214,540 | | | 222,670 | | | 380,065 | | | 372,529 | |
Apparel | 77,327 | | | 55,631 | | | 128,734 | | | 105,954 | |
Licensing | 11,781 | | | 8,872 | | | 18,278 | | | 14,384 | |
Other | 22,777 | | | 14,618 | | | 43,406 | | | 24,697 | |
| 1,266,471 | | | 1,331,500 | | | 2,569,642 | | | 2,563,607 | |
Financial Services Revenue: | | | | | | | |
Interest income | 168,707 | | | 167,728 | | | 330,441 | | | 327,542 | |
Other | 33,909 | | | 32,830 | | | 64,190 | | | 63,416 | |
| 202,616 | | | 200,558 | | | 394,631 | | | 390,958 | |
| $ | 1,469,087 | | | $ | 1,532,058 | | | $ | 2,964,273 | | | $ | 2,954,565 | |
The Company maintains certain deferred revenue balances related to payments received at contract inception in advance of the Company’s performance under the contract and generally relates to the sale of Harley Owners Group® memberships and various financial services products. Deferred revenue is recognized as revenue as the Company performs under the contract. Deferred revenue, included in Accrued liabilities and Other long-term liabilities on the Consolidated balance sheets, was as follows (in thousands): | | | | | | | | | | | | | |
| June 26, 2022 | | | | June 27, 2021 |
Balance, beginning of period | $ | 40,092 | | | | | $ | 36,614 | |
Balance, end of period | $ | 47,061 | | | | | $ | 38,934 | |
Previously deferred revenue recognized as revenue in the three months ended June 26, 2022 and June 27, 2021 was $7.7 million and $5.7 million, respectively, and $15.4 million and $11.8 million in the six months ended June 26, 2022 and June 27, 2021, respectively. The Company expects to recognize approximately $19.3 million of the remaining unearned revenue over the next 12 months and $27.7 million thereafter.
4. Restructuring Activities
The Company's restructuring activities are included in Restructuring (benefit) expense on the Consolidated statements of operations.
In 2020, the Company initiated restructuring activities including a workforce reduction, the termination of certain current and future products, facility changes, optimizing its global dealer network, exiting certain international markets, and discontinuing its sales and manufacturing operations in India. The workforce reduction resulted in the termination of approximately 500 employees. In addition, the India action resulted in the termination of approximately 70 employees. These restructuring activities are essentially complete, and the Company does not expect restructuring expenses of any significance in 2022.
Since the inception of the restructuring activities in 2020 through the six months ended June 26, 2022, the Company has incurred cumulative restructuring expenses of $133.0 million, including $121.5 million and $11.5 million in the Motorcycles and Financial Services segments, respectively. This includes restructuring (benefit) expense for the three and six month periods ended June 26, 2022 and June 27, 2021 by segment as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended | | Six months ended |
| June 26, 2022 | | June 27, 2021 | | June 26, 2022 | | June 27, 2021 |
Motorcycles and Related Products | $ | (264) | | | $ | 807 | | | $ | (392) | | | $ | 214 | |
Financial Services | — | | | 111 | | | — | | | 338 | |
| $ | (264) | | | $ | 918 | | | $ | (392) | | | $ | 552 | |
Changes in accrued restructuring expenses, which are included in Accrued liabilities on the Consolidated balance sheets, were as follows (in thousands): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended June 26, 2022 | | |
| Employee Termination Benefits | | Contract Terminations & Other | | Non-Current Asset Adjustments | | Total | | | | | | | | |
Balance, beginning of period | $ | 100 | | | $ | 1,133 | | | $ | — | | | $ | 1,233 | | | | | | | | | |
Restructuring benefit | — | | | (264) | | | — | | | (264) | | | | | | | | | |
Utilized – cash | (18) | | | (114) | | | — | | | (132) | | | | | | | | | |
Utilized – non cash | — | | | — | | | — | | | — | | | | | | | | | |
Foreign currency changes | (3) | | | (11) | | | — | | | (14) | | | | | | | | | |
Balance, end of period | $ | 79 | | | $ | 744 | |
| $ | — | | | $ | 823 | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Three months ended June 27, 2021 | | | | | | | | |
| Employee Termination Benefits | | Contract Terminations & Other | | Non-Current Asset Adjustments | | Total | | | | | | | | |
Balance, beginning of period | $ | 3,007 | | | $ | 4,467 | | | $ | — | | | $ | 7,474 | | | | | | | | | |
Restructuring (benefit) expense | (22) | | | 664 | | | 276 | | | 918 | | | | | | | | | |
Utilized – cash | (1,685) | | | (3,008) | | | — | | | (4,693) | | | | | | | | | |
Utilized – non cash | — | | | — | | | (276) | | | (276) | | | | | | | | | |
Foreign currency changes | (54) | | | (39) | | | — | | | (93) | | | | | | | | | |
Balance, end of period | $ | 1,246 | | | $ | 2,084 | |
| $ | — | | | $ | 3,330 | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Six months ended June 26, 2022 | | | | | | | | |
| Employee Termination Benefits | | Contract Terminations & Other | | Non-Current Asset Adjustments | | Total | | | | | | | | |
Balance, beginning of period | $ | 121 | | | $ | 2,874 | | | $ | — | | | $ | 2,995 | | | | | | | | | |
Restructuring benefit | — | | | (392) | | | — | | | (392) | | | | | | | | | |
Utilized – cash | (36) | | | (1,728) | | | — | | | (1,764) | | | | | | | | | |
Utilized – non cash | — | | | — | | | — | | | — | | | | | | | | | |
Foreign currency changes | (6) | | | (10) | | | — | | | (16) | | | | | | | | | |
Balance, end of period | $ | 79 | | | $ | 744 | |
| $ | — | | | $ | 823 | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Six months ended June 27, 2021 | | | | | | | | |
| Employee Termination Benefits | | Contract Terminations & Other | | Non-Current Asset Adjustments | | Total | | | | | | | | |
Balance, beginning of period | $ | 7,724 | | | $ | 16,196 | | | $ | — | | | $ | 23,920 | | | | | | | | | |
Restructuring (benefit) expense | (966) | | | 1,769 | | | (251) | | | 552 | | | | | | | | | |
Utilized – cash | (5,346) | | | (15,790) | | | — | | | (21,136) | | | | | | | | | |
Utilized – non cash | — | | | — | | | 251 | | | 251 | | | | | | | | | |
Foreign currency changes | (166) | | | (91) | | | — | | | (257) | | | | | | | | | |
Balance, end of period | $ | 1,246 | | | $ | 2,084 | |
| $ | — | | | $ | 3,330 | | | | | | | | | |
5. Income Taxes
The Company’s effective income tax rate for the six months ended June 26, 2022 was 22.7% compared to 24.5% for the six months ended June 27, 2021. The decrease in the effective income tax rate was due primarily to favorable discrete income tax benefits recognized during 2022.
6. Earnings Per Share
The computation of basic and diluted earnings per share was as follows (in thousands, except per share amounts): | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended | | Six months ended |
| June 26, 2022 | | June 27, 2021 | | June 26, 2022 | | June 27, 2021 |
Net income | $ | 215,849 | | | $ | 206,340 | | | $ | 438,351 | | | $ | 465,484 | |
| | | | | | | |
Basic weighted-average shares outstanding | 147,211 | | | 153,748 | | | 149,936 | | | 153,616 | |
Effect of dilutive securities – employee stock compensation plan | 624 | | | 1,345 | | | 876 | | | 1,178 | |
Diluted weighted-average shares outstanding | 147,835 | | | 155,093 | | | 150,812 | | | 154,794 | |
Net earnings per share: | | | | | | | |
Basic | $ | 1.47 | | | $ | 1.34 | | | $ | 2.92 | | | $ | 3.03 | |
Diluted | $ | 1.46 | | | $ | 1.33 | | | $ | 2.91 | | | $ | 3.01 | |
Shares of common stock related to share-based compensation that were not included in the effect of dilutive securities because the effect would have been anti-dilutive include 1.3 million and 0.5 million shares for the three months ended June 26, 2022 and June 27, 2021, respectively, and 2.4 million and 0.5 million shares for the six months ended June 26, 2022 and June 27, 2021, respectively.
7. Additional Balance Sheet and Cash Flow Information
Investments in Marketable Securities – The Company’s investments in marketable securities consisted of the following (in thousands): | | | | | | | | | | | | | | | | | |
| June 26, 2022 | | December 31, 2021 | | June 27, 2021 |
| | | | | |
Mutual funds | $ | 38,779 | | | $ | 49,650 | | | $ | 52,434 | |
| | | | | |
Mutual funds, included in Other long-term assets on the Consolidated balance sheets, are carried at fair value with gains and losses recorded in income. Mutual funds are held to support certain deferred compensation obligations.
Inventories, net – Substantially all inventories located in the U.S. are valued using the last-in, first-out (LIFO) method. Other inventories are valued at the lower of cost or net realizable value using the first-in, first-out (FIFO) method. Motorcycle finished goods inventories include motorcycles that are ready for sale and motorcycles that are substantially complete but awaiting installation of certain components affected by global supply chain constraints. Inventories, net consisted of the following (in thousands): | | | | | | | | | | | | | | | | | |
| June 26, 2022 | | December 31, 2021 | | June 27, 2021 |
Raw materials and work in process | $ | 384,658 | | | $ | 347,915 | | | $ | 245,562 | |
Motorcycle finished goods | 277,614 | | | 345,956 | | | 187,708 | |
Parts and accessories and apparel | 152,221 | | | 103,191 | | | 78,461 | |
Inventory at lower of FIFO cost or net realizable value | 814,493 | | | 797,062 | | | 511,731 | |
Excess of FIFO over LIFO cost | (87,907) | | | (84,120) | | | (54,083) | |
| $ | 726,586 | | | $ | 712,942 | | | $ | 457,648 | |
Deposits – Harley-Davidson Financial Services offers brokered certificates of deposit to customers indirectly through contractual arrangements with third-party banks and/or securities brokerage firms through its bank subsidiary. The Company had $345.8 million, $290.3 million and $259.4 million, net of fees, of interest-bearing brokered certificates of deposit outstanding as of June 26, 2022, December 31, 2021, and June 27, 2021, respectively. The liabilities for deposits are included in Short-term deposits, net or Long-term deposits, net on the Consolidated balance sheets based upon the term of each brokered certificate of deposit issued. Each separate brokered certificate of deposit is issued under a master certificate, and as such, all outstanding brokered certificates of deposit are considered below the Federal Deposit Insurance Corporation insurance coverage limits.
Future maturities of the Company's certificates of deposit as of June 26, 2022 were as follows (in thousands): | | | | | |
2022 | $ | 28,475 | |
2023 | 80,281 | |
2024 | 80,378 | |
2025 | 24,006 | |
2026 | 79,742 | |
Thereafter | 54,158 | |
Future maturities | 347,040 | |
Unamortized fees | (1,250) | |
| $ | 345,790 | |
Operating Cash Flow – The reconciliation of Net income to Net cash provided by operating activities was as follows (in thousands): | | | | | | | | | | | |
| Six months ended |
| June 26, 2022 | | June 27, 2021 |
Cash flows from operating activities: | | | |
Net income | $ | 438,351 | | | $ | 465,484 | |
Adjustments to reconcile Net income to Net cash provided by operating activities: | | | |
Depreciation and amortization | 77,389 | | | 81,323 | |
Amortization of deferred loan origination costs | 47,101 | | | 40,089 | |
Amortization of financing origination fees | 7,637 | | | 7,224 | |
Provision for long-term employee benefits | (9,844) | | | 13,366 | |
Employee benefit plan contributions and payments | (5,466) | | | (11,055) | |
Stock compensation expense | 19,765 | | | 23,340 | |
Net change in wholesale finance receivables related to sales | (201,326) | | | (129,819) | |
Provision for credit losses | 57,955 | | | (6,273) | |
| | | |
| | | |
| | | |
Deferred income taxes | 2,475 | | | 12,732 | |
| | | |
Other, net | 11,102 | | | (2,065) | |
Changes in current assets and liabilities: | | | |
Accounts receivable, net | (134,605) | | | (124,738) | |
Finance receivables – accrued interest and other | 4,255 | | | 9,691 | |
Inventories, net | (33,986) | | | 58,366 | |
Accounts payable and accrued liabilities | (4,239) | | | 196,606 | |
| | | |
Other current assets | (32,378) | | | 10,029 | |
| (194,165) | | | 178,816 | |
Net cash provided by operating activities | $ | 244,186 | | | $ | 644,300 | |
8. Finance Receivables
The Company provides retail financial services to customers of its dealers in the U.S. and Canada. The origination of retail loans is a separate and distinct transaction between the Company and the retail customer, unrelated to the Company’s sale of product to its dealers. Retail finance receivables consist of secured promissory notes and secured installment sales contracts and are primarily related to dealer sales of motorcycles to retail customers. 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 its dealers in the U.S. and Canada. Wholesale finance receivables are related primarily to the Company's sale of motorcycles and related parts and accessories to dealers. Wholesale loans to dealers are generally secured by financed inventory or property.
Finance receivables, net were as follows (in thousands): | | | | | | | | | | | | | | | | | |
| June 26, 2022 | | December 31, 2021 | | June 27, 2021 |
Retail finance receivables | $ | 6,847,651 | | | $ | 6,493,519 | | | $ | 6,663,518 | |
Wholesale finance receivables | 608,170 | | | 417,781 | | | 584,247 | |
| 7,455,821 | | | 6,911,300 | | | 7,247,765 | |
Allowance for credit losses | (352,137) | | | (339,379) | | | (358,811) | |
| $ | 7,103,684 | | | $ | 6,571,921 | | | $ | 6,888,954 | |
The Company’s finance receivables are reported at amortized cost, net of the allowance for credit losses. Amortized cost includes the principal outstanding, accrued interest, and deferred loan fees and costs. The Company's allowance for credit losses reflects expected lifetime credit losses on its finance receivables. Based on differences in the nature of the finance receivables and the underlying methodology for calculating the allowance for credit losses, the Company segments its finance receivables into the retail and wholesale portfolios. The Company further disaggregates each portfolio by credit quality indicators. As the credit risk varies between the retail and wholesale portfolios, the Company utilizes different credit quality indicators for each portfolio.
The retail portfolio primarily consists of a large number of small balance, homogeneous finance receivables. The Company performs a collective evaluation of the adequacy of the retail allowance for credit losses. The Company utilizes a vintage-based loss forecast methodology that includes decompositions for probability of default, exposure at default, attrition rate, and recovery balance rate. Reasonable and supportable economic forecasts for a two-year period are incorporated into the methodology to reflect the estimated impact of changes in future economic conditions, such as unemployment rates, household obligations or other relevant factors, over the two-year reasonable and supportable period. For periods beyond the Company’s reasonable and supportable forecasts, the Company reverts to its average historical loss experience using a mean-reversion process over a three-year period. Adjustments to historical loss information are made for differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, or term as well as other relevant factors.
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 to determine whether the loans share similar risk characteristics. The Company individually evaluates loans that do not share risk characteristics. Loans identified as those for which foreclosure is probable are classified as Non-Performing, and a specific allowance for credit losses is established when appropriate. The specific allowance is determined based on the amortized cost of the related finance receivable and the estimated fair value of the collateral, less selling costs and the cash that the Company expects to receive. Finance receivables in the wholesale portfolio not individually assessed are aggregated, based on similar risk characteristics, according to the Company’s internal risk rating system and measured collectively. 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 credit loss experience, reasonable and supportable economic forecasts, and the value of the underlying collateral and expected recoveries.
The Company considers various third-party economic forecast scenarios as part of estimating the allowance for expected credit losses and applies a probability-weighting to those economic forecast scenarios. Each quarter, the Company’s outlook on economic conditions impacts the Company's retail and wholesale estimates for expected credit losses. During the second quarter of 2022, the U.S. economy and the Company’s outlook on economic conditions remained largely unchanged from the first quarter of 2022. The pace of economic recovery remained uncertain as demonstrated by rising inflation, muted consumer confidence, continued global supply chain disruptions, and the conflict in Ukraine, among other factors. As such, at the end of the second quarter of 2022, the Company’s outlook on economic conditions included slow economic improvement with risk of a near-term recession in its economic scenario weighting.
Additionally, the historical experience incorporated into the portfolio-specific models does not fully reflect the Company's comprehensive expectations regarding the future. As such, the Company incorporated qualitative factors to establish an appropriate allowance for credit losses balance. These factors include motorcycle recovery value considerations, delinquency adjustments, specific problem loan trends, and others, as appropriate.
Due to the use of projections and assumptions in estimating the losses, the amount of losses actually incurred by the Company in either portfolio could differ from the amounts estimated. Further, the Company’s allowance for credit losses incorporates known conditions at the balance sheet date and the Company’s expectations surrounding the economic forecasts. The Company will continue to monitor future economic trends and conditions. Expectations surrounding the Company's economic forecasts may change in future periods as additional information becomes available.
Changes in the Company's allowance for credit losses on its finance receivables by portfolio were as follows (in thousands): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended June 26, 2022 | | Six months ended June 26, 2022 |
| Retail | | Wholesale | | Total | | Retail | | Wholesale | | Total |
Balance, beginning of period | $ | 327,206 | | | $ | 13,267 | | | $ | 340,473 | | | $ | 326,320 | | | $ | 13,059 | | | $ | 339,379 | |
Provision for credit losses | 32,954 | | | (3,821) | | | 29,133 | | | 61,568 | | | (3,613) | | | 57,955 | |
Charge-offs | (32,058) | | | — | | | (32,058) | | | (73,862) | | | — | | | (73,862) | |
Recoveries | 14,589 | | | — | | | 14,589 | | | 28,665 | | | — | | | 28,665 | |
Balance, end of period | $ | 342,691 | | | $ | 9,446 | | | $ | 352,137 | | | $ | 342,691 | | | $ | 9,446 | | | $ | 352,137 | |
| Three months ended June 27, 2021 | | Six months ended June 27, 2021 |
| Retail | | Wholesale | | Total | | Retail | | Wholesale | | Total |
Balance, beginning of period | $ | 327,060 | | | $ | 19,173 | | | $ | 346,233 | | | $ | 371,738 | | | $ | 19,198 | | | $ | 390,936 | |
Provision for credit losses | 19,053 | | | (2,852) | | | 16,201 | | | (3,396) | | | (2,877) | | | (6,273) | |
Charge-offs | (17,107) | | | — | | | (17,107) | | | (51,696) | | | — | | | (51,696) | |
Recoveries | 13,484 | | | — | | | 13,484 | | | 25,844 | | | — | | | 25,844 | |
Balance, end of period | $ | 342,490 | | | $ | 16,321 | | | $ | 358,811 | | | $ | 342,490 | | | $ | 16,321 | | | $ | 358,811 | |
The Company manages retail credit risk through its credit approval process 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. For the Company’s U.S. and Canadian retail finance receivables, the Company determines the credit quality indicator for each loan at origination and does not update the credit quality indicator subsequent to the loan origination date.
As loan performance by credit quality indicator differs between the U.S. and Canadian retail loans, the Company’s credit quality indicators vary for the two portfolios. For U.S. retail finance receivables, those with a FICO score of 740 or above at origination are generally considered super prime, loans with a FICO score between 640 and 740 are generally categorized as prime, and loans with FICO score below 640 are generally considered sub-prime. For Canadian retail finance receivables, those with a FICO score of 700 or above at origination are generally considered super prime, loans with a FICO score between 620 and 700 are generally categorized as prime, and loans with FICO score below 620 are generally considered sub-prime.
The amortized cost of the Company's U.S. and Canadian retail finance receivables by vintage and credit quality indicator was as follows (in thousands): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| June 26, 2022 |
| 2022 | | 2021 | | 2020 | | 2019 | | 2018 | | 2017 & Prior | | Total |
U.S. Retail: | | | | | | | | | | | | | |
Super prime | $ | 703,972 | | | $ | 780,335 | | | $ | 364,514 | | | $ | 225,193 | | | $ | 111,097 | | | $ | 50,527 | | | $ | 2,235,638 | |
Prime | 923,272 | | | 1,107,587 | | | 546,653 | | | 348,801 | | | 194,109 | | | 134,420 | | | 3,254,842 | |
Sub-prime | 287,448 | | | 379,189 | | | 211,288 | | | 139,507 | | | 78,111 | | | 73,359 | | | 1,168,902 | |
| 1,914,692 | | | 2,267,111 | | | 1,122,455 | | | 713,501 | | | 383,317 | | | 258,306 | | | 6,659,382 | |
Canadian Retail: | | | | | | | | | | | | | |
Super prime | 35,811 | | | 40,084 | | | 24,426 | | | 18,702 | | | 8,819 | | | 3,085 | | | 130,927 | |
Prime | 11,623 | | | 13,831 | | | 9,767 | | | 7,022 | | | 4,458 | | | 3,267 | | | 49,968 | |
Sub-prime | 1,415 | | | 1,844 | | | 1,628 | | | 1,186 | | | 743 | | | 558 | | | 7,374 | |
| 48,849 | | | 55,759 | | | 35,821 | | | 26,910 | | | 14,020 | | | 6,910 | | | 188,269 | |
| $ | 1,963,541 | | | $ | 2,322,870 | | | $ | 1,158,276 | | | $ | 740,411 | | | $ | 397,337 | | | $ | 265,216 | | | $ | 6,847,651 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 |
| 2021 | | 2020 | | 2019 | | 2018 | | 2017 | | 2016 & Prior | | Total |
U.S. Retail: | | | | | | | | | | | | | |
Super prime | $ | 1,010,636 | | | $ | 484,479 | | | $ | 316,390 | | | $ | 171,763 | | | $ | 65,753 | | | $ | 27,424 | | | $ | 2,076,445 | |
Prime | 1,391,385 | | | 712,858 | | | 470,177 | | | 277,206 | | | 142,288 | | | 82,169 | | | 3,076,083 | |
Sub-prime | 476,688 | | | 273,787 | | | 182,002 | | | 105,330 | | | 61,923 | | | 51,035 | | | 1,150,765 | |
| 2,878,709 | | | 1,471,124 | | | 968,569 | | | 554,299 | | | 269,964 | | | 160,628 | | | 6,303,293 | |
Canadian Retail: | | | | | | | | | | | | | |
Super prime | 51,779 | | | 32,724 | | | 27,073 | | | 13,984 | | | 4,619 | | | 1,614 | | | 131,793 | |
Prime | 16,882 | | | 12,675 | | | 9,244 | | | 6,230 | | | 3,628 | | | 1,779 | | | 50,438 | |
Sub-prime | 2,356 | | | 2,134 | | | 1,571 | | | 947 | | | 606 | | | 381 | | | 7,995 | |
| 71,017 | | | 47,533 | | | 37,888 | | | 21,161 | | | 8,853 | | | 3,774 | | | 190,226 | |
| $ | 2,949,726 | | | $ | 1,518,657 | | | $ | 1,006,457 | | | $ | 575,460 | | | $ | 278,817 | | | $ | 164,402 | | | $ | 6,493,519 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| June 27, 2021 |
| 2021 | | 2020 | | 2019 | | 2018 | | 2017 | | 2016 & Prior | | Total |
U.S. Retail: | | | | | | | | | | | | | |
Super prime | $ | 632,627 | | | $ | 634,661 | | | $ | 429,884 | | | $ | 250,679 | | | $ | 106,124 | | | $ | 53,347 | | | $ | 2,107,322 | |
Prime | 876,007 | | | 911,265 | | | 619,597 | | | 380,662 | | | 208,176 | | | 140,807 | | | 3,136,514 | |
Sub-prime | 313,302 | | | 352,221 | | | 233,934 | | | 137,060 | | | 83,886 | | | 81,538 | | | 1,201,941 | |
| 1,821,936 | | | 1,898,147 | | | 1,283,415 | | | 768,401 | | | 398,186 | | | 275,692 | | | 6,445,777 | |
Canadian Retail: | | | | | | | | | | | | | |
Super prime | 38,562 | | | 42,967 | | | 37,461 | | | 20,709 | | | 8,625 | | | 3,374 | | | 151,698 | |
Prime | 12,468 | | | 15,872 | | | 11,990 | | | 8,254 | | | 5,007 | | | 3,182 | | | 56,773 | |
Sub-prime | 1,856 | | | 2,727 | | | 1,998 | | | 1,263 | | | 819 | | | 607 | | | 9,270 | |
| 52,886 | | | 61,566 | | | 51,449 | | | 30,226 | | | 14,451 | | | 7,163 | | | 217,741 | |
| $ | 1,874,822 | | | $ | 1,959,713 | | | $ | 1,334,864 | | | $ | 798,627 | | | $ | 412,637 | | | $ | 282,855 | | | $ | 6,663,518 | |
The Company's credit risk on the wholesale portfolio is different from that of the retail portfolio. Whereas the retail portfolio represents a relatively homogeneous pool of retail finance receivables that exhibit more consistent loss patterns, the wholesale portfolio exposures are less consistent. The Company utilizes an internal credit risk rating system to manage credit risk exposure consistently across wholesale borrowers and individually evaluates credit risk factors for each borrower. The Company uses the following internal credit quality indicators, based on an internal risk rating system, listed from highest level of risk to lowest level of risk for the wholesale portfolio: Doubtful, Substandard, Special Mention, Medium Risk and Low Risk. Based upon the Company’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. Additionally, the Company classifies dealers identified as those in which foreclosure is probable as Non-Performing. The internal rating system considers factors such as the specific borrower's ability to repay and the estimated value of any collateral. Dealer risk rating classifications are reviewed and updated by the Company on a quarterly basis.
The amortized cost of the Company's wholesale financial receivables, by vintage and credit quality indicator, was as follows (in thousands): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| June 26, 2022 |
| 2022 | | 2021 | | 2020 | | 2019 | | 2018 | | 2017 & Prior | | Total |
Non-Performing | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
Doubtful | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Substandard | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Special Mention | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Medium Risk | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Low Risk | 540,284 | | | 45,976 | | | 7,871 | | | 4,153 | | | 9,247 | | | 639 | | | 608,170 | |
| $ | 540,284 | | | $ | 45,976 | | | $ | 7,871 | | | $ | 4,153 | | | $ | 9,247 | | | $ | 639 | | | $ | 608,170 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 |
| 2021 | | 2020 | | 2019 | | 2018 | | 2017 | | 2016 & Prior | | Total |
Non-Performing | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
Doubtful | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Substandard | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Special Mention | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Medium Risk | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Low Risk | 380,211 | | | 11,379 | | | 11,047 | | | 10,565 | | | 3,662 | | | 917 | | | 417,781 | |
| $ | 380,211 | | | $ | 11,379 | | | $ | 11,047 | | | $ | 10,565 | | | $ | 3,662 | | | $ | 917 | | | $ | 417,781 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| June 27, 2021 |
| 2021 | | 2020 | | 2019 | | 2018 | | 2017 | | 2016 & Prior | | Total |
Non-Performing | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
Doubtful | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Substandard | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Special Mention | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Medium Risk | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Low Risk | 500,490 | | | 38,408 | | | 26,449 | | | 11,888 | | | 4,581 | | | 2,431 | | | 584,247 | |
| $ | 500,490 | | | $ | 38,408 | | | $ | 26,449 | | | $ | 11,888 | | | $ | 4,581 | | | $ | 2,431 | | | $ | 584,247 | |
Retail finance receivables are contractually delinquent if the minimum payment is not received by the specified due date. Retail finance receivables at amortized cost, excluding accrued interest, 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. The Company reverses accrued interest related to charged-off accounts against Financial Services interest income when the account is charged-off. The Company reversed $4.2 million and $3.3 million of accrued interest against Financial Services interest income during the three months ended June 26, 2022 and June 27, 2021, respectively, and $9.1 million and $8.5 million during the six months ended June 26, 2022 and June 27, 2021, respectively. All retail finance receivables accrue interest until either collected or charged-off. Due to the timely write-off of accrued interest, the Company made the election provided under Accounting Standards Codification (ASC) Topic 326, Financial Instruments - Credit Losses to exclude accrued interest from its allowance for credit losses. Accordingly, as of June 26, 2022, December 31, 2021 and June 27, 2021, all retail finance receivables were accounted for as interest-earning receivables.
Wholesale finance receivables are delinquent if the minimum payment is not received by the contractual due date. Wholesale finance receivables are written down once the Company determines that the specific borrower does not have the ability to repay the loan in full. Interest continues to accrue on past due finance receivables until the date the Company determines that foreclosure is probable, 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. Once an account is charged-off, the Company will reverse the associated accrued interest against interest income. As the Company
follows a non-accrual policy for interest, the allowance for credit losses excludes accrued interest for the wholesale portfolio. There were no charged-off accounts during the three and six months ended June 26, 2022 and June 27, 2021. As such, the Company did not reverse any accrued interest in those periods. There were no dealers on non-accrual status at June 26, 2022, December 31, 2021, and June 27, 2021.
The aging analysis of the Company's finance receivables was as follows (in thousands): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| June 26, 2022 |
| Current | | 31-60 Days Past Due | | 61-90 Days Past Due | | Greater than 90 Days Past Due | | Total Past Due | | Total |
Retail finance receivables | $ | 6,660,108 | | | $ | 117,436 | | | $ | 38,855 | | | $ | 31,252 | | | $ | 187,543 | | | $ | 6,847,651 | |
Wholesale finance receivables | 608,169 | | | — | | | 1 | | | — | | | 1 | | | 608,170 | |
| $ | 7,268,277 | | | $ | 117,436 | | | $ | 38,856 | | | $ | 31,252 | | | $ | 187,544 | | | $ | 7,455,821 | |
| | | | | | | | | | | |
| December 31, 2021 |
| Current | | 31-60 Days Past Due | | 61-90 Days Past Due | | Greater than 90 Days Past Due | | Total Past Due | | Total |
Retail finance receivables | $ | 6,298,485 | | | $ | 115,942 | | | $ | 44,326 | | | $ | 34,766 | | | $ | 195,034 | | | $ | 6,493,519 | |
Wholesale finance receivables | 417,720 | | | 9 | | | 1 | | | 51 | | | 61 | | | 417,781 | |
| $ | 6,716,205 | | | $ | 115,951 | | | $ | 44,327 | | | $ | 34,817 | | | $ | 195,095 | | | $ | 6,911,300 | |
| | | | | | | | | | | |
| June 27, 2021 |
| Current | | 31-60 Days Past Due | | 61-90 Days Past Due | | Greater than 90 Days Past Due | | Total Past Due | | Total |
Retail finance receivables | $ | 6,531,560 | | | $ | 87,853 | | | $ | 27,300 | | | $ | 16,805 | | | $ | 131,958 | | | $ | 6,663,518 | |
Wholesale finance receivables | 584,154 | | | 39 | | | — | | | 54 | | | 93 | | | 584,247 | |
| $ | 7,115,714 | | | $ | 87,892 | | | $ | 27,300 | | | $ | 16,859 | | | $ | 132,051 | | | $ | 7,247,765 | |
Generally, it is the Company’s policy not to change the terms and conditions of finance receivables. However, to minimize economic loss, the Company may modify certain finance receivables in troubled debt restructurings. Total finance receivables in troubled debt restructurings were not significant as of June 26, 2022, December 31, 2021 and June 27, 2021. Additionally, in certain situations, the Company may offer short-term adjustments to customer payment due dates without affecting the associated interest rate or loan term. From the second quarter of 2020 through the end of the second quarter of 2021, in response to the impact of the COVID-19 pandemic, the Company granted an increased amount of short-term payment due date extensions on eligible retail loans to help retail customers get through financial difficulties associated with the COVID-19 pandemic. The Company continues to grant standard payment extensions to customers in accordance with its policies.
9. Derivative Financial Instruments and Hedging Activities
The Company is exposed to risks from fluctuations in foreign currency exchange rates, interest rates and commodity prices. To reduce its exposure to such risks, the Company selectively uses derivative financial instruments. All derivative transactions are authorized and executed pursuant to regularly reviewed policies and procedures which prohibit the use of financial instruments for speculative trading purposes.
The Company sells products in foreign currencies and utilizes foreign currency exchange contracts to mitigate the effects of foreign currency exchange rate fluctuations related to the Euro, Australian dollar, Japanese yen, Brazilian real, Canadian dollar, Mexican peso, Chinese yuan, Singapore dollar, Thai baht, and Pound sterling. The Company's foreign currency exchange contracts generally have maturities of less than one year.
The Company utilizes commodity contracts to mitigate the effects of commodity price fluctuations related to metals and fuel consumed in its motorcycle operations. The Company's commodity contracts generally have maturities of less than one year.
The Company periodically utilizes treasury rate lock contracts to fix the interest rate on a portion of the principal related to an anticipated issuance of long-term debt and cross-currency swaps to mitigate the effect of foreign currency exchange rate fluctuations on its foreign currency-denominated debt. The Company also utilizes interest rate caps to facilitate certain asset-backed securitization transactions.
All derivative financial instruments are recognized on the Consolidated balance sheets at fair value. In accordance with ASC Topic 815, Derivatives and Hedging (ASC Topic 815), the accounting for changes in the fair value of a derivative financial 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 derivative financial instruments that are designated as cash flow hedges are initially recorded in Other comprehensive (loss) income (OCI) and subsequently reclassified into income when the hedged item affects income. The Company assesses, both at the inception of each hedge and on an ongoing basis, whether the derivative financial instruments that are designated as cash flow hedging transactions are highly effective in offsetting changes in cash flows of the hedged items. No component of a designated hedging derivative financial instrument’s gain or loss is excluded from the assessment of hedge effectiveness. Derivative financial instruments not designated as hedges are not speculative and are used to manage the Company’s exposure to foreign currency, commodity risks, and interest rate risks. Changes in the fair value of derivative financial instruments not designated as hedging instruments are recorded directly in income. Cash flow activity associated with the Company's derivative financial instruments is recorded in Cash flows from operating activities on the Consolidated statement of cash flow.
The notional and fair values of the Company's derivative financial instruments under ASC Topic 815 were as follows (in thousands): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Derivative Financial Instruments Designated as Cash Flow Hedging Instruments |
| June 26, 2022 | | December 31, 2021 | | June 27, 2021 |
| Notional Value | | Other Current Assets | | Accrued Liabilities | | Notional Value | | Other Current Assets | | Accrued Liabilities | | Notional Value | | Other Current Assets | | Accrued Liabilities |
Foreign currency contracts | $ | 435,208 | | | $ | 18,960 | | | $ | 1,004 | | | $ | 562,262 | | | $ | 14,644 | | | $ | 1,388 | | | $ | 493,919 | | | $ | 7,015 | | | $ | 3,433 | |
Commodity contracts | 834 | | | 228 | | | — | | | 996 | | | 19 | | | 39 | | | 735 | | | 134 | | | — | |
Cross-currency swaps | 1,383,390 | | | 386 | | | 54,954 | | | 1,367,460 | | | 35,071 | | | — | | | 1,396,542 | | | 88,730 | | | — | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| $ | 1,819,432 | | | $ | 19,574 | | | $ | 55,958 | | | $ | 1,930,718 | | | $ | 49,734 | | | $ | 1,427 | | | $ | 1,891,196 | | | $ | 95,879 | | | $ | 3,433 | |
| | | | | | | | | | | | | | | | | |
| Derivative Financial Instruments Not Designated as Hedging Instruments |
| June 26, 2022 | | December 31, 2021 | | June 27, 2021 |
| Notional Value | | Other Current Assets | | Accrued Liabilities | | Notional Value | | Other Current Assets | | Accrued Liabilities | | Notional Value | | Other Current Assets | | Accrued Liabilities |
Foreign currency contracts | $ | — | | | $ | — | | | $ | — | | | $ | 241,935 | | | $ | 1,299 | | | $ | 916 | | | $ | 151,252 | | | $ | 215 | | | $ | 401 | |
Commodity contracts | 9,857 | | | 1,107 | | | 987 | | | 10,631 | | | 641 | | | 18 | | | 9,112 | | | 1,219 | | | 2 | |
Interest rate caps | 1,286,262 | | | 1,860 | | | — | | | 504,526 | | | 360 | | | — | | | 721,850 | | | 151 | | | — | |
| $ | 1,296,119 | | | $ | 2,967 | | | $ | 987 | | | $ | 757,092 | | | $ | 2,300 | | | $ | 934 | | | $ | 882,214 | | | $ | 1,585 | | | $ | 403 | |
The amounts of gains and losses related to the Company's derivative financial instruments designated as cash flow hedges were as follows (in thousands): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Gain/(Loss) Recognized in OCI | | Gain/(Loss) Reclassified from AOCL into Income |
| Three months ended | | Six months ended | | Three months ended | | Six months ended |
| June 26, 2022 | | June 27, 2021 | | June 26, 2022 | | June 27, 2021 | | June 26, 2022 | | June 27, 2021 | | June 26, 2022 | | June 27, 2021 |
Foreign currency contracts | $ | 19,328 | | | $ | (1,861) | | | $ | 27,772 | | | $ | 12,176 | | | $ | 9,627 | | | $ | (7,594) | | | $ | 15,282 | | | $ | (12,547) | |
Commodity contracts | 166 | | | 153 | | | 728 | | | 156 | | | 254 | | | 3 | | | 480 | | | (29) | |
Cross-currency swaps | (73,403) | | | 15,282 | | | (89,639) | | | (49,892) | | | (80,466) | | | 21,613 | | | (106,266) | | | (44,175) | |
Treasury rate lock contracts | — | | | — | | | — | | | — | | | (117) | | | (124) | | | (244) | | | (248) | |
Interest rate swaps | — | | | — | | | — | | | 397 | | | — | | | — | | | — | | | (2,689) | |
| $ | (53,909) | | | $ | 13,574 | | | $ | (61,139) | | | $ | (37,163) | | | $ | (70,702) | | | $ | 13,898 | | | $ | (90,748) | | | $ | (59,688) | |
The location and amount of gains and losses recognized in income related to the Company's derivative financial instruments designated as cash flow hedges were as follows (in thousands): | | | | | | | | | | | | | | | | | | | | | | | |
| Motorcycles cost of goods sold | | Selling, administrative & engineering expense | | Interest expense | | Financial Services interest expense |
| Three months ended June 26, 2022 |
Line item on the Consolidated statements of operations in which the effects of cash flow hedges are recorded | $ | 879,721 | | | $ | 235,233 | | | $ | 7,720 | | | $ | 47,649 | |
| | | | | | | |
Gain/(loss) reclassified from AOCL into income: | | | | | | | |
Foreign currency contracts | $ | 9,627 | | | $ | — | | | $ | — | | | $ | — | |
Commodity contracts | $ | 254 | | | $ | — | | | $ | — | | | $ | — | |
Cross-currency swaps | $ | — | | | $ | (80,466) | | | $ | — | | | $ | — | |
Treasury rate lock contracts | $ | — | | | $ | — | | | $ | (90) | | | $ | (27) | |
| | | | | | | |
| Three months ended June 27, 2021 |
Line item on the Consolidated statements of operations in which the effects of cash flow hedges are recorded | $ | 924,449 | | | $ | 261,509 | | | $ | 7,722 | | | $ | 48,621 | |
| | | | | | | |
Gain/(loss) reclassified from AOCL into income: | | | | | | | |
Foreign currency contracts | $ | (7,594) | | | $ | — | | | $ | — | | | $ | — | |
Commodity contracts | $ | 3 | | | $ | — | | | $ | — | | | $ | — | |
Cross-currency swaps | $ | — | | | $ | 21,613 | | | $ | — | | | $ | — | |
Treasury rate lock contracts | $ | — | | | $ | — | | | $ | (90) | | | $ | (34) | |
| | | | | | | |
| | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Motorcycles cost of goods sold | | Selling, administrative & engineering expense | | Interest expense | | Financial Services interest expense |
| Six months ended June 26, 2022 |
Line item on the Consolidated statements of operations in which the effects of cash flow hedges are recorded | $ | 1,775,257 | | | $ | 474,858 | | | $ | 15,431 | | | $ | 89,748 | |
| | | | | | | |
Gain/(loss) reclassified from AOCL into income: | | | | | | | |
Foreign currency contracts | $ | 15,282 | | | $ | — | | | $ | — | | | $ | — | |
Commodity contracts | $ | 480 | | | $ | — | | | $ | — | | | $ | — | |
Cross-currency swaps | $ | — | | | $ | (106,266) | | | $ | — | | | $ | — | |
Treasury rate lock contracts | $ | — | | | $ | — | | | $ | (181) | | | $ | (63) | |
| | | | | | | |
| Six months ended June 27, 2021 |
Line item on the Consolidated statements of operations in which the effects of cash flow hedges are recorded | $ | 1,736,071 | | | $ | 493,353 | | | $ | 15,430 | | | $ | 104,328 | |
| | | | | | | |
Gain/(loss) reclassified from AOCL into income: | | | | | | | |
Foreign currency contracts | $ | (12,547) | | | $ | — | | | $ | — | | | $ | — | |
Commodity contracts | $ | (29) | | | $ | — | | | $ | — | | | $ | — | |
Cross-currency swaps | $ | — | | | $ | (44,175) | | | $ | — | | | $ | — | |
Treasury rate lock contracts | $ | — | | | $ | — | | | $ | (181) | | | $ | (67) | |
Interest rate swaps | $ | — | | | $ | — | | | $ | — | | | $ | (2,689) | |
The amount of net loss included in Accumulated other comprehensive loss (AOCL) at June 26, 2022, estimated to be reclassified into income over the next 12 months was $4.7 million.
The amount of gains and losses recognized in income related to derivative financial instruments not designated as hedging instruments were as follows (in thousands). Gains and losses on foreign currency contracts and commodity contracts were recorded in Motorcycles cost of goods sold. Gains on interest rate caps were recorded in Financial Services revenue and related losses were recorded in Selling, administrative & engineering expense.
| | | | | | | | | | | | | | | | | | | | | | | |
| Amount of Gain/(Loss) Recognized in Income |
| Three months ended | | Six months ended |
| June 26, 2022 | | June 27, 2021 | | June 26, 2022 | | June 27, 2021 |
Foreign currency contracts | $ | 9,793 | | | $ | (1,919) | | | $ | 6,287 | | | $ | (5,548) | |
Commodity contracts | (1,155) | | | 722 | | | 1,232 | | | 1,426 | |
Interest rate caps | (1,682) | | | (19) | | | 18 | | | 104 | |
| $ | 6,956 | | | $ | (1,216) | | | $ | 7,537 | | | $ | (4,018) | |
The Company is exposed to credit loss risk in the event of non-performance by counterparties to its derivative financial instruments. Although no assurances can be given, the Company does not expect any of the counterparties to its derivative financial instruments to fail to meet their 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 their position.
10. Leases
The Company determines if an arrangement is or contains a lease at contract inception. Right-of-use (ROU) assets related to the Company's leases are recorded in Lease assets and lease liabilities are recorded in Accrued liabilities and Lease liabilities on the Consolidated balance sheets.
ROU assets represent the Company’s right to use an underlying asset over the lease term, and lease liabilities represent the Company's obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized at the lease commencement date based on the present value of future lease payments over the lease term. The ROU asset also includes prepaid lease payments and initial direct costs and is reduced for lease incentives paid by the lessor. The discount rate used to determine the present value is generally the Company's incremental borrowing rate because the implicit rate in the lease is not readily determinable. The lease term used to calculate the ROU asset and lease liabilities includes periods covered by options to extend or terminate when the Company is reasonably certain the lease term will include these optional periods.
In accordance with ASC Topic 842, Leases (ASC Topic 842), the Company elected the short-term lease practical expedient that allows entities to recognize lease payments on a straight-line basis over the lease term for leases with a term of 12 months or less. The Company has also elected the practical expedient under ASC Topic 842 allowing entities to not separate non-lease components from lease components, but instead account for such components as a single lease component for all leases except leases involving assets used in manufacturing and distribution processes.
The Company has operating lease arrangements for sales and administrative offices, manufacturing and distribution facilities, product testing facilities, equipment and vehicles. The Company’s leases have remaining lease terms ranging from 1 to 6 years, some of which include options to extend the lease term for periods generally not greater than 5 years and some of which include options to terminate the leases within 1 year. Certain leases also include options to purchase the leased asset. The Company's leases do not contain any material residual value guarantees or material restrictive covenants.
Operating lease expense for the three months ended June 26, 2022 and June 27, 2021 was $6.3 million and $6.2 million, respectively, and $13.0 million and $13.8 million for the six months ended June 26, 2022 and June 27, 2021, respectively. This includes variable lease costs related to assets used in manufacturing and distribution processes of approximately $0.8 million and $1.3 million for the three months ended June 26, 2022 and June 27, 2021, respectively, and $1.8 million and $3.7 million for the six months ended June 26, 2022 and June 27, 2021, respectively. Other variable and short-term lease costs were not material.
Balance sheet information related to the Company's leases was as follows (in thousands): | | | | | | | | | | | | | | | | | |
| June 26, 2022 | | December 31, 2021 | | June 27, 2021 |
Lease assets | $ | 44,247 | | | $ | 49,625 | | | $ | 41,210 | |
| | | | | |
Accrued liabilities | $ | 16,515 | | | $ | 17,369 | | | $ | 16,003 | |
Lease liabilities | 26,697 | | | 29,904 | | | 21,708 | |
| $ | 43,212 | | | $ | 47,273 | | | $ | 37,711 | |
Future maturities of the Company's operating lease liabilities as of June 26, 2022 were as follows (in thousands): | | | | | |
2022 | $ | 9,799 | |
2023 | 13,715 | |
2024 | 8,147 | |
2025 | 5,972 | |
2026 | 5,009 | |
Thereafter | 1,953 | |
Future lease payments | 44,595 | |
Present value discount | (1,383) | |
Lease liabilities | $ | 43,212 | |
Other lease information surrounding the Company's operating leases was as follows (dollars in thousands): | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended | | Six months ended |
| June 26, 2022 | | June 27, 2021 | | June 26, 2022 | | June 27, 2021 |
Cash outflows for amounts included in the measurement of lease liabilities | $ | 4,637 | | | $ | 10,777 | | | $ | 9,594 | | | $ | 15,723 | |
ROU assets obtained in exchange for lease obligations, net of modifications | $ | 5,075 | | | $ | 895 | | | $ | 6,354 | | | $ | 6,200 | |
| | | | | | | | | | | | | | | | | |
| June 26, 2022 | | December 31, 2021 | | June 27, 2021 |
Weighted-average remaining lease term (in years) | 3.51 | | 3.86 | | 3.76 |
Weighted-average discount rate | 2.0 | % | | 1.9 | % | | 2.7 | % |
11. Debt
Debt with a contractual term less than 12 months is generally classified as short-term and consisted of the following (in thousands): | | | | | | | | | | | | | | | | | |
| June 26, 2022 | | December 31, 2021 | | June 27, 2021 |
Unsecured commercial paper | $ | 701,384 | | | $ | 751,286 | | | $ | 749,037 | |
| | | | | |
| | | | | |
Debt with a contractual term greater than 12 months is generally classified as long-term and consisted of the following (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | June 26, 2022 | | December 31, 2021 | | June 27, 2021 |
Secured debt: | | | | | | |
Asset-backed Canadian commercial paper conduit facility | | $ | 77,984 | | | $ | 85,054 | | | $ | 87,439 | |
Asset-backed U.S. commercial paper conduit facility | | 570,628 | | | 272,589 | | | 291,511 | |
Asset-backed securitization debt | | 2,860,810 | | | 1,634,753 | | | 1,735,706 | |
Unamortized discounts and debt issuance costs | | (12,889) | | | (7,611) | | | (8,184) | |
| | 3,496,533 | | | 1,984,785 | | | 2,106,472 | |
Unsecured notes (at par value): | | | | | | |
Medium-term notes: | | | | | | |
| | | | | | |
Due in 2022, issued February 2019 | 4.05 | % | — | | | 550,000 | | | 550,000 | |
Due in 2022, issued June 2017 | 2.55 | % | — | | | 400,000 | | | 400,000 | |
Due in 2023, issued February 2018 | 3.35 | % | 350,000 | | | 350,000 | | | 350,000 | |
Due in 2023, issued May 2020(a) | 4.94 | % | 681,837 | | | 737,302 | | | 773,825 | |
Due in 2024, issued November 2019(b) | 3.14 | % | 629,388 | | | 680,586 | | | 714,300 | |
Due in 2025, issued June 2020 | 3.35 | % | 700,000 | | | 700,000 | | | 700,000 | |
Due in 2027, issued February 2022 | 3.05 | % | 500,000 | | | — | | | — | |
Unamortized discounts and debt issuance costs | | (10,905) | | | (9,228) | | | (12,068) | |
| | 2,850,320 | | | 3,408,660 | | | 3,476,057 | |
| | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | June 26, 2022 | | December 31, 2021 | | June 27, 2021 |
Senior notes: | | | | | | |
Due in 2025, issued July 2015 | 3.50 | % | 450,000 | | | 450,000 | | | 450,000 | |
Due in 2045, issued July 2015 | 4.625 | % | 300,000 | | | 300,000 | | | 300,000 | |
Unamortized discounts and debt issuance costs | | (4,984) | | | (5,332) | | | (5,679) | |
| | 745,016 | | | 744,668 | | | 744,321 | |
| | 3,595,336 | | | 4,153,328 | | | 4,220,378 | |
Long-term debt | | 7,091,869 | | | 6,138,113 | | | 6,326,850 | |
Current portion of long-term debt, net | | (1,887,552) | | | (1,542,496) | | | (1,581,826) | |
Long-term debt, net | | $ | 5,204,317 | | | $ | 4,595,617 | | | $ | 4,745,024 | |
(a)€650.0 million par value remeasured to U.S. dollar at June 26, 2022, December 31, 2021, and June 27, 2021, respectively
(b)€600.0 million par value remeasured to U.S. dollar at June 26, 2022, December 31, 2021, and June 27, 2021, respectively
Future principal payments of the Company's debt obligations as of June 26, 2022 were as follows (in thousands): | | | | | |
2022 | $ | 1,196,321 | |
2023 | 1,848,914 | |
2024 | 1,391,946 | |
2025 | 1,923,342 | |
2026 | 556,601 | |
Thereafter | 904,907 | |
Future principal payments | 7,822,031 | |
Unamortized discounts and debt issuance costs | (28,778) | |
| $ | 7,793,253 | |
12. Asset-Backed Financing
The Company participates in asset-backed financing both through asset-backed securitization transactions and through asset-backed commercial paper conduit facilities. In the Company's asset-backed financing programs, the Company transfers retail motorcycle finance receivables to special purpose entities (SPEs), which are considered VIEs under U.S. GAAP. Each SPE then converts those assets into cash, through the issuance of debt. The Company retains servicing rights for all of the retail motorcycle finance receivables transferred to SPEs as part of an asset-backed financing. The accounting treatment for asset-backed financings depends on the terms of the related transaction and the Company’s continuing involvement with the VIE.
In transactions where the Company has power over the significant activities of the VIE and has an obligation to absorb losses or the right to receive benefits from the VIE that are potentially significant to the VIE, the Company is the primary beneficiary of the VIE and consolidates the VIE within its consolidated financial statements. On a consolidated basis, the asset-backed financing is treated as a secured borrowing in this type of transaction and is referred to as an on-balance sheet asset-backed financing.
In transactions where the Company is not the primary beneficiary of the VIE, the Company must determine whether it can achieve a sale for accounting purposes under ASC Topic 860, Transfers and Servicing. To achieve a sale for accounting purposes, the assets being transferred must be legally isolated, not be constrained by restrictions from further transfer, and be deemed to be beyond the Company’s control. If the Company does not meet all of these criteria for sale accounting, then the transaction is accounted for as a secured borrowing and is referred to as an on-balance sheet asset-backed financing.
If the Company meets all three of the sale criteria above, the transaction is recorded as a sale for accounting purposes and is referred to as an off-balance sheet asset-backed financing. Upon sale, the retail motorcycle finance receivables are removed from the Company’s Consolidated balance sheets and a gain or loss is recognized for the difference between the cash proceeds received, the assets derecognized, and the liabilities recognized as part of the transaction. The gain or loss on sale is included in Financial Services revenue on the Consolidated statements of operations.
The Company is not required, and does not currently intend, to provide any additional financial support to the on- or off-balance sheet VIEs associated with these transactions. Investors and creditors in these transactions only have recourse to the assets held by the VIEs.
The assets and liabilities related to the on-balance sheet asset-backed financings included in the Consolidated balance sheets were as follows (in thousands): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| June 26, 2022 |
| Finance receivables | | Allowance for credit losses | | Restricted cash | | Other assets | | Total assets | | Asset-backed debt, net |
On-balance sheet assets and liabilities: | | | | | | | | | | | |
Consolidated VIEs: | | | | | | | | | | | |
Asset-backed securitizations | $ | 3,477,839 | | | $ | (173,853) | | | $ | 202,029 | | | $ | 3,432 | | | $ | 3,509,447 | | | $ | 2,847,921 | |
Asset-backed U.S. commercial paper conduit facility | 630,305 | | | (31,491) | | | 43,701 | | | 782 | | | 643,297 | | | 570,628 | |
Unconsolidated VIEs: | | | | | | | | | | | |
Asset-backed Canadian commercial paper conduit facility | 88,197 | | | (3,598) | | | 6,481 | | | 76 | | | 91,156 | | | 77,984 | |
| $ | 4,196,341 | | | $ | (208,942) | | | $ | 252,211 | | | $ | 4,290 | | | $ | 4,243,900 | | | $ | 3,496,533 | |
| | | | | | | | | | | |
| December 31, 2021 |
| Finance receivables | | Allowance for credit losses | | Restricted cash | | Other assets | | Total assets | | Asset-backed debt, net |
On-balance sheet assets and liabilities: | | | | | | | | | | | |
Consolidated VIEs: | | | | | | | | | | | |
Asset-backed securitizations | $ | 2,048,194 | | | $ | (102,779) | | | $ | 123,717 | | | $ | 2,328 | | | $ | 2,071,460 | | | $ | 1,627,142 | |
Asset-backed U.S. commercial paper conduit facility | 297,454 | | | (14,898) | | | 20,567 | | | 654 | | | 303,777 | | | 272,589 | |
Unconsolidated VIEs: | | | | | | | | | | | |
Asset-backed Canadian commercial paper conduit facility | 97,180 | | | (3,990) | | | 6,191 | | | 139 | | | 99,520 | | | 85,054 | |
| $ | 2,442,828 | | | $ | (121,667) | | | $ | 150,475 | | | $ | 3,121 | | | $ | 2,474,757 | | | $ | 1,984,785 | |
| | | | | | | | | | | |
| June 27, 2021 |
| Finance receivables | | Allowance for credit losses | | Restricted cash | | Other assets | | Total assets | | Asset-backed debt, net |
On-balance sheet assets and liabilities: | | | | | | | | | | | |
Consolidated VIEs: | | | | | | | | | | | |
Asset-backed securitizations | $ | 2,090,041 | | | $ | (107,174) | | | $ | 140,276 | | | $ | 2,522 | | | $ | 2,125,665 | | | $ | 1,727,522 | |
Asset-backed U.S. commercial paper conduit facility | 316,467 | | | (16,205) | | | 24,540 | | | 726 | | | 325,528 | | | 291,511 | |
Unconsolidated VIEs: | | | | | | | | | | | |
Asset-backed Canadian commercial paper conduit facility | 98,905 | | | (4,236) | | | 8,162 | | | 129 | | | 102,960 | | | 87,439 | |
| $ | 2,505,413 | | | $ | (127,615) | | | $ | 172,978 | | | $ | 3,377 | | | $ | 2,554,153 | | | $ | 2,106,472 | |
On-Balance Sheet Asset-Backed Securitization VIEs – The Company transfers U.S. retail motorcycle finance receivables to SPEs which in turn issue secured notes to investors, with various maturities and interest rates, secured by future collections of the purchased U.S. retail motorcycle finance receivables. Each on-balance sheet asset-backed securitization SPE is a separate legal entity, and the U.S. retail motorcycle finance receivables included in the asset-backed securitizations are only available for payment of the secured debt and other obligations arising from the asset-backed securitization transactions 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 currently have various contractual maturities ranging from 2023 to 2030.
The Company is the primary beneficiary of its on-balance sheet asset-backed securitization VIEs because it retains servicing rights and a residual interest in the VIEs in the form of a debt security. As the servicer, the Company is the variable interest holder with the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance. As a residual interest holder, the Company has the obligation to absorb losses and the right to receive benefits which could potentially be significant to the VIE.
Quarterly transfers of U.S. retail motorcycle finance receivables to SPEs, the respective proceeds, and the respective proceeds, net of discounts and issuance costs were as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2022 | | 2021 |
| Transfers | | Proceeds | | Proceeds, net | | Transfers | | Proceeds | | Proceeds, net |
First quarter | $ | — | | | $ | — | | | $ | — | | | $ | 663.1 | | | $ | 600.0 | | | $ | 597.4 | |
Second quarter | 2,176.4 | | | 1,836.3 | | | 1,826.9 | | | — | | | — | | | — | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| $ | 2,176.4 | | | $ | 1,836.3 | | | $ | 1,826.9 | | | $ | 663.1 | | | $ | 600.0 | | | $ | 597.4 | |
On-Balance Sheet Asset-Backed U.S. Commercial Paper Conduit Facility VIE – The Company has a $900.0 million revolving facility agreement (the U.S. Conduit Facility) with third-party banks and their asset-backed U.S. commercial paper conduits. Under the revolving facility agreement, the Company may transfer U.S. retail motorcycle finance receivables to an SPE, which in turn may issue debt to those third-party banks and their asset-backed U.S. commercial paper conduits. In addition to the $900.0 million aggregate commitment, the agreement allows for additional borrowings, at the lender’s discretion, of up to $300.0 million. Availability under the U.S. Conduit Facility is based on, among other things, the amount of eligible U.S. retail motorcycle finance receivables held by the SPE as collateral.
Under the U.S. Conduit Facility, 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 if funded by a conduit lender through the issuance of commercial paper. If not funded by a conduit lender through the issuance of commercial paper, the terms of the interest are based on LIBOR, with provisions for a transition to other benchmark rates, generally aligning to recommendations published by the Alternative Reference Rates Committee convened by the Federal Reserve Board and Federal Reserve Bank of New York. In each of these cases, a program fee is assessed based on the outstanding debt principal balance. The U.S. Conduit Facility also provides for an unused commitment fee based on the unused portion of the total aggregate commitment. When calculating the unused fee, the aggregate commitment does not include any unused portion of the $300.0 million additional borrowings allowed. 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 Facility, any outstanding principal will continue to be reduced monthly through available collections. The expected remaining term of the related receivables held by the SPE is approximately 5 years. Unless earlier terminated or extended by mutual agreement of the Company and the lenders, as of June 26, 2022, the U.S. Conduit Facility has an expiration date of November 18, 2022.
The Company is the primary beneficiary of its U.S. Conduit Facility VIE because it retains servicing rights and a residual interest in the VIE in the form of a debt security. As the servicer, the Company is the variable interest holder with the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance. As a residual interest holder, the Company has the obligation to absorb losses and the right to receive benefits which could potentially be significant to the VIE.
During the second quarter of 2022, the Company transferred $420.8 million of U.S. retail motorcycle finance receivables to an SPE which, in turn, issued $362.8 million of debt under the U.S. Conduit Facility. During the first quarter of 2022, the Company transferred $47.1 million of U.S. retail motorcycle finance receivables to an SPE which, in turn, issued $41.3 million of debt under the U.S. Conduit Facility. There were no finance receivable transfers under the U.S. Conduit Facility during the first half of 2021.
On-Balance Sheet Asset-Backed Canadian Commercial Paper Conduit Facility – In June 2022, the Company renewed its facility agreement (Canadian Conduit) with a Canadian bank-sponsored asset-backed commercial paper conduit. Under the agreement, the Canadian Conduit is contractually committed, at the Company's option, to purchase eligible Canadian retail motorcycle finance receivables for proceeds up to C$125.0 million. The transferred assets are restricted as collateral for the payment of the associated 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$125.0 million. There is no amortization schedule; however, the debt is reduced monthly as available collections on the related finance receivables are applied to outstanding principal. Upon expiration of the Canadian Conduit, any outstanding principal will continue to be reduced
monthly through available collections. The expected remaining term of the related receivables is approximately 4 years. Unless earlier terminated or extended by mutual agreement between the Company and the lenders, as of June 26, 2022, the Canadian Conduit has an expiration date of June 30, 2023.
The Company is not the primary beneficiary of the Canadian bank-sponsored, multi-seller conduit VIE; therefore, the Company does not consolidate the VIE. However, the Company treats the conduit facility as a secured borrowing as it maintains effective control over the assets transferred to the VIE and, therefore, does not meet the requirements for sale accounting.
As the Company participates in and does not consolidate the Canadian bank-sponsored, multi-seller conduit VIE, the maximum exposure to loss associated with this VIE, which would only be incurred in the unlikely event that all the finance receivables and underlying collateral have no residual value, was $13.2 million at June 26, 2022. The maximum exposure is not an indication of the Company's expected loss exposure.
There were no finance receivable transfers under the Canadian Conduit during the second quarter of 2022 or the first half of 2021. During the first quarter of 2022, the Company transferred $25.3 million of Canadian retail motorcycle finance receivables to the Canadian Conduit for proceeds of $21.2 million.
13. Fair Value
The Company assesses the inputs used to measure fair value using a three-tier hierarchy.
Level 1 inputs include quoted prices for identical instruments and are the most observable.
Level 2 inputs include quoted prices for similar assets and observable inputs such as interest rates, foreign currency exchange rates, commodity prices, and yield curves. The Company uses the market approach to derive the fair value for its Level 2 fair value measurements. Foreign currency contracts, commodity contracts, and cross-currency swaps are valued using quoted forward rates and prices; interest rate caps are valued using quoted interest rates and yield curves.
Level 3 inputs are not observable in the market and include the Company's judgments about the assumptions market participants would use in pricing the asset or liability.
Recurring Fair Value Measurements – The Company’s assets and liabilities measured at fair value on a recurring basis were as follows (in thousands): | | | | | | | | | | | | | | | | | | | |
| June 26, 2022 |
| Balance | | Level 1 | | Level 2 | | |
Assets: | | | | | | | |
Cash equivalents | $ | 1,936,000 | | | $ | 1,936,000 | | | $ | — | | | |
Marketable securities | 38,779 | | | 38,779 | | | — | | | |
Derivative financial instruments | 22,541 | | | — | | | 22,541 | | | |
| $ | 1,997,320 | | | $ | 1,974,779 | | | $ | 22,541 | | | |
Liabilities: | | | | | | | |
Derivative financial instruments | $ | 56,945 | | | $ | — | | | $ | 56,945 | | | |
| December 31, 2021 |
| Balance | | Level 1 | | Level 2 | | |
Assets: | | | | | | | |
Cash equivalents | $ | 1,617,887 | | | $ | 1,337,900 | | | $ | 279,987 | | | |
Marketable securities | 49,650 | | | 49,650 | | | — | | | |
Derivative financial instruments | 52,034 | | | — | | | 52,034 | | | |
| $ | 1,719,571 | | | $ | 1,387,550 | | | $ | 332,021 | | | |
Liabilities: | | | | | | | |
Derivative financial instruments | $ | 2,361 | | | $ | — | | | $ | 2,361 | | | |
| | | | | | | | | | | | | | | | | | | |
| June 27, 2021 |
| Balance | | Level 1 | | Level 2 | | |
Assets: | | | | | | | |
Cash equivalents | $ | 1,439,400 | | | $ | 1,274,400 | | | $ | 165,000 | | | |
Marketable securities | 52,434 | | | 52,434 | | | — | | | |
Derivative financial instruments | 97,464 | | | — | | | 97,464 | | | |
| $ | 1,589,298 | | | $ | 1,326,834 | | | $ | 262,464 | | | |
Liabilities: | | | | | | | |
Derivative financial instruments | $ | 3,836 | | | $ | — | | | $ | 3,836 | | | |
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 $16.1 million, $18.3 million and $16.6 million at June 26, 2022, December 31, 2021 and June 27, 2021, respectively, for which the fair value adjustment was an increase of $1.4 million, a decrease of $2.9 million and an increase of $0.6 million, respectively. Fair value is estimated using Level 2 inputs based on the recent market values of repossessed inventory.
Fair Value of Financial Instruments Measured at Cost – The carrying value of the Company's Cash and cash equivalents and Restricted cash approximates their fair values. The fair value and carrying value of the Company’s remaining financial instruments that are measured at cost or amortized cost were as follows (in thousands): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| June 26, 2022 | | December 31, 2021 | | June 27, 2021 |
| Fair Value | | Carrying Value | | Fair Value | | Carrying Value | | Fair Value | | Carrying Value |
Assets: | | | | | | | | | | | |
Finance receivables, net | $ | 7,329,371 | | | $ | 7,103,684 | | | $ | 6,794,499 | | | $ | 6,571,921 | | | $ | 7,141,608 | | | $ | 6,888,954 | |
Liabilities: | | | | | | | | | | | |
Deposits, net | $ | 364,938 | | | $ | 345,790 | | | $ | 293,602 | | | $ | 290,326 | | | $ | 260,338 | | | $ | 259,373 | |
Debt: | | | | | | | | | | | |
Unsecured commercial paper | $ | 701,384 | | | $ | 701,384 | | | $ | 751,286 | | | $ | 751,286 | | | $ | 749,037 | | | $ | 749,037 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Asset-backed U.S. commercial paper conduit facility | $ | 570,628 | | | $ | 570,628 | | | $ | 272,589 | | | $ | 272,589 | | | $ | 291,511 | | | $ | 291,511 | |
Asset-backed Canadian commercial paper conduit facility | $ | 77,984 | | | $ | 77,984 | | | $ | 85,054 | | | $ | 85,054 | | | $ | 87,439 | | | $ | 87,439 | |
Asset-backed securitization debt | $ | 2,831,401 | | | $ | 2,847,921 | | | $ | 1,633,749 | | | $ | 1,627,142 | | | $ | 1,744,841 | | | $ | 1,727,522 | |
Medium-term notes | $ | 2,762,208 | | | $ | 2,850,320 | | | $ | 3,513,815 | | | $ | 3,408,660 | | | $ | 3,651,957 | | | $ | 3,476,057 | |
Senior notes | $ | 703,629 | | | $ | 745,016 | | | $ | 790,373 | | | $ | 744,668 | | | $ | 804,187 | | | $ | 744,321 | |
Finance Receivables, net – The carrying value of retail and wholesale finance receivables 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 are generally either short-term or have interest rates that adjust with changes in market interest rates.
Deposits, net – The carrying value of deposits is amortized cost. The fair value of deposits is estimated based upon rates currently available for deposits with similar terms and maturities. Fair value is calculated using Level 3 inputs.
Debt – The carrying value of debt is generally cost, net of unamortized discounts and debt issuance costs. The fair value of unsecured commercial paper is calculated using Level 2 inputs and approximates carrying value due to its short maturity. The fair value of debt provided under the U.S. Conduit Facility and the Canadian Conduit Facility is calculated using Level 2 inputs and approximates carrying value since the interest rates charged under the facilities are tied directly to market rates and fluctuate as market rates change. The fair values of the medium-term notes and senior notes are estimated based upon rates currently available for debt with similar terms and remaining maturities (Level 2 inputs). The fair value of the fixed-rate debt related to on-balance sheet asset-backed securitization transactions is estimated based on pricing currently available for transactions with similar terms and maturities (Level 2 inputs). The fair value of the floating-rate debt related to on-balance sheet asset-backed securitization transactions is calculated using Level 2 inputs and approximates carrying value since the interest rates charged are tied directly to market rates and fluctuate as market rates change.
14. Product Warranty and Recall Campaigns
The Company currently provides a standard two-year limited warranty on all new motorcycles sold worldwide, except in certain markets, where the Company currently provides a standard three-year limited warranty. The Company also provides a five-year unlimited warranty on the battery for electric motorcycles. In addition, the Company provides a one-year warranty for parts and accessories. The warranty coverage for the retail customer generally begins when the product is sold to a retail customer. The Company accrues for future warranty claims at the time of shipment using an estimated cost based primarily on historical Company claim information.
Additionally, the Company has from time to time initiated certain voluntary recall campaigns. The Company records estimated recall costs when the liability is both probable and estimable. This generally occurs when the Company's management approves and commits to a recall. The warranty and recall liability is included in Accrued liabilities and Other long-term liabilities on the Consolidated balance sheets. Changes in the Company’s warranty and recall liabilities were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended | | Six months ended |
| June 26, 2022 | | June 27, 2021 | | June 26, 2022 | | June 27, 2021 |
Balance, beginning of period | $ | 65,095 | | | $ | 72,427 | | | $ | 61,621 | | | $ | 69,208 | |
Warranties issued during the period | 9,744 | | | 12,818 | | | 20,455 | | | 24,490 | |
Settlements made during the period | (10,060) | | | (10,378) | | | (17,156) | | | (18,963) | |
Recalls and changes to pre-existing warranty liabilities | (3,052) | | | (1,241) | | | (3,193) | | | (1,109) | |
Balance, end of period | $ | 61,727 | | | $ | 73,626 | | | $ | 61,727 | | | $ | 73,626 | |
The liability for recall campaigns, included in the balance above, was $14.6 million, $16.9 million and $24.0 million at June 26, 2022, December 31, 2021 and June 27, 2021, respectively.
15. Employee Benefit Plans
The Company has a qualified pension plan and postretirement healthcare benefit plans. The plans cover certain eligible employees and retirees of the Motorcycles segment. The Company also has unfunded supplemental employee retirement plan agreements (SERPA) with certain employees. Service cost is allocated among Selling, administrative and engineering expense, Motorcycles cost of goods sold and Inventories, net. Amounts capitalized in inventory are not significant. Non-service cost components of net periodic benefit (income) cost are presented in Other income, net. Components of net periodic benefit (income) cost for the Company's defined benefit plans were as follows (in thousands): | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended | | Six months ended |
| June 26, 2022 | | June 27, 2021 | | June 26, 2022 | | June 27, 2021 |
Pension and SERPA Benefits: | | | | | | | |
Service cost | $ | 4,763 | | | $ | 6,348 | | | $ | 9,525 | | | $ | 12,696 | |
Interest cost | 15,472 | | | 15,472 | | | 30,945 | | | 30,942 | |
Expected return on plan assets | (31,476) | | | (32,720) | | | (62,952) | | | (65,440) | |
Amortization of unrecognized: | | | | | | | |
Prior service credit | (328) | | | (312) | | | (656) | | | (624) | |
Net loss | 7,978 | | | 18,386 | | | 15,956 | | | 36,772 | |
Settlement (gain) loss | — | | | — | | | (256) | | | 816 | |
| | | | | | | |
Net periodic benefit (income) cost | $ | (3,591) | | | $ | 7,174 | | | $ | (7,438) | | | $ | 15,162 | |
| | | | | | | |
| | | | | | | |
Postretirement Healthcare Benefits: | | | | | | | |
Service cost | $ | 1,161 | | | $ | 1,288 | | | $ | 2,322 | | | $ | 2,576 | |
Interest cost | 1,904 | | | 1,626 | | | 3,808 | | | 3,252 | |
Expected return on plan assets | (3,809) | | | (3,495) | | | (7,618) | | | (6,990) | |
Amortization of unrecognized: | | | | | | | |
Prior service credit | (581) | | | (581) | | | (1,162) | | | (1,162) | |
Net loss | 122 | | | 264 | | | 244 | | | 528 | |
| | | | | | | |
| | | | | | | |
Net periodic benefit income | $ | (1,203) | | | $ | (898) | | | $ | (2,406) | | | $ | (1,796) | |
There are no required or planned voluntary qualified pension plan contributions for 2022. The Company expects it will continue to make ongoing benefit payments under the SERPA and postretirement healthcare plans.
16. Commitments and Contingencies
Litigation and Other Claims – The Company is subject to lawsuits and other claims related to product, product recall, commercial, employee, environmental and other matters. In determining costs to accrue related to these items, the Company carefully analyzes cases and considers the likelihood of adverse judgments or outcomes, as well as the potential range of possible loss. The Company accrues for matters when losses are both probable and estimable. Any amounts accrued for these matters are monitored on an ongoing basis and are updated based on new developments or new information as it becomes available for each matter. The Company also maintains insurance coverage for product liability exposures. The Company believes that its accruals and insurance coverage are adequate and there are no material exposures to loss in excess of amounts accrued and insured for losses related to these matters.
Supply Matter – During the second quarter of 2022, the Company received information from a third-party supplier concerning a regulatory compliance matter relating to the supplier's component part. As a result, out of an abundance of caution, the Company suspended all vehicle assembly and shipments (excluding LiveWire models) for approximately two weeks during the second quarter of 2022. The Company continues to work through the regulatory compliance matter with its relevant suppliers and at this time does not expect that this matter will result in additional costs or recall expenses that are material. Given the uncertainties related to this matter, the Company is currently unable to reasonably estimate any potential additional costs or recall expenses it may incur.
LiveWire Transaction – On December 13, 2021, the Company and AEA-Bridges Impact Corp. (ABIC), a special purpose acquisition company (SPAC), announced that they have entered into a definitive business combination agreement under which LiveWire, the Company's electric motorcycle division, will become a separate business of the Company and combine with ABIC to create a new publicly traded company. The parties expect that the transaction will be financed by ABIC’s $400 million cash held in trust (assuming no redemptions by ABIC’s shareholders in the context of the transaction), a $100 million cash investment from the Company, and a $100 million investment from an independent strategic investor, Kwang Yang Motor Co., Ltd. (KYMCO). In addition, to the extent any shares of the SPAC are redeemed, the Company will invest an additional amount equal to the dollar value of such redemptions up to a maximum of $100 million.
The transaction, which has been approved by the boards of directors of both the Company and ABIC, is now expected to close at the beginning of the Company's 2022 fourth fiscal quarter. The consummation of the business combination is subject to the approval of ABIC’s shareholders and other conditions. Upon closing of the transaction, the Company will retain a controlling financial interest in LiveWire. As the controlling shareholder following the transaction, the Company will continue to consolidate LiveWire’s results, with additional adjustments to recognize non-controlling shareholder interests.
17. Accumulated Other Comprehensive Loss
Changes in Accumulated other comprehensive loss were as follows (in thousands): | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended June 26, 2022 |
| Foreign currency translation adjustments | | | | Derivative financial instruments | | Pension and postretirement benefit plans | | Total |
Balance, beginning of period | $ | (48,522) | | | | | $ | 7,923 | | | $ | (189,011) | | | $ | (229,610) | |
Other comprehensive loss, before reclassifications | (31,600) | | | | | (53,909) | | | — | | | (85,509) | |
Income tax benefit | 579 | | | | | 11,731 | | | — | | | 12,310 | |
| (31,021) | | | | | (42,178) | | | — | | | (73,199) | |
Reclassifications: | | | | | | | | | |
| | | | | | | | | |
Net loss on derivative financial instruments | — | | | | | 70,702 | | | — | | | 70,702 | |
Prior service credits(a) | — | | | | | — | | | (909) | | | (909) | |
Actuarial losses(a) | — | | | | | — | | | 8,100 | | | 8,100 | |
Reclassifications before tax | — | | | | | 70,702 | | | 7,191 | | | 77,893 | |
Income tax expense | — | | | | | (15,672) | | | (1,688) | | | (17,360) | |
| — | | | | | 55,030 | | | 5,503 | | | 60,533 | |
Other comprehensive (loss) income | (31,021) | | | | | 12,852 | | | 5,503 | | | (12,666) | |
Balance, end of period | $ | (79,543) | | | | | $ | 20,775 | | | $ | (183,508) | | | $ | (242,276) | |
| | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended June 27, 2021 |
| Foreign currency translation adjustments | | | | Derivative financial instruments | | Pension and postretirement benefit plans | | Total |
Balance, beginning of period | $ | (24,927) | | | | | $ | (28,586) | | | $ | (416,124) | | | $ | (469,637) | |
Other comprehensive income, before reclassifications | 1,722 | | | | | 13,574 | | | — | | | 15,296 | |
Income tax expense | (307) | | | | | (2,994) | | | — | | | (3,301) | |
| 1,415 | | | | | 10,580 | | | — | | | 11,995 | |
Reclassifications: | | | | | | | | | |
| | | | | | | | | |
Net gain on derivative financial instruments | — | | | | | (13,898) | | | — | | | (13,898) | |
Prior service credits(a) | — | | | | | — | | | (893) | | | (893) | |
Actuarial losses(a) | — | | | | | — | | | 18,650 | | | 18,650 | |
Reclassifications before tax | — | | | | | (13,898) | | | 17,757 | | | 3,859 | |
Income tax benefit (expense) | — | | | | | 2,816 | | | (4,170) | | | (1,354) | |
| — | | | | | (11,082) | | | 13,587 | | | 2,505 | |
Other comprehensive income (loss) | 1,415 | | | | | (502) | | | 13,587 | | | 14,500 | |
Balance, end of period | $ | (23,512) | | | | | $ | (29,088) | | | $ | (402,537) | | | $ | (455,137) | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Six months ended June 26, 2022 |
| Foreign currency translation adjustments | | | | Derivative financial instruments | | Pension and postretirement benefit plans | | Total |
Balance, beginning of period | $ | (44,401) | | | | | $ | (2,005) | | | $ | (194,513) | | | $ | (240,919) | |
Other comprehensive loss, before reclassifications | (35,404) | | | | | (61,139) | | | — | | | (96,543) | |
Income tax benefit | 262 | | | | | 13,224 | | | — | | | 13,486 | |
| (35,142) | | | | | (47,915) | | | — | | | (83,057) | |
Reclassifications: | | | | | | | | | |
| | | | | | | | | |
Net loss on derivative financial instruments | — | | | | | 90,748 | | | — | | | 90,748 | |
Prior service credits(a) | — | | | | | — | | | (1,818) | | | (1,818) | |
Actuarial losses(a) | — | | | | | — | | | 16,200 | | | 16,200 | |
Reclassifications before tax | — | | | | | 90,748 | | | 14,382 | | | 105,130 | |
Income tax expense | — | | | | | (20,053) | | | (3,377) | | | (23,430) | |
| — | | | | | 70,695 | | | 11,005 | | | 81,700 | |
Other comprehensive (loss) income | (35,142) | | | | | 22,780 | | | 11,005 | | | (1,357) | |
Balance, end of period | $ | (79,543) | | | | | $ | 20,775 | | | $ | (183,508) | | | $ | (242,276) | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Six months ended June 27, 2021 |
| Foreign currency translation adjustments | | | | Derivative financial instruments | | Pension and postretirement benefit plans | | Total |
Balance, beginning of period | $ | (7,589) | | | | | $ | (46,116) | | | $ | (429,712) | | | $ | (483,417) | |
Other comprehensive loss, before reclassifications | (15,352) | | | | | (37,163) | | | — | | | (52,515) | |
Income tax (expense) benefit | (571) | | | | | 8,098 | | | — | | | 7,527 | |
| (15,923) | | | | | (29,065) | | | — | | | (44,988) | |
Reclassifications: | | | | | | | | | |
| | | | | | | | | |
Net loss on derivative financial instruments | — | | | | | 59,688 | | | — | | | 59,688 | |
Prior service credits(a) | — | | | | | — | | | (1,786) | | | (1,786) | |
Actuarial losses(a) | — | | | | | — | | | 37,300 | | | 37,300 | |
Reclassifications before tax | — | | | | | 59,688 | | | 35,514 | | | 95,202 | |
Income tax expense | — | | | | | (13,595) | | | (8,339) | | | (21,934) | |
| — | | | | | 46,093 | | | 27,175 | | | 73,268 | |
Other comprehensive (loss) income | (15,923) | | | | | 17,028 | | | 27,175 | | | 28,280 | |
Balance, end of period | $ | (23,512) | | | | | $ | (29,088) | | | $ | (402,537) | | | $ | (455,137) | |
(a)Amounts reclassified are included in the computation of net periodic benefit (income) cost, discussed further in Note 15
18. Reportable Segments
Harley-Davidson, Inc. is the parent company for the groups of companies referred to as Harley-Davidson Motor Company and Harley-Davidson Financial Services. The Company operates in two business segments: Motorcycles and Related Products (Motorcycles) and Financial Services. The Company's reportable segments are strategic business units that offer different products and services and are managed separately based on the fundamental differences in their operations.
The Motorcycles segment consists of the activities of Harley-Davidson Motor Company which designs, manufactures and sells motorcycles. The Motorcycles segment also sells motorcycle parts, accessories, and apparel as well as licenses its trademarks. The Company's products are sold to retail customers primarily through a network of dealers.
The Financial Services segment consists of Harley-Davidson Financial Services which is engaged in the business of financing and servicing wholesale inventory receivables and retail consumer loans, primarily for the purchase of Harley-Davidson motorcycles. Harley-Davidson Financial Services also works with certain unaffiliated insurance companies to provide motorcycle insurance and protection products to motorcycle owners.
Selected segment information is set forth below (in thousands): | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended | | Six months ended |
| June 26, 2022 | | June 27, 2021 | | June 26, 2022 | | June 27, 2021 |
Motorcycles and Related Products: | | | | | | | |
Motorcycles revenue | $ | 1,266,471 | | | $ | 1,331,500 | | | $ | 2,569,642 | | | $ | 2,563,607 | |
Gross profit | 386,750 | | | 407,051 | | | 794,385 | | | 827,536 | |
Selling, administrative and engineering expense | 195,327 | | | 220,422 | | | 400,215 | | | 413,968 | |
Restructuring (benefit) expense | (264) | | | 807 | | | (392) | | | 214 | |
Operating income | 191,687 | | | 185,822 | | | 394,562 | | | 413,354 | |
Financial Services: | | | | | | | |
Financial Services revenue | 202,616 | | | 200,558 | | | 394,631 | | | 390,958 | |
Financial Services expense | 116,688 | | | 105,909 | | | 222,346 | | | 177,440 | |
Restructuring expense | — | | | 111 | | | — | | | 338 | |
Operating income | 85,928 | | | 94,538 | | | 172,285 | | | 213,180 | |
Operating income | $ | 277,615 | | | $ | 280,360 | | | $ | 566,847 | | | $ | 626,534 | |
Total assets for the Motorcycles and Financial Services segments were $3.0 billion and $9.1 billion, respectively, as of June 26, 2022, $3.3 billion and $7.7 billion, respectively, as of December 31, 2021, and $2.8 billion and $8.2 billion, respectively, as of June 27, 2021.
19. Supplemental Consolidating Data
The supplemental consolidating legal entity data for Harley-Davidson Motor Company, Harley-Davidson Financial Services and related consolidating adjustments are presented for informational purposes. The legal entity income statement information presented below differs from reportable segment income statement information due to the allocation of legal entity consolidating adjustments to income for reportable segments. Supplemental consolidating data is as follows (in thousands): | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended June 26, 2022 |
| Harley-Davidson Motor Company | | Harley-Davidson Financial Services | | Consolidating Adjustments | | Consolidated |
Revenue: | | | | | | | |
Motorcycles and Related Products | $ | 1,269,592 | | | $ | — | | | $ | (3,121) | | | $ | 1,266,471 | |
Financial Services | — | | | 203,386 | | | (770) | | | 202,616 | |
| 1,269,592 | | | 203,386 | | | (3,891) | | | 1,469,087 | |
Costs and expenses: | | | | | | | |
Motorcycles and Related Products cost of goods sold | 879,721 | | | — | | | — | | | 879,721 | |
Financial Services interest expense | — | | | 47,649 | | | — | | | 47,649 | |
Financial Services provision for credit losses | — | | | 29,133 | | | — | | | 29,133 | |
Selling, administrative and engineering expense | 195,939 | | | 43,028 | | | (3,734) | | | 235,233 | |
Restructuring benefit | (264) | | | — | | | — | | | (264) | |
| 1,075,396 | | | 119,810 | | | (3,734) | | | 1,191,472 | |
Operating income | 194,196 | | | 83,576 | | | (157) | | | 277,615 | |
Other income, net | 10,055 | | | — | | | — | | | 10,055 | |
Investment loss | (3,530) | | | — | | | — | | | (3,530) | |
Interest expense | 7,720 | | | — | | | — | | | 7,720 | |
Income before income taxes | 193,001 | | | 83,576 | | | (157) | | | 276,420 | |
Provision for income taxes | 40,994 | | | 19,577 | | | — | | | 60,571 | |
Net income | $ | 152,007 | | | $ | 63,999 | | | $ | (157) | | | $ | 215,849 | |
| | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Six months ended June 26, 2022 |
| Harley-Davidson Motor Company | | Harley-Davidson Financial Services | | Consolidating Adjustments | | Consolidated |
Revenue: | | | | | | | |
Motorcycles and Related Products | $ | 2,575,885 | | | $ | — | | | $ | (6,243) | | | $ | 2,569,642 | |
Financial Services | — | | | 395,776 | | | (1,145) | | | 394,631 | |
| 2,575,885 | | | 395,776 | | | (7,388) | | | 2,964,273 | |
Costs and expenses: | | | | | | | |
Motorcycles and Related Products cost of goods sold | 1,775,257 | | | — | | | — | | | 1,775,257 | |
Financial Services interest expense | — | | | 89,748 | | | — | | | 89,748 | |
Financial Services provision for credit losses | — | | | 57,955 | | | — | | | 57,955 | |
Selling, administrative and engineering expense | 401,356 | | | 80,886 | | | (7,384) | | | 474,858 | |
Restructuring benefit | (392) | | | — | | | — | | | (392) | |
| 2,176,221 | | | 228,589 | | | (7,384) | | | 2,397,426 | |
Operating income | 399,664 | | | 167,187 | | | (4) | | | 566,847 | |
Other income, net | 21,085 | | | — | | | — | | | 21,085 | |
Investment loss | (5,509) | | | — | | | — | | | (5,509) | |
Interest expense | 15,431 | | | — | | | | | 15,431 | |
Income before income taxes | 399,809 | | | 167,187 | | | (4) | | | 566,992 | |
Provision for income taxes | 88,841 | | | 39,800 | | | — | | | 128,641 | |
Net income | $ | 310,968 | | | $ | 127,387 | | | $ | (4) | | | $ | 438,351 | |
| | | | | | | |
| Three months ended June 27, 2021 |
| Harley-Davidson Motor Company | | Harley-Davidson Financial Services | | Consolidating Adjustments | | Consolidated |
Revenue: | | | | | | | |
Motorcycles and Related Products | $ | 1,336,970 | | | $ | — | | | $ | (5,470) | | | $ | 1,331,500 | |
Financial Services | — | | | 199,637 | | | 921 | | | 200,558 | |
| 1,336,970 | | | 199,637 | | | (4,549) | | | 1,532,058 | |
Costs and expenses: | | | | | | | |
Motorcycles and Related Products cost of goods sold | 924,449 | | | — | | | — | | | 924,449 | |
Financial Services interest expense | — | | | 48,621 | | | — | | | 48,621 | |
Financial Services provision for credit losses | — | | | 16,201 | | | — | | | 16,201 | |
Selling, administrative and engineering expense | 223,512 | | | 42,091 | | | (4,094) | | | 261,509 | |
Restructuring expense | 807 | | | 111 | | | — | | | 918 | |
| 1,148,768 | | | 107,024 | | | (4,094) | | | 1,251,698 | |
Operating income | 188,202 | | | 92,613 | | | (455) | | | 280,360 | |
Other income, net | 690 | | | — | | | — | | | 690 | |
Investment income | 122,731 | | | — | | | (120,000) | | | 2,731 | |
Interest expense | 7,722 | | | — | | | — | | | 7,722 | |
Income before income taxes | 303,901 | | | 92,613 | | | (120,455) | | | 276,059 | |
Provision for income taxes | 49,570 | | | 20,149 | | | — | | | 69,719 | |
Net income | $ | 254,331 | | | $ | 72,464 | | | $ | (120,455) | | | $ | 206,340 | |
| | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Six months ended June 27, 2021 |
| Harley-Davidson Motor Company | | Harley-Davidson Financial Services | | Consolidating Adjustments | | Consolidated |
Revenue: | | | | | | | |
Motorcycles and Related Products | $ | 2,575,437 | | | $ | — | | | $ | (11,830) | | | $ | 2,563,607 | |
Financial Services | — | | | 388,387 | | | 2,571 | | | 390,958 | |
| 2,575,437 | | | 388,387 | | | (9,259) | | | 2,954,565 | |
Costs and expenses: | | | | | | | |
Motorcycles and Related Products cost of goods sold | 1,736,071 | | | — | | | — | | | 1,736,071 | |
Financial Services interest expense | — | | | 104,328 | | | — | | | 104,328 | |
Financial Services provision for credit losses | — | | | (6,273) | | | — | | | (6,273) | |
Selling, administrative and engineering expense | 419,872 | | | 82,366 | | | (8,885) | | | 493,353 | |
Restructuring expense | 214 | | | 338 | | | — | | | 552 | |
| 2,156,157 | | | 180,759 | | | (8,885) | | | 2,328,031 | |
Operating income | 419,280 | | | 207,628 | | | (374) | | | 626,534 | |
Other income, net | 967 | | | — | | | — | | | 967 | |
Investment income | 124,133 | | | — | | | (120,000) | | | 4,133 | |
Interest expense | 15,430 | | | — | | | — | | | 15,430 | |
Income before income taxes | 528,950 | | | 207,628 | | | (120,374) | | | 616,204 | |
Provision for income taxes | 105,566 | | | 45,154 | | | — | | | 150,720 | |
Net income | $ | 423,384 | | | $ | 162,474 | | | $ | (120,374) | | | $ | 465,484 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| June 26, 2022 |
| Harley-Davidson Motor Company | | Harley-Davidson Financial Services | | Consolidating Adjustments | | Consolidated |
ASSETS | | | | | | | |
Current assets: | | | | | | | |
Cash and cash equivalents | $ | 600,091 | | | $ | 1,594,168 | | | $ | — | | | $ | 2,194,259 | |
| | | | | | | |
Accounts receivable, net | 617,220 | | | — | | | (315,171) | | | 302,049 | |
Finance receivables, net | — | | | 1,674,970 | | | — | | | 1,674,970 | |
Inventories, net | 726,586 | | | — | | | — | | | 726,586 | |
Restricted cash | — | | | 226,488 | | | — | | | 226,488 | |
Other current assets | 148,632 | | | 48,079 | | | (12,895) | | | 183,816 | |
| 2,092,529 | | | 3,543,705 | | | (328,066) | | | 5,308,168 | |
Finance receivables, net | — | | | 5,428,714 | | | — | | | 5,428,714 | |
Property, plant and equipment, net | 626,230 | | | 25,923 | | | — | | | 652,153 | |
Pension and postretirement assets | 411,906 | | | — | | | — | | | 411,906 | |
Goodwill | 61,890 | | | — | | | — | | | 61,890 | |
Deferred income taxes | 16,640 | | | 75,754 | | | (23,000) | | | 69,394 | |
Lease assets | 37,616 | | | 6,631 | | | — | | | 44,247 | |
Other long-term assets | 209,006 | | | 41,616 | | | (105,476) | | | 145,146 | |
| $ | 3,455,817 | | | $ | 9,122,343 | | | $ | (456,542) | | | $ | 12,121,618 | |
LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | | | |
Current liabilities: | | | | | | | |
Accounts payable | $ | 383,994 | | | $ | 347,880 | | | $ | (315,171) | | | $ | 416,703 | |
Accrued liabilities | 447,055 | | | 156,995 | | | (11,791) | | | 592,259 | |
Short-term deposits, net | — | | | 78,005 | | | — | | | 78,005 | |
Short-term debt | — | | | 701,384 | | | — | | | 701,384 | |
Current portion of long-term debt, net | — | | | 1,887,552 | | | — | | | 1,887,552 | |
| 831,049 | | | 3,171,816 | | | (326,962) | | | 3,675,903 | |
Long-term deposits, net | — | | | 267,785 | | | — | | | 267,785 | |
Long-term debt, net | 745,016 | | | 4,459,301 | | | — | | | 5,204,317 | |
Lease liabilities | 19,995 | | | 6,702 | | | — | | | 26,697 | |
Pension and postretirement liabilities | 91,362 | | | — | | | — | | | 91,362 | |
Deferred income taxes | 30,092 | | | 1,458 | | | (22,361) | | | 9,189 | |
Other long-term liabilities | 153,846 | | | 55,164 | | | 2,203 | | | 211,213 | |
Commitments and contingencies (Note 16) | | | | | | | |
Shareholders’ equity | 1,584,457 | | | 1,160,117 | | | (109,422) | | | 2,635,152 | |
| $ | 3,455,817 | | | $ | 9,122,343 | | | $ | (456,542) | | | $ | 12,121,618 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| June 27, 2021 |
| Harley-Davidson Motor Company | | Harley-Davidson Financial Services | | Consolidating Adjustments | | Consolidated |
ASSETS | | | | | | | |
Current assets: | | | | | | | |
Cash and cash equivalents | $ | 923,505 | | | $ | 818,463 | | | $ | — | | | $ | 1,741,968 | |
| | | | | | | |
Accounts receivable, net | 643,505 | | | — | | | (380,052) | | | 263,453 | |
Finance receivables, net | — | | | 1,629,636 | | | — | | | 1,629,636 | |
Inventories, net | 457,648 | | | — | | | — | | | 457,648 | |
Restricted cash | — | | | 152,411 | | | — | | | 152,411 | |
Other current assets | 91,735 | | | 132,753 | | | — | | | 224,488 | |
| 2,116,393 | | | 2,733,263 | | | (380,052) | | | 4,469,604 | |
Finance receivables, net | — | | | 5,259,318 | | | — | | | 5,259,318 | |
Property, plant and equipment, net | 663,549 | | | 30,829 | | | — | | | 694,378 | |
Pension and postretirement assets | 120,542 | | | — | | | — | | | 120,542 | |
Goodwill | 65,395 | | | — | | | — | | | 65,395 | |
Deferred income taxes | 48,710 | | | 83,615 | | | (791) | | | 131,534 | |
Lease assets | 33,433 | | | 7,777 | | | — | | | 41,210 | |
Other long-term assets | 188,535 | | | 35,427 | | | (96,717) | | | 127,245 | |
| $ | 3,236,557 | | | $ | 8,150,229 | | | $ | (477,560) | | | $ | 10,909,226 | |
LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | | | |
Current liabilities: | | | | | | | |
Accounts payable | $ | 394,792 | | | $ | 416,136 | | | $ | (380,052) | | | $ | 430,876 | |
Accrued liabilities | 483,470 | | | 103,131 | | | 1,139 | | | 587,740 | |
Short-term deposits, net | — | | | 101,672 | | | — | | | 101,672 | |
Short-term debt | — | | | 749,037 | | | — | | | 749,037 | |
Current portion of long-term debt, net | — | | | 1,581,826 | | | — | | | 1,581,826 | |
| 878,262 | | | 2,951,802 | | | (378,913) | | | 3,451,151 | |
Long-term deposits, net | — | | | 157,701 | | | — | | | 157,701 | |
Long-term debt, net | 744,321 | | | 4,000,703 | | | — | | | 4,745,024 | |
Lease liabilities | 14,626 | | | 7,082 | | | — | | | 21,708 | |
Pension and postretirement liabilities | 105,833 | | | — | | | — | | | 105,833 | |
Deferred income taxes | 7,166 | | | 1,747 | | | — | | | 8,913 | |
Other long-term liabilities | 183,600 | | | 48,521 | | | 2,503 | | | 234,624 | |
Commitments and contingencies (Note 16) | | | | | | | |
Shareholders’ equity | 1,302,749 | | | 982,673 | | | (101,150) | | | 2,184,272 | |
| $ | 3,236,557 | | | $ | 8,150,229 | | | $ | (477,560) | | | $ | 10,909,226 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Six months ended June 26, 2022 |
| Harley-Davidson Motor Company | | Harley-Davidson Financial Services | | Consolidating Adjustments | | Consolidated |
Cash flows from operating activities: | | | | | | | |
Net income | $ | 310,968 | | | $ | 127,387 | | | $ | (4) | | | $ | 438,351 | |
Adjustments to reconcile Net income to Net cash (used) provided by operating activities: | | | | | | | |
Depreciation and amortization | 73,098 | | | 4,291 | | | — | | | 77,389 | |
Amortization of deferred loan origination costs | — | | | 47,101 | | | — | | | 47,101 | |
Amortization of financing origination fees | 348 | | | 7,289 | | | — | | | 7,637 | |
Provision for long-term employee benefits | (9,844) | | | — | | | — | | | (9,844) | |
Employee benefit plan contributions and payments | (5,466) | | | — | | | — | | | (5,466) | |
Stock compensation expense | 18,341 | | | 1,424 | | | — | | | 19,765 | |
Net change in wholesale finance receivables related to sales | — | | | — | | | (201,326) | | | (201,326) | |
Provision for credit losses | — | | | 57,955 | | | — | | | 57,955 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Deferred income taxes | 4,312 | | | (1,431) | | | (406) | | | 2,475 | |
Other, net | 5,678 | | | 5,420 | | | 4 | | | 11,102 | |
Changes in current assets and liabilities: | | | | | | | |
Accounts receivable, net | (347,250) | | | — | | | 212,645 | | | (134,605) | |
Finance receivables – accrued interest and other | — | | | 4,255 | | | — | | | 4,255 | |
Inventories, net | (33,986) | | | — | | | — | | | (33,986) | |
Accounts payable and accrued liabilities | (5,423) | | | 223,086 | | | (221,902) | | | (4,239) | |
Other current assets | (48,633) | | | 6,592 | | | 9,663 | | | (32,378) | |
| (348,825) | | | 355,982 | | | (201,322) | | | (194,165) | |
Net cash (used) provided by operating activities | (37,857) | | | 483,369 | | | (201,326) | | | 244,186 | |
| | | | | | | |
Cash flows from investing activities: | | | | | | | |
Capital expenditures | (53,694) | | | (1,321) | | | — | | | (55,015) | |
Origination of finance receivables | — | | | (4,379,674) | | | 1,868,481 | | | (2,511,193) | |
Collections on finance receivables | — | | | 3,739,107 | | | (1,667,155) | | | 2,071,952 | |
| | | | | | | |
Other investing activities | 797 | | | — | | | $ | — | | | 797 | |
Net cash used by investing activities | (52,897) | | | (641,888) | | | 201,326 | | | (493,459) | |
| | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Six months ended June 26, 2022 |
| Harley-Davidson Motor Company | | Harley-Davidson Financial Services | | Consolidating Adjustments | | Consolidated |
Cash flows from financing activities: | | | | | | | |
| | | | | | | |
| | | | | | | |
Proceeds from issuance of medium-term notes | — | | | 495,785 | | | — | | | 495,785 | |
Repayments of medium-term notes | — | | | (950,000) | | | — | | | (950,000) | |
Proceeds from securitization debt | — | | | 1,826,891 | | | — | | | 1,826,891 | |
Repayments of securitization debt | — | | | (610,205) | | | — | | | (610,205) | |
Borrowings of asset-backed commercial paper | — | | | 425,253 | | | — | | | 425,253 | |
Repayments of asset-backed commercial paper | — | | | (133,159) | | | — | | | (133,159) | |
Net increase in unsecured commercial paper | — | | | (50,672) | | | — | | | (50,672) | |
| | | | | | | |
Net increase in deposits | — | | | 55,255 | | | — | | | 55,255 | |
Dividends paid | (47,146) | | | — | | | — | | | (47,146) | |
Repurchase of common stock | (325,828) | | | — | | | — | | | (325,828) | |
| | | | | | | |
Other financing activities | (1,237) | | | — | | | — | | | (1,237) | |
Net cash (used) provided by financing activities | (374,211) | | | 1,059,148 | | | — | | | 684,937 | |
Effect of exchange rate changes on cash, cash equivalents and restricted cash | (13,149) | | | (1,264) | | | — | | | (14,413) | |
Net (decrease) increase in cash, cash equivalents and restricted cash | $ | (478,114) | | | $ | 899,365 | | | $ | — | | | $ | 421,251 | |
| | | | | | | |
Cash, cash equivalents and restricted cash: | | | | | | | |
Cash, cash equivalents and restricted cash, beginning of period | $ | 1,078,205 | | | $ | 947,014 | | | $ | — | | | $ | 2,025,219 | |
Net (decrease) increase in cash, cash equivalents and restricted cash | (478,114) | | | 899,365 | | | — | | | 421,251 | |
Cash, cash equivalents and restricted cash, end of period | $ | 600,091 | | | $ | 1,846,379 | | | $ | — | | | $ | 2,446,470 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Six months ended June 27, 2021 |
| Harley-Davidson Motor Company | | Harley-Davidson Financial Services | | Consolidating Adjustments | | Consolidated |
Cash flows from operating activities: | | | | | | | |
Net income | $ | 423,384 | | | $ | 162,474 | | | $ | (120,374) | | | $ | 465,484 | |
Adjustments to reconcile Net income to Net cash provided by operating activities: | | | | | | | |
Depreciation and amortization | 76,749 | | | 4,574 | | | — | | | 81,323 | |
Amortization of deferred loan origination costs | — | | | 40,089 | | | — | | | 40,089 | |
Amortization of financing origination fees | 344 | | | 6,880 | | | — | | | 7,224 | |
Provision for long-term employee benefits | 13,366 | | | — | | | — | | | 13,366 | |
Employee benefit plan contributions and payments | (11,055) | | | — | | | — | | | (11,055) | |
Stock compensation expense | 21,550 | | | 1,790 | | | — | | | 23,340 | |
Net change in wholesale finance receivables related to sales | — | | | — | | | (129,819) | | | (129,819) | |
Provision for credit losses | — | | | (6,273) | | | — | | | (6,273) | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Deferred income taxes | 6,505 | | | 6,597 | | | (370) | | | 12,732 | |
Other, net | (2,092) | | | (347) | | | 374 | | | (2,065) | |
Changes in current assets and liabilities: | | | | | | | |
Accounts receivable, net | (427,762) | | | — | | | 303,024 | | | (124,738) | |
Finance receivables – accrued interest and other | — | | | 9,691 | | | — | | | 9,691 | |
Inventories, net | 58,366 | | | — | | | — | | | 58,366 | |
Accounts payable and accrued liabilities | 182,066 | | | 313,178 | | | (298,638) | | | 196,606 | |
Other current assets | 8,615 | | | 5,145 | | | (3,731) | | | 10,029 | |
| (73,348) | | | 381,324 | | | (129,160) | | | 178,816 | |
Net cash provided by operating activities | 350,036 | | | 543,798 | | | (249,534) | | | 644,300 | |
Cash flows from investing activities: | | | | | | | |
Capital expenditures | (36,104) | | | (1,464) | | | — | | | (37,568) | |
Origination of finance receivables | — | | | (4,254,353) | | | 1,959,853 | | | (2,294,500) | |
Collections on finance receivables | — | | | 3,774,683 | | | (1,830,319) | | | 1,944,364 | |
| | | | | | | |
Other investing activities | 2,425 | | | — | | | — | | | 2,425 | |
Net cash used by investing activities | (33,679) | | | (481,134) | | | 129,534 | | | (385,279) | |
| | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Six months ended June 27, 2021 |
| Harley-Davidson Motor Company | | Harley-Davidson Financial Services | | Consolidating Adjustments | | Consolidated |
Cash flows from financing activities: | | | | | | | |
| | | | | | | |
| | | | | | | |
Repayments of medium-term notes | — | | | (1,400,000) | | | — | | | (1,400,000) | |
Proceeds from securitization debt | — | | | 597,411 | | | — | | | 597,411 | |
Repayments of securitization debt | — | | | (664,685) | | | — | | | (664,685) | |
| | | | | | | |
Repayments of asset-backed commercial paper | — | | | (143,256) | | | — | | | (143,256) | |
Net decrease in unsecured commercial paper | — | | | (262,452) | | | — | | | (262,452) | |
Net increase in credit facilities | — | | | 84 | | | — | | | 84 | |
Net increase in deposits | — | | | 179,329 | | | — | | | 179,329 | |
Dividends paid | (46,209) | | | (120,000) | | | 120,000 | | | (46,209) | |
Repurchase of common stock | (10,911) | | | — | | | — | | | (10,911) | |
Other financing activities | 4,324 | | | — | | | — | | | 4,324 | |
Net cash used by financing activities | (52,796) | | | (1,813,569) | | | 120,000 | | | (1,746,365) | |
Effect of exchange rate changes on cash, cash equivalents and restricted cash | (6,217) | | | (661) | | | — | | | (6,878) | |
Net increase (decrease) in cash, cash equivalents and restricted cash | $ | 257,344 | | | $ | (1,751,566) | | | $ | — | | | $ | (1,494,222) | |
| | | | | | | |
Cash, cash equivalents and restricted cash: | | | | | | | |
Cash, cash equivalents and restricted cash, beginning of period | $ | 666,161 | | | $ | 2,743,007 | | | $ | — | | | $ | 3,409,168 | |
Net increase (decrease) in cash, cash equivalents and restricted cash | 257,344 | | | (1,751,566) | | | — | | | (1,494,222) | |
Cash, cash equivalents and restricted cash, end of period | $ | 923,505 | | | $ | 991,441 | | | $ | — | | | $ | 1,914,946 | |